Lecture 2:Share capital and reserves | My Assignment Tutor

Lecture 2:Share capital and reservesHI5020 Corporate AccountingHolmes InstituteApplied Business Statistics for ManagersTopics CoveredAfter completing this session, you will:▪ Understand that the equity of an organisation can consist of several different accounts▪ Understand that within equity there can be various classes of shares, each providing differentrights to holders▪ Be able to provide the journal entries to recognise the issue of both fully paid and partly paidshares by a company▪ Be able to provide the necessary journal entries when shares are forfeited upon non-payment ofinstalment money by their owners▪ Be able to provide the journal entries necessary when preference shares are to be redeemed▪ Understand the concepts of rights issues and option issues▪ Understand what constitutes a share split and a bonus shares▪ Know the disclosure requirements of AASB 101 Presentation of Financial Statements in relationto share capitalHolmes InstituteApplied Business Statistics for ManagersEquity as a residual claim on net assetsEquity▪ The Conceptual Framework defines equity as:➢ the residual interest in the assets of the entity after deducting all of itsliabilities➢ Assets -liabilities = EquitiesHolmes InstituteApplied Business Statistics for ManagersComponent of Owner’s Equity▪ 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 surplus, general reserve, forfeited sharereserve)➢ Retained earnings (or accumulated losses)Holmes InstituteApplied Business Statistics for ManagersExample of owner equityHolmes InstituteApplied Business Statistics for ManagersRetained earningsRetained 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 accountingstandard 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 inaccordance with AASB 108Holmes InstituteApplied Business Statistics for ManagersReserves▪ A range of reserves recognising adjustments that result inincreases (generally) in equity (or adjustments to existingreserves)Holmes InstituteApplied Business Statistics for ManagersCreating reservesIf an organisation revenues its land from $700 000 to $850 000, ignoring tax implications, the accounting entry to record therevaluation would be: DrLand150 000CrGain on revaluation (part of OCI)150 000 (to recognise the gain as part of other comprehensive income)At the end of the accounting period, the gain on revaluation recognised within other comprehensive income would be transferredto equity in the form of a transfer to the revaluation surplus account: DrGain on revaluation (part of OCI)150 000CrRevaluation surplus150 000 (to transfer the gain to revaluation surplus)Holmes InstituteApplied Business Statistics for ManagersCreating reserves▪ Companies often create reserves that they label ‘general reserves’. Some companies establish generalreserves as a means of transferring profits out of retained earnings for future expansion plans.▪ For example, a company might consider that it needs to put aside $750 000 per year for three years to fundthe restructuring of the organisation in three years’ time. The entry each year would be: DrRetained earnings750 000CrGeneral reserve750 000 (transfer from retained earnings to the general reserve)Holmes InstituteApplied Business Statistics for ManagersAccounting for the issue of share capitalShare capital➢ Balance of owners’ equity within a company comprising the capitalcontributions made by owners▪ When shares are issued, then the amount received from the issue is added to ‘sharecapital’Holmes InstituteApplied Business Statistics for ManagersAccounting for issue of fully paid share capitalTo recognise receipt of application monies: DrBank trustxCrApplicationx To recognise the issue of shares and to close application account: DrApplicationxCrShare capitalx Holmes InstituteApplied Business Statistics for ManagersAccounting for the issue of share capitalTo transfer cash from trust account to general operating bankaccount: Dr Cash at bankCr Bank trustx Holmes InstituteApplied Business Statistics for ManagersPartly paid shares▪ A company might issue shares on an instalment basis▪ Where shares are partly paid, the paid portion of the shares is accounted for in thesame manner as fully paid shares, while the balance, the deferred consideration, is ofthe nature of a receivable▪ Where no future date has been specified for calling up the unpaid portion, an asset isnot recognised until the company has specified a future date or dates for calling up theunpaid portion and informs shareholders of these dates▪ However, where shares have been issued on an instalment basis, with an amount tobe paid on issue and with further amounts payable at specified future dates, areceivable must be recognisedHolmes InstituteApplied Business Statistics for ManagersWorked Example 13.3—Issue of partly paid sharesYeates Ltd commenced operations on 1 July 2023 by issuing 15 million ordinary shares by way of adirect private placement and at an issue price of $1.50 per share.Shareholders were required to pay $1.00 on application, with a further $0.35 payable on 1September 2023 and a further $0.15 payable on 1 December 2023:1 July 2023 Dr CashCr Share capital15 000 00015 000 000 1 July 2023 DrFirst call5 250 000Dr Second call2 250 000Cr Share capital7 500 000 1 September 2023 Dr Cash5 250 000CrFirst call5 250 000 1 December 2023 Dr CashCr Second call2 250 0002 250 000 Holmes InstituteApplied Business Statistics for ManagersOversubscription of shares▪ When more shares are applied for than the number to be issued—quite common▪ Two approaches to manage oversubscription:1. Satisfy full demand of a certain number of subscribers and refundthe funds advanced by others2. Issue shares to all subscribers on a pro rata basis– Excess monies on application can either be refunded or used toreduce further monies owing on allotmentHolmes InstituteApplied Business Statistics for ManagersWorked Example 13.5—Oversubscription for sharesIn July 2023, ABC Ltd calls for public subscriptions for 10 million shares. issued as partly paidThe issue price per share is $1.20, to be paid in three parts, these being $0.50 onapplication, $0.40 within one month of the shares being allotted and $0.30 within twomonths of the first and final call, with the call for final payment being payable on 1September 2023.By the end of July, when applications close, applications have been received for 12million shares; that is, two million in excess of the amount to be allotted:1–31 July 2023 DrBank trust6 000 000CrApplication6 000 000 Holmes InstituteApplied Business Statistics for ManagersWorked Example 13.5—Oversubscription forsharesWe will assume that the excess funds are used to offset the amount due on allotment ($0.40 pershare), and that all subscribers will receive an allotment of shares on a pro rata basis:1 August 2023 DrApplication5 000 000CrShare capital5 000 000 (to allot the shares as partly paid to $0.50) DrAllotment4 000 000DrCall3 000 000CrShare capital7 000 000 DrApplication1 000 000CrAllotment1 000 000 DrCash at bank6 000 000CrBank trust6 000 000 Holmes InstituteApplied Business Statistics for ManagersWorked Example 13.5—Oversubscription for shares30 August 2023 DrCash at bank 3 000 000CrAllotment3 000 000(to recognise the receipt of amounts due on allotment)It is assumed that all amounts due on allotment are paid:1 September 2023DrCash at bank 3 000 000CrCall3 000 000 Holmes InstituteApplied Business Statistics for ManagersForfeited shares▪ Shares can be forfeited if:➢ shares are issued as partly paid and shareholders do notsubsequently 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 ofmonies paid before forfeitureVarious outcomes➢ If company is listed on the ASX or if company’s operating rules allowit, a refund is paid to the investor less costs incurred in reissuingshares• amounts paid are recorded in a forfeited shares account(liability) until refundedHolmes InstituteApplied Business Statistics for ManagersForfeited shares (cont.)Various outcomes (cont.)➢ If company is not listed on the ASX and constitution says nothingabout refunds, the company can retain the amounts paid less costsof reissuing shares:• amounts paid are held in a forfeited shares reserve (part ofshareholders’ funds)Holmes InstituteApplied Business Statistics for ManagersForfeited shares (cont.)Refer to the ABC ltd example that we have just discussed,If holders of 1 Million shares fails to pay the allotment money.Directors forfeit those shares and reissue them as fully paid at aprice of $1.00 per share. Cost associates with the issue is$5000.Directors refund the remaining amount to the shareholderswhose shares were forfeited on 1 November.Holmes InstituteApplied Business Statistics for ManagersForfeited shares (cont.)To record forfeiture of shares: DrCrShare capitalCall$1200,000$300,000CrForfeited shares account $900,000To recognise amount received on sale of forfeited shares:DrDrCrCash at bankForfeited shares accountShare capital$1000,000$ 200,000$ 1200,000 Holmes InstituteApplied Business Statistics for ManagersForfeited shares (cont.)To recognise payment of costs relating to sale of shares: DrCrForfeited shares accountCash at bank$5000$5000To recognise return of remaining monies to originalshareholders:DrCrForfeited shares accountCash at bank$695,000$695,000 Holmes InstituteApplied Business Statistics for ManagersIssue of shares other than for cash▪ Where shares are to be issued for a consideration other than cash, the fair value of theconsideration for the issue must be determined▪ Fair value is defined in the accounting standards as:➢ the price that would be received to sell an asset or paid to transfer aliability in an orderly transaction between market participants at themeasurement dateHolmes InstituteApplied Business Statistics for ManagersRights issues▪ A rights issue provides existing shareholders with the right toacquire additional shares typically at an ‘attractive’ price▪ Some rights might be tradeable, some are not• A rights issue must be underwritten, basically a guaranteethat all shares on offer against existing shares will be takenup.• Where there is an under-subscription, the underwriter will berequired to acquire the balance (will be a receivable),meaning that the share capital increases by the “required”amountHolmes InstituteApplied Business Statistics for ManagersShare options▪ Share options give the holder the right to acquire shares inthe future at a particular price▪ Typically sold by the entity, or provided to employees as partof their salary▪ If shares are issued to employees then they will be treated aspart of salaries expense (with a credit to share capital)Holmes InstituteApplied Business Statistics for ManagersShare splitsShare splits▪ Subdivision of the company’s shares into shares of smallervalue▪ Result in no change to owners’ equity▪ Companies may undertake share splits because they feel thatlower priced shares will be more marketable▪ A company with 20 million shares may split them down to 40 millionshares.▪ There is NO change to equity and as such, no journals required. Theyjust need to amend their share register.Holmes InstituteApplied Business Statistics for ManagersBonus issuesBonus shares• Existing shareholders receive additional shares, at no cost, inproportion to their shareholding at the date of the bonus issue• Journal entryDr Retained earnings xCr Share capital—ordinary shares x• Bonus shares from retained earnings often referred to as a bonusshare dividendHolmes InstituteApplied Business Statistics for ManagersAccounting for dividends▪ Once the final profit for the year has been calculated, thedirectors decide on the amount of final dividends to allocateto shareholders▪ Australian Accounting Standards (and IFRS) prohibit therecognition of a dividend at the end of the reporting periodunless the dividend has been declared and ratified byappropriate party prior to year end.Holmes InstituteApplied Business Statistics for ManagersDifferent classes of sharesOrdinary shares• Provide a claim against the entity that ranks behind the claims ofcreditors 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 dividendsuntil dividends are paidHolmes InstituteApplied Business Statistics for ManagersDifferent classes of sharesPreference shares• Subject to preferential treatment, often with receipt of dividends ororder 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 atfixed rate, participate with ordinary shareholders in further profitsdistributedHolmes InstituteApplied Business Statistics for ManagersRedemption of preference sharesUnder s. 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– Finally, it should be noted that the Corporations Act 2001 requires that aredemption of preference shares should not reduce total share capital.Holmes InstituteApplied Business Statistics for ManagersRedemption of preference sharesTo recognise issue of preference shares: DrCash at bankCrShare capital—preference shares xxTo eliminate preference shares and create ‘capital redemption reserve’: DrCrShare capital—preference sharesCapital redemption reservexx Holmes InstituteApplied Business Statistics for ManagersRedemption of preference sharesTo redeem shares out of profits: DrRetained earningsCrCash xxFurther entry required pursuant to amendments to the Corporations Act: DrCapital redemption reservexCrShare capitalx Holmes InstituteApplied Business Statistics for ManagersRequired disclosures for share capitalAASB 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➢ 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 equityHolmes InstituteApplied Business Statistics for ManagersSummary of the LectureIn this session you have learned the following:▪ Understand that the equity of an organisation can consist of several different accounts▪ Understand that within equity there can be various classes of shares, each providing different rights to holders▪ Provide the journal entries to recognise the issue of both fully paid and partly paid shares by a company▪ Provide the necessary journal entries when shares are forfeited upon non-payment of instalment money by their owners▪ Provide the journal entries necessary when preference shares are to be redeemed▪ Understand the concepts of rights issues and option issues▪ Understand what constitutes a share split and a bonus shares▪ Know the disclosure requirements of AASB 101 Presentation of Financial Statements in relation to share capital

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