Kế toán, kiểm toán - Chapter 18: Shareholders’ equity

SHAREHOLDERS’ EQUITYChapter 18© 2013 The McGraw-Hill Companies, Inc.The Nature of Shareholders’ Equity Assets – Liabilities = Shareholders’ Equity Shareholders’ EquityIssued CapitalRetained EarningsAmounts earnedby corporationAmounts investedby shareholdersReservesOther gains and losses not included in net incomeSources ofShareholders’EquityNet AssetsFinancial Reporting OverviewReserves or Accumulated OtherComprehensive IncomeGains (losses) from foreign currency translation. Net unrealized gains (losses) on available-for-sale instrumentsDeferred gains (losses) on derivativesGains from revaluation of PPEReserves or Accumulated other comprehensive income include the following types of gains and losses that traditionally have been excluded from net income.Gains (losses) from amendments to postretirement benefit plansThe accumulated amount of comprehensive income is reported as a separate item of shareholders’ equity in the statement of financial position, under U.S. GAAP, but not under IFRS.An expanded version of income statementA separate statement immediately following the income statementPresentation of Comprehensive IncomeComprehensive income is reported periodically as it is created. There are 2 options for reporting comprehensive income created during the reporting period.U.S. GAAP vs. IFRSSingle statement of comprehensive income.Two statements: a separate income statement and a statement of comprehensive income.SameSameComprehensive IncomeThe Corporate OrganizationContinuousExistenceEasy ownership transferLimitedliabilityEasy toraise capitalAdvantages of a corporationDisadvantages of a corporationDoubletaxationGovernmentregulationTypes of CorporationsPublicly-held corporationswhose shares are widelyowned by the general public.Privately-held corporationswhose shares are owned by only a few individuals.Not-for-profit corporations includehospitals, charities, and governmentagencies such as FDIC.Hybrid OrganizationsS Corporation (in the United States)Limited liability protection of a corporation. Maximum number of owners.Limited liability companyLimited liability protection of a corporation.All owners may be involved in managementwithout losing limited liability protection.No limit on number of owners.Limited liability partnershipOwners are liable for their own actions but not entirely liable for actions of other partners.Doubletaxationavoided.Laws and Regulations on Shareholders’ Equity Transactions Corporations are formed in accordance with the corporation laws and regulations of the individual country or state in which the company is incorporated. Laws are not uniform across countries or statesIn the United States, the Model Business Corporation Act is designed to guide the states in the development of their corporation statutesFundamental Share RightsRightto vote.Right to sharein distribution ofassets if companyis liquidated.Right to sharein profits whendividends aredeclared.Preemptiveright to maintainpercentageownership.Share CapitalPar value shareDollar amount per share is stated in the corporate charter.Par value has no relationship to market value.No-par shareDollar amount per share is not designated in corporate charter.Corporations can assign a stated value per share (treated like par value).Legal capital is . . .The portion of shareholders’ equity that must be contributed to the firm when share is issued.The amount of capital, required by law, that must remain invested in the business. Refers to par value, stated value, or full amount paid for no-par share.Share CapitalOrdinary Share is the basic voting share of the corporation. It ranks after preference shares for dividend and liquidation distribution. Dividends are determined by the board of directors.Dividend and liquidation preference overordinary share.Generally does nothave voting rights.Usually has apar or stated value.May be convertible,callable, and/orredeemable.PreferencesharesPreference SharesCumulative preference shares: Unpaid dividends must be issued in full before any distributions to ordinary shareholders.Dividends in arrears are not liabilities, but the pershare and aggregate amounts must be disclosed. 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.Shares Issued for Cash10,000 shares of share are issued for $100,000 cash.$1 Par ValueNo ParValueNo Par,$1 Stated ValueCash ....................................................... 100,000 Ordinary share capital, par value .............. 10,000 Ordinary share premium (remainder) 90,000To record issue of ordinary share.Cash ....................................................... 100,000 Ordinary share capital............................. 100,000To record issue of ordinary share.Cash ................................................................... 100,000 Ordinary share capital, stated value ..................... 10,000 Ordinary share premium (remainder) . 90,000To record issue of ordinary share.Shares Issued forNoncash ConsiderationApply the general valuation principle by using fair value of shares given up or fair value of assets received, whichever is more clearly evident.If market values cannot be determined, use appraised values.More Than One SecurityIssued for a Single PriceAllocate the lump-sum received based on the relative fair values of the two securities. If only one fair value is known, allocate a portion of the lump-sum received based on that fair value and allocate the remainder to the other security.Toys Ltd issued 5,000 ordinary shares, $10 par value and 3,000 preference share, $5 par value for $450,000. The market values of the ordinary sharesand preference shares were $55 and $75, respectively. Calculate the additional issuedcapital for each class of shares.More Than One SecurityIssued for a Single PriceCash ............................................................................ 450,000 Ordinary share, $10 par ..................................... 50,000 Ordinary share premium (remainder).... 197,500 Preference share, $5 par 15,000 Preference share premium (remainder). 187,500 To record issue of ordinary and preference share.Share Issue CostsShare issue costs reduce net proceedsfrom selling shares, resulting in a loweramount of additional issued capital. Registration fees Underwriter commissions Printing and clerical costs Legal and accounting fees Promotional costsShare Buybacks A corporation might reacquire shares of its share to . . . support the market price. increase earnings per share.distribute in share option plans.distribute in a bonus issue.use in mergers and acquisitions.thwart takeover attempts.I can account for the reacquired shares by retiring them or by holding them as treasury shares.Accounting for Retired SharesWhen 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.5,000 shares of $2 par value share that were issuedfor $20 per share are reacquired for $17 per share.Price paid is less than issue price. Ordinary share capital................................................. 10,000 Ordinary share premium ...... 90,000 Additional issued capital – share repurchase 15,000 Cash .. 85,000 To record repurchase and retirement of ordinary share.Price paid is more than issue price. Accounting for Retired Shares5,000 shares of $2 par value share that were issuedfor $20 per share are reacquired for $25 per share.Ordinary share capital................................................. 10,000 Ordinary share premium ... 90,000Additional 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.Accounting for Treasury SharesAcquisition of Treasury SharesRecorded at cost to acquire.Resale of Treasury SharesTreasury Shares credited for cost.Difference between cost and issuance price is (generally) recorded in additional issued capital – share repurchase.Treasury shares usually do not have:Voting rights.Dividend rights.Preemptive rights.Liquidation rights.Treasury shares are reported as an unallocated reductionof total Shareholders’ Equity.Retained EarningsRepresents the undistributed earnings of the company since its inception. Retained 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. Accounting for Cash DividendsDeclared by board of directors.Not legally required.Creates liability at declaration.Requires sufficient Retained Earnings and Cash.Declaration dateBoard of directors declares a $10,000 cash dividend.Record a liability. Declaration Date:Retained earnings ........................................ 10,000 Dividends payable .............................. 10,000To record declaration of cash dividend.Date of Record Shareholders holding shares on this date will receivethe dividend. (No entry needed) Dividend DatesDate of PaymentRecord the dividend payment to shareholders.Ex-dividend date The first day the shares trade without the right to receive the declared dividend. (No entry needed) Date of Payment:Dividends payable ........................................ 10,000 Cash .............................. 10,000To record payment of cash dividend.Property DividendsDistributions of non-cash assets.Record at fair value of non-cash asset.Recognize gain or loss for difference between book value and fair value. Accounting for Bonus IssuesDistribution of additional shares to owners.No change in total shareholders’ equity.All shareholders retain same percentage ownership.No change inpar values.No entry needed.But corporation laws may require reclassification within shareholders’ equityBonus issue > 25%Record at parvalue of share.LargeBonus issue < 25%Record at current fairvalue of share.SmallIFRSU.S. GAAP Accounting for Bonus Issues CarCo declares and distributes a 1-for-5 bonus issue on 5 million ordinary shares. Par value is $1; market value is $20. Retained earnings (1,000,000 x $20)............................. 20,000,000 Ordinary share capital (1,000,000 x $1). 1,000,000 Ordinary share premium ..... 19,000,000To record declaration and distribution of bonus issue.Additional shares distributed = 5,000,000 shares ÷5 = 1,000,000 sharesIf the corporation law requires a reclassification from retained earnings to issued capital of an amount equal to the market value of the bonus shares distributed, the journal entry is:If the corporation law requires a reclassification from share premium to share capital of an amount equal to the par value of the bonus shares distributed, the journal entry is:Ordinary share premium (1,000,000 x $1)....................... 1,000,000 Ordinary share capital (1,000,000 x $1). 1,000,000To record declaration and distribution of bonus issue.Share splits change the par value per share and the number of shares outstanding, but the total share capital is unchanged, and no journal entry is required. Share SplitsAssume that a corporation had 3,000 of $2 par value ordinary shares outstanding before a 2–for–1 share split.IncreaseDecreaseNo ChangeAppendix 18 ─ Quasi ReorganizationsPurposeTo allow a company undergoing financial difficulty, but with favorable future prospects, to get a fresh start by writing down inflated assets and eliminating an accumulated balance in retained earnings.ProceduresAssets and liabilities are revalued to reflect market values, with corresponding debits and credits to retained earnings.The debit balance in retained earnings is eliminated first against additional issued capital or share premium, and then, if necessary, against ordinary share capital.Retained earnings is dated to indicate when the new accumulation of earnings began.Emerson-Walsch Corporation has incurred losses for several years. The board of directors voted to implement a quasi reorganization, subject to shareholder approval. The statement of financial position prior to restatement, in millions, follows : Quasi ReorganizationsFair values: Inventory = $300,000,000 and Property, plant, and equipment = $225,000,000.Let’s prepare the journal entries necessary for the quasi reorganization.To revalue assetsQuasi ReorganizationsTo eliminate the deficit in retained earningsRetained earnings .................. 250,000,000 Inventory . 75,000,000 Property, plant, & equipment 175,000,000To record reduction to fair value of assets.Share premium ............................ 150,000,000 Ordinary share capital .. 400,000,000 Retained earnings .. 550,000,000To eliminate the deficit in retained earnings.$300,000,000 + $250,000,000Statement of financial position immediately after restatement.Quasi ReorganizationsEnd of Chapter 18