Limited_Companies_Lecture_PowerPoints_PART_2_OF_2_2024-25

ACFI101 Topic 10 Overview

• Focus: Financial Statements of Limited Companies

• Attendance Code: 1

Lecture Breakdown

• Part 1 (19th November):

  • Overview of limited companies

  • Equity section of a company’s Statement of Financial Position (SFP)

• Part 2 (26th November):

  • Rights issues and bonus issues of shares

  • Company borrowing and loan notes

  • Corporation tax on company profits

  • Presentation and format of company financial statements

Double Entry System

• DEADCLIC Principles:

  • Debit Entries increase:

    • Expenses

    • Assets

    • Dividends (not Drawings!)

    • Capital (or ‘Equity’)

  • Credit Entries increase:

    • Income

    • Liabilities

Shareholder's Equity - Ryanair Case Study

• Shareholders’ Equity Components (at 31 March 2024):

  • Share capital: €7 million

  • Share premium: €1,404 million

  • Other reserves: €303 million

  • Retained profits: €5,900 million

  • Total Shareholders’ Equity: €7,614 million

Retained Profits

• Definition: Cumulative total of a company's annual profits minus dividends paid.

• Statement of Changes in Equity (SCE):

  • Summarizes all movements in equity components over the year.

  • Example Calculation:

    • Retained profits start: £400

    • Add Profit for the year: £160

    • Less Transfers: £50

    • Less Dividends: £60

    • End Retained Profits: £450

General Reserve

• Purpose: Directors may transfer profits to indicate they won't be paid as dividends.

• Double Entry Example:

  • Dr Retained Profits £x

  • Cr General Reserve £x

• No actual cash movement, just a reallocation in equity.

Statement of Changes in Equity - Example

• Components shown for illustration:

  • At 1/1/X1:

    • Share Capital: £100

    • Share Premium: £200

    • Retained Profits: £400

  • Changes:

    • New Shares Issued: £70 (capital and premium)

    • Profit for Year: £160

    • Dividends Paid: -£60

  • At 31/12/X1 Total: £1,520

Rights Issues

• Definition: New shares offered to existing shareholders at a discounted price.

• Rationale: Preferred method of raising funds by companies.

Case Example: Dex plc

• Rights issue example: 1-for-4 at £3.50/share.

• SFP changes:

  • Share Capital: Increases by £250

  • Share Premium: Increases by £1,500

Bonus Issues

• Definition: New shares given to existing shareholders for free; funded from reserves.

• Registered Entry:

  • Dr Share Premium £x

  • Cr Share Capital £x

  • Benefits: Enhances liquidity and signals to the market.

Loan Notes

• Definition: Debt instruments issued by companies, like corporate bonds.

• Characteristics: Redeemable vs Non-redeemable, secured vs unsecured.

• Shown as non-current liabilities in SFP. Unpaid interest must be recorded as accruals.

Corporation Tax

• Definition: Tax on profits, presented in the SPL.

• Calculated liabilities reported in the SFP.

Presentation of Financial Statements

• Two types:

  • Internal Use

  • External Use/Publication (preferred)

• Governed by IAS 1 standards.

• Detail in presentation varies based on intended audience.

Practice Questions Overview

• Sample questions covering various topics related to shareholder equity, rights issues, bonus issues, and loan notes.

• Ensure understanding of practical applications and statement preparations.

Recommended Additional Study

• Textbook Readings (FW 15e): Chapters 35 & 36.

• ICAEW Workbook: Self-test questions and review questions from Chapters 11 & 12, and Chapter 14.

• Complete seminar preparation exercises before the 5th seminar.