Kế toán, kiểm toán - Chapter 7: Accounting for the presentation of owners’ equity

CHAPTER 7Accounting for the Presentation of Owners’ Equity1Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynLearning ObjectivesList the characteristics of ordinary shares and present ordinary shares on the balance sheet.Explain the nature of preference shares.Explain a cash dividend transaction and the dates involved in dividend transactions.Explain the components of reserves, why these items appear in owners’ equity and how they are reported in the financial statements.Explain the nature of minority interest, why it is part of owners’ equity and how this is reported in the financial statements.2Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynOverviewThis chapter (along with chapter 6) deal with the financial resources available to an entity for financing the assets of the entity. That is the right hand side of the equation. Assets = Liabilities + Owners’ Equity The specific terminology used to identify owners’ equity will depend upon the legal form of the entity. For a sole trader, the term used is owner’s capital. In a company, the capital consists of issued shares, reserves and retained earnings.3Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynLiabilities and Owners’ EquityA = L + OEAccounting EquationFinancial resources available to an entity for financing its assetsClaim of the entities owners to the assetsObligations of the entity4Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynOwners’ Equity Share capital Retained earnings. Reserves=PARENT ENTITY INTEREST Minority interest in subsidiaries=TOTAL EQUITY INTEREST5Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynShare Capital Ordinary shares and Preferences shares represent amounts invested in the company.Retained earnings represents the entity’s cumulative earnings (net profit over life of entity).High retained earnings relative to contributed capital reflects ability to earn a return on invested amounts. Share Capital6Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynShare CapitalOrdinary shareholders:Ultimate owners of the company.Claim to all assets after liabilities and preference shareholders claims in event of liquidation.Right and obligation to elect members to company’s board of directors.Ordinary Shares7Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynShare CapitalAmount contributed by owners.Shares may be issued as fully or partly paid.Once a share is fully paid, no more money is due from shareholders – LIMITED LIABILITYBalance sheet disclosure: Number of shares issued and outstanding.Paid-up Capital8Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynShare CapitalSeveral debt-like features:Fixed rate dividendsRedemption value fixedUsually callableUsually do not have voting rightsTypesCumulative dividendParticipating dividendsConvertibleInterest on debt is tax deductible but preference share dividends are not.Preference Shares9Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynShare CapitalPreference to dividends and priority of claims to assets in event of liquidation.Do not usually have voting privilege.Less risk than ordinary shares due to priority.Balance sheet disclosure: dividend rate, liquidation or redemption value, number of shares issued.Preference Shares10Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynRetained EarningsCumulative earnings of the company kept rather than distributed as dividends.Retained earnings are NOT cashThey are increased by a firm’s net profit, based on the accrual basis of accounting. This is different to the operating cash flows.11Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynCash DividendsRequirements:Company must have retained earnings.Board of directors must declare dividend.Company must have enough cash to pay dividend.12Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynCash DividendsOnce the board of directors declares a dividend it becomes a legally enforceable liability of the company.Dividends are not an expense and do not appear on the income statement.Dividends are a distribution of profit and are treated as a direct reduction of retained earnings. 13Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynShare DividendNo change in owners’ equityShareholders retain percentage ownership in the company (pre-emptive right)Issue of additional shares to existing shareholders in proportion to number of shares heldReasons for share dividends:Preserve cash Decrease market value of each share  - shares more affordableReduce retained earningsMaintain loyalty of shareholders 14Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynShare SplitNo accounting entry requiredNo change tototalowner’sequityDecrease the marketvalue per shareIncrease thenumber of sharesoutstandingIssue of additional shares to existing shareholders proportionately, e.g. 4 for 1 split15Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynReservesFor example, asset -revaluation reserve, foreign currency reserve.A reserve may arise from retained earnings or through the application of a particular accounting standard.16Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynReservesFinancial statement disclosureChanges in reserves are required to be shown on the face of the Income Statement. Valuation adjustments represent the consequences of unrealised wealth. So, reserves are the consequences of realised or unrealised income or loss.17Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynMinority interest in subsidiariesParent companySubsidiary companyControlling interestWhere this type of structure exists, the parent company must prepare consolidated accounts for all the companies in the economic entity.Where the parent company controls less than 100% of the subsidiary, an outside equity interest exists and must be disclosed.18Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynMinority interest in subsidiariesParent companySubsidiary companyControlling interestIn Consolidated accounts all of the assets and liabilities of the parent and subsidiary(ies) are added together to show the financial position of the economic entity as if it were a single entity.The outside equity interest is a minority interest and must be disclosed.19Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynMinority interest in subsidiariesParent companySubsidiary companyControlling interestIn Consolidated accounts all of the assets and liabilities of the parent and subsidiary (ies) are added together to show the financial position of the economic entity as if it were a single entity.The minority equity interest must be disclosed.20Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van Rhyn