BALANCE SHEET

SNAPSHOT The financial position of a business that lists the assets, liabilities, and owners' equity at
a particular point in time.

The balance sheet is the most important of the three main financial statements used to
illustrate the financial health of a business.

A balance sheet helps business stakeholders and analysts evaluate the overall financial
position of a company and its ability to pay for its operating needs

In The balance sheet is one of the three fundamental financial statements and is key to
both financial Modeling and accounting. The balance sheet displays the company’s
total assets, and how these assets are financed, through either debt or equity. It can
also sometimes be referred to as a statement of net worth, or a statement of financial
position.

The balance sheet is based on the fundamental equation: Assets = Liabilities + Equity.

BS is divided into two sections:

+
Assets
-
Liabilities & Equity

Assets Liabilities & Equity

(Owned and Used by Business) (Amount Owed & Funding Sources)

The assets section represents the various use

of funds by an enterprise
= The Liabilities & Equity section represents the
various use of funds by an enterprise
These are the assets held by the enterprise, These are the liabilities of the enterprise to
that are needed to operate the business (e.g. the providers of these funds
Office Space, Factory, Raw material, etc.)

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Cash and cash equivalents xxxx Liabilities $M
Assets $M Current Liabilities
Current Assets Account Payable xxx
Account Receivables xxx Accrued Expenses xxx
Inventories xxx Deferred Revenue xxx
Loans & Finance Receivables xxx Commercial Paper xxx
Short Term Marketable Securities xxx Current Portion of Long-Term Debt xxx
Deferred Tax Assets xxx Income Tax Payable xxx
Vendor non-trade assets xxx Current Portion of Capital Leases xxx
Other Current Assets xxx Total Current Liabilities xxxx
Total Current Assets xxxx
Long Term Liabilities:
Investments Deferred Revenue, non-current xxx
Fixed Maturity Securities xxx Long Term Debt xxx
Equity Securities xxx Other non-current Liabilities xxx
Long Term Marketable Securities xxx Financing Leases/Capital Leases xxx
Total Liabilities xxxx
Fixed Assets (PP&E) Commitments & Contingencies xxx
Property, Plant and Equipment, Net xxx Shareholder’s Equity
Goodwill xxx Common Stocks xxx
Regulatory Assets xxx Capital in Excess of Par Value xxx
Acquired Intangible Assets, Net xxx Retained Earnings xxx
Other Assets xxx Accumulated Other Comprehensive xxx
Total Fix Assets (Tangible & Intangible) xxxx Income
Treasury Stock at Cost xxx
Total Assets xxxxx Non-controlling Interests xxx
Total Shareholders Equity xxxx

Total Liabilities and xxxxx

Shareholder’s Equity

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Current Assets

Current assets include those assets expected to be converted into cash within the upcoming fiscal year or the
company’s operating-cycle (the cash-to-cash cycle,) whichever is longer.

Cash and Equivalents:

The most liquid of all assets, cash, appears on the first line of the balance sheet. Cash Equivalents are also
lumped under this line item and include assets that have short-term maturities under three months or assets
that the company can liquidate on short notice, such as marketable securities. Companies will generally
disclose what equivalents it includes in the footnotes to the balance sheet.

Accounts Receivable:
This account includes the balance of all sales revenue still on credit, net of any allowances for doubtful
accounts (which generates a bad debt expense). As companies recover accounts receivables, this account
decreases and cash increases by the same amount.

Inventory:
Inventory includes amounts for raw materials, work-in-progress goods and finished goods. The company uses
this account when it reports sales of goods, generally under cost of goods sold in the income statement.
Inventory represents the purchase of price of goods held for resale. It includes all costs including freight and
delivery for example. In a production-based business the inventory is made up of the following:

a Raw Material
a Work in Progress
a Finished Product
This is illustrated by the following example:

Raw material and consumables 67.4

Work in Progress 4.8
Finished Goods and Goods for resale 91.5
163.7

Production is a complex business process and the cost of inventories includes all items such as labor,
depreciation, factory overheads, components and raw materials:

Production
Labor

Factory Raw
Overheads Materails
Inventory

Depreciation Components

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Balance sheet inventory has not yet been sold. The inventory which has been sold to customers is removed
from the balance sheet and transferred to COGS in the income statement.
The relationship between these items can be summarized in an inventory BASE analysis as follows:

B Beginning - Inventory Balance

Inventories,
A Addition - Inventory Purchased
purchases
and COGS are S Subtraction - COGS (Inventory Sold)
connected E Ending - Inventory Balance

If prices are changing, it matters which inventory cost is allocated into COGS and which remains on the balance
sheet as inventory. Reported profits can be impacted dramatically in an environment of price volatility. There
are three options, First In First Out (FIFO), Last In First Out (LIFO), and Average Cost. The balance sheet and
income statement impact can be seen in the following example:

Purchases FIFO - 1 Unit Sold

Week Purchases Cost Total Cost COGS 15.0
1 1 unit 15.0 15.0 17.0 +
2 1 unit 17.0 17.0 Inventory 19.0 36.0
3 1 unit 19.0 19.0
3 units 51.0

LIFO - 1 Unit Sold Average - 1 Unit Sold

COGS 19.0 COGS 17.0
15.0 + 17.0 +
Inventory 17.0 32.0 Inventory 17.0 34.0

Just like accounts receivable, inventories are stated net of write downs. In the case of inventory, a write down is
normally due to the resale value being below the carrying amount in the balance sheet. Also, inventories are
normally shown as a current asset.

PREPAID EXPENSES
Prepaid expenses represent goods or services paid for upfront where the company expects to use the benefit
within 12 months. It is a future expense that a company has paid for in advance. A prepaid expense is only
recognized in the income statement when the company consumes the product or service.

Until the expense is consumed, it is treated as a current asset on the balance sheet. As the asset is consumed, it
is removed from the balance sheet and expensed through the income statement via retained earnings. If a
company does not consume the prepaid expense within twelve months of payment, it will be reported under
long-term or non-current assets.
EXAMPLES ARE RENT AND INSURANCE

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Example
A company has paid its monthly rental of 15,000 at the end of January in advance for the following two months.
The effect on the balance sheet is as follows:

Asset Liability
cash -100000
Prepaid expenses 100000

Expensed 02/01/2020 Assets Liabilities & Equity

Rent (February) -50,000
Prepaid Expense -50,000
Ending prepaid expense 50,000

Expensed 03/01/2020 Assets Liabilities & Equity

Rent (March) -50,000
Prepaid Expense -50,000
Ending prepaid expense $0.00

EXPLAINATION:

The company recognizes the first expense in February since that was the month of consumption, not January.
After the company expensed February’s rent at the beginning of the month, the prepaid expense account in
the balance sheet decreased to 50,000. When the company expensed March’s rent at the beginning of that
month, it cleared the prepaid expense account.

Prepaid Expenses Versus Accrued Expenses

The key difference is that prepaid expenses are reported as a current asset on the balance sheet and accrued
expenses as current liabilities. A prepaid expense means a company has made an advance payment for goods
or services, which it will use at a future date. Accrued expenses are costs that a company has incurred but not
yet paid by the end of the accounting period.

What is Capital Expenditure?

Capital expenditure, or capex, is the money used to purchase, upgrade or improve a businesses’ long-term
tangible assets such as property, plant, equipment (PP&E).
It is an expenditure that is immediately capitalized (i.e., not expensed directly through the income statement)
but instead is seen as an investment into the company’s ongoing operations.
Capex is vital for companies to grow and maintain their business. A company’s capital expenditures do not initially
appear on the earnings report but can have a big impact on cash flow. Examples of capex are shown below:

Equipment
Office
Land and Computers Furniture Vehicles Licenses Patents Copyrights
buildings
machinery

Capex Formula
Capital expenditure can be derived from a company’s cash flow statement, reported in the cash flow from
investing activities. It can also be calculated using a BASE calculation for net PP&E and rearranging for capex.
BASE analysis compares the beginning amount of net PP&E in the balance sheet (prior year) plus or minus
changes during the current period, in order to give the ending amount of net PP&E in the balance sheet
(current year).

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The net PP&E BASE is as follows:

B Beginning - Prior Year PP&E

A Addition - Capital Expenditure
S Subtraction - Depreciation
E Ending - Reported PP&E

The current PP&E is the PP&E reported in the previous accounting period with the addition of capital expenditure
and subtraction of depreciation. The formula can be rearranged to give the capex formula shown below:

Capex = PP&E(Ending)
- PP&E(Beginning)
+ Depreciation (Subtraction)

PP&E stands for property, plant, and equipment and represents the fixed, tangible assets owned by a company.
They are physical assets that a company cannot easily liquidate.

In summary:
Locate depreciation on the income statement (often not shown and can be embedded in COGs and SG&A or
PP&E note).
Locate the current period property, plant & equipment (PP&E) on the balance sheet.
Locate the prior period PP&E on the same balance sheet.
Rearrange BASE to arrive at capex.

Net amount of PP&E in current year 5,800.00

Net amount of PP&E in prior year 6,000.00
Depreciation expense 400

PP&E (Current Period) 5,800.00

– PP&E (Prior) -6,000.00
+ Depreciation Expense 400
Capex 200

the company has invested 200.0 into its property, plant and equipment. The company has capitalized the
expense on their balance sheet resulting in an increase in the net book (and gross) value of PP&E. Depreciation
is a cost allocation system and represents the consumption of benefits over time, matching the revenues in any
period with the PP&E cost of producing those revenues.

To Capitalize or Expense
A business purchases asset with the expectation it will generate future economic benefits. An asset with the
expectation of producing benefits in less than 12 months (current assets) is expensed through the income
statement for the current accounting period.

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A tangible long-term asset expects to produce future economic benefits for more than 12 months. Rather than
expense the cost of the asset in one accounting period, a business will capitalize the cost of the asset over its
useful life. This results in the future benefits generated by the asset being matched with the cost across future
accounting periods.

Reporting assets this way means the business won’t incur a large one-off expense in its income statement, but
instead will spread the cost of the asset across multiple accounting periods

ACCUMULATED DEPRECIATION
ACCUMULATED DEPRECIATION IS TOTAL REDUCTION IN VALUE OF TANGIBLE ASSETS SINCE IT HAS BEEN PUT IN
USE. it’s the amount of costs allocated to depreciation expenditure so far in the useful life of an asset.
ASSETS OF WHICH ECONOMIC BENEFITS ARE MORE THEN 1 YEAR, THEY CONSIDERED LONG TERM ASSETS
Depreciation is the process of reducing the value of assets in the balance sheet by transferring part of it to the
profit and loss account for each period.

Accounting for Accumulated Depreciation

the accumulated depreciation account is a contra asset account that reduces the book value of the assets
reported on the balance sheet. As the depreciation expense is recognized in profits the accumulated
depreciation balance increases.
The depreciation expense for the year is the portion of the initial cost of a company’s fixed asset allocated to a
single period. Depreciation expenses are recognized on the income statement as non-cash expenses which
decreases the company’s net income.

THERE ARE 2 FAMOUS DEPRECIATION METHODS

1- STRAIGHT LINE METHOD (SLM) - same depreciation value would be charged for each year of a tangible
asset’s life. The future benefits of the asset are expensed at the same rate each year.
2- DOUBLE DECLINE METHOD (DDM) - The amount of depreciation charged to an asset declines each year
because the same fixed percentage is applied to the falling value yearly. As a result, we never get an asset value
down to zero until it is scrapped.

Accumulated depreciation at the start of the period

+ Depreciation expense during the period
– Accumulated depreciation on assets sell off
= Accumulated depreciation at the end of the period

Example 1
A company purchased machinery equipment on 1 January 2019 for INR 100,000. The equipment has a residual
value of INR 10,000 and an expected useful life of 5 years. Calculate the accumulated depreciation account
balance (straight line) as on 31 December 2022.

72000 = ((100000-10000)/5)*4

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Tangible assets, Property, plant & equipment (PPE)
Assets which can be touched or seen.
Common examples include vehicles, buildings and property, plant and equipment (PP&E).

Intangible assets
Assets which we can't touch and see but they do exist. They contribute in revenue generation. They are generally
acquired from third party not created by company itself.
• Goodwill - Reputation and brand recognition
• Intellectual property, such as patents, trademarks and copyrights

Intangible assets which acquired by a third party are recorded in the balance sheet at their purchase price.
Intangibles assets are not revalued upwards. Purchased intangibles are divided into two categories:
Finite (with limited life) - amortized the same way we calculate straight-line depreciation for Property, Plant &
equipment (PP&E).
Infinite (with un limited life) - usually revalue using a present value calculation and impaired if their value has
fallen. Its not regular in nature.
For example, Coca-Cola owns the Coca-Cola brand which is estimated to be worth over $50 billion. The brand is
intangible and was developed internally so it’s not recorded anywhere on the balance sheet.

Brand Equity Company Intellectual

Goodwill Copyrights Trademarks Patents
(Regnition) Reputation Property

Customer Domain Employment Lease Client Trade

Films
Lists Names Contracts Agreements Relationships Secrets

Computer Import
Licenses Permits Franchises
Softwares Quotas

Impairment
Impairment is simply damaged’ or ‘spoiled’. Brand damaged, reputation spoiled.
Both intangible assets (with finite life & infinite life) will undergo impairment testing regularly annually.
When the intangible asset is disposed of, the gain or loss on disposal is included in the income statement.
when the carrying value of goodwill cannot be recovered via sale or use, it is said to be impaired. The goodwill is
impaired when the business will not be able to recover the amount recorded in the company’s balance sheet,
either through use or through a sale. The asset value in the balance sheet must therefore be reduced.
If Management thinks that impairment may have taken place, an impairment review must be conducted. It
involves comparing the net book value with the cash-generating ability of the asset. If the review shows that
there has been impairment of the recorded net book value, the loss in asset value (reduced) results in an
expense in the income statement.

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EQUITY METHOD INVESTMENTS
Companies use the equity method to report their profits earned through investments in other companies. With
the equity method of accounting, the investor company reports the revenue earned by the other company on
its income statement, in an amount proportional to the percentage of its equity investment in the other
company.
Investor companies will use the equity method to report their investments in the investee company when they
have:
• Significant influence but not control. the threshold for "significant influence" is commonly a 20-50%
ownership
• Exception – if the investor company owns 55% but anti-trust issues prevent it from having control.
• Exception – if you have a board veto and own 45%, then you would probably fully consolidate.

The investor company would report the investment as a one-line consolidation – one line on the income
statement, balance sheet and cash flow statement. The investment on the balance sheet would reflect at the
original cost, then retained earnings would be added over time. In most cases, the balance sheet does not
reflect the fair value of the investment. The investment is initially recorded at historical cost and adjustments
are made to the value based on the investor's percentage ownership in net income, loss, and dividend payouts.
The investment's value is periodically adjusted to reflect the changes in value due to the investor's share in the
company's income or losses. Adjustments are also made when dividends are paid out to shareholders.

EXAMPLE:
Nestle owns a 23.2% stake in L’oreal, which is treated as an equity method investment.
One the income statement is a one-line called: Income from Associates and Joint Ventures.” The line is below tax
and shown net of taxes So Nestle’s share of income from equity investments (Which is largely L’oreal) is 906MM.

Financial Income 250

Financial Expense (1 011)
Profit Before Taxes, associates and joint ventures 12 741

Taxes (2 412)
Income from associates and joint ventures 906
Profit for the Year 11 235
Of which attributable to non-controlling interest 323
Of which attributable to shareholder of the parent (Net Profit) 9 912

On the balance sheet, a long-term asset shows the original purchase price plus any reinvested
earnings to date:

Non-Current Assets
Property, Plant and Equipment 39 856
Goodwill 41 702
Intangible Assets 18 564
Investments in associates and joint ventures 9 871
Financial Assets 2 387
Employee Benefits Assets 847
Current Income Tax Assets 47
Deferred Tax Assets 1 917

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In millions of CHF 2018
L’Oreal Other Associates Joint Ventures Total
At 1st January 8 098 1 190 2 198 11 486
Currency retranslation (261) (42) (52) (355)
Investments - 206 42 248
Divestments - (3) (977) (980)
Share of results 1 044 (142) 25 927
Share of other comprehensive income 125 1 (30) 96
Dividends and interest received (543) (23) (127) (693)
Other (82) - 12 70
At 31st December 8 381 1 187 1 091 10 799

For L’Oreal, the 2018 year started with 8,098MM and Nestle then added it’s share of L’Oreal’s net income of
1,044MM (this number is different than the 906MM on the income statement as there were other associates
and JVs, some of which were lossmaking so Nestle took their share of the other company’s losses). When Nestle
receives dividends from L’Oreal these are deducted from the investment and added to the cash balance.
On the cash flow statement, the equity income of 1,044MM is subtracted in the cash flow from operations, and
usually the dividends received are added to the cash flow from operations (there is scope under IFRS to add the
dividends received to the cash flow from investing activities).

Accounting Entries
The initial purchase of the equity investment – 20% of the equity in Company B. for $ 100 million by Company A.
Here are the impacts of the Company A’s financial statements.

Assets (Company A) L&E

Cash (100.0)
Equity Investment 100.0
Company B records net income of $60 million after-tax.
Assets (Company A) L&E

Equity Investments 12.0 (=60*20%) RE Equity Income 12.0

Company B pays dividends of $30 million in total.
Assets (Company A) L&E

Equity Investments (6.0) (=30*20%*-1)

Cash 6.0

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Points to Note
Company A reduces its cash with $100 million and shows its investment in Company B. Although Company B
earned $60 million net income, Company A only reports 20% of that in their books since that is their investment
in Company B.
When Company B declared a dividend of $30 million, Company A reported only $6 million since they are entitled
to 20% of that. Company A increased their cash with the dividend amount ($6 million) but decreased their equity
investment since they received the dividend from Company B. If they had increased their investment, they
would be double-counting.
The dividend accounting is confusing as many people want to put the 6.0MM in dividends into the income
statement. However, Goran has already taken 12.0MM to the income statement – its share of net income, taking
the dividends as well, would be double counting.
Remember, when a public company pays a dividend its stock price drops. So, we reflect the decrease in Goran’s
equity value by deducting the dividend from the equity method investment.

Summary of changes to the equity investment

Beginning balance 0
Purchases 100
Share of income 12
Share of dividends -6
Ending balance 106

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Current Liabilities

Account Payable

Short-Term Debt

Notes Payable
Current Liabilities

Dividends Payable

Accrued Expenses

Taxes Payable

Current maturities of long-term debt

Interest Payable

Customer Deposits

Notes and loans payable (amount borrowed for less than 12 months)

+
Current portion of long term debt (amount borrowed for more than
12 months but now to be repaid within a year)
+
Accounts Payable (Invoiced amount owed to suppliers)
Total
+ = Current
Liabilties
Acrrued income taxes (estimates of company's tax liability)

+
Acrrued expenses (other estimates of costs to be paid)

+
Other short term liabilities (an aggragation of remaining current obligations)

ACCOUNTS PAYABLE
When a company purchases goods and services from a supplier or creditor on credit that needs to be paid back
in a short period of time, the accounting entry is known as Accounts Payable (AP). It represents a company’s
obligation to pay the short-term debt it owes to suppliers for goods or services purchased to run its operations,
where they have received an invoice. A company will have several suppliers, so it will report the total amount
outstanding in accounts payable.

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Managing the accounts payable account is important to a business to ensure healthy cash flow. Accounts
payable differ from notes payable, which are debts created by formal legal documents. It is also called trade
payables/creditors. Once the payment is made to the vendor for the unpaid purchases, the corresponding
amount is reduced from the accounts payable balance. Change in accounts payable from the previous period to
current period will appear in the cash flow statement's operating activities. An increase from the previous
period means that a company has bought more goods or services on credit, instead of paying cash and in case
flow, it will be net cash outflow. A decrease depicts that a company has paid its outstanding supplier invoices at a
faster rate than it has accumulated new ones and will show net cash inflow.

Example
When a business receives an invoice from its supplier for goods or services purchased, the accountant will credit
it to accounts payable so that the short-term liability reflects and will debit an expense to offset the entry. The
key difference between accounts payable and accruals is that the company has received an invoice, so they are
100% certain of the liability, as opposed to an estimate with an accrual.

Liabilities and stockholder’s equity

Current Liabilities:
Accounts Payable 9,246
Current portion of long-term debt 3,748
Accrued Compensation 6,254
Short-term income taxes 3,296
Short-term unearned revenue 27,012
Other current liabilities 9,151
Total Current Liabilities 58,707

Accruals:
In accrual accounting, businesses allocate expenses and revenues in the periods to which they occur, rather
than when the actual cash flows happen. An accrued liability arises when a company recognizes a cost but is yet
to receive the invoice. It cannot treat the expense as an accounts payable as the obligation it owes is based on
an estimate not confirmed as in case of account payable where company received invoice.
Accrued amount may be incorrect as it is only estimates. Companies estimate accrued liabilities based on prior
year operating expenses taking prior year as bases.
Accruals can also include one-off expenses e.g. the accrual for legal costs. Which are needed to adjusted while
normalizing working capital for valuation.
Deferred revenues - Accruals also include the cash a company has received in advance for services or goods that
it will provide in the future, so called deferred revenues.

Example
A company estimates its electricity expense of INR 10,000 in Jan 2020. Though, it will not receive the invoice until
Feb 2020. See impact of this on company's Balance sheet

31-Jan-2020 Liabilities + Equity

Retained Earnings (10000.0)
Accrued Expense 10,000

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Why Accrual Method?
Cash method don’t provide real picture of business profitability during the period. While Accrual method
records revenues & expenses for the period they occur, irrespective when actual cash received.

Liabilities and stockholder’s equity

Current Liabilities:
Accounts Payable 9,246 9,382
Current portion of long-term debt 3,748 5,516
Accrued Compensation 6,254 6,830
Short-term income taxes 3,296 5,665
Short-term unearned revenue 27,012 32,676
Other current liabilities 9,151 9,351
Total Current Liabilities 58,707 69,420

DEFERRED REVENUE
Deferred revenue is the income a company has received for goods or services that it has not yet provided. The
payment is not yet revenue because the company hasn’t earned it therefore it cannot yet be reported on the
income statement. Deferred revenue is common in businesses where customers pay a retainer to guarantee
services or prepay for a subscription.
It is a prepayment by customers, and a company recognizes it as a liability on the balance sheet until it delivers
the goods or services, when the revenue is recorded.
Deferred revenue is sometimes called unearned revenue, deferred income, or unearned income, Customer
Deposits. As soon as the company deliver the services or products, the equivalent value of deferred amount is
earned, it should be moved from Unearned Revenues (BS) to an income statement revenue account (such as
Sales Revenues, Service Revenues, Fees Earned, etc).
Deferred revenue is common in businesses where customers pay a retainer to guarantee services or prepay for
a subscription. If a company fails to deliver, it will have to refund customers.

Example
Customers can purchase a six-month subscription to get a discounted rate. They pay you the full amount at the
beginning of the six-month period, and you perform the services over the six months.
• Rent payments received in advance
• prepayment received for newspaper subscriptions
• annual prepayment received for the use of software
• prepaid insurance
An example of deferred revenue is a subscription service. A customer may pay for an annual subscription in
advance, but the company will initially recognize the paid amount as deferred revenue.
The service provider will recognize only the subscription it has delivered as revenue. The remaining of the
deferred revenue will remain in the balance sheet in deferred revenue, and the company
will reduce the balance every month as it delivers the subscription. It helps companies to predict future sales.

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Liabilities and stockholder’s equity
Current Liabilities:
Accounts Payable 9,246
Current portion of long-term debt 3,748
Accrued Compensation 6,254
Short-term income taxes 3,296
Short-term unearned revenue 27,012
Other current liabilities 9,151
Total Current Liabilities 58,707
Long-term debt 62,862
Long-term income taxes 28,888
Long-term unearned revenue 3,385
Deferred income taxes 185
Operating Lease liabilities 7,248
Other long-term liabilities 9,673
Total Liabilities 170,948

Unearned revenue by segment was as follows:

In millions March 31,2020 March 31,2019
Productivity and Business Processes $ 14,077 $ 16,831
Intelligent Cloud 12,984 16,988
More Personal Computing 3,336 3,387
Total Current Liabilities $ 30,397 $ 37,206

Changes in Unearned revenue were as follows:

In millions
Nine months ending March 31,2020
this year, fee received from customer
Balance, Beginning of Period $ 37,206
Deferral of Revenue 49,749 this year, Services Delivered

Recognition of Unearned Revenue (56,558)

Balance, End of Period $ 30,397

Revenue allocated to remaining performance obligations, which includes unearned revenue and amount that
will be invoiced and recognised as revenue from future periods, was $93 billion as of March 31, 2020, of which
$89 billion is related to the commercial portion of the revenue. We expect to recognize approximately 50% of
this revenue over the next 12 months and the remainder thereafter.

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Besides enabling companies to predict future sales, deferred revenue helps to ensure accurate reporting of a
company’s assets and liabilities. Deferred revenue shows analysts that the company has outstanding
obligations before it can consider the revenue as assets.

SHARE CAPITAL

Share Capital is the fund a company raises from issuing common shares and or preferred stock. A company’s
share capital or equity financing can change over time. When a company wishes to raise more equity, it can
obtain authorization to issue new shares to existing or new shareholders. This results in an increase in share
capital.
The authorized share capital is the maximum amount that a company can raise from public offering without
going back to shareholders to ask. Some
companies redeem or repurchase their shares, which reduces the share capital. Generally, the shares are not
cancelled but held by the company’s treasury department, hence the term treasury stock.
An important point to note is that the value does not include price changes of share sold in a secondary market
after a company has issued them. The rise and fall of those shares on an open
market does not affect the company’s share capital. Market capitalisation & equity value in BS are not same.
Reporting of Indian companies
Share capital is reported under Equity section of company's balance sheet. It generally has Common stocks,
Proffered stock, Share premium/additional paid in capital.
Common stocks and preferred stocks are reported at par value/face value. Over and above face value which
issuing shares in market is recorded in Additional paid in capital line.

Example:
A company issued 1,00,000 shares at USD 100 per share while its par value is USD10.

Number of Par value

shares issued per share

Common Stock

Additional paid in capital =100000*(100-10) =100000(number of stocks)*(100-10)

Issuance
price

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Type of Share capital/ Equity Capital

Authorised Capital

For good
companies, Issued Capital Un-issused Capital
there Issued
capital often
Subscribed
equals Un-subscribed
Capital
Subscribed
capital &
Paid-up Paid-up Un-Paid
capital

Authorized Capital
To raise equity by issuing shares, a company needs the authorization to sell stocks. A company will stipulate the
amount of equity it plans to raise and the par value of the shares.
When a company is formed and registered, a legal document is prepared called Memorandum of Association
(MOA). Authorised Capital is indicated in MOA. The maximum capital a company can raise by issuing shares to
public is capped as Authorised Capital.
Amendment of AUTHORISED CAPITAL can be done by taking the consent of shareholders.
Issued Capital (IC):
Issued share capital is the total value of shares that are physically in existence. Outstanding shares plus
treasury shares equal issued shares. The number of issued shares cannot be greater than the number of
authorized shares.
Subscribed Share Capital
A company treats shares that investors have promised to buy as subscribed share capital, which is subscribed
during an initial public offering (IPO). In many instances, underwriters make a certain number of subscribed
shares available before the IPO. Most of those subscribers will be large institutional investors and banks.
Paid-up Capital (PuC):
There can be three steps of subscription for the shareholders. Shareholders will have to pay to the company in
three steps. These steps can be
1. Upon application
2. On Allotment
3. On Call
Suppose few subscribers failed to pay the last instalments. In this case paid-up capital will be less than the
subscribed capital.

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 For example, consider paid-up capital as Rs.65 Cr. out of the total subscription of Rs.70 Crore.

Authorised Capital (Rs. 100 Cr)

Issued Capital Un-issused Capital

(Rs.75 Cr) (Rs.50 Cr)

Subscribed Capital Un-subscribed

(Rs.70 Cr) (Rs.5 Cr)

Paid-up Un-Paid
(Rs.65 Cr) (Rs.5 Cr)

For example –
A company XYZ was formed with an authorised Capital of say USD 1,000 million divided into 100 million number
shares of USD 10 each (Face Value/par value). The Company issued 75 million number shares to public with
intention to raise capital worth USD750 million (issued capital).
Money will be collected from investors in following instalments:
USD 3: On Application
USD 5: On Allotment
USD 2: On Final Call
Upon public issue of shares in IPO, it was found that only 70 million number shares were subscribed by public,
which means a subscribed capital of USD 70 million. The balance 5 million number shares received no
application.

UNSUBSCRIBED SHARE CAPITAL IN IPO treatment in various schenarios

1. IPO should be subscribed at least 90% on the day of closure. If it does not get good response and can’t
achieve 90% threshold then company will have to return all money to investor and they see no loss.
2. if IPO is subscribed by 90% or more, in this case what happens to the balance capital (10%)?

There can be two things that can be done:

1. Lowering of Issue Price: If the shares are issued at a premium, then company may lower its issued price. The
lowering in price may attract more investors and thus the whole IPO may get subscribed. Though in this
case, the issuing company will generate less capital than their target.

2. Underwriters will buy: Underwriters are basically investment banks who manage the IPO for the company.
The company may ask their underwriters to buy the unsubscribed shares for the moment.

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The Coca-Cola Company Shareowner’s Equity
Common stock, $25 par value; authorized – 11,200 shares; issued – 7,040 shares 1,760 1,760
Capital Surplus 17,154 16,520
Reinvested earnings 65,855 63,234
Accumulated other comprehensive income (Loss) (13,544) (12,814)
Treasury stock; at cost – 2,760 & 2,772 shares, respectively (52,244) (51,719)
Equity Attributable to Shareowner’s of The Coca-Cola Company 18,981 16,981
Equity Attributable to noncontrolling interests 2,117 2,077
Total Equity 21,098 19,058
Total Liabilities and Equity $ 86,381 $ 83,216

Authorised shares =11,2000

Issued = 7040
Face value per share = USD 0.25

Issued capital & paid up capital is same for KO as this was 1760 =7040*0.25
oversubscribed company.

Example 2-
Indian company

Reliance Industries
Standalone Balance sheet ……………..in Rs. Cr. ……………..
Mar-20 Mar-19 Mar-18
12 mths 12 mths 12 mths
Sources of Funds
Total Share Capital 6,339.0 6,339.0 6,335.0
Equity Share Capital 6,339.0 6,339.0 6,335.0
Share Application Money 0.0 0.0 15.0
Reserves 418,245.00 398,983.00 308,297.00
Networth 424,584.00 405,322.00 314,647.00

Reliance Industries
Capital Structure
Period Instrument .. CAPITAL (Rs. Cr.) …. ..PAIDUP..
From To Authorised Issued Shares (nos) Face Value Capital
2018 2019 Equity Shares 14000 6338.69 6338693823 10 6338.69
2017 2018 Equity Shares 5000 6334.65 6334651022 10 6334.65
2016 2017 Equity Shares 5000 3251.28 3251287100 10 3251.28

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Authorised Capital: RIL’s authorised capital is Rs.14,000 Crore. Face value of each share of RIL is Rs.10. So total
number of shares available for issue with RIL is 1,400 crore numbers (=14,000/10). Now we will see, out of these
1,400 crore number share, how much is already issued by RIL for subscription.
Issued Capital: RIL’s capital schedule report is showing an issued capital of Rs.6,338.69 Crore. At a face value of
Rs.10/share, total number of shares issued by RIL as on date is 633.869 crore number shares. It means, RIL has
issued only 45.27% (=633.869/1400) of their total Authorised Capital.
Paid-up Capital: You can see in the balance sheet, what is showing there is the company’s paid-up capital. For a
famous company like RIL, their issued capital and paid-up capital are often the same value. Why? Because IPO’s
of these company’s are often oversubscribed.

Share premium
Issue Price = Face value + Premium

EXAMPLE
A company XYZ was formed with an authorised Capital of say USD 1,000 million divided into 100 million number
shares of USD 10 each (Face Value/par value).
The Company issued 75 million number shares to public with intention to raise capital worth USD750 million
(issued capital).

FACE VALLUE USD 10 PER SHARE

NO. OF SHARES ISSUED 75000000
ISSUED PRICE USD 100 PER SHARE
PREMIUM USD 90 PER SHARE (ISSUED PRICE - FACE VALLUE)

TOTAL ADDITIONAL PAID IN CAPITAL OR USD 6,750 million (PREMIUM * NO. OF SHARES
SHARE PREMIUM ISSUED)/10^6 )

EXAMPLE 2

The Coca-Cola Company Shareowner’s Equity

Common stock, $25 par value; authorized – 11,200 shares; issued – 7,040 shares 1,760 1,760
Capital Surplus 17,154 16,520
Reinvested earnings 65,855 63,234
Accumulated other comprehensive income (Loss) (13,544) (12,814)
Treasury stock; at cost – 2,760 & 2,772 shares, respectively (52,244) (51,719)
Equity Attributable to Shareowner’s of The Coca-Cola Company 18,981 16,981
Equity Attributable to noncontrolling interests 2,117 2,077
Total Equity 21,098 19,058
Total Liabilities and Equity $ 86,381 $ 83,216

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RETAINED EARNINGS / Reserve & surplus/ Reinvestment Income
Retained earnings reported by global companies mainly US. Reserve & surplus/Reinvested income is used by
Indian companies. it is a accumulated reinvested profit into business after paying dividend to shareholders.
With this profit, company buys assets to increase revenue or repay its debt and then more profit on increased
assets and so on.
Retained earnings appear on the balance sheet under shareholder’s equity. The statement of shareholders’
equity will include the changes in these earnings for a specific period.
RE = Beginning period RE + Net Income/(Loss) – Cash Dividends – Stock Dividends
Example
Last year (fy2019), retained earnings was USD 12,600 million. In FY2020, company has earned USD 100 million
for the financial year. It paid total DIVIDEND OF USD 20 million.
WHAT WILL BE THIS YEAR RE

RE
LAST YEAR RE 12600
PROFIT IN 2020 100
DIVIDEND IN 2020 -20
RE 2020 12680 (LAST YEAR RE+ PROFIT IN 2020+ DIVIDEND IN 2020)

WHICH ITEMS IMPACT RE

Any items in income statement will impact retained earnings. If there is income then it will impact positively and
if its expenses or loss then negatively.
dividend - negative impact on retained earnings

Use for a possible merger or acquisition

with another company
Usage of Retained Earnings

Hold for share buybacks

Repay outstanding debts

Invest in a new product to expand business operations

Manage existing assets

OTHER COMPREHENSIVE INCOME (OCI)

Revenues, expenses, gains and losses appear in other comprehensive income only when they have not yet been realized.
OCI detail schedule will be reported separately in GAAP OR IFRS. While for Ind-AS it will be reported after net
profit in income statement but it is not part of IS. It is part of Balance sheet and single line will report full amount
of OCI. It provides additional detail to the balance sheet’s equity section, which identifies the change in
stockholder’s equity beyond the net income listed on an income statement

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Revenue, expenses, gain & losses has been realised when underlying transaction has been completed. Eg -
earlier it was gain on investment held for sales was recorded in OCI and when an investment is sold, gain or loss
will be reliased and reported in income statement.
if your company has invested in bonds, and the value of those bonds changes, you recognize the difference as a
gain or loss in other comprehensive income. Once you sell the bonds, you have then realized the gain or loss
associated with the bonds, and can then shift the gain or loss out of other comprehensive income and into a line
item higher in the income statement, so now it is a part of net income.
The reason a company has not realized those transactions is that they have not yet been completed, such as a
sale of an investment (and you won’t be able to pay dividends to your own shareholders using the gains), but its
value has changed since acquisition.

Unrealized holding gains or holding losses on

investments that are classified as available for sale
Items may be included in OCI

Foreign currency translation gains or losses

Pension plan gains or losses

Pension prior service costs or credits

Unrealized gains or losses on available for

sale securities.

Unrealized gains or losses on

retirement benefit plans.

Why is the disclosure of Other Comprehensive income important?

Other comprehensive income provides investors with the true value of a company’s assets and potential future
earnings if the company’s assets are sold and gains are realized. In other words, it gives financial statement
readers a more comprehensive view of a company’s financial status. The other aspect of realized gains or losses
is that it enables investors to see is if there are any potential losses in the future and how a company is managing
its investments.
Example
When a company invest in marketable securities, it will be recorded in BS based on purchase price. when there
is change in value of investment due to market price fluctuation over the time, the book value or value of
investment will not change in BS. so any gain or loss which are still un-realised will be recorded under OCI in
equity section of BS. Once this is realised gain or loss, income and expenses, this will be moved to income
statement while investment in marketable security will remain same.
If a company bought an investment for $10 million at the beginning of 2020, it would reflect that purchase price
on its balance sheet. At the end of 2020, that investment is worth $12 million. The figure on the balance sheet at
the end of 2020 is misleading since the investment has increased by $2,000,000. The company will reflect that
gain in the line item other comprehensive income to show the true value of the investment.
If the company later sells the investment for S12 million, the $2000,000 gain in other comprehensive income will
be deducted from OCI and recorded on the income statement after interest expenses or in non-recurring/one
time gain /loss section.

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