18.7 Chapter Summary

LO 1: Describe the different forms of equity and identify the key features that are important for accounting purposes.

Equity represents the residual interest in a business held by the owners, or the difference between assets and liabilities. Equity can take the form of funds contributed by shareholders (common and preferred shares and contributed surplus), retained earnings, and other reserves. Preferred shares will have legal features that give them preference when dividends are distributed, and may have other features that will affect their classification as a liability or equity. Retained earnings represent the accumulated profits of a business, less any dividend distributions made. Reserves can take a number of forms, but are often the result of retained earnings appropriations or the application of several accounting standards that result in re-measurements that lead to revaluation surpluses.

LO 2: Explain and apply accounting standards for different types of share issues.

When shares are issued for cash, the par value (or full amount of proceeds if there is no par value) is credited to common share capital. The balance of proceeds in excess of the par value is credited to contributed surplus. When shares are issued by subscription, a receivable is created and an interim share capital account (shares subscribed) is created, as unpaid shares normally cannot be issued. The interim share account is eliminated when the final payment is received and shares are actually issued. If a subscriber defaults, the accounting treatment will depend on legal requirements, the subscription contract, and corporate policy. When shares are issued in exchange for goods or services, the shares should be recorded at the fair value of the goods or services received.

LO 3: Explain and apply accounting standards for different situations that can occur when shares are reacquired.

When shares are reacquired, they may either be cancelled or retained as treasury shares. When they are cancelled, the proceeds paid should first be allocated to share capital at the average issue cost, then to contributed surplus that relates to the class of shares, and finally to retained earnings, if necessary. When shares are retained as treasury shares, the amount of the proceeds is a debit to a treasury share account until the shares are either reissued or cancelled. The treasury share account is reported as a contra-equity amount.

LO 4: Describe the accounting treatments for different types of dividends and calculate divided allocations when preferred shares exist.

Dividends represent distributions of earnings to shareholders and may take several forms. The most common form is dividends paid in cash. When dividends are declared, a journal entry is required to establish the liability. No journal entry is required on the date of record, but a journal entry will be required to record the actual payment of dividends. Property dividends require the asset being distributed to be revalued to its fair value immediately prior to the distribution. Share dividends should be reported at the share’s fair value immediately after the distribution (ex-dividend amount). Share dividends essentially capitalize part of the company’s retained earnings and remove them from future dividend distributions. Share splits do not require any journal entries, and are usually motivated by a desire to lower the company’s share price. When preferred shares are outstanding, the declared dividends must first be allocated to the preferred shares, based on the stated rate and the cumulative and participating features that may be present in those shares.

LO 5: Describe the presentation and disclosure requirements for shareholders’ equity accounts.

IFRS requires presentation of a statement of changes in equity that details the opening and closing balances of all equity accounts, along with details of changes during the year. As well, significant disclosures of the legal requirements and features of different classes of shares are required, along with descriptions of the purposes of the different reserve accounts. Dividends declared during the year must also be disclosed, along with a discussion of the company’s capital management activities.

LO 6: Identify differences in the accounting treatment of shareholders’ equity between IFRS and ASPE.

ASPE provides specific guidance for treasury shares and the re-acquisition of shares, whereas IFRS does not. Accumulated other comprehensive income is a category of equity that exists in IFRS but not ASPE. A statement of changes in equity is required by IFRS, but ASPE usually presents a retained earnings statement and note disclosures. Capital management disclosures are required under IFRS but not ASPE.