1. Capital and reserves Chapter 13
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider

2. 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
(Continues)
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider

3. Learning objectives (cont.)
Be able to provide the journal entries necessary when preference shares are to be redeemed
Be able to provide the necessary journal entries when shares are forfeited by their owners
Understand what constitutes a share split and a bonus issue of shares
Know the disclosure requirements of NZ IAS 1 ‘Presentation of Financial Statements’ in relation to share capital and reserves
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider

4. Owners’ equity as a residual claim on net assets
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 NZ Framework defines equity as:
the residual interest in the assets of the entity after deducting all of its liabilities
(Continues)
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider

5. 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 profits (or accumulated losses)
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider

6. Accounting for the issue of 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 the Companies Act 1993 shares of a company have no par value
Shares no longer issued at a premium or a discount
(Continues)
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider

7. Accounting for the issue of share capital (cont.)
To recognise receipt of application moneys:
Debit Bank trust
Credit Application
To recognise the issue of shares and to close application account:
Debit Application
Credit Share capital
(Continues)
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider

8. 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 13.1, 'Determination of contributed equity', p. 534 and 13.2, 'Public issues of shares', pp. 534–5.
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider

9. Oversubscription of shares
When more shares are applied for than the number to be issued e.g. Telstra and the Commonwealth Bank
Two approaches to manage oversubscription include:
satisfy full demand of a certain number of subscribers and refund the funds advanced by others
issue shares to all subscribers on a pro rata basis
excess moneys on application can either be refunded or used to reduce further moneys owing on allotment
Refer to Worked Example 13.3, 'Issue of partly paid shares', pp. 535–6
(Continues)
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider

10. 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
(Continues)
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider

11. 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
(Continues)
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider

12. Oversubscription of shares (cont.)
To transfer funds to operating bank account:
Debit Cash at bank
Credit Bank trust
To recognise receipt of amounts due on allotment:
Credit Allotment
(Continues)
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider

13. 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
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider

14. 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
(Continues)
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider

15. 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
(Continues)
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider

16. 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
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider

17. Redemption of preference shares
The Companies Act 1993, ss 68–75, requires:
Where the shares are redeemed at the option of the company, the directors must be satisfied that, immediately after the redemption of the shares has occurred, the solvency test is passed
If the redemption of the shares is done at the option of the shareholder, or on a specified date, there is no necessity for the solvency test to be passed
If the redemption involves a consideration other than cash, the fair value of the consideration must be determined. If the fair value of the asset given up differs from its carrying value, the difference is recognised as a component of revenue or expense in the income statement
Refer to Worked Example 13.8, 'Redemption of preference shares', p. 543
(Continues)
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider

18. 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
(Continues)
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider

19. Redemption of preference shares (cont.)
To redeem shares out of profits:
Debit Retained profits
Credit Cash
Further entry required pursuant to amendments to the Corporations Law:
Debit Capital redemption reserve
Credit Share capital
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider

20. 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 moneys paid before forfeiture
(Continues)
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider

21. Forfeited shares (cont.)
Various outcomes
If company is listed on the NZX 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
If company is not listed on the NZX 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 13.10, 'Forfeiture of shares', pp. 556–7
(Continues)
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider

22. Forfeited shares (cont.)
To record the call:
Debit Call
Credit Share capital
To record receipt of call moneys:
Debit Cash at bank
Credit Call
(Continues)
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider

23. Forfeited shares (cont.)
To record forfeiture of shares:
Debit Share capital
Credit Call
Credit Forfeited shares account
To recognise amount received on sale of forfeited shares:
Debit Cash at bank
Debit Forfeited shares account
Credit Share capital
(Continues)
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider

24. 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 moneys to original shareholders:
Debit Forfeited shares account
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider

25. Share splits and bonus issues
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
(Continues)
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider

26. 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 profits
Credit Share capital — ordinary shares
Bonus shares from retained profits often referred to as a bonus share dividend
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider

27. Required disclosures for share capital
NZ IAS 1 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
(Continues)
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider

28. 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
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider

29. Reserves Include: Required to disclose (NZ IAS 1): revaluation reserve
general reserve: may be used as a means of transferring profits out of retained profits for future expansion plans
Required to disclose (NZ IAS 1):
reconciliation between carrying amount of each reserve at the beginning and end of the period, separately disclosing each change
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider

30. 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
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider

31. Summary of main changes to accounting standards
A number of new accounting standards have superseded former ones
But only minor changes to requirements have resulted:
NZ IAS 39 ‘Financial Instruments: Recognition and Measurement’ imposes new requirements for measurement of equity and liability component of preference shares
Copyright  2006 McGraw-Hill Australia Pty Ltd PPTs t/a New Zealand Financial Accounting 3e by Grant Samkin
Slides prepared by Grant Samkin and Annika Schneider