Corporations: Additional Topics & IFRS

Stock Dividends

refers to distributions of additional shares to a firm's stockholders instead of paying them in cash

Financial impact of stock dividends

Does not change total assets or total shareholders equity

It decreases retained earnings and increases share capital by the same dollar amount; making total shareholders equity remain unchanged

Benefits of stock dividends

- satisfies dividend expectations of shareholders without the company having to spend cash

- increases marketability of shares by making them more affordable (more supply, less cost)

- sends a signal that a portion of shareholders equity had been permanently reinvested and is no longer available for future cash dividends

Accounting entries for stock dividend

Declaration date: record the dividend obligation

Record date: No entry

Distribution date: Record the issuance of shares

Stock splits

an action by a company that gives stockholders two or more shares of stock for each one they own based J their existing percentage of ownership

Marketability Effect

Increases marketability by lowering the market price / shares . The effect on the share price is generally inversely proportional to the size of the split

-> does not affect any account balances in shareholders equity; so now journal entry

Accounting Effects of Dividend

Action:

Cash Dividend: Assets decrease, share capital has no effect, retained earnings decrease

Stock dividend: no effect on assets, share capital increases, retained earnings decrease

Stock split: no effect on anything

Reasons for reacquisition of shares

- increase trading on securities market to potentially boost share value

- increase earnings per share (EPS by reducing amt of shares outstanding

- to buy out hostile shareholders

- to have shares available for employee compensation or other corporate uses

Accounting treatment of reacquired shares

In most jurisdictions: retired and cancelled

Accounting procedure for reacquisition

1. Remove the dollar amt from share capital account based on the average per share amount (must be calculated)

2. Record the actual cash paid for shares

3. Record the diff between average cost of the shares snd the amt paid in shareholders equity

reacquisition below average per share amount

excess is credited to an equity account: contributed surplus - reacquisition of shares

Difference is called an excess on reacquisition

Reacquisition above average per share amount

If there's an existing balance: difference (deficiency) is first debited to contributed surplus - reacquisition or shares to the extent of any existing credit balance from previous reacquisitions

If there's no existing balance or there's remaining deficiency that exceeds the balance: the remaining amount is debited to retained earnings

Discontinued Operations

refers to the disposal or reclassification as "held for sale" of a component of an entity

such as the elimination of a major class of customers or an entire activity

-> recorded separately on income statement

-> includes allocation of income tax expense or tax savings specifically to those discontinued components (intraperiod tax collection)

-> must show profit (loss) from discontinued operations and the gain (loss) from the disposal of the component

Other Comprehensive Income (OCI) under IFRS

certain gains and losses are excluded from profit but are added to or deducted from shareholders equity

Public companies are required to report comprehensive income

APSE does NOT have OCI

Accumulated Other Comprehensive Income (AOCI)

amount of other comprehensive income (nonowner changes in equity other than net income) accumulated over the life of the company.

Separate component of shareholders equity on the balance sheet

Statement of Comprehensive Income

Required under IFRS (all inclusive or a separate format). It includes all changes and equity, except those resulting from share transactions and dividends.

changes in accounting estimates

Occurred due to a change in circumstances or new information (ex. update to bad debt expense or warranty expense)

The new estimate is used for the current and future periods. Prior periods are not changed

changes in accounting principle

Occurs when current year policy differs from prior year (ex. Required by new IFRS/ASPE guidance or provides more reliable information)

Prior years must be restated, unless it is not practical to do so

Correction of a prior period error

Occurs when a material error is discovered after financial statements have been issued

The correction is made directly to retained earnings (net of any income tax effect) because all revenues and expenses have already been closed into that account

The correction is added to or deducted from the opening balance of retained earnings. Prior years' financial statements are restated, and the details are disclosed in a note.

Statements required in each system

IFRS: requires a statement of changes in shareholders equity, showing movements in contributed capital, retained earnings, and AOCI.

ASPE: continues to use a statement of retained earnings. Other equity changes are disclosed in notes.

Issuance of Share Capital

Increases common or preferred shares

Acquisition of share capital

Decreases common or preferred shares, affects contributed surplus or retained earnings

Effective change in accounting policy

Either increases or decreases retained earnings

Profit (Loss) of the Year

Increases (decreases) retained earnings

Other comprehensive income (loss)

Increases (decreases) AOCI

Cash dividends declared

Decreases retained earnings

Stock dividends declared

Decreases retained earnings; increases stock dividends distributable

Stock dividends distributed

Decrease stock dividend distributable; increases common shares

stock split

Increases the number of shares; no effect on account balance

Earnings Per Share (EPS)

Indicates the profit earned by each common share; required under IFRS not required under ASPE

EPS formula

net income - preferred dividends / weighted average number of common shares

Handling preferred dividends

Noncumulative: reduce profit ONLY if dividends were actually declared.

Cumulative: reduce profit by the annual dividend amount, regardless of declaration.

complex capital structure

Capital structure that includes outstanding rights or options to purchase common stock, or securities that are convertible into common stock

Fully Diluted EPS

Calculated as if all convertible securities were converted into common shares, generally resulting in a lower EPS

Price/Earnings (P/E) Ratio

Helps compare earnings of different companies relatives to their market price

Formula for P/E ratio

Market Price per Share / Earnings per Share

A high PE ratio indicates investor belief in high future growth/earning potential

Payout ratio

Indicates the percentage of profit distributed to shareholders

Payout ratio formula

Cash Dividends/Profit OR

Cash Dividends per Share / Earnings per Share

Payout ratio interpretation

Mature companies: often have higher payout ratios due to pure reinvestment opportunities

Growth companies: after to have lower power ratios as they retain cash for expansion

-> varies significantly by industry