CH 12

Financial Accounting
IFRS 4th Edition

Weygandt ● Kimmel ● Kieso
Chapter 12
Corporations: Organization, Share
Transactions, and Equity
Chapter Outline
Learning Objectives
LO 1 Discuss the major characteristics of a corporation.
LO 2 Explain how to account for ordinary, preference,
and treasury shares.
LO 3 Explain how to account for cash dividends, share
dividends, and share splits.
LO 4 Discuss how equity is reported and analyzed.
Copyright © 2019 John Wiley & Son, Inc. 2

Learning Objective 1
Discuss the Major Characteristics of a
Corporation
Copyright © 2019 John Wiley & Sons, Inc. 3

The Corporate Form of Organization
An entity separate and distinct from its owners.
Classified by Purpose Classified by Ownership
◆ Not-for-Profit ◆ Publicly held
◆ For Profit ◆ Privately held
► International ► Toyota (JPN) ► Cargill Inc.

Committee of the ► Siemens (DEU)
Red Cross (CHE) ► Sinopec (CHN)
► Bill & Melinda Gates ► General Electric (USA)
Foundation (USA)
Characteristics of Corporation (1 of 10)
Characteristics that distinguish corporations from
proprietorships and partnerships.
• Separate Legal Existence
• Limited Liability of Shareholders
• Transferable Ownership Rights
Advantages
• Ability to Acquire Capital
• Continuous Life
• Corporate Management
• Government Regulations Disadvantages
• Additional Taxes
Corporation acts
• Separate Legal Existence under its own
• Limited Liability of Shareholders name rather than
• Transferable Ownership Rights in the name of its
shareholders
• Continuous Life
• Government Regulations
Limited to their
• Limited Liability of Shareholders investment
• Continuous Life
• Transferable Ownership Rights Shareholders may
sell their shares
• Continuous Life
• Transferable Ownership Rights Corporation can
• Ability to Acquire Capital obtain capital
through the
• Continuous Life issuance of shares
• Transferable Ownership Rights Continuance as a
going concern is
• Ability to Acquire Capital not affected by the
• Continuous Life withdrawal, death,
or incapacity of a
• Corporate Management shareholder,
• Government Regulations employee, or
officer
• Ability to Acquire Capital Separation of
ownership and
• Continuous Life management often
• Corporate Management reduces an owner’s
• Government Regulations ability to actively
manage the
• Additional Taxes company
Characteristics Shareholders
of Corporation Corporation
(8 of 10)
Chairman and
organization
Board of chart
Directors
President and
Chief Executive
Officer
General Vice President Vice President

Vice President Vice President
Counsel/ Finance/Chief Human
Marketing Operations
Secretary Financial Officer Resources
Treasurer Controller

• Continuous Life A corporation is
• Corporate Management subject to
• Government Regulations numerous
governmental
• Additional Taxes regulations
• Transferable Ownership Rights Corporations pay
• Ability to Acquire Capital income taxes as a
separate legal
• Continuous Life entity and in
• Corporate Management addition,
• Government Regulations shareholders pay
taxes on cash
• Additional Taxes dividends
Forming a Corporation
Initial Steps:
• File application with governmental agency in the
jurisdiction in which incorporation is desired
• Government grants charter
• Corporation develops by-laws
Companies generally incorporate in a state or country whose
laws are favorable to the corporate form of business.
Corporations engaged in commerce outside their state or
country must obtain a license from each government in which
they do business.
Shareholder Rights
1. Vote in election of board of directors at annual
meeting and vote on actions that require
shareholder approval.
2. Share the corporate earnings through receipt of
dividends.
3. Keep the same percentage ownership when new
shares are issued (preemptive right).
4. Share in assets upon liquidation in proportion to
their holdings. This is called a residual claim.

Share Issue Considerations (1 of 6)
When a corporation decides to issue shares, it must
resolve a number of basic questions:
1. How many shares should it authorize for sale?
2. How should it issue the shares?
3. What value should the corporation assign to the
shares?

Authorized Shares
• Charter indicates amount of shares that a corporation
is authorized to sell
• Number of authorized shares is often reported in
equity section
• No formal accounting entry

Issuance of Shares
• Companies issue ordinary shares directly to investors
or indirectly through an investment banking firm
• Factors in setting price for a new issue of shares:
1. Company’s anticipated future earnings
2. Expected dividend rate per share
3. Current financial position
4. Current state of economy
5. Current state of securities market
Market Price of Shares
• Shares of publicly held companies are traded on
organized exchanges
• Interaction between buyers and sellers determines
the prices per share
• Prices tend to follow the trend of a company’s
earnings and dividends
• Factors beyond a company’s control may cause day-
to-day fluctuations in market prices
Par and No-Par Value Shares
• Years ago, par value determined legal capital per
share that a company must retain in business for
protection of corporate creditors
• Today many governments do not require a par value
• No-par value shares is fairly common today
• In many countries, the board of directors assigns a
stated value to no-par shares

Corporate Capital (1 of 3)
Equity is identified by various names:
• stockholders’ equity,
• shareholders’ equity, or
• corporate capital.
The equity section of a corporation’s statement of
financial position consists of two parts:
1. share capital and
2. retained earnings (earned capital).

Share Capital
Share capital is the total amount of cash and other assets
paid in to the corporation by shareholders in exchange
for shares.

Retained Earnings
Net income that a corporation retains for future use.
Net income is recorded in Retained Earnings by a closing
entry. For example, assuming that net income for Delta
Robotics in its first year of operations is HK$1,300,000,
the closing entry is:
Income Summary 1,300,000
Retained Earnings 1,300,000

Retained Earnings
If Delta Robotics has a balance of HK$800,000 in Share
Capital—Ordinary and HK$130,000 in retained earnings at the
end of its first year, its equity section is as follows:
Delta Robotics
Statement of Financial Position (partial)
Equity
Share capital—ordinary HK$8,000,000
Retained earnings 1,300,000
Total equity HK$9,300,000

Corporate Capital
Comparison of the equity accounts reported on a
statement of financial position for a proprietorship and a
corporation.

Explain How to Account for Ordinary,
Preference, and Treasury Shares

Accounting for Share Transactions
Accounting for Ordinary Shares
Primary Objective is to identify the specific sources of
capital.

Accounting for Ordinary Shares
Issuing Par Value Ordinary Shares for Cash
• Par value does not indicate a share’s market price
• Cash proceeds from issuing par value shares may be
equal to, greater than, or less than par value
• Issuance of ordinary shares for cash
▪ Credit par value of shares to Share Capital—
Ordinary
▪ Record in a separate account portion of proceeds
that is above or below par value

Issuing Par Value Ordinary Shares for
Cash (1 of 3)
Illustration: Assume that Hydro-Slide SA issues 1,000 shares
of €1 par value ordinary shares. Prepare the entry to record
this transaction.
Cash 1,000
Share Capital—Ordinary (1,000 x €1) 1,000

Cash (2 of 3)
Now assume that Hydro-Slide issues an additional 1,000
shares of the €1 par value ordinary shares for cash at €5 per
share. Prepare the entry to record this transaction.
Cash 5,000
Share Capital—Ordinary (1,000 x €1) 1,000
Share Premium—Ordinary 4,000

Cash (3 of 3)
Hydro-Slide SA
Equity
Share capital—ordinary € 2,000
Share premium—ordinary 4,000
Retained earnings 27,000
Total equity €33,000

Issuing No-Par Ordinary Shares (1 of 2)
Illustration: Assume that instead of €1 par value shares,
Hydro-Slide SA has €5 stated value no-par shares and the
company issues 5,000 shares at €8 per share for cash.
Cash 40,000
Share Capital—Ordinary 25,000

Issuing No-Par Ordinary Shares (2 of 2)
Illustration: if Hydro-Slide does not assign a stated value to its
no-par shares, it records the issuance of the 5,000 shares at
€8 per share for cash as follows.
Cash 40,000

Issuing Ordinary Shares for Services or
Non-cash Assets
Corporations also may issue shares for:
• Services (attorneys or consultants)
• Non-cash assets (land, buildings, and equipment)
Cost is either the fair market value of the consideration
given up, or the fair market value of the consideration
received, whichever is more clearly determinable.

Ordinary Shares for Services
Illustration: Attorneys have helped Jordan Company
incorporate. They have billed the company €5,000 for their
services. They agree to accept 4,000 shares of €1 par value
ordinary shares in payment of their bill. At the time of the
exchange, there is no established market price for the shares.
Prepare the journal entry for this transaction.
Organization Expense 5,000

Ordinary Shares for Non-Cash Assets
Illustration: Athletic Research AG is an existing publicly held
corporation. Its €5 par value shares are actively traded at €8
per share. The company issues 10,000 shares to acquire land
recently advertised for sale at €90,000. Prepare the journal
entry for this transaction.
Land 80,000

Accounting for Preference Shares (1 of 2)
Typically, preferred shareholders have a priority as to:
1. Distributions of earnings (dividends).
2. Assets in event of liquidation.
Generally do not have voting rights.
Accounting for preference shares at issuance is similar to
that for ordinary shares.

Accounting for Preference Shares (2 of 2)
Illustration: Florence SpA issues 10,000 shares of €10 par
value preference shares for €12 cash per share. The journal
entry to record the issuance is:
Cash 120,000
Share Capital—Preference 100,000
Share Premium—Preference 20,000
Preference shares may have a par value or no-par value.

DO IT! 2: Issuance of Shares (1 of 3)
Illustration: Hefei Ltd. begins operations on March 1 by
issuing 1,000,000 shares of €10 par value ordinary shares for
cash at ¥12 per share. Journalize the issuance of the shares on
March 1 assuming the shares are not publicly traded.
Cash 12,000,000
Share Capital—Ordinary 10,000,000
Share Premium—Ordinary 2,000,000

DO IT! 2: Issuance of Shares (2 of 3)
Illustration: On March 15, Hefei Ltd. issues 50,000 ordinary
shares to attorneys in settlement of their bill of ¥600,000 for
organization costs. Journalize the issuance of these shares.
Organization Expense 600,000

Accounting for Treasury Shares
Treasury shares are a corporation’s own shares that it has
reacquired from shareholders but not retired.
Corporations acquire treasury shares for various reasons:
1. To reissue the shares to officers and employees
under bonus and share compensation plans.
2. To enhance the share’s market value.
3. To have additional shares available for use in the
acquisition of other companies.
4. To increase earnings per share.

Purchase of Treasury Shares (1 of 3)
• Companies generally use cost method
• Debit Treasury Shares for price paid to reacquire
shares
• Treasury shares is a contra equity account
• Reduces equity

Purchase of Treasury Shares (2 of 3) ILLUSTRATION 12.8
Equity section with
no treasury shares
Mead, Ltd.
Equity
Share capital—ordinary, HK$50 par value, 100,000
shares issued and outstanding HK$5,000,000
Illustration: On February 1, 2020, Mead acquires 4,000 shares of its

stock at HK$80 per share. The entry is as follows.
Treasury Shares 320,000
Cash 320,000
Purchase of Treasury Shares (3 of 3) ILLUSTRATION 12.9
Equity section with
treasury shares
Mead, Ltd.
Equity
Share capital—ordinary, HK$50 par value, 100,000
shares issued and 96,000 shares outstanding HK$5,000,000
7,000,000
Less: Treasury stock (4,000 shares) 320,000
Both the number of shares issued (100,000) and the number of

shares held as treasury (4,000) are disclosed.

Sale of Treasury Shares Above Cost
Illustration: On July 1, Mead, Ltd. sells for HK$100 per share
1,000 of the 4,000 treasury shares previously acquired at
HK$80 per share. The entry is as follows.
Cash 100,000
Share Premium—Treasury 20,000
A corporation does not realize a gain or suffer a loss from

shares transactions with its own shareholders.

Sale of Treasury Shares Below Cost (1 of 2)
If Mead, Ltd. sells an additional 800 treasury shares on
October 1 at HK$70 per share, it makes the following entry.
Cash (800 × HK$70) 56,000
Treasury Shares Share Premium––Treasury

Feb. 1 320,000 July 1 80,000 Oct. 1 8,000 July 1 20,000
Oct. 1 64,000 Oct. 1 Bal. 12,000
Oct. 1 Bal. 176,000

Sale of Treasury Shares Below Cost (2 of 2)
On December 1, assume that Mead, Ltd. sells its remaining
2,200 shares at HK$70 per share and makes the following
entry.
Cash (2,200 × HK$70) 154,000
Limited to
Share Premium—Treasury 12,000 balance on
hand
Retained Earnings 10,000

DO IT! 2b: Treasury Shares
Salvador SA purchases 3,000 shares of its R$50 par value
ordinary shares for R$180,000 cash on July 1. It will hold the
shares in the treasury until resold. On November 1, the
corporation sells 1,000 treasury shares for cash at R$70 per
share. Journalize the treasury share transactions.
July 1 Treasury Shares 180,000
Cash 180,000
Nov. 1 Cash 70,000
Explain How to Account for Cash
Dividends, Share Dividends, and Share
Splits

Dividends and Splits
Distribution of cash or shares to shareholders on a pro
rata (proportional to ownership) basis.
Types of Dividends:
1. Cash
2. Property
3. Shares
4. Scrip (promissory note to pay cash)

Accounting for Cash Dividends (1 of 3)
For a corporation to pay a cash dividend, it must have:
1. Retained earnings - Payment of cash dividends from
retained earnings is legal in all jurisdictions.
2. Adequate cash.
3. A declaration of dividends by Board of Directors.

Three dates are important:

Illustration: On December 1, 2020, the directors of Media
General declare a €0.50 per share cash dividend on 100,000
shares of €10 par value ordinary shares. The dividend is
payable on January 20 to shareholders of record on December
22.
Dec. 1 Cash Dividends 50,000
Dividends Payable 50,000
Dec. 22 No entry
Jan. 20 Dividends Payable 50,000
Cash 50,000
Dividend Preferences (1 of 3)
• Right to receive dividends before ordinary
shareholders
• Per share dividend amount is stated as a percentage
of preference shares par value or as a specified
amount
• Cumulative Dividend - Preference shareholders must
be paid both current-year dividends and any unpaid
prior-year dividends before ordinary shareholders are
paid dividends

Cumulative Dividend
Illustration: Scientific Leasing has 5,000 shares of 7%, €100
par value, cumulative preference shares outstanding. Each
€100 share pays a €7 dividend (.07 × €100). The annual
dividend is €35,000 (5,000 × €7 per share). If dividends are
two years in arrears, preference shareholders are entitled to
receive the following dividends.
Dividends in arrears (€35,000 × 2) € 70,000
Current-year dividends 35,000
Total preference dividends €105,000

Allocating Cash Dividends between Preference
and Ordinary Shares
Holders of cumulative preference shares must be paid any
unpaid prior-year dividends and their current year’s dividend
before ordinary shareholders receive dividends.

Allocating Cash Dividends (1 of 3)
Illustration: On December 31, 2019, IBR Inc. has 1,000 shares
of 8%, €100 par value cumulative preference shares. It also
has 50,000 shares of €10 par value ordinary shares
outstanding. At December 31, 2019, the directors declare a
€6,000 cash dividend. Calculate the annual preferred
dividend.
€100 par x 8% x 1,000 shares = €8,000
Prepare the entry to record the declaration of the dividend.

Illustration: At December 31, 2020, IBR declares a €50,000
cash dividend. Show the allocation of dividends to each class
of stock.
Total dividend €50,000

Allocated to preference shares
Dividends in arrears, 2019 (1,000 × €2) €2,000
2020 dividend (1,000 × €8) 8,000 10,000
Remainder allocated to common shares €40,000

Illustration: At December 31, 2020, IBR declares a €50,000
cash dividend. Prepare the entry to record the declaration of
the dividend.

DO IT! 3a: Dividends on Preference and
Ordinary Shares (1 of 3)
Master Mind Gaming has 2,000 shares of 6%, ¥100 par value
preference shares outstanding at December 31, 2020. At December
31, 2020, the company declared a ¥60,000 cash dividend.
Determine the dividend paid to preference shareholders and
ordinary shareholders under each of the following scenarios.
1. The preference shares are non-cumulative, and the company
has not missed any dividends in previous years.
Preference shareholders are paid only this year’s dividend
Preference shareholders = ¥12,000 (2,000 x .06 x ¥100)
Ordinary shareholders = ¥48,000 (¥60,000 - ¥12,000)
2. The preference shares are non-cumulative, and the company
did not pay a dividend in each of the two previous years.
Past unpaid dividends do not have to be paid
Preference shareholders = ¥12,000 (2,000 x .06 x ¥100)
3. The preference shares are cumulative, and the company did
not pay a dividend in each of the two previous years.
Dividends that have been missed (arrears) must be paid
Preference shareholders = ¥36,000 (3 x 2,000 x .06 x ¥100)
Accounting for Share Dividends (1 of 2)
A pro rata (proportional to ownership) distribution of the
corporation’s own shares to shareholders.
Reasons why corporations issue share dividends:
1. Satisfy shareholders’ dividend expectations without
spending cash
2. Increase marketability of corporation’s shares
3. Emphasize a portion of shareholders’ equity has
been permanently reinvested in business

Accounting for Share Dividends (2 of 2)
• Small share dividend (less than 20–25% of
corporation’s issued shares, recorded at fair market
value)
▪ Accounting based on assumption that a small
share dividend will have little effect on market
price of outstanding shares
• Large share dividend (greater than 20–25% of issued
share, recorded at par value)

Entries for Share Dividends (1 of 2)
Illustration: Danshui Ltd. declares a 10% share dividend on its
50,000 shares of NT$100 par value ordinary shares. The current fair
market value of its shares is NT$150 per share. Record the entry on
the declaration date:
Share Dividends 750,000
Ordinary Share Dividends Distributable 500,000
Equity Section Statement Presentation:

Share capital NT$5,000,000
Ordinary share dividends distributable 500,000
NT$5,500,000
Entries for Share Dividends (2 of 2)
Illustration: When Danshui issues the dividend shares, it debits
Ordinary Share Dividends Distributable and credits Share Capital—
Ordinary as follows.
Ordinary Share Dividends Distributable 500,000

Effects of Share Dividends
Before After
Dividend Change Dividend
Equity
Share capital—ordinary NT$5,000,000 NT$500,000 NT$5,500,000
Share premium—ordinary — 250,000 250,000
Total share capital 5,000,000 +750,000 5,750,000
Retained earnings 3,000,000 −750,000 2,250,000
Total equity NT$8,000,000 NT$0 NT$8,000,000
Outstanding shares 50,000 +5,000 55,000
Par value per share NT$100.00 NT$0 NT$100.00

Accounting for Share Splits (1 of 3)
• Issuance of additional shares to shareholders
according to their percentage ownership
• Reduction in par or stated value per share
• Increase in number of shares outstanding
• Reduces market value of shares
• No journal entry recorded, no effect on the balances
in any equity accounts

Effect of 4-for-1 stock split for shareholders

Effects for Danshui Ltd., assuming that it splits its 50,000
ordinary shares on a 2-for-1 basis.
Before After
Share Split Change Share Split
Equity
Share capital—ordinary NT$5,000,000 NT$ –0– NT$5,000,000
Share premium—ordinary –0– –0– –0–
Retained earnings 3,000,000 –0– 3,000,000
Total equity NT$8,000,000 NT$ –0– NT$8,000,000
Outstanding shares 50,000 +50,000 100,000
Par value per share NT$100.00 −NT$50.00 NT$50.00

DO IT! 3b: Share Dividends and Splits (2 of 2)
Sing CD has had five years of record earnings. Due to this success,
the market price of its 500,000 shares of £2 par value ordinary
shares has tripled from £15 per share to £45. CEO Joan Elbert is
considering either a 10% share dividend or a 2-for-1 share split.
Original After After
Balances Dividend Split
Share capital/premium £2,000,000 £4,250,000 £2,000,000
Retained earnings 10,000,000 7,750,000 10,000,000
Total equity £12,000,000 £12,000,000 £12,000,000
Shares outstanding 500,000 550,000 1,000,000
Par value per share £2.00 $2.00 $1.00

Discuss How Equity is Reported and
Analyzed

Reporting and Analyzing Equity
Retained earnings
Includes net income that a company retains in the
business.
• Part of shareholders’ claim on total assets of
corporation
• Does not represent a claim on any specific asset
• Amount cannot be associated with the balance of any
asset account

Retained Earnings (1 of 3)
• If cumulative losses exceed cumulative income over a
company’s life, a debit balance in Retained Earnings
results
• Debit balance is identified as a deficit

Equity
Share capital—ordinary €800,000
Retained earnings (deficit) (50,000)
Total equity €750,000

In some cases there may be retained earnings restrictions.
• These make a portion of the retained earnings balance
currently unavailable for dividends
• Companies generally disclose retained earnings
restrictions in the notes to the financial statements.
Tektronix Inc.
Notes to the Financial Statements
Certain of the Company’s debt agreements require compliance with debt
covenants. Management believes that the Company is in compliance with such
requirements. The Company had unrestricted retained earnings of $223.8 million
after meeting those requirements.

Statement for Graber SA, based on assumed data.
Graber SA
Statement of Retained Earnings
For the Year Ended December 31, 2020
Balance, January 1 €1,050,000
Add: Net income 410,000
1,460,000
Less: Cash Dividends 100,000
Share Dividends 200,000
Balance, December 31 €1,160,000

Statement of Financial Position
Graber SA
Equity
Share capital—preference, 9% €100 par value,
cumulative, callable at €120, 10,000 shares
authorized, 6,000 shares issued and outstanding € 600,000
Share capital—ordinary, no-par, €5 stated
value, 500,000 shares authorized,
400,000 shares issued and 390,000 outstanding €2,000,000
Ordinary share dividends distributable 50,000 2,050,000
Share premium—preference 30,000
Share premium—ordinary 1,050,000 1,080,000
Retained earnings (see Note R) 1,160,000
Less: Treasury shares (10,000 shares) 80,000
Total equity €4,810,000
Note R: Retained earnings is restricted for the cost of treasury
shares, €80,000.
Analysis
Return on Ordinary Shareholders’ Equity
• Indicates how many euros of net income the company earned
for each euro invested by ordinary shareholders
Carrefour’s (FRA) beginning and ending ordinary shareholders’
equity was €8,047 and €8,597 million respectively. Net income was
€1,263 million, no preference shares were outstanding.
Net Income minus Average Ordinary

Return on Ordinary
Preference ÷ Shareholders’ =
Shareholders’ Equity
Dividends Equity
(€8,047 + €8,597)
(€1,263 - €0) ÷ = 15.2%
2

DO IT! 4b: Return on Shareholders’
Equity (1 of 2)
On January 1, 2020, Siena purchased 2,000 treasury shares. Other
information regarding Siena is provided below.
2019 2020
Net income €110,000 €110,000
Dividends on preference shares 10,000 10,000
Dividends on ordinary shares 2,000 1,600
Weighted-average number of shares outstanding 10,000 8,000*
Ordinary shareholders’ equity, beginning of year 500,000 400,000*
Ordinary shareholders’ equity, ending of year 500,000 400,000
*Adjusted for purchase of treasury shares.
Compute return on ordinary shareholders’ equity for each year.

DO IT! 4b: Return on Shareholders’
Equity (2 of 2) 2019 2020
Net income €110,000 €110,000
Dividends on preference shares 10,000 10,000
Dividends on ordinary shares 2,000 1,600
Weighted-average number of shares outstanding 10,000 8,000*
Ordinary shareholders’ equity, beginning of year 500,000 400,000*
Ordinary shareholders’ equity, ending of year 500,000 400,000
*Adjusted for purchase of treasury shares.
Compute return on ordinary shareholders' equity for each year.
2019 2020
(€110,000 – €10,000) (€110,000 – €10,000)
= 20% = 25%
(€500,000 + €500,000)/2 (€400,000 + €400,000)/2

Describe the Use and Content of the
Statement of Changes in Equity

Appendix 12A Statement Presentation of
Equity (1 of 2)
When statements of financial position and income statements are
presented by a corporation, changes in the separate accounts
comprising equity should also be disclosed.
• Disclosures are made in an additional statement called the
statement of changes in equity.
• Statement shows the changes in each equity account and in
total equity during the year
• When a statement of changes in equity is presented, a
retained earnings statement is not necessary because the
retained earnings column explains the changes in this account
Appendix 12A Statement Presentation of
Equity (2 of 2)

Compute Book Value per Share

Appendix 12B Book Value—Another per
Share Amount
Book Value per Share
The equity an ordinary shareholder has in the net assets
of the corporation.

Book Value per Share (1 of 3)
Computation of book value per share involves the following
steps.
1. Compute the preference share equity. This equity is
equal to the sum of the call price of preference shares
plus any cumulative dividends in arrears. If the
preference shares do not have a call price, the par value
of the shares is used.
2. Determine the ordinary shareholders’ equity. Subtract
the preference share equity from total equity.
3. Determine book value per share. Divide ordinary
shareholders’ equity by ordinary shares.
Illustration: Using the equity section of Graber SA as
previously shown. Graber’s preference shares are callable at
€120 per share and are cumulative. Assume that dividends on
Graber’s preference shares were in arrears for one year,
€54,000 (6,000 x €9). The computation of preference share
equity (Step 1 in the preceding list) is:

Computation of book value:

Book Value versus Market Value
The correlation between book value and the annual range of a
company’s market value per share is often remote.

Compare the Accounting for Equity
Under IFRS and U.S. GAAP

A Look at U.S. GAAP (1 of 5)
Key Points
Similarities
• Aside from the terminology used, the accounting transactions for the
issuance of shares and the purchase of treasury stock are similar.
• Like IFRS, GAAP does not allow a company to record gains or losses
on purchases of its own shares.

Key Points
Differences
• Under IFRS, the term reserves is used to describe all equity accounts
other than those arising from contributed (paid-in) capital. This
would include, for example, reserves related to retained earnings,
asset revaluations, and fair value differences.
• Many countries have a different mix of investor groups than in the
United States. For example, in Germany, financial institutions like
banks are not only major creditors of corporations but often are the
largest corporate stockholders as well. In the United States, Asia, and
the United Kingdom, many companies rely on substantial investment
from private investors.

Key Points
Differences
• There are often terminology differences for equity accounts.
GAAP IFRS
Common stock Share capital—ordinary
Stockholders Shareholders
Par value Nominal or face value
Authorized stock Authorized share capital
Preferred stock Share capital—preference
Paid-in capital Issued/allocated share capital
Paid-in capital in excess of par—common stock Share premium—ordinary
Paid-in capital in excess of par—preferred stock Share premium—preference
Retained earnings Retained earnings or Retained profits
Retained earnings deficit Accumulated losses
Accumulated other comprehensive income General reserve and other reserve
accounts
Key Points
Differences
• A major difference between IFRS and GAAP relates to the account
Revaluation Surplus. Revaluation surplus arises under IFRS because
companies are permitted to revalue their property, plant, and
equipment to fair value under certain circumstances. This account is
part of general reserves under IFRS and is not considered contributed
capital.
• IFRS often uses terms such as retained profits or accumulated profit
or loss to describe retained earnings. The term retained earnings is
also often used.
• Equity is given various descriptions under GAAP, such as shareholders’
equity, owners’ equity, and stockholders’ equity.

Looking to the Future
The IASB and the FASB are currently working on a project related to
financial statement presentation. An important part of this study is to
determine whether certain line items, subtotals, and totals should be
clearly defined and required to be displayed in the financial statements.

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Financial Accounting

IFRS 4th Edition

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► International ► Toyota (JPN) ► Cargill Inc.

General Vice President Vice President

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Preference shares may have a par value or no-par value.

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Illustration: On February 1, 2020, Mead acquires 4,000 shares of its

Both the number of shares issued (100,000) and the number of

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A corporation does not realize a gain or suffer a loss from

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Prepare the entry to record the declaration of the dividend.

Total dividend €50,000

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Equity Section Statement Presentation:

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