Kế toán, kiểm toán - Chapter 15: Shareholders’ equity

CHAPTER 15:SHAREHOLDERS’ EQUITYCHAPTER 15: Shareholders’ EquityAfter studying this chapter, you should be able to:Discuss the characteristics of the corporate form of organization, rights of shareholders, and different types of shares.Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.Understand the components of shareholders’ equity and how they are presented.Understand capital disclosure requirements.Calculate and interpret key ratios relating to equity.Identify the major differences in accounting between ASPE and IFRS, and what changes are expected in the near future.3Primary Forms of Business OrganizationProprietorshipPartnershipCorporationNot-for-profitNo shares issued; created to provide services for members or societyProfit-orientedEngaged in making financial returns for their ownersShares publicly tradedShares privately heldPrivate SectorPublic SectorCrownCreated by government statute to provide public servicesMunicipalities, Cities, Etc.4Corporate LawArticles of IncorporationCorporation Charter IssuedCorporation Recognized as Legal Entity5Corporate LawThe Canada Business Corporation Act (CBCA) is a relevant business corporation actProvincial business corporation acts also exist but vary from province to provinceArticles of incorporation prepared and submittedCompany nameLocation of registered officeClasses and authorized sharesShare transfer restrictions (if any)DirectorsBusiness restrictions6Share Capital SystemShares grouped by “class” (e.g. Class A Common)Within each class, each share equalEach share contains certain rights and privilegesEase of transfer of ownershipAdvantage to both issuing corporation and investorShare becomes more attractive investment7Share Capital SystemAs a minimum each share has these basic or inherent rightsTo share proportionately in profits and lossesThe right to vote for directorsTo share proportionately in assets upon liquidationPreemptive right for any new share issues can also be assigned under CBCA8Types of SharesCommon SharesRepresent basic ownership interestRepresents residual ownership interest - have ultimate risk of loss and benefit from successDividends or assets on dissolution are not guaranteedTrue advantage is in the right of Common Shares to ultimately control by way of voting9Types of SharesPreferred SharesCertain inherent rights given up or exchanged for other special rights or privilegesPreference given onDividends (usually at a stated rate)Claim to assets on dissolutionPreferred shares features (some or all may be attached to a preferred share)Cumulative  Callable/redeemableConvertible  RetractableParticipating10Types of SharesPreferred Shares FeaturesCumulative: Dividends in arrears must be paid before any profits can be distributed to common shareholdersConvertible: The company or holder can exchange the shares for common shares at a predetermined ratioCallable/Redeemable: The issuing company can “call” at its option the preferred shares at specified future dates at stipulated pricesRetractable: The holders can “put” (or sell) their shares to the companyParticipating: Holders can participate with common shareholders in any profit distributions higher than the prescribed rate11Limited LiabilityLimited Liability of ShareholdersUnlike partnership or proprietorship form of businessShareholders not generally liable for the obligations of the corporationShareholders losses restricted to the amount invested in the corporate shares12Formality of Profit DistributionNo amounts may be distributed unless corporate capital is maintained intactUnder the CBCA:There needs to be sufficient capital after the dividend to pay liabilities as they are dueThe realizable value of the corporate assets does not fall below the total of the liabilities and the stated and legal capital for all classes of sharesFormal approval of the Board of Directors requiredDividends must be in full agreement with share capital contractsBefore declaration of a dividend, management should consider availability of funds to pay the dividend13Share Issue - BasicFull amount of proceeds received is credited to the respective share capital account (preferred/common/class type)500 common shares are sold for $10.00 each (issuance costs not included in this transaction). The journal entry is:Cash 5,000 Common Shares 5,00014Shares Sold on a Subscription BasisShares are sold, with “instalment” paymentsShares are not issued, and any rights are not given (e.g., voting, dividends) until the full subscription price is receivedDividends may be attached to some subscription shares, once the initial payment is received15Shares Sold on a Subscription BasisAccounts in share subscription transactionCommon Shares SubscribedSet up a separate one for each type/class of shareAn equity account, reported below the respective share capital accountSubscriptions ReceivableNormally considered a current assetMay be reported as a contra account to the Shares Subscribed account in equity sectionShare CapitalCredited only when the subscription is paid in full, or settled in some other manner in the case of default16Shares Sold on a Subscription Basis500 common shares are sold on subscription for $20 each. 50% is due as initial payment.The initial journal entries would be:Subscriptions Receivable 10,000 Common Shares Subscribed 10,000Cash 5,000 Subscription Receivable 5,00017Shares Sold on a Subscription BasisIf all payments are made as scheduled, the entries would be:Cash 5,000 Subscription Receivable 5,000Common Shares Subscribed 10,000 Common Shares 10,00018Shares Sold on a Subscription BasisIf a subscription contract is defaulted there are generally three possible consequences:Funds paid to date are refunded, often with a deduction for expenses, and the balance of the contract is cancelled Funds paid to date are forfeited transferring it to the Contributed Surplus account, with no refund or shares being issued; balance of the contract is cancelledShares are issued for the amount paid to date, with the balance of the contract cancelled19Shares Sold on a Subscription BasisDefault after first payment – funds refunded with no penalty.Default after first payment – shares issued for amount paid.Common Shares Subscribed 10,000 Accounts Payable (or Cash) 5,000 Subscription Receivable 5,000Common Shares Subscribed 10,000 Share Capital 5,000 Subscription Receivable 5,00020Shares Sold on a Subscription BasisDefault after first payment – funds held by corporationCommon Shares Subscribed 10,000 Subscription Receivable 5,000 Contributed Surplus 5,00021Shares Issued With Other SecuritiesWhen two or more classes of shares are sold for a lump sumAccounting problem is the allocation of the funds received to the respective share classesTwo methods availableProportional method (relative fair value method)Incremental method22Accounting for Share Issue CostsDirect incremental costs incurred to sell shares include legal fees, accounting fees, underwriter fees & commissions, printing and mailing costs, taxes, etc.These amounts are considered to be capital transactions (rather than operating transactions) and therefore should not be included in net income calculationAccounting treatment: debit to Share Capital23Accounting for Share Issue CostsReduction of the amount paid in 1,000 shares sold for $10.00 each, with $500 in issue costsCash 9,500Share Capital 500 Share Capital 10,00024Reacquisition and Retirement of SharesMajor reasons for the reacquisition of a corporation’s own sharesReduce the shares outstanding to increase EPS Have enough shares on hand to meet employee share compensation contracts Buy out a particular ownership interestMeet the needs of a potential mergerStop (or slow down) takeover attemptsReduce number of shareholdersMake a market in the company’s sharesReturn cash to shareholders25Reacquisition and Retirement of SharesShares may be retired when reacquiredMay also (in limited circumstances and jurisdictions) become Treasury Stock (held in treasury for reissue)In Canada, the CBCA requires repurchased shares be cancelled and restored to status of authorized but unissued if a limit to authorized shares exists 26Reacquisition and Retirement of SharesShare capital debited with the original issue or assigned value onlyThe difference then allocated to equity accounts:Contributed SurplusRetained Earnings27Reacquisition and Retirement of Shares - ExampleIn January 2017, Cooke Corp. purchased and cancelled 500 Class A shares at $4 per share. There are 10,500 shares issued and outstanding, with total share capital of $63,000 Common Shares (500 [$63,000/10,500] ) 3,000 Cash (500 shares@ $4.00) 2,000 Contributed Surplus (500 @$2.00) 1,000Assigned share value = $63,000/10,500 = $ 6.00Acquisition cost = per share price/cost 4.00Value over assigned value $2.0028DividendsTwo basic classes of dividends:Return on capital (a share of earnings)Return of capital (liquidating dividends)Important dates:Date of declarationDate of recordDate of payment29Cash DividendsFirst journal entry is on Date of DeclarationDividend becomes legal obligation of the corporationDividends (or Retained Earnings) xxx Dividends Payable xxxOn Date of Payment, the liability is reduced30Cash DividendsBefore the dividend is paid, a current list of shareholders needs to be prepared (as at the date of record)If a Dividends account is used rather than Retained Earnings at the date of declaration, this account is closed to Retained Earnings at year end31Dividends in KindDividends payable in corporation assets other than cashThese dividends are normally measured at the “fair value” of the asset given upFair value can be determined by referring to estimated realizable value of same or similar assets, quoted market prices, independent appraisals etc.32Stock DividendsNo assets distributed (unlike cash dividends)Unlike with cash dividends or dividends in kind, total shareholders equity does not changeAmounts are “re-arranged” as a result of the stock dividendThe transaction is measured at the fair value of the shares at declaration dateEach shareholder has the same proportionate interest in the corporationHowever, book value per share decreases33Stock Dividends - Example1,000 common shares outstandingRetained earnings = $50,00010% stock dividend declaredFair (market) value of share = $130 per shareDividends (or Retained Earnings) 13,000 Common Shares 13,0001,000 x 10% = 100 Fair value $13,00034Liquidating DividendsAny dividends paid in excess of the accumulated income of the company represents a liquidating dividendResults in a return of the shareholders’ investment35Dividend PreferencesGiven:$50,000 total declared as dividendsCommon share capital: $400,0001,000 $6 Preferred shares: $100,000Preferred share dividends have been paid for the past 2 yearsCalculate the dividend distribution to common and preferred shareholders based on the different types of dividend preferences 36Non-cumulativeIf shares are non-cumulative and non-participating:Dividends are distributed only when declared, up to the stated amount of the shareNo amount is paid for years where dividends were not declaredThe dividend distribution is therefore:Preferred Shareholders are paid $6,000 ($6 x 1000) Common Shareholders are paid the remaining amount of $44,00037CumulativeIf the preferred shares are cumulative and non-participating:The dividends that were not paid to preferred shareholders in the previous 2 years must also be paidThe dividend distribution is therefore:Preferred Shareholders are paid $18,000 ( ($6 x 1000 x 2) + $6,000)Common Shareholders are paid the remaining $32,000 ($50,000 - $18,000)38ParticipatingIf preferred shares are non-cumulative and fully participating, using the previous data: Preferred CommonCurrent year’s:Preferred ($6 x 1000) $6,000 Common (6% x $400,000) $24,000Remaining $20,000 at a rate of $20,000/$500,000 (i.e. 4%):Preferred (4% x $100,000) $4,000 Common (4% x $400,000) $16,000 TOTAL $10,000 $40,000 39Stock Dividends vs. Stock SplitsStock DividendA type of dividend, so must follow the requirements of dividend accounting Both the number of shares and the amount of share capital generally affectedShares are not exchangedStock SplitIncreases the number of shares outstandingAmount of share capital is not affectedTypically results in a market price per share change 40Components of Shareholders’ EquityContributed CapitalEarned CapitalShare Capital:CommonAnd/orPreferred sharesContributed SurplusRetained EarningsAccumulated other Comprehensive Income41Contributed SurplusContributed Surplus transactionsPar value share issue and/or retirementTreasury share transactionsLiquidating dividendsFinancial reorganizationStock options and warrantsIssue of convertible debtShare subscriptions forfeitedDonated assets by a shareholderRedemption or conversion of shares42Retained EarningsDEBITSNet lossAccounting principle changes Cash, property, stock dividendsSome treasury share transactionsCREDITSNet IncomeAccounting principle changes Adjustments from financial reorganization43Accumulated Other Comprehensive Income (AOCI)Cumulative change in equity from non-shareholder transactions which are excluded from net incomeConsidered to be earned incomeNote that the concept of comprehensive income is not applicable under ASPE44Disclosure of Share CapitalFollowing basic disclosure is required:Authorized share capitalIssued share capitalChanges in share capital since the last statement of financial position date45Disclosure of Share CapitalAdditional disclosures include: Authorized number of shares (if no limit, then so stated)The existence of unique rights Number of shares issued and the amount receivedWhether the shares are par value or no par valueAmount of any dividends in arrears for cumulative preferred sharesChanges during the year, including new issuances and redemptions (under IFRS, presented in statement of changes in equity)Restrictions on retained earnings46Shareholders’ Equity RatiosRate of return on common shareholders’ equityNet income – Preferred dividendsAverage common shareholders’ equityPayout ratioCash Dividends to common shareholders Net income – Preferred dividendsPrice earnings ratioMarket price per share Earnings per shareBook value per shareCommon shareholders’ equityNumber of outstanding shares47Looking AheadThere are several projects being undertaken by IASB and FASB that may impact accounting for shareholders’ equityThese include financial statement project, and project on liabilities and equity48