Chapter 14
Share capital and
reserves
.
Copyright  2010 McGraw-Hill Australia Pty Ltd
PPTs to accompany Deegan, Australian Financial Accounting 6e
14-1
Objectives of this lecture
• Understand that the equity of an organisation can consist
of several different accounts
• Understand that within equity there can be various
classes of shares, each providing different rights to
holders
• Be able to provide the journal entries to recognise the
issue of both fully paid and partly paid shares by a
company
• Be able to provide the journal entries to account for
distributions
• Be able to provide the journal entries necessary when
preference shares are to be redeemed
.
Copyright  2010 McGraw-Hill Australia Pty Ltd
PPTs to accompany Deegan, Australian Financial Accounting 6e
14-2
Objectives (cont.)
• Be able to provide the necessary journal entries
when shares are forfeited by their owners
• Be able to provide the journal entries to account for
rights issues and option issues
• Understand what constitutes a share split and a
bonus issue of shares
• Know the disclosure requirements of AASB 101
Presentation of Financial Statements in relation to
share capital and reserves
.
Copyright  2010 McGraw-Hill Australia Pty Ltd
PPTs to accompany Deegan, Australian Financial Accounting 6e
14-3
Relevant accounting standards and other
guidance
•
•
•
•
AASB 101 Presentation of Financial Statements
AASB 132 Financial Instruments: Presentation
AASB 2 Share-Based Payments
AASB 108 Accounting Policies, Changes in
Accounting Estimates, and Errors
• The AASB’s Framework for the Preparation and
Presentation of Financial Statements
.
Copyright  2010 McGraw-Hill Australia Pty Ltd
PPTs to accompany Deegan, Australian Financial Accounting 6e
14-4
Equity as a residual claim on net assets
• Equity
– Owners’ share of the business calculated by
subtracting the entity’s liabilities from its assets
• Shareholders’ funds
– In a company this represents the difference between
total assets and total liabilities
• The AASB Framework defines equity as:
– the residual interest in the assets of the entity after
deducting all of its liabilities
.
Copyright  2010 McGraw-Hill Australia Pty Ltd
PPTs to accompany Deegan, Australian Financial Accounting 6e
14-5
Equity as a residual claim on net assets
(cont.)
• The definition and recognition of equity are directly a
function of the definition and recognition of assets
and liabilities
• Total owners’ equity is made up of a number of
accounts
– Share capital relating to one or several classes of
shares
– Reserves (e.g. revaluation surplus, general reserve,
forfeited share reserve)
– Retained earnings (or accumulated losses)
.
Copyright  2010 McGraw-Hill Australia Pty Ltd
PPTs to accompany Deegan, Australian Financial Accounting 6e
14-6
Retained earnings
• Retained earnings often makes up a significant
proportion of shareholders’ funds
– Represents the accumulation of prior period profits and
losses
– Reduced by dividends declared and paid
– Reduced by any transfers to other reserves
– Could be reduced by a bonus issue of shares
– Changes in accounting policies as the result of the initial
adoption of a new accounting standard can result in a direct
adjustment in retained earnings in accordance with AASB
108
– The recognition of prior period errors can result in a
reduction in retained earnings in accordance with AASB 108
.
Copyright  2010 McGraw-Hill Australia Pty Ltd
PPTs to accompany Deegan, Australian Financial Accounting 6e
14-7
Accounting for the issue of share capital
• Share capital
– Balance of owners’ equity within a company
comprising the capital contributions made by owners
• Under section 254C of the Corporations Act 2001
shares of a company have no par value
• Shares no longer issued at a premium or a discount
• When shares are issued then the amount received
from the issue is added to ‘share capital’
.
Copyright  2010 McGraw-Hill Australia Pty Ltd
PPTs to accompany Deegan, Australian Financial Accounting 6e
14-8
Accounting for the issue of share capital
(cont.)
• To recognise receipt of application monies
Debit
Credit
Bank trust
Application
• To recognise the issue of shares and to close
application account
Debit
Credit
.
Application
Share capital
Copyright  2010 McGraw-Hill Australia Pty Ltd
PPTs to accompany Deegan, Australian Financial Accounting 6e
14-9
Accounting for the issue of share capital
(cont.)
• To transfer cash from trust account to general
operating bank account
Debit
Credit
Cash at bank
Bank trust
• Refer to Worked Examples 14.1, Determination of share
capital, and 14.2, Public issue of shares (pp. 442 and
443)
.
Copyright  2010 McGraw-Hill Australia Pty Ltd
PPTs to accompany Deegan, Australian Financial Accounting 6e
14-10
Partly paid shares
• A company might issue shares on an instalment basis
• Where shares are partly paid, the paid portion of the shares is
accounted for in the same manner as fully paid shares, while
the balance, the deferred consideration, is of the nature of a
receivable
• Where no future date has been specified for calling up the
unpaid portion, an asset is not recognised until the company
has specified a future date or dates for calling up the unpaid
portion and informs shareholders of these dates
• However, where shares have been issued on an instalment
basis, with an amount to be paid on issue and with further
amounts payable at specified future dates, a receivable must be
recognised
.
Copyright  2010 McGraw-Hill Australia Pty Ltd
PPTs to accompany Deegan, Australian Financial Accounting 6e
14-11
Worked Example 14.3—Issue of partly paid shares
Yeates Ltd commenced operations on 1 July 2012 by issuing 15 million ordinary shares by way
of a direct private placement and at an issue price of $1.50 per share.
Shareholders were required to pay $1.00 on application, with a further $0.35 payable on 1
September 2012 and a further $0.15 payable on 1 December 2012.
.
1 July 2012
Dr Cash
Cr Share capital
15 000 000
1 July 2012
Dr First call
Dr Second call
Cr Share capital
5 250 000
2 250 000
1 September 2012
Dr Cash
Cr First call
5 250 000
1 December 2012
Dr Cash
Cr Second call
2 250 000
15 000 000
7 500 000
5 250 000
Copyright  2010 McGraw-Hill Australia Pty Ltd
PPTs to accompany Deegan, Australian Financial Accounting 6e
2 250 000
14-12
Issue of shares other than for cash
• Where shares are to be issued for a consideration other
than cash, the fair value of the consideration for the issue
must be determined
• Fair value is defined in the accounting standards as ‘the
amount for which an asset can be exchanged between
knowledgeable, willing parties in an arm’s length
transaction’
.
Copyright  2010 McGraw-Hill Australia Pty Ltd
PPTs to accompany Deegan, Australian Financial Accounting 6e
14-13
Oversubscription of shares
•
•
When more shares are applied for than the number
to be issued—quite common
Two approaches to manage oversubscription:
1. Satisfy full demand of a certain number of subscribers
and refund the funds advanced by others
2. Issue shares to all subscribers on a pro rata basis
- Excess monies on application can either be refunded or
used to reduce further monies owing on allotment
•
.
Refer to Worked Example 14.5 (p. 445)—
Oversubscription for shares issued as partly paid
Copyright  2010 McGraw-Hill Australia Pty Ltd
PPTs to accompany Deegan, Australian Financial Accounting 6e
14-14
Worked Example 14.5—Oversubscription for
shares issued as partly paid
In July 2012, Mooloolaba Ltd calls for public subscriptions for 10
million shares.
The issue price per share is $1.20, to be paid in three parts, these
being $0.50 on application, $0.40 within one month of the shares
being allotted and $0.30 within two months of the first and final
call, with the call for final payment being payable on 1 September
2012.
By the end of July, when applications close, applications have
been received for 12 million shares; that is, two million in excess of
the amount to be allotted.
1–31 July 2012
Dr
Bank trust
Cr
Application
.
6 000 000
Copyright  2010 McGraw-Hill Australia Pty Ltd
PPTs to accompany Deegan, Australian Financial Accounting 6e
6 000 000
14-15
Worked Example 14.5—Oversubscription for shares
issued as partly paid (cont.)
We will assume that the excess funds are used to offset the amount due
on allotment ($0.40 per share), and that all subscribers will receive an
allotment of shares on a pro rata basis
1 August 2012
Dr
Application
5 000 000
Cr
Share capital
(to allot the shares as partly paid to $0.50)
.
Dr
Dr
Cr
Allotment
Call
Share capital
4 000 000
3 000 000
Dr
Cr
Application
Allotment
1 000 000
Dr
Cr
Cash at bank
Bank trust
6 000 000
5 000 000
7 000 000
1 000 000
Copyright  2010 McGraw-Hill Australia Pty Ltd
PPTs to accompany Deegan, Australian Financial Accounting 6e
6 000 000
14-16
Worked Example 14.5—Oversubscription for shares
issued as partly paid (cont.)
30 August 2012
Dr
Cash at bank
3 000 000
Cr
Allotment
3 000 000
(to recognise the receipt of amounts due on allotment)
It is assumed that all amounts due on allotment are paid.
1 September 2012
Dr
Cash at bank
Cr
Call
.
3 000 000
Copyright  2010 McGraw-Hill Australia Pty Ltd
PPTs to accompany Deegan, Australian Financial Accounting 6e
3 000 000
14-17
Accounting for dividends
• Once the final profit for the year has been calculated, which is
after the end of the financial year, the directors are in a position
to decide on the amount of final dividends to allocate to
shareholders
• Australian Accounting Standards prohibit the recognition of a
dividend at the end of the reporting period unless the dividend
has been declared prior to year end and the payment of the
dividend does not require further ratification by other parties,
such as by the shareholders at the annual general meeting
(which is typically held after the year end)
• The rationale behind this is that dividends declared after the
reporting period do not meet the definition of a present
obligation at the end of the reporting period because the entity
has the discretion rather than an unavoidable commitment at
the end of the reporting period to pay the dividends
.
Copyright  2010 McGraw-Hill Australia Pty Ltd
PPTs to accompany Deegan, Australian Financial Accounting 6e
14-18
Different classes of shares
• Ordinary shares
– Provide a claim against the entity that ranks behind
the claims of creditors and some preference
shareholders
– Confer voting rights on shareholders
– Entitle their owners to distribution of profits in the form
of dividends
– Entail, however, no guarantee of dividends
– If dividends not paid in one year, do not accrue the
right to dividends until dividends are paid
.
Copyright  2010 McGraw-Hill Australia Pty Ltd
PPTs to accompany Deegan, Australian Financial Accounting 6e
14-19
Different classes of shares (cont.)
• Preference shares
– Subject to preferential treatment, often with receipt of
dividends or order of ranking for asset distributions
– Some have voting rights
– Some have voting rights if dividends unpaid
– Others have no voting rights
– If participating, holders may, after receiving preference
dividend at fixed rate, participate with ordinary
shareholders in further profits distributed
.
Copyright  2010 McGraw-Hill Australia Pty Ltd
PPTs to accompany Deegan, Australian Financial Accounting 6e
14-20
Different classes of shares (cont.)
• Preference shares (cont.)
– If convertible, have a right of conversion to ordinary
shares
– If redeemable, have the ability to redeem shares for
cash at later date
– Some have the characteristics of equity and others
have the characteristics of debt
– Preference shares that are redeemable on a fixed
date or at the option of the shareholder, provide a
fixed rate of return, and provide no voting rights should
be disclosed as debt (AASB 132)
– If disclosed as debt then the ‘dividend’ payments will
be classified as treated as expenses (interest)
.
Copyright  2010 McGraw-Hill Australia Pty Ltd
PPTs to accompany Deegan, Australian Financial Accounting 6e
14-21
Redemption of preference shares
• Under section 254 (J) and (K) of the Corporations Act
shares are to be redeemed:
– out of profits that would otherwise be available for
dividends, or
– out of proceeds of a fresh issue of shares made for
the purposes of the redemption
• Refer to Worked Example 14.7 (p. 450)—Redemption of
preference shares
.
Copyright  2010 McGraw-Hill Australia Pty Ltd
PPTs to accompany Deegan, Australian Financial Accounting 6e
14-22
Redemption of preference shares (cont.)
• To recognise issue of preference shares
Debit
Cash at bank
Credit
Share capital—preference shares
• To eliminate preference shares and create ‘capital
redemption reserve’
Debit
Share capital—preference shares
Credit
Capital redemption reserve
.
Copyright  2010 McGraw-Hill Australia Pty Ltd
PPTs to accompany Deegan, Australian Financial Accounting 6e
14-23
Redemption of preference shares (cont.)
• To redeem shares out of profits
Debit
Retained earnings
Credit
Cash
• Further entry required pursuant to amendments to the
Corporations Law
Debit
Capital redemption reserve
Credit
Share capital
.
Copyright  2010 McGraw-Hill Australia Pty Ltd
PPTs to accompany Deegan, Australian Financial Accounting 6e
14-24
Forfeited shares
• Shares can be forfeited if:
– shares are issued as partly paid and shareholders do
not subsequently pay the amounts due on allotment or
on calls
– a shareholder ceases to be a member of the company
at that time
• Shareholders who have forfeited shares might be
entitled to a full or partial refund of monies paid
before forfeiture
.
Copyright  2010 McGraw-Hill Australia Pty Ltd
PPTs to accompany Deegan, Australian Financial Accounting 6e
14-25
Forfeited shares (cont.)
• Various outcomes
– If company is listed on the ASX or if company’s
operating rules allow it, a refund is paid to the investor
less costs incurred in reissuing shares
 Amounts paid are recorded in a forfeited shares
account (liability) until refunded
.
Copyright  2010 McGraw-Hill Australia Pty Ltd
PPTs to accompany Deegan, Australian Financial Accounting 6e
14-26
Forfeited shares (cont.)
• If company is not listed on the ASX and constitution
says nothing about refunds, company can retain the
amounts paid less costs of reissuing shares
- Amounts paid are held in a forfeited shares reserve
(part of shareholders’ funds)
• Refer to Worked Example 14.8 (p. 452)—Forfeiture
of shares
.
Copyright  2010 McGraw-Hill Australia Pty Ltd
PPTs to accompany Deegan, Australian Financial Accounting 6e
14-27
Forfeited shares (cont.)
To record the call
•
Debit
Call
Credit
Share capital
To record receipt of call monies
•
Debit
Cash at bank
Credit
Call
.
Copyright  2010 McGraw-Hill Australia Pty Ltd
PPTs to accompany Deegan, Australian Financial Accounting 6e
14-28
Forfeited shares (cont.)
To record forfeiture of shares
Debit
Share capital
Credit
Call
Credit
Forfeited shares account
To recognise amount received on sale of forfeited
shares
Debit
Cash at bank
Debit
Forfeited shares account
Credit
Share capital
.
Copyright  2010 McGraw-Hill Australia Pty Ltd
PPTs to accompany Deegan, Australian Financial Accounting 6e
14-29
Forfeited shares (cont.)
To recognise payment of costs relating to sale of
shares
Debit
Forfeited shares account
Credit
Cash at bank
To recognise return of remaining monies to original
shareholders
Debit
Forfeited shares account
Credit
Cash at bank
.
Copyright  2010 McGraw-Hill Australia Pty Ltd
PPTs to accompany Deegan, Australian Financial Accounting 6e
14-30
Share splits and bonus issues
• Share splits
– Subdivision of the company’s shares into shares of
smaller value
– Result in no change to owners’ equity
– Companies may undertake share splits because they
feel that lower priced shares will be more marketable
– No journal entries required
– Company must amend share register
.
Copyright  2010 McGraw-Hill Australia Pty Ltd
PPTs to accompany Deegan, Australian Financial Accounting 6e
14-31
Share splits and bonus issues (cont.)
• Bonus shares
– Existing shareholders receive additional shares, at no
cost, in proportion to their shareholding at the date of
the bonus issue
– Journal entry
Debit
Retained earnings
Credit
Share capital—ordinary shares
– Bonus shares from retained earnings often referred to
as a bonus share dividend
.
Copyright  2010 McGraw-Hill Australia Pty Ltd
PPTs to accompany Deegan, Australian Financial Accounting 6e
14-32
Rights issues and share options
• A rights issue provides existing shareholders with the right to
acquire additional shares typically at an ‘attractive’ price
• Some rights might be tradeable, some are not
See Worked Example 14.9 (p. 454)—A rights issue
• Share options give the holder the right to acquire shares in the
future at a particular price
• Typically sold by the entity, or provided to employees as part of
their salary
• If shares are issued to employees then they will be treated as
part of salaries expense (with a credit to share capital)
See Worked Example 14.10 (p. 456)—Share options provided to
employees
.
Copyright  2010 McGraw-Hill Australia Pty Ltd
PPTs to accompany Deegan, Australian Financial Accounting 6e
14-33
Required disclosures for share capital
AASB 101 requires disclosure of the following:
• For each class of share capital
– Number of shares authorised
– Number of shares issued and fully paid, and issued
but not fully paid
– Par value per share, or that shares have no par
value
– Reconciliation of number of shares outstanding at
beginning and end of period
– Rights, preferences and restrictions of the class
.
Copyright  2010 McGraw-Hill Australia Pty Ltd
PPTs to accompany Deegan, Australian Financial Accounting 6e
14-34
Required disclosures for share capital
(cont.)
• For each class of share capital (cont.)
– Shares reserved for issue under options and
contracts for sale of shares
– Shares in the entity held by the entity or by
subsidiaries or associates
• Description of nature and purpose of each reserve
within equity
.
Copyright  2010 McGraw-Hill Australia Pty Ltd
PPTs to accompany Deegan, Australian Financial Accounting 6e
14-35
Reserves
• Include:
– revaluation surplus
– general reserve—may be used as a means of
transferring profits out of retained profits for future
expansion plans
• Required to disclose (AASB 101):
– Reconciliation between carrying amount of each
reserve at the beginning and end of the period,
separately disclosing each change
.
Copyright  2010 McGraw-Hill Australia Pty Ltd
PPTs to accompany Deegan, Australian Financial Accounting 6e
14-36
Summary
• The lecture addresses various issues associated
with share capital and reserves
• Equity is the residual interest in the assets of an
entity after deduction of its liabilities
• When shares are issued to the public, funds must
be placed in trust prior to allotment of shares
• Preference shares should be disclosed as debt or
equity depending on the conditions of issue
• Forfeiture of shares, share splits and bonus issues
were also discussed
.
Copyright  2010 McGraw-Hill Australia Pty Ltd
PPTs to accompany Deegan, Australian Financial Accounting 6e
14-37