Equities Flashcards
What is equity in the context of financial reporting?
Equity is the residual interest in the assets of an entity after deducting all liabilities. It represents owners’ capital contributions and retained earnings, including OCI and non-controlling interests.
Why is the book value of equity considered an unreliable measure of a business’s true worth?
Because it often excludes fair value adjustments, identifiable intangibles, and goodwill, which may understate the actual market value.
What is the function of the Statement of Changes in Equity?
To report all movements in equity accounts over a reporting period, including profits, losses, OCI items, and transactions with owners such as dividends and share issues.
What is the layout of the Statement of Changes in Equity?
Equity components are shown as columns (e.g., share capital, retained earnings, OCI reserves), while changes are shown as rows (e.g., profit/loss, dividends, share issues).
What types of transactions are shown in the rows of the statement?
-Transactions from comprehensive income (e.g., net profit/loss, OCI items)
-Transactions with owners (e.g., dividends, share issues, buybacks)
How does comprehensive income affect the Statement of Changes in Equity?
Profit increases retained earnings; a loss decreases it. OCI items affect specific OCI equity reserves.
How are owner-related transactions reflected in the statement?
-Share issues: Increase share capital and/or premium
-Dividends: Reduce retained earnings
-Buybacks: Reduce equity
-Share options: Recognised over vesting, impact capital when exercised
-Bonus/scrip issues: Shift between retained earnings and capital with no total equity change
How are accounting policy changes or material errors treated in the statement?
They require retrospective adjustments, shown by changing the opening balances of prior period equity accounts.
Why is the Statement of Changes in Equity important for users of financial statements?
It helps stakeholders understand how the company’s equity has changed due to performance and interactions with owners, providing a bridge between opening and closing equity balances.
What accounting principles underlie the logic of the Statement of Changes in Equity?
The statement follows the accounting equation (Assets = Liabilities + Equity) and double-entry principles, ensuring all changes in equity are matched and balanced.
What is a share issue in accounting?
It’s when a company receives capital from owners in exchange for shares.
How are share issues reflected in financial statements?
Recognised as an increase in the bank (asset) and share capital (equity), with any excess recorded as share premium.
Where are share issues reported?
In the statement of changes in equity under transactions with owners, and the statement of financial position under equity.
What is a share buyback?
It’s when a company repurchases its own issued shares.
Does the market share price affect the financial statements after issue?
No, post-issue price fluctuations don’t affect the financials.
Why might a company do a buyback?
To return cash to shareholders, buy out exiting owners, or when shares are undervalued.
How are treasury and outstanding shares related?
Outstanding shares = Issued shares – Treasury shares.
How are buybacks reflected?
As a decrease in assets (cash) and equity, not as an expense.
Are dividends expenses?
No, they are distributions to owners and not shown in profit or loss.
What is “shareholders for dividend”?
A liability created when dividends are declared.
Where are dividends recorded?
As a deduction from retained earnings in equity and a liability once declared.
What are share options?
Rights to buy company shares in the future at a set price.
What are scrip dividends?
Zero-cost share issues instead of cash dividends; reduce retained earnings and increase capital.
How are share options accounted for?
Expense is recognised in profit or loss; equity increases simultaneously.
