Chapter06 Equity

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CHAPTER

6

Owners’ Equity

Financial Accounting and Reporting 1 - Pearson


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Financial Accounting and Reporting 1 2

Learning Outcomes

After studying this chapter, you should be able to:

Explain the types of organizations and thevarious forms of owners’ euity

Explain the functions of !emorandum andArticles of Associations

"i#erentiate between ordinary shares andpreference shares, and their embeddedrights and privileges

"i#erentiate between authorized, issued,and paid up share capital

"escribe issuance of share on application

Explain various types of reserves


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Owners’ Euity

$nvestment made by owners in abusiness or organization


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Owners’ Euity of anEnterprise

%ri Asnat Enterprise%tatement of Owners’ Euity

&or the 'ear Ended "ecember (), *++ RM-apital, .anuary ) *+,+++

Add: /et 0ro1t (,2++

*(,2++ Less: "rawings ),++ -apital, "ecember () *),3++


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Example of Owners’ Euity%tatement of a -ompany

4efer &igure )(5* page ((*


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-riteria of 6usinessOrganizations

Sole Proprietor Partnership Company

-apital %mall 0ooled amongpartners

Large

Ownership $ndividual 0artners %hareholders

Legal entity /o /o 'es

Liability 7nlimited .ointly unlimited Limited

6usiness tax /o /o 'es

Owners’euity

%imple 8 oneowner

%imple 8 pooled -omplex


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&orms of -orporateOrganizations

Public Company Private Company

Share Capital Issued to public Issued to relatedpersons

Shareholders Unlimited Limited to 50 persons

Designation Bhd Sdn !d


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Financial Accounting and Reporting 1 "

!emorandum and Articles ofAssociation

!emorandum and Articles of Associations are thefundamental documents of a company9

!emorandum of Associations regulate externala#airs of a company such as company’s name, itsregistered oce and ob;ectives of its incorporation9

Articles of Associations deal with internal a#airs ofa company such as issuance of shares, generalmeetings and directors9

$n the case of con


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Financial Accounting and Reporting 1 #

%hare -apital %tructure

=enerated from the amount ofauthorized share capital that beingissued and paid, valued at nominalprice9 >wo main forms of sharecapital:Ordinary shares

0reference shares


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Ordinary %hare -apital

!ain component of capital structure in acompany

?olders of ordinary shares: are the owners of the company9 have the right to attend general meetings

and vote on the election of its directors andother resolutions9

en;oy preemptive rights upon the issuance ofnew shares9 are liability bearer in the case of liuidations9Are the last groups to receive dividend at no

1xed rate9


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0reference %hare -apital

$n general, preference shareholdershave some preferential rights such as:privilege to receive dividends9

-apital refund in the case of liuidations9 &ixed rate of dividend

6ut no voting rights9 >ypes of preference shares

-umulative preference sharesEligible to receive 1xed annual dividends even

when the company cannot pay dividends for aparticular year, by way of accumulating thatdividends to the following year9


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0reference %hare -apital

/on5cumulative preference shares ?ave no right to claim any unpaid dividends, in the

future9

0articipating preference shares

?ave rights to receive additional dividends over andabove the speci1ed dividend rate9

-onvertible preference shares -an be converted into ordinary shares after a

predetermined date9

-allable preference shares Allows the issuing company to buy bac@ the shares

and retire them9

4edeemable preference shares Allows the issuing company to buy bac@ the shares at

a speci1ed maturity date9


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Authorized %hare -apital

/umber of units of sharesregistered and written in Articles

of Associations9

$t sets the limit to which the

company can issue shares9


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4eporting Authorized %hare-apital

Authorized share apital RM),+++,+++ ordinary shares at 4! ) ),+++,+++

*++,+++ preference shares at 4! * 2++,+++ ),2++,+++!ssued and paid"up share apital3++,+++ ordinary shares at 4! ) 3++,++++,+++ ordinary shares at 4! * )++,+++ B++,+++

Authorized share apital RM),+++,+++ ordinary shares at 4! ) ),+++,+++

*++,+++ preference shares at 4! * 2++,+++ ),2++,+++!ssued and paid"up share apital3++,+++ ordinary shares at 4! ) 3++,++++,+++ ordinary shares at 4! * )++,+++ B++,+++


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$ssued %hare -apital

-ompany invites the public to buyshares9

Anybody who is interested to buy theshares will express his interest byapplying to the company with fullpayment for the shares9

%hares will be allotted to successfulapplicants, while unsuccessfulapplicants will be refunded9

>he total shares allotted are @nown as

issued share capital9


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Example

Assume !edaniaga 6hd issues 2+,++shares at 4! ) each during the yearended () "ecember *++9 >he

applications are received with fullpayment on October (), *++ for)++,+++ shares9 >he shares aresubseuently allotted on "ecember (),

*++ to the successful applicants, whileunsuccessful applicants are refunded atthe same date9 >he entries to record thetransactions are as follows:


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.ournal Entries

Step 1 : Upon Application

$ate $etails Re% $e&it 'redit

31(10 'as! 100)000

S!are application 100)000

*record s!areapplication+


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Financial Accounting and Reporting 1 1"

.ournal Entries

Step 2 : Upon Allotment


31(12 S!are application 40)000

,rdinar s!are capital 40)000

S!are application 60)000

'as! 60)000


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Financial Accounting and Reporting 1 1#

$ssuance of %hare at 0ar

4efers to the face value of the shares asregistered in the Articles of Associations9

$f the par value is 4!) each, thesubscriber of )++,+++ units of sharesshould pay 4!)++,+++9


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.ournal entry


'as! 100)000


(Being ordinary shareissued at par)


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$ssuance of %hare at 0ar

Authorized share apital RM

),+++,+++ ordinary shares at 4! ) ),+++,+++ *++,+++ preference shares at 4! * 2++,+++ ),2++,+++

!ssued and paid"up share apital)++,+++ ordinary shares at 4! ) )++,+++



!ssued and paid"up share apital)++,+++ ordinary shares at 4! ) )++,+++


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$ssuance of %hare at0remium

$ssue shares at the price higher than theface value of the shares9

$f the par value of a share is 4!) but thecompany issues )++,+++ shares at theprice of 4!)92+ per share, that additional

2+ cents per share is considered aspremium9


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.ournal entry


'as! 140)000

,rdinar s!are capital

S!are Premium

100)000

40)000

(Being ordinary share issued at premium)


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$ssuance of %hare at 0remium



!ssued and paid"up share apital)++,+++ ordinary shares at 4! ) )++,+++Reser#es

%hare premium 2+,+++ >otal share capital and reserves )2+,+++

Authorized share apital RM),+++,+++ ordinary shares at 4! ) ),+++,+++ *++,+++ preference shares at 4! * 2++,+++

),2++,+++!ssued and paid"up share apital)++,+++ ordinary shares at 4! ) )++,+++Reser#es

%hare premium 2+,+++ >otal share capital and reserves )2+,+++


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$ssuance of %hare at"iscount

$ssue shares at the price lower than theface value of the shares9

$f the par value of a share is 4!) but thecompany issues )++,+++ shares at theprice of 4!+9+ per share, that *+ cents

per share is considered as discount9


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.ournal entry


'as!S!are $iscount

"0)00020)000


(Being ordinary share issued at discount)


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$ssuance of %hare at "iscount

Assets RM%hare discount

*+,+++

Owners’ EquityAuthorized share apital),+++,+++ ordinary shares at 4! ) ),+++,+++ *++,+++ preference shares at 4! * 2++,+++

),2++,+++!ssued and paid"up share apital)++,+++ ordinary shares at 4! ) )++,+++

Assets RM%hare discount

*+,+++

Owners’ EquityAuthorized share apital),+++,+++ ordinary shares at 4! ) ),+++,+++ *++,+++ preference shares at 4! * 2++,+++

),2++,+++!ssued and paid"up share apital)++,+++ ordinary shares at 4! ) )++,+++


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Financial Accounting and Reporting 1 2"

4eserves

0art of owners’ euity-omprise of capital reserve and

revenue reserve9


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Financial Accounting and Reporting 1 2#

-apital 4eserve

statutory non5distributable reserve and cannot bedistributed as dividends to shareholders9

%hare premium and capital redemption reserveare examples of capital reserves reuired by the-ompanies Act9

%hare premium is the excess value of sharesabove their nominal price9

capital redemption reserve is reuired for speci1c

purpose, normally transferred from either theshare premium or the company’s retainedearnings9


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4evenue 4eserve

/ormally represented by the accumulatedretained earnings and can be distributed asdividends9

Examples are general reserve and dividendreserve9

6oth reserves are transferred from retainedearnings for particular reason9

=eneral reserve is meant for reducing the amount

of dividends paid out during booms and acts as1nancial preparation for periods of crisis when alot of funds are needed9

"ividend reserve is maintained to ensure that asimilar amount of dividends can be distributed toshareholders even during periods of low pro1t9


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"isclosure of Owners’Euity

>he -ompanies Act )C3 reuires the following disclosureof owners’ euity: the amount of authorized capital

the particulars of issued capital

redeemable preferences shares any share capital on which interest has been paid out of capital

during the 1nancial year and the rate at which interest hasbeen so paid

separate disclosure of the following reserves:

i9 share premium accountii9 revaluation surplus

iii9 balance of pro1t and loss account

iv9 other reserves


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According to &4% )+) paragraph B3, 0resentation of&inancial %tatements, an enterprise should disclose thefollowing, either on the face of the balance sheet or inthe notes:

&or each class of share capital: 5 the number of authorized shares

5 the number of shares issued and fully paid, and issued but not fullypaid

5 par value per share, or that the shares have no par value

5 a reconciliation of the number of shares outstanding at the

beginning and at

the end of the year

5 the rights, preferences, and restrictions attaching to that classincluding

restrictions on the distribution of dividends and the repayment ofcapital

5 shares in the enterprise held by the enterprise itself or by


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A description of the nature and purpose of eachreserve within

owner’s euity9

Dhen dividends have been proposed but not formallyapproved for payment, the amount included or notincludedF in liabilities9

>he amount of any cumulative preference dividends notrecognized9

An enterprise without share capital, such as partnership, should disclose

information euivalent to that reuired above, showing movementsduring the period in each category of euity interest and rights,preferences, and restrictions attaching to each category of euity

interest9 >he standard further emphasizes that euity capital andreserves are analyzed showing separately the various classes of paid5up


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A Sample o$ Owners’ Equity

Re%er Figure 13-4 on page

341-342


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Conlusion

Owners’ euity represents theownership of a company9

Owners’ euity of a companynormally arises from the investmentof shareholders and retainedearnings9

$t is mandatory for a company to reportowners’ euity on the balance sheet ashighlighted in &4% )+), 0resentations of&inancial %tatements9


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End of -hapter 3

Chapter06 Equity

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