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Int. Acc. FA LECT 4: CH 15 part 3: Equity (Describe the accounting for…
Int. Acc. FA LECT 4: CH 15 part 3: Equity
Describe the accounting for treasury shares.: share buyback
Share buybacks
Once shares have been issued, a company can re- acquire them
Corporations purchase their outstanding shares to:
Increase earnings per share and return on equity.
Provide shares for employee compensation contracts or to meet potential merger needs.
Provide tax-efficient distributions of excess cash to
shareholders.
Thwart takeover attempts or to reduce the number of shareholders
Make a market in the shares.
Treasury shares are not an asset!
Reduction in assets and equity
Company can not own itself!
No voting rights
Basically the same as unissued ordinary shares
After re-acquiring
Shares are retired, OR:
Shares are held in “treasury” account à “treasury shares”
Treasury shares may be re-issued
Share buyback: Cost method of accounting
Debit the Treasury Shares account for the cost of buying back
the shares
Report this account as a deduction from equity on the balance sheet
--> Contra-equity account
Retiring Treasury Shares
Decision results in
cancellation of the treasury shares and
a reduction in the number of shares of issued shares.
Retired treasury shares have the status of authorized and unissued shares.
Explain the accounting for preference shares.
Features
often associated with preference shares:
Convertible into ordinary shares.
Callable at the option of the corporation.
Preference as to assets in the event of liquidation.
Non-voting. (not always!)
Preference as to dividends (cumulative/non-cumulative)
The accounting for preference shares at issuance is similar to that for ordinary shares.
Describe the policies used in distributing dividends and identify the various forms of dividend distributions
.
Few companies pay dividends in amounts equal to their legally available retained earnings. Why?
To finance growth or expansion.
To smooth out dividend payments.
Meet corporation requirements.
To build up a cushion against possible losses.
Maintain agreements with creditors.
Dividends
One way to let shareholders share in profits is through dividend payments
Types
Cash dividend:
declare, record, payment.
Create (current) liability against retained earnings on date of
dividend declaration
On payment date, pay cash and reduce liability.
Property dividend
: pay-out other than cash. Usually in equity investments (e.g., held-for-trading securities).
Liquidating dividend:
dividends not based on retained earnings (e.g., from share premiums).
Company B issues dividend amounting to X, half of which should be considered as income, the other half as return on capital.
Share dividends
$X of dividends reduce
retained earnings
by the same
amount
-->Total equity also reduced by the same amount
--> Part of the firm’s value is distributed among the owners
[only not for share dividends]