Equity 2

Advanced Financial Accounting Overview

Equity Overview

• Advanced financial accounting focuses on complex concepts within equity, including profit distribution, capital reduction, and other adjustments impacting shareholder equity.

Profit Distribution

Key Considerations

• Net Income Distribution: Net income or earnings can be distributed to shareholders through dividends or retained in the company as retained earnings.

• Approval Process: Any decision regarding distribution must be approved at the General Shareholders Meeting (GSM), held months after the financial year-end upon financial statement approval.

• Legal Requirements: Certain reserves may be mandated by law or internal bylaws before dividends can be disbursed. For instance, in Spain, companies must transfer at least 10% of net profit to build legal reserves up to 20% of their share capital.

• Practical Example: Target Corporation's board has declared a quarterly dividend of 66 cents per share, marking a 3.1% increase from the previous quarter's dividend.

Order of Priority in Profit Distribution

1. Offset prior losses

2. Legal reserves

3. Statutory reserves

4. Shareholder dividends

5. Voluntary reserves

6. Retained earnings

Accounting Codes for Profit Distribution

Interim Dividend

• Definition: An interim dividend is a dividend paid before the official annual dividends post-GSM.

• Accounting Treatment: Recorded as a liability and impacts equity.

• Accounting Codes:

Agreement on Distribution

At Payment

Profit Distribution Accounting

Consolidated Balance Sheet Example

• Presented data extracted from the Bolsas y Mercados Españoles Group as of December 31, 2016, and 2015:

Other Comprehensive Income

• Includes items not reclassified to profit or loss and items that may be reclassified after profit/loss for the year.

• For instance, available-for-sale financial assets were recorded at 1,360 (in 2016) and 1,150 (in 2015).

Capital Reduction

Reasons for Capital Reduction

• Offsetting Accumulated Losses: As per country legislation, corporations must hold certain equity levels compared to share capital.

• Mandatory Bankruptcy Proceedings: In Spain, corporations must begin these proceedings if equity falls below 50% of share capital.

Accounting Entries for Capital Reduction

Practical Example

• If share capital is 500 and losses are accumulated at -375, the equity calculation yields 225, which is below 2/3 of the share capital (333.3). A capital reduction is necessitated.

Share Issuances and Non-Cash Capital Contributions

Reasons for Issuing Shares

1. Receipt of an asset (often cash or fixed assets).

2. Reducing a liability by converting outstanding debts into equity.

3. Capitalization of reserves and retained earnings through share or scrip dividends.

Financing: Debt vs. Equity

• Key Considerations for Investors and Companies:

  • Debt comes with a fixed maturity date, interest obligations, and security in case of default.

  • Equity does not have a maturity date, involves discretionary dividend payments, and provides voting rights but no guaranteed returns.

Final Thoughts

• The discussion touches on the significant differences and implications between utilizing debt and equity as financing sources.