slide 12.1 pauline weetman, financial and management accounting, 5 th edition © pearson education...
TRANSCRIPT
Slide 12.1
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Chapter 12
Ownership interest
Slide 12.2
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Non-current (fixed) assets
plus
Current assets
minus
Current liabilities
minus
Liabilities due after one year
equals
Ownership Interest[Share capital plusReserves of past profits]
Structure of a statement offinancial position
Slide 12.3
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Statement of financial position of Safe and Sure plc
370.4464.3Equity holders’ funds
340.8431.615Retained earnings
4.64.614Revaluation reserve
5.58.513Share premium accountReserves
19.519.612Called-up share capitalCapital and
£m£m
Year 6Year 7Notes
Slide 12.4
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Issue of shares at the date of incorporation
When company first comes into existence:
• it issues shares to the owners,
• who become shareholders.
• Each share has a named value
• which is called its nominal value (par value)
Slide 12.5
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Certificate number 24516
Public Company plcSHARE CERTIFICATE
This is to certify that
J A Smith
is the registered owner of 100,000 ordinary shares of 25 pence each,
Signed P McDowall
Company Secretary
Given under Seal of the Company the 15th day of August 1985
J JonesW BrownDirectors
Share certificate
Slide 12.6
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
J A Smith has paid £25,000 to the company. That is the limit of this person's liability if the
company fails.The company issues 100,000 shares to J A
Smith at a price of 25 pence each. The shares represent the ownership interest in the company.
Assets – Liabilities = Ownership interest
Increase in cash
£25,000
Increase in nominal valueof shares£25,000
Share certificate (Continued)
Slide 12.7
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Some time later…
• Company has traded profitably: Company wishes to raise as much funds as possible.
• Will issue shares at their market value.
• Nominal value remains the same, the market value may be quite different.
• Nominal value 25 pence but the shares are selling in the market at 80 pence each.
Slide 12.8
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Share premium
• Share Premium = Amount per share above nominal value = (80p – 25p) = 55p per share.
• Company issues 200,000 new shares. It will collect (200,000 shares x 80p) = £160,000 in cash.
Total share premium 55 pence per share × 200,000 shares = £110,000Total nominal value 25 pence per share × 200,000 shares = £50,000
Slide 12.9
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Share premium (Continued)
Increase in nominal valueof shares £50,000
and increase in sharepremium £110,000
Increase in cash £160,000
Assets – Liabilities = Ownership interest
Slide 12.10
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Revaluation
Hotel cost is £560,000. The hotel is run successfully for a period of three years and at the end of that period a professional valuer confirms that the hotel, if sold, would probably result in sale proceeds of £620,000.
The directors of the company may wish to tell shareholders about this increased market value of the company's (fixed) asset.
Slide 12.11
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Revaluation – choices
1. Keep the reported value at £560,000 (the historical cost) but include a note to the statement of financial position explaining that the market value is £620,000.
2. Alternative treatment is to RECOGNISE in financial statements the increase in value. But not a realised profit.
Slide 12.12
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Recognise increase in value – not ‘realised’
Increase in revaluation reserve as part of the ownership interest
£60,000
Increase in value of non-current (fixed) asset
£60,000
Assets – Liabilities = Ownership Interest
Slide 12.13
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Foreign currency gains & losses
Gains or losses resulting from changes in the rates of exchange with regard to assets held and liabilities owed and denominated in a different currency.
• Loans $6m when rate of exchange is £1 = $2Liability expressed in £ = (6 × 1/2) = £3m
• Rate of exchange changes to £1 = $3 Liability expressed in £ = (6 × 1/3) = £2m
Slide 12.14
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Foreign currency (Continued)
• Assets – Liabilities↓ = Ownership interest↑ Gain of £1m but not a realised gain
Slide 12.15
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Example
• A company, Office Owner Ltd, is formed on 1 January Year 1 by the issue of 4m ordinary shares of 25 pence nominal value each.
• The cash raised from the issue is used on 2 January to buy an office block which is rented to a customer for an annual rent of £50,000. The tenant carries all costs of repairs.
• The company's administration costs for the year are £10,000.
• At the end of the year the office block is valued by an expert at £1,015,000.
• On the last day of the year the company issues a further 2m ordinary shares at a price of 40 pence each, to raise cash for expansion plans in Year 2.
Slide 12.16
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Date Transaction or event Effect on Effect on
Year 1 Assets Ownership interest
Jan. 1 Issue of shares at nominal value
Increase asset of cash Increase share capital at nominal value
Jan. 2 Purchase of office block
Increase asset property.Decrease asset of cash
No impact
Jan.–Dec.
Rent received Increase asset of cash Revenue of the period
Jan. –Dec.
Administration costs Decrease asset of cash Expense of the period
Dec. 31 Revaluation of asset Increase asset of property
Increase ownership interest by revaluation
Dec. 31 Issue of further shares Increase asset of cash Increase share capital at nominal value and increase share premium
Analysis of transactions for Year 1
Table 12.1 Office Owner Ltd – analysis of transactions for Year 1
Increase asset of cash
Slide 12.17
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Date Transaction Cash Office SC S,Prem Ret. Rev
Year 1 £000’s £000’s £000’s £000’s £000’s £000’s
Jan 1 Issue of shares 1,000 1,000
Jan 2 Purchase of office block
(1,000) 1,000
Jan-Dec
Rent received 50 50
Jan –Dec
Administration costs
(10) (10)
Dec 31 Revaluation of asset
15 15
Dec 31 Issue of further shares
800 500 300
840 1,015 1,500 300 40 15
1,855 1,855
Analysis of transactions for Year 1 (Continued)
Table 12.2 Office Owner Ltd – spreadsheet of transactions for Year 1
Slide 12.18
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Office Owner Ltd £000’s
Fixed asset: Office block 1,015
Current asset: Cash 840
Net assets 1,855
Share capital 1,500
Share premium 300 Reserves
Revaluation reserve 15
Retained earnings 40
1,855
Balance sheet at end of year Year 1
Slide 12.19
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Additional primary financial statements
(A) IASB standards: Statement of changesin equity.
(B) UK ASB standards: Statement of total recognised gains and losses (STRGL).
Slide 12.20
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Statement of changes in equity
Must report
(a) Profit or loss for the period
(b) Items of income and expense for the period required to be reported directly through equity
(c) Effects of changes in accounting policies and correction of errors.
A statement reporting (a) + (b) + (c) also called a statement of comprehensive income.
Slide 12.21
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Statement of changes in equity (Continued)
Must also report
(d) Transactions with equity holders (e.g. dividend).
(e) Retained earnings at start and end of period.
(f) Explanation of changes in each class of equity.
A statement showing (a) to (f) is called a statement of changes in equity.
Slide 12.22
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
UK Statement of total recognised gains and losses (STRGL)
• Statement that helps to bridge the gap between income statement (profit and loss account) and balance sheet.
• STRGL shows the extent to which shareholders’ funds have increased or decreased from the various gains and losses of the period.
• Income statement (profit and loss account) only reports realised profits (the results of transactions with third parties.)
Slide 12.23
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
STRGL (Continued)
Income statement (profit and loss account) only reports realised profits (the results of transactions with third parties.)
Add to this unrealised gains and losses, e.g.
• Revaluations of fixed assets.
• Effect of exchange rates on foreign currency translation.
Slide 12.24
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
UK movements in shareholders’ funds
Shows all changes in shareholders’ funds. Could include:
• Issue of new shares.
• Repurchase and cancellation of shares.
• Profit of the period.
• Dividends of the period.
• Effect of exchange rates on foreign currency translation.
• Revaluations of fixed assets.
Slide 12.25
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Dividends
Reward to the owner (usually cash)Questions:1. Does the company have sufficient cash to pay
a dividend?2. Has the company made sufficient profits (increase in ownership interest) to justify a dividend?The decision is taken by the Directors.It is approved by shareholders at Annual General Meeting.
Slide 12.26
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Dividends paid
Might be:
• Dividend proposed for previous year, now paid.
• Interim dividend as part of dividend for current year,
A ↓ – L = OI ↓
Decrease in asset of cash,
Decrease in ownership interest reported in income statement (profit and loss account).
Slide 12.27
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Final dividend
• At end of accounting year, after profits have been calculated, directors decide whether to pay a final dividend and, if so, how much.
• This is not a liability because it has not been approved by shareholders. It is a proposal from directors.
• The proposal to pay the dividend is reported as an item in the directors’ report.
Slide 12.28
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Issue of further shares (1)
Capitalisation issue (Bonus issue or Scrip issue)
A company decides to increase the number of shares with no change to assets or liabilities.
Slide 12.29
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Capitalisation issue
• Share price tends to outperform the market after the announcement of a capitalisation issue.
• There tends to be an acceptable range of prices for listed shares. £20 per share maximum. Increase number of shares, to scale down the price per share.
• Capitalisation issue is often made out of reserves (of retained profits). Message given to shareholders that these are now part of the long-term funds of the company. No longer available to cover the payment of dividends.
Slide 12.30
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Issue of further shares (2)
Rights issueWhen a public (quoted) company raises finance by the issue of shares, this is normally done by way of a ‘rights issue’. This gives existing shareholders the choice of subscribing for new shares in the company and so maintain their proportional shareholding in the company.The issue price is set at below the current market price of the shares.
Slide 12.31
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Capitalisation issue
Assume that Office Owners Ltd wishes to make a 1 for 5 capitalisation issue.
Share capital is 6 million 25 p shares Nominal value £1.5 million
New shares:
6,000,000/5 = 1,200,000
Nominal value:
1,200,000 × 25 p = £300,000
Slide 12.32
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Increase in share capital £300,000decrease in reserves £300,000
Assets – Liabilities = Ownership interest
Capitalisation issue (Continued)
Slide 12.33
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Date Transaction or event
Cash Office block
Share capital
Share premium
Retained earnings
Reval’n reserve
£000’s £000’s £000’s £000’s £000’s £000’s
At 1 Jan Yr 2
Balance sheet values
840 1,015 1,500 300 40 15
Jan 1 for 5 capitalis-ation issue
300 (300)
840 1,015 1,800 nil 40 15
1,855 1,855
Capitalisation issue in Jan Year 2
Slide 12.34
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Rights issue
Company has 400 million shares in issue of nominal value 25 pence per share. It wishes to issue a further 100 million shares.
This means a rights issue of 1 for 4,
for example, a holder of 8,000 shares will be given the right to subscribe for 2,000 new shares.
Slide 12.35
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Rights issue (Continued)
A shareholder who does not wish to invest any more in the company is able to sell the ‘rights’.
Assume an issue price of 150 pence per share.
This is split for accounting purposes into the nominal value of 25 pence and the premium of 125 pence.
Slide 12.36
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Rights issue (Continued)
• In terms of the accounting equation the effect of the rights issue on the balance sheet is:
• Total cash raised by the issue £1.5 x 100 million shares = £150m
• Nominal value of shares issued will be 25 pence × 100 million shares = £25m
• Share premium on issue of shares will be £1.25 × 100 million shares = £125m.
Slide 12.37
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
increase in share capital £25mincrease in share premium £125m
Increase in cash £150m
Assets – Liabilities = Ownership interest
Rights issue (Continued)
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Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
(a) At the end of the month it is found that the roof has been leaking and rainwater has damaged goods worth £500.
Year-end adjustments
Expense of £500 for inventory (stock) damaged
Inventory (stock) decreases by £500
Assets – Liabilities = Ownership interest
Slide 12.39
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
(b) The business uses gas to heat a water boiler and it is estimated that consumption for the month amounts to £80.
Year-end adjustments (Continued)
Ownership interest =Liabilities – Assets
Expense of £80 for gas consumed
Obligation to pay for gas consumed £80
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Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Illustration
• See Supplement to Chapter 12 in the book
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Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Chapter 12
Bookkeeping supplement
Slide 12.42
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
DEBIT ENTRIES CREDIT ENTRIES
Left-hand side of the equation
Asset Increase Decrease
Right-hand side of the equation
Liability Decrease Increase
Ownership interest Expense Revenue
Capital withdrawn Capital contributed
Debit and credit entries
Slide 12.43
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Expense of £500 for inventory (stock) damaged
Inventory (stock) decreases by £500
Ownership interest= Assets – Liabilities
(a) At the end of the month it is found that the roof has been leaking and rainwater has damaged goods worth £500.
Year-end adjustments
Slide 12.44
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Dr Cost of goods sold £500Cr Inventory (stock) of goods £500
Year-end adjustments (Continued)
Slide 12.45
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
(b) The business uses gas to heat a water boiler and it is estimated that consumption for the month amounts to £80.
Year-end adjustments (Continued)
Assets
Expense of £80 for gas consumed
Obligation to pay for gas consumed £80
Ownership interest = Liabilities –
Slide 12.46
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Dr Expense of gas £80 Cr Accruals £80
Year-end adjustments (Continued)
Slide 12.47
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Illustration
• See Supplement to Chapter 12 in the book