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Equities Part 2Comm 313

George Boland

September 26, 2013


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Bundling of shares

Two methods of recording:1. Relative fair value or proportional method2. Residual or incremental method


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REACQUISITION OF SHARES


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Increases EPS and ROE (for the remaining shares)

To provide shares for employee share compensation or to meetpotential merger needsTo stop takeover attempts or to reduce the number ofshareholdersTo make a market

To return cash to shareholdersTo create value for shareholders

Reacquisition Why?


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Reacquisition of shares

Types of contributed surplusType A created by the issuance of shares inexcess of par

Type B created by repurchase and resale of

previously issued sharesType C created by any transactions other

than A or B above, such as,issuance of stock options


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Accounting for reacquisition

ASPE Section 3240

Under the CBCA, companies are not allowed to hold their own shares: any sharesreacquired must be immediately retired. This leads to section 3240.09 of the Handbook

09 When a company redeems its own shares, or cancels shares that it has acquired, and the cost isin excess of the par, stated or assigned values, there are a number of possible methods ofallocating the difference. These include the following:(a) The excess would be charged first to contributed surplus until the entire account has been

eliminated and the balance to retained earnings. Consequently, the excess may be offset inpart against contributed surplus arising from entirely different sources.

(b) The excess would be charged first to any contributed surplus arising from transactions inshares of the same class and the balance to retained earnings. Consequently, the excess maybe offset in part against contributed surplus relating to shares that are not being redeemedor cancelled.

(c) The excess would be charged entirely to retained earnings. Contributed surplus arising uponthe original issue of shares would not be reduced even though such shares are beingredeemed or cancelled.

(d) The excess would be charged to contributed surplus, pro rata, and the balance to retainedearnings. The amount charged would be the direct opposite of the credit previously carriedto contributed surplus.


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ASPE Section 3240

11 When a company redeems its own shares, or cancels its own shares that it hasacquired, and the cost of such shares is equal to or greater than their par, stated orassigned value, the cost shall be allocated as follows:(a) to share capital, in an amount equal to the par, stated or assigned value of the

shares (see paragraph 3240.14 for computation of assigned value);(b) any excess, to contributed surplus to the extent that contributed surplus was

created by a net excess of proceeds over cost on cancellation or resale of sharesof the same class;

(c) any excess, to contributed surplus in an amount equal to the pro rata share of the portion of contributed surplus that arose from transactions, other than those in

(b) above, in the same class of shares; and(d) any excess, to retained earnings.


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ASPE Section 3240

.13 When a company redeems its own shares, or cancels its own shares that it hasacquired, and the cost of such shares is below their par, stated or assigned value,the cost shall be allocated as follows:(a) to share capital in an amount equal to the par, stated or assigned value of the

shares (see paragraph 3240.14 for computation of assigned value); and(b) the difference, to contributed surplus.


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REACQUISITION FOR RESALE


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Continuing with ASPE 3240

Acquisition of shares

.03 There are two methods of accounting for the acquisition by acompany of its own shares; the difference between thesemethods rests on differing views as to whether the acquisitionand subsequent resale are regarded as two separatetransactions or as a single transaction.


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More section 3240

16 When a company resells shares that it has acquired,any excess of the proceeds over cost shall be credited to

contributed surplus; any deficiency shall be charged tocontributed surplus to the extent that a previous netexcess from resale or cancellation of shares of the sameclass is included therein, otherwise to retainedearnings.


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Single transaction method

At time of Acquisition:Dr. Treasury Shares xxxCr. Cash xxx


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Single Transaction Method

Case I - Reissue of Treasury Shares At acquisition cost:

Dr. Cash xxxCr. Treasury Shares xxx

Case II - Reissue of Treasury Shares for less than acquisition cost:

Dr. Cash xxxDr. Contributed Surplus/ Retained earnings xxxCr. Treasury Shares xxx

Case III - Reissue of Treasury Shares for more than acquisition costDr. Cash xxx

Cr. Treasury Shares xxxCr. Contributed Surplus xxx


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Two-transaction method

Handled as if the shares are purchased and cancelled i.e., thereis no reference to treasury shares

Resale looks like any other sale of shares.


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IFRS on reacquisitions

Not specific but IAS 8 does specify that management shall use judgment (IAS 8 Para 10) and :

11 In making the judgment described in paragraph 10, managementshall refer to, and consider the applicability of, the following sourcesin descending order:(a) the requirements in IFRSs dealing with similar and related

issues; and(b) the definitions, recognition criteria and measurement concepts

for assets, liabilities, income and expenses in the Framework.

12 In making the judgment described in paragraph 10, management

may also consider the most recent pronouncements of otherstandard-setting bodies that use a similar conceptual framework todevelop accounting standards, other accounting literature andaccepted industry practices, to the extent that these do not conflictwith the sources in paragraph 11.


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Reacquisition of Shares

Holding reacquired shares in treasury

CBCA: generally no treasury shares permittedPermitted in other jurisdictions e.g., B.C.Treasury shares have no voting rightsDo not receive dividendsRecorded using the single-transaction (preferred) or two-transaction methodNotice in Exhibit 12-12 that the two transaction method

similar to the acquire and retire treatment.


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RETAINED EARNINGS AND DIVIDENDS


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Items Affecting Retained Earnings

Debits Credits

1. Net Income2. Prior period adjustments,

accounting principlechanges

3. Adjustments from financialreorganization

1. Net loss2. Prior period adjustments,

accounting principlechanges

3. Cash, property, stockdividends

4. Treasury stock


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No amounts may be distributed unless corporate capital ismaintained intact

Under the CBCA:1. There needs to be sufficient capital after the dividend to

pay liabilities as they are due2. The realizable value of the corporate assets does not fall

below the total of the liabilities and the stated and legalcapital for all classes of sharesFormal approval of the Board of Directors requiredDividends are in full agreement with share capital contractsBefore declaration of a dividend, management should consideravailability of funds to pay the dividend

Formality of Profit Distribution


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These become a liability at the declaration date (true even ofcumulative preferred dividends)The date of record is used to establish who gets paid but thereare no entriesAt payment date the liability is closed

You could use a dividends declared account that gets closed toretained earnings at the end of the year.

Cash Dividends


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Cash Dividends


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Cash Dividends


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considered non-reciprocal transfer of non-monetary assets

measured at the fair value of the asset given up- this couldresult in a gain (or loss)air value is determined by referring to: estimated realizablevalue of same or similar assets, quoted market prices,independent appraisals

Dividends in Kind


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In this case, a portion of retained earnings is capitalized that is,retained earnings is debited and the share account credited

They should be measured at the fair value of the shares

Stock Dividends


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Stock splits

Nothing of substance has occurred- each shareholder holds the same proportionate

number of shares- company value is unchanged- memo entry only recording the new number of

shares outstanding


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STATEMENT OF CHANGES INSHAREHOLDERS EQUITY


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Statement of Changes in Shareholders Equity - CP

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