WEYGANDT . KIESO . KIMMEL . TRENHOLM . KINNEAR . BARLOW . ATKINS
PRINCIPLES OF
FINANCIAL ACCOUNTING
CANADIAN EDITION
Chapter 14
Corporations: Additional Topics and IFRS
Prepared by:
Debbie Musil
Kwantlen Polytechnic University
1
Corporations: Additional
Topics and IFRS
• Additional Share Transactions
– Stock dividends and splits
– Reacquisition of shares
• Comprehensive Income
– Continuing and discontinued operations
– Other comprehensive income
• Accounting Changes
– Changes in accounting policies and estimates
– Correction of prior period errors
• Reporting Changes in Shareholders’ Equity
– Summary of transactions
– Statement of changes in shareholders’ equity
• Analyzing Shareholders’ Equity
– Earnings performance; Dividend record
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2
Chapter 14: Corporations:
Additional Topics and IFRS
Study Objectives
1. Account for stock dividends and splits and
compare their financial impact.
2. Account for the reacquisition of shares.
3. Prepare an income statement showing
continuing and discontinued operations, and
prepare a statement of comprehensive
income.
4. Explain the accounting for different types of
accounting changes and account for
corrections of prior period errors.
5. Prepare a statement of changes in
shareholders’ equity.
6. Evaluate earnings and dividend performance.
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3
Stock Dividends
• Distribution of corporation’s own
shares to its shareholders
– Issued in shares instead of cash
• Does not change assets or
shareholders’ equity
– Decreases retained earnings and
increases share capital by the same
amount
– Total amount is therefore the same
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Stock Dividends: Purpose and
Benefits
• Satisfies shareholders' dividend
expectations without spending cash
• Increases marketability of corporation’s
shares
– Increasing number of shares will cause market
price to decrease and make shares more
affordable
• Emphasizes that a portion of shareholders’
equity has been permanently retained in
the business
– Therefore unavailable for cash dividends
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Entries for Stock Dividends
• Declaration date:
•
•
Record date: no entry required
Distribution date:
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Stock Splits
• Involves the issue of additional shares
to shareholders
– Similar to a stock dividend
• Increases the marketability of shares
by lowering market value per share
– Effect on share price is generally inversely
proportional to size of split
• Does not affect shareholders’ equity
– Therefore no entries are required
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Comparison of Dividends and
Stock Splits
• Cash dividends reduce assets and
shareholders’ equity (retained earnings)
• Stock dividends increase share capital
and decrease retained earnings
• Stock dividends have no effect (but do
increase number of shares issued)
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Chapter 14: Corporations:
Additional Topics and IFRS
Study Objectives
1. Account for stock dividends and splits and
compare their financial impact.
2. Account for the reacquisition of shares.
3. Prepare an income statement showing
continuing and discontinued operations, and
prepare a statement of comprehensive
income.
4. Explain the accounting for different types of
accounting changes and account for
corrections of prior period errors.
5. Prepare a statement of changes in
shareholders’ equity.
6. Evaluate earnings and dividend performance.
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9
Common Shares:
Reacquisition of Shares
• Companies can reacquire their shares
from shareholders in order to:
– Increase trading on securities markets
– Increase earnings per share
– Buy out hostile shareholders
– Have shares available for compensation
or other uses
• Reacquired shares are retired and
cancelled
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Common Shares:
Reacquisition of Shares 2
• Steps to record a reacquisition:
– Remove cost of shares from share capital
account
• Based on average cost per share (must be
calculated)
– Record cash paid for the shares
– Record the gain or loss on reacquisition
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Reacquisition of Shares:
Below Average Cost
• Average cost of shares:
= Balance in Common Shares Account
Number of Common Shares Issued
• If shares reacquired at a price < average cost:
– Difference is a “gain” on reacquisition
– This “gain” is credited to a new shareholders’
equity account for the contributed capital from the
reacquisition:
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Reacquisition of Shares:
Above Average Cost
• If shares reacquired at a price > average cost:
– Difference is a “loss” on reacquisition
– Additional cost of shares is first debited to
contributed capital from previous reacquisitions (if
any)
– Remaining difference is debited to retained
earnings:
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13
Chapter 14: Corporations:
Additional Topics and IFRS
Study Objectives
1. Account for stock dividends and splits and
compare their financial impact.
2. Account for the reacquisition of shares.
3. Prepare an income statement showing
continuing and discontinued operations, and
prepare a statement of comprehensive
income.
4. Explain the accounting for different types of
accounting changes and account for
corrections of prior period errors.
5. Prepare a statement of changes in
shareholders’ equity.
6. Evaluate earnings and dividend performance.
Copyright John Wiley & Sons Canada, Ltd.
14
Discontinued Operations
• Disposal or reclassification to “held for
sale” of a component of an entity
– A separate major business line or
geographic area
• Reported separately on income
statement
– Includes allocation of income tax expense
or savings (called intraperiod tax
allocation)
– Profit (loss) from discontinued operations
and gain (loss) from disposal
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Discontinued Operations 2
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Other Comprehensive Income
• Additional statement required under IFRS
– All-inclusive format or as a separate statement
– No “other comprehensive income” under ASPE
• All changes in shareholders’ equity except
from sale/purchase of shares and dividend
transactions
Copyright John Wiley & Sons Canada, Ltd.
17
Chapter 14: Corporations:
Additional Topics and IFRS
Study Objectives
1. Account for stock dividends and splits and
compare their financial impact.
2. Account for the reacquisition of shares.
3. Prepare an income statement showing
continuing and discontinued operations, and
prepare a statement of comprehensive
income.
4. Explain the accounting for different types of
accounting changes and account for
corrections of prior period errors.
5. Prepare a statement of changes in
shareholders’ equity.
6. Evaluate earnings and dividend performance.
Copyright John Wiley & Sons Canada, Ltd.
18
Change in Accounting Policy
• Occurs when the policy used in current year
is different that that used in prior year
• Only occurs when change:
– Is required by GAAP
– Provides more reliable and relevant information
• Must be applied retroactively (prior years
restated) unless not practical to do so
• Using a new accounting method due to a
change in circumstances is not a change in
accounting policy
– No retroactive application
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Change in Accounting
Estimates
• Estimates of future conditions and events
are made often in accounting
– For example, bad debt expense or warranty
expense
• These estimates may need to be changed
due to:
– A change in circumstances
– New information becoming available
• The new estimate is used from now on
– Do not go back and change prior periods
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Correction of Prior Period Errors
• When a material error is discovered after the
financial statements have been issued
• Correction is made directly to Retained
Earnings
– Since effect of error is now located there (all
revenues and expenses have been closed to
retained earnings)
• Net of any income tax effect
• Example: overstatement of cost of goods sold
– Understatement of inventory, profit (now retained
earnings), and income tax payable
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Presentation of Prior Period
Adjustments
• Adjustment is added to (or deducted
from) opening balance of retained
earnings, net of income tax effect
• Financial statements of prior years are
restated to reflect the change
• Details of the change and its impact
disclosed in a note to the financial
statements
Copyright John Wiley & Sons Canada, Ltd.
22
Chapter 14: Corporations:
Additional Topics and IFRS
Study Objectives
1. Account for stock dividends and splits and
compare their financial impact.
2. Account for the reacquisition of shares.
3. Prepare an income statement showing
continuing and discontinued operations, and
prepare a statement of comprehensive
income.
4. Explain the accounting for different types of
accounting changes and account for
corrections of prior period errors.
5. Prepare a statement of changes in
shareholders’ equity.
6. Evaluate earnings and dividend performance.
Copyright John Wiley & Sons Canada, Ltd.
23
Statement of Changes in
Shareholders’ Equity
• Required for companies following IFRS
• Shows changes in shareholder’s equity
during year
– Including contributed capital, retained earnings,
other comprehensive income
• Companies following ASPE:
– Continue to use a Statement of Retained
Earnings
– Other changes are reported in notes to the
statements
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24
Summary of Shareholders’
Equity Transactions
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25
Chapter 14: Corporations:
Additional Topics and IFRS
Study Objectives
1. Account for stock dividends and splits and
compare their financial impact.
2. Account for the reacquisition of shares.
3. Prepare an income statement showing
continuing and discontinued operations, and
prepare a statement of comprehensive
income.
4. Explain the accounting for different types of
accounting changes and account for
corrections of prior period errors.
5. Prepare a statement of changes in
shareholders’ equity.
6. Evaluate earnings and dividend performance.
Copyright John Wiley & Sons Canada, Ltd.
26
Earnings Performance:
Earnings per Share
• Indicates profit earned by each common share
• Used under IFRS not under Private Entity GAAP
• Formula to calculate:
• Weighted average number of common shares =
shares issued during the year x the fraction of the
year they are outstanding
– Example: April 1 = 3/12 months if calendar year used
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Earnings per Share:
Complex Capital Structure
• When a company has securities that can be
converted into common shares
– Example: convertible preferred shares
– If converted, the additional common shares will
result in a reduced (diluted) EPS figure
• Two EPS amounts are calculated:
– Basic EPS: calculation on preceding page
– Fully diluted EPS: calculated as if all securities
were converted into common shares
• Calculation of weighted average number of
shares becomes more complicated
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Earnings Performance:
Price-Earnings Ratio
• Helps investors compare earnings of
different companies
• Formula to calculate:
• A high PE ratio is an indicator that
investors believe the company has
good earnings potential
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Payout Ratio
• Indicates what percentage of profit a company
is distributing to its shareholders
• Can be calculated for common, preferred and
all dividends:
• Payout ratios vary with the industry
• High payout ratios can indicate that a company
is not reinvesting enough in its operations
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Copyright
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information contained herein.
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