Topics and IFRS Additional Share Transactions Stock dividends and splits Reacquisition of shares Comprehensive Income Continuing and discontinued operations Other comprehensive income Accounting Changes ID: 380473
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Corporations: Additional Topics and IFRS
Additional Share TransactionsStock dividends and splitsReacquisition of sharesComprehensive IncomeContinuing and discontinued operationsOther comprehensive incomeAccounting ChangesChanges in accounting policies and estimatesCorrection of prior period errorsReporting Changes in Shareholders’ EquitySummary of transactionsStatement of changes in shareholders’ equityAnalyzing Shareholders’ EquityEarnings performance; Dividend record
Copyright John Wiley & Sons Canada, Ltd.
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CHAPTER 14:Corporations: Additional Topics and IFRS
Account for stock dividends and splits and compare their financial impact.Account for the reacquisition of shares.Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income.Explain the accounting for different types of accounting changes and account for corrections of prior period errors.Prepare a statement of changes in shareholders’ equity.Evaluate earnings and dividend performance.Copyright John Wiley & Sons Canada, Ltd.
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Stock Dividends
Distribution of corporation’s own shares to its shareholdersPaid in shares instead of cashDoes not change assets or shareholders’ equityDecreases retained earnings and increases share capital by the same amountTotal amount is therefore the sameCopyright John Wiley & Sons Canada, Ltd.4Slide5
Stock Dividends: Purpose and Benefits
Satisfies shareholders' dividend expectations without spending cashIncreases marketability of corporation’s sharesIncreasing number of shares will cause market price to decrease and make shares more affordable Emphasizes that a portion of shareholders’ equity has been permanently retained in the business Therefore unavailable for cash dividendsCopyright John Wiley & Sons Canada, Ltd.5Slide6
Entries for Stock Dividends
Declaration date:Record date: no entry requiredDistribution date:Copyright John Wiley & Sons Canada, Ltd.6Slide7
Stock Splits
Involves the issue of additional shares to shareholdersSimilar to a stock dividendIncreases the marketability of shares by lowering market value per shareEffect on share price is generally inversely proportional to size of splitDoes not affect shareholders’ equityTherefore no entries are requiredCopyright John Wiley & Sons Canada, Ltd.7Slide8
Comparison of Dividends and Stock Splits
Cash dividends reduce assets and shareholders’ equity (retained earnings)Stock dividends increase share capital and decrease retained earningsStock dividends have no effect (but do increase number of shares issued)Copyright John Wiley & Sons Canada, Ltd.8Slide9
CHAPTER 14:Corporations: Additional Topics and IFRS
Account for stock dividends and splits and compare their financial impact.Account for the reacquisition of shares.Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income.Explain the accounting for different types of accounting changes and account for corrections of prior period errors.Prepare a statement of changes in shareholders’ equity.Evaluate earnings and dividend performance.Copyright John Wiley & Sons Canada, Ltd.
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Common Shares:Reacquisition of Shares
Companies can reacquire their shares from shareholders in order to:Increase trading on securities marketsIncrease earnings per shareBuy out hostile shareholdersHave shares available for compensation or other usesReacquired shares are retired and cancelledCopyright John Wiley & Sons Canada, Ltd.10Slide11
Common Shares:Reacquisition of Shares 2
Steps to record a reacquisition:Remove cost of shares from share capital accountBased on average cost per share (must be calculated)Record cash paid for the sharesRecord the gain or loss on reacquisitionCopyright John Wiley & Sons Canada, Ltd.11Slide12
Reacquisition of Shares:Below Average Cost
Average cost of shares: Balance in Common Shares Account Number of Common Shares IssuedIf shares reacquired at a price < average cost:Difference is a “gain” on reacquisitionThis “gain” is credited to a new shareholders’ equity account for the contributed capital from the reacquisition:=Copyright John Wiley & Sons Canada, Ltd.
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Reacquisition of Shares:Above Average Cost
If shares reacquired at a price > average cost:Difference is a “loss” on reacquisitionAdditional cost of shares is first debited to contributed capital from previous reacquisitions (if any)Remaining difference is debited to retained earnings:Copyright John Wiley & Sons Canada, Ltd.13Slide14
CHAPTER 14:Corporations: Additional Topics and IFRS
Account for stock dividends and splits and compare their financial impact.Account for the reacquisition of shares.Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income.Explain the accounting for different types of accounting changes and account for corrections of prior period errors.Prepare a statement of changes in shareholders’ equity.Evaluate earnings and dividend performance.Copyright John Wiley & Sons Canada, Ltd.
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Discontinued Operations
Disposal or reclassification to “held for sale” of a component of an entityA separate major business line or geographic areaReported separately on income statementIncludes allocation of income tax expense or savings (called intraperiod tax allocation)Profit (loss) from discontinued operations and gain (loss) from disposal15Copyright John Wiley & Sons Canada, Ltd.Slide16
Discontinued Operations 2
Copyright John Wiley & Sons Canada, Ltd.16Slide17
Other Comprehensive Income
Additional statement required under IFRSAll-inclusive format or as a separate statementNo “other comprehensive income” under ASPEAll changes in shareholders’ equity except from sale/purchase of shares and dividend transactionsCopyright John Wiley & Sons Canada, Ltd.17Slide18
CHAPTER 14:Corporations: Additional Topics and IFRS
Account for stock dividends and splits and compare their financial impact.Account for the reacquisition of shares.Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income.Explain the accounting for different types of accounting changes and account for corrections of prior period errors.Prepare a statement of changes in shareholders’ equity.Evaluate earnings and dividend performance.Copyright John Wiley & Sons Canada, Ltd.
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Change in Accounting Policy
Occurs when the policy used in current year is different that that used in prior yearOnly occurs when change:Is required by GAAPProvides more reliable and relevant informationMust be applied retroactively (prior years restated) unless not practical to do soUsing a new accounting method due to a change in circumstances is not a change in accounting policyNo retroactive applicationCopyright John Wiley & Sons Canada, Ltd.19Slide20
Change in Accounting Estimates
Estimates of future conditions and events are made often in accountingFor example, bad debt expense or warranty expenseThese estimates may need to be changed due to:A change in circumstancesNew information becoming availableThe new estimate is used from now onDo not go back and change prior periodsCopyright John Wiley & Sons Canada, Ltd.20Slide21
Correction of Prior Period Errors
When a material error is discovered after the financial statements have been issuedCorrection is made directly to Retained EarningsSince effect of error is now located there (all revenues and expenses have been closed to retained earnings)Net of any income tax effectExample: overstatement of cost of goods soldUnderstatement of inventory, profit (now retained earnings), and income tax payableCopyright John Wiley & Sons Canada, Ltd.21Slide22
Presentation of Prior Period Adjustments
Adjustment is added to (or deducted from) opening balance of retained earnings, net of income tax effectFinancial statements of prior years are restated to reflect the changeDetails of the change and its impact disclosed in a note to the financial statementsCopyright John Wiley & Sons Canada, Ltd.22Slide23
CHAPTER 14:Corporations: Additional Topics and IFRS
Account for stock dividends and splits and compare their financial impact.Account for the reacquisition of shares.Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income.Explain the accounting for different types of accounting changes and account for corrections of prior period errors.Prepare a statement of changes in shareholders’ equity.Evaluate earnings and dividend performance.Copyright John Wiley & Sons Canada, Ltd.
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Statement of Changes in Shareholders’ Equity
Required for companies following IFRSShows changes in shareholders’ equity during yearIncluding contributed capital, retained earnings, other comprehensive incomeCompanies following ASPE:Continue to use a Statement of Retained EarningsOther changes are reported in notes to the statementsCopyright John Wiley & Sons Canada, Ltd.24Slide25
Summary of Shareholders’ Equity Transactions
Copyright John Wiley & Sons Canada, Ltd.25Slide26
CHAPTER 14:Corporations: Additional Topics and IFRS
Account for stock dividends and splits and compare their financial impact.Account for the reacquisition of shares.Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income.Explain the accounting for different types of accounting changes and account for corrections of prior period errors.Prepare a statement of changes in shareholders’ equity.Evaluate earnings and dividend performance.Copyright John Wiley & Sons Canada, Ltd.
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Indicates profit earned by each common shareUsed under IFRS not under Private Entity GAAP
Formula to calculate:Weighted average number of common shares = shares issued during the year x the fraction of the year they are outstandingExample: April 1 = 3/12 months if calendar year usedEarnings Performance:Earnings per ShareCopyright John Wiley & Sons Canada, Ltd.27Slide28
Earnings per Share:Complex Capital Structure
When a company has securities that can be converted into common sharesExample: convertible preferred sharesIf converted, the additional common shares will result in a reduced (diluted) EPS figureTwo EPS amounts are calculated:Basic EPS: calculation on preceding pageFully diluted EPS: calculated as if all securities were converted into common sharesCalculation of weighted average number of shares becomes more complicatedCopyright John Wiley & Sons Canada, Ltd.
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Helps investors compare earnings of different companiesFormula to calculate:
A high PE ratio is an indicator that investors believe the company has good earnings potentialEarnings Performance:Price-Earnings RatioCopyright John Wiley & Sons Canada, Ltd.29Slide30
Indicates what percentage of profit a company is distributing to its shareholders
Can be calculated for common, preferred and all dividends:Payout ratios vary with the industryHigh payout ratios can indicate that a company is not reinvesting enough in its operationsPayout RatioCopyright John Wiley & Sons Canada, Ltd.30Slide31
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Prepared by:
A. Davis,
MSc
,
BComm
, CA, CFE
Copyright
Copyright John Wiley & Sons Canada, Ltd.