Chapter 14 Flashcards
what type of company as a limited number of shares
private
How many shares is a private company generally limited to
50 shares maximum
can a private company’s shares be traded publicly?
no
what is often stated for private shares
the agreement describes the way in which shares can be transferred
What can private companies use IFRS or ASPE?
either
What happens with public companies’ stocks
their securities, debt or equity, are traded on stock exchange
what do shares represent
ownership in a company
can publicly traded shares be bought or transferred by shareholders without the consent of the corporation
yes, unless there is an enforceable agreement to the contrary
A corporation may be authorized to issue several different classes of shares each with distinctive rights and privileges
what might be different about the different classes
dividends entitlements and voting rights are characteristics that might be altered among classes
describe common shares
- have voting rights
- receives the residual interest (if any) in the assets if the company are liquidated or dissolved and
- dividends paid only when declared
what are special shares
may have multiple votes
what are restrictive shares
may be non-voting
Preferred shares confer certain preferences, or differences, over common shares
Preference may involve one of the following (7)
- limited voting or nonvoting rights
- receive dividends before the common
- cumulative or non-cumulative
- participating - right to share in additional dividends
- priority over common on liquidation
- convertible to other securities
- guaranteed return by redemption or retraction
what are par value shares
have a designated dollar amount per share, as stated in the articles of incorporation
who allows par value shares
limited number of provincial business corporations acts (not allowed by CBCA and other provinces)
on issuance, par amount is assigned to the
share account
on issuance, premium amount received over par is allocated to what
a separate account in equity
what is another name for common shares
residual ownership shares, since they get whatever is left after the creditors and other investors have had their share in earnings and net assets
what kind of risk do common shareholders have
risk over ownership. they are at risk with respect to their original investment and return on that investment. they also have the rewards of ownership since they get the residual of earnings and have control over the company through their voting shares
what are no-par shares
do not carry a designate or assigned value per share
- the entire amount of proceeds received is credited to share capital
what type of share may have a guarantee on their invested principal?
preferred shares
no
no
what is issued share capital
the number of shares that have been issued to shareholders to date
what is outstanding share capital
issued and currently owned by shareholders
what is subscribed shares
un-issued shares set aside to meet subscription contracts
no par value shares issued for cash: when shares are issued what happens
a certificate, specifying the number of shares represented, is prepared for each shareholder
the number of shares held by each shareholder is made in the
shareholder ledger, a subsidiary ledger to the share capital account
what are the accounts used to record the share
debit cash
credit share capital amount for amount received
if par value shares issued, the premium over par is allocated to
contributed surplus
how can a corporation issue non-cash share capital
issue share capital for non-cash assets or to settle debt
how do your record an issuance of a non-cash share capital
record transaction at the fair value of the asset received, if reliably determinable
what are basket sales of share capital
a corporation sells two or more classes for one lump-sum amount
what are the two methods to record a basket sale of share capital
- proportional method
2. incremental method
what is the proportional method for basket sale of shares
weighted average
what is the incremental method for basket sale of shares
we know the fair value of all but one class involved in the transaction
which method for basket sales is preferred
proportional
what if no market value for any classes of shares for the basket sale is known
do whatever you want to figure it out
- BOD may arbitrarily split the proceeds between the securities
what are share issue costs
costs incurred when share issued in a public offering
what can share issue costs include
- registration fees
- underwriter commissions
- legal
- accounting
- printing costs
- clerical costs
- promotional costs
what are the two method of accounting for shares issue costs
- offset method
2. retained earnings method
what is the offset method for accounting for share issue costs
share issue costs are treated as a reduction of the amount received from the sale of the related share capital - usual method
what is the retained earnings method for accounting for share issue costs
share issue costs are charged directly to retained earnings in a radiation of the offset method
if issuance is not completed what happens to issue costs
they are expensed
what does it mean by retractable
at the option of the shareholder, and at a contractually arranged price, a company is REQUIRED to buy back its shares
what does it mean when it is callable or redeemable
there are specific buy-back provisions, at the option of the company
A company may retire shares for the following reasons: to
- increase earnings per share
- provide cash flow to shareholders in lieu of dividends
- acquire shares when they appear to be undervalued
- buy out one or more particular shareholders and thwart take-over bids or
- reduce future dividend payments by reducing the shares outstanding
When shares are purchased and immediately retired, all capital items relating to the specific shares are
removed form the accounts
If cumulative preferred shares are retired, and there are dividends in arrears, such dividends are
paid and charged to retained earnings in the normal manner
what do you do when shares converted
- account for at book value
2. equal decrease in one class and increase in the other class
a firm may also buy its own shares and hold them for
eventual resale
- may not vote at shareholder meetings or receive dividends
The CBCA and some provincial legislation modelled after the act –stipulate corporations that reacquire their own shares must
immediately retire those shares
- limited circumstances where shares may be purchased and held in trust for employee compensation arrangements
what does retained earnings represent
- accumulated net income or net loss
- error corrections and retrospective changes in accounting policy
- less accumulated cash dividends or stock dividends; and
- other amounts related to share repurchases
The following items affect retained earnings:
Decreases (debits):
- net loss
- cash and other dividends
- stock dividends
- share retirement
- share issue costs
- spin off of investments to shareholders
- adjustments related to complex financial instruments
- error correction (may also be a credit)
9, effect of a change in accounting policy applied retrospectively (may also be a credit)
The following items affect retained earnings:
Increases (credits)
- earnings
2. removal of deficit in a financial reorganization
what are the standards in IFRS for when a company purchases and retires its own shares
there are no standards in IFRS
- Canadian practice is described as an acceptable practice
how do you account for retired shares
contributed capital relating to the specific shares are removed from the accounts.
when reacquisition costs exceeds the average price per share issued to date (retiring shares), the cost should be charged to
a. first, to share capital, at the average price per issued share
b. any remaining amount, to other contributed capital
- a separate contributed capital account is set up for EACH class of shares that are retired
when buying back their own shares, does a corporation report a gain or loss?
no
how are conversion of shares accounted for
at book value, wit an equal decrease to one share class and an increase to another - no gain or loss reported
CBCA provides that if a company reacquires its own shares it must
retire those shares immediately
one of the fundamental principles in accounting for shareholders’ equity is that it
does not have an impact on net income
appropriated retained earnings result form
discretionary management action
restricted retained earnings result form
a legal contract or corporate law
what are some examples of appropriations or restrictions
- to fulfil a contractual agreement (a debt covenant)
- restrict the use of retained earnings for dividends - appropriation of a specified portion of retained earnings in anticipation of possible future losses
- to fulfil a legal requirement, as in the case of a provincial corporate law requiring a restriction on retained earnings equivalent to the cost of treasury stock held
what is the definition of a dividend
a distribution of earnings to shareholders in the form of assets or shares
- typically credit the account that represents the item distributed (cash, non-cash asset, or share capital) and debit to retained earnings
