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Shareholders’ Equity

Shareholders’ Equity. Strategic Accounting 7120. Assets – Liabilities = Shareholders’ Equity . The Nature of Shareholders’ Equity . Net Assets (Residual Interest). S/H Equity. Shareholders’ equity is classified under IFRS into two categories: Share capital and “reserves.”

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Shareholders’ Equity

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  1. Shareholders’ Equity Strategic Accounting 7120

  2. Assets – Liabilities = Shareholders’ Equity The Nature of Shareholders’ Equity Net Assets(Residual Interest)

  3. S/H Equity Shareholders’ equity is classified under IFRS into two categories: Share capital and “reserves.” eThe term reserves is considered misleading and thus is discouraged under U.S. GAAP.

  4. Reporting S/H Equity U.S. GAAP IFRS Capital stock: Share capital: Common stock Ordinary shares Preferred stock Preference shares PIC—excess of par Share premium, Accumulated OCI: Reserves: Net gains (losses) on investments Investment revaluation reserve Net gains (losses) foreign currency translation Translation reserve {N/A: adjusting P,P, & E to fair value not permitted} Revaluation reserve Retained earnings Retained earnings Total shareholders’ equity Total equity Presented after Liabilities Often presented before Liabilities

  5. Nature and locationof business activities. Number and classesof shares authorized. Composition of initialboard of directors. Formation of a Corporation Corporate Charter

  6. Articles of incorporationare filed with the state. Board of directors appoint officers. State issues a corporate charter. Board of directors elected by shareholders. Shares of stock issued. Formation of a Corporation

  7. Authorized Shares Authorized, Issued, and Outstanding Capital Stock The maximum number of shares of capital stock that can be sold to the public is called the authorized number of shares.

  8. Authorized Shares Authorized, Issued, and Outstanding Capital Stock Issued sharesare authorized shares of stock that have been sold. Unissued shares are authorized shares of stock that have never been sold.

  9. Outstanding sharesare issued shares that are owned by stockholders. Authorized Shares Issued Shares Treasury sharesare issued shares that have been reacquired by the corporation. Authorized, Issued, and Outstanding Capital Stock Outstanding Shares Unissued Shares Treasury Shares

  10. Outstanding sharesare issued shares that are owned by stockholders. Authorized Shares Retired sharesassume the same status as authorized but unissued shares. Authorized, Issued, and Outstanding Share Capital Outstanding Shares Unissued Shares Retired Shares

  11. Ordinary shares Preference shares Types of Share Capital

  12. Types of Capital Stock

  13. Ordinary Shares The basic voting stock of the corporation. Ranks after preference shares for dividend and liquidation distribution. Dividends determined by the board of directors.

  14. Preference Shares Usually has apar or stated value. Generally does nothave voting rights. Preference over ordinary shares in the event of liquidation. Dividend preference over ordinary shares.

  15. Preference Shares Dividends Are usually stated as a percentage of the par or stated value. May be cumulative or noncumulative. May be partially participating, fully participating, or nonparticipating.

  16. Preference Shares DividendsCumulative Unpaid dividends must be paid before any distributions to common stock. Dividends in arrearsare not liabilities, but must be disclosed.

  17. IFRS / U.S. GAAP Difference e Under U.S. GAAP, preferred stock normally is reported as equity, but is reported as debt with the dividends reported in the income statement as interest expense if it is “manditorily redeemable” preferred stock. e Under IFRS, most non-mandatorily redeemable preferred stock (preference shares) also is reported as debt as well as some preference shares that aren’t redeemable. The critical feature that distinguishes a liability is if the issuer is or can be required to deliver cash (or another financial instrument) to the holder

  18. Net holding losses (gains) on FVTOCI investments. Deferred losses (gains) from derivatives. Postretirement plans: Losses (gains) Past service cost. Losses (gains) from foreign currency translations. Comprehensive Income Comprehensive income includes losses and gains that traditionally havebeen excluded from net income.

  19. Comprehensive Income Components of comprehensive income created during the reporting period: ($ in millions) Net income $xxx Other comprehensive income: Net unrealized holding gains (losses) on investments(net of tax)† $ x Losses (gains) on postretirement benefit plans(net of tax)‡ (x) Past service cost on postretirement benefit plans(net of tax)# x Deferred losses (gains) from derivatives(net of tax)§ x Losses (gains) from foreign currency translation(net of tax)* x xx Comprehensive income$xxx † Changes in the market value of FVTOCI securities. ‡ Increases (decreases) in the postretirement benefit obligation from changing assumptions as well as plan assets earning less or more than expected #Cost of recalculating postretirement benefits in prior years after amending a plan. § When a derivative designated as a cash flow hedge is adjusted to fair value, the gain or loss is deferred as a component of comprehensive income and included in earnings later, at the same time as earnings are affected by the hedged transaction. * Gains or losses from changes in foreign currency exchange rates. The amount could be an addition to or reduction in shareholders’ equity.

  20. The accumulated amount of comprehensive income is reported as a separate item of SE in the balance sheet. There are 2 options for reporting comprehensive income created during the reporting period. The statement of comprehensive income can be presented: As an expanded version of the income statement. As a separate statement. Comprehensive Income Comprehensive income (a) is reported periodicallyas it is created and (b) also is reported as a cumulative amount.

  21. IFRS / U.S. GAAP Difference U.S. GAAP 1. single statement of comprehensive income 2. two statements: a separate ‘income statement’ and ‘statement of comprehensive income 3. in the statement of shareholders’ equity eTheIFRS does not to allow the third presentation option. Rationale: to clearly segregate changes in equity arising from transactions with owners in their capacity as owners (statement of shareholders’ equity) from non-owner changes in equity (statement of comprehensive income). eWhen a company using IFRS chooses the two-statement option, the Statement of Comprehensive Income traditionally is referred to as the Statement of Recognized Income and Expense, or “SoRIE.”

  22. SHARES SOLD FOR CASH Dow Industrial sells 100,000 of its common shares, $1 par per share, for $10 per share: ($ in 000s) Cash (100,000 shares at $10 price per share) 1,000 Ordinary shares (100,000 shares at $1 par ) 100 Share premium (remainder) 900 The entire proceeds from the sale of nopar stock are recorded in the stock account: Cash (100,000 shares at $10 price per share) 1,000 Ordinary shares 1,000

  23. Issuing Shares for Noncash Assets Record the transaction at fair value(of stock issued or of asset or service received, whichever is more clearly evident). If market values cannot be determined, use appraised values.

  24. Issuing Stock for Noncash Assets DuMont Chemicals issues 1 million of its ordinary shares, $1 par per share, in exchange for a custom-built factory for which no cash price is available. Today’s issue of the Wall Street Journal lists DuMont’s stock at $10 per share: ($ in millions) Property, plant, & equipment (1 million sh at $10) 10 Ordinary shares (1 million shares at $1 par) 1 Share premium(remainder) 9 We record both the asset and the stock at the $10 million fair value.

  25. Allocate the amount received based on the relative fair values of the two securities. If only one fair value is known, allocate a portion of the amount received based on that fair value and allocate the remainder to the other security. More Than One Security Issuedfor a Single Price

  26. Registration fees • Underwriter commissions • Printing and clerical costs • Legal and accounting fees • Promotional costs Share Issue Costs Share issue costsreduce net proceedsfrom selling shares, resulting in a loweramount of share premium.

  27. Share Buybacks A corporation might reacquire shares of its stock to . . . • Support the market price. • Increase earnings per share. • Distribute in stock option plans. • Issue as a stock dividend. • Use in mergers and acquisitions. • Thwart takeover attempts.

  28. I can account forthe reacquired sharesbyretiring them or byholding them astreasury shares. Share Buybacks

  29. Accounting for Retired Shares When shares are formally retired, we reduce the same capital accounts that were increased when the shares were issued – ordinary or preference shares, and share premium.

  30. Accounting for Treasury Stock Acquisition of Treasury Stock • Recorded at cost to acquire. Resale of Treasury Stock • Treasury Stock credited for cost. • Difference between cost andissuance price is (generally)recorded in Share premium–share repurchase.

  31. COMPARISON OF SHARE RETIREMENT AND TREASURY STOCK ACCOUNTING American Semiconductor’s balance sheet included the following: Shareholders' Equity ($ in millions) Ordinary shares, 100 million shares at $1 par $ 100 Share premium 900 Share premium – share repurchase 2 Retained earnings 2,000

  32. COMPARISON OF SHARE RETIREMENT AND TREASURY STOCK ACCOUNTING Reacquired 1 million of its ordinary shares Retirement Treasury Stock Case 1: Shares repurchased at $7 per share Ordinary shares ($1 par x 1 million sh) 1 Treasury stock (cost) 7 Share premium ($9 per sh) 9 Reserve–share repurchase (difference) 3 Cash 7 Cash 7 OR Case 2: Shares repurchased at $13 per share Ordinary shares ($1 par x 1 million sh) 1 Treasury stock (cost) 13 Share premium ($9 per sh) 9 Reserve– share repurchase 2* Retained earnings (difference) 1 Cash 13 Cash 13 We credit Reserve– share repurchase for the amount needed to make debits equal credits in the entry. We reduce ordinary shares and Share premium the same amounts they were increased when the shares were issued: Cash 10 Ordinary shares 1 Share premium 9 *Because there is a $2 million credit balance.

  33. SUBSEQUENT SALE OF SHARES Sold 1 million shares after reacquiring shares at $13 per share (Case 2 in previous situation) Retirement Treasury Stock Case A: Shares sold at $14 per share Cash 14 Cash 14 Ordinary shares (par) 1 Treasury stock (cost) 13 Share premium 13 Reserve– share repurchase 1 OR Case B: Shares sold at $10 per share Cash 10 Cash 10 Ordinary shares (par) 1 RE (to balance) 1 Share premium 9 Reserve–sh repurchase 2* Treasury stock (cost) 13 *Because there is a $2 million credit balance.

  34. REPORTING SHARE BUYBACKS IN THE BALANCE SHEET Formally retiring shares restores the balances in both the Ordinary shares account and Share premium to what those balances would have been if the shares never had been issued at all. eAny net increase in assets resulting from the sale and subsequent repurchase is reflected as Reserve – share repurchase. eAny net decrease in assets resulting from the sale and subsequent repurchase is reflected as a reduction in retained earnings.

  35. REPORTING SHARE BUYBACKS IN THE BALANCE SHEET Shares Treasury Retired Stock Shareholders’ Equity($ in millions) Share capital:Ordinary shares, 100 million sh at $1 par $ 99 $ 100Share premium 891 900 Reserves Reserve–share repurchase 2 Retained earnings 1,999 2,000 Less: Treasury stock, 1 million shares (at cost) (13) Total shareholders’ equity$2,989$2,989 When a share repurchase is viewed as treasury stock, the cost of the treasury stock is simply reported as a reduction in total shareholders’ equity.

  36. Accounting for Treasury Stock In 2009, Peridot, Inc. reacquired 3,000 ordinary shares at $55 per share. In 2010, Peridot, Inc. reissued 1,000 shares of the stock at $75 per share. Which of the following would be included in the 2010 entry? a. Credit Cash for $165,000. b. Debit Treasury Stock for $75,000. c. Credit Treasury Stock for $55,000. d. Credit Cash for $75,000.

  37. Accounting for Treasury Stock 2009 Treasury stock 165,000 Cash 165,000 2010 Cash 75,000 Treasury stock 55,000 Reserve-sh repurchase 20,000

  38. Retained Earnings Represents the undistributed earnings of the company since its inception.

  39. Cash Dividends Dividends must bedeclared by the boardof directors beforethey can be paid. Cash dividendsrequire sufficient cashand retained earningsto cover the dividend. A corporation is notlegally requiredtopay dividends. When a dividend isdeclared, a liabilityis created.

  40. CASH DIVIDENDS On June 1, the board of directors of Craft Industries declares a cash dividend of $2 per share on its 100 million shares, payable to shareholders of record June 15, to be paid July 1: ($ in millions) June 1 – declaration date Retained earnings 200 Cash dividends payable (100 million shares at $2/share) 200 June 13 – ex-dividend date no entry June 15 – date of record no entry July 1 – payment date Cash dividends payable 200 Cash 200

  41. June Dividend Dates Ex-dividend date • The first day the shares trade without the right to receive the declared dividend. (No entry) X

  42. July June X Dividend Dates Date of record • Stockholders holding shares on this date will receive the dividend.(No entry) X

  43. SHARE DIVIDENDS A stock dividend is the distribution of additional shares of stock to current shareholders of the corporation. Because each shareholder receives the same percentage increase in shares, shareholders' proportional interest in (percentage ownership of) the firm remains unchanged. Craft declares and distributes a 10% ordinary share dividend (10 million shares) when the market value of the $1 par ordinary shares is $12 per share: ($ in millions) Retained earnings (10 million shares at $12 per share) 120 Ordinary shares (10 million shares at $1 par per share) 10 Share premium (remainder) 110 For a "small" stock dividend (less than 25%), the fair market value of the additional shares distributed is transferred from retained earnings to share capital.

  44. STOCK SPLITS A stock distribution of 25% or higher is referred to as a stock split. A frequent reason for issuing a stock split is to reduce the market price per share (by half in a 2 for 1 split, for example). No journal entry, unless the stock distribution is referred to as a "stock split effected in the form of a stock dividend." Craft declares and distributes a 2 for 1 stock split effected in the form of a 100% stock dividend (100 million shares) when the market value of the $1 par ordinary shares is $12 per share: ($ in millions) Share premium 100 Ordinary shares (100 million shares at $1 par) 100 Some companies choose to debit retained earnings instead.

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