. Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 14-1 Chapter 14 Share capital and reserves

. Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 14-2 Objectives of this lecture Understand that the equity of an organisation can consist of several different accounts Understand that within 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 to account for distributions Be able to provide the journal entries necessary when preference shares are to be redeemed

. Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 14-3 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

. Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 14-4 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

. Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 14-5 Equity as a residual claim on net assets 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

. Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 14-6 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 surplus, general reserve, forfeited share reserve) –Retained earnings (or accumulated losses)

. Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 14-7 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

. Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 14-8 Accounting for the issue of share capital Share capital –Balance of owners’ equity within a company comprising the capital contributions made by owners 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 When shares are issued then the amount received from the issue is added to ‘share capital’

. Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 14-9 Accounting for the issue of share capital (cont.) To recognise receipt of application monies DebitBank trust CreditApplication To recognise the issue of shares and to close application account DebitApplication CreditShare capital

. Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Accounting for the issue of share capital (cont.) To transfer cash from trust account to general operating bank account DebitCash at bank CreditBank trust Refer to Worked Examples 14.1, Determination of share capital, and 14.2, Public issue of shares (pp. 442 and 443)

. Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Partly paid shares A company might issue shares on an instalment basis Where shares are partly paid, the paid portion of the shares is accounted for in the same manner as fully paid shares, while the balance, the deferred consideration, is of the nature of a receivable Where no future date has been specified for calling up the unpaid portion, an asset is not recognised until the company has specified a future date or dates for calling up the unpaid portion and informs shareholders of these dates However, where shares have been issued on an instalment basis, with an amount to be paid on issue and with further amounts payable at specified future dates, a receivable must be recognised

. Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Worked Example 14.3—Issue of partly paid shares Yeates Ltd commenced operations on 1 July 2012 by issuing 15 million ordinary shares by way of a direct private placement and at an issue price of $1.50 per share. Shareholders were required to pay $1.00 on application, with a further $0.35 payable on 1 September 2012 and a further $0.15 payable on 1 December July 2012 Dr Cash Cr Share capital July 2012 Dr First call Dr Second call Cr Share capital September 2012 Dr Cash Cr First call December 2012 Dr Cash Cr Second call

. Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Issue of shares other than for cash Where shares are to be issued for a consideration other than cash, the fair value of the consideration for the issue must be determined Fair value is defined in the accounting standards as ‘the amount for which an asset can be exchanged between knowledgeable, willing parties in an arm’s length transaction’

. Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Oversubscription of shares When more shares are applied for than the number to be issued—quite common Two approaches to manage oversubscription: 1.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 14.5 (p. 445)— Oversubscription for shares issued as partly paid

. Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Worked Example 14.5—Oversubscription for shares issued as partly paid In July 2012, Mooloolaba Ltd calls for public subscriptions for 10 million shares. The issue price per share is $1.20, to be paid in three parts, these being $0.50 on application, $0.40 within one month of the shares being allotted and $0.30 within two months of the first and final call, with the call for final payment being payable on 1 September By the end of July, when applications close, applications have been received for 12 million shares; that is, two million in excess of the amount to be allotted. 1–31 July 2012 Dr Bank trust Cr Application

. Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Worked Example 14.5—Oversubscription for shares issued as partly paid (cont.) We will assume that the excess funds are used to offset the amount due on allotment ($0.40 per share), and that all subscribers will receive an allotment of shares on a pro rata basis 1 August 2012 Dr Application Cr Share capital (to allot the shares as partly paid to $0.50) Dr Allotment Dr Call Cr Share capital Dr Application Cr Allotment Dr Cash at bank Cr Bank trust

. Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Worked Example 14.5—Oversubscription for shares issued as partly paid (cont.) 30 August 2012 Dr Cash at bank Cr Allotment (to recognise the receipt of amounts due on allotment) It is assumed that all amounts due on allotment are paid. 1 September 2012 Dr Cash at bank Cr Call

. Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Accounting for dividends Once the final profit for the year has been calculated, which is after the end of the financial year, the directors are in a position to decide on the amount of final dividends to allocate to shareholders Australian Accounting Standards prohibit the recognition of a dividend at the end of the reporting period unless the dividend has been declared prior to year end and the payment of the dividend does not require further ratification by other parties, such as by the shareholders at the annual general meeting (which is typically held after the year end) The rationale behind this is that dividends declared after the reporting period do not meet the definition of a present obligation at the end of the reporting period because the entity has the discretion rather than an unavoidable commitment at the end of the reporting period to pay the dividends

. Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 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

. Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 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

. Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 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)

. Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Redemption of preference shares Under section 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 14.7 (p. 450)—Redemption of preference shares

. Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Redemption of preference shares (cont.) To recognise issue of preference shares DebitCash at bank CreditShare capital—preference shares To eliminate preference shares and create ‘capital redemption reserve’ DebitShare capital—preference shares CreditCapital redemption reserve

. Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Redemption of preference shares (cont.) To redeem shares out of profits DebitRetained earnings CreditCash Further entry required pursuant to amendments to the Corporations Law DebitCapital redemption reserve CreditShare capital

. Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 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

. Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 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

. Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 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 14.8 (p. 452)—Forfeiture of shares

. Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Forfeited shares (cont.) To record the call DebitCall CreditShare capital To record receipt of call monies DebitCash at bank CreditCall

. Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Forfeited shares (cont.) To record forfeiture of shares DebitShare capital Credit Call CreditForfeited shares account To recognise amount received on sale of forfeited shares DebitCash at bank DebitForfeited shares account CreditShare capital

. Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Forfeited shares (cont.) To recognise payment of costs relating to sale of shares Debit Forfeited shares account CreditCash at bank To recognise return of remaining monies to original shareholders DebitForfeited shares account CreditCash at bank

. Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 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

. Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 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 DebitRetained earnings CreditShare capital—ordinary shares –Bonus shares from retained earnings often referred to as a bonus share dividend

. Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 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 14.9 (p. 454)—A rights issue Share options give the holder the right to acquire shares in the future at a particular price Typically sold by the entity, or provided to employees as part of their salary If shares are issued to employees then they will be treated as part of salaries expense (with a credit to share capital) See Worked Example (p. 456)—Share options provided to employees

. Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e 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

. Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Required disclosures for share capital (cont.) For each class of 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

. Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Reserves Include: –revaluation surplus –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

. Copyright  2010 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 6e Summary The lecture addresses various issues associated with share capital and reserves 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