14-1 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Chapter

14-1 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig DeeganSlides prepared by Craig Deegan

Chapter 14

Share capital and reserves


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

• Be able to provide the journal entries necessary when preference shares are to be redeemed


Learning 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


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’


Owners’ equity as a residual claim on net assets

• Owners’ 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


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 earnings (or accumulated losses)


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


Accounting for the issue of share capital

• 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 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


Accounting for the issue of share capital (cont.)

• To recognise receipt of application monies

Debit Bank trustCredit Application

• To recognise the issue of shares and to close application account

Debit ApplicationCredit Share capital


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 14.1 and 14.2 (pp. 484 and 485)


Oversubscription of shares

• When more shares are applied for than the number to be issued – quite common

• Two approaches to manage oversubscription include1. 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 14.3 (p. 485)


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



• To recognise amount due on allotment

Debit Allotment


• To offset excess amounts paid on application against amount due on allotment

Debit Application

Credit Allotment



• To transfer funds to operating bank accountDebit Cash at bank

Credit Bank trust

• To recognise receipt of amounts due on allotment

Debit Cash at bankCredit Allotment



• Accounting for call made on shares subsequent to allotment

• To record call

Debit Call


• To record receipt of amounts due on call

Debit Cash at bank

Credit Call


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


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


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)


Redemption of preference shares

• Under sections 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



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


Redemption of preference shares (cont.)

• To redeem shares out of profits

Debit Retained earnings

Credit Cash

• Further entry required pursuant to amendments to the Corporations Law

Debit Capital redemption reserve



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


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



• 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)




To record the call

• Debit Call


To record receipt of call monies

• Debit Cash at bank

Credit Call



To record forfeiture of sharesDebit Share capital

Credit CallCredit Forfeited shares account

To recognise amount received on sale of forfeited shares:Debit Cash at bankDebit Forfeited shares account




To recognise payment of costs relating to sale of shares

Debit Forfeited shares account

Credit Cash at bank

To recognise return of remaining monies to original shareholders

Debit Forfeited shares account

Credit Cash at bank


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


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 earnings

Credit Share capital—ordinary shares

– bonus shares from retained profits often referred to as a bonus share dividend


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 14.6 (p. 496)

• Share options give the holder the right to acquire shares in the future at a particular price

• Are typically sold by the entity, or provided to employees as part of their salary

See Worked Example 14.7 (p. 497)


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


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


Reserves

• Include– revaluation reserve

– 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


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

Documents

14-1 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig Deegan Slides prepared by Craig Deegan Chapter