Chapter 11: Corporations and their Financial Statements Flashcards
1
Q
What are the different kinds of business structures?
A
- Corporation
- Sole proprietorships
- Partnerships
2
Q
What is a corporation?
A
- is a distinct legal entity separate from the people who own its shares.
- An incorporated business pays taxes and can sue or be sued in a court of law.
- Property acquired by the corporation does not belong to the shareholders of the corporation, but to the corporation itself.
- Shareholder have limited liability.
3
Q
What is a sole proprietorship?
A
- one person runs the business and is taxed on earnings at his or her personal income tax rate.
- there is no distinction between personal assets and assets held in the business.
4
Q
What is a partnership (legislated under Partnership Act)?
A
- two or more persons run the business,
- Partnerships can be general or limited.
+ general partnership, all general partners run the day-to-day operations and are personally liable for all debts and obligations incurred.
+ With a limited partnership, general partners run the business while limited partners cannot participate in daily business activities. The limited partners’ liability is limited to the amount of their investments.
5
Q
What are the advantages of incorporation?
A
- Limited share holder liability
- Continuity of existence (only terminate when bankruptcy)
- Transfer of ownership
- Ability to finance
- Growth (can handle large capital for operating large and growth)
- Professional management
6
Q
What are the disadvantages of incorporation?
A
- Inflexibility (subject to many rules)
- Taxation (corporation tax and tax on dividend income)
- Expense (audits, tax returns, meetings, …)
- Capital withdrawal (even if the company doesnt want, small investors can withdraw their capital by selling share on the market).
7
Q
What are the different types of corporations?
A
- Private corporations (restrict right of transfering shares, <= 50 shareholders, prohibit inviting the public to subscribe for their securities)
- Public corporations (listed on stock exchange and traded OTC)
8
Q
What is the law about corporations?
A
- regulated by federal or provincial act and various laws.
- The by-laws are passed by the BODirectors and approved by the sharehodlers. Including:
+ Shareholders and directors meetings
+ Qualification, election, and removal of directors
+ Appointment, duties, and remuneration of officers
+ Declaration and payment of dividends
+ Date of fiscal year end
+ Signing authority for documents
9
Q
What is proxy statement?
A
Is the document that shareholders will receive before the annual meeting. It oulines what is to be voted on at the meeting.
10
Q
What is voting by proxy?
A
Shareholders don’t vote directly but give autority to a member of management team by indicating in proxy statement (or proxy form). Must be completed by hand and signed. (If shareholder leaves the items on proxy statement unmarked, will automaticlly cast with management’s viewpoint.
11
Q
How shares are often registered?
A
In the street form (with name of dealer rather than name of beneficial owner)
12
Q
When do they use voting trusts?
A
- When there is financial difficulties, restructuring may be placed under the control of a few individuals through a voting trust.
- This measure is used because financiers may be willing to inject new capital only if they can be assured of control to protect their investment until the corporation recovers
13
Q
How do voting trusts work?
A
- To transfer voting control, shareholders are asked to deposit their shares with a trustee (usually a trust company) under the terms of a voting trust agreement.
- The trustee issues a voting trust certificate to give back to the shareholder
- Voting trust certificate has same rights possessed by the original shares except Voting privileges.
14
Q
How long usually the voting trusts last?
A
The voting trust is usually put into effect for specific periods, or until certain results have been achieved
15
Q
What is the corporate structure?
A
Shareholders -> BOD -> Chairman of the board -> President -> Executive Vice presiden (VP) -> VP finance = VP Marketing = VP secretary and general counsel = VP HR = VP research = VP public affairs.
16
Q
What are the responsibilities of Directors?
A
- Set company policies by passing resolutions ( Đặt chính sách công ty bằng cách thông qua các nghị quyết).
- Appoint and supervise officers and signing authorities for banking, budget approval, financing, and plans for expansion.
- Responsible for the decision to issue shares and declare dividends and other dispositions of profits.
- They are personally liable for illegal acts of the corporation done with their knowledge and consent.
- They are personally responsible for employee wages, declared dividends, and government remittances.
- They must act honestly, in good faith, and in the best interests of the corporation.
17
Q
What are the responsibilities of Chairman (elected by BOD)?
A
- Have all or any of the duties of the president or any other officer of the corporation.
- They may be the chief executive officer.
- They preside over meetings (chủ trì các cuộc họp) of the board and exert great influence on the management of the affairs of the corporation.
- May be combined with that of president.
18
Q
What are the responsibilities of President (appointed by and responsible to the board of directors)?
A
- Exercise authority through the other officers and through the heads of departments or divisions.
- If the job of the president is not combined with that of the chairman, the president may act as chairman in the latter’s absence.
19
Q
What are the responsibilities of Vice-presidents?
A
- Vice-presidents are appointed by, and responsible to, the president.
- They lead specific areas of the corporation’s operations, such as sales or finance.
20
Q
What are the responsibilities of officers?
A
- Officers are appointed by the board of directors.
2. They are corporate employees responsible for the day-to-day operation of the business.
21
Q
Which principal that most incorporated companies in Canada used until recently?
A
GAAP - Generally accepted accouting principles.
22
Q
What is the position of statement of financial?
A
shows a company’s financial position in the last day of the company’s fiscal year (often Dec 31 but not require, Bank and Trust companies traditionally end their fiscal year on Oct 31).
23
Q
What are the main items on Financial statement?
A
- Assets
- Equity (referred to as the book value of company)
- Liabilities
Total assets = Total equity + total liabilities
24
Q
What are the classification of assets?
A
- Current
2. Non-current
25
What are noncurrent assets?
1. Property, plant, and equipment (PP&E)
2. Goodwill and Other intangible assets
3. Investments in associates.
(They are shown as items 1 to 3 on the Statement of Financial Position)
26
What is include in category PP&E?
- consists of land, buildings, machinery, tools and equipment of all kinds, trucks, furnishings, and other items used in the day-to-day operations of a business.
- Valuable because it is used directly in producing the goods and services the company eventually sells.
- Are not intended to be sold.
27
What is depreciation?
- The loss over a period of years is known as depreciation
| - Property (except land), plant, and equipment wear out over time or otherwise lose their usefulness.
28
What is depletion (can kiet)?
- Similar to the term depreciation but used in resource extraction industries such as mining, oil, natural gas.
- Depletion is the annual decrease in value the company records. ( these assets are developed and sold, the company loses part of its assets with each sale)
29
What is Amortization?
- is the term used to describe the gradual writing off of intangible assets such as patents or trademarks
30
How Items in the PP&E category are initially shown on the statement of financial position?
Show at original cost, including certain costs of acquisition (such as installation costs)
31
How they record depreciation?
- companies record depreciation expenses in each year’s statement of comprehensive income.
- the total accumulated depreciation is deducted from the original cost.
32
What are the factors that affect the amount of depreciation every year?
1. the original cost of each asset
2. Its expected useful life,
3. Any residual value
33
What are the methods to calculate depreciation?
1. Straight-line method
| 2. The declining-balance method
34
What is the Straight-line method?
- Applying an equal amount to each period. (often used by public companies in Canada)
- Annual Depreciation Expense = (Original cost - residual value) / Expected useful life in year
35
What is the declining-balance method?
- Applying a fixed percentage to the outstanding balance to determine the expense to be charged in each period.
- This amount is then deducted from the capital asset balance to determine the amount against which the percentage will be applied in the subsequent period (thus the term declining balance).
36
What is the benefit of calculating depreciation?
- to allocate the cost of the company’s PP&E over the useful lives of the assets -> matching earnings to expenses and income in a fiscal period. (The depreciation method estimated life and valuation must be reviewed each year according to the IFRS accounting system).
37
In which account depreciation, depletion and amortization appear in the statement of comprehensive income?
- Cash or non-cash expense (it is possible cash increase considerably but still no profit. These effects are reflected in the statement of cash flows)
38
In accounting activity, what is capitalization?
- Records an expenditure as an asset, rather than an expense. (When buying a machine, it is recorded in asset, not immediate in expense)
- The purpose is to spread the amount over more than one accounting period. When a company capitalizes an asset, profit in the year of acquisition is affected to a much lesser degree.
39
What is the regulation in the acquisition?
Under IFRS, fewer acquisition-related costs are allowed to be capitalized; instead, they must be expensed in the year of acquisition
40
What is Goodwill?
- Loyalty customers, location, reputations -> a buyer of a business is often willing to pay for the good name of that business, or for its continued good management, in addition to the value of its assets.
- In a statement of financial of the acquirer, it is the excess of the amount paid for the shares over their net asset value.
41
What are intangible assets?
- Are non-monetary assets that do not have physical substance.
- Can be sold, licensed, or transferred, but they usually decline greatly in value when a company is liquidated (bi thanh ly).
- Ex: patents, copyrights, franchises, and trademarks.
- Their value is connected more to their contribution to earning power than to their saleability as assets.
42
What is Investment in associates?
- Refers to the degree of ownership that a company has in another company.
- As a general rule, significant influence is presumed to exist when a company owns at least 20% – but less than half – of the voting rights of the other company.
43
What are current assets?
- Are assets that will be realized, consumed, or sold in the normal course of business, typically within one year.
5. Inventory
6. prepaid expenses
7. Trade receivables
8. Cash and cash equivalents.
( are shown as Items 5 to 8 on the Statement of Financial Position)
44
What is the most important asset group, why?
Current assets because they largely determine a firm’s ability to pay its day-to-day operating expenses.
45
What is Inventory?
- Inventory consists of the goods and supplies that a - company keeps in stock.
- Inventories are changed into cash through successive steps as raw materials are processed into finished goods.
46
How Inventories are valued?
- At original cost or net realizable value, whichever is lower. (Net realizable value as the expected sale price less the costs associated with selling the asset)
47
What are the two common methods used to value inventories at the original cost?
1. The weighted average method uses the average of the total cost of the goods purchased over the period on a per unit basis.
2. The first-in-first-out (FIFO) method implies that items acquired earliest are assumed to be used or sold first.
48
What is prepaid expenses?
- Are payments made by the company for services to be received in the near future (eg. prepaid rents, insurance premiums, and taxes)
- Prepaid expenses are the equivalent of cash because they eliminate the need to pay cash for goods or services in the immediate future.
49
What is trade receivables?
- Represents money owing to a company for goods or services it has sold.
- The net amount of trade receivables is shown on the statement of financial position as trade receivables minus the allowance for doubtful accounts
50
What is Allowance for doubtful account?
Some customers might fail to pay their bills, this account is used to subtracted from receivables the amount that estimated will not be collected.
51
What is Cash and Cash equivalents?
- represents cash on hand, funds in the company’s bank accounts, or funds held in short-term investments.
- These items hold minimal risk of a change in value and are readily convertible into cash.
52
What are the items in Equity?
11. share capital
12. retained earnings
13. Non-controlling interest
They are shown on the statement of financial position as Items 11 to 13
53
What is Share capital?
- Is the money paid in by shareholders.
- The amount received by the company for its shares at the time issuing. (-> the share capital shown on the statement of financial position is not related
in any way to the current market price of the outstanding shares)
54
What is retained earnings?
- Portion of annual earnings retained by the company after payment of all expenses and the distribution of all dividends. (Profit reinvested in the business)
- The reinvestment of accumulated earnings can be held in cash or reinvested in inventories, property, or any other of the company’s assets.
55
What is Non-controlling interest?
- Non-controlling interest is the part of subsidiary that not owned by the parent company.
- Under IFRS, non-controlling interest is presented separately from the parent company’s shareholders’ equity.
56
Will Share capital change over years along with the market?
No, It only changes if the company issues new shares or buys back outstanding shares.
57
What will happen to retained earning if the comany suffer a loss?
The loss is deducted from the retained earnings. In this event, each shareholder’s ownership interest in the company is reduced because the retained earnings amount has been reduced. If more losses than earnings accumulate, the result is a deficit
58
When the company have Non-controlling interest?
- Appears when a company owns more than 50% of a subsidiary company and consolidates its financial statements.
- The company combines all the assets, liabilities, and operating accounts of the parent company with those of its subsidiary or subsidiaries into a single joint statement
- Even when the parent company owns less than 100% of a subsidiary’s stock, all of the subsidiary’s assets and liabilities are combined in the consolidated financial statements.
59
What are the items of liabilities?
1. current
| 2. Noncurrent
60
What is included in Noncurrent liabilities?
15. Long-term debt
16. Deferred tax liabilities.
(These items are shown as Items 15 and 16 on the Statement of Financial Position)
61
What is long-term debt?
- Is debt that is due in annual instalments over a period of years, or else in a lump sum in a future year.
- The most common of these debts are mortgages, bonds, and debentures.
- Any portion of long-term debt that is due within the current year is shown as a current item.
62
What is deferred tax liabilities?
- Represents income tax payable in future periods.
- These liabilities commonly result from temporary differences between the book value of assets and liabilities as reported on the statement of financial position and the amount attributed to that asset or liability for income tax purposes.
- The difference between these two amounts is multiplied by a future tax rate to arrive at the tax amount owing for the period
63
What kind of assets that is often pledged as security for long-term debt?
capital assets classified as PP&E
64
What needs to be noted in the Notes to financial statements in Long-term assets?
Tell the reader what kind of security is provided on the loan, what interest rate is carried, when the debt becomes repayable, and what sinking fund provision, if any, is made for repayment.
65
What is current liabilities?
- current liabilities are debts incurred by a company in the ordinary course of its business that must be paid within the company’s normal operating cycle (typically, one year). (items 18 to 21)
18. Current portion of long-term debt due in one year
19. Taxes payable to the government in the near term
20. Trade payables (unpaid bills for items such as raw materials and supplies)
21. Short-term borrowings from financial institutions
66
What is the statement of comprehensive income?
- shows how much money a company earned during the year compared to how much money it spent. The profit or loss of the year and dividends may be paid to the shareholders.
- reveals the information of a company:
• Where earnings come from
• Where earnings go
• The adequacy of earnings, both to assure the successful operation of the company and to provide income for the holders of its securities
67
What are the primary interest in analyzing the financial condition of a company?
- To see its earning power and cash flow
(The proof of a company’s financial strength and security lies in its ability to generate earnings and, through those earnings, cash flow. Which is provided by both the statement of comprehensive income and the statement of cash flows)
68
What is the structure of the statement of comprehensive income?
1. The first section: revenue, cost of sales, and
gross profit (gross profit = revenue - cost of sales). (item 24, 25, 26)
- Then other income, general expenses and comprehensive income (= gross profit - general expenses + other income)
69
What is revenue (item 24) in the statement of comprehensive income?
- Is the income made from the sale of products or services (key figure, needed to calculate various ratios)
70
What is cost of sales (item 25) in the statement of comprehensive income?
- are Expenses that arise in producing the income received from the sale of the company’s products or services.
- Such as cost of labor, fuel and power, supplies and services, and other kinds of expenses that go directly into the cost of manufacturing, or in the case of a merchandising company, expenses that go directly into the cost of goods purchased for resale.
71
What is gross profit (item 26) in the statement of comprehensive income?
= Revenue - the cost of sales, we have the company’s gross profit figure for the period.
- This figure is significant because it measures the margin of profit or spread between the cost of goods produced for sale and revenue.
72
What are the formats that a company can use to display cost of sales in the Statement of comprehensive income?
* By nature of their use (e.g., depreciation, raw materials, and employee benefits)
* By function (e.g., cost of sales, administrative, and distribution)
73
What is the managerial ability?
% of gross profit / revenue is used to compare the ability to produce profit with other companies in the same line of business.
74
What is other income (item 27) in the statement of comprehensive income?
- income is not from normal operating activities.
| - This category includes dividends and interest from investments, rents, and sometimes profits from the sale of PP&E.
75
what are the two main source of income?
1. Revenue (item 24)
| 2. Other income (item 27)
76
What is the difference between revenue and other income?
1. Revenue (item 24) - is derived from the sale of products or services.
2. Other income (item 27) - not from normal operation activities. Including dividends and interest from investments, rents, and sometimes profits from the sale of PP&E.
77
Why does good accounting practice require to separate other income with revenue?
- To gain a true picture of the company’s real earning power based on its main operations.
- Because other income is not likely to be repeated every year.
78
What is general expenses (item 28-31) in the statement of comprehensive income?
* Distribution costs. ( advertising costs, salaries, and commissions to sales personnel)
* Administrative expenses (office salaries, accounting staff salaries, and office supplies)
* Other expenses not directly related to the company’s normal operating activities, including expenses associated with the sale of PP&E
* Finance costs in the form of interest payments on debtholders’ securities or loans to the company. (These interest charges are paid out of income before taxes and are fixed in the sense that the amount of interest that has to be paid on borrowed money is definite).
79
When the company has share of profit of associates (item 32 in the statement of comprehensive income)?
- when one company’s investment in another company creates significant influence without gaining control,
80
How to calculate the Share of profit of associates?
- Use the profit of the other company * % share own.
81
When does a company consider having a significant influence on another company?
- when it owns at least 20%—but less than half—of voting shares
- No significant influence when it owns less than 20%
82
when does accounting use cost method to calculate the Share of profit of associates (item 32)?
- is primarily used for ownership holdings that do not result in significant influence and where investments in other companies are reported in the form of investments on the financial statements
83
In which case the Share of profit of associates (item 32) need to be adjusted?
- When income but does not actually receive it in cash. (Therefore, share of profit of associates is a non-cash source of funds—just as depreciation, amortization, and depletion are non-cash uses of funds).
- Company profit must be reduced by the amount of share of profit of associates when calculating ratios when a true picture of the company’s cash profit
84
What if the company's significant influence experiences a loss?
- Then the company has to reports its share of loss in an item called Share of loss of associates and reduces profit on the statement.
- This item also a non-cash item so needs to be added back to the profit when calculating the ratio shows a true picture of the company's cash profit.
85
What is Income tax expense (item 33 in the statement of comprehensive income)?
includes both current tax and deferred tax for the time period. The notes to the company’s financial statements provide additional information on this topic
86
What is profit (item 34 in the statement of comprehensive income)?
- This step calculates profit or loss of the company.
87
What is listed in the section called Other comprehensive income on the Statement of comprehensive Income?
- this section might include the following items:
• Actuarial gains and losses on defined benefit plans
• Gains and losses from currency translations relating to the financial statements of a foreign operation
88
How to calculate item 35 - The total comprehensive income?
- consists of the profit (or loss) plus the other comprehensive income.
- At this point, total comprehensive income is transferred to the statement of changes in equity
89
What is the statement of changes in equity?
- is used to record changes to each component of equity, including share capital and retained earnings (items 11 and 12 on the statement of financial position).
- It also records any change in noncontrolling interest (item 13 on the statement of financial position)
- > provides a link between the statement of comprehensive income and the statement of financial position.
- > also discloses the profit or loss to the non-controlling interests and to the parent company.
90
What is retained earnings?
- are profits earned over the years that have not been paid out to shareholders as dividends. These retained profits accrue to the shareholders, but the directors have decided to reinvest them in the business for now.
- Retained earnings provide a record of the total comprehensive income kept in the business year after year.
91
How they calculate retained earnings?
- A portion of the total comprehensive income for the current year is added to (or, in the event of a loss, subtracted from) the balance of retained earnings shown in the statement of financial position from the previous year.
- Dividends declared during the year are subtracted from retained earnings in the statement of changes in equity
92
Where will they record the new final retained earning figure?
In the statement of financial position where it appears
| in the equity section (item 12)
93
Where in The statement of changes in equity show the company's total comprehensive income?
In the form of retained earnings. (The total comprehensive income attributable to the owners of the company represents the total comprehensive the income of the company minus the total comprehensive income attributable to the non-controlling interests)
94
What is non-controlling interest (minority interest)?
is an ownership position wherein a shareholder owns less than 50% of outstanding shares and has no control over decisions
95
Example of non-controlling interest?
A company owns 80% of the shares of a subsidiary, and the subsidiary had total comprehensive income of
$1,000,000 last year. The subsidiary’s total comprehensive income of $1,000,000 is included in the total comprehensive income of the parent company. The statement of comprehensive income shows $200,000 as
income attributable to non-controlling interests, which represents the 20% of the subsidiary that is not owned
by the parent company.
96
What is the difference in time between the 3 statements?
1. the statement of financial position shows a company’s financial position at a specific point in time
2. the statement of comprehensive income summarizes the company’s operating activities for the year.
3. The statement of cash flow shows how the company’s financial position changed from one period to the next.
97
What does the Statement of cash show?
- helps the reader to evaluate the liquidity and solvency of a company and assess its overall quality
- The statement of cash flows over a number of years may illustrate trends that might otherwise go unnoticed. - - This statement often provides a clearer picture of the viability (kha nang ton tai) of a company than does the statement of comprehensive income because it measures actual cash generated from the business.
98
What question should be answered in the Statement of cash flow to assess the liquidity and solvency of a company?
1. Can the company pay its creditors, especially in business downturns?
2. Can it fund its needs internally, if necessary?
3. Can it reinvest while continuing to pay dividends to shareholders?
99
What items included in the item cash and cash equivalents for the purposes of the statement of cash flows?
- cash on hand or in the company’s bank accounts.
- Short-term, highly liquid investments that are readily convertible into known amounts of cash (with little risk of a change in value).
( The statement of cash flows details the changes in cash and cash equivalents and the reasons for those changes)
100
What is the structure of the statement of cash flows?
Show the company's cash flows for the period under 3 headings:
1. Operating activities.
2. Financing activities.
3. Investing activities.
- Also shows the increase or decrease in cash in the current fiscal year.
101
What is include in the begins of Cash flows statement in operating activities (items 34-37 in the statement of cash flows)?
- Accounts reflect cash flow on the business activities of the company.
- Begin with item 34 Profit, add back to profit all items not involving cash, and subtracted item 32 (share of profit of associates) because it is not actual cash.
- Item 37 - change in net working capital - shows changes in various asset and liability accounts.
102
What are included in Net working capital items?
1. Trade receivables
2. Inventories
3. Trade payables
4. Interest payable
5. Taxes payable.
- The change of these accounts (current year compared to the previous year) recorded in the statement of cash flow.
103
What is Financing activities in cash flows statement about?
Cash flows from financing activities involve transactions used to finance the company
104
What is included in the Financing activities (items 38-41 in the statement of cash flows)?
1. If the company has issued new share capital (item 38) or debt (item 40), cash flows into the company.
2. If the company repays debt (item 39) or pays dividends to the shareholders (item 41), cash flows out of the company.
105
Who should pay attention into Financing activities?
- shareholders because it highlights changes to a company’s capital structure—the overall use of debt and equity financing. A substantial increase in debt, or issuance of new shares, may negatively affect the shareholders’ equity in the company.
106
What problems can Operating activities in Cash flows statement show?
- See the ability to manage accounts receiveable, customers' debt.
- The company may look good on paper because its revenues are up. However, as demonstrated by the statement of comprehensive income, it may soon be in serious financial difficulty, if it cannot generate enough cash to pay its creditors.
107
Which section should dividend paid to shareholders placed in the cash flow statement?
could be placed in either the operating activities section or the financing activities section.
108
What is included in the Investing activities (items 42-44 in the statement of cash flows)?
Investing activities highlight what the company did with any money not used in its direct operation. Including any investment made in the company itself, such as the purchase of new capital assets (item 42) or disposal of such assets (item 43). As well, this part includes any dividends actually received from associates
(item 44).
109
Which section should dividend from associates placed in the cash flow statement?
Dividends from associates could be placed in either the operating activities section or the investing activities section.
110
What is included in the final section in the statement of cash flows (items 45 46 : the change in the cash flow)?
- sums up the cash flows from operating, investing, and financing activities to arrive at the increase or decrease in cash (item 45) for the current fiscal year.
- Because the statement of cash flows looks at the actual change in the cash position for the year, the final balance in cash and cash equivalents (item 46) comprises cash and cash equivalents found in the year-end statement of financial position.
- > Ideally, the company should always have a positive net cash flow. If it does not, it is important to find out why.
111
What are the two important components of a company’s annual report?
1. the notes to financial statements
| 2. The auditor’s report
112
What are the notes to financial statements?
- Showing a considerable amount of detailed information about a company’s financial conditions.
- The company’s notes include the following items: its statement of compliance with IFRS; the accounting policies used; more detailed descriptions of fixed assets, share capital, and long-term debt; and commitments and contingencies (dự phòng).
113
What is the auditor's report?
- Expressing auditor's opinion in writing about the fairness of the statements. (obligatory for public canadian corporate, privately held corporations, where all shareholders have agreed that an audit is not necessary)
- The auditor is appointed at the company’s annual meeting by a resolution of the shareholders and may also be dismissed by them.
114
What information that securities legislation in each of the provinces requires the continuous disclosure concerning the business and affairs of public companies?
- They are periodic financial statements (including management discussion and analysis), insider trading reports, information circulars required in proxy solicitation (trưng cầu), the annual information form, press releases, and material change reports.
115
What do the distributors of new securities have to provide?
A prospectus (bản cáo bạch) containing full, true, and plain disclosure of all material facts related to the issue.
116
What is A control position and when will it happen?
- A control position refers to ownership of voting stock in a company that is sufficient to materially affect (đủ ảnh hưởng trọng yếu) its affairs.
- In all provinces except Manitoba, New Brunswick, and Quebec, a 20% holding is deemed to represent control.
117
what is continue disclosure?
- Is the requirements of the securities acts.
- The primary disclosure requirements include issuing a press release and filing a material change report with the administrators if a material change (thay doi quan trong) occurs.
- Most companies usually provide financial statements in the required form to all shareholders and send additional copies to the appropriate administrators.
118
What are considered as material changes?
A material change is a change in the business, operations, or capital of an issuer that would reasonably be expected to have a significant effect on the market price or value of its securities.
119
What else related to information disclosure that companies are required to ensure?
- no confidential material information is selectively disclosed to third parties and restricted conference calls with institutional investors. (If it was, an immediate press release by one of its responsible officers should be released, and the appropriate regulators should be notified of the inadvertent (vô tình) disclosure)
120
What else do the financial disclosure provisions also require that shareholders and administrators be provided with?
1. Comparative audited annual financial statements should be sent within 120 days of the financial yearend, for companies listed on the TSX Venture Exchange, or within 90 days, for senior issuers on the TSX.
2. Comparative unaudited quarterly interim financial statements should be sent within 60 days of the end of each of the first three quarters of the financial year, for companies listed on the TSX Venture Exchange, or within 45 days, for issuers on the TSX
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What are statutory (theo luật định) rights of investors?
- It is a statement of withdrawal and rescission rights for purchasers to be included in all prospectuses.
1. RIGHT OF WITHDRAWAL
2. RIGHT OF RESCISSION. (quyen han che)
3. RIGHT OF ACTION FOR DAMAGES (quyen hanh dong khi co thiet hai)
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What is right of withdrawal?
- Securities legislation provides purchasers with right to withdraw from an agreement to purchase securities within two business days after receipt or deemed receipt of a prospectus or any amendment to the prospectus.
- The purchaser must give notice to the vendor or its agent.
- In case of selling with no prospectus, most provinces permit a purchaser who still owns the security to revoke (thu hoi) the transaction, subject to applicable time limits. In Quebec, the purchaser can apply for an adjustment of the purchase price.
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What is right of rescission?
- Securities legislation gives purchasers the right to rescind (huy bo) or cancel a completed contract for the purchase of securities if the prospectus or amended prospectus offering the security contains a misrepresentation.
- This right is applicable time limits. In most provinces, a purchaser alleging misrepresentation must choose between the remedy of rescission and the alternative (thay the) of damages.
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What is right of action for damages?
- Most securities legislation provides that an issuer and its directors, and anyone who signs a prospectus, may be liable for damages if the prospectus contains a misrepresentation.
- The same liability applies to an expert (such as an auditor, lawyer, geologist, or appraiser), whose report or opinion appears with his or her consent in a prospectus. Experts are only liable if the misrepresentation is with respect to their report or opinion.
- Legislation provides a number of defences to an action for rescission or damages based on a misrepresentation.
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What is takeover bid?
- A takeover bid is an offer to purchase from a company’s shareholders more than 20% of the outstanding voting securities of the company to control the targeted company.
- The definition of a takeover includes an offer to purchase, an acceptance of an offer to sell, and a combination of the two.
- A takeover bid must comply with provincial legislation unless it is exempted under the relevant act.
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What is early warning disclosure?
- Most provincial acts state that every person or company accumulating 10% or more of the outstanding voting securities of any class of a reporting issuer, or securities convertible into such securities, must issue a press release immediately.
- The press release and report must include a statement of the purpose of the acquisition and any future intentions to increase ownership or control.
- After a formal bid is made for voting securities of a reporting issuer, and before the expiry of the bid, every person or company acquiring 5% or more of the securities of the class subject to the bid (other than the offeror under the bid) must issue a press release reporting this information.
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What are insiders?
- directors.
- the senior officers (the chair, vice-chair of the board of directors, the president, any vice-president, the secretary, the treasurer, the general manager of the issuer, or equivalent in function, and each of the five highest-paid employees, including any individual referred to above)
- any person or company (excluding underwriters in the course of public distribution) beneficially owning, directly or indirectly, or controlling or directing more than 10% of the voting rights attached to all voting securities; and
• any director or senior officer of a company that is a subsidiary of the issuer or is itself an insider due to ownership, control or direction over more than 10% of the voting rights attached to all voting securities of the
issuer involved.
(if a corporation becomes an insider of a second corporation, an insider of the first corporation may be deemed to be an insider of the second corporation as well. When dealing with trades relating to securities of a company that has been involved in such transactions, care should be taken to ascertain whether the persons involved are deemed under the relevant legislation to be insiders.)
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What is insider reporting?
- Insiders must inform the relevant securities commissions when they become insiders and when they transact in securities of the company in which they are insiders.
- Reports must state the extent of the insider’s direct or indirect beneficial ownership of, or control or direction over, securities of the company. Securities firms should be aware that most acts require an insider who transfers securities of a reporting issuer into the name of an agent, nominee, or custodian to file a report with the administrator.
- Transfers for the purpose of collateral for a debt are exempt from this rule.
- All reports filed with the administrator are open for public inspection.
- Failing to file an insider report are offences under the acts and are usually punishable by a fine.
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When would a company typically use the cost method of accounting for a subsidiary?
if it holds less than 20% (not have significant influence)
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What is consolidated method of accounting?
Consolidated Method of accounting (leads to non-controlling interest entries in financial statements): If Company ABC owns more than 50% of Company XYZ, then all of XYZ’s financial information is included in ABCs financial statements. Non-controlling interest reflects that a small portion of XYZ is actually owned by someone other than the parent company. Treatment of dividends for this scenario is complex and not covered in this course.
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What is equity method of accounting?
Equity Method of accounting (leads to investments in associates and share of profits of associates entries in the financial statements): If Company ABC owns between 20% and 50% of Company XYZ, then any time XYZ reports income, Company ABC records a percentage of that income on their own financial statements (even though Company ABC didn’t actually receive any of the income). If XYZ decides to pay a dividend, ABC will get some money but will not record it on their income statement since they already recorded share of profits of associates. The dividend would show up on the cash flow statement however, since it is an inflow of money.
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What is cost method of accounting?
Cost Method of accounting (leads to investment and investment income entries on financial statements): If Company ABC owns less than 20% of Company XYZ, then any time XYZ pays a dividend Company ABC will receive money and will record it as investment income on the Statement of Comprehensive Income.
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What is nominee?
Often shares are registered in street form; that is, in the name of someone other than the true beneficial owner of the shares (e.g., a bank, investment dealer or the Canadian Depository for Securities). The nominee is the group under whose name the shares are registered but who is not considered the beneficial owner. For example, if your shares are registered in the name of your brokerage firm for convenience, even though you bought the shares and are the beneficial owner, the broker is considered the nominee.
