Chapter 18: Shareholder's Equity

2 components of shareholder's equity

Paid in Capital and Retained Earnings

Where does US GAAP present total shareholder's equity?

after liabilities

US GAAP capital stock:

common stock preferred stock paid-in capital -- excess of par, common paid-in capital -- excess of par, preferred

preferred stocks may be:

cumulative or noncumulative participating or nonparticipating

Where does IFRS present total equity?

often before liabilities

preferred stock rights include one or both of the following:

1. if the board of directors declares dividends, preferred shareholders will receive the designated dividend before any dividends are paid to common shareholders 2. preferred shareholders customarily have a preference over common shareholders as to the distribution of assets in the event the corporation is dissolved

4 gains and losses of AOCI

1. net holding gains (losses) on available-for-sale investment in debt securities 2. gains (losses) from and amendments to post-retirement benefit plans 3. deferred gains (losses) on derivatives 4. adjustments from currency translation

terminologies of different share types

Class A, class B, and so on (Tyson Foods) Preferred stock, common stock, and class B (Hershey's) common and preferred (HP) common and capital stock (Alphabet, Inc.) common and serial preferred (Smucker's)

paid in captial

amount stockholders have invested in the company with preferred or common stock sold

which of the following is not a component of paid in capital? a. amounts invested by shareholders when they purchase shares of stock from the corporation b. earnings accumulated on behalf of the shareholders c. amounts arising from share-based compensation activities d. amounts arising from share repurchases

b. earnings accumulated on behalf of the shareholders (component of retained earnings)

which of the following items would not be reported in the statement of comprehensive income as OCI? a. decrease in the value of available-for-sale debt securities b. loss on post retirement benefit plan assets c. gain on sale of equipment d. adjustment for foreign currency translation

c. gain on sale of equipment (reported in income statement as part of Net Income)

how is paid in capital presented?

companies keep track of individual paid-in-capital accounts in company records but they report these amounts as a single subtotal called additional paid-in capital

limited liability advantage

corporations are separate legal entities (separate and distinct from its owners), responsible for its own debts owners are not personally liable for debts of a corporation shareholders' liability is limited to the amounts they invest in the company when they purchase shares

double taxation of corporations

corporations first pay income taxes on their earnings then, when those earnings are distributed as cash dividends, shareholders pay personal income taxes on the previously taxed earnings

ease of raising capital advantage

corporations sell ownership interest in the form of shares of stock and hence ownership rights are easily transferred

Which of the following equity-related terms is used under IFRS but not under US GAAP? a. preferred stock b. paid-in capital -- excess of par, common c. accumulated other comprehensive income d. revaluation reserve

d. revaluation reserve (only used in financial statements prepared in accordance with IFRS as adjustments to fair value of PPE are note permitted under US GAAP

Articles of Incorporation (Corporate Charter)

describes: the nature of the firm's business activities shares to be issued the composition of the initial board of directors

the Model Business Corporation Act

designed to serve as a guide to states in the development of their corporation statuses variations among state laws influence GAAP pertaining to shareholders' equity transactions

retained earnings are:

earnings accumulated on behalf of the shareholders and reported as a single amount

accumulated other comprehensive income

extends our view beyond net income reported in an income statement to include 4 types of gains and losses not included in income statements

disadvantages of the corporate organization

extensive reporting requirements and double taxation

hybrid organizations

have characteristics of both regular corporations and partnerships limited liability companies and limited liability partnerships

how are classes of shares distinguished?

if more than one class of share is authorized by the articles of incorporation, the specific rights of each must be stated

paid in capital consists primarily of amounts:

invested by shareholders when they purchase shares of stock from the corporation arise from the company buying back some of those shares from share-based compensation activities

IFRS reserves

investment revaluation reserve translation reserve revaluation reserve retained earnings

advantages of the corporate organization

limited liability and ease of raising capital

not for profit corporations

may be owned by the public sector or a governmental unit ex: churches, hospitals, universities, and the Federal Deposit Insurance Corporation

US GAAP AOCI

net gains (losses) on investments - AOCI net gains (losses) on foreign currency translation - AOCI Retained Earnings (N/A: adjusting PPE to fair value is not permitted)

types of corporations

not-for-profit, publicly held, privately held

IFRS share capital:

ordinary shares preference shares share premium, ordinary shares share premium, preference shares

limited liability companies

owners are not liable for the debts of the business, except to the extent of their investment all members can be involved with managing the business without losing liability protection income and expenses are passed through to the owners as in a partnership, avoiding double taxation there are no limitations on the number of owners

Shareholder's Equity financial reporting overview

paid in capital retained earnings treasury stock accumulated other comprehensive income

limited liability partnerships

partners are liable for their own actions but not entirely liable for the actions of other partners

extensive reporting requirements of corporations

primarily the required paperwork is intended to ensure adequate disclosure of information needed by investors and creditors imposed by federal and state governments

retained earnings

prior undistributed net income

purpose of retained earnings

provide dividends allow equation to balance ties Income Statement to Balance Sheet

preemptive right

right to maintain one's percentage share of ownership when new shares are issued

fundamental share rights of common shares:

right to vote on matters that come before the shareholders (including the election of corporate directors) right to share in profits when dividends are declared right to share in the distribution of assets if the company is liquidated

privately held corporation

shares are owed by only a few individuals (ex. family) and are not available to the general public

treasury stock

shares that were issued and then bought back by the corporation

preferred stock

shares with certain preferences or features that distinguish them from common shares

publicly held corporation

stock is available for purchase by the general public

Shareholder's Equity is

the interest of shareholders (owners) and is reported on the Balance Sheet

what do preferred shareholders sometimes have?

the right of conversion or a redemptive privilege

statement of comprehensive income

two attributes of OCI are reported: 1. components of comprehensive income created curing the reporting period in the statement of comprehensive income 2. the comprehensive income accumulated (AOCI) over the current and prior periods in the balance sheet