11-1. 11-2 reporting and analyzing stockholders’ equity kimmel ● weygandt ● kieso financial...

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Reporting and Analyzing Stockholders’ Equity

Kimmel ● Weygandt ● KiesoFinancial Accounting, Eighth Edition

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Explain how to account for the issuance of common and preferred stock, and the purchase of treasury stock.

CHAPTER OUTLINE

Discuss the major characteristics of a corporation.1

2

LEARNING OBJECTIVES

Explain how to account for cash dividends and describe the effect of stock dividends and stock splits.3

Discuss how stockholders’ equity is reported and analyzed.4

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An entity separate and distinct from its owners.

Classified by Purpose Not-for-Profit For Profit

Classified by Ownership Publicly held Privately held

► Facebook► IBM► Caterpillar► General Electric

► Salvation Army► American Cancer

Society

► Cargill Inc.

LEARNING OBJECTIVE

Discuss the major characteristics of a corporation.1

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11-5

Separate Legal Existence Limited Liability of Stockholders Transferable Ownership Rights Ability to Acquire Capital Continuous Life Corporation Management Government Regulations Additional Taxes

Characteristics that distinguish corporations from proprietorships and partnerships.

Advantages

Disadvantages

CHARACTERISTICS OF A CORPORATION

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Corporation acts under its own name

rather than in the name of its

stockholders.



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Limited to their investment.



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Shareholders may sell their stock.




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Corporation can obtain capital

through the issuance of stock.



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Continuance as a going concern is not

affected by the withdrawal, death, or

incapacity of a stockholder, employee,

or officer.



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Separation of ownership and management

prevents owners from having an active role

in managing the company.



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Corporations pay income taxes as a

separate legal entity and in addition,

stockholders pay taxes on cash

dividends.



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Stockholders

Chairman and Board of Directors

President andChief Executive

Officer

General Counsel/Secretary

Vice PresidentMarketing

Vice PresidentFinance/Chief

Financial Officer

Vice PresidentOperations

Vice PresidentHuman

Resources

Treasurer Controller

ILLUSTRATION 11-1 Corporation organization chart


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The Impact of Corporate Social ResponsibilityA survey conducted by Institutional Shareholder Services, a proxy advisory firm, shows that 83% of investors now believe environmental and social factors can significantly impact shareholder value over the long term. This belief is clearly visible in the rising level of support for shareholder proposals requesting action related to social and environmental issues. The following table shows that the number of corporate social responsibility (CSR) related shareholder proposals rose from 150 in 2000 to 191 in 2010. Moreover, those proposals received average voting support of 18.4% of votes cast versus just 7.5% a decade earlier. Trends in Shareholder Proposals on Corporate Responsibility

2000 2005 2010Number of proposals voted 150 155 191Average voting support 7.5% 9.9% 18.4%Percent proposals receiving >10% support 16.7% 31.2% 52.1%Source: Investor Responsibility Research Center, Ernst & Young, Seven Questions CEOs and Boards Should Ask About: “Triple Bottom Line” Reporting.

PEOPLE, PLANET, AND PROFIT INSIGHT

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Other Forms of Business Organization

Limited partnerships

Limited liability partnerships (LLPs)

Limited liability companies (LLCs)

S Corporation

► No double taxation.

► Cannot have more than 100 shareholders.

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File application with the Secretary of State.

State grants charter.

Corporation develops by-laws.

Initial Steps:

Companies generally incorporate in a state whose laws are favorable to the corporate form of business (Delaware, New Jersey).

Corporations engaged in interstate commerce must obtain a license from each state in which they do business.

FORMING A CORPORATION

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1. Vote in election of board of directors and on actions that require stockholder approval.

2. Share the corporate earnings through receipt of dividends.

STOCKHOLDER RIGHTS

ILLUSTRATION 11-3Ownership rights of stockholders

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3. Keep the same percentage ownership when new shares of stock are issued (preemptive right).

STOCKHOLDER RIGHTS


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4. Share in assets upon liquidation in proportion to their holdings. This is called a residual claim.


STOCKHOLDER RIGHTS

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Name of corporation

Stockholder’s name

STOCKHOLDER RIGHTSSharesPrenumbered

Signatures of corporate officials

ILLUSTRATION 11-4A stock certificate

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Charter indicates the amount of stock that a corporation is authorized to sell.

Number of authorized shares is often reported in the stockholders’ equity section.

Authorized Stock

STOCK ISSUE CONSIDERATIONS

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Corporation can issue common stock

► directly to investors or

► indirectly through an investment banking firm.

Top five exchanges by value of shares traded:

1. New York Stock Exchange

2. Nasdaq stock market

3. London Stock Exchange

4. Tokyo Stock Exchange

5. Euronext

Issuance of Stock


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Total take: $1.7 million

ANATOMY OF A FRAUD

The president, chief operating officer, and chief financial officer of SafeNet, a software encryption company, were each awarded employee stock options by the company’s board of directors as part of their compensation package. Stock options enable an employee to buy a company’s stock sometime in the future at the price that existed when the stock option was awarded. For example, suppose that you received stock options today, when the stock price of your company was $30. Three years later, if the stock price rose to $100, you could “exercise” your options and buy the stock for $30 per share, thereby making $70 per share. After being awarded their stock options, the three employees changed the award dates in the company’s records to dates in the past, when the company’s stock was trading at historical lows. For example, using the previous example, they would choose a past date when the stock was selling for $10 per share, rather than the $30 price on the actual award date. In our example, this would increase the profit from exercising the options to $90 per share.

THE MISSING CONTROL Independent internal verification. The company’s board of directors should have ensured that the awards were properly administered. For example, the date on the minutes from the board meeting should be compared to the dates that were recorded for the awards. The dates should again be confirmed upon exercise.

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Par value stock is capital stock that has been assigned a value per share.

Years ago, par value determined the legal capital per share that a company must retain in the business for the protection of corporate creditors.

Many states do not require a par value.

No-par value stock is fairly common.

In many states the board of directors assigns a stated value to no-par shares.

Par and No-Par Value Stocks


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Review QuestionWhich of these statements is false?

a. Ownership of common stock gives the owner a voting right.

b. The stockholders’ equity section begins with paid-in capital.

c. The authorization of capital stock does not result in a formal accounting entry.

d. Legal capital is intended to protect stockholders.

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Paid-in Capital

Retained Earnings

Account

Paid-in Capital in Excess of Par

Account

Two Primary Sources of

Equity

Common StockAccount

Preferred StockAccount

Paid-in capital is the total amount of cash and other assets paid in to the corporation by stockholders in exchange for shares of ownership.

CORPORATE CAPITAL

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Paid-in Capital

Retained Earnings

Account


Account


Equity

Common StockAccount


Retained earnings is net income that a corporation retains for future use in the business.

CORPORATE CAPITAL

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Indicate whether each of the following statements is true or false.

Corporate OrganizationDO IT! 1

1. Similar to partners in a partnership, stockholders of a corporation have unlimited liability.

2. It is relatively easy for a corporation to obtain capital through the issuance of stock.

3. The separation of ownership and management is an advantage of the corporate form of business.

4. The journal entry to record the authorization of capital stock includes a credit to the appropriate capital stock account.

5. All states require a par value per share for capital stock.

False

True

False

FalseLO 1

False

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Primary objectives:

1) Identify the specific sources of paid-in capital.

2) Maintain the distinction between paid-in capital and retained earnings.

Other than consideration received, the issuance of common stock affects only paid-in capital accounts.

ACCOUNTING FOR COMMON STOCK

LEARNING OBJECTIVE

Explain how to account for the issuance of common and preferred stock, and the purchase of treasury stock.

2

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Illustration: Assume that Hydro-Slide, Inc. issues 2,000 shares of $1 par value common stock. Prepare Hydro-Slide’s journal entry if (a) 1,000 share are issued for $1 per share, and (b) 1,000 shares are issued for $5 per share.

Cash 1,000

Common Stock (1,000 x $1) 1,000

Cash 5,000

Common Stock (1,000 x $1) 1,000

Paid-in Capital in Excess of Par Value 4,000

(a)

(b)

Issuing Par Value Common Stock for Cash

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Stockholders’ equity section assuming Hydro-Slide, Inc. has retained earnings of $27,000.

Issuing Par Value Common Stock for Cash

ILLUSTRATION 11-5Stockholders’ equity—paid-in capital in excess of par value

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Review QuestionABC Corp. issues 1,000 shares of $10 par value common stock at $12 per share. When the transaction is recorded, credits are made to:

a. Common Stock $10,000 and Paid-in Capital in Excess of Stated Value $2,000.

b. Common Stock $12,000.

c. Common Stock $10,000 and Paid-in Capital in Excess of Par Value $2,000.

d. Common Stock $10,000 and Retained Earnings $2,000.


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Typically, preferred stockholders have a priority in relation to

1. dividends and

2. assets in the event of liquidation.

However, they sometimes do not have voting rights.

Each paid-in capital account title should identify the stock to which it relates:

Paid-in Capital in Excess of Par Value—Preferred Stock

Paid-in Capital in Excess of Par Value—Common Stock

ACCOUNTING FOR PREFERRED STOCK

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Illustration: Stine Corporation issues 10,000 shares of$10 par value preferred stock for $12 cash per share. Journalize the issuance of the preferred stock.

Cash 120,000

Preferred Stock (10,000 x $10) 100,000

Paid-in Capital in Excess of Par – Preferred Stock 20,000

Preferred stock may have a par value or no-par value.

ACCOUNTING FOR PREFERRED STOCK

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INVESTOR INSIGHT

Organized exchanges trade the stock of publicly held companies at dollar prices per share established by the interaction between buyers and sellers. For each listed security, the financial press reports the high and low prices of the stock during the year, the total volume of stock traded on a given day, the high and low prices for the day, and the closing market price, with the net change for the day. Facebook is listed on the Nasdaq exchange. Here is a recent listing for Facebook:

How to Read Stock Quotes

These numbers indicate the following. The high and low market prices for the last 52 weeks have been $86.07 and $54.66. The trading volume for the day was 54,156,600 shares. The high, low, and closing prices for that date were $85.59, $83.11, and $84.63, respectively. The net change for the day was a decrease of $0.629 per share.

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Cayman Corporation begins operations on March 1 by issuing 100,000 shares of $1 par value common stock for cash at $12 per share. On March 28, Cayman issues 1,500 shares of $10 par value preferred stock for cash at $30 per share. Journalize the issuance of the common and preferred shares.

Issuance of StockDO IT! 2

Cash 1,200,000Common Stock (100,000 × $1) 100,000Paid-in Capital in Excess of Par Value— Common Stock 1,100,000

Mar. 1

Cash 45,000Preferred Stock (1,500 × $10) 15,000Paid-in Capital in Excess of Par Value— Preferred Stock 30,000

Mar. 28

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Paid-in Capital

Retained Earnings

Account


Account

Less:Treasury Stock

Account


Equity

Common StockAccount


TREASURY STOCK

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Treasury stock is a corporation’s own stock that has been reacquired by the corporation and is being held for future use.

Corporations purchase their outstanding stock:1. To reissue shares to officers and employees under bonus

and stock compensation plans.

2. To increase trading of the company’s stock in the securities market.

3. To have additional shares available for use in acquiring other companies.

4. To increase earnings per share.

Another infrequent reason is to eliminate hostile shareholders.

TREASURY STOCK

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Generally accounted for by the cost method.

Debit Treasury Stock for the price paid.

Treasury stock is a contra stockholders’ equity account, not an asset.

Treasury Stock decreases by the same amount when the company later sells the shares.

TREASURY STOCK

Purchase of Treasury Stock

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Treasury Stock (4,000 x $8) 32,000

Cash 32,000

Illustration: On February 1, 2017, Mead acquires 4,000 shares of its stock at $8 per share. Prepare the entry.

Purchase of Treasury Stock ILLUSTRATION 11-6Stockholders’ equity withno treasury stock

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Both the number of shares issued (100,000), outstanding (96,000), and the number of shares held as treasury (4,000) are disclosed.

Purchase of Treasury Stock ILLUSTRATION 11-7Stockholders’ equity withtreasury stock

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Review QuestionTreasury stock may be repurchased:

a. to reissue the shares to officers and employees under bonus and stock compensation plans.

b. to signal to the stock market that management believes the stock is underpriced.

c. to have additional shares available for use in the acquisition of other companies.

d. More than one of the above.

Purchase of Treasury Stock

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Santa Anita Inc. purchases 3,000 shares of its $50 par value common stock for $180,000 cash on July 1. It expects to hold the shares in the treasury until resold. Journalize the treasury stock transaction.

Treasury StockDO IT! 2b

Treasury Stock 180,000Cash 180,000

July 1

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A dividend is a distribution to stockholders on a pro rata (proportional to ownership) basis.

Types of Dividends:

1. Cash dividends.

2. Property dividends.

Dividends expressed: (1) as a percentage of the par or stated value, or (2) as a dollar amount per share.

3. Stock dividends.

4. Scrip (promissory note)

LEARNING OBJECTIVE

Explain how to account for cash dividends and describe the effect of stock dividends and stock splits.

3

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For a corporation to pay a cash dividend, it must have:

1. Retained earnings - Payment of dividends from retained earnings is legal in all states.

2. Adequate cash.

3. Declaration by the Board of Directors.

CASH DIVIDENDS

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Dividends require information concerning three dates:

Entries for Cash Dividends

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Illustration: On December 1, the directors of Media General declare a $0.50 per share cash dividend on 100,000 shares of $10 par value common stock. The dividend is payable on January 20 to shareholders of record on December 22:

December 1 (Declaration Date)

Cash Dividends 50,000Dividends Payable 50,000

December 22 (Record Date)

January 20 (Payment Date)

Dividends Payable 50,000Cash 50,000

No entry


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Review QuestionEntries for cash dividends are required on the:

a. declaration date and the record date.

b. record date and the payment date.

c. declaration date, record date, and payment date.

d. declaration date and the payment date.


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ACCOUNTING ACROSS THE ORGANIZATIONUp, Down, and ??The decision whether to pay a dividend, and how much to pay, is a very important management decision. As the chart below shows, from 2002 to 2007, many companies substantially increased their dividends, and total dividends paid by U.S. companies hit record levels. One reason for the increase is that Congress lowered, from 39% to 15%, the tax rate paid by investors on dividends received, making dividends more attractive to investors. Then the financial crisis of 2008 occurred. As a result, in 2009, 804 companies cut their dividends (see chart), the highest level since Standard & poor’s started collecting data in 1995. In 2010, more companies started to increase their dividends. However, potential higher taxes on dividends coming in the future and the possibility of a low growth economy may stall any significant increase.

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Preferred stockholders have the right to receive dividends before common stockholders.

Per share dividend amount is stated as a percentage of the preferred stock’s par value or as a specified amount.

Cumulative dividend – holders of preferred stock must be paid their annual dividend plus any dividends in arrears before common stockholders receive dividends.

Preference on corporate assets if the corporation fails.

Preference may be for the par value of the shares or for a specified liquidating value.

DIVIDEND PREFERENCES

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Illustration: Scientific Leasing has 5,000 shares of 7%, $100 par value, cumulative preferred stock outstanding. Each $100 share pays a $7 dividend (.07 x $100). The annual dividend is $35,000 (5,000 x $7 per share). If dividends are two years in arrears, preferred stockholders are entitled to receive the following dividends in the current year.

Cumulative Preferences

Dividends in arrears ($35,000 × 2) $ 70,000

Current-year dividends 35,000

Total preferred dividends $105,000

ILLUSTRATION 11-8Computation of total dividendsto preferred stock

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Review QuestionU-Bet Corporation has 10,000 shares of 8%, $100 par value, cumulative preferred stock outstanding at December 31, 2017. No dividends were declared in 2015 or 2016. If U-Bet wants to pay $375,000 of dividends in 2017, common stockholders will receive:

a. $0.

b. $295,000.

c. $215,000.

d. $135,000.

Cumulative Preferences

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MasterMind Corporation has 2,000 shares of 6%, $100 par value preferred stock outstanding at December 31, 2017. At December 31, 2017, the company declared a $60,000 cash dividend. Determine the dividend paid to preferred stockholders and common stockholders under each of the following scenarios. 1. The preferred stock is noncumulative, and the company

has not missed any dividends in previous years.

SOLUTION

Preferred Stock DividendsDO IT! 3a

Preferred stockholders (2,000 x .06 x $100) $ 12,000

Common stockholders ($60,000 - $12,000) 48,000

Total dividends $60,000

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MasterMind Corporation has 2,000 shares of 6%, $100 par value preferred stock outstanding at December 31, 2017. At December 31, 2017, the company declared a $60,000 cash dividend. Determine the dividend paid to preferred stockholders and common stockholders under each of the following scenarios. 2. The preferred stock is noncumulative, and the company

did not pay a dividend in each of the two previous years.

SOLUTION


Preferred stockholders (2,000 x .06 x $100) $ 12,000



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MasterMind Corporation has 2,000 shares of 6%, $100 par value preferred stock outstanding at December 31, 2017. At December 31, 2017, the company declared a $60,000 cash dividend. Determine the dividend paid to preferred stockholders and common stockholders under each of the following scenarios. 3. The preferred stock is cumulative, and the company did

not pay a dividend in each of the two previous years.

SOLUTION


Preferred stockholders (3 x 2,000 x .06 x $100) $ 36,000



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Pro rata distribution of the corporation’s own stock.

STOCK DIVIDENDS

LO 3

ILLUSTRATION 11-10Effect of stock split for stockholders

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Pro rata distribution of the corporation’s own stock.

Results in decrease in retained earnings and increase in paid-in capital.

Reasons why corporations issue stock dividends:

1. Satisfy stockholders’ dividend expectations without spending cash.

2. Increase the marketability of the corporation’s stock.

3. Emphasize that a portion of stockholders’ equity has been permanently reinvested in the business.

STOCK DIVIDENDS

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Changes the composition of stockholders’ equity.

Total stockholders’ equity remains the same.

No effect on the par or stated value per share.

Increases the number of shares outstanding.

Effects of Stock Dividends

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Illustration: Medland Corp. declares a 10% stock dividend on its $10 par common stock when 50,000 shares were outstanding. The market price was $15 per share.

Effects of Stock Dividends

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ILLUSTRATION 11-9Stock dividend effects

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Reduces the market value of shares.

No entry recorded for a stock split.

Decrease par value and increase number of shares.

STOCK SPLITS ▼ HELPFUL HINTA stock split changes thepar value per share but does not affect any balances in stockholders’ equity.

ILLUSTRATION 11-10Effect of stock split forstockholders

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Illustration: Assuming that instead of issuing a 10% stock dividend, Medland splits its 50,000 shares of common stock on a 2-for-1 basis.

STOCK SPLITS

ILLUSTRATION 11-11Stock split effects

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Differences between the effects of stock dividends and stock splits.

STOCK DIVIDENDS vs STOCK SPLITS

ILLUSTRATION 11-12Effects of stock splits and stock dividends differentiated

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Review QuestionWhich of these statements about stock dividends is true?

a. Stock dividends reduce a company’s cash balance.

b. A stock dividend has no effect on total stockholders’ equity.

c. A stock dividend decreases total stockholders’ equity.

d. A stock dividend ordinarily will increase total stockholders’ equity.

STOCK DIVIDENDS

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INVESTOR INSIGHT

A No-Split PhilosophyWarren Buffett’s company, Berkshire Hathaway, has two classes of shares. Until recently, the company had never split either class of stock. As a result, the class A stock had a market price of $97,000 and the class B sold for about $3,200 per share. Because the price per share is so high, the stock does not trade as frequently as the stock of other companies. Buffett has always opposed stock splits because he feels that a lower stock price attracts short-term investors. He appears to be correct. For example, while more than 6 million shares of IBM are exchanged on the average day, only about 1,000 class A shares of Berkshire are traded. Despite Buffett’s aversion to splits, in order to accomplish a recent acquisition, Berkshire decided to split its class B shares 50 to 1. Source: Scott Patterson, “Berkshire Nears Smaller Baby B’s,” Wall Street Journal Online (January 19, 2010).

Berkshire Hathaway

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The market price of Sing CD Corporation’s 500,000 shares of $2 par value common stock is $45. President Joan Elbert is considering either a 10% stock dividend or a 2-for-1 stock split. She asks you to show the before-and-after effects of each option on (a) retained earnings, (b) total stockholders’ equity, and (c) par value per share.

Stock Dividends; Stock SplitsDO IT! 3b

Stock dividend amount is $2,250,000 [(500,000 × 10%) × $45].LO 3

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Retained earnings is net income that a company retains for use in the business.

Net income increases Retained Earnings and a net loss decreases Retained Earnings.

Retained earnings is part of the stockholders’ claim on the total assets of the corporation.

A debit balance in Retained Earnings is identified as a deficit.

LEARNING OBJECTIVE

Discuss how stockholders’ equity is reported and analyzed.4

RETAINED EARNINGS

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RETAINED EARNINGS

ILLUSTRATION 11-14Stockholders’ equity with deficit

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Restrictions can result from:

1. Legal restrictions.

2. Contractual restrictions.

3. Voluntary restrictions.

ILLUSTRATION 11-15Disclosure of unrestricted retained earnings

RETAINED EARNINGS RESTRICTIONS

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Two classifications of paid-in capital:

1. Capital stock

2. Additional paid-in capital

Other comprehensive income items include

certain adjustments to pension plan assets,

types of foreign currency gains and losses, and

some gains and losses on investments.

BALANCE SHEET PRESENTATION

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11-71ILLUSTRATION 11-16Stockholders’ equity section of balance sheet LO 4

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Jennifer Corporation has issued 300,000 shares of $3 par value common stock. It is authorized to issue 600,000 shares. The paid-in capital in excess of par value on the common stock is $380,000. The corporation has reacquired 15,000 shares at a cost of $50,000 and is currently holding those shares. It also had a cumulative other comprehensive loss of $82,000.

The corporation also has 4,000 shares issued and outstanding of 8%, $100 par value preferred stock. It is authorized to issue 10,000 shares. The paid-in capital in excess of par value on the preferred stock is $97,000. Retained earnings is $610,000.

Prepare the stockholders’ equity section of the balance sheet.

Stockholders’ Equity SectionDO IT! 4a

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Dividend RecordIllustration: The following is the calculation of the payout ratio for Nike in 2014 and 2013.

The payout ratio measures the percentage of earnings a company distributes in the form of cash dividends.

ANALYSIS OF STOCKHOLDERS’ EQUITY

ILLUSTRATION 11-17Nike’s payout ratio

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This ratio shows how many dollars of net income a company earned for each dollar of common stockholders’ equity.

Earnings PerformanceIllustration: The following is the calculation of Nike’s return on common stockholders’ equity ratios for 2014 and 2013.

ANALYSIS OF STOCKHOLDERS’ EQUITY

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DEBT VERSUS EQUITY DECISION

ILLUSTRATION 11-20Advantages of bond financing over common stock

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ILLUSTRATION 11-21Components of the return oncommon stockholders’ equity

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Illustration: Microsystems Inc. currently has 100,000 shares ofcommon stock outstanding issued at $25 per share and no debt. It is considering two alternatives for raising an additional $5 million: Plan A involves issuing 200,000 shares of common stock at the current market price of $25 per share. Plan B involves issuing $5 million of 12% bonds at face value. Income before interest and taxes will be $1.5 million; income taxes are expected to be 30%.


ILLUSTRATION 11-22Effects on return on common stockholders’ equity

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On January 1, 2017, Siena Corporation purchased 2,000 shares of treasury stock. Other information regarding Siena Corporation is provided below.

2017 2016Net income $110,000

$110,000Dividends on preferred stock $10,000

$10,000Dividends on common stock $1,600

$2,000Common stockholders’ equity, beg. of year $400,000*

$500,000Common stockholders’ equity, end of year $400,000

$500,000

*Adjusted for purchase of treasury stock.

Compute the return on common stockholders’ equity for each year.

Analyzing Stockholders’ EquityDO IT! 4b

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2017 2016Net income $110,000

$110,000Dividends on preferred stock $10,000

$10,000Dividends on common stock $1,600

$2,000Common stockholders’ equity, beg. of year $400,000*

$500,000Common stockholders’ equity, end of year $400,000

$500,000

*Adjusted for purchase of treasury stock.

Compute the return on common stockholders’ equity for each year.

Analyzing Stockholders’ EquityDO IT! 4b

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Illustration: Medland Corporation declares a 10% stock dividend on its 50,000 shares of $10 par value common stock. The current fair market value of its stock is $15 per share. Record the entry on the declaration date:

LEARNING OBJECTIVE

APPENDIX 11A: Prepare entries for stock dividends.5

Stock Dividends 75,000

Common Stock Dividends Distributable 50,000

Paid-in Capital in Excess of Par Value 25,000

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Illustration: Record the journal entry when Medland issues the dividend shares.

STOCK DIVIDENDS

Common Stock Dividends Distributable 50,000

Common Stock 50,000

ILLUSTRATION 11A-1Statement presentation ofcommon stock dividends distributable

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KEY POINTS

A Look at IFRS

LEARNING OBJECTIVE

Compare the accounting for stockholders’ equity under GAAP and IFRS.

6

Similarities Aside from the terminology used, the accounting transactions for

the issuance of shares and the purchase of treasury stock are similar.

Like GAAP, IFRS does not allow a company to record gains or losses on purchases of its own shares.

The accounting related to prior period adjustment is essentially the same under IFRS and GAAP.

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Similarities A statement of comprehensive income is presented in a one- or

two-statement format. The single-statement approach includes all items of income and expense, as well as each component of other comprehensive income or loss by its individual characteristic. In the two-statement approach, a traditional income statement is prepared. It is then followed by a statement of comprehensive income, which starts with net income or loss and then adds other comprehensive income or loss items. Regardless of which approach is reported, income tax expense is required to be reported.

The computations related to earnings per share are essentially the same under IFRS and GAAP.

A Look at IFRS

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Differences Under IFRS, the term reserves is used to describe all equity

accounts other than those arising from contributed (paid-in) capital. This would include, for example, reserves related to retained earnings, asset revaluations, and fair value differences.

Many countries have a different mix of investor groups than in the United States. For example, in Germany, financial institutions like banks are not only major creditors of corporations but often are the largest corporate stockholders as well. In the United States, Asia, and the United Kingdom, many companies rely on substantial investment from private investors.

A Look at IFRS

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Differences There are often terminology differences for equity accounts.

A Look at IFRS

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Differences A major difference between IFRS and GAAP relates to the

account Revaluation Surplus. Revaluation Surplus arises under IFRS because companies are permitted to revalue their property, plant, and equipment to fair value under certain circumstances. This account is part of general reserves under IFRS and is not considered contributed capital.

IFRS often uses terms such as retained profits or accumulated profit or loss to describe retained earnings. The term retained earnings is also often used.

Equity is given various descriptions under IFRS, such as shareholders’ equity, owners’ equity, capital and reserves, and shareholders’ funds.

A Look at IFRS

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A Look at IFRS

LOOKING TO THE FUTUREThe IASB and the FASB are currently working on a project related to financial statement presentation. An important part of this study is to determine whether certain line items, subtotals, and totals should be clearly defined and required to be displayed in the financial statements. For example, it is likely that the statement of stockholders’ equity and its presentation will be examined closely.

Both the IASB and FASB are working toward convergence of any remaining differences related to earnings per share computations.

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IFRS Practice

Which of the following is true?

a) In the United States, the primary corporate stockholders are financial institutions.

b) Share capital means total assets under IFRS.

c) The IASB and FASB are presently studying how financial statement information should be presented.

d) The accounting for treasury stock differs extensively between GAAP and IFRS.

A Look at IFRS

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IFRS Practice

Under IFRS, the amount of capital received in excess of par value would be credited to:

a) Retained Earnings.

b) Contributed Capital.

c) Share Premium.

d) Par value is not used under IFRS.

A Look at IFRS

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IFRS Practice

Earnings per share computations related to IFRS and GAAP:

a) are essentially similar.

b) result in an amount referred to as earnings per share.

c) must deduct preferred (preference) dividends when computing earnings per share.

d) All of the answer choices are correct.

A Look at IFRS

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