CHAPTER 11

COMPANY FINANCIAL
STATEMENTS

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 LEARNING OBJECTIVES
 Record and accounts for transactions and events resulting in
income, expenses, assets, liabilities and equity in accordance with
the appropriate basis of accounting and the laws, regulations and
accounting standards applicable to the financial statement
 Record and account for changes in the ownership structure and
ownership interests in an equity
 Identify the main components of a set of financial statements and
specify their purpose and interrelationship
 Prepare and present a statement of financial position, statement of
profit or loss, statement of changes in equity and statement of cash
flow from the accounting records and trial balance in a format which
satisfies the information requirements of entity
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TOPIC LIST
1. The nature of a limited company
2. Equity: share capital
3. Equity: retained earnings and bonus isues of shares
4. Dividends
5. Rights issues and bonus issues of shares
6. Non-current liabilities
7. Provisions (IAS 37) (FRS 102 s21)
8. Tax
9. Revenue (IFRS 15) (FRS 102 s23)
10. The regulatory framework for company FSs

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1. THE NATURE OF A LIMITED COMPANY
1.1. Share capital and shareholders
 Initial capital – divided into equal size (shares)
 Equity share capital
 By law, shares must have par value (‘nominal value’)
 All shares of same type (‘class’) have same par value
 Distinguish par value and:
Issue price
Market value

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1. THE NATURE OF A LIMITED COMPANY
1.2. Public and private companies
 Public company (‘plc’)
 May offer securities (shares and loan stocks) to unrelated
persons (‘the public’)
 Stricter regulation
 Before it can trade: at least £12,500 plus Premium as
cash (net asset of at least £12,500)
 Private company (‘ltd’)
 Can not offer securities ‘the public’
 No minimum level of net asset
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1. THE NATURE OF A LIMITED COMPANY
1.3. Accounting for companies
 Equity
 Debt capital
 Provisions
 Tax on profits
 Dividends

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2. EQUITY: SHARE CAPITAL
2.1. Equity shares and preference shares
 Equity share capital – each share represents an equal
interest in the ownership of the company
 Preference shares – dividends out of profits (not an
expense??) (‘irredeemable preference shares) before
equity shareholders
 Retained earnings

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 2. EQUITY: SHARE CAPITAL
2.2. Issued and called-up share capital
 Issued share capital (allotted share capital) – par value
 Called-up share capital: amounts in instalments – figure for
share capital in SFP.
Worked example: Called-up share capital
A company issues 100,000 shares of £1 at par value, but only
calls up 75p per share as a first instalment. The issued share
capital is £100,000, but the called -up share capital is only
£75,000 The figure in the statement of financial position will be
£75,000.
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 2. EQUITY: SHARE CAPITAL

2.2. Issued and called-up share capital

If a company has called-up share capital, but is waiting for
payment from some shareholders, it has paid up capital of less
than its called-up capital.
Worked example: Paid up capital
A company issues 1 million shares of £1 at par, and asks
for payment in full on issue, but it is still owed £5,000 by
shareholders who have yet to pay what they owe. The called-up
share capital is £1,000,000, but the paid up share capital is only
£995,000. In the statement of financial position, the share capital
(a credit balance) is the called-up share capital of £1,000,000,
and the unpaid capital of £5,000 is shown as an 'other
receivable' (a debit balance).
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2. EQUITY: SHARE CAPITAL
2.3. Irredeemable and redeemable preference shares
 Irredeemable preference shares: company not entiltled
to buy back (to redeem)
 Redeemable preference shares: company is entittled
to buy back => non-current liabilities (debt capital)

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 2. EQUITY: SHARE CAPITAL
2.4. Accounting for share capital
 When shares are issued at their par value and they are fully
paid
 When shares are issued at a premium to their par value,
and the full amount is paid
 When shares are issued at their par value but an amount
remains uncalled by the company
 When shares are issued and called-up at their par value but
an amount remains unpaid

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 2. EQUITY: SHARE CAPITAL

2.4. Accounting for share capital

 When shares are issued at their par value and they are fully paid:
DEBIT Cash X
CREDIT Share capital (par value) X
 When shares are issued at a premium to their par value, and the
full amount is paid:
DEBIT Cash X
CREDIT Share capital (par value) X
CREDIT Share premium (excess over par value) X

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 2. EQUITY: SHARE CAPITAL
2.4. Accounting for share capital
 When shares are issued at their par value but an amount remains
uncalled by the company
DEBIT Cash X
CREDIT Share capital (called-up amount of issued shares) X
 When shares are issued and called-up at their par value but an
amount remains unpaid:
DEBIT Cash X
DEBIT Other receivables (unpaid capital) X
CREDIT Share capital (par value) X
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3. EQUITY: RETAINED EARNINGS AND OTHER
RESERVES

3.1. Retained earnings

 Retained earnings: a reserve used to accumulate the
company’s retained earnings
 Retained earnings: income retained within the
business (accumulated profits and losses over time)

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3. EQUITY: RETAINED EARNINGS AND
OTHER RESERVES
3.2. Share premium
 Share Premium: the excess of the issue price above
par value
 Note: shares issued at a discount? (price below par
value?)

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3. EQUITY: RETAINED EARNINGS AND
OTHER RESERVES
3.3. Other reserves
 Other reserves: exist! 

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4. DIVIDENDS
4.1. Equity dividends
 Dividends to shareholders: decided by the BODs
 Quoted: pence amount each share or percentage of
par value

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4. DIVIDENDS
4.2. Preference dividends
 Preference dividends (???!!!) out of profits – before
equity (ordinary) shareholders
 Quoted: pence amount each share or percentage of
par value

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 4. DIVIDENDS

4.3. Calculating the dividends from R/E

 Opening retained earnings + profit for the year –
dividends paid in the year = closing retained earnings.
 Worked example: Dividends and retained earnings
The retained earnings of a company at 1 January 20X5 were
£800,000. The retained earnings at 31 December 20X5 are
£1,140,000. The profit for the year is £370,000.
Requirement: What was the total dividend paid during the
year?

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5. RIGHTS ISSUES AND BONUS ISSUES OF
SHARES
5.1. Rights issues of shares
 Right issues: new shares offered to existing owners
 Note: mind the wordings, ie ‘1 for 4’

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5. RIGHTS ISSUES AND BONUS ISSUES OF SHARES
5.1. Rights issues of shares
Interactive question 1: Rights issue
The statement of financial position of Omnibus plc contains the following information.
The company decides to make a 1 for 3 rights issue for cash, fully paid, at a price of
£1.80 per share.
ASSETS £’000
Non-current assets 18,600
Current assets 2,900
Total assets 21,500
EQUITY AND LIABILITIES
Equity
Share capital: equity shares of 20p each 6,000
Share premium 5,700
Retained earnings 7,000
Total equity 18,700
Total liabilities 2,800
Requirement: Total equity and liabilities 21,500
What are the balances for (a) current assets, (b) share capital and (c) share premium
after the rights issue? 21
5. RIGHTS ISSUES AND BONUS ISSUES OF
SHARES
5.2. Bonus issues of shares
 Bonus issues (capitalisation issue/ scrip issue): issue
of fully paid shares to existing owners, free
 Question: bonus issues raises any cash?
 Note: Assume that a company uses share Premium
as fully as possible before using R/E, unless told
otherwise!

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5. RIGHTS ISSUES AND BONUS ISSUES OF SHARES
5.2. Bonus issues of shares
Worked example: Bonus issue
A company has the following statement of financial position.
£’000
ASSETS 30,000
EQUITY AND LIABILITIES
Equity
Share capital: equity shares of £1 5,000
each
Share premium 1,300
Retained earnings 9,700
Total equity 16,000
Total liabilities 14,000
The company decides to make
Total equity a 2 for 5 bonus
and liabilities 30,000 issue of shares.
Requirement:
Prepare the statement of financial position after the issue. 23
5. RIGHTS ISSUES AND BONUS ISSUES OF SHARES
5.2. Bonus issues of shares
Worked example: Bonus issue
The statement of financial position after the issue shows no
change in assets or liabilities, but equity has changed, as follows:

£’000
ASSETS 30,000
EQUITY AND LIABILITIES
Equity
Share capital: equity shares of 7,000
£1 each (£5m + £2m)
Share premium (£1.3m - £1.3m) 0
Retained earnings (£9.7m - 9,000
£0.7m)
Total equity 16,000
Total liabilities 14,000 24
5. RIGHTS ISSUES AND BONUS ISSUES OF
SHARES
5.2. Bonus issues of shares
5.2.1. Calculating the dividends from R/E where there
has been a bonus issue during the year

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5. RIGHTS ISSUES AND BONUS ISSUES OF SHARES
5.2. Bonus issues of shares
Interactive question 2: Bonus issue
Statement of financial position of Canvat plc at 31/12/X1 is as follows:

£’ 000
ASSETS 2,000
EQUITY AND LIABILITIES
Equity
Share capital: 800,000 50p equity 400
shares
Share premium 500
Retained earnings 300
Total equity 1,200
Total liabilities 800
The company decides Total
to make
equityaand
2 for 5 bonus issue of shares.
liabilities 2,000
Requirement:
Prepare the statement of financial position after the issue.
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6. NON-CURRENT LIABILITIES
6.1. Accounting for non-current liabilities
 On issue of debt
 On repayment of debt
 Discussion:
Redeemable v irredeemable preference shares?
Debt due for repayment in less than 12 months after
SFP date (prudence!)

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7. PROVISIONS (IAS 37) (FRS 102 S21)
 A provision: liability of uncertain timing or amount
 A liability: present obligation – past events – result in
outflow from resources
 Discussion: provision v accrual?
 IAS 37: critiria:
Present obligation to incur expenditure
Probable (>50%)

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7. PROVISIONS (IAS 37) (FRS 102 S21)
7.1. Accounting for provisions
1) Create provision
2) Incur expenditure
Note: expenditure for which the provision was created is
incurred, it should be charged against the provision
(therefore removing the provision from current liabilities)
3) Remove excess provision

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 7. PROVISIONS (IAS 37) (FRS 102 S21)

7.1. Accounting for provisions

Worked example: Provision for legal claim
An employee of Stop Ltd damaged his hand whilst using
machinery that was not fitted with adequate safety guards.
In the year ended 31 July 20X7, the employee sued Stop
Ltd for E100,000 in respect of the damages he suffered.
Stop Ltd's lawyers 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.
What is the accounting treatment for this case?
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 7. PROVISIONS (IAS 37) (FRS 102 S21)

7.1. Accounting for provisions

Worked example: Provision for legal claim (Cont.)
On 3 November 20X7, the claim was settled in favour of the
employee and Stop Ltd paid him £80,000.
What are the journals to record the settlement of the
claim and to remove the provision.

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8. TAX
8.1. Accounting for tax
 Tax (not VAT!): single tax payable ledger account is
used for both the expense in SPL and liability in SFP

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8. TAX
8.1. Accounting for tax
 When a tax liability arises and is identified, the double
entry to record it is:
DEBIT Tax expense (statement of profit or loss) £X
CREDIT Tax payable account £X
 When a tax payment is made:
DEBIT Tax payable account £X
CREDIT Cash £X

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8. TAX
8.1. Accounting for tax
 At the end of the reporting period, any balance on the
tax payable account is carried down. Usually this is a
credit balance and is shown as 'Tax payable' under
current liabilities on the statement of financial position.

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8. TAX
8.1. Accounting for tax
Since a company's statement of profit or loss is usually
prepared before the tax due is finally agreed with HMRC,
the expense in SPL is an estimate. It nearly always
proves to be too high (over-provision) or too low (under-
provision).

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8. TAX
8.1. Accounting for tax
Instead of going back to the financial statements for the
reporting period and changing them:
 Any over-provision from the previous reporting period
reduces the tax expense for the subsequent period.
 Any under-provision from the previous reporting period
increases the tax expense for the subsequent period
Note: VAT, PAYE/NIC – other payables (not tax payable)

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9. REVENUE (IFRS 15) (FRS 102 S23)
9.1. IFRS 15, Revenue from Contracts with
Customers
1) Identify the contract
2) Separate performance obligations
3) Price
4) Allocate price to performance obligation
5) Recognise revenue when performance obligation
satisfied

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10. THE REGULATORY FRAMEWORK FOR
COMPANY F/S
Rules and regulations are applied to:
Content
Accounting concepts
Presentation

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10. THE REGULATORY FRAMEWORK FOR
COMPANY F/S
10.1. Why does IAS 1 include formats?
 Find items easily
 Make comparisons

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10. THE REGULATORY FRAMEWORK FOR
COMPANY F/S
10.2. Structure and content
 Name
 Date of SFP/report period
 SFP: current/non-current items (assets/liabilities)
 Accounting policies note: measurement basis,
accounting policies

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10. THE REGULATORY FRAMEWORK FOR
COMPANY F/S
10.3. IAS 8. Accounting policies, Channges in
Accounting Estimates and Errors
 IAS 8: prescribes criteria for selecting and changing
accounting policies, accounting treatment and
disclosure

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10. THE REGULATORY FRAMEWORK FOR
COMPANY F/S
10.4. Ethics as an issue for regulators
 Honest and truthful
 Transparent and adaptable
 Legally compliant
 consistent

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End of Chapter 11
Thank you!

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