LECTURE NOTES

CHAPTER 11
Company financial statements
(– the overall topics)
truongthihanhdung@uel.edu.vn
Topic list
1. The nature of limited liability companies (corporations)
2. Equity: Shares capital
3. Equity: retained earnings and other reserves
4. Dividends
5. Right issues and bonus issues of share
6. Non current liabilities
7. Provision IAS 37
8. Tax
9. Revenue IFRS 15
10. The regulatory framework for company FSs

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Limited liability companies 1

Features
 Separate legal existence
 Limited liability companies offer limited liability to their owners (shareholders).
If the company becomes insolvent, the maximum amount that an owner stands to
lose is his share of the capital of the business.
This is an attractive prospect to investors. Limited liability companies may be
private or public. IAS 1 sets out a suggested format for financial statements.
Limited liability companies 1

Public and private company

Companies are either public or private companies.
 Public company has 'plc' in its name. A public company may offer
its shares for sale to persons who are unrelated to the company,
namely the public.
 Private company ends its name with 'Limited' or 'Ltd'. Private
companies cannot offer their shares for sale to the public at large.
Limited liability companies 2

Accounting for companies

Companies have distinctive/different characteristics to be accounted for.
 Owners' capital (known as 'equity' and comprising share capital and reserves)
 Borrowings (non-current liabilities)
 Provisions (du phong) – liabilities (a probable liabilities)
 Taxation on profits (income tax)
 Dividends
Definitions should be differentiated

ꟷ Stock authorized issued (von duoc phep phat hanh)

ꟷ Stock called – up (von thuc te goi: Dr Cash/Cr SC)
ꟷ Stock paid – up (von da gop du, phan chua gop du treo o Other Receivables)
ꟷ Ex: You wanna issue 1.000 shares, but the gov accept 800 shares issues, 1$
each share, received $600. Journal entry:
Dr Cash 600
Dr Other receivables 200
Cr Share capital 800
SHARE CAPITAL

Ordinary shares and preference shares

Winding up: the process of closing a company

Irredeemable and redeemable preference shares and
Dividends (*****)

BECAUSE THE COMPANY HAVE THE OBLIGATIONS TO PAY BACK MONEY TO THE
SHAREHOLDERS OF REDEEMABLE PREFERENCE SHARES NCL (SUBSTANCE OVER FORM)

Redeemable: change into cash

Convertible: change into other forms/shapes SUBSTANCE OVER FORM
SHARE CAPITAL
Accounting for share capital
When shares are issued at their nominal value and they are fully paid:
DEBIT Cash X
CREDIT Share capital (nominal/face/par value) X

When shares are issued at a premium to their nominal value, and the full amount is paid:
DEBIT Cash X
CREDIT Share capital (nominal value) X
CREDIT Share premium (excess over nominal value)X
When shares are issued and called up at their par value but an amount remain unpaid:
Dr Cash
Dr Other receivables
Cr Share capital
RESERVES

A company might have a number of different reserves, each set up

for a different purpose, including:
 Share premium account
 Retained earnings
 General or other reserves
Dividends

Equity
dividends
Preference
dividends
Equity dividends (for ordinary shareholders)

 Equity dividends can be quoted in terms of pence amount each share

receives, for ex, the equity share information may appear in the trial
balance as follows:
 The company paid an equity dividend of 5c per share- dividend paid
= $20,000 = 0.05 x 400,000

Dr Cr
$ $
Ordinary shares capital ($1 per share) 400,000
Preference dividends

 Preference dividends are paid before ordinary shareholders are entitled for any equity
dividends. Preference shares may appear in the trial balance as follows:
 Case 1: Preference dividend paid = $100,000 x7%=$7,000
 Case 2: Finance cost (interest on preference shares) = $7,000

Case 1 Dr Cr
$ $
7% $1 irredeemable preference shares (Equity) 100,000

Case 2 Dr Cr
$ $
7% $1 redeemable preference shares (NCL) 100,000
BONUS ISSUES AND RIGHTS ISSUES

Rights issues Bonus issues

Shares available to existing shareholders These are shares issued by the company to
equal to their holdings which can be bought at the existing shareholders in specific proportion
a discounted price for a definite period of time. of their holdings, free of cost.

Created out of accumulated profits and

These are additional shares created
reserves.

To bring the market price of the shares within

To raise new/fresh capital for the company.
attractive ranges.

Bonus issues = Scrip Issues = Capitalization

issues
BONUS
BONUSISSUES
ISSUESAND
ANDRIGHTS
RIGHTSISSUES
ISSUES

Rights issues Bonus issues

A company declares a 2 for 5 bonus issues

A company declares a 1 for 5 rights issues to to existing shareholders- 5 old shares get
existing shareholders- 5 existing shares 2 new free shares.
held/old shares are offered in exchanging for
1 new shares.
Bonus issues and rights issues
Liabilities in this course
 Non-current liabilities:
 Debt securities: debentures, loan stock and bonds
 Bank loans
 Redeemable preference shares
 Current liabilities:
 Provision
 Tax liabilities
 Note: If a preferred stock is redeemable, it means that the issuing company can
exchange those shares for cash (liability in nature – substance over form)
Liabilities

Debentures (trái khoán)

• a long-term security yielding a fixed rate of interest, issued by a company and
secured against assets.

Loan stock (cổ phiếu nợ)

• stocks and shares that a company sells to investors for an
agreed period in order to raise money from the fixed interest rates of the loan

Bonds (trái phiếu)

• A bond is a fixed income instrument that represents a loan made by an
investor to a borrower (typically corporate or governmental)
Non current liabilities
 On issue debts:
Dr Cash
Cr Non current liabilities
 On repayment of debt:
Dr Non-current liabilities
Cr Cash
Remember accrue interest (on months-base) at the end of the period when you have any
kinds of NCL:
Dr Interest expenses/ Finance cost
Cr Interest payable/ Accruals
Provision – IAS 37
 Provision: a liability of uncertain timing or amount.
 Liability:
─ present obligation as a result of past events
─ settlement is expected to result in an outflow of resources (payment)
 Provision is a liability with probable (more than 50% likely) outflow.
 Common provision in this course:
─ Provision for legal claim/legal cases
─ Provision for warranty

Provisions are not contra-asset accounts. It’s not for Inventory and Receivbales.
Inventory - Inventory loss – IAS 02
Receivables  Allowances for receivables
Accounting for provision

Step 1: create provision

• Dr Expense (SPL)
• Cr Provisions (current liabilities – SFP)
Step 2: incur expenditure
• Dr Expense (amount greater than the provision made)
• Dr Provision
• Cr Cash
Step 3: remove excess provision
• Dr Provision
• Cr Expense
Example 1 – legal claim provision

 An employee of A Ltd damaged his hand whilst using machinery that was out fitted with adequate safety
guards. In the year end 31/7/x7, the employee sued A for $100,000 in respect of the damages he suffered. A’s
lawyer have indicated that the employee is 80% likely to win the case and agree that the amount payable is
likely to be $100,000. They are not sure when the amount will be settled, but it is expected to be within the
next 12 months (short-term). Record the entries?- this is uncertain liability, but it probable b/c 80% it will
happen---- so we call it provision
 B/c of there is obligation from past event, outflow 80% (>50%)- book provision - Current liabilities in SFP.
Example 2 – warranty provision
 A company sells a product with a standard two-year warranty. The company estimates that 5%
of warranties will be invoked (*) at a cost of $15,000.
invoked (*): this means in the exam it is probable that this expenditure will be incurred.
Entry This year:
Dr Ex 15,000
Cr Provisions 15,000
 The following year, due to a change in material used, the company estimated that only 3% of
warranties would be invoked, at a cost of 9,000. there has been no claims against the warranty
provision in the year. Record the entries?
 Entry following year:
Dr Provisions 6,000 ( we wanna make the provision back to 9,000)
Cr Ex 6,000
(Income) Tax liabilities

 Any tax due on profits is the company’s liability and therefore must be
shown:
 As a deduction (expenses) in SPL
 As a tax payable in SFP
 Any over-provision or under-provision in previous reporting periods is
credited/debited in the current reporting period’s SPL.
Accounting for tax

 Tax liabilities arises:

Dr Tax expense (SPL)
Cr Tax payable (SFP) (estimates at year end = Profit before tax x Tax rate)
 When payment:
Dr Tax payable
Cr Cash (real cash have to be paid next year, when we submit cash for tax to
the GOV)
Example 3

 A plc has estimated that $90,000 is payable in tax on the profits

earned in the year ended 31/12/x1. None of this tax has been paid by
the date of the SFP. Record the entries?
Example 4

 In the year to 31/12/x2, A plc has a credit balance brought down on its
tax payable account of £90,000(1). It agrees with HMRC that the tax due
on x1’s profits is £87,000, which it pays in Feb x2 (2) Its over-provision
for x1 is therefore £3,000 (3). It estimates that its tax due on x2’s profits
should be £100,000 (4).
 How much is Tax payable and Tax expenses in X2?
Revenues (IFRS 15)

 Revenues: income arising in the course of an entity’s ordinary activities. It may

include:
 Sales
 Turnover
 Interest
 Dividends
 Royalties
Revenues include both credit and cash sales, net of trade and early settlement
discounts, refunds and VAT.
Revenues (IFRS 15)
OVERVIEW OF REVENUE RECOGNITION
International Financial Reporting Standard 15 – Objective [IFRS 15.01]
The objective of IFRS 15 is to establish the principles that an entity shall apply to
report useful information to users of financial statements about the nature, amount,
timing and uncertainty of revenue and cash flows arising from a contract with a
customer.
Meeting the objective [IFRS 15.02]
To meet the objective in paragraph 1, the core principle of IFRS 15 is that an entity
shall recognise revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the entity expects to
be entitled in exchange for those goods or services.
New Revenue Recognition Standard (IFRS15)
THE FIVE-STEP PROCESS

Assume that Airbus (FRA) Corporation signs a contract to sell airplanes to Cathay Pacific Airlines
(HKG) for €100 million. ILLUSTRATION 1
Five Steps of Revenue Recognition

A contract is an agreement between two parties

Step 1: Identify the contract that creates enforceable rights or obligations. In
with customers. this case, Airbus has signed a contract to deliver
airplanes to Cathay Pacific.

Step 2: Identify the separate Airbus has only one performance obligation—to deliver airplanes to
performance obligations in the Cathay Pacific. If Airbus also agreed to maintain the planes, a
contract. separate performance obligation is recorded for this promise.
THE FIVE-STEP PROCESS
THE FIVE-STEP PROCESS
ILLUSTRATION 1 Five Steps of Revenue Recognition

Transaction price is the amount of consideration

Step 3: Determine the
that a company expects to receive from a customer in exchange for
transaction
transferring a good or service. In this case, the transaction price is
price.
straightforward—it is €100 million.

Step 4: Allocate the transaction

In this case, Airbus has only one performance
price to the separate
obligation—to deliver airplanes to Cathay Pacific.
performance obligations.
THE FIVE-STEP PROCESS
THE FIVE-STEP PROCESS
ILLUSTRATION 1 Five Steps of Revenue Recognition

Step 5: Recognize revenue Airbus recognizes revenue of €100 million for the
when sale of the airplanes to Cathay Pacific when it satisfies its
each performance obligation performance obligation—the delivery of the airplanes to Cathay
is satisfied. Pacific.
The regulatory framework for company
financial statements

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IAS 1 Presentation of financial statements

A complete set of financial statements in accordance with IAS 1 (revised)

comprises:
a) a statement of financial position
b) a statement of profit or loss
c) a statement of comprehensive income (outside the scope of Accounting)
d) a statement of changes in equity (outside the scope of Accounting)
e) a statement of cash flows
Structure and content of financial statements
in general
 IAS 1 requires an entity to clearly identify: [IAS 1.49-51]
─ the financial statements, which must be distinguished from other information in a published
document
─ each financial statement and the notes to the financial statements.
 In addition, the following information must be displayed prominently, and repeated as
necessary: [IAS 1.51]
─ the name of the reporting entity and any change in the name
─ whether the financial statements are a group of entities or an individual entity
─ information about the reporting period
─ the presentation currency
─ the level of rounding used (e.g. thousands, millions).
IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors

 IAS 8 is applied in selecting and applying accounting policies, accounting for

changes in estimates and reflecting corrections of prior period errors.
 The standard requires compliance with any specific IFRS applying to a
transaction, event or condition, and provides guidance on developing accounting
policies for other items that result in relevant and reliable information.
Changes in accounting policies and corrections of errors are generally
retrospectively accounted for, whereas changes in accounting estimates are
generally accounted for on a prospective basis.
Ethics as an issue for regulators

 In order to give trust for financial information, accountants should be:

 Honest and truthful (faithful presentation)
 Transparent and adaptable
 Legally compliant
 Consistent
Homework

 Self test textbook chap 11

 Test bank chap 11

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THANK YOU!