Reporting and Analyzing Shareholders' Equity
Corporate form of Organization
Characteristics of a corp
Shareholder rights
Share issues considerations
Share capital
Accountign for common and preferred shares
Accounting for Dividends and Stock splits
Cash and stock dividends
Stock splits
Comparsion of effects
Presentation of shareholders' equity
Statement of financial position
Statement of changes in equity - IFRS
Statement of retained earnings - ASPE
Summary of shareholders' equity transactions
Measuring corporate performance
Dividend record
Earning performance
The Corporate form of organization
A separate legal entity
Separate and distinct from its owner
Has most of the rights and privileges of a person
May be public or private
Public
Many shareholder, shares are publicly traded and held
Private
Few shareholders, shares are closely held and not traded
Characteristics of a corporation
Separate legal existence
Limited liability of shareholders
Tranferable ownership rights
Ability to acquire capital
Continous life
Corporation management
Government regulations
Income tax
Advantages and Disadvantages of a Corporation
Share Issue Considerations
To raise capital, the corps sells ownership rights in the form of shares
Shares can be divided into different classes
Usually referred to as common shares and preferred shares
Common and preferred shares for share capital
Ownership rights are specified in article of incorporation or in by-laws
Rights in voting, dividends, liquidation
Authorized shares
Max amount of shares corp allowed to sell
May be limited or unlimited
Not recorded; disclosed only
Issues shares
Number of shares sold
Legal capital
Share cpaital cannot be distributed to shareholders, unlike retained earnign, which can be dsitrubted as dividends
Fair Value of Shares
First issue normally through initail public offering
Share price is set by the company
Once issued, shares of publicly held companies trade an organized exchanges
At price per share established between buyers and sellers
Fiar value of shares
Share price is determined by market forces
Issuing Common Shares
Share capital
The amount that shareholders have paid to the corp for their shares
Shares are usually issued for cash
Dr.Cash
Cr. Common Shares
Shares can be issued in exchange for services or noncash assets
IFRS: Record at cash equivalent price
ASPE: Fair value of shares given up or fiar value of consideration received
Reason to Repurcahse Common Shares
Distribute Cash to shareholders
Increase trading on securityies markets
Reduce number of shares issued per share and return on common shareholders' equity
Buyout hostile shareholders
Have share available for compensation or other uses
Repurchase of Common Shares
Repurcahsed shares are a corp's own shares wither common or preferred that had been previously issued and later reacquired by the corp
Normally retired and cancelled
Removed from the share capital account
Can also be held as treasury shares, for future resale, in limited circumstances
Only in some provincesand foreign jurisdictions
Steps
Remove cost of shares from share cpaital account
Record the cash paid
Reocrd the gain or loss on repurchase
Repurchase Below Average Cost
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Repurchase Above Average Cost
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Preferred Shares
Preferred shares have contractual provisions that give them priority over common shares
Usually do not have voting rights
Accountign for preferred ahres similar to common shares
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Preferential Features of Preferred Shares
Specified dividend rate
Dividend preference
Preferred shareholders must be paid dividends beofre any paid to common shareholders
Cumulative divididends in arreats
Liquiations preference
Other preferences
Conversion privilege
Redeemable/callable (company option)
Retractable (shareholder option)
Dividends
A pro rata (equal) distribution of a portion of a corps retained earnigns to its shareholders
Cash dividends are most common
A distribution of cash to shareholders
Stock dividends may also be issued
Cash Dividends
For a cash dividend to occur, a corp must
Meet a 2 part solvency test CBCA and
Effect a formal declaration of dividends by boards of directors
3 important dates in connection with dividends
Declaration date
Date the board of directors formally authorizes the cash dividends
Commits the corp to a binding legal obligation
Example: declartion on Dec 1 of 1 50 cent per share quaterly cash dividend on a 2 dollar preferred shares
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Record date
Date ownership of shares is determined for divided purposes
No journal entry required
Payment date
Date dividends are paid to shareholders
Example: pay date is jan 20
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Stock Dividends
Cash dividends is paid in cash, whereas
Stock dividend: distributed (paid) in shares
Fair value on date of declartion is assigned to the stock dividend shares
Same 3 dates as cash dividends
Stock dividend does not change assets, liabilities or total shareholder's equity
Purposes and Benefits of Stock Dividends
Satisfy shareholders' dividend expectations without spending cash
Increase marketability of the shares
Increases number of shares and decreases market price per share
Reinvest and restrict a portion of shareholders' equity
Unavailable for future cash dividends
Examples
Assume that 50, 000 common shares
Balance of 500,000 in common shares account and 300,00 in retained earnings
A 10 percent stock dividend, 5,000 common shares (50,000*10 percent) would be issued
Amount debited to dividends declared account is 75,000 (5,000*$15)
15 is market price of the shares
Stock Dividends Entries
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Effect of stock dividends on shareholders' equity
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Stock Splits
A stock split involves the issues of additional shares to shareholders according to their percentage ownership
Like a stock dividend but much largers
Primary purpose is to increase marketability of shares by lowering share price
A stock split has no effect on total share capital, retained earnign, or total shareholder's equity
Market value of the shares will decrease roughly proportionately to the split
Not jounrnalized
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Comparison of Dividends and Stock splits
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Presentation of Shareholder's equity: Statement of Financial position
Share capital and contributed surplus
Share capital: preferred and common shares
Contributed surplus: amounts contributed from repurchasing and retiring shares
Retained earnigns
Cumulative net incomes since incorp
Annual net incoem is added ; net losses and dividends declared are deducted
A portion may be restricted and therefore unavailable for dividends
Accumulated Other Comprehensive Incoem (IFRS)
Other comprehensive income reported ONLY under IFRS
Other companies comprehensive income OCI includes certain gains and losses that bypass new income such as revaluation gains and losses of property, plant, and equipment using the revaluation model
Accumulated other comprehensive income AOCI is the cumulative change in shareholders equity
Starts with opening balance and is increased (decreased) by other comprehensive income each period
Comprehensive Income
Total comprehensive income includes net income (loss) and other comprehensives income (loss) OCI
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Statement of Changes in Equity IFRS
Discloses changes in total shareholders equity for the period, including
Share capital
Contributed surplus
Retained earnigns
Accumulated other comprehensive income
Required under IFRS
Stateent of Retained Earnigns ASPE
For private companies who have a simpler share sturctures and few share transactions
Shows the amounts and changes in retained earnings during the period
Beginning retained earnign amount +net income - dividends declared = ending retained amount
Required under ASPE
Measuring Corp Performance
Dividend record
Payout ratio
Measures the percentage of progit distributed in the forms of cash dividends to common shareholders
Payout ratio= cash dividends declared/ net income
Higher is better if investor looking for more income
Investors looking for share price appreciation would look for lower payout ratios
Dividends ratio
Measures the profit generated by each share, based on the market price of the shares
Dividends = Dividends decalred/ market price per shares
Higher is better for income
Lower is better for price appreciation
Earnings performance
Basic earnign per share
Return on common shareholders' equity
Basic Earnings per Share (EPS)
Measures the income earned by each common share
Basic earnings per share = income available to common shareholders/ weighted average number of common shares
Income to common shareholders = net income less perferred dividends
Increased EPS over prior years indicate improved performnance
Not comparable between companies
Weighted average number of common shares
Shares issued during the year x the fraction of the year they are out standing
Example: oct 1 - 3/12
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Return on Common shareholders' equity
Measures the company's profitability from the shareholders' viewpoint
How many dollars were earned for each dollar invested by common shareholders
Commons shareholders' equity
= total shareholders' equity - legal capital of preferred shares
Return on common shareholders' equity = income available to common shareholders/ average common shareholders' equity
Higher is better
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