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Transcript of 14-1 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by...
14-1 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig DeeganSlides prepared by Craig Deegan
Chapter 14
Share capital and reserves
14-2 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig DeeganSlides prepared by Craig Deegan
Learning objectives
• Understand that the owners’ equity of an organisation can consist of several different accounts
• Understand that within owners’ equity there can be various classes of shares, each providing different rights to holders
• Be able to provide the journal entries to recognise the issue of both fully paid and partly paid shares by a company
• Be able to provide the journal entries necessary when preference shares are to be redeemed
14-3 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig DeeganSlides prepared by Craig Deegan
Learning objectives (cont.)
• Be able to provide the necessary journal entries when shares are forfeited by their owners
• Be able to provide the journal entries to account for rights issues and option issues
• Understand what constitutes a share split and a bonus issue of shares
• Know the disclosure requirements of AASB 101 ‘Presentation of Financial Statements’ in relation to share capital and reserves
14-4 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig DeeganSlides prepared by Craig Deegan
Relevant accounting standards and other guidance
• AASB 101 ‘Presentation of Financial Statements’
• AASB 132 ‘Financial Instruments: Presentation’
• AASB 2 ‘Share-Based Payments’
• AASB 108 ‘Accounting Policies, Changes in Accounting Estimates, and Errors’
• The AASB’s ‘Framework for the Preparation and Presentation of Financial Statements’
14-5 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig DeeganSlides prepared by Craig Deegan
Owners’ equity as a residual claim on net assets
• Owners’ equity– owners’ share of the business calculated by subtracting
the entity’s liabilities from its assets
• Shareholders’ funds– in a company this represents the difference between
total assets and total liabilities
• The AASB Framework defines equity as– the residual interest in the assets of the entity after
deducting all of its liabilities
14-6 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig DeeganSlides prepared by Craig Deegan
Owners’ equity as a residual claim on net assets (cont.)
• The definition and recognition of equity are directly a function of the definition and recognition of assets and liabilities
• Total owners’ equity is made up of a number of accounts– share capital relating to one or several classes of shares
– reserves (e.g. revaluation reserve, general reserve, forfeited share reserve)
– retained earnings (or accumulated losses)
14-7 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig DeeganSlides prepared by Craig Deegan
Retained earnings
• Retained earnings often makes up a significant proportion of shareholders’ funds– represents the accumulation of prior period profits and losses– reduced by dividends declared and paid– reduced by any transfers to other reserves– could be reduced by a bonus issue of shares– changes in accounting policies as the result of the initial
adoption of a new accounting standard can result in a direct adjustment in retained earnings in accordance with AASB 108
– the recognition of prior period errors can result in a reduction in retained earnings in accordance with AASB 108
14-8 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig DeeganSlides prepared by Craig Deegan
Accounting for the issue of share capital
• Share capital– balance of owners’ equity within a company comprising
the capital contributions made by owners
• Par value– the face value of a security
• Share premium– the difference between the issue price of a share and its
par value
• Under section 254C of the Corporations Act 2001 shares of a company have no par value
• Shares no longer issued at a premium or a discount
14-9 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig DeeganSlides prepared by Craig Deegan
Accounting for the issue of share capital (cont.)
• To recognise receipt of application monies
Debit Bank trustCredit Application
• To recognise the issue of shares and to close application account
Debit ApplicationCredit Share capital
14-10 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig DeeganSlides prepared by Craig Deegan
Accounting for the issue of share capital (cont.)
• To transfer cash from trust account to general operating bank account
Debit Cash at bank
Credit Bank trust
• Refer to Worked Examples 14.1 and 14.2 (pp. 484 and 485)
14-11 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig DeeganSlides prepared by Craig Deegan
Oversubscription of shares
• When more shares are applied for than the number to be issued – quite common
• Two approaches to manage oversubscription include1. satisfy full demand of a certain number of subscribers
and refund the funds advanced by others
2. issue shares to all subscribers on a pro rata basis- excess monies on application can either be refunded or
used to reduce further monies owing on allotment
• Refer to Worked Example 14.3 (p. 485)
14-12 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig DeeganSlides prepared by Craig Deegan
Oversubscription of shares (cont.)
• Accounting for oversubscription of shares partly paid - recognise aggregate applications for shares
Debit Bank trust
Credit Application
- to allot shares as partly paid
Debit Application
Credit Share capital
14-13 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig DeeganSlides prepared by Craig Deegan
Oversubscription of shares (cont.)
• To recognise amount due on allotment
Debit Allotment
Credit Share capital
• To offset excess amounts paid on application against amount due on allotment
Debit Application
Credit Allotment
14-14 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig DeeganSlides prepared by Craig Deegan
Oversubscription of shares (cont.)
• To transfer funds to operating bank accountDebit Cash at bank
Credit Bank trust
• To recognise receipt of amounts due on allotment
Debit Cash at bankCredit Allotment
14-15 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig DeeganSlides prepared by Craig Deegan
Oversubscription of shares (cont.)
• Accounting for call made on shares subsequent to allotment
• To record call
Debit Call
Credit Share capital
• To record receipt of amounts due on call
Debit Cash at bank
Credit Call
14-16 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig DeeganSlides prepared by Craig Deegan
Different classes of shares
• Ordinary shares– provide a claim against the entity that ranks behind the
claims of creditors and some preference shareholders
– confer voting rights on shareholders
– entitle their owners to distribution of profits in the form of dividends
– entail, however, no guarantee of dividends
– if dividends not paid in one year, do not accrue the right to dividends until dividends are paid
14-17 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig DeeganSlides prepared by Craig Deegan
Different classes of shares (cont.)
• Preference shares– subject to preferential treatment, often with receipt of
dividends or order of ranking for asset distributions
– some have voting rights
– some have voting rights if dividends unpaid
– others have no voting rights
– if participating, holders may, after receiving preference dividend at fixed rate, participate with ordinary shareholders in further profits distributed
14-18 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig DeeganSlides prepared by Craig Deegan
Different classes of shares (cont.)
• Preference shares (cont.)– if convertible, have a right of conversion to ordinary
shares– if redeemable, have the ability to redeem shares for
cash at later date– some have the characteristics of equity and others have
the characteristics of debt– preference shares that are redeemable on a fixed date,
or at the option of the shareholder, provide a fixed rate of return, and provide no voting rights, should be disclosed as debt (AASB 132)
– if disclosed as debt then the ‘dividend’ payments will be classified as treated as expenses (interest)
14-19 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig DeeganSlides prepared by Craig Deegan
Redemption of preference shares
• Under sections 254 (J) and (K) of the Corporations Act shares are to be redeemed– out of profits that would otherwise be available for
dividends; or
– out of proceeds of a fresh issue of shares made for the purposes of the redemption
• Refer to Worked Example 14.4 (p. 490)
14-20 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig DeeganSlides prepared by Craig Deegan
Redemption of preference shares (cont.)
• To recognise issue of preference shares
Debit Cash at bank
Credit Share capital—preference shares
• To eliminate preference shares and create ‘capital redemption reserve’
Debit Share capital—preference shares
Credit Capital redemption reserve
14-21 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig DeeganSlides prepared by Craig Deegan
Redemption of preference shares (cont.)
• To redeem shares out of profits
Debit Retained earnings
Credit Cash
• Further entry required pursuant to amendments to the Corporations Law
Debit Capital redemption reserve
Credit Share capital
14-22 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig DeeganSlides prepared by Craig Deegan
Forfeited shares
• Shares can be forfeited if– shares are issued as partly paid and shareholders do
not subsequently pay the amounts due on allotment or on calls
– a shareholder ceases to be a member of the company at that time
• Shareholders who have forfeited shares might be entitled to a full or partial refund of monies paid before forfeiture
14-23 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig DeeganSlides prepared by Craig Deegan
Forfeited shares (cont.)
• Various outcomes– if company is listed on the ASX or if company’s
operating rules allow it, a refund is paid to the investor less costs incurred in reissuing shares amounts paid are recorded in a forfeited shares account
(liability) until refunded
14-24 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig DeeganSlides prepared by Craig Deegan
Forfeited shares (cont.)
• If company is not listed on the ASX and constitution says nothing about refunds, company can retain the amounts paid less costs of reissuing shares
- amounts paid are held in a forfeited shares reserve (part of shareholders’ funds)
• Refer to Worked Example 14.5 (p. 492)
14-25 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig DeeganSlides prepared by Craig Deegan
Forfeited shares (cont.)
To record the call
• Debit Call
Credit Share capital
To record receipt of call monies
• Debit Cash at bank
Credit Call
14-26 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig DeeganSlides prepared by Craig Deegan
Forfeited shares (cont.)
To record forfeiture of sharesDebit Share capital
Credit CallCredit Forfeited shares account
To recognise amount received on sale of forfeited shares:Debit Cash at bankDebit Forfeited shares account
Credit Share capital
14-27 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig DeeganSlides prepared by Craig Deegan
Forfeited shares (cont.)
To recognise payment of costs relating to sale of shares
Debit Forfeited shares account
Credit Cash at bank
To recognise return of remaining monies to original shareholders
Debit Forfeited shares account
Credit Cash at bank
14-28 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig DeeganSlides prepared by Craig Deegan
Share splits and bonus issues
• Share splits– subdivision of the company’s shares into shares of
smaller value
– result in no change to owners’ equity
– companies may undertake share splits because they feel that lower priced shares will be more marketable
– no journal entries required
– company must amend share register
14-29 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig DeeganSlides prepared by Craig Deegan
Share splits and bonus issues (cont.)
• Bonus shares– existing shareholders receive additional shares, at no
cost, in proportion to their shareholding at the date of the bonus issue
– journal entry
Debit Retained earnings
Credit Share capital—ordinary shares
– bonus shares from retained profits often referred to as a bonus share dividend
14-30 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig DeeganSlides prepared by Craig Deegan
Rights Issues and Share Options
• A rights issue provides existing shareholders with the right to acquire additional shares typically at an ‘attractive’ price
• Some rights might be tradeable, some are not
See Worked Example 14.6 (p. 496)
• Share options give the holder the right to acquire shares in the future at a particular price
• Are typically sold by the entity, or provided to employees as part of their salary
See Worked Example 14.7 (p. 497)
14-31 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig DeeganSlides prepared by Craig Deegan
Required disclosures for share capital
AASB 101 requires disclosure of the following
• For each class of share capital– number of shares authorised
– number of shares issued and fully paid, and issued but not fully paid
– par value per share, or that shares have no par value
– reconciliation of number of shares outstanding at beginning and end of period
– rights, preferences and restrictions of the class
14-32 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig DeeganSlides prepared by Craig Deegan
Required disclosures for share capital (cont.)
– shares reserved for issue under options and contracts for sale of shares
– shares in the entity held by the entity or by subsidiaries or associates
• Description of nature and purpose of each reserve within equity
14-33 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig DeeganSlides prepared by Craig Deegan
Reserves
• Include– revaluation reserve
– general reserve: may be used as a means of transferring profits out of retained profits for future expansion plans
• Required to disclose (AASB 101)– reconciliation between carrying amount of each reserve
at the beginning and end of the period, separately disclosing each change
14-34 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig DeeganSlides prepared by Craig Deegan
Summary
• The chapter addresses various issues associated with share capital and reserves
• Owners’ equity is the residual interest in the assets of an entity after deduction of its liabilities
• When shares are issued to the public, funds must be placed in trust prior to allotment of shares
• Preference shares should be disclosed as debt or equity depending on the conditions of issue
• Forfeiture of shares, share splits and bonus issues were also discussed