accounting - intangible assets, liabilities, and equity

SEMINAR FIVEAn accounting presentation presented by Group 4

Han Yue - Zhafir -Yang Yi – JonathanBU8101 S06

February 2015

1INTANGIBLE ASSETS

Rights, privileges, and competitive advantagesthat result from ownership of long-lived assetsthat do not possess physical substance

Identifiable

It is probable that future economic benefits attributable to assets will flow to the entity

Cost can be measurable

Properties of Intangible Assets

Limited Life Indefinite Life

Only

Impairment

Amortizationand

Impairment

Date Description Debit Credit

xxx Impairment Loss ( E+ ) (OE - ) xxx

Accumulated Impairment Loss ( A - ) xxx

Amortization

Impairment Loss

Date Description Debit Credit

xxx Amortization Expense ( E+ )( OE - ) xxx

Accumulated Amortization Expense ( A - ) xxx

Accounts for Intangible Assets

2

DEBT VS EQUITYDifferent types of financing

Debt Financing Equity Financing

Payable (Notes or Trade)

Bank Loan

Bonds

Shares Issuance

Retained Earnings

Debt Financing Equity Financing

Risk of Default Risk of Dillution

No legal obligationOn Dividend Payment

Legal obligation toPay Interest and repayPrincipal when due

3

LIABILITIESare legal obligations

Recognized when Incurred

Failure to record meansUnderstatement of Assets / Expenses

Valued at amount due

Properties of Liabilities

Current Non-Current

ONE YEAR OR LESS MORE THAN ONE YEAR

Examples of Current Liabilities

AccountsPayable

AcrruedLiabilities

NotesPayable

Portion ofLT Debt

GSTPayable

UnearnedRevenue

NotesPayable

Date Description Debit Credit

xxx Cash( E+ )( OE - ) xxx

Notes Payable ( A - ) xxx

Accounts for Current Liabilities

Date Description Debit Credit

xxx Interest Expense ( E+ )( OE - ) xxx

Interest Payable ( L+ ) xxx

Date Description Debit Credit

xxx Cash ( A+ ) xxx

GST Payable ( L+ ) xxx

Sales Revenue (R+)(OE+) xxx

InterestPayable

GST / TaxPayable

Warranty (Estimated Liability)

Warranty is seller obligation to replace product, recorded when revenue from sale is reported

Liabilities exist

Uncertain to dollar amount

Reasonable estimate of dollar amount is available

Accounts for Warranty Expenses

Date Description Debit Credit

xxx Warranty Expenses ( E+ )(OE -) xxx

Provision for Warranty Expenses ( L+ ) xxx

Date Description Debit Credit

xxx Provision for Warranty Expenses (L -) xxx

Inventory ( A -) xxx

Accrued of Warranty Expenses

Replacing Defective Parts

Accounts for Long Term Liability

Date Description Debit Credit

Jan 1 Cash (A +) 1,500,000

Bonds Payable(L +) 1,500,000

Jul 1 Interest Expenses (E +) (OE -) 90,000

Cash(A -) 90,000

Long term debt are usually coming from bonds. Which has fixed maturity date, face value, and interest semi-annually

Some liability that soon-to-mature may be refinanced, thus it will be classified as long-term liability.

BondPayableSemiAnnual

4CORPORATION

Corporation is a legal entity. It may entercontracts and it may sue as be sued as if it werea person. The type of Ownerships can bePrivately or Closely Held and Publicly Held.

Advantages of Corporation

LIMITED LIABILITY

TRANSFERABILITY

PROFESSIONAL MANAGEMENT

CONTINUITY OF EXISTENCE

stockholders are not personally liable for the debts of a corporation

Ownership of a corporation is evidenced by transferable shares of stocks, which may be sold by one investor to another.

Stockholders own the company but do not manage it on a daily basis.

Disadvantages of Corporation

TaxationCorporate income tax + Personal income tax

RegulationMore regulated than unincorporated business

Cost of formation Forming a corporation normally requires the services of an attorney

Separation of ownership and management

5EQUITY

There are two things that can generate equity. Share Capital and Retained Earnings

AUTHORIZED SHARES

ISSUED SHARES

NO-PAR STOCKIssue stocks without designating a par or stated value. The entire issue price is credited to the Capital Stock

account, viewed as legal capital not subject to withdrawal

ISSUED SHARES UNISSUED SHARES

OUTSTANDING SHARES TREASURY SHARES

Preference Shares

Priority in Dividend Distribution and Asset Liquidation

Cumulative Dividend Right and Convertible to Ordinary Shares

Usually Callable by the Company

No Voting Rights

Cumulative VS Noncumulative

CUMULATIVEDividends in arrears must be paid before dividends may be paid on ordinary shares.

NONCUMULATIVEUndeclared dividends from current and prior years do not have to be paid in future.

6TREASURY SHARES

They are Issued shares, reacquired by the company for various reasons

Reason for Reacquire

Make more shares available for employee purchase plans

Increase earnings per share

To avoid takeover by external parties

Return cash to shareholdersReduce cash needed to pay future dividends

Recording Treasury SharesDate Description Debit Credit

xxx Treasury Shares ( OE- ) 144,000

Cash (A- ) 144,000

Purchased 1,600 shares at $90 per share

ISSUING SHARES

PURCHASINGTREASURY

A = L + OE

A = L + OE

7MARKET VALUE VS BOOK VALUE

Difference and Significance from both of them

Market Value

Daily Fluctuations of share prices on the stock market do not affect the accounting records of the issuer company

Issuer Investor

Share is always at the original issue price Share is carried at the market value

Book Value per Share

Refers to the value per share if a company is liquidated at balance sheets amounts

𝐵𝑃𝑆 =𝑇𝑜𝑡𝑎𝑙 𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 𝐸𝑞𝑢𝑖𝑡𝑦

𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑂𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑆ℎ𝑎𝑟𝑒𝑠 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔

Preference shares and preferred dividends in arrears are not included in total shareholders’ equity

Market Value to Book Value

Market Value is the price at which the share is currently trading at on the stock market

𝑀𝑎𝑟𝑘𝑒𝑡 𝑡𝑜 𝐵𝑜𝑜𝑘 𝑅𝑎𝑡𝑖𝑜 =𝑀𝑎𝑟𝑘𝑒𝑡 𝑃𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒

𝐵𝑜𝑜𝑘 𝑉𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑆ℎ𝑎𝑟𝑒

It is a measure of how much a company is worth to investors and the worth of every dollar invested

1

TUTORIAL QUESTION

“A note payable to its bank is due in 60 days. Arrangements have been made to renew this note for an additional 18 months.”

AStatement :

Income Statement Balance Sheet

E ANIR CL LTL OE

A change occurred within liability. There is a change from current liablility into Long term Liability.No effect to other items.

“Interest expense that will result from existing liabilities over the next 12 months amounted to $12,000. ”

BStatement :

Income Statement Balance Sheet

E ANIR CL LTL OE

This information is not relevant.It is a future expense and future liability.

No effect at all

“Made a year–end adjusting entry to accrue interest on a note payable”

CStatement :

Accountant need to make adjustment to the financial statement in terms of accruing interest from existing liabilities.

Income Statement Balance Sheet

E ANIR CL LTL OE

Since this interest is payable within 1 year, it is classified as a current liability.

Date Description Debit Credit

xxx Interest Expenses ( E+ )(OE -) xxx

Interest Payable( L+ ) xxx

“A liability classified for several years as long-term becomes due within the next 12 months”

DStatement :

Income Statement Balance Sheet

E ANIR CL LTL OE

A change occurred within liability. There is a change from Long Term liablility into Current Liability.No effect to other items.

“Earned an amount previously recorded as unearned revenue” EStatement :

Date Description Debit Credit

xxx Unearned Revenue (L -) xxx

Revenue( R+ )(OE +) xxx

Income Statement Balance Sheet

E ANIR CL LTL OE

Unearned revenue usually classified as current liabilities

“Recorded an estimated liability for warranty claims” FStatement :

Income Statement Balance Sheet

E ANIR CL LTL OE

Means : Record Provision for Warranty Expenses

Date Description Debit Credit

xxx Warranty Expenses ( E+ )(OE -) xxx

Provision for Warranty Expenses ( L+ ) xxx

Traditionally, Provision of warranty classified as Current Liabilities

“Entered a two year commitment to buy all hard drives from a

particular supplier at a price 10 percent below market”

GStatement :

Income Statement Balance Sheet

This transaction is considered as commitment. There are no obligation to pay until transaction is happened, thus this is not liability.

No effect at all, except must be disclosed in notes

E ANIR CL LTL OE

“Received notice that a lawsuit has been filed against the company for $8 million. The amount of the company’s liability,

if any, cannot be reasonably estimated at this time.”

HStatement :

Income Statement Balance Sheet

Since the amount owed is nonestimable and the result of lawsuit is still uncertain, This is not recorded as liability

E ANIR CL LTL OE

No effect at all, except must be disclosed in notes

“The Company’s president is in poor health and has previously

suffered two heart attacks”

IStatement :

Income Statement Balance Sheet

There are no statement that the company is obliged to pay for any expenses. If any, it would be future expensesAccounting did not take president as an asset.

E ANIR CL LTL OE

No Effect at All

“Received cash deposits from customers for goods and

services to be delivered over the next nine months”

JStatement :

Income Statement Balance Sheet

E ANIR CL LTL OE

Date Description Debit Credit

xxx Cash( A+) xxx

Unearned Revenue( L+ ) xxx

Means : Received cash, for services that hasn’t been done yet

Since the due date is less than one year, it is considered as Current Liabilities. There are no changes in income statement, unless the services has been done

2ANNUAL GENERAL

MEETING

2Description Amount in $’000s

Preference Shares – 5% cumulative

1,000,000 shares issued and outstanding 100,000

Ordinary shares

100,000,000 shares issued and outstanding 150,000

Retained Earnings 681,000

Total Shareholders’ equity 931,000

BH’s ordinary shares were traded on the stockexchange at $$33.50 per share on 31 December 2014.The total ordinary shares value should be $3,000million, but the amount reflected in the financialstatements as at 31 December 2014 is only$150,000,000. How could that be?

“

- Shareholder A

A

$33.50 the market value per share, while what was stated on the financial statement is the original issue price.

AMarket value per share is the price at which the share is currently trading

What does the term ‘cumulative’ in relation to thepreference shares mean?“

- Shareholder B

B

Cumulative means If all or any part of the regular dividend on the preferred stock is omitted in a given year, the amount omitted is said to be in arrears and must be paid in a subsequent year before any dividend can be paid on common stock.

B

2009 2010 2011

If stock is noncumulative

Dividend paid $80,000 $20,000 -

Dividend in arrears Not applicable

If stock is noncumulative

Dividend paid $80,000 $20,000 -

Dividend in arrears - $60,000 $140,000

The Board of directors proposed a cash dividend of 20cents per share to ordinary shareholders for thecurrent year to be approved during this AGM. It did notpay dividends during the last 2 financial years topreference shareholders. How much dividends wouldbe payable to preference shareholders and to ordinaryshareholders?

“

- Shareholder C

C

Payment for Preferred Shares C

Preferred Shares Payment = $15,000,000

DividendRate

Years Accumulated Dividends

X XAmounts of

Shares Issued

Preferred Shares Payment = $100,000,000 x 5% x (2+1)

Payment for Ordinary Shares C

Ordinary Shares Payment = $20,000,000

DividendPer Share

XNumber of

Shares Issued

Ordinary Shares Payment = 100,000,000 x $0.2

Why were the outstanding dividends to preferenceshareholders not accrued as liabilities in the financialstatements?

“

- Shareholder D

D

Dividends in the arrears are not included among the liabilities of a corporation because no liability exists until a dividend is declared by the board of directors.

The amount of any dividends in arrears on preferred stock is an important factor to investors, however, and should be always disclosed by a note on balance sheet

D

Note 6: Dividend in arrears.As of December 31,2011, dividends on the $8 cumulative preferred stock were in arrears to the extent of $14 per share and amounted in total to $140,000

You mentioned just now that the ordinary shares weretraded at about 4 times book value per share at 31December 2014. Could you please show us how didyou derive the number?

“

- Shareholder C

E

E𝐵𝑃𝑆 =𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟′𝑠 𝐸𝑞𝑢𝑖𝑡𝑦

𝑇𝑜𝑡𝑎𝑙 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑆ℎ𝑎𝑟𝑒

𝐵𝑃𝑆 =𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦 − 𝑃𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟′𝑠 𝐸𝑞𝑢𝑖𝑡𝑦 − 𝑃𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑

𝑇𝑜𝑡𝑎𝑙 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑆ℎ𝑎𝑟𝑒

𝐵𝑃𝑆 =$931,000,000 − $100,000,000 − $15,000,000

100,000,000

𝐵𝑃𝑆 = $8,16

𝑀𝑎𝑟𝑘𝑒𝑡 𝑉𝑎𝑙𝑢𝑒𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 = $33.50 ≅ 4 𝑋 𝐵𝑃𝑆

BH is currently in the process of raising funds byissuing another $10,000,000 preference shares tofinance the purchase of a hotel. What is the company’srationale for choosing preference shares over long-term debt?

“

- Shareholder A

F

Debt Financing• Increases Assets available at the expense of increased liabilities• BH is contractually obligated to pay off the loan• If BH defaults on payments, the company may be forced into

bankruptcy

Equity Financing• Increases Assets available at the expense of owners equity by issuing

shares• Company usually pays a fixed dividend to preferential shareholders.• Can suspend dividend pay out.

FThis question compares between debit financing and equity financing

Is book value per share the amount ordinaryshareholders should expect to receive if BH were tocease operations and liquidate? Could you enlighten me?

“

- Shareholder C

G

Book value per share indicates the value per share if a company is liquidated at balance sheet amounts.

It is also the theoretical value per share an ordinary shareholder should receive if the company is liquidated.

However, in the event the company were to be liquidated, ordinary shareholders will have the lowest priority in terms of debt repayment.

G

I would like to ask a question relating to the assetssection of the balance sheet at 31 December 2014. Thereis an amount of $500,000 Goodwill under the assetssection. What is Goodwill? How did it arise? Do wedepreciate Goodwill just like plant assets?

“

- Shareholder D

H

Goodwill is the worth of intangible asset such as rights, privileges, and competitive advantages that do not possess any physical substance..

H

Intangible Asset Properties

Identifiable AttributableTo Future Benefits

Cost can beMeasured Reliably

Goodwill occurs only when one company buys another company, and only purchased goodwill is an intangible asset.

H

Since goodwill has an indefinite lifespan, it is tested annually for possible impairment and write down.There are no depreciation in goodwill

Good CustomerRelation

SuperiorManagement

Other Factors thatResulted in Earnings

END

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