Chapter 16: Corporate Reporting Part 3

1
Chapter 16Corporate Reporting Part 3

• Statement of Retained Earnings
• Accounting Changes
• Treasury Shares

2
Statement of Retained Earnings

• Shows how the Retained Earnings account changes
  over the accounting period.
• Retained earnings is NOT cash, it is merely how
  much of the assets are owned by the shareholders
  as a result of earnings that have been retained
  or kept for the purpose of reinvestment.
• The statement is often combined with the income
  statement.

3
Restricted Retained Earnings

• Amount of retained earnings that are not
  available for dividends.
• There are three types of restrictions on retained
  earnings
• Statutory restrictions Are imposed by a
  regulatory body.
• Contractual restrictions Occur when contract
  specifies that the payment of dividends is
  limited to a certain amount of retained earnings.
• Voluntary restrictions Placed on retained
  earnings by directors to limit dividends because
  of a special need for cash.

4
Accounting Changes

• There are three types of accounting changes
• Change in Accounting Principle or Policy
• Correction of Accounting Errors in Prior
  Financial Statements
• Change in Estimate

5
Change in Accounting Principles

• A change in accounting policy requires
  retroactive restatement of the financial
  statements to provide meaning comparisons to
  current results.
• The Consistency Principle requires a company to
  apply the same accounting principles once they
  are chosen to ensure comparability.

6
Change in Accounting Principles

• Changes are permitted as long as the change
  improves the usefulness of information provided
  in the financial statements.
• Disclosure is required detailing the nature of
  the change and the impact on the financial
  statements.

7
Change in Accounting Principles

• Example Note Disclosure
• XYZ Corporation changed from Straight Line to
  Declining Balance method of amortization to
  better match expenses with the expected life of
  the underlying assets and their ability to earn
  revenue. The prior year financial statements
  have been restated to reflect the change as if it
  happened in the prior year. The impact of the
  change was 150,000 for the prior year.

8
Accounting Errors

• Errors can occur that are not due to a change in
  policy or a change in estimate.
• This is an accounting change that requires a
  journal entry for the impact of the error.

9
Accounting Errors

• Retained earnings is credited or charged for the
  impact of the error, net of income taxes.
• The corrected amount is reported in the current
  years operating results.

10
Accounting Errors

• The Statement of Retained Earnings shows the
  error as a separate item within the statement to
  adjust the prior years closing balance (i.e. the
  current years opening balance). See Exhibit
  16.17 on page 828.

11
Change in Accounting Estimates

• Many items reported in the financial statements
  are based on estimates.
• If new information comes to light that would
  cause us to change our estimate, we show the
  impact of the change in current and future
  periods.
• An example of a change in accounting estimate
  would be an accrual for the year-end management
  bonuses.

12
Treasury Shares

• Some provincial jurisdictions allow for a buy
  back of shares without having to retire them.
• Similar to unissued shares neither one is an
  asset, they do not receive stock or cash
  dividends, and neither has voting rights.

13
Treasury Shares

• Differ from unissued shares they have been
  issued, but are not outstanding. Outstanding
  shares can only be held by shareholders.
• Treasury Shares account is a contra shareholders
  equity account, and is subtracted from total
  contributed capital and retained earnings.

14
Treasury Shares

• The retained earnings description indicates the
  partial restriction caused by the treasury
  shares.
• The sale of treasury shares is similar in
  presentation to that of the sale of common shares.

15
Treasury Shares

• Any amount of the sale in excess of the cost is
  credited to Contributed Capital, Treasury Shares.
• Any amount of the sale lower than cost is first
  charged against any credit balance in Contributed
  Capital, Treasury Shares, to reduce that balance
  to zero. The remaining difference between cost
  and the selling price is debited to Retained
  Earnings.

16
Corporate Reporting Part 3

• Questions??

17
Assignment Hints

• Exercises
• 16-16
• B) Total contributed capital 750,000
• 16-18
• Retained earnings Dec. 31, 2005 1,174,000
• 16-20
• Nov. 25, 2005
• DR Contributed Capital, Treasury Shares 12,000

18
Assignment Hints

• Problem 16-8A
• Part 1 Aug 22
• DR Contributed Capital, Treasury Shares 3,000
• Part 2
• Treasury Share reissuances 750