Since the switch from GAAP to IFRS in 2006, there has not been an
abundance of academic research performed in the field of Share Capital.
As
share capital is a significant source of investment, firms need to generate
capital to develop and grow.
This lack of academic research certainly does
not imply lack of debate or discussion surrounding share capita
In 2006 Canada made the change from GAAP (Generally Accepted
Accounting Principles) to IFRS (International Financial Reporting
Systems).
The main reasoning behind this change was the U.S. GAAP was too
rule bound, detailed, expensive, and inappropriate for the smaller Canadian
marketplace.
This change in the equity portion of the balance sheet
involved both changes in vocabulary and processes.
The following represents
the vocabulary changes from GAAP to IFRS.
GAAP
Common Stock
Retained earnings/Reinvested earnings
Accumulated other comprehensive income
Pain-in Capital in excess of
par/Additional paid in capital
IFRS
Share Capital
Retained earnings/Retained profits
General reserve & other reserve
accounts
Share Premiums
The main equity difference from GAAP to IFRS is the calculation of treasury
stocks. A treasury stock is when a corporation buys back its outstanding
common stock.
Under IFRS, treasury stock is shown as a deduction from
shareholder’s equity at the cost.
If these stocks are resold, the profit or
loss is shown as a change in equity.
This method of calculating treasury
stock is different from GAAP, which effects the calculation of diluted
earnings per share, as treasury stock is needed in that calculation.
GAAP
used year-to-date weighted average in the calculation of diluted EPS based on
each quarterly EPS calculation and the average market prices.
As share
values may rise or fall considerably during the year, this method may leave
firms with, what could be, a misleading EPS based on only quarterly
performance.
“IFRS, however, calculated incremental shares using weighted
average at the end of the year, rather than on a quarterly basis.
Thus
different average stock prices are used to determine the dilutive effect of
convertible financial instruments.” (Fay 50)
This change in Earnings per Share may change a potential investor’s
opinion on how profitable a company is if they are not familiar with the
differences in the two methods.
Overall this change will help with the
fluctuation of diluted EPS in companies, as it is calculated at the end of
the year rather than on a quarterly basis.