The chapter focuses on the expansion of corporate capital through the issuance of shares and the contraction caused by the retirement of shares or the purchase of treasury shares and concludes with a discussion of cash dividends, property dividends, onus issues of shares, and share splits.
Chapter 18 SHAREHOLDERS’ EQUITY © 2013 The McGraw-Hill Companies, Inc The Nature of Shareholders’ Equity Assets – Liabilities = Shareholders’ Equity Net Assets Sources of Shareholders’ Equity Amounts earned Amounts invested by corporation by shareholders Shareholders’ Equity Issued Capital Retained Earnings Reserves 18 - Other gains and losses not included in net income Financial Reporting Overview 18 - Reserves or Accumulated Other Comprehensive Income Reserves Reserves or or Accumulated Accumulated other other comprehensive comprehensive income income include include the the following following types types of of gains gains and and losses losses that that traditionally traditionally have have been been excluded excluded from from net net income income Gains Gains (losses) (losses) from from foreign foreign currency currency translation translation Gains Gains from from revaluation revaluation of of PPE PPE Net Net unrealized unrealized gains gains (losses) (losses) on on available-for-sale available-for-sale instruments instruments 18 - Deferred Deferred gains gains (losses) (losses) on on derivatives derivatives Gains Gains (losses) (losses) from from amendments amendments to to postretirement postretirement benefit benefit plans plans Presentation of Comprehensive Income Comprehensive Comprehensive income income is is reported reported periodically periodically as as itit is is created created There There are are 22 options options for for reporting reporting comprehensive comprehensive income income created created during during the the reporting reporting period period An An expanded expanded version version of of income income statement statement 18 - A A separate separate statement statement immediately immediately following following the the income income statement statement The The accumulated accumulated amount amount of of comprehensive comprehensive income income is is reported reported as as aa separate separate item item of of shareholders’ shareholders’ equity equity in in the the statement statement of of financial financial position, position, under under U.S U.S GAAP, GAAP, but but not not under under IFRS IFRS U.S GAAP vs IFRS Comprehensive Income • • 18 - Single statement of comprehensive income Two statements: a separate income statement and a statement of comprehensive income • Same • Same The Corporate Organization Advantages of a corporation Continuous Existence Easy ownership transfer Easy to raise capital Limited liability Disadvantages of a corporation Double taxation 18 - Government regulation Types of Corporations Not-for-profit corporations include hospitals, charities, and government agencies such as FDIC Publicly-held corporations whose shares are widely owned by the general public Privately-held corporations whose shares are owned by only a few individuals 18 - Hybrid Organizations S S Corporation Corporation (in (in the the United United States) States) •• Limited Limited liability liability protection protection of of aa corporation corporation •• Maximum Maximum number number of of owners owners Double taxation avoided Limited Limited liability liability company company •• Limited Limited liability liability protection protection of of aa corporation corporation •• All All owners owners may may be be involved involved in in management management •• without without losing losing limited limited liability liability protection protection No No limit limit on on number number of of owners owners Limited Limited liability liability partnership partnership •• Owners Owners are are liable liable for for their their own own actions actions but but not not entirely entirely liable liable for for actions actions of of other other partners partners 18 - Laws and Regulations on Shareholders’ Equity Transactions Corporations Corporations are are formed formed in in accordance accordance with with the the corporation corporation laws laws and and regulations regulations of of the the individual individual country country or or state state in in which which the the company company is is incorporated incorporated • • 18 - 10 Laws are not uniform across countries or states In the United States, the Model Business Corporation Act is designed to guide the states in the development of their corporation statutes 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 share capital, and additional issued capital Price paid is less than issue price 5,000 shares of $2 par value share that were issued for $20 per share are reacquired for $17 per share Ordinary share capital Ordinary share premium ……………… …………… Additional issued capital – share repurchase …… Cash ……………………………………………… To record repurchase and retirement of ordinary share 18 - 21 10,000 90,000 15,000 85,000 Accounting for Retired Shares Price paid is more than issue price 5,000 shares of $2 par value share that were issued for $20 per share are reacquired for $25 per share Ordinary share capital 10,000 Ordinary share premium ……………… ……………… 90,000 Additional issued capital – share repurchase ……… 25,000 Cash ……………………………………………… 125,000 To record repurchase and retirement of ordinary share Reduce Retained Earnings if the Additional issued capital – share repurchase account balance is insufficient 18 - 22 Accounting for Treasury Shares Treasury shares usually not have: •Voting rights •Dividend rights •Preemptive rights •Liquidation rights Treasury shares are reported as an unallocated reduction of total Shareholders’ Equity Acquisition of Treasury Shares •Recorded at cost to acquire Resale of Treasury Shares •Treasury Shares credited for cost •Difference between cost and issuance price is (generally) recorded in additional issued capital – share repurchase 18 - 23 Retained Earnings Represents the undistributed earnings of the company since its inception Balance January 1, 2013 Net income Cash dividends Balance December 31, 2013 Retained $ 106,500 25,000 (10,000) $ 121,500 earnings may also be affected by the correction of an accounting error that occurred in the financial statements of a prior period, called a prior period adjustment Any restrictions on retained earnings must be disclosed in the notes to the financial statements 18 - 24 Accounting for Cash Dividends Declared by board of directors Not legally required Creates liability at declaration Requires sufficient Retained Earnings and Cash Declaration date • • Board of directors declares a $10,000 cash dividend Record a liability Declaration Date: Retained earnings Dividends payable To record declaration of cash dividend 18 - 25 10,000 10,000 Dividend Dates Ex-dividend date The first day the shares trade without the right to receive the declared dividend (No entry needed) Date of Record Shareholders holding shares on this date will receive the dividend (No entry needed) Date of Payment Record the dividend payment to shareholders Date of Payment: Dividends payable Cash ……………… To record payment of cash dividend 18 - 26 10,000 10,000 Property Dividends Distributions Distributions of of nonnoncash cash assets assets Record Record at at fair fair value value of of non-cash non-cash asset asset Recognize Recognize gain gain or or loss loss for for difference difference between between book book value value and and fair fair value value 18 - 27 Accounting for Bonus Issues Distribution of additional shares to owners No change in total shareholders’ equity IFRS No No entry entry needed needed But But corporation corporation laws laws may may require require reclassification reclassification within within shareholders’ 18 - 28 shareholders’ No change in par values All shareholders retain same percentage ownership U.S GAAP Large Small Bonus Bonus issue issue >> 25% 25% Bonus issue issue