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Chapter 18: Companies (Test 1 notes) - Coggle Diagram
Chapter 18: Companies (Test 1 notes)
•In SA, companies are regulated by the Companies Act 71 of 2008 and the Companies Amendment Act 3 of 2011
All companies have to have an
Memorandum of Incorporation (MOI)
•a set of rights, duties and responsibilities of shareholders, directors and other within and in relation to a company
•its purpose is
to protect the interests of shareholders
• founding and governing document of the company, can be altered but may not override the provisions of the Companies Ac
Types of companies:
Profit and non profit companies
Profit:
-Private company
-Public company
-State owned company
-Personal liability company
Non-profit:
-formed for cultural or social activity or for a communal interest
Private vs. Public company:
Shareholder rules:
Private: minimum of 1 shareholder and at least 1 director
Public: minimum of 1 shareholder and at least 3 directors
Transfer of shares:
Private: Offered to existing shareholders first, then outsiders with consent from existing shareholders
Public: No limitations
Public subscription and stock exchange listing:
Private: Prohibited
Public: Allowed
Name:
Private: ABC (Pty) Ltd (Proprietary) Limited
Public: XYZ Ltd Limited
-board of directors
control company
-individual shareholders
cannot bind company
-shareholders appoint
directors to manage the Co
Factors required to be listed as a public company:
•A clear vision and plan, strong board of directors, proven product, loss of privacy (disclose sensitive information such as salaries paid to directors)
•A share is an
equity investment
Ordinary shares
-main risk bearing shares
-shareholders benefit from growth in value of investment and from dividends
Preference shares
-preference given to people who pay more
Issuing of shares
The first shares of a company are always issued to the
incorporators
of the company
see pg528 for journals
Preliminary costs
costs related to establishing a company, recognised as an expense, expenses allocated to profit or loss:
To recognise preliminary costs:
DR Preliminary Costs (E)
CR Bank (A)
At the end of the reporting period, to close off preliminary costs to Profit or Loss
DR Profit or Loss (T)
CR Preliminary Costs (E)
Share issue costs
costs related to issuing of shares, e.g underwriter, marketing etc
To recognise costs:
DR Share issue costs (OE)
CR Bank (A)
At the end of reporting period, Share issue costs closed off/offset against retained earnings or shares capital account:
DR Share capital (OE)
CR Share issue costs (OE)
Journals for issuing of shares:
Recording alloting of shares:
DR Person receiving shares (Incorporators/Share Application Acc)
CR Share capital (OE)
Recording money received in share application account:
DR Bank (A)
CR Share Application Acc (T)/ Incorporators (A)
Recording refund to unsuccessful applicants:
DR Share application Acc (T)
CR Bank (A)
Underwriting an issue of shares:
a public offer of shares can be
under
or
over subscribed
underwriters are paid a commission for underwriting the issue of shares and subscribes to any shares not taken up
commission calculated based on price of total number of shares issued
have to record same journal for share issues to underwriters for underwritten shares
balance that underwriters pay to bank is offset by the underwriter's commission
Recording underwriter's commission:
DR Underwriters commission (OE)
CR Underwriters Ltd (A)
Recording cash received for shares from underwriter:
DR Bank (A)
CR Underwriters Ltd (A)
amount to be put here is (Price for shares allotted - underwriter's commission)
Characteristics of a company
•Shareholders own shares that represents ownership of part of the equity of company
Consequences of separate legal entity status:
•limitation of liability: lenders can recover debt only from the Co and not its shareholders
•indefinite life: shareholders may transfer shares
•Companies Act
requires public companies to be audited
: to express the opinion on the fair presentation of the financial statements and whether or not it has been prepared in accordance with the requirements reporting standards
An alternative to an audit is an independent review for companies with a low public interest score
-Private companies are subject to audit only if regarded as being in the public interest
The equity of a company
Sources of finance for a company:
•investor funds, known as
share capital
•borrowed funds, in the form of
loans
or
debentures
A debenture is a type of loan that enables the company to borrow funds from the public (like a bond)
shares are the primary source of financing for a company
Profits not declared as dividends are known as
reserves
Reserves are split into
distributable
or
non-distributable
Distributable reserves:
retained profits that may be declared as a dividend to shareholders. Mostly used to finance future growth of company, all distributable reserves of a company are known as
retained earnings
Non-distributable reserves:
retained profits that are not available to be declared as a dividend to shareholders
e.g revaluation surplus on a non-current asset; the gain on disposal from a disposal
When a dividend is declared:
a
dividends payable
or
shareholders for dividends
account is used to record the liability to shareholders
since there is delay between declaration and payment of dividends, any dividend declared and not paid to shareholders at the
end of the financial year
is reported as a
liability
on SOFP
if a dividend is declared after the end of a reporting period, the amount should not be recognised on the SOFP for the reporting period that just ended.
:warning: there would be a note to financial statements that would record the declaration of dividends after the end reporting period,
IGNORE IT
Accounting for a revaluation surplus:
when a NC asset is revalued, the surplus is therefore unrealised. The unrealised surplus is not recorded as an income item for profit of loss but is rather recorded as
other comprehensive income
to determine total comprehensive income
Accounting for disposal of non-current asset:
the realised surplus is reported as an income item
gain on disposal is included in profit for the period and ultimately in retained earnings as a distributable reserve
see pg523 for entries