Chapter 13
Share capital and
reserves
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PPTs to accompany Deegan, Australian Financial Accounting 7e
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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
• Know what a preference share is and be able to identify
factors that would determine whether they should be
disclosed as debt or equity
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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
• 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
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PPTs to accompany Deegan, Australian Financial Accounting 7e
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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 Conceptual Framework
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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 Conceptual Framework defines equity as:
– the residual interest in the assets of the entity after
deducting all of its liabilities
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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)
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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
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Retained earnings (cont.)
Exhibit 13.1 Components of BHP Billiton’s equity as at 30 June 2011
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Accounting for the issue of share
capital
• Share capital
– Balance of owners’ equity within a company comprising the
capital contributions made by owners
• When shares are issued then the amount received
from the issue is added to ‘share capital’
Refer to Worked Examples 13.1—Determination of share capital
and 13.2—Public issue of shares (pp. 439–40)
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Partly paid shares
• A company might issue shares on an instalment basis
• Where shares are partly paid
• When no future date has been specified for calling up the
unpaid portion
• Where shares have been issued on an instalment basis
Refer to Worked Examples 13.3, p. 441—Issue of partly paid
shares
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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 price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants at the measurement date’
Refer to Worked Example 13.4, p. 44— Issue of shares other than
for cash
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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 13.5, p. 442—Oversubscription for
shares issued as partly paid
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Share issue costs
• Costs involved with the issue of equity
instruments
–
–
–
–
Legal
Promotional
Accounting
Underwriting and brokerage
• Indirect costs during a share issue
– Management time
– Research
– Feasibility studies
Refer to Worked Example 13.6, p. 444— Accounting for share
issue costs
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Accounting for dividends
• Directors decision on the amount of final dividends
allocation
• Recognition of a dividend at the end of the reporting
period as prescribed by the Australian Accounting
Standards
• Rationale for dividend recognition
• Types of dividends
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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
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Different classes of shares (cont.)
• Preference shares
– Subject to preferential treatment
– Voting rights
– Participating preference shares
– Convertible preference shares
– Redeemable preference shares
– Equity versus debt characteristics
– If disclosed as debt then the ‘dividend’ payments will be
classified as treated as expenses (interest)
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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 13.7, p. 447—Redemption of preference
shares
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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
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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
– 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
Refer to Worked Example 13.8, p. 449—Forfeiture of shares
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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
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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
– Bonus shares from retained earnings often referred to
as a bonus share dividend
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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
Refer to Worked Example 13.9, p. 451—A rights issue
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Rights issues and share options
(cont.)
• 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 13.10, p. 452—Share options provided to
employees
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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
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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
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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
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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
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