Chapter 13
Share capital and reserves
Copyright  2005 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 4e by Craig Deegan
13–1
Learning objectives
• Understand that the owners’ equity of an
organisation can consist of several different
accounts
• Understand that within owners’ 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
Continues/ …
Copyright  2005 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 4e by Craig Deegan
13–2
Learning objectives (cont.)
• Be able to provide the journal entries necessary
when preference shares are to be redeemed
• Be able to provide the necessary journal entries
when shares are forfeited by their owners
• 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  2005 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 4e by Craig Deegan
13–3
Status of newly converged accounting
standards
• AASB 101 ‘Presentation of Financial Statements’
replaces:
AASB 1001 ‘Accounting Policies’
– AASB 1018 ‘Statement of Financial Performance’
– AASB 1034 ‘Financial Report Presentation and
Disclosures’
– AASB 1040 ‘Statement of Financial Position’
–
• AASB 132 ‘Financial Instruments: Presentation
and Disclosure’ replaces:
–
AASB 1033 ‘Presentation and Disclosure of Financial
Instruments’
Continues/ …
Copyright  2005 McGraw-Hill Australia Pty Ltd
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13–4
Status of newly converged accounting
standards (cont.)
• The AASB’s ‘Framework for the Preparation and
Presentation of Financial Statements’ replaces:
–
Statement of Accounting Concept No. 3 and No. 4
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13–5
Owners’ equity as a residual claim on net
assets
• Owners’ 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
Continues/ …
Copyright  2005 McGraw-Hill Australia Pty Ltd
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13–6
Owners’ 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 reserve, general reserve,
forfeited share reserve)
– retained profits (or accumulated losses)
Copyright  2005 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 4e by Craig Deegan
13–7
Accounting for the issue of share capital
• Share capital
–
Balance of owners’ equity within a company comprising
the capital contributions made by owners
• Par value
–
The face value of a security
• Share premium
–
The difference between the issue price of a share and
its par value
• 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
Continues/ …
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13–8
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
Continues/ …
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PPTs t/a Australian Financial Accounting 4e by Craig Deegan
13–9
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 13.1 and 13.2
Copyright  2005 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 4e by Craig Deegan
13–10
Oversubscription of shares
•
•
When more shares are applied for than the
number to be issued, e.g. Telstra and
Commonwealth Bank
Two approaches to manage oversubscription
include:
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
1.
▪
•
excess monies on application can either be refunded or
used to reduce further monies owing on allotment
Refer to Worked Example 13.3
Continues/ …
Copyright  2005 McGraw-Hill Australia Pty Ltd
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13–11
Oversubscription of shares (cont.)
• Accounting for oversubscription of shares
partly paid:
–
Recognise aggregate applications for shares:
Debit
Credit
Bank trust
Application
• To allot shares as partly paid:
Debit
Credit
Application
Share capital
Continues/ …
Copyright  2005 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 4e by Craig Deegan
13–12
Oversubscription of shares (cont.)
• To recognise amount due on allotment:
Debit
Credit
Allotment
Share capital
• To offset excess amounts paid on application
against amount due on allotment:
Debit
Credit
Application
Allotment
Continues/ …
Copyright  2005 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 4e by Craig Deegan
13–13
Oversubscription of shares (cont.)
• To transfer funds to operating bank account:
Debit
Credit
Cash at bank
Bank trust
• To recognise receipt of amounts due on
allotment:
Debit
Credit
Cash at bank
Allotment
Continues/ …
Copyright  2005 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 4e by Craig Deegan
13–14
Oversubscription of shares (cont.)
• Accounting for call made on shares
subsequent to allotment:
• To record call:
Debit
Credit
Call
Share capital
• To record receipt of amounts due on call:
Debit
Credit
Cash at bank
Call
Copyright  2005 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 4e by Craig Deegan
13–15
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
Continues/ …
Copyright  2005 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 4e by Craig Deegan
13–16
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
Continues/ …
Copyright  2005 McGraw-Hill Australia Pty Ltd
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13–17
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
Copyright  2005 McGraw-Hill Australia Pty Ltd
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13–18
Redemption of preference shares
• Under sections 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 13.4
Continues/ …
Copyright  2005 McGraw-Hill Australia Pty Ltd
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13–19
Redemption of preference shares (cont.)
•
To recognise issue of preference shares:
Debit
Credit
Cash at bank
Share capital—preference
shares
• To eliminate preference shares and create ‘capital
redemption reserve’:
Debit
Credit
Share capital—preference
shares
Capital redemption
reserve
Continues/ …
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13–20
Redemption of preference shares (cont.)
• To redeem shares out of profits:
Debit
Credit
Retained profits
Cash
• Further entry required pursuant to amendments
to the Corporations Law:
Debit
Credit
Capital redemption reserve
Share capital
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13–21
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
Continues/ …
Copyright  2005 McGraw-Hill Australia Pty Ltd
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13–22
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
Continues/ …
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13–23
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 13.5
Continues/ …
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13–24
Forfeited shares (cont.)
• To record the call:
•
Debit
Call
Credit
Share capital
• To record receipt of call monies:
•
Debit
Cash at bank
Credit
Call
Continues/ …
Copyright  2005 McGraw-Hill Australia Pty Ltd
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13–25
Forfeited shares (cont.)
• To record forfeiture of shares:
Debit
Credit
Credit
Share capital
Call
Forfeited shares account
• To recognise amount received on sale of forfeited
shares:
Debit
Debit
Credit
Cash at bank
Forfeited shares account
Share capital
Continues/ …
Copyright  2005 McGraw-Hill Australia Pty Ltd
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13–26
Forfeited shares (cont.)
• To recognise payment of costs relating to sale of
shares:
Debit
Credit
Forfeited shares account
Cash at bank
• To recognise return of remaining monies to
original shareholders:
Debit
Forfeited shares account
Credit
Cash at bank
Copyright  2005 McGraw-Hill Australia Pty Ltd
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13–27
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
Continues/ …
Copyright  2005 McGraw-Hill Australia Pty Ltd
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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 profits
Credit
Share capital—ordinary shares
– Bonus shares from retained profits often referred to as
a bonus share dividend
Copyright  2005 McGraw-Hill Australia Pty Ltd
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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
Continues/ …
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Required disclosures for 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
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Reserves
• Include:
–
revaluation reserve
– 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  2005 McGraw-Hill Australia Pty Ltd
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Summary
• The chapter addresses various issues associated
•
•
•
•
with share capital and reserves
Owners’ 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  2005 McGraw-Hill Australia Pty Ltd
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13–33
Summary of main changes to accounting
standards
• A number of new accounting standards have
superseded former ones
• But only minor changes to requirements have
resulted:
–
AASB 139 ‘Financial Instruments: Recognition and
Measurement’ imposes new requirements for
measurement of equity and liability component of
preference shares
Copyright  2005 McGraw-Hill Australia Pty Ltd
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13–34