Corporations: Additional Topics and IFRS Additional Share Transactions Stock dividends and splits Reacquisition of shares Comprehensive Income Continuing and discontinued operations Other comprehensive income Accounting Changes Changes in accounting policies and estimates Correction of prior period errors Reporting Changes in Shareholders’ Equity Summary of transactions Statement of changes in shareholders’ equity Analyzing Shareholders’ Equity Earnings performance; Dividend record Copyright John Wiley & Sons Canada, Ltd.

CHAPTER 14: Corporations: Additional Topics and IFRS Account for stock dividends and splits and compare their financial impact. Account for the reacquisition of shares. Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income. Explain the accounting for different types of accounting changes and account for corrections of prior period errors. Prepare a statement of changes in shareholders’ equity. Evaluate earnings and dividend performance. Copyright John Wiley & Sons Canada, Ltd. 3

Copyright John Wiley & Sons Canada, Ltd. Stock Dividends Distribution of corporation’s own shares to its shareholders Paid in shares instead of cash Does not change assets or shareholders’ equity Decreases retained earnings and increases share capital by the same amount Total amount is therefore the same Copyright John Wiley & Sons Canada, Ltd.

Stock Dividends: Purpose and Benefits Satisfies shareholders' dividend expectations without spending cash Increases marketability of corporation’s shares Increasing number of shares will cause market price to decrease and make shares more affordable Emphasizes that a portion of shareholders’ equity has been permanently retained in the business Therefore unavailable for cash dividends Copyright John Wiley & Sons Canada, Ltd.

Entries for Stock Dividends Declaration date: Record date: no entry required Distribution date: Copyright John Wiley & Sons Canada, Ltd.

Copyright John Wiley & Sons Canada, Ltd. Stock Splits Involves the issue of additional shares to shareholders Similar to a stock dividend Increases the marketability of shares by lowering market value per share Effect on share price is generally inversely proportional to size of split Does not affect shareholders’ equity Therefore no entries are required Copyright John Wiley & Sons Canada, Ltd.

Comparison of Dividends and Stock Splits Cash dividends reduce assets and shareholders’ equity (retained earnings) Stock dividends increase share capital and decrease retained earnings Stock dividends have no effect (but do increase number of shares issued) Copyright John Wiley & Sons Canada, Ltd.

CHAPTER 14: Corporations: Additional Topics and IFRS Account for stock dividends and splits and compare their financial impact. Account for the reacquisition of shares. Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income. Explain the accounting for different types of accounting changes and account for corrections of prior period errors. Prepare a statement of changes in shareholders’ equity. Evaluate earnings and dividend performance. Copyright John Wiley & Sons Canada, Ltd. 9

Common Shares: Reacquisition of Shares Companies can reacquire their shares from shareholders in order to: Increase trading on securities markets Increase earnings per share Buy out hostile shareholders Have shares available for compensation or other uses Reacquired shares are retired and cancelled Copyright John Wiley & Sons Canada, Ltd.

Common Shares: Reacquisition of Shares 2 Steps to record a reacquisition: Remove cost of shares from share capital account Based on average cost per share (must be calculated) Record cash paid for the shares Record the gain or loss on reacquisition Copyright John Wiley & Sons Canada, Ltd.

Reacquisition of Shares: Below Average Cost Average cost of shares: Balance in Common Shares Account Number of Common Shares Issued If shares reacquired at a price < average cost: Difference is a “gain” on reacquisition This “gain” is credited to a new shareholders’ equity account for the contributed capital from the reacquisition: = Copyright John Wiley & Sons Canada, Ltd.

Reacquisition of Shares: Above Average Cost If shares reacquired at a price > average cost: Difference is a “loss” on reacquisition Additional cost of shares is first debited to contributed capital from previous reacquisitions (if any) Remaining difference is debited to retained earnings: Copyright John Wiley & Sons Canada, Ltd.

CHAPTER 14: Corporations: Additional Topics and IFRS Account for stock dividends and splits and compare their financial impact. Account for the reacquisition of shares. Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income. Explain the accounting for different types of accounting changes and account for corrections of prior period errors. Prepare a statement of changes in shareholders’ equity. Evaluate earnings and dividend performance. Copyright John Wiley & Sons Canada, Ltd. 14

Discontinued Operations Disposal or reclassification to “held for sale” of a component of an entity A separate major business line or geographic area Reported separately on income statement Includes allocation of income tax expense or savings (called intraperiod tax allocation) Profit (loss) from discontinued operations and gain (loss) from disposal Copyright John Wiley & Sons Canada, Ltd.

Discontinued Operations 2 Copyright John Wiley & Sons Canada, Ltd.

Other Comprehensive Income Additional statement required under IFRS All-inclusive format or as a separate statement No “other comprehensive income” under ASPE All changes in shareholders’ equity except from sale/purchase of shares and dividend transactions Copyright John Wiley & Sons Canada, Ltd.

CHAPTER 14: Corporations: Additional Topics and IFRS Account for stock dividends and splits and compare their financial impact. Account for the reacquisition of shares. Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income. Explain the accounting for different types of accounting changes and account for corrections of prior period errors. Prepare a statement of changes in shareholders’ equity. Evaluate earnings and dividend performance. Copyright John Wiley & Sons Canada, Ltd. 18

Change in Accounting Policy Occurs when the policy used in current year is different that that used in prior year Only occurs when change: Is required by GAAP Provides more reliable and relevant information Must be applied retroactively (prior years restated) unless not practical to do so Using a new accounting method due to a change in circumstances is not a change in accounting policy No retroactive application Copyright John Wiley & Sons Canada, Ltd.

Change in Accounting Estimates Estimates of future conditions and events are made often in accounting For example, bad debt expense or warranty expense These estimates may need to be changed due to: A change in circumstances New information becoming available The new estimate is used from now on Do not go back and change prior periods Copyright John Wiley & Sons Canada, Ltd.

Correction of Prior Period Errors When a material error is discovered after the financial statements have been issued Correction is made directly to Retained Earnings Since effect of error is now located there (all revenues and expenses have been closed to retained earnings) Net of any income tax effect Example: overstatement of cost of goods sold Understatement of inventory, profit (now retained earnings), and income tax payable Copyright John Wiley & Sons Canada, Ltd.

Presentation of Prior Period Adjustments Adjustment is added to (or deducted from) opening balance of retained earnings, net of income tax effect Financial statements of prior years are restated to reflect the change Details of the change and its impact disclosed in a note to the financial statements Copyright John Wiley & Sons Canada, Ltd.

CHAPTER 14: Corporations: Additional Topics and IFRS Account for stock dividends and splits and compare their financial impact. Account for the reacquisition of shares. Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income. Explain the accounting for different types of accounting changes and account for corrections of prior period errors. Prepare a statement of changes in shareholders’ equity. Evaluate earnings and dividend performance. Copyright John Wiley & Sons Canada, Ltd. 23

Statement of Changes in Shareholders’ Equity Required for companies following IFRS Shows changes in shareholders’ equity during year Including contributed capital, retained earnings, other comprehensive income Companies following ASPE: Continue to use a Statement of Retained Earnings Other changes are reported in notes to the statements Copyright John Wiley & Sons Canada, Ltd.

Summary of Shareholders’ Equity Transactions Copyright John Wiley & Sons Canada, Ltd.

CHAPTER 14: Corporations: Additional Topics and IFRS Account for stock dividends and splits and compare their financial impact. Account for the reacquisition of shares. Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income. Explain the accounting for different types of accounting changes and account for corrections of prior period errors. Prepare a statement of changes in shareholders’ equity. Evaluate earnings and dividend performance. Copyright John Wiley & Sons Canada, Ltd. 26

Earnings Performance: Earnings per Share Indicates profit earned by each common share Used under IFRS not under Private Entity GAAP Formula to calculate: Weighted average number of common shares = shares issued during the year x the fraction of the year they are outstanding Example: April 1 = 3/12 months if calendar year used Copyright John Wiley & Sons Canada, Ltd.

Earnings per Share: Complex Capital Structure When a company has securities that can be converted into common shares Example: convertible preferred shares If converted, the additional common shares will result in a reduced (diluted) EPS figure Two EPS amounts are calculated: Basic EPS: calculation on preceding page Fully diluted EPS: calculated as if all securities were converted into common shares Calculation of weighted average number of shares becomes more complicated Copyright John Wiley & Sons Canada, Ltd.

Earnings Performance: Price-Earnings Ratio Helps investors compare earnings of different companies Formula to calculate: A high PE ratio is an indicator that investors believe the company has good earnings potential Copyright John Wiley & Sons Canada, Ltd.

Copyright John Wiley & Sons Canada, Ltd. Payout Ratio Indicates what percentage of profit a company is distributing to its shareholders Can be calculated for common, preferred and all dividends: Payout ratios vary with the industry High payout ratios can indicate that a company is not reinvesting enough in its operations Copyright John Wiley & Sons Canada, Ltd.

Copyright John Wiley & Sons Canada, Ltd. Copyright © 2013 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright (the Canadian copyright licensing agency) is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his or her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages caused by the use of these files or programs or from the use of the information contained herein. Prepared by: A. Davis, MSc, BComm, CA, CFE Copyright John Wiley & Sons Canada, Ltd.