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Prepared by: Patricia Zima, CA Mohawk College of Applied Arts and Technology
Corporate Share Capital Form
Corporate Types of Law shares Share capital system Limited liability of shareholders Issuance Reacquisition Retirement Retained Earnings Formality of profit distribution Types of dividends Stock splits Other Components Contributed surplus Accumulated Other comprehensive income Presentation and Perspectives Disclosure Analysis Special presentation issues
Appendix 15B Financial Reorganization
Appendix 15A – Par Value and Treasury Shares
Par value shares Treasury shares
Components of Shareholders’ Equity Share Capital:
Common And/or Preferred shares Contributed Surplus Retained Earnings Accumulated other Comprehensive Income Contributed Capital
Major Sources of Changes in Shareholders’ Equity
All Transactions and Events That Cause Changes in Shareholders’ Equity
Transfers Between Entity and Owners
Revenues & Expenses
Gains and Losses
Investments by Owners
Distributions to Owners
• Legal capital (stated capital)
– the full price received for shares issued
• If par value shares are issued, then legal/stated capital = par value
– Par value shares are not permitted under CBCA – Permitted under some provincial jurisdictions (see Appendix)
Defining Capital Accounting definition of capital • Shareholders’ equity which includes: – Share capital • the legal/stated capital – Contributed surplus • equity transactions not specifically included elsewhere – Retained earnings • all undistributed income that remains invested in the business – Accumulated other comprehensive income • Cumulative change in equity due to revenues and expenses. and gains and losses from transactions not included in net income 6 .
Etc. Cities.Primary Forms of Business Organization Proprietorship Partnership Corporation Profit-oriented Private Sector Not-for-profit Shares privately held Shares publicly traded Engaged in making financial returns for their owners Public Sector No shares issued. created to provide services for members or society Municipalities. Crown Created by government statute to provide public services 7 .
Limited Liability 8 .Corporate Accounting Special characteristics that impact on accounting: 1. Share capital system 3. Corporate law 2.
Corporate Law Articles of Incorporation Corporation Recognized as Legal Entity Corporation Charter Issued 9 .
Corporate Law • Canada Business Corporation Act (CBCA) • Articles of incorporation prepared and submitted – Company name – Location of registered office – Classes and authorized shares – Share transfer restrictions (if any) – Directors – Business restrictions • CBCA regulations required financial statements be prepared in accordance with GAAP 10 .
each share equal • Each share contains certain rights and privileges • Ease of transfer of ownership – Advantage to both issuing corporation and investor – Share becomes more attractive investment 11 . Class A Common) – Within each class.Share Capital System • Shares grouped by ―class‖ (e.g.
Share Capital System • As a minimum each share has these basic or inherent rights 1. Preemptive right for any new share issues 12 . To share proportionately in profits and losses 2. The right to vote for directors 3. To share proportionately in assets upon liquidation 4.
Share Capital Common shares • Represent basic ownership interest • Represents residual ownership interest have ultimate risk of loss and benefit from success • Dividends. or assets on dissolution. not guaranteed • True advantage is in the right of Common Shares to ultimately control by way of voting 13 .
Share Capital Preferred Shares • Certain inherent rights given up or exchanged for other special rights or privileges • Preference given on – Dividends (usually at a stated rate) – Claim to assets on dissolution • Preferred shares features (some or all may be attached to a preferred share – Cumulative Callable/redeemable – Convertible Retractable – Participating 14 .
Share Capital Preferred Shares Features • Cumulative: Dividends in arrears must be paid before any profits can be distributed to common shareholders • Convertible: The company or holder can exchange the shares for common shares at a predetermined ratio • Callable/Redeemable: The issuing company can ―call‖ at its option the preferred shares at specified future dates at stipulated prices • Retractable: The holders can ―put‖ (or sell) their shares to the company • Participating: Holders can participate with common shareholders in any profit distributions 15 higher than the prescribed rate .
Limited Liability • Limited Liability of Shareholders – Unlike partnership or proprietorship form of business – Shareholders not generally liable for the obligations of the corporation • Shareholders losses restricted to – Amount invested in the corporate shares 16 .
Accounting for the Issuance of Shares • • • • Shares basic Shares sold on a subscription basis Defaulted Subscription accounts Shares issued in combination with other securities 17 .
Basic Full amount of proceeds received is credited to the respective share capital account (preferred/common/class type) 500 common shares are sold for $10.000 5.000 18 .Shares Issue . The journal entry is: Cash Common Shares 5.00 each (issuance costs not included in this transaction).
Shares Sold by Subscription • Shares are sold. once the initial payment is received 19 . and any rights are not given (e. with ―instalment‖ payments • Shares are not issued..g. voting. dividends) until the full subscription price is received • Dividends may be attached to some subscription shares.
or settled in some other manner.Shares Sold by Subscription Accounts in share subscription transaction – Shares Subscribed • Set up a separate one for each type/class of share • An equity account. in the case of default 20 . reported below the respective share capital account on the Balance Sheet – Subscription Receivable • Normally considered a current asset • May be reported as a contra account to the Shares Subscribed account in equity section of the Balance Sheet – Share Capital • Credited only when the subscription is paid in full.
Shares Sold by Subscription • If a subscription contract is defaulted there are generally three possible consequences: – Funds paid to date are refunded. with the balance of the contract cancelled 21 . and the balance of the contract is cancelled – Funds paid to date are forfeited transferring it to the Contributed Surplus account. often with a deduction for expenses. balance of the contract is cancelled – Shares are issued for the amount paid to date. with no refund or shares being issued.
000 5. 50% is due as initial payment.00 each.000 10.000 .000 22 10.Shares Sold by Subscription 500 shares are sold on subscription for $20. The initial journal entries would be: Subscription Receivable Shares Subscribed Cash Subscription Receivable 5.
000 10. 23 . one of the following may happen (depending on the contract terms and applicable legislation).000 5. the entries would be: Cash 5.000 Subscription Receivable Shares Subscribed Share Capital 10.Shares Sold by Subscription If all payments are made as scheduled.000 If the subscriber defaults.
000 Default after first payment – shares issued for amount paid.000 Accounts Payable (or Cash) Subscription Receivable 5. Shares Subscribed 10.000 5.Shares Sold by Subscription Default after first payment – funds refunded with no penalty. Shares Subscribed Share Capital Subscription Receivable 10.000 5.000 5.000 24 .
Shares Subscribed Subscription Receivable Contributed Surplus 10.000 25 .Shares Sold by Subscription Default after first payment – funds held by corporation.000 5.000 5.
Shares Issued With Other Securities • When two or more classes of shares are sold for a lump sum • Accounting problem is the allocation of the funds received to the respective share classes • Two methods available – Proportional method (relative market value method) – Incremental method 26 .
accounting fees. advertising and administrative expenses of preparation • CICA Handbook (Section 3610) deems these amounts to be capital transactions (rather than operating transactions) and therefore should not be included in net income calculation • Accounting treatment—debit to Share Capital 27 . underwriter fees & commissions. printing and mailing costs.Accounting for Share Issue Costs • Include legal fees.
500 500 10.000 28 . with $500 in issue costs Cash Share Capital Share Capital 9.Accounting for Share Issue Costs Reduction of the amount paid in 1.000 shares sold for $10.00 each.
Share Repurchase • Major reasons for the reacquisition of a corporation’s own shares – Reduce the shares outstanding to increase EPS – Have enough shares on hand to meet employee share compensation contracts – Buy out a particular ownership interest – Meet the needs of a potential merger – Stop (or slow down) takeover attempts – Reduce number of shareholders – Make a market in the company’s shares – Return cash to shareholders 29 .
Share Repurchase • Other reasons may include: – – – – Reduce the operations of the business Change the debt-to-equity ratio Settle a debt Provide a boost to shareholders (remaining shareholders end up with a larger portion of the entity) – Fulfill the terms of a contract – Satisfy a claim from a shareholder – Change from a public to a private corporation 30 .
the CBCA requires repurchased shares be cancelled and restored to status of authorized but unissued.Reacquisition of Shares • Shares may be retired when reacquired • May also (in limited circumstances and jurisdictions) become Treasury Stock (see Appendix) • In Canada. the accounts affected are: – – – – Share Capital Contributed Surplus Retained Earnings Treasury Stock (for Treasury Stock only) 31 . if a limit to authorized shares exists • In either case.
Reacquisition of Shares • Share capital debited with the original issue or assigned value only • The difference then allocated to equity accounts: – Contributed Surplus – Retained earnings Contributed Surplus NEVER goes to a debit balance 32 .
purchased and cancelled 500 Class A shares at $4 per share.000 Contributed Surplus (500 @$2.00 Acquisition cost = per share price/cost 4.00) 1.00) 2.Reacquisition of Shares .000 Assigned share value = $63. with total share capital of $63.000 Cash (500 shares@ $4. There are 10.00 33 . Cooke Corp.000/10.00 Value over assigned value $2.000/10.Retired In January 2007.500 shares issued and outstanding.000 Common Shares (500 [$63.500 = $ 6.500] ) 3.
Net Income 2. Prior period adjustments. accounting principle changes 3. 3. 4. Adjustments from financial reorganization 34 . 2. stock dividends Treasury stock CREDITS 1.Items Affecting Retained Earnings 1. property. accounting principle changes Cash. DEBITS Net loss Prior period adjustments.
There needs to be sufficient capital after the dividend to pay liabilities as they are due 2. The 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 shares • • • Formal approval of the Board of Directors required Dividends are in full agreement with share capital contracts Before declaration of a dividend. management should consider availability of funds to pay the dividend 35 .Formality of Profit Distribution • • No amounts may be distributed unless corporate capital is maintained intact Under the CBCA: 1.
Dividend Distributions • Types of dividends 1. Return of capital – Liquidating dividends 3. Return on capital – Cash dividend – Stock dividend 2. Important dates – Date of declaration – Date of record – Date of payment 36 .
Cash Dividends • First journal entry is on Date of Declaration – Dividend becomes legal obligation of the corporation – Equity account is debited. liability account is credited Cash Dividends Declared (or Retained Earnings) xxx Dividends Payable xxx – On Date of Payment liability is reduced 37 .
this account is closed to Retained Earnings at year end 38 . a current list of shareholders needs to be prepared (as at the date of record) • If a Cash Dividends Declared account is used rather than Retained Earnings at the date of declaration.Cash Dividends • Before the dividend is paid.
independent appraisals 39 .Dividends in Kind • Dividends payable in corporation assets other than cash • These dividends are normally measured at the ―fair value‖ of the asset given up • Fair value is determined by referring to: estimated realizable value of same or similar assets. quoted market prices.
Stock Dividends • No assets distributed (unlike cash dividends) • Unlike with cash dividends or dividends in kind. total shareholders equity does not change – Amounts are ―re-arranged‖ as a result of the stock dividend – The transaction is measured at the fair value of the shares at declaration date – Each shareholder has the exact same proportionate interest in the corporation – However. book value per share decreases 40 .
000 Stock Dividends Declared Common Shares 1.000 10% stock dividend declared Fair (market) value of share = $130 per share 13.000 x 10% = 100 Fair value $ 130 Total $13.000 13.Stock Dividends • • • • 1.000 common shares outstanding Retained earnings = $50.000 41 .
000) 42 .000 $6 outstanding (issued at $100.000 total declared as dividends • Common share capital = $400.Dividend Preferences Example Data • $50.000 • Preferred shares: 1.
up to the stated amount of the share – No amount is paid for years where dividends were not declared • Referring to previous data: – Preferred Shareholders are paid $6.000 ($6 x 1000) and – Common Shareholders are paid the remaining amount of $44.Non-cumulative • If shares are non-cumulative and non-participating – Dividends are distributed only when declared.000 43 .
000) • Common Shareholders are paid the remaining $32.000 ($50. and dividends not paid to the preferred shareholders in previous 2 years: • Preferred Shareholders are paid $18.000) 44 .000 .$18.Cumulative • If the preferred shares are cumulative and non-participating.000 ( ($6 x 1000 x 2) + $6.
Any remaining dividend amount is shared by both preferred and common in proportion to the carrying value of each share class 45 . Following assignment to preferred shares of current year dividends (any cumulative dividends have been allocated first). participation generally follows these guidelines a. common shares receive an amount to give them the same return rate as the preferred b.Participating • If no specific participation agreement exists.
000 (i.000 at a rate of $20. Current year’s: – Preferred ($6 x 1000) – Common (6% x $400.000 – Common (4% x $400.e.000) $4.000 46 . 4%): – Preferred (4% x $100.000) $6.000 $24.000/$500.000 2.000 $40. Remaining $20. using the previous data: Preferred Common 1.000 $16.000) TOTAL $10.Participating • If preferred shares are non-cumulative and fully participating.
and the amount of share capital are affected • Shares are not exchanged Stock Split • Increases the number of shares outstanding • Amount of share capital is not affected • Results in a market price manipulation 47 . Stock Splits Stock Dividend • As form of dividend must follow the requirements of a dividend • Both the number of shares.Stock Dividends vs.
Components of Shareholders’ Equity Contributed Surplus transactions • Par value share issue and/or retirement • Liquidating dividends • Financial reorganization • Stock options and warrants • Issue of convertible debt • Share subscriptions forfeited • Donated shares • Redemption or conversion of shares 48 .
Components of Shareholders’ Equity Accumulated Other Comprehensive Income • Cumulative change in equity from nonshareholder transactions which are excluded from net income • Considered to be earned income 49 .
or in the body of the Balance Sheet 50 .Disclosure of Share Capital • Per CICA Handbook. Section 3240. the following disclosure is required: – Authorized share capital – Issued share capital – Changes in share capital since last balance sheet date • May be disclosed in the notes to the financial statements.
Disclosure of Share Capital • Note disclosure will contain the following information: – Authorized number of shares (if no limit. then so stated) – The existence of unique rights – Number of shares issued. including new issuances and redemptions – Restrictions on retained earnings 51 . and the amount received – Whether the shares are par-value or no-par value – Amount of any dividends in arrears for cumulative preferred shares – Changes during the year.
Rate of return on common shareholders’ equity Net income – Preferred dividends Average common shareholders’ equity 2. Price earnings ratio Market price per share Earnings per share 4. Payout ratio Cash Dividends Net income – Preferred dividends 3.Shareholders’ Equity Ratios 1. Book value per share Common shareholders’ equity Number of outstanding shares 52 .
International • IAS requires a separate statement for changes in all equity accounts • Canadian GAAP only requires separate retained earnings statement 53 .
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