1. WEYGANDT. KIESO. KIMMEL. TRENHOLM. KINNEAR. BARLOW. ATKINS PRINCIPLES OF FINANCIAL ACCOUNTING CANADIAN EDITION Chapter 14 Corporations: Additional Topics and IFRS Prepared by: Debbie Musil Kwantlen Polytechnic University 1

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

3. Copyright John Wiley & Sons Canada, Ltd.3 Chapter 14: Corporations: Additional Topics and IFRS Study Objectives 1.Account for stock dividends and splits and compare their financial impact. 2.Account for the reacquisition of shares. 3.Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income. 4.Explain the accounting for different types of accounting changes and account for corrections of prior period errors. 5.Prepare a statement of changes in shareholders’ equity. 6.Evaluate earnings and dividend performance.

4. Copyright John Wiley & Sons Canada, Ltd.4 Distribution of corporation’s own shares to its shareholders – Issued 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 Stock Dividends

5. Copyright John Wiley & Sons Canada, Ltd.5 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 Stock Dividends: Purpose and Benefits

6. Copyright John Wiley & Sons Canada, Ltd.6 Declaration date: Record date: no entry required Distribution date: Entries for Stock Dividends

7. Copyright John Wiley & Sons Canada, Ltd.7 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 Stock Splits

8. Copyright John Wiley & Sons Canada, Ltd.8 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) Comparison of Dividends and Stock Splits

9. Copyright John Wiley & Sons Canada, Ltd.9 1.Account for stock dividends and splits and compare their financial impact. 2.Account for the reacquisition of shares. 3.Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income. 4.Explain the accounting for different types of accounting changes and account for corrections of prior period errors. 5.Prepare a statement of changes in shareholders’ equity. 6.Evaluate earnings and dividend performance. Chapter 14: Corporations: Additional Topics and IFRS Study Objectives

10. Copyright John Wiley & Sons Canada, Ltd.10 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 Common Shares: Reacquisition of Shares

11. Copyright John Wiley & Sons Canada, Ltd.11 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 Common Shares: Reacquisition of Shares 2

12. Copyright John Wiley & Sons Canada, Ltd.12 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: Reacquisition of Shares: Below Average Cost

13. Copyright John Wiley & Sons Canada, Ltd.13 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: Reacquisition of Shares: Above Average Cost

14. Copyright John Wiley & Sons Canada, Ltd.14 1.Account for stock dividends and splits and compare their financial impact. 2.Account for the reacquisition of shares. 3.Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income. 4.Explain the accounting for different types of accounting changes and account for corrections of prior period errors. 5.Prepare a statement of changes in shareholders’ equity. 6.Evaluate earnings and dividend performance. Chapter 14: Corporations: Additional Topics and IFRS Study Objectives

15. Copyright John Wiley & Sons Canada, Ltd.15 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 Discontinued Operations

16. Copyright John Wiley & Sons Canada, Ltd.16 Discontinued Operations 2

17. Copyright John Wiley & Sons Canada, Ltd.17 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 Other Comprehensive Income

18. Copyright John Wiley & Sons Canada, Ltd.18 1.Account for stock dividends and splits and compare their financial impact. 2.Account for the reacquisition of shares. 3.Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income. 4.Explain the accounting for different types of accounting changes and account for corrections of prior period errors. 5.Prepare a statement of changes in shareholders’ equity. 6.Evaluate earnings and dividend performance. Chapter 14: Corporations: Additional Topics and IFRS Study Objectives

19. Copyright John Wiley & Sons Canada, Ltd.19 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 Change in Accounting Policy

20. Copyright John Wiley & Sons Canada, Ltd.20 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 Change in Accounting Estimates

21. Copyright John Wiley & Sons Canada, Ltd.21 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 Correction of Prior Period Errors

22. Copyright John Wiley & Sons Canada, Ltd.22 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 Presentation of Prior Period Adjustments

23. Copyright John Wiley & Sons Canada, Ltd.23 1.Account for stock dividends and splits and compare their financial impact. 2.Account for the reacquisition of shares. 3.Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income. 4.Explain the accounting for different types of accounting changes and account for corrections of prior period errors. 5.Prepare a statement of changes in shareholders’ equity. 6.Evaluate earnings and dividend performance. Chapter 14: Corporations: Additional Topics and IFRS Study Objectives

24. Copyright John Wiley & Sons Canada, Ltd.24 Required for companies following IFRS Shows changes in shareholder’s 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 Statement of Changes in Shareholders’ Equity

25. Copyright John Wiley & Sons Canada, Ltd.25 Summary of Shareholders’ Equity Transactions

26. Copyright John Wiley & Sons Canada, Ltd.26 1.Account for stock dividends and splits and compare their financial impact. 2.Account for the reacquisition of shares. 3.Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income. 4.Explain the accounting for different types of accounting changes and account for corrections of prior period errors. 5.Prepare a statement of changes in shareholders’ equity. 6.Evaluate earnings and dividend performance. Chapter 14: Corporations: Additional Topics and IFRS Study Objectives

27. Copyright John Wiley & Sons Canada, Ltd.27 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 Earnings Performance: Earnings per Share

28. Copyright John Wiley & Sons Canada, Ltd.28 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 Earnings per Share: Complex Capital Structure

29. Copyright John Wiley & Sons Canada, Ltd.29 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 Earnings Performance: Price-Earnings Ratio

30. Copyright John Wiley & Sons Canada, Ltd.30 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 Payout Ratio

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