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ACF| 2001LECTURE 1:NATURE, ENVIRONMENT ANDGOVERNANCE

OFCOMPANIES

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Lecture Themes* Nature and types of companies* Company formation and administration* Australian standard-setting arrangements* Conceptual basis of financial reporting. AASB 1053 -Reduced DisclosureRequirements* Principles of Corporate GovernanceYl\ ?t.. ,i: ,);.i:: 'liirfti'iri i,r r.rLltii:t,lrlliJlL:r: h*C$j}tr lriirlL r ilr,.- 2

Nature of a company* A company is a separate legal identity- lncorporation achieved through registration by ASIC(Australian Securihes and lnvestments Commisston;- Subject to requirements of Corporations Act 2001* A company:- has limited liability (by shares or guarantee)- is also possible to be unlimited liability with a share capital- has rights, powers and responsibilities- has its own separate legal existence- exists in perpetuity- has financing advantages- is subject to greater public scrutiny and regulation,ffiiiftffi j$J..*-" l

Types of companies" Proprietary (Pty) companies- Minimum of 1 member, maximum of 50- Minimum of 1 director- Cannot raise funds from the public- ClassiUed as large or small* Public companies ru".'r- Can invite public to subscribe for securities- Can list on Austraiian Securities Exchange (ASX)- Minimum 1 member. no maximum- Minimum of 3 directors- Must prepare published flnancial statements and be audited?;.'q },r,-. .. r;1.1 . ,.,,,, iiriliilitilLiriii+il,r, tLii,ir lil*{ilr',lltirrlli,,liiii'

Size test for Proprietary Companies* Small proprietary companies must satisfy atleast two of the following criteria;- Annual gross operating revenue. < $25 million- Gross assets: < $12.5 million- Number ofemployees: < 50" Entities that do not satisfy the criteria forclassification as a small proprietary companyare classified as larqe

Other types of companies* Listed corporations- Public companies listed on the ASX /." Disclosing entities . 6- An rentity with enhanced disclosure (ED) securities* Foreign companies- lncorporated outside of Australia or in an externalterritory of Australia* No-liability company- Shareholders are not liable for debts of thecompany. Sole ob.ject of the company must bemrnlng- 'J,.\,.,,-.H llilr: . Il .,ri:i. r,Lrr-]lii: :,i i i.tir-:r,.: 6

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Company formation* To register a company, a person lodges theprescribed application form with ASIC* On registration, the company aehieves legalexistence- ASIC issues a certificate of registration andan Australian Company Number (ACN)

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Company constitution' Management of the company is governed byreplaceable rules or constitution" Constitution/replaceable rules represent a contractwith shareholders* Replaceable rules- Deals with issues relating to directors and members,inspection of companies books and records, shares and sharetransfers* Constitution- Necessary lf a company wants different rules- Public mmpany must lodge constitution with ASICt ',tt- t!;::,-':.F4,r1,=,1u.,,.,:.Thi'+,:,\arm"r:,=.-l,Ei,*irSi;..;;ilffi'a.,rLiiiiri.rr.-i1L *l li*ulu . B

Company administration* Directors manage on behalf of the members* Certain registers and records must be maintainedand kept at the company's registered office

- Minute books - records actions/decisions ln meetings- Financial records - to enable statements to be audited- Registers of members, debenture holders and chargesi !itri$j!'Jrl4+.v.i!*rw.awdt trc])$$sa*1*:i!1:r- vs*R e

Company funding. A public company can raise funds by issuingsecurities:- Shares {equity)- Debenlures (debt)- Options (equity)t Shares represent'ownership' and can be issued tothe public or privately 'placed' with new investorqorcurrent shareholders 0.\ f !bf:r Cr,. irr.,t* Debentures representa claim on the assets of thecompany and may be secured by a fixed or floatingcharge ofthe company's assets.

Funding documentation. Public issues of both debt and equity require adisclosure document to be issued:- Written notice inviting subscription- Content regulated by Corporations Act- Contains issue price, iems and conditions- Copy of the disclosure document must be lodged with ASIC

* A prospectus is an example ofa disclosure document

The Corporations Act* The Corporations Act has arisen from significantamendments resulting from CLERP. CLERP = Corporate Law Economic Reform Program* Federal Government program, commenced in 1997 andstill running* Wide ranging reforms. Major changes to date include:- changes to lhe development and application of accountingstandards in Australia.- establishment ofthe FRC and FRP- refomed auditing practices*tffiffi. $ ffi ni

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Key TermsShareholder:

member of company holding sharesDividends:

distribution of profits to membersLimited Liability:

the liability of members of a company islimited to their investment.Audit:

independent investigation of, and report onthe company's flnancial affair:t'Yffiitr'ffi1i/P,,s,,.*n,13

Need for accounting regulation' Separation ofownership from control* Need for reporting by agents to owners. Need for protection of owners' and creditors'investmentst lncreasing complexity offinancral transactions andsize of organisaiions* Regulation achieved via legislation or professionalpronouncements including.

- Corporations Act- Accounting StandardsT,f;li.t*ffi *,.- l!I:,ii:,"iiii'rll ir

Australian accounting regulationFinancial Reporting Gouncil (FRC)* Oversees MSB ,- ", h, O" VAustralian Accounting Standards Board (AASB)k.lc,; ,lu al! 7 n.h -,-3'" Responsible for:

/ development of the conceptual framework/ formulating accounting standards in accordance with theCorporations Act/ fomulating accounting standards for other purposes (for example,pubiic and not-for-profit sectors)w":, ::s:

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AASB Accounting Standardsc'ln line with these objectives,for financial reporting periods beginningon or after 1 January 2005,Australia adopted accounting standardsand financial reporting standardsissued by the lnternational AccountingStandards Board (IASB)

Objectives of accounting regulation. Key objectives of developing accountingstandards include:1. The provision of financial information that isrelevant, reliable, understandable and comparable2. To facilitate the Australian economy by reducingthe cost of capital, thus enabling Australian entitiesto compete effectively overseas3. Maintaining investor confidence in the Australianeconomy and capital markets

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A-tFRS.... Australian accounting standards are identical to theirinternational equivalents, with 3 exceptions:

1. AASBS may not allow optional treatments provided ininternational equivalents2. Some AASBs require more detailed disclosurss than theirintemational equivalents3. AASBs contain additional paragraphs relevant to not-for-prollt entities

AASB numbering system* As a result of adopting internationalstandards there are now three sourcesof AASB standards:

-AASB 1.99-AASB101-199- AASB1001-1099

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AASB 1-99- AASB equivalents to IFRS standards issued by the

rASB (A-rFRS)- Have same number as their equivalent IASBstandards

Thus, IFRS 2 > AASB 2 Share-Based Payment

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AASB 101-199- AASB equivalents to IAS standards of the IASC before

it was replaced by the IASB in 2001- Have the same number (+100) as the amended older

IAS standards on which they are based

Thus, IAS 16 > AASB 116 Property, Plant & Equipment

lnfluential Regulators 1lnternationa I AccountingStandards Board (IASB). lndependent, privately fundedaccounting standard setter. Committed to the development of asingle set of high quality, enforceableglobal accounting standards

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lnfluential Regulators 2Financial Accounting Standardstsoard (FASB). US Accounting Standards body forprivate sector entities, both for-profitand NFP, Currently involved in a joint project withthe IASB working towards converged USand internaiional standards

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lnfluential Regulators 3. IPSASB (lnternational PublicSector Accounting StandardsBoard) - a board of IFAC \.. FASAB (Federal AccountingStandards Advisory Board) - makesaccounting standards for the US federalgovernment?i:t ; rl ,,1\,r

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Other accounting regulatory bodieslnternational Financial Reporting lnterpretationsCommittee (lFR|C). Sub-committee of the IASB. Considers issues ofwidespread importance not coveredin IFRS standards. IFRIC interpretations are adapted by the AASB to suit theAustralian environmentUrgent lssues Group (UlG). Now disbanded' Previously issued UIG consensus views still applicable. AASB 1048 lnterpretatrons and Applicaiions of Standards

Corporate regulators 2. Financial Reporting Panel (FRP)- Established in 2006 under CLERP9- Function is to resolve disputes between ASICand companies concerning accountingtreatments in financial reports

Corporate regulators 1. Australian Securities and lnvestments -7Commission (ASIC)- Administers Corporations Act- Monitors implementation of the Aci and investigatesand prosecutes breaches of the Act- Promotes confidence in the financial system' Australian Securities Exchange (ASX)- Administers Listing Rules- Played a major role rn influencing the move towardsthe adoption of IASB standards!.r, .,fr,r1..',.:ill{ii**+.1-Fs-.s,\,:; ,,.S\,,,,,. 2B

General Purpose Financial Report'/ A financial report intended to meet the infomation needs commonto users who are unable to command the preparation of reports

tailored so as to satisfy, specitically, all of their information needs(that is, there are'dependent' users)r' Allows management and governing bodies to discharge theiraccountability. Preparation of a GPFR devolves on the notion of a reporlingentity contained in the conceptual framework. Public companies and large proprietary companies are deemedto be reporting entities

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- ,51:,,r;\,4:,."Reporting entity concept

' A reporting entity is an entity in respect of which it isreasonable to expect the existence of usersdependent on general-purpose financial reports forjnformation useful for making and evaluatjngdecisions about the allocation of scarce resources. Defined in SACI Definition of the Repofting Entity. Classes of users are set out in The Framework. Reporting entities are required to prepare a GPFRand comply with accounting standards, while non-

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Goncept abandoned?. Due to release of an Exposure Draft on Small and

Medium-sized entities (SMEs) by the IASB, the AASBinitially proposed a move away from the reporting/non-reporting entity concept. The ED on SMEs proposed a move towards a size andpublic accountability test. However, IASB/FASB.ioint project includes the reportingentity concept in its conceptual framework, leading the

Reduced Disclosure Regime. ln June 2010, AASB 1053 Application ofTiers of Australian Accounting standardswas issued. lntroduces two tiers of reporting:- Tier 1 : publicly accountable entities

- Tier 2 : all other preparers of general purposefinancial reports - same recognition,measurement and presentationrequirements but with substantiallyreduced disclosures*F'..$u$#'M"$.gil '*,,-. 33

AASB 1053. Represents a rejection of the IFRS on SMES (read

paragraphs BC67-75 for the reasons). Applies for financial reporting period on or after 1 July2013 but rnay be adopted early. Non-reporting entities will continue to be excluded fromthe requirement to prepare a GPFR but may still need toprepare a SPFR

AASB 1053 - Defined terms 1Tier 1:. for-profit private sector entities that have publicaccountability and the Australian Governmentand State, Territory and Local GovernmentsTier 2:. for-profit private sector entities that do not havepublic accountability, NFP private sector entitiesand public sector entities (profit or NFP) notmentioned in iier 1'l,,Fil1.*,-,..,.:'...''.E;J, il't, t,, ,r,, 35

AASB 1053 - Defined terms 2Public Accountability:' Appendix A "... means accountability tothose existing and potential resourceproviders and others external to the entitywho make economic decisions but are notin a position to demand reports tailored tomeet their particular information needs"

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AASB 1053 Tier 1 impactAccording to Appendix A,. a for-profit private sector entity has public accountability if:a) its debt or equi9 instruments are traded in a public market (or isin the process of so doing);orb) it hold assets in a flduciary capacity for a broad group of outsidersas one of its primary businesses (banks, credit unions, insumncecompanies, securities brokers/dealers, mutual funds and investmentbanks)I Read paragraphs BC53-54 for the rationale for thetreatment of public sector NFP universities

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Corporate Governance- A brief background and introduction

Legal perspective. Body incorporated under Corporations Act 2001' Artificially created entity. Concession theory ofa company. Company owes its existence to the state and must

conform to requirements of company law.

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Economic perspective. Aggregate theory of companies. Companies as'natural entit'es'. Capacity to raise capital. Advantage of limited liability. Agency theory - separataon of ownership and

control

Financial perspective. Facilitation of investment in/transfer of

company securitjes via stock exchange. Provision of information to investors. Assessment of market value of companysecurities

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Political perspe;tive. Communitarian theory of companies:

companies are important inencouraging economic activity andinvestment in the community. Contribution of companies to the

Sociolog ica! perspective" Social responsibility theory of companies:

companies have some'moralresponsibility' to society asindividuals

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Accountability. Definition: provision of information to stakeholders to aid

informed decision making. Stakeholders - include shareholders, lenders, suppliers,customers and society at large. Directors accountability:

. Stewardship. Agents for shareholders. Accountability for compensation arrangements

Regulation of CompaniesRegulation of companies is a resDonse to corooratecollaDses and failuresRegulation: rule that conirols activitiesEconomic rationality: people acting in their own self-interest

Theories of regulationprivate interestpublic interestForms of Regulation: CA 2001, AASBS, ASX Listing Rules

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Corporate social responsibilityCorporations may voluntarily report on a range ofnon-financial matters as a resuli of perceivedcorporate social responsibility.CSR Examples in text, pages 12-13

. James Hardie lndustries Ltd

. 2004 Tsunami appeal

Gorporate governance' system by which governing body of an

organisation provides strategic direction,achieves its objectives, manages risks andattests to the use of its resources

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ASX CGC DefinitionThe ASX CGC defines corporate governance as:"... the framework oi rules, relationships, systemi and processes wilhinand by which authority is exercised and controlled in corporations ltencompasses the mechanisms by which companies, and those incontrol, are held to account. Corporate govemance influences how theobjectives of the company are set and achieved, how risk is monitoredand assessed, and how performance is optimised. Good corporategovemance structures encourage companies to create value...andprovide accountability and control systems commensurate with the

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lmportance of corPorategovernanceGood corporate governance is said to result in thefollowing advantages in the operation of the company:. Transparency and accountability in executive decision-making:. Producing quality financial repo.iing' Preventing management from over-consumirg company'esources

. Effective monitoring of management.. Economic performance. Good corporate govemance is seen as adding economic value thoughefficient operation and decision making-. On the other hand corporate govemance structures may act to restricteconomic perfomance.

2012 Student Brand ChamP>Are you in your second year of university?> Studying a business or commerce degree with an accounting majop> Available to work 2-4 hours per week?> Looking to eam some extra money?> Enthusiastic, outgoing and well organised?Then apply to be the 201 2 UoN Student Brand Champ for The lnstituteof Chartered Accountants!Send your cover letter and resume tocareers.nsw@charteredaccountants.com.auFor mdre info: M-charteredaccountants.com.au/students

Principles of corporate governance.The ASX CGC Corporate Govemance principles andrecommendations document articulates eight core principles of goodcorporate govemance:'1.Lay solid foundations for management and oversighl h f *2.Structure the board lo add value i-. tct1,Ji3.Promote ethical and responsible decision-making i ,4.safeguard integrity in financial reporting b" \5.1\4ake timely and balanced disclosure '^J :"*-; .' "t 'tt# A6.Respect the rights of shareholdersT.Recognise and manage nskS.Remunerate fairly and responsiblyiil.,4.,+lli"ii ilfi. ,'"i rli;..ia

Theoretical models of corporategovernanceThere are four major theoretical contexts in whichcorporate governance can be considered:. Agency theory. Stakeholder theory. Stewardship theory. Resource dependency theory.iri r\ ^r'i a' \ L\ " .r, -.,J J '!r-2[L# i,iffiL-ru.-*,,b,*- 51

Facilitation of corporategovernanceThe board of directors of a company js central to theoptimisatron of a company's corporate governancestrategies and practices. The following considerationsrelate to the board of directors:. Type of board of directors e.g. unitary versus two tierstructure. Corporations Act requirements. Composition and operation of the board of directors' Director indeoendence.Y:\\; 6u

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ACF| 2001LECTURE 2:

COMPANY FORMATIONSf,ARE CAPTAL

ANDDEBT SECUR/T'ES

G regory. P h i I I ip@n ewc a stl e. ed u. au

l-ecture Themes. Review oftypes ofcompanies" Formation and financing ofa company. lssuing shares. Forfeiture of shares. Treatment of share issue costsn Preference shares' Share options. Presentation of Shareholders Equity. Debt securities

Companies limited by sharesLimited liability companies which have a sharecapital are either:.Proprietary companies (Pty Ltd)

- Large-Small.Public companies (Ltd) - can invite the public toinvest via share or debt capital

Formation of a companyA company is formed by application to ASIC. Onregistration a company will be issued with:

' Certificate of Registration (ACN)A company must adopt either:. Constitution or Replaceable rulesAny invitation to the public to invest in thecompany must be accompanied by:. Prospectus (Disclosure Document)ffl-ffiffiffiM M

Financing a company - equityShare issues are the main way in which a new company raises fundsA company can issue shares on any tems or conditions it determinGShares can be issued at any price, payable in full or by instalmentFor public companies shares are transferableTypes of Shares:. Ordinary : the basic ownership unit for which membeE of thecompany subscribe. Preference : may be cumulative, redeemable, and/or participatoryTo issue preference shares a conslitution setting out the rights isnecessary (s254A(2))"Preftrsce'means preferential as to payment of dividend and meymean priority as to retum ofcapital in a liquidation

Key features of share capital. Shares may have different rights in respect of voting, sharjngin profits or retum of capital

. Rights ofordinary shareholders include:. The right to vote for directoF of the company. The right to share in assets on the winding-up/liquidation ofthe company' The right to share in new share issues (for the same classof shares)

. Ordinary shareholders have no specific right to dividends.

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Financing a company - debtCompanies may also issue debt capital:,debontures, convertible notes, unsecured notes,mortgages

Hybrid securities exhibit attributes of both equity and debt

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Classification of Preference SharesUnder AASB132 preference shares must beclassified as a liability where:.They are subject to mandatory redemption bythe company.The shareholders may demand that the companyredeem their sharesE.#,$#K*

Classification of Securities:Criteria for classification are provided inAASB 132 Financial lnstruments: PresentationParaoraoh 1 1.An equity instrument is any contract that evidences a residuaiinterest in the assets of an entity after deducting all its liabilities.A financial liability, on the other hand, is a contractual obligation todeliver cash or another financial asset, or exchange financial assets orliabilities under conditions that are potentially unfavourable, or settlewith the entity's own equity instruments

lmportance of Classification ofFinancial lnstruments. Where securities are classified as liabilitiespayments made to shareholders are interestexpense 4 .* ":'(-1' '7- "1 ?r.,."/.i. Effect on restrictive covenants on lending '- i. lnfluence on directors' statement of solvency

Accounting for share issues slThe following slides contain a number of examples ofthe accounting process involved when a companyissues new shares,

. Most of the follo*il:5..9-.\.-a_-ryj.1:9--s-._f.sume that shares areissued via an IPO *aW#(@r./prospectus process.Such processes involve the shareholders applying for anumber of shares in response to a prospectus issued bythe company. The company will then issue the sharesto new shareholders based on the applications it hasreceived.

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Accounting for share issuesSuch share issues are accompanied by disclosuredocuments. Commonly lhe disclosure documents speciry aminimum number of applications which must be received inorder for the share issue to proceed.The Corporations Acl requirs:. That the minimum subscription be achieved wjthin 4 months of

the issue of the disclosure document; and' shares be allotted within 13 months of the issue of thedisclosure document.ft.1::::t:::

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Accounting for share issuesOn issuing new shares the company may require the fullamount owing on the shares to be paid at the time ofapplication. Altematively it may requir a portion to be paidon application, with the balance being due at some time inthe future (on allotment and/or at call) I ,r).,4 I l, I t UVIThere are a number of different accounts used to facilitatethis application, allotment and call process.

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Lecture Example 7: lssue of shares -payable in full on application. ABC issued a prospectus for the issue of 1 00,000 $5 shares on 1January 201 1." The prospectus specified that the $5 was payable in full on application.. The company received applications for a total of 100,000 shares -these applications were received throughout the month of January.. On 31 January 201 1 ABC issued 100,000 shares.. Share issue costs of $1 ,500 were incurred by ABC.Required;

Prepare the journal entries to account for the issue of shares by ABC.

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lssue of shares -Payable in full on application (Exampte 1)1-30 January 2011Dr Bank trust , N,rL .tss 500,000

sffi"^n'iCr ApplicationTo record receiptshares monies prior ao issumg the

lssue of shares -Payable in full on application Examptel)31 January 2011 #iDr Application 500,000Cr Share capital 500,000lssue of shares applied for

Cr Bank trust 500,000Transfer from cash trusa or issue of sharesDr Share capital t,500Gr Bank 1,500fo fecord share issue cosls

Lecture Example 2.' lssue of shares -Deposit on application, balance on allotment

ABC issued a prospectus for the issue of 100,000 $5 shares on 1January 2011.

The prospectus specilied that $3 was payable on application, with thebalance payable on allotrnent.

The company received applications for a total of'120,000 shares - theseapplications were received throughout the month of January.The Directors decided to issue 5 shares for every 6 applied for, refunding

the money in relation to unsuccessful applications.On 31 January 2011 ABC issued 100,000 shares.

Required:Prepare the joumal entries to account for the issue of shares andthe subsequent receipt of allotment monies.

lssue of shares - Deposit on application, balanceon allotment Exampte2) ffi1 January 20'11

Dr Bank trust 360,000Cr Application 360,000To record receipt of application monies prior to issuingtheshares ti **#,l#d

31 January 2011Dr ApplicationDr Allotment

Share capital

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lssue of shares - Deposit on application,balance on allotment(Example 2) *xJN:31 January 2011Dr Application 60,000Cr Bank trust 60,000Refund of application monies to unsuccessful applicantsJ*R\RRNTDr Bank 300,000Cr Bank trust 300,000Tnnsfer from cash trust on issue of st ares .$$$tlmiiin*#!4i lDr Bank 200,000Cr Allotment 200,000cash received on allotment 4**itii*;wi;ii1,&laui ,!

Lecture Example 3: lssue of shares -Deposit on application, instalment on allotment,balance on callABC issued a prospectus for the issue of 100,000 $5 shares on 1

January 201 1.The prospectus speciUed that $2.50 was payable on applicataon, afurther $1.25 was payable on allotment and the llnal $1.25 waspayable at call.On 31 January 201 1 ABC issued 100,000 shares.On 31 May 2O11, the company made the call for the outstanding

balance of $1.25 pershare. The callwas payable by30 June 2011.At 30 June 201 1, the call on 10,000 shares remained unpaid.Required:

Prepare the joumal entries to account for the issue of shares andthe subsequent receipt of allotment monies.aR;:rNiRfil:if.l.S tiN':ll 'l.i; .'ri lj:i'r4 - 2a

lssue of shares - Deposit on application,instalment on allotment, balance on call (ExampJe 3)#s1 January 2011 l4NlDr Bank trust 250,000Cr Application 250,000To record receipt of application monies prrcr to issumgthe shares {lds.ncf rtaJq :31 January 2011Dr Application 250,000Dr Allotment 125,000Cr Share capital 375,000lssue of Shares appried for tsAqqnixSat6)"Dr Bank 250,000.,r,ffiltL$Fii,:.1 ,,.-. _.. 'ss: \. 250,000

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lssue of shares - Deposit on application,instalment on allotment, balance on call (Example 3)31 January 2011Dr w, Er-t rzs,oooCr Allotment 125,000Cash received on allotment31 May 201 IDr Call 125.000

of$1.25 per sharc on 100,000 shares issued

lssue of shares - Deposit on application, instalmenton allotment, balance on call (Example 3) ,.d*{

30 June 201 1Dr BankCr CallCash received on allotmenl. At30 June2011 the balance inthecall account is 912,500,representing $1.25 per share on '10,000 shares.. Such unpaid calls are referred to as calls in arrears andare shown as a reduction of share capital in thecompany's tinancial statements.. As such the balance in the share capital account at 30June is as follows:

ShaB c.pttal (100,000 ordinery shiles @ SS pst she) 500,0ooLes : Calls in ne u s ( I o,O(n shares @ $1. 2 5 pe t slwe) ll],@!),F'lrR*-rytE -, : 'TaisooiR\-,\.i r,Liir;r.;: i..:': iijtftie;rji ii[:::i::.::;i]: r:**" r

Oversubscription N*NS. The number of shares applied for may exceed the number ofshars that the company has available for issue.. ln such cases the diroctors of the company may decide to:. Reduce the number of share to be issued to eachapplicant (on a pro-rata basis). To issua shares only to certain applicants (for example,on a first-in-first-seryed basisl. The treatment of excegs application monies depends on theterms ofa company's constitution. Options include:. Relunding excess application monies to unsuccessfulapplicants; orRetaining the excess application money as an advancea-0 f uture calls v!r'ii* rnramrm xw*&i 'Q;.;'*;

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Lectu re Exa mpl e 4; Oversubscri ption. ABC issued a prospectus for 100,000 $5 shares on 1 January2011.. The prospectus requircd payment ol 53 on application and g2 inone years time.. The company received applications for a total of 125,000 shares -these applications were received throughout the month ofJanuary.. On 3'l January 201 1 ABC issued 100,000 shares.Required:

Prepare the iournal entries to account for the issue of sharesassuming the excess money was offset against the call due ln one

Forfeiture of shares2. The amount paid may be refunded back to the forfeitingshareholder.. ln this case the balance is recorded in a liablllty account

{Forfeited Shares Account).. Prior to refunding the balance lhe company could reissuethe shares as fully paid shares to new sharsholders withthe new shareholders paying less than the fully paid valueof the share.. The difference, as well as any costs of reissue are deductedfrom the amount to be refunded back to the forfeitingshareholders.. This option is only available ifthe company's constitutionstates this fact. Where the constitution is silent, thecompany is entitled to keep any excess (option 1 above).

Oversubscriplion (Exampte 4)1-30 January 2011Dr Bank trust 375,000Cr Application 375,000To record receipt of applicaaion monies prior fo ,ssuingthe shares irecportX)t:;t*htt a\Et\{:93l January 2011Dr Application 375,000Cr Calls in advance 75,000 't?r.$drCr Share capital 300,000tssue ofshares applied for and transfer of excess to callsin advance accountDr Bank 375,000E,':, .oi'::fu,:tr,,3 l&o! r.,*,,.,,..r i l,' lll L. 375,000i..+i:it;!: 1W

Forfeiture of sharesDirectors may be given the power under the company'sconstitution to forfeit (cancel) shares in respect of whichcalls are not made. Possible actions that can be taken insuch circumstances are:1. The balance of paid monies may be retained by the

GOmpany.. ln this case the balanca is retained in an equity account(Forfeited Shares Reserve)

Lecture Example 5; Forfeiture ofshares. This example continues onfrom example 3.. On 1 July 20l l the directors of ABC decided to forfeit the

10,000 shares in respect of which the call of $1.25 wasnot made.. The shares were cancelled and reissued as fully paid to$5 per share on payment of $4 per share.. Costs of $500 were incurred to reissue the shares.Required:Prepare the journal entries to account for the forfeitureand re issue of the 10,000 shares.

Forfeiture of shares ffxampte b).reI1 July 20llDr Share capital 50,000Cr Call :A*ao r s*i\ IIt#tto,rl$iN:;r Forfeited shares a/c 37,500Cancel of forteited shares

DrDr 40,000Forfeited shares a/c 10,000Cr Share capitalR*issue of forteited shares for $1 per shareDr Forfeited shares a/c 500Cr Bank 500Costs incurred to reissue shares

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Share issue and formation costsUnderuriting costs:- Arranoino for the issue to be underuritten will avoidhavin! tdrefund monies due to under-subscription- Underuriter agrees to purchase all excess shares inreturn tor an ripfront phyment of air underoritingcommission- Treated as a reduction against contributed equity

Other share issue costs:- lncludes costs such as stamp duty, legal fees etc- Treated as a reduc{ion against contributed equity

Formalion costs:5

Contributed EquitY - summary. The contributed equity total shown on the BalanceL Sheet is the net of:>rr. $1-1 ,"' * share capital x*-o

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Subsequent movements in sharecapital - options @xam1e 6)

Required:Prepare the journal entries to account for the issue andexercising of the options assuming;a) The options are issued for no consideration. On 1 May

2012, when the share price is $3.10, the CEO exercisesthe options.b) The options are issued for no consideration. Theoptions are not exercised by the CEO and lapse on 30June 2012.c) The options are issued for $1 each. By 30 June 20'12,9,000 of the options have been exercised.

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Subsequent movements in sharecapital - options Exange 6)

30 June 201 I (same entry for a) and b))Dr Wages expense 10,000Cr Options 10,000,ssue ofoptions to CEOal1 May 20'12Dr Bank 30,000Or Options 10,000Cr Share capital 40,000Exercising of options by CEOb) 30 June 2012Dr Options 10,000Cr Reserve 10,000

Subsequent movements in sharecapital - options gxampte 6)c) 30 June 201 IDr BankCr Optionslssuing of optionsI July 2011 - 30 June 2012Dr Bank 27,000

Dr Options 10,000Cr Share capitalCr Reerye 1,000 i!#afiExercising of 9,ooo options to 30 June 2007 and tAftgfCFVbalance to a reserue account on the lapsing ofthe options

Redeemable preference shares. Such shares either:- Give the holder the right to be repaid his/her capitalOr- Give the company the right to repay the capital. Main issue is the classiftcation of such shares

- Are they equity or liabilities?Vo'.l ogrr&>^"'1 f(v1r!l' \ A+ ltirv,X+-,

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Redeemable preference shares - equityShares can be redeemed from:

t . Proceeds of a fresh issue of sharesOr2. Retained earnings- Additionally, the constitution may specify payment ofa redemption p.emium which is paid from profit- On redemption the shares are cancelled and cannot bereissued

Redeemable preference shares - equitysNdffiDr Share Capital - Preference $xCr Shareholders redemption $xTnnsfer of preference capital to redemption accountDr Shareholders redemption $x'Gr Bank $x

Redemption of preference sharesDr Bank I Retained earnings $xCr Share Capital - Ordinary $xReceipt of cash on issue ofnew shares

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bWI,W tJrp tuuue)\ r^ )evuRedeemable preference shares -liabilities

. Redeemable preference shares with the tollowingcharacteristics are more in the nature of liabilities:- Redeemable in cash on a cenain date or at the option of theholder- Cumulative as to the payment of dividends- Non.participating in further dividends distributions- Priority capital return rights

. Under Australian law, redemption of pre{erence shares must bemade out of protits or a tresh issue of shares, irrespective oftheir classification as equities or liabilities

. A company may change its issued capital by:- Consolidation. lnvolves grouping issued shares into larger parcels. Eg; 2 x $'1.00 consolidated into I x $2.00 share- Split. lnvolves splitting issued shares into smaller parcels. Eg; I x $2.00 share split into 2 x $1.00 shares- Conversion. lnvolves converting an ordinary share to apreference share or vice versa

Share buy-backs. WHYBUYBACKSHARES?- Change debuequity ratio- Defence againsi takeover- Clear odd lots or employe share schemes. LEGAL REQUIREMENTS- Covred by Section 257 A of Co.porations Act- Allowed only if not preiudicial to creditors- Limited typs of buy-backs allowed. ACCOUNTING FOR BUY-BACKS- Shares must be cancelled- Buy-back may generate a premium or a discount- These are adiusted aoainst either reserues. retainedprofits or both (UlG A'bstract 22)

1. At a premium:- 120 000 shares initially issued at $'1.20 were boughtback tor $1.50 eachDr Share Capital 1.14,000Dr Retained earnings 36,000Cr Bank 180,000

2, At a discount:- 120 000 shares initially issued at $l-20 were boughtback for q1.00 each. Write back firstly against reserves(balance $20,000)Dr Share Capltal 14/.,000Cr Reserves 20,000

Debentures. A legally binding agreement to repay money lentto the company. A debenture holder is protected by a securiiy of acharge over assets:- Fixed over specific assets, or- Floating over assets generally

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Accounting for debentureslssuing debentures. May be issued at parlpremium/discount. lssue preceded by disclosure document. Application monies held in trusi until allotment. Can be listed on the stock exchangeRedemption of debentures. May be redeemable at company's option before maturity. Redeemable on a set date or after a set period of time. Debmtures may be redeemed at parlpremium/discount. Premiums and discounts are treated as expenses and revenues. Funds lo redeem debentures may come fiom:- Proceeds of new share issue or bonowing- Proceds of assei sale- Assets curently held. Maybeconvertibleintoshares

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Lecture Example 7:Accounting for Debenture lssueA company issues a prospectus for the issue of 5000 x $100 i0 yeardebentures which is fully subscribed (Note: prcspectus should atsospecify the coupon (interest) rate)Solution:General JournalDR Bank Trust 500 000

CR Debenture Application 500 000DR gank 500 000CR Bank Trust 500 OO0

DR Debenture Application 500 000CR Debenture 500 000

Redemption of debenturesAp*ns uREDEMPTION AT A PREMIUM (LOSS)

Dr Debentures 9xDr Redemption expense gxCr Redemption revenueCr Cash !xsx

CONVERSION TO EQUITYDr Debentures $xCr Share Capitat $x.':I riaL:til].lR:=,ffi.Nf..'= ,l,il * ,,,,,,.,,- so

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Convertible notes. A form of debt which can be converted into sharesafter a set period of time (maturity). lnitial classification as liability or equity depends oncharacteristics.. Some may be partly debt, partly equity. Accounting for redemption depends on initialctassificatioUlW

Other Debt Securities.MortgagesA charge over property to secure a loan

.Unsecured NotesA form of debt where there is no charge over thecompany's assets

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| --,| .."ACFI 2001 5112012 Comprehensive Share lssue Example - past exam paperOn 1 July 2011, Catalina Ltd invited applications for 100,000 shares at an issue price of $3.50,payable $2.50 on application, 75 cents on allotment, and a future call of 25 cents. At the close ofapplications on 31 July 2011, individual investors had applied for 125,000 shares. 100,000applications were submitted with only the application money as stipulated in the prospectus, with theremainder submitting the full issue price of ihe shares-Catalina Ltd decided to allot 100,000 shares in total, on a pro rata basis. ln accordance with theterms of the issue, Catalina Ltd also decided to apply excess application money to allotment and tocalls in advance accounts. Shares were allofted on 1 August 2011. Allotment money was due on 1September 2011.Required:(i) Prepare a schedule that shows a breakup of the:. number of shares applied for;r number of shares allotted;. totalcash received;o cash received that relates to application;r cash received that relates to allotment;o cash received that relates to calls (in advance); ando cash refunded.(ii) Prepare journal entries to reflect all transactions up to and including 31 August 2011. Excludejournal narrations.Solution(i)

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