Chapter 14
Share capital and
reserves
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
14-1
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
• Be able to provide the journal entries necessary
when preference shares are to be redeemed
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
14-2
Learning 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  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
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  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
14-4
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
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
14-5
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 earnings (or accumulated losses)
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
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  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
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
• 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
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
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  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
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 and 14.2 (pp. 484
and 485)
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
14-10
Oversubscription of shares
•
•
When more shares are applied for than the
number to be issued – quite common
Two approaches to manage oversubscription
include
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 14.3 (p. 485)
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
14-11
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
Application
Credit
Share capital
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
14-12
Oversubscription of shares (cont.)
• To recognise amount due on allotment
Debit
Allotment
Credit
Share capital
• To offset excess amounts paid on application
against amount due on allotment
Debit
Credit
Application
Allotment
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
14-13
Oversubscription of shares (cont.)
• To transfer funds to operating bank account
Debit
Cash at bank
Credit
Bank trust
• To recognise receipt of amounts due on allotment
Debit
Credit
Cash at bank
Allotment
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
14-14
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
Cash at bank
Credit
Call
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
14-15
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
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
14-16
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
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
14-17
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
– 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  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
14-18
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 14.4 (p. 490)
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
14-19
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  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
14-20
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  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
14-21
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
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
14-22
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
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
14-23
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 14.5 (p. 492)
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
14-24
Forfeited shares (cont.)
To record the call
•
Debit
Call
Credit
Share capital
To record receipt of call monies
•
Debit
Cash at bank
Credit
Call
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
14-25
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  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
14-26
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  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
14-27
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
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
14-28
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 profits often referred to as a
bonus share dividend
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
14-29
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 14.6 (p. 496)
• Share options give the holder the right to acquire
shares in the future at a particular price
• Are typically sold by the entity, or provided to
employees as part of their salary
See Worked Example 14.7 (p. 497)
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
14-30
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  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
14-31
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
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
14-32
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  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
14-33
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  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
14-34