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Ch15 Kieso IFRS4 PPT (PDF)

Fundamental Design (Trường Đại học Kinh tế Thành phố Hồ Chí Minh)

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Intermediate Accounting
IFRS Edition
Kieso, Weygandt, Warfield
Fourth Edition

Chapter 15
Equity
Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College

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Learning Objectives
After studying this chapter, you should be able to:
LO 1 Describe the corporate form and the issuance of
shares.
LO 2 Explain the accounting and reporting for treasury
shares.
LO 3 Explain the accounting and reporting issues related
to dividends.
LO 4 Indicate how to present and analyze equity.

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PREVIEW OF CHAPTER 15

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Learning Objective 1
Describe the corporate form and the
issuance of shares.

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Corporate Capital

Three primary forms of business organization.

Special characteristics of the corporate form:

1. Influence of corporate law.
2. Use of the share system.
3. Development of a variety of ownership interests.

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Corporate Law
• Corporation must submit articles of incorporation to the
appropriate governmental agency for the country in which
incorporation is desired.
• Governmental agency issues a corporation charter.
• Advantage to incorporate where laws favor the corporate
form of business organization.

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Share System

In the absence of restrictive provisions, each share carries the

following rights:
1. To share proportionately in profits and losses.
2. To share proportionately in management (the right to vote
for directors).
3. To share proportionately in assets upon liquidation.
4. To share proportionately in any new issues of shares of
the same class—called the preemptive right.

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Variety of Ownership Interests

Ordinary shares represent the residual corporate interest that

• Bears ultimate risks of loss.
• Receives the benefits of success.
• Not guaranteed dividends nor assets upon dissolution.
Preference shares are created by contract, when
shareholders’ sacrifice certain rights in return for other rights
or privileges, usually dividend preference.

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Components of Equity
Equity is often subclassified on the statement of financial
position into the following categories
1. Share capital.
2. Share premium.
3. Retained earnings.
4. Accumulated other comprehensive income.
5. Treasury shares.
6. Non-controlling interest (minority interest).

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Components of Equity Diagram

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Issuance of Shares
Accounting problems involved in the issuance of shares:
1. Par value shares.
2. No-par shares.
3. Shares issued in combination with other securities.
4. Shares issued in non-cash transactions.
5. Costs of issuing shares.

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Issuance of Shares
Par Value Shares
Low par values help companies avoid a contingent liability.
Corporations maintain accounts for:
• Preference Shares or Ordinary Shares.
• Share Premium.

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Issuance of Shares
No-Par Shares
Reasons for issuance:
• Avoids contingent liability.
• Avoids confusion over recording par value versus fair
market value.
A major disadvantage of no-par shares is that some countries
levy a high tax on these issues. In addition, in some countries
the total issue price for no-par shares may be considered
legal capital, which could reduce the flexibility in paying
dividends.

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Issuance of Shares
Journal Entries for No-Par Shares
Illustration: Video Electronics AG is organized with 10,000 ordinary
shares authorized without par value. If Video Electronics issues 500
shares for cash at €10 per share, it makes the following entry.

Cash 5,000
Share Capital — Ordinary 5,000

Video Electronics issues another 500 shares for €11 per share.

Cash 5,500
Share Capital — Ordinary 5,500

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Issuance of Shares
Journal Entry for Stated Value Shares
Illustration: Some countries require that no-par shares have a
stated value. If a company issued 1,000 of the shares with a
€5 stated value at €15 per share for cash, it makes the
following entry.

Cash 15,000
Share Capital — Ordinary 5,000
Share Premium — Ordinary 10,000

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Issuance of Shares
Shares Issued with Other Securities

Two methods of allocating proceeds:

• Proportional method.
• Incremental method.

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Shares Issued with Other Securities

Proportional Method
BE15-4: 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.

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Shares Issued with Other Securities

Journal Entry Using Proportional Method
BE15-4: 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.

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Shares Issued with Other Securities

Incremental Method
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.

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Shares Issued with Other Securities

Journal Entry Using Incremental Method

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.

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Issuance of Shares
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.

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Shares Issued in Noncash Transactions

Situation 1
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

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Shares Issued in Noncash Transactions

Situation 2
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

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Shares Issued in Noncash Transactions

Situation 3
3. Marlowe cannot readily determine the fair value of the
shares nor the fair value of the patent. An independent
consultant values the patent at €125,000 based on
discounted expected cash flows.
Patent 125,000
Share Capital — Ordinary 100,000
Share Premium — Ordinary 25,000

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Issuance of Shares
Costs of Issuing Stock

Direct costs incurred to sell shares, such as

• underwriting costs,
• accounting and legal fees,
• printing costs, and
• taxes,
should reduce the proceeds received from the sale of
the shares.

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Preference Shares
Features often associated with preference shares.
1. Preference as to dividends.
2. Preference as to assets in the event of liquidation.
3. Convertible into ordinary shares.
4. Callable at the option of the corporation.
5. Non-voting.

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Features of Preference Shares

Features of Preference Shares

• Cumulative A corporation may attach
whatever preferences or
• Participating
restrictions it desires, as
• Convertible long as it does not violate
• Callable its country’s incorporation
• Redeemable law.

The accounting for preference shares at issuance is similar to

that for ordinary shares.
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Journal Entry to Issue Preference Shares

Illustration: Bishop plc issues 10,000 shares of £10 par value

preference shares for £12 cash per share. Bishop records the
issuance as follows:

Cash 120,000
Share Capital — Preference 100,000
Share Premium — Preference 20,000

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Learning Objective 2
Explain the accounting and reporting
for treasury shares

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Reacquisition of Shares
Companies purchase their outstanding shares to:
1. Provide tax-efficient distributions of excess cash to
shareholders.
2. Increase earnings per share and return on equity.
3. Provide shares for employee compensation contracts or to
meet potential merger needs.
4. Thwart takeover attempts or to reduce the number of
shareholders.
5. Make a market in the shares.

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Purchase of Treasury Shares

Two acceptable methods:

• Cost method (more widely used).
• Par (stated) value method.
Treasury shares reduce equity.

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Equity with No Treasury Shares

Illustration: Pacific Company issued 100,000 shares of $1 par
value ordinary shares at a price of $10 per share. In addition,
it has retained earnings of $300,000.

ILLUSTRATION 15.5

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Journal Entry to Record Purchase of

Treasury Shares
Illustration: Pacific Company issued 100,000 shares of $1 par
value ordinary shares at a price of $10 per share. In addition,
it has retained earnings of $300,000.
On January 20, 2020, Pacific acquires 10,000 of its shares at
$11 per share. Pacific records the reacquisition as follows.

Treasury Shares 110,000

Cash 110,000

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Equity with Treasury Shares

Illustration: The equity section for Pacific after purchase of
the treasury shares.

ILLUSTRATION 15.6

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Sale of Treasury Shares

• Above Cost
• Below Cost
Both increase total assets and equity.

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Sale of Treasury Shares Above Cost

Pacific acquired 10,000 treasury shares at $11 per share. It
now sells 1,000 shares at $15 per share on March 10. Pacific
records the entry as follows.

Cash (1,000 x $15) 15,000

Treasury Shares (1,000 x $11) 11,000
Share Premium — Treasury 4,000

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Sale of Treasury Shares Below Cost

Pacific sells an additional 1,000 treasury shares on March 21
at $8 per share, it records the sale as follows.

Cash (1,000 x $8) 8,000

Share Premium — Treasury 3,000
Treasury Shares (1,000 x $11) 11,000

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Sale of Treasury Shares Below Cost

(continued)
ILLUSTRATION 15.7

Assume that Pacific sells an additional 1,000 shares at $8 per share

on April 10. After eliminating the credit balance in share
Premium—Treasury, the corporation debits any additional excess
of cost over selling price to Retained Earnings.
Cash (1,000 x $8) 8,000
Share Premium — Treasury 1,000
Retained Earnings 2,000
Treasury Shares (1,000 x $11) 11,000

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Retiring Treasury Shares

Decision results in
• cancellation of the treasury shares and
• a reduction in the number of shares of issued shares.
Retired treasury shares have the status of authorized and
unissued shares.

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Learning Objective 3
Explain the accounting and reporting
issues related to dividends.

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Dividend Policy
Few companies pay dividends in amounts equal to their
legally available retained earnings. Why?
1. Maintain agreements with creditors.
2. Meet corporation requirements.
3. To finance growth or expansion.
4. To smooth out dividend payments.
5. To build up a cushion against possible losses.

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Financial Condition and Dividend

Distributions
• Before declaring a dividend, management must consider
availability of funds to pay the dividend.
• Should not pay a dividend unless both the present and
future financial position warrant the distribution.

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Types of Dividends

1. Cash dividends.
2. Property dividends
3. Liquidating dividends.
4. Share dividends.
All dividends, except for share dividends, reduce the total
equity in the corporation.

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Cash Dividends
• Board of directors vote on the Three dates:
declaration of cash dividends.
a. Date of
• A declared cash dividend is a declaration
liability.
b. Date of record
• Companies do not declare or pay
cash dividends on treasury shares. c. Date of payment

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Cash Dividends Journal Entries

Illustration: Roadway Freight Corp. on June 10 declared a cash
dividend of 50 cents a share on 1.8 million shares payable July 16 to
all shareholders of record June 24.
At date of declaration (June 10)
Retained Earnings 900,000
Dividends Payable 900,000
At date of record (June 24) No entry
At date of payment (July 16)
Dividends Payable 900,000
Cash 900,000

ILLUSTRATION 15.10

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Property Dividends

• Dividends payable in assets other than cash.

• Restate at fair value the property it will distribute,
recognizing any gain or loss.

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Property Dividends
Journal Entry on Declaration Date
Illustration: Tsen, Ltd. transferred to shareholders some of its
investments in securities with a carrying value of HK$1,250,000 by
declaring a property dividend on December 28, 2021, to be
distributed on January 30, 2022, to shareholders of record on
January 15, 2022. At the date of declaration the securities have a
fair value of HK$2,000,000. Tsen makes the following entries.
At date of declaration (December 28, 2021)
Equity Investments 750,000
Unrealized Holding Gain or Loss — Income 750,000
Retained Earnings 2,000,000
Property Dividends Payable 2,000,000
ILLUSTRATION 15.11
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Property Dividends
Journal Entry on Date of Distribution
Illustration: Tsen, Ltd. transferred to shareholders some of its
investments in securities with a carrying value of HK$1,250,000 by
declaring a property dividend on December 28, 2021, to be
distributed on January 30, 2022, to shareholders of record on
January 15, 2022. At the date of declaration the securities have a
fair value of HK$2,000,000. Tsen makes the following entries.
At date of distribution (January 30, 2022)

Property Dividends Payable 2,000,000

Equity Investments 2,000,000

ILLUSTRATION 15.11
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Liquidating Dividends
Any dividend not based on earnings reduces amounts paid-in
by shareholders.

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Liquidating Dividends
Journal Entry on Date of Declaration
Illustration: McChesney Mines Inc. issued a “dividend” to its
ordinary shareholders of £1,200,000. The cash dividend
announcement noted that shareholders should consider £900,000
as income and the remainder a return of capital. McChesney Mines
records the dividend as follows.
At date of declaration
Retained Earnings 900,000
Share Premium — Ordinary 300,000
Dividends Payable 1,200,000

ILLUSTRATION 15.12

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Liquidating Dividends
Journal Entry on Date of Payment
Illustration: McChesney Mines Inc. issued a “dividend” to its
ordinary shareholders of £1,200,000. The cash dividend
announcement noted that shareholders should consider £900,000
as income and the remainder a return of capital. McChesney Mines
records the dividend as follows.
At date of payment
Dividends Payable 1,200,000
Cash 1,200,000

ILLUSTRATION 15.12

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Share Dividends
• Issuance by a corporation of its own shares to
shareholders on a pro rata basis, without receiving any
consideration.
• Par value, not the fair value, is used to record the share
dividend.
• Share dividend does not affect any asset or liability.
• Journal entry reflects a reclassification of equity.
• Ordinary share dividend distributable reported in the
equity section as an addition to share capital—ordinary.

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Share Dividends
Journal Entry on Date of Declaration
Illustration: Vine plc has outstanding 100,000 shares of £1 par
value ordinary shares and retained earnings of £50,000. If
Vine declares a 10 percent share dividend, it issues 10,000
additional shares to current shareholders. If the fair value of
the shares at the time of the share dividend is £8 per share,
the entry is:
At date of declaration

Retained Earnings (Share Dividend Declared) 10,000

Ordinary Share Dividend Distributable 10,000

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Share Dividends
Journal Entry on Date of Distribution
Illustration: Vine plc has outstanding 100,000 shares of £1 par
value ordinary shares and retained earnings of £50,000. If
Vine declares a 10 percent share dividend, it issues 10,000
additional shares to current shareholders. If the fair value of
the shares at the time of the share dividend is £8 per share,
the entry is:
At date of distribution
Ordinary Share Dividend Distributable 10,000
Share Capital — Ordinary 10,000

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Effects of Share Dividends

ILLUSTRATION 15.13

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Share Splits
• To reduce the market value of shares.
• No entry recorded for a share split.
• Decrease par value and increased number of shares.

ILLUSTRATION 15.14

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Share Split and Share Dividend

Differentiated
Share Split and Share Dividend Differentiated
A share split differs from a share dividend. How?
• A share split increases the number of shares outstanding
and decreases the par or stated value per share.
• A share dividend,
o increases the number of shares outstanding.
o does not decrease the par value.
o increases the total par value of outstanding shares.

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Effects of Dividends and Share Splits on

Financial Statement Elements

ILLUSTRATION 15.15

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Learning Objective 4
Indicate how to present and analyze equity.

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Comprehensive Equity Presentation

ILLUSTRATION 15.16

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Disclosure of Restrictions on Retained

Earnings
Such restrictions are best disclosed by note.
• Restrictions imposed by bond indentures and loan
agreements commonly require an extended explanation.
• The note disclosure should reveal
o the source of the restriction,
o pertinent provisions, and
o the amount of retained earnings subject to restriction or
the amount not restricted.

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Disclosure of Restrictions on Retained

Earnings and Dividends

ILLUSTRATION 15.17

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Statement of Changes in Equity

ILLUSTRATION 15.18

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Analysis of Equity
Computation of Return on Ordinary Share Equity

Illustration: Gerber’s Inc. had net income of $360,000, declared

and paid preference dividends of $54,000, and average ordinary
shareholders’ equity of $2,550,000.
Return on Net Income  Preference Dividends

Ordinary Share Equity Average Ordinary Shareholders' Equity
$360,000  $54,000

$2,550,000
 12%

ILLUSTRATION 15.19
Ratio shows how many dollars of net income the company earned
for each dollar invested by the owners.

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Analysis
Payout Ratio
Illustration: Troy SA has cash dividends of €100,000 and net
income of €500,000, and no preference shares outstanding.
Cash Dividends
Payout Ratio 
Net Income  Preference Dividends
€100,000

€500,000
 20%

ILLUSTRATION 15.20

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Analysis
Computation of Book Value per Share
Illustration: Chen Ltd.’s ordinary shareholders’ equity is
HK$1,000,000 and it has 100,000 ordinary shares outstanding.
Book Value Ordinary Shareholders' Equity

per Share Outstanding Share
HK$1,000,000

100,000
 HK$10 per share

ILLUSTRATION 15.21
Amount each share would receive if the company were liquidated
on the basis of amounts reported on the statement of financial
position.

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Learning Objective 5
Discuss the different types of
preference share dividends and their
effect on book value per share.

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Dividend Distribution
Non-Cumulative and Non-Participating Preference
Illustration: In 2022, Mason Company is to distribute €50,000 as
cash dividends, its outstanding ordinary shares have a par value
of €400,000, and its 6 percent preference shares have a par value
of €100,000.
1. If the preference shares are noncumulative and
nonparticipating:

ILLUSTRATION 15A.1

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Dividend Distribution
Cumulative and Non-Participating Preference Shares,
with Dividends in Arrears
Illustration: In 2022, Mason Company is to distribute €50,000 as
cash dividends, its outstanding ordinary shares have a par value
of €400,000, and its 6 percent preference shares have a par value
of €100,000.
2. If the preference shares are cumulative and non-
participating, and Mason Company did not pay dividends on
the preference shares in the preceding two years:

ILLUSTRATION 15A.2

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Dividend Distribution
Non-Cumulative and Fully Participating Preference
Shares
Illustration: In 2022, Mason Company is to distribute €50,000 as cash
dividends, its outstanding ordinary shares have a par value of €400,000,
and its 6 percent preference shares have a par value of €100,000.
3. If the preference shares is noncumulative and is fully participating:

ILLUSTRATION 15A.3

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Dividend Distribution
Cumulative and Fully Participating Preference Shares,
with Dividends in Arrears
Illustration: In 2022, Mason Company is to distribute €50,000 as
cash dividends, its outstanding ordinary shares have a par value
of €400,000, and its 6 percent preference shares have a par value
of €100,000.
4. If the preference shares are cumulative and fully
participating, and Mason Company did not pay dividends on
the preference shares in the preceding two years:

ILLUSTRATION 15A.4

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Computation of Book Value per Share

No Dividends in Arrears
Book value per share is computed as net assets divided by
outstanding shares at the end of the year. The computation
becomes more complicated if a company has preference shares.

ILLUSTRATION 15A.5

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Computation of Book Value per Share

Dividends in Arrears and Participating
Assume that the same facts exist except that the 5 percent
preference shares are cumulative, participating shares up to 8
percent, and that dividends for three years before the current
year are in arrears.

ILLUSTRATION 15A.6

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Learning Objective 6
Compare accounting procedures for
equity under IFRS and U.S. GAAP.

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Global Accounting Insights

Equity

The accounting for transactions related to equity, such as

issuance of shares, purchase of treasury shares, and
declaration and payment of dividends, are similar under
both IFRS and U.S. GAAP. Major differences relate to
terminology used and presentation of equity information.

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Global Accounting Insights

Similarities
• The accounting for the issuance of shares and purchase of
treasury shares are similar under both U.S. GAAP and IFRS.
• The accounting for declaration and payment of dividends
and the accounting for share splits are similar under both
U.S. GAAP and IFRS.

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Global Accounting Insights

Differences
• U.S. GAAP requires that small share dividends (referred to as
stock dividends) should be recorded by transferring an amount
equal to the fair value of the shares issued from retained
earnings to share capital accounts. IFRS is silent on the
accounting for share dividends.
• Major differences relate to terminology used, introduction of
concepts such as revaluation surplus, and presentation of equity
information.
• In the United States and the United Kingdom, many companies
rely on substantial investments from private investors. Other
countries have different investor groups. For example, in
Germany, financial institutions such as banks are not only the
major creditors but often are the largest shareholders as well.
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Global Accounting Insights

More Differences
• The accounting for treasury share retirements differs
between U.S. GAAP and IFRS. Under U.S. GAAP, a company
has three options: (1) charge the excess of the cost of
treasury shares over par value to retained earnings, (2)
allocate the difference between paid-in capital and retained
earnings, or (3) charge the entire amount to paid-in capital.
Under IFRS, the excess may have to be charged to paid-in
capital, depending on the original transaction related to the
issuance of the shares.
• The statement of changes in equity is usually referred to as
the statement of stockholders’ equity (or shareholders’
equity) under U.S. GAAP.
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Global Accounting Insights

Even More Differences
• Both U.S. GAAP and IFRS use the term retained earnings. However,
U.S. GAAP uses the account Accumulated Other Comprehensive
Income (Loss). Use of this account is gaining prominence within the
IFRS literature, which traditionally has relied on the term “reserve”
as a dumping ground for other types of equity transactions, such as
other comprehensive income items as well as various types of
unusual transactions related to convertible debt and share option
contracts.
• The term surplus is generally not used in U.S. GAAP, as the
standards do not allow revaluation accounting. Under IFRS, it is
common to report “revaluation surplus” related to increases or
decreases in items such as property, plant, and equipment; mineral
resources; and intangible assets.
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Global Accounting Insights

About the Numbers
As indicated, numerous differences in terminology exist in comparing equity
under U.S. GAAP and IFRS. The following excerpt from a U.S. statement of
financial position (balance sheet) illustrates these distinctions.

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Global Accounting Insights

On the Horizon
As indicated in earlier discussions, the IASB and the FASB
have completed some work 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
whether they should be included in the financial
statements. For example, it is likely that the statement of
changes in equity and its presentation will be examined
closely. In addition, the options of how to present other
comprehensive income under U.S. GAAP will change in any
converged standard.
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Copyright
Copyright © 2020 John Wiley & Sons, Inc.
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of these programs or from the use of the information contained herein.

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