Equity part1
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The document discusses various aspects of owners' equity, including: - Owners' equity represents the investment made by owners in a business. - Statements of owners' equity track the capital contributed and any profits/losses of a business over time. - Different types of business organizations (sole proprietorships, partnerships, companies) have different structures for owners' equity and liability. - Companies establish authorized, issued, and paid-up share capital through the issuance of ordinary and preference shares. Reserves are also part of owners' equity.
Equity part1
- 1. EQUITYEQUITY Part 1Part 1 Financial Accounting and Reporting 1 - Pearson
- 2. Learning OutcomesLearning Outcomes After studying this chapter, you should be able to: • Explain the types of organizations and the various forms of owners’ equity • Explain the functions of Memorandum and Articles of Associations • Differentiate between ordinary shares and preference shares, and their embedded rights and privileges • Differentiate between authorized, issued, and paid up share capital • Describe issuance of share on application • Explain various types of reserves Financial Accounting and Reporting 1 2
- 3. Owners’ EquityOwners’ Equity Investment made by owners in a business or organization Investment made by owners in a business or organization Financial Accounting and Reporting 1 3
- 4. Owners’ Equity of an EnterpriseOwners’ Equity of an Enterprise Sri Asnat Enterprise Statement of Owners’ Equity For the Year Ended December 31, 2013 RM Capital, January 1 20,000 Add: Net Profit 3,400 23,400 Less: Drawings 1,800 Capital, December 31 21,600 Financial Accounting and Reporting 1 4
- 5. Example of Owners’ EquityExample of Owners’ Equity Statement of a CompanyStatement of a Company Note RM000 RM000 2010 2009 Share capital 10 1,050 1,020 Share premium 11 140 120 Other reserves 12 110 100 Retained earnings 13 1,610 1,540 Shareholders’ equity 2,910 2,780 Minority interest 20 10 Total 2,930 2,790 Financial Accounting and Reporting 1 5
- 6. Criteria of BusinessCriteria of Business OrganizationsOrganizations Sole Proprietor Partnership Company Capital Small Pooled among partners Large Ownership Individual Partners Shareholders Legal entity No No Yes Liability Unlimited Jointly unlimited Limited Business tax No No Yes Owners’ equity Simple – one owner Simple – pooled Complex Financial Accounting and Reporting 1 6
- 7. Financial Accounting and Reporting 1 7 Forms of Corporate Organizations Public Company Private Company Share Capital Issued to public Issued to related persons Shareholders Unlimited Limited to 50 persons Designation Bhd Sdn Bhd
- 8. Memorandum and Articles of AssociationMemorandum and Articles of Association Memorandum and Articles of Associations are the fundamental documents of a company. Memorandum of Associations regulate external affairs of a company such as company’s name, its registered office and objectives of its incorporation. Articles of Associations deal with internal affairs of a company such as issuance of shares, general meetings and directors. In the case of conflicting statements, Memorandum of Associations shall prevail. Memorandum and Articles of Associations are the binding contract between the company and its shareholders. Financial Accounting and Reporting 1 8
- 9. Share Capital StructureShare Capital Structure Generated from the amount of authorized share capital that being issued and paid, valued at nominal price. Two main forms of share capital: o Ordinary shares o Preference shares Financial Accounting and Reporting 1 9
- 10. Ordinary Share CapitalOrdinary Share Capital • Main component of capital structure in a company • Holders of ordinary shares: o are the owners of the company. o have the right to attend general meetings and vote on the election of its directors and other resolutions. o enjoy preemptive rights upon the issuance of new shares. o are liability bearer in the case of liquidations. o Are the last groups to receive dividend at no fixed rate. Financial Accounting and Reporting 1 10
- 11. Financial Accounting and Reporting 1 11 Preference Share Capital In general, preference shareholders have some preferential rights such as: privilege to receive dividends. Capital refund in the case of liquidations. Fixed rate of dividend But no voting rights. Types of preference shares Cumulative preference shares Eligible to receive fixed annual dividends even when the company cannot pay dividends for a particular year, by way of accumulating that dividends to the following year.
- 12. Preference Share CapitalPreference Share Capital o Non-cumulative preference shares • Have no right to claim any unpaid dividends, in the future. o Participating preference shares • Have rights to receive additional dividends over and above the specified dividend rate. o Convertible preference shares • Can be converted into ordinary shares after a predetermined date. o Callable preference shares • Allows the issuing company to buy back the shares and retire them. o Redeemable preference shares • Allows the issuing company to buy back the shares at a specified maturity date. Financial Accounting and Reporting 1 12
- 13. Authorized Share CapitalAuthorized Share Capital • Number of units of shares registered and written in Articles of Associations. • It sets the limit to which the company can issue shares. Financial Accounting and Reporting 1 13
- 14. Reporting Authorized Share CapitalReporting Authorized Share Capital Authorized share capital RM 1,000,000 ordinary shares at RM 1 1,000,000 200,000 preference shares at RM 2 400,000 1,400,000 Issued and paid-up share capital 600,000 ordinary shares at RM 1 600,000 50,000 ordinary shares at RM 2 100,000 700,000 Financial Accounting and Reporting 1 14
- 15. Financial Accounting and Reporting 1 15 Issued Share Capital Company invites the public to buy shares. Anybody who is interested to buy the shares will express his interest by applying to the company with full payment for the shares. Shares will be allotted to successful applicants, while unsuccessful applicants will be refunded. The total shares allotted are known as issued share capital.
- 16. ExampleExample Assume Medaniaga Bhd issues 40,00 shares at RM 1 each during the year ended 31 December 2008. The applications are received with full payment on October 31, 2008 for 100,000 shares. The shares are subsequently allotted on December 31, 2008 to the successful applicants, while unsuccessful applicants are refunded at the same date. The entries to record the transactions are as follows: Financial Accounting and Reporting 1 16
- 17. Journal EntriesJournal Entries Financial Accounting and Reporting 1 17 Step 1 : Upon Application Date Details Ref Debit Credit 31/10 Cash 100,000 Share application 100,000 (record share application)
- 18. Journal EntriesJournal Entries Date Details Ref Debit Credit 31/12 Share application 40,000 Ordinary share capital 40,000 Share application 60,000 Cash 60,000 Financial Accounting and Reporting 1 18 Step 2 : Upon Allotment
- 19. Financial Accounting and Reporting 1 19 Issuance of Share at Par Refers to the face value of the shares as registered in the Articles of Associations. If the par value is RM1 each, the subscriber of 100,000 units of shares should pay RM100,000.
- 20. Journal entryJournal entry Date Details Ref Debit Credit Cash 100,000 Ordinary share capital 100,000 (Being ordinary share issued at par) Financial Accounting and Reporting 1 20
- 21. Financial Accounting and Reporting 1 21 Issuance of Share at Par Authorized share capital RM 1,000,000 ordinary shares at RM 1 1,000,000 200,000 preference shares at RM 2 400,000 1,400,000 Issued and paid-up share capital 100,000 ordinary shares at RM 1 100,000 Authorized share capital RM 1,000,000 ordinary shares at RM 1 1,000,000 200,000 preference shares at RM 2 400,000 1,400,000 Issued and paid-up share capital 100,000 ordinary shares at RM 1 100,000
- 22. Financial Accounting and Reporting 1 22 Issuance of Share at Premium Issue shares at the price higher than the face value of the shares. If the par value of a share is RM1 but the company issues 100,000 shares at the price of RM1.40 per share, that additional 40 cents per share is considered as premium.
- 23. Journal entryJournal entry Date Details Ref Debit Credit Cash 140,000 Ordinary share capital Share Premium 100,000 40,000 (Being ordinary share issued at premium) Financial Accounting and Reporting 1 23
- 24. Financial Accounting and Reporting 1 24 Issuance of Share at Premium Authorized share capital RM 1,000,000 ordinary shares at RM 1 1,000,000 200,000 preference shares at RM 2 400,000 1,400,000 Issued and paid-up share capital 100,000 ordinary shares at RM 1 100,000 Reserves Share premium 40,000 Total share capital and reserves140,000 Authorized share capital RM 1,000,000 ordinary shares at RM 1 1,000,000 200,000 preference shares at RM 2 400,000 1,400,000 Issued and paid-up share capital 100,000 ordinary shares at RM 1 100,000 Reserves Share premium 40,000 Total share capital and reserves140,000
- 25. Financial Accounting and Reporting 1 25 Issuance of Share at Discount Issue shares at the price lower than the face value of the shares. If the par value of a share is RM1 but the company issues 100,000 shares at the price of RM0.80 per share, that 20 cents per share is considered as discount.
- 26. Journal entryJournal entry Date Details Ref Debit Credit Cash Share Discount 80,000 20,000 Ordinary share capital 100,000 (Being ordinary share issued at discount) Financial Accounting and Reporting 1 26
- 27. Financial Accounting and Reporting 1 27 Issuance of Share at Discount Assets RM Share discount 20,000 Owners’ Equity Authorized share capital 1,000,000 ordinary shares at RM 1 1,000,000 200,000 preference shares at RM 2 400,000 1,400,000 Issued and paid-up share capital 100,000 ordinary shares at RM 1 100,000 Assets RM Share discount 20,000 Owners’ Equity Authorized share capital 1,000,000 ordinary shares at RM 1 1,000,000 200,000 preference shares at RM 2 400,000 1,400,000 Issued and paid-up share capital 100,000 ordinary shares at RM 1 100,000
- 28. ReservesReserves • Part of owners’ equity • Comprise of capital reserve and revenue reserve. Financial Accounting and Reporting 1 28
- 29. Capital ReserveCapital Reserve • statutory non-distributable reserve and cannot be distributed as dividends to shareholders. • Share premium and capital redemption reserve are examples of capital reserves required by the Companies Act. • Share premium is the excess value of shares above their nominal price. • capital redemption reserve is required for specific purpose, normally transferred from either the share premium or the company’s retained earnings. Financial Accounting and Reporting 1 29
- 30. Financial Accounting and Reporting 1 30 Revenue Reserve Normally represented by the accumulated retained earnings and can be distributed as dividends. Examples are general reserve and dividend reserve. Both reserves are transferred from retained earnings for particular reason. General reserve is meant for reducing the amount of dividends paid out during booms and acts as financial preparation for periods of crisis when a lot of funds are needed. Dividend reserve is maintained to ensure that a similar amount of dividends can be distributed to shareholders even during periods of low profit.
- 31. Shares Issued with Other Securities Two methods of allocating proceeds: Proportional method. Incremental method. LO 3 Explain the accounting procedures for issuing shares. EquityEquityEquityEquity
- 32. LO 3 EquityEquityEquityEquity Number Amount Total Percent Ordinary shares 300 x 20.00$ = 6,000$ 40% Preference shares 100 x 90.00 9,000 60% Fair Market Value 15,000$ 100% Allocation: Ordinary Preference Issue price 13,500$ 13,500$ Allocation % 40% 60% Total 5,400$ 8,100$ Proportional Method BE15-4BE15-4:: Ravonette Corporation issued 300 shares of $10 par value ordinary shares and 100 shares of $50 par value preference shares for a lump sum of $13,500. The ordinary shares have a market value of $20 per share, and the preference shares have a market value of $90 per share.
- 33. LO 3 Explain the accounting procedures for issuing shares. EquityEquityEquityEquity Cash 13,500 Preference shares (100 x $50) 5,000 Journal entry (Proportional): Share premium - preference 3,100 Ordinary shares (300 x $10) 3,000 Share premium - ordinary 2,400 BE15-4BE15-4:: Ravonette Corporation issued 300 shares of $10 par value ordinary shares and 100 shares of $50 par value preference shares for a lump sum of $13,500. The ordinary shares have a market value of $20 per share, and the preference shares have a market value of $90 per share.
- 34. BE15-4 (Variation): Ravonette Corporation issued 300 shares of $10 par value ordinary shares and 100 shares of $50 par value preference shares for a lump sum of $13,500. The ordinary shares have a market value of $20 per share, and the value of preference shares are unknown. LO 3 Explain the accounting procedures for issuing shares. EquityEquityEquityEquity Number Amount Total Ordinary shares 300 x 20.00$ = 6,000$ Preference shares 100 x - Fair Market Value 6,000$ Allocation: Ordinary Preference Issue price 13,500$ Ordinary (6,000) Total 6,000$ 7,500$ Incremental Method
- 35. LO 3 Explain the accounting procedures for issuing shares. EquityEquityEquityEquity Cash 13,500 Preference shares (100 x $50) 5,000 Journal entry (Incremental): Share premium - preference 2,500 Ordinary shares (300 x $10) 3,000 Share premium - ordinary 3,000 BE15-4 (Variation): Ravonette Corporation issued 300 shares of $10 par value ordinary shares and 100 shares of $50 par value preference shares for a lump sum of $13,500. The ordinary shares have a market value of $20 per share, and the value of preference shares are unknown.
- 36. Shares Issued in Noncash Transactions The general rule: Companies should record shares issued for services or property other than cash at the fair value of the goods or services received. If the fair value of the goods or services cannot be measured reliably, use the fair value of the shares issued. LO 3 Explain the accounting procedures for issuing shares. EquityEquityEquityEquity
- 37. LO 3 Explain the accounting procedures for issuing shares. EquityEquityEquityEquity Illustration: The following series of transactions illustrates the procedure for recording the issuance of 10,000 shares of $10 par value ordinary shares for a patent for Marlowe Company, in various circumstances. 1. Marlowe cannot readily determine the fair value of the patent, but it knows the fair value of the shares is $140,000. Patent 140,000 Share Capital—Ordinary 100,000 Share Premium—Ordinary 40,000
- 38. LO 3 Explain the accounting procedures for issuing shares. EquityEquityEquityEquity 2. Marlowe cannot readily determine the fair value of the shares, but it determines the fair value of the patent is $150,000. Patent 150,000 Share Capital—Ordinary 100,000 Share Premium—Ordinary 50,000
- 39. Financial Accounting and Reporting 1 39 Disclosure of Owners’ Equity The Companies Act 1965 requires the following disclosure of owners’ equity: the amount of authorized capital the particulars of issued capital redeemable preferences shares any share capital on which interest has been paid out of capital during the financial year and the rate at which interest has been so paid separate disclosure of the following reserves: i. share premium account ii. revaluation surplus iii. balance of profit and loss account iv. other reserves
- 40. Financial Accounting and Reporting 1 40 Disclosure of Owners’ Equity According to MFRS 101 paragraph 76, Presentation of Financial Statements, an enterprise should disclose the following, either on the face of the balance sheet or in the notes: For each class of share capital: - the number of authorized shares - the number of shares issued and fully paid, and issued but not fully paid - par value per share, or that the shares have no par value - a reconciliation of the number of shares outstanding at the beginning and at the end of the year - the rights, preferences, and restrictions attaching to that class including restrictions on the distribution of dividends and the repayment of capital - shares in the enterprise held by the enterprise itself or by subsidiaries or associates of the enterprise - shares reserved for issuance under options and sales contracts, including the terms and amounts.
- 41. Financial Accounting and Reporting 1 41 Disclosure of Owners’ Equity A description of the nature and purpose of each reserve within owner’s equity. When dividends have been proposed but not formally approved for payment, the amount included (or not included) in liabilities. The amount of any cumulative preference dividends not recognized. An enterprise without share capital, such as partnership, should disclose information equivalent to that required above, showing movements during the period in each category of equity interest and rights, preferences, and restrictions attaching to each category of equity interest. The standard further emphasizes that equity capital and reserves are analyzed showing separately the various classes of paid-up capital, share premium, and reserves.
- 42. ConclusionConclusion • Owners’ equity represents the ownership of a company. • Owners’ equity of a company normally arises from the investment of shareholders and retained earnings. • It is mandatory for a company to report owners’ equity on the balance sheet as highlighted in FRS 101, Presentations of Financial Statements. Financial Accounting and Reporting 1 42