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ACCOUNTING FOR COMPANIES

ACCOUNTING FOR COMPANIES. Introduction Characteristics Listing of a public company Sources of finance Formation Producing information Share issues Debenture issues. OUTCOMES. Recall the characteristics of a company

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ACCOUNTING FOR COMPANIES

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  1. ACCOUNTING FOR COMPANIES Introduction Characteristics Listing of a public company Sources of finance Formation Producing information Share issues Debenture issues

  2. OUTCOMES • Recall the characteristics of a company • Describe the sources of finance available to a company, the identification of profits retained and the composition of equity • Describe the formation process • Prepare financial information for a company • Prepare accounting entries relating to share issues

  3. CHARACTERISTICS OF A COMPANY • A company is a legal entity distinct from its owners, known as shareholders • Owners and management likely to be a separate group of persons • Board of directors manage company • Company acts through its board who report to shareholders

  4. Characteristics of a company . . . • Consequences of separate legal entity status • limitation of liability • indefinite life • Appointment of auditor • Companies Act, 1973 requires all companies to appoint an auditor • Act no.71:Companies Act , 2008 requires public companies appoint an auditor, but not private companies • As a separate legal entity, the company is a taxpayer

  5. Characteristics of a company . . . • Companies Act, 1973 provides for two types of companies • company having a share capital, used by business entities • company not having a share capital, used by non-business entities • Business entities can be either • Private company • (Pty) Ltd • between 1 and 50 shareholders • free transfer of shares restricted • prohibited form inviting public to subscribe for shares • Public company • Ltd • minimum of 7 shareholders, no maximum • shares are freely transferable and shares can be offered to the public • can be listed on JSE

  6. Characteristics of a company . . . • Companies Act, 2008 proposes two types of companies • Profit company, incorporated for financial gain • Non-profit company, incorporated for public benefit • Four categories of profit companies • Private companies • Personal liability companies • Public companies • State-owned enterprises

  7. LISTING OF A PUBLIC COMPANY • A public company can be listed on a stock exchange – in SA, the JSE Securities Exchange • Two possible listings • Main Board • Alternative Exchange (AltX)

  8. Listing of a public company . . . • Factors to consider when considering a listing • Clear vision and plan • Strong board of executive and non-executive directors • Good tangible asset backing • Suitable accounting and information systems • Proven product • Financial costs • Hidden costs • Loss of privacy • Potential loss of control

  9. SOURCES OF FINANCE • Company financed from two sources • investors funds, known as share capital • borrowed funds, in form of • loans • debentures

  10. Share capital • Share capital is an equity instrument • Classes of shares • Ordinary • main risk bearing shares • shareholders benefit from growth in value of investment and from dividends • Preference • receive dividends prior to ordinary shareholders • dividends are either cumulative or non-cumulative • participating preference shares • redeemable preference shares

  11. Share capital . . . • Types of shares • Par value shares • specified nominal value per share • may be issues at a premium • No par value shares • do not have a specified nominal value per share • issues at any price considered appropriate by the directors • Only no par value shares permitted to be issued in terms of the Companies Act,2008

  12. Debentures • Type of loan • Document issued by company evidencing indebtedness to debenture holders • Usually secured over property • Characteristics • negotiable documents • not part of equity • issued and redeemed at par, premium or discount

  13. Identification of profits retained • Share capital is dominant source of financing • As a separate legal entity, • company pays tax on its profits • directors decide how much of after tax profit to declare as a dividend to shareholders • Profits retained are referred to as reserves • distributable • non-distributable

  14. Distributable reserves • Distributable reserves are retained profits • may be declared as a dividend to shareholders at discretion of directors • known as retained earnings • The dividend is initiated by the company as opposed to shareholders withdrawing amounts owing to them • Dividends declared • before reporting period date and not paid at end of financial year • recognised as a liability on SOFP • after reporting period date • not recognised as a liability on SOFP

  15. Difference between profits retained and profits authorised for distribution

  16. Non-distributable reserve • Not available to be declared as a dividend to shareholders • NDR may be created on • Revaluation of a non-current asset • Disposal of a non-current asset • Leave gain in distributable reserve • Transfer gain to NDR • Consider solvency and liquidity of company • Solvency and liquidity requirements satisfied if FV of A > L and debts can be paid over following 12 months • If doubt about solvency and liquidity, transfer gain to NDR

  17. NDR arising from unrealised and realised surplus

  18. Equity of a company • Share capital • Reserves • distributable • non-distributable

  19. FORMATION OF A COMPANY • Companies Act provides for two documents • Memorandum of association • name • main business • share capital • Articles of association • internal rules • Persons who sign memorandum are known as subscribers to the memorandum

  20. Formation of a company . . . • Companies Act, 2008 requires companies to have one document, The Memorandum of Incorporation • Sole governing document of the company

  21. PRODUCING INFORMATION FOR A COMPANY • Determination of the profit for the period • Same as for a sole proprietorship, partnership or close corporation • Appropriation of profit • Taxation • Transfer to reserves • Dividends

  22. Taxation • As company is separate legal entity apart from its shareholders, subject to normal tax at rate of 28% • Company required to make two provisional payments during the year • Journal entry

  23. Taxation . . . • At end of year, tax calculation performed to determine current tax charge for the year • Journal entry

  24. Dividends to shareholders • Shareholders do not have an automatic claim to the accumulated profit • Liability to shareholders established when directors declare a dividend • interim dividend • final dividend

  25. Preference dividends • preference shareholders allocated their dividend before ordinary shareholders • journal entries

  26. Ordinary dividends • company does not have a separate liability a/c for each shareholder • journal entries • interim • final

  27. Capitalisation issue • Many listed companies offer shareholders a choice iro dividends • cash dividend • further shares in the company referred to as a capitalisation issue • number of possible accounting options • Dr Retained earningsCr Share capital • no cash payment to shareholders

  28. Transfer to non-distributable reserve • Gain on sale (of non-current assets) reported on I/S • If directors decide that it is necessary to transfer gain to NDR • Dr Retained earningsCr NDR

  29. Closing entries • Closing entries to trading a/c and profit & loss a/c identical for all entity forms • In a company • profit is transferred to the retained earnings a/c • Journal entry

  30. Closing entries . . . • Taxation expense and dividends transferred to retained earnings • Journal entries

  31. SHARE ISSUES • Public company may apply for a listing on one of the boards of the JSE once criteria for listing are satisfied • Three methods of obtaining a listing • Introduction • Private placing • Public offer

  32. Share issues . . . • Where public offer for subscription, further steps • Appointment of underwriter • Issue of prospectus • Allotment of shares to applicants • Oversubscription • Undersubscription • Shareholding recorded electronically by Strate

  33. Recording an issue of PV shares (at par) • Same procedure followed on issue of both ordinary and preference shares • Proceeds on issue are recorded in a share capital a/c

  34. Recording an issue of PV shares at a premium • Proceeds on issue are recorded in both a share capital a/c (PV) and a share premium a/c (SP) • nominal value is credited to the share capital a/c & the premium to the share premium a/c • share premium may be used for: • capitalisation issue • write off of • preliminary expenses • any share issue expenses • premium on redemption of preference shares • PV shares not permitted in terms of the Companies Act,2008

  35. Recording an issue of NPV shares • Shares of NPV can be issued at any price • If issue price is lower thanR value of share capital No. of shares in issue then special resolution • Proceeds on issue credited to “stated capital a/c” • Use of stated capital a/c • write off of preliminary expenses • write off of share issue expenses of such shares

  36. Underwriting an issue of shares • Public offer of shares can be underwritten by a merchant bank or other financial institution • Underwriter agrees to subscribe for shares not taken up by the public • The underwriter is paid a commission, usually based on issue price

  37. Conversion of PV shares into NPV shares • On conversion, transfer to stated capital a/c • whole of share capital a/c (ordinary or preference) • whole of share premium a/c (or part relating to shares converted)

  38. Conversion of NPV shares into PV shares • Whole of stated capital to be transferred to share capital • New PV cannot be > the average value of the NPV shares • If PV is < the average value of the NPV shares, surplus must be transferred to a non-distributable reserve • PV shares not permitted in terms of the proposed Companies Bill

  39. DEBENTURE ISSUES • Rates of interest • Nominal rate • determines interest paid each year • PV of debentures X nominal rate • Market rate • prevailing interest rate

  40. Debenture issues . . . • Effective rate • Effective cost to the company / return to the investor • Debentures issued at par • when nominal rate = market rate • thus effective rate = nominal rate • Debentures issued at a discount • when nominal rate < market rate • ‘loss’ to company, accounted for as additional interest (Dr) • increases effective rate • Debentures issued at a premium • when nominal rate > market rate • ‘profit’ to company, accounted for as reduced interest (Cr) • decreases effective rate

  41. Issue of debentures at a discount • When nominal rate < market rate, debentures can be offered at a discount • Leads to effective rate > nominal rate • Steps • Schedule of cash flows to calculate effective interest rate • IRR = effective interest rate • Amortisation table to calculate interest expense and carrying amount of liability

  42. Issue of debentures at a premium • When nominal rate > market rate, debentures can be offered at a premium • Leads to effective rate < nominal rate • Steps • Schedule of cash flows to calculate effective interest rate • IRR = effective interest rate • Amortisation table to calculate interest expense and carrying amount of liability

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