Business
Equity
Equity refers to the ownership interest of shareholders in a company. It represents the residual value of assets after deducting liabilities. Equity can be in the form of common stock, preferred stock, or retained earnings.
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11 Key excerpts on "Equity"
- (Author)
- 2020(Publication Date)
- Wiley(Publisher)
367 SHAREHOLDERS’ Equity Introduction 367 Definitions of Terms 368 Recognition and Measurement 369 Presentation and Disclosure 369 Types of Shares 369 Presentation and Disclosures Relating to Share Capital 370 Presentation and Disclosures Relating to Other Equity 373 Classification Between Liabilities and Equity 374 Puttable Shares 375 Compound Financial Instruments 376 Share Issuances and Related Matters 376 Additional Guidance Relative to Share Issuances and Related Matters 376 Accounting for the issuance of shares 376 Share capital issued for services 377 Issuance of share units 377 Share subscriptions 378 Distinguishing additional contributed capital from the par or stated value of the shares 379 Donated capital 380 Compound and Convertible Equity Instruments 381 Retained Earnings 381 Dividends and Distributions 383 Cash dividends 383 Liquidating dividends 385 Taxation impact 385 Accounting for Treasury Share Transactions 385 Members’ Shares in Co-operative Entities 385 Future Developments 386 Examples of Financial Statement Disclosures 386 US GAAP Comparison 388 16 INTRODUCTION The Framework defines Equity as the residual interest in the assets of an entity after deducting all its liabilities. Shareholders’ Equity is comprised of all capital contributed to the entity (including share premium, also referred to as capital paid-in in excess of par value) plus retained earnings (which represents the entity’s cumulative earnings, less all distribu- tions that have been made therefrom). IAS 1 suggests that shareholders’ interests be categorised into three broad subdivisions: issued share capital, retained earnings (accumulated profits or losses) and other compo- nents of Equity (reserves). Depending on jurisdiction, issued share capital may need to be further categorised as par or stated capital and as additional contributed capital/share pre- mium.
- (Author)
- 2021(Publication Date)
- Wiley(Publisher)
IAS 1 suggests that shareholders' interests be categorised into three broad subdivisions: issued share capital, retained earnings (accumulated profits or losses) and other components of Equity (reserves). Depending on jurisdiction, issued share capital may need to be further categorised as par or stated capital and as additional contributed capital/share premium. This standard also sets forth requirements for disclosures about the details of share capital for corporations and the various capital accounts of other types of entities, such as partnerships.Equity represents an interest in the net assets (i.e., assets less liabilities) of the entity. It is, however, not a claim on those assets in the sense that liabilities are. Upon the liquidation of the business, an obligation arises for the entity to distribute any remaining assets to the shareholders, but only after all liabilities are first settled.Earnings are not generated by transactions in an entity's own Equity (for example, by the issuance, reacquisition or reissuance of its common or preferred shares). Depending on the laws of the jurisdiction of incorporation, distributions to shareholders may be subject to various limitations, such as to the amount of retained (accounting basis) earnings. In other cases, limitations may be based on values not presented in the financial statements, such as the future liquidity and net solvency of the entity as determined on a market value basis; in such instances, IFRS‐based financial statements will not provide information needed for making such determination.A major objective of the accounting for shareholders' Equity is the adequate disclosure of the sources from which the capital was derived. For this reason, a number of different contributed capital accounts may be presented in the statement of financial position. The rights of each class of shareholder must also be disclosed. Where shares are reserved for future issuance, such as under the terms of share option plans, this fact must also be made known. Share option plans will be addressed within Chapter 17
eBook - PDFFinancial Accounting Theory and Analysis
Text and Cases
- Richard G. Schroeder, Myrtle W. Clark, Jack M. Cathey(Authors)
- 2022(Publication Date)
- Wiley(Publisher)
545 15 Equity is the basic risk capital of an enterprise. Equity capital has no guaranteed return and no timetable for the repayment of the capital investment. From the standpoint of enterprise stability and exposure to risk of insolvency, a basic characteristic of Equity capital is that it is permanent and can be counted on to remain invested in good times as well as bad. Consequently, Equity funds can be most confidently invested in long-term assets, and it is generally thought that Equity funds can be exposed to the greatest potential risks. Investors deciding whether to purchase a company’s common stock must balance the existence of the company’s debt, which represents a risk of loss of investment, against the potential of high profits from financial leverage. The mix of a company’s debt and Equity capital is termed its capital structure. Over the years, there has been considerable debate over whether a firm’s cost of capital varies with different capital structures. Specifically, financial theorists and researchers have espoused theories and examined empirical evidence to discern whether different mixtures of debt and Equity in a firm’s capital affect the value of the firm. Modigliani and Miller found that an enterprise’s cost of capital is, except for the tax deductibility of interest, not affected by the mix of debt and Equity. 1 This is true, they asserted, because each individual stockholder can inject his or her own blend of risk into the total investment position. In this chapter, we maintain that the degree of risk associated with an investment in an enterprise as perceived by a potential investor is a given. In the following paragraphs, we review some theories of Equity and discuss the theoretical issues associated with how companies do and/ or should report the various components of Equity. Theories of Equity Chapter 11 introduced two theories of Equity: the proprietary theory and the entity theory.
eBook - PDFFinancial Accounting Theory and Analysis
Text and Cases
- Richard G. Schroeder, Myrtle W. Clark, Jack M. Cathey(Authors)
- 2019(Publication Date)
- Wiley(Publisher)
15 514 Equity Equity is the basic risk capital of an enterprise. Equity capital has no guaranteed return and no timetable for the repayment of the capital investment. From the standpoint of enterprise stability and exposure to risk of insolvency, a basic characteristic of Equity capital is that it is permanent and can be counted on to remain invested in good times as well as bad. Consequently, Equity funds can be most confidently invested in long-term assets, and it is generally thought that Equity funds can be exposed to the greatest potential risks. Investors deciding whether to purchase a company’s common stock must balance the existence of the company’s debt, which represents a risk of loss of investment, against the potential of high profits from financial leverage. The mix of a company’s debt and Equity capital is termed its capital structure. Over the years, there has been considerable debate over whether a firm’s cost of capital varies with different capital structures. Specifically, financial theorists and researchers have espoused theories and examined empirical evidence to discern whether different mixtures of debt and Equity in a firm’s capital affect the value of the firm. Modigliani and Miller found that an enterprise’s cost of capital is, except for the tax deductibility of interest, not affected by the mix of debt and Equity. 1 This is true, they asserted, because each individual stockholder can inject his or her own blend of risk into the total investment position. In this chapter, we maintain that the degree of risk associated with an investment in an enterprise as perceived by a potential investor is a given. In the following paragraphs, we review some theories of Equity and discuss the theoretical issues associated with how companies do and/ or should report the various components of Equity. Theories of Equity Chapter 11 introduced two theories of Equity: the proprietary theory and the entity theory.
- Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield(Authors)
- 2019(Publication Date)
- Wiley(Publisher)
15-1 CHAPTER 15 Stockholders’ Equity Student Practice and Solutions Manual Chapter 15 focuses on the stockholders’ Equity section of the corporate form of business organization. Stockholders’ Equity represents the amount that was contributed by the share- holders and the portion that was earned and retained by the enterprise. There is a definite distinction between liabilities and stockholders’ Equity that must be understood if one is to effectively grasp the accounting treatment for Equity issues. This chapter addresses the accounting issues related to capital contributed by owners of a business organization, and the means by which profits are distributed through dividends. LO 1: Describe the corporate form and the issuance of shares of stock. Corporate Capital The corporate form of business organization begins with the submitting of articles of incorporation to the state in which incorporation is desired. Assuming the requirements are properly fulfilled, the corporation charter is issued and the corporation is recognized as a legal entity subject to state law. The laws of the state of incorporation that govern owners’ Equity transactions are normally set out in the state’s business corporation act. Within a given class of stock, each share is exactly equal to every other share. A person’s percent of ownership in a corporation is determined by the number of shares he or she pos- sesses in relation to the total number of shares owned by all stockholders. In the absence of restrictive provisions, each share carries the right to participate proportionately in: (a) profits, (b) management, (c) corporate assets upon liquidation, and (d) any new issues of stock of the same class (preemptive right). LEARNING OBJECTIVES 1. Describe the corporate form and the issuance of shares of stock. 2. Describe the accounting and reporting for reacquisition of shares. 3. Explain the accounting and reporting issues related to dividends.
eBook - PDFFinancial Accounting Theory and Analysis
Text and Cases
- Richard G. Schroeder, Myrtle W. Clark, Jack M. Cathey(Authors)
- 2020(Publication Date)
- Wiley(Publisher)
CHAPTER 1 463 E quity is the basic risk capital of an enterprise. Equity capital has no guaranteed return and no timetable for the repayment of the capital investment. From the standpoint of enterprise stability and exposure to risk of insolvency, a basic characteristic of Equity capital is that it is permanent and can be counted on to remain invested in good times as well as bad. Consequently, Equity funds can be most confidently invested in long‐term assets, and it is generally thought that Equity funds can be exposed to the greatest potential risks. Investors deciding whether to purchase a company’s common stock must balance the existence of the company’s debt, which represents a risk of loss of investment, against the poten- tial of high profits from financial leverage. The mix of a company’s debt and Equity capital is termed its capital structure. Over the years, there has been considerable debate over whether a firm’s cost of capital varies with different capital structures. Specifically, financial theorists and researchers have espoused theories and examined empirical evidence to discern whether different mixtures of debt and Equity in a firm’s capital affect the value of the firm. Modigliani and Miller found that an enterprise’s cost of capital is, except for the tax deductibility of interest, not affected by the mix of debt and Equity. 1 This is true, they asserted, because each individual stockholder can inject his or her own blend of risk into the total investment position. In this chapter we maintain that the degree of risk associated with an investment in an enterprise as perceived by a potential investor is a given. In the following paragraphs, we review some theories of Equity and discuss the theoretical issues associated with how companies do and/ or should report the various components of Equity. Chapter 11 introduced two theories of Equity: the proprietary theory and the entity theory.
- (Author)
- 2018(Publication Date)
- Wiley(Publisher)
IAS 1 suggests that shareholders ’ interests be categorised into three broad subdivisions: issued share capital, retained earnings (accumulated pro fi ts or losses) and other components of Equity (reserves). Depending on jurisdiction, issued share capital may need to be further categorised as par or stated capital and as additional contributed capital/share premium. This standard also sets forth requirements for disclosures about the details of share capital for corporations and the various capital accounts of other types of entities, such as partnerships. Equity represents an interest in the net assets (i.e., assets less liabilities) of the entity. It is, however, not a claim on those assets in the sense that liabilities are. Upon the liquidation of the business, an obligation arises for the entity to distribute any remaining assets to the shareholders, but only after all liabilities are fi rst settled. Earnings are not generated by transactions in an entity ’ s own Equity (for example, by the issuance, reacquisition or reissuance of its common or preferred shares). Depending on the laws of the jurisdiction of incorporation, distributions to shareholders may be subject to various limitations, such as to the amount of retained (accounting basis) earnings. In other 361 362 Wiley Interpretation and Application of IFRS Standards 2018 cases, limitations may be based on values not presented in the fi nancial statements, such as the future liquidity and the net solvency of the entity as determined on a market value basis; in such instances, IFRS-based fi nancial statements will not provide information needed for making such determination. A major objective of the accounting for shareholders ’ Equity is the adequate disclosure of the sources from which the capital was derived. For this reason, a number of different contributed capital accounts may be presented in the statement of fi nancial position. The rights of each class of shareholder must also be disclosed.
eBook - PDF- Janice Loftus, Ken Leo, Sorin Daniliuc, Belinda Luke, Hong Nee Ang, Mike Bradbury, Dean Hanlon, Noel Boys, Karyn Byrnes(Authors)
- 2022(Publication Date)
- Wiley(Publisher)
For a company, the situation is different because their formation is generally governed by legislation. As noted earlier, there is normally a clear distinction made between contributed capital and profits retained in the company. Other classifications of Equity (i.e. reserves) are reported if they are relevant to the users of the financial statements. Such classifications can arise due to legislation (e.g. restrictions on the ability to distribute Equity), national taxation laws (e.g. to distinguish between Equity that can be distributed tax-free and distributions that are taxable income in the hands of the recipient) or requirements in accounting standards (e.g. under the revaluation model in AASB 116/IAS 16, Property, Plant and Equipment, revaluation increases are required to be recognised in the revaluation surplus). LEARNING CHECK From a Conceptual Framework point of view Equity is a residual, representing the net assets of the entity. In a sole proprietorship, there is no need to distinguish between capital contributed and earnings that have been retained. Pdf_Folio:450 450 Financial reporting In a partnership, the components of Equity will refect the partnership agreement. Typically, each partner has a capital account representing the partner’s investment in the business and a current (or retained earnings) account representing the partner’s share of profts. Both amounts represent the partners’ investment in the business. In a company, the Equity section of the statement of fnancial position includes contributed capital, retained earnings and reserves. Tradition, legislation, taxation and accounting standards have resulted in many differ- ent types of reserves. 14.2 Types of companies LEARNING OBJECTIVE 14.2 Identify the different types of corporate entities. Generally, companies can be distinguished by the nature of the ownership, and the rights and responsibil- ities of the shareholders.
eBook - PDF- Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield(Authors)
- 2022(Publication Date)
- Wiley(Publisher)
Trading on the Equity describes the practice of using borrowed money or issuing preferred stock in hopes of obtaining a higher rate of return on the money used. • Shareholders win if return on the assets is higher than the cost of financing these assets. • When this happens, the return on common stockholders’ Equity will exceed the return on total assets. 14.4 Presentation and Decision Analysis of Stockholders’ Equity 14-39 In short, the company is “trading on the Equity at a gain.” In this situation, the money obtained from bondholders or preferred stockholders earns enough to pay the interest or preferred dividends and leaves a profit for the common stock- holders. On the other hand, if the cost of the financing is higher than the rate earned on the assets, the company is trading on Equity at a loss and stockholders lose. Payout Ratio Another ratio of interest to investors, the payout ratio , is the ratio of cash dividends to net income. The payout ratio is calculated as follows. Payout Ratio = Cash Dividends Paid to Common Stockholders __________________________________________ Net Income Available to Common Stockholders Note this ratio focuses on dividends paid to common stockholders only. If preferred stock is outstanding, then preferred stock dividends must be subtracted from net income to arrive at net income available to common stockholders. We can calculate Allstate’s payout ratio as follows. 2020: $680 ___________ $5,576 − $115 = 12.45% 2019: $658 ___________ $4,847 − $169 = 14.07% Allstate paid out 12.45% of the income available to common shareholders as a dividend in 2020, a slight decrease from 2019. Book Value per Share A much-used basis for evaluating net worth is found in the book value or Equity value per share of stock. Book value per share of stock is the amount each share would receive if the company were liquidated on the basis of amounts reported on the balance sheet.
eBook - PDFFinancial Accounting
Reporting, Analysis and Decision Making
- Shirley Carlon, Rosina McAlpine, Chrisann Lee, Lorena Mitrione, Ngaire Kirk, Lily Wong(Authors)
- 2021(Publication Date)
- Wiley(Publisher)
This was mainly due to the 155% increase in profit associated with the reclassification adjustment of $52 million referred to previously. However, a strong performance from the entity’s core brands as well as growth in the entity’s online sales also contributed to this substantial improvement in 2023. 542 Financial accounting: Reporting, analysis and decision making SUMMARY 10.1 Explain the business context and the importance of deci- sion making relating to Equity. The business context for Equity is very dependent on the nature of the entity and ownership structure. Decision making relating to Equity is important for many stakeholders apart from owners, and relates to such issues as share issues, share splits, dividend policies, earning power, and so on. 10.2 Identify and discuss the main characteristics of a corpo- ration (company). The main characteristics of a corporation are separate legal existence, limited liability of shareholders, transferable ownership rights, ability to acquire capital, continuous life, company management, and the application of government and other regulations. 10.3 Record the issue of ordinary shares. For a private placement, the proceeds of a share issue are directly credited to share capital. When the public is invited to subscribe to a share issue, application money is credited to the application account and the proceeds are held in a trust account until shares are allotted. At that time the proceeds become legal capital and are credited to the share capital account. The money received into the trust account is then transferred to the company’s bank account. 10.4 Describe the effects of share splits. Share splits increase the number of shares owned by each shareholder and decrease the assigned value of each share. Share splits do not affect the total amount of share capital. 10.5 Prepare the entries for cash dividends and share divi- dends and describe the impact on Equity and assets.
eBook - PDF- Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield(Authors)
- 2019(Publication Date)
- Wiley(Publisher)
Among the specific characteristics of the corporate form that affect accounting are the (1) influence of state corporate law, (2) use of the capital stock or share system, and (3) development of a variety of ownership interests. In the absence of restrictive provisions, each share of stock carries the right to share proportionately in (1) profits and losses, (2) management (the right to vote for directors), (3) cor- porate assets upon liquidation, and (4) any new issues of stock of the same class (called the preemptive right). Stockholders’ or owners’ Equity is classified into two cat- egories: contributed capital and earned capital. Contributed 15-32 CHAPTER 15 Stockholders’ Equity capital (paid-in capital) describes the total amount paid in on capital stock. Put another way, it is the amount that stockholders invested in the corporation for use in the business. Contributed capital includes items such as the par value of all outstanding capital stock and premi- ums less any discounts on issuance. Earned capital is the capital that develops if the business operates profitably; it consists of all undistrib- uted income that remains invested in the company (retained earnings and accumulated other comprehensive income). Accounts are kept for the following different types of stock. Par value stock: (a) preferred stock or common stock, (b) paid-in cap- ital in excess of par or additional paid-in capital, and (c) discount on stock. No-par stock: common stock or common stock and additional paid-in capital, if stated value used. Stock issued in combination with other securities (lump- sum sales): The two methods of allocation available are (a) the proportional method and (b) the incremental method.
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