Accounting 343 Chapter 15

Public sector corporations

Government units (municipalities), government business enterprises and other crown corporations

Private corporations

Not-for-profit orgs ( Churches and charities), for-profit orgs (private or public)

Making the company a separate legal entity

Certificate of incorporation from the Department of Consumer and Corporate Affairs

Share or Stock

Evidence of ownership in a corporation

Subject to restrictive powers, each share can

1) Share in profits/losses 2) share in management ( voting at SH meetings) 3) Share in corporate assets upon liquidation

Pre-emptive Right

Right of first refusal that allows existing shareholders to purchase any new issues of shares in order to not diminish their ownership interest

Transfer agent or registrar

Appointed by every public corporation and usually a trust company that maintains a list of shareholders

What legal document must a business send to the Department of Consumer and Corporate Affairs to incorporate?

Articles of Incorporation

Under the CBCA companies must issue shares without what specific type of value?

Nominal or par value

Preferred

Class of shares with more privileges that may give up certain rights in return

Common shares

Shares that do not have preference but have voting rights, bearing the residual corporate interest and ultimate risk of loss

Limited Liability

Shareholder cannot lose any more than the amount they invested in the business ( unless personally the guaranteer)

Par value

A value determined by the legal counsel of a company

CBCA limit on declaration/payment of dividends

If the corporation (After) would be unable to pay its liabilities or total liabilities > Total assets

Income Trusts

Trusts that hold assets and distribute most of their income to unit holders

Shareholders Equity

The residual interest in the assets of an enterprise after deducting all its liabilities

Subordination

Characteristic of common shares where they rank last in terms of asset distribution

Risks and rewards of ownership

Characteristic of common shares where they bear all risks and rewards with no special provisions to mitigate risk

No obligation to transfer value

Characteristic of common shares where the market values these shares based on the net assets and performance of the company not a predetermined redemption value

Cumulative feature

PS feature that allows unpaid dividends from previous years to be paid before any other dividends ( right to receive the dividend in the future)

Non-cumulative

Right to receive a dividend only occurs for a PS when the BOD declares it

Callable ( redeemable) shares

Term for PS that the company has the right to buy back the shares

Retractable Shares

The shareholder has the right to sell the shares back to the corporation

Share Capital Subscribed classification

Equity Account, its just the subscribed preferred or common share account

Shares sold on subscription basis

Company receives instalment payments before issuing shares

Instalment receipt

Like a partially paid share that trades in the market and gives the holder the right to purchase a CS at a predetermined price

Subscriptions receivable account presentation on SFP

Contra equity account

Windfall Gain

When payments under the subscription default and the company does not refund and issues no shares, recorded in the contributed surplus account

Incremental Method

Allocate proceeds of the unit to class with determinable value= FV then remaining to the undeterminable

Proportional Method

Allocates proceeds based on the relative FV of each class of shares

ASPE value shares in nonmonetary transactions

At FV of consideration received or given up, whichever is more clearly determinable

IFRS value shares in non monetary transactions

At the value of the consideration received unless undeterminable, in which case BOD assigns an independent appraiser to determine it

Watered Stock

Shares issued by management at an inflated appraisal value

Secret Reserve

When management understates the value of assets received in exchange for shares

Where direct share issuance costs recorded

Increase to the applicable share capital account ( CS/PS)

Reacquire shares+ cancels them at a cost > carrying amount where is the excess?

Debit to retained earnings ( decrease)

Reacquire shares+ cancels them at a cost < carrying amount where is the excess?

Credit to contributed surplus

Maximum dividend a company can pay

Balance in RE ( and sometimes + contributed surplus) or if a treasury shares exist then cannot reduce RE to an amount lower than the balance in the treasury shares account

Treasury Share

A share a company has reacquired but not cancelled ( reported as a contra account to share capital)

The declaration date

Date that a BOD formally approves a dividend, creating a legal liability

Record Date

The specific date that parties owning the company’s shares will be eligible to receive the dividend, identifies eligible shareholders

Dividends in Kind

A non-reciprocal transfer of non-monetary assets from the company to its owners

Value at which dividends in kind must be recorded

The fair value of the asset given up

Stock Dividend

Results in the issuance of shares rather than cash

Stock Dividend Receivable classification

Equity account we show under the share capital accounts since it dosent require the future sacrifice of economic resources

Liquidating Dividend

A dividend payment that exceeds the balance of RE and excess portion is considered a return of capital ( paid out in specific circumstances and requires a reduction to contributed surplus)

Dividends in arrears

Unpaid dividends on cumulative PS that accumulate until the company pays them, must be settled before any dividends are paid to CS

Preferred Shares with participating feature

Offers shareholders a combination of fixed dividends and opportunity to participate in the company’s profits ( get additional profits). Receive a participating dividend after the CS had received the same amount (%) that the PS had received for their current year dividend

Stock Split

When a company creates more shares without selling them or issuing a stock dividend, reducing the price but keeping total fair value the same

Reason for stock split

Provides most investors the ability to buy the shares by reducing it to a more affordable price

Reverse Split/ Share Consolidation

Opposite of a stock split

Stock dividend representing 25% of previously outstanding stock

Record as a stock split

Comprehensive Income

OCI + NI

AOCI

The portion of equity arising from revenues, expenses, G/L from non-shareholder transactions that we do not report in net income

Authorized share capital

The maximum number of shares a company is legally permitted to issue determined upon incorporation

Number of issued shares

Number of shares a company has sold to investors

Number of outstanding shares

Number of shares held by parties excluding the company

Rate of return on common shareholders equity

Measures the return on common shareholders equity and can be increased if using leverage successfully by using debt to earn more income. The higher the amount the better the company is performing

Payout Ratio

Measures the % of income attributable to the common shareholders paid out by way of dividends. The higher this amount the less likely a company is committed to expanding

Price earnings ratio

Shows how highly priced a stock is, normally shown as x:1, the lower the ratio the cheaper the stock

Book Value per share

Expressed in $ per CS, and compared to the share price to determine if the market believes the value of a share is greater than its underlying book value. Usually share price is higher since companies show BV’s at historical cost.