Ruth Picker, Ken J. Leo, Janice Loftus, Victoria Wise, Kerry Clark, Keith Alfredson
November 2012, ©2012
Applying International Financial Reporting Standards, 3rd edition, has been thoroughly updated to reflect the varied and numerous developments in International Financial Reporting Standards (IFRSs). The expert knowledge and authoritative explanations of the author team have resulted in the book being extensively referenced by both the accounting profession and academics in countries that have either adopted, or intend to adopt, international accounting standards.
The continuing focus of the second edition of this book is on interpreting, analysing and illustrating the financial reporting requirements under IFRSs. Each chapter contains numerous illustrative examples that present and explain concepts to ensure that users gain a deep understanding of the reporting requirements and meet the knowledge expectations of the accounting profession.
The coverage of accounting standards has been expanded in the second edition with the inclusion of new chapters on IFRS 6 Exploration for and Evaluation of Mineral Resources, IAS 18 Revenue, IAS 19 Employee Benefits and IAS 41Agriculture. This book has been written for intermediate and advanced financial accounting courses, at both undergraduate and postgraduate levels.
Solutions Manual
to accompany
Applying International Financial Reporting Standards 3e
Ruth Picker, Ken Leo, Janice Loftus, Victoria Wise & Kerry Clark
Prepared by Ken Leo
John Wiley & Sons Australia, Ltd 2013
Chapter 2 – Shareholders’ equity: share capital and
reserves
Discussion Questions
1. Discuss
the nature of a reserve. How do reserves differ from the other main components
of equity?
Under international
accounting standards there are 2 forms of equity:
-
contributed
equity: inflows from equity contributors
-
reserves
See paras
65-68 of the Conceptual Framework.
Reserves
arise as a result of increases in equity other than from contributions from
equity participants. They may arise from various actions:
-
earnings
of profits [retained earnings]
-
increases
in the fair value of assets [asset revaluation surplus]
Unlike share capital,
reserves are not created via cash flows into the entity.
Dividends may be paid out
of reserves, but not out of capital.
2. A
company announces a final dividend at the end of the financial year. Discuss
whether a dividend payable should be recognised.
Note paras. 12 and 13 of
IAS 10.
Note also IFRIC 17
“Distributions of Non-cash Assets to Owners” (effective 1 July 2009):
A dividend payable should be recognised when
the dividend is appropriately authorised and is no longer at the discretion of
the entity.
If a dividend is not
declared at end of reporting period, no liability is recognised.
If a liability is declared
after end of reporting period, a liability is recognised only if the dividends
are appropriately authorised and no longer at the discretion of the
entity. For example, if the payment of
dividends requires the approval of shareholders at a forthcoming AGM, then they
are still at the discretion of the entity and no liability is raised.
The reason for this
treatment is that no present obligation exists while an entity still has
discretion in relation to payment.
3. The
telecommunications industry in a particular country has been a part of the
public sector. As a part of its privatisation agenda, the government decided to
establish a limited liability company called Telecom Plus, with the issue of 10
million $3 shares. These shares were to be offered to the citizens of the
country. The terms of issue were such that investors had to pay $2 on
application and the other $1 per share would be called at a later time.
Discuss:
(a) The nature of the limited liability company, and in particular the
financial obligations of acquirers of shares in the company.
(b) The journal entries that would be required if applications were received
for 11 million shares.
The answer to this
question may depend on local jurisdictional arrangements.
In general:
The nature of a limited liability company is such that shareholders’
liability is limited to the issue price of a share. If the shares are issued at
par value, the liability is limited to payment of that par value per share. If
shares are issued at a given price, the limitation is to that price.
The journal entries are –
assuming that applications were received for 10 million shares:
Cash
Trust Dr 20 000 000
Application Cr 20 000 000
(Receipt
of application money)
Application Dr 20 000 000
Share
capital Cr 20 000 000
(Issue
of shares)
Cash Dr 20 000 000
Cash
trust Cr 20 000 000
(Transfer
from cash trust on issue of shares)
4. Why would a company wish to buy back its
own shares? Discuss.
Companies
may undertake a buy-back of shares:
-
to
increase the worth per share of the remaining shares.
-
as
a part of management of the capital structure in terms of gearing.
-
most
efficiently manage surplus funds, rather than pay a dividend.
5. A company has a share
capital consisting of 100 000 shares issued at $2 per share, and 50 000 shares
issued at $3 per share. Discuss the effects on the accounts if:
(a) The company buys back 20 000 shares at $4 per share
(b) The company buys back 20 000 shares at $2.50 per share
At
date of buyback, the company has issued 150 000 shares and has a total share
capital of $350 000. Having issued the shares, the issue price is irrelevant.
(a) If
the company buys back 20 000 shares at $4 per share, the company will record a
cash receipt of $80 000. Which equity accounts it adjusts is the decision of
management. There is no requirement that share capital be reduced.
(b) The
answer is the same if the shares are bought back at $2.50 per share.
6. A company has a share
capital consisting of 100 000 shares having a par value of $1 per share and
issued at a premium of $1 per share, and 50 000 shares issued at $2 par and $1
premium. Discuss the effects on the accounts if:
(a) The company buys back 20 000 shares at $4 per share
(b) The company buys back 20 000 shares at $2.50 share
The
share capital consists of:
100
000 $1 shares issued at a $1 premium $200
000
50
000 $2 shares issued at a $1 premium $150
000
(a) The
company would have to specify which shares it was buying back.
If
the $1 par shares were bought back, the relevant entry is:
Cash Dr 80 000
Share
Capital Cr 20 000
Share
Premium Cr 20 000
Reserves Cr 40 000
If
the $2 par shares were bought back, the entry is:
Cash Dr 80 000
Share
Capital Cr 40 000
Share
Premium Cr 20 000
Reserves Cr 20 000
(b) The
company would have to specify which shares it was buying back.
If
the $1 par shares were bought back, the relevant entry is:
Cash Dr 50 000
Share
Capital Cr 20 000
Share
Premium Cr 20 000
Reserves Cr 10 000
If
the $2 par shares were bought back, the entry is:
Cash Dr 50 000
Reserve
[Share Buy-Back Discount] Dr 10 000
Share
Capital Cr 40 000
Share
Premium Cr 20 000
7. Discuss the nature of a
rights issue, distinguishing between a renounceable and a non-renounceable
issue.
A
rights issue is an issue of shares with the terms of issue giving existing
shareholders the right to an additional number of shares in proportion to their
current shareholding, i.e. the shares are offered on a pro rata basis.
For
example, each shareholder may be entitled to one share for every two currently
held.
Renounceable: existing shareholders may
-
accept
the offer i.e. exercise the rights.
-
sell
all or part of their rights to the new shares to another party.
-
do
nothing i.e. reject the offer.
Non-renounceable: existing shareholders
may:
-
do
nothing i.e. reject the offer.
-
accept
the offer.
8. What is a private placement
of shares? What are the advantages and disadvantages of such a placement?
A
private placement is where a company places the shares with specific investors
rather than invite applications for the new issue of shares.
Advantages
[see text]:
-
speed
-
price
-
direction
-
prospectus
Disadvantages;
-
dilution
of current shareholders’ interests.
-
where
shares are placed at a discount.
9. Discuss whether it is
necessary to distinguish between the different components of equity rather than
just having a single number for shareholders’ equity.
The
question is whether an investor would prefer to invest in Company A or Company
B assuming the net assets of the company are the same:
Company
A Company B
Share
capital $100 000 $20 000
General
reserve 30 000 60 000
Retained
earnings 40 000 90 000
170
000 170
000
In
general the composition of equity is irrelevant.
Composition
may be relevant where local laws place restrictions on what can be done with
particular equity accounts e.g. if dividends may be paid only out of profits.
Testbank
to accompany
Applying International Financial Reporting Standards 3e
By
Prepared by
John Sweeting and Emma
Holmes
John Wiley & Sons
Australia, Ltd 2013
CHAPTER 2
Shareholders’ equity: share capital and reserves
Learning Objective 2.2.1 Describe the equity of a sole proprietor,
partnership and company
Learning Objective 2.2.2 Identify the different forms of corporate
entities
Learning Objective 2.2.3 Outline the key features of the corporate
structure
Learning Objective 2.2.4 Discuss the different forms of share
capital
Learning Objective 2.2.5 Account for the issue of both par value
and no-par shares
Learning Objective 2.2.6 Account for share placements, rights
issues, options, and bonus issues
Learning Objective 2.2.7 Discuss the rationale behind and
accounting treatment of share buy-backs
Learning Objective 2.2.8 Outline the nature of reserves other than
retained earnings and account for movements in retained earnings, including
dividends
Learning Objective 2.2.9 Prepare note disclosures in relation to
equity, as well as a statement of changes in equity.
Multiple Choice
1. For-profit
companies may be
Learning
Objective 2.2 Identify the different forms of corporate entities
I Unlimited
II Listed
III Limited by guarantee
IV No-liability
a. II and III only
b. I, II and III only
c. II, III and IV only
*d. I, II, III and IV
2. Which
of the following statements is incorrect?
Learning
Objective 2.3 Outline the key features of the corporate structure
a. Each share in a
company carries a right to share in the assets on the liquidation of the
company
*b. Each share in a company
carries a right to share proportionately in all new share issues of a company
c. A share represents an ownership right in a
company
d. Each share in a company carries a right to
vote for directors of the company
3. In
respect to the issue of shares by a company, what is an IPO?
Learning
Objective 2.5 Account for the issue of both par value and no-par shares
a. Investment
in Preference and Ordinary shares;
*b. Initial
Public Offering of shares;
c. Investment
Prospectus for an issue of Options;
d. Instruments
Providing Options to ordinary shareholders.
4. When
a public share issue is made, the offer comes from:
Learning Objective
2.5 Account for the issue of both par value and no-par shares
a. the
company issuing the shares;
b. the
relevant oversight body once it has reviewed the prospectus documentation;
c. the
broker handing the share issue for the company;
*d. the
applicant.
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