[{"Name":"Introduction to Equity","TopicPlaylistFirstVideoID":0,"Duration":null,"Videos":[{"Watched":false,"Name":"Definition of Equity","Duration":"2m 11s","ChapterTopicVideoID":29451,"CourseChapterTopicPlaylistID":294469,"HasSubtitles":true,"ThumbnailPath":"https://www.proprep.uk/Images/Videos_Thumbnails/29451.jpeg","UploadDate":"2022-07-07T18:43:08.7400000","DurationForVideoObject":"PT2M11S","Description":null,"MetaTitle":"Definition of Equity: Video + Workbook | Proprep","MetaDescription":"Equity - Introduction to Equity. Watch the video made by an expert in the field. Download the workbook and maximize your learning.","Canonical":"https://www.proprep.uk/general-modules/all/introduction-to-financial-accounting-and-reporting/equity/introduction-to-equity/vid31061","VideoComments":[],"Subtitles":[{"Start":"00:00.560 ","End":"00:03.150","Text":"In this series of videos,"},{"Start":"00:03.150 ","End":"00:08.303","Text":"the objectives are to present the various components of shareholders\u0027 equity,"},{"Start":"00:08.303 ","End":"00:12.300","Text":"to present the accounting for transactions affecting equity,"},{"Start":"00:12.300 ","End":"00:18.690","Text":"and then also to introduce a statement called the statement of changes in equity."},{"Start":"00:18.690 ","End":"00:23.300","Text":"The statement of changes in equity sits alongside the income statement and"},{"Start":"00:23.300 ","End":"00:28.550","Text":"balance sheet as part of the financial statements of a business entity."},{"Start":"00:28.550 ","End":"00:30.740","Text":"In this first video,"},{"Start":"00:30.740 ","End":"00:34.400","Text":"we will look at the definition of equity."},{"Start":"00:34.400 ","End":"00:38.390","Text":"You should know by now that equity represents"},{"Start":"00:38.390 ","End":"00:44.479","Text":"the residual interest in the assets of an entity after deducting liabilities,"},{"Start":"00:44.479 ","End":"00:48.080","Text":"so the assets after deducting liabilities."},{"Start":"00:48.080 ","End":"00:54.185","Text":"We therefore know that assets less liabilities is equal to owners\u0027 equity,"},{"Start":"00:54.185 ","End":"00:58.430","Text":"which we have seen many times before as the accounting equation."},{"Start":"00:58.430 ","End":"01:00.355","Text":"Now looking a bit further,"},{"Start":"01:00.355 ","End":"01:03.110","Text":"we know that the asset of the business of"},{"Start":"01:03.110 ","End":"01:08.059","Text":"funded by both liabilities and also owners\u0027 equity,"},{"Start":"01:08.059 ","End":"01:13.130","Text":"which in fact brings us back to the same accounting equation and this in fact,"},{"Start":"01:13.130 ","End":"01:19.430","Text":"now I will say assets are equal to liabilities plus owners\u0027 equity."},{"Start":"01:19.430 ","End":"01:22.355","Text":"Just restating the accounting equation."},{"Start":"01:22.355 ","End":"01:23.975","Text":"Now, just to recap,"},{"Start":"01:23.975 ","End":"01:28.580","Text":"we know that assets represent the resources of an entity."},{"Start":"01:28.580 ","End":"01:32.780","Text":"Liabilities represent an obligation of the entity."},{"Start":"01:32.780 ","End":"01:38.210","Text":"Obligations specifically to lenders and creditors,"},{"Start":"01:38.210 ","End":"01:45.710","Text":"whereas equity represents the obligation of the business specifically to the owners."},{"Start":"01:45.710 ","End":"01:49.505","Text":"In other words, the liabilities,"},{"Start":"01:49.505 ","End":"01:51.140","Text":"the lenders and creditors,"},{"Start":"01:51.140 ","End":"01:53.900","Text":"have claims against the assets of the entity,"},{"Start":"01:53.900 ","End":"01:58.765","Text":"and the residual claims are the claims in fact of the owner\u0027s."},{"Start":"01:58.765 ","End":"02:01.475","Text":"Equity has various components,"},{"Start":"02:01.475 ","End":"02:04.310","Text":"including share capital and share premium,"},{"Start":"02:04.310 ","End":"02:08.135","Text":"retained earnings, and various other reserves,"},{"Start":"02:08.135 ","End":"02:11.940","Text":"which we\u0027ll discuss in the series of videos."}],"ID":31061},{"Watched":false,"Name":"Ordinary Shares","Duration":"22m 50s","ChapterTopicVideoID":29452,"CourseChapterTopicPlaylistID":294469,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.710 ","End":"00:03.675","Text":"In this video presentation,"},{"Start":"00:03.675 ","End":"00:06.990","Text":"we will look at ordinary shares."},{"Start":"00:06.990 ","End":"00:12.135","Text":"First and background about the characteristics of ordinary shares."},{"Start":"00:12.135 ","End":"00:16.450","Text":"Ordinary shares issued to the owners of a company."},{"Start":"00:16.450 ","End":"00:20.765","Text":"The ordinary shareholders, also known as the equity holders,"},{"Start":"00:20.765 ","End":"00:22.955","Text":"own the shares in the company,"},{"Start":"00:22.955 ","End":"00:26.930","Text":"and as owners, that entitles them to vote on how"},{"Start":"00:26.930 ","End":"00:32.060","Text":"the company is run and also to share in some of the profits of the company."},{"Start":"00:32.060 ","End":"00:36.710","Text":"A company retains its profits for future growth, but also,"},{"Start":"00:36.710 ","End":"00:42.575","Text":"some of those retained earnings may be paid back to those ordinary shareholders,"},{"Start":"00:42.575 ","End":"00:45.965","Text":"the owners of the company, as dividends."},{"Start":"00:45.965 ","End":"00:49.205","Text":"Now, it is important to recognize and understand"},{"Start":"00:49.205 ","End":"00:52.760","Text":"that the dividends paid by a company to its owners,"},{"Start":"00:52.760 ","End":"00:58.490","Text":"it\u0027s shareholders are only paid on the discretion of management."},{"Start":"00:58.490 ","End":"01:04.160","Text":"In other words, even though ordinary shareholders are owners of the company,"},{"Start":"01:04.160 ","End":"01:07.955","Text":"they don\u0027t have a right to receive dividends."},{"Start":"01:07.955 ","End":"01:13.070","Text":"That dividend must be declared by management to the owners."},{"Start":"01:13.070 ","End":"01:17.630","Text":"That clearly applies more in the case of a large listed company."},{"Start":"01:17.630 ","End":"01:20.570","Text":"Whereas in the case of a small private company,"},{"Start":"01:20.570 ","End":"01:25.830","Text":"where owners and management are typically the same group of people,"},{"Start":"01:25.830 ","End":"01:29.580","Text":"that distinction becomes somewhat blurred."},{"Start":"01:30.470 ","End":"01:33.635","Text":"In the case of a liquidation,"},{"Start":"01:33.635 ","End":"01:38.570","Text":"the ordinary shareholders will receive a payment in cash,"},{"Start":"01:38.570 ","End":"01:41.240","Text":"but before that payment can be made,"},{"Start":"01:41.240 ","End":"01:46.560","Text":"all other liabilities have to be settled first."},{"Start":"01:47.320 ","End":"01:50.870","Text":"In other words, on liquidation,"},{"Start":"01:50.870 ","End":"01:58.530","Text":"ordinary shareholders sits at the bottom of the list of claimants to the entities assets."},{"Start":"01:58.750 ","End":"02:03.140","Text":"Remember, the fact that ordinary shareholders are"},{"Start":"02:03.140 ","End":"02:07.160","Text":"shareholders in what\u0027s called a limited company,"},{"Start":"02:07.160 ","End":"02:12.540","Text":"that brings about the concept of what we call limited liability."},{"Start":"02:12.760 ","End":"02:22.220","Text":"Limited liability in a limited company effectively means that the liability,"},{"Start":"02:22.220 ","End":"02:26.315","Text":"or therefore obligation of shareholders is"},{"Start":"02:26.315 ","End":"02:32.195","Text":"limited to the amount of the cash investment that they made in the first place."},{"Start":"02:32.195 ","End":"02:34.925","Text":"Ordinary shareholders do not have to contribute"},{"Start":"02:34.925 ","End":"02:39.880","Text":"any additional cash in the event of liquidation."},{"Start":"02:39.880 ","End":"02:44.570","Text":"Ordinary shares do not have a maturity date and unlike"},{"Start":"02:44.570 ","End":"02:49.640","Text":"a loan or certain times you will see of preference shares,"},{"Start":"02:49.640 ","End":"02:53.190","Text":"which may in fact have a maturity date."},{"Start":"02:55.650 ","End":"02:59.215","Text":"Also, as we will see in the next example,"},{"Start":"02:59.215 ","End":"03:03.355","Text":"ordinary shares typically have a value attached to them."},{"Start":"03:03.355 ","End":"03:08.710","Text":"That value is called the nominal value or the par value of the shares."},{"Start":"03:08.710 ","End":"03:12.670","Text":"The large British supermarkets,"},{"Start":"03:12.670 ","End":"03:16.825","Text":"Tesco, has issued 5 pens ordinary shares,"},{"Start":"03:16.825 ","End":"03:19.630","Text":"while another large supermarkets, Sainsbury\u0027s,"},{"Start":"03:19.630 ","End":"03:27.445","Text":"has issued ordinary shares with a par value of 28.5714 pens."},{"Start":"03:27.445 ","End":"03:30.220","Text":"The par value, as you will see,"},{"Start":"03:30.220 ","End":"03:36.040","Text":"is nothing more than an accounting or book value to the shares and has in fact got"},{"Start":"03:36.040 ","End":"03:41.930","Text":"nothing whatsoever to do with the market value on the stock exchange."},{"Start":"03:41.930 ","End":"03:47.135","Text":"Some countries permit ordinary shares to be issued with no par value."},{"Start":"03:47.135 ","End":"03:52.300","Text":"As I\u0027ve just said, the par value has got little financial meaning and"},{"Start":"03:52.300 ","End":"03:58.295","Text":"shareholders typically pay much more than the par value when shares are issued."},{"Start":"03:58.295 ","End":"04:01.160","Text":"This is because, and take the, for example,"},{"Start":"04:01.160 ","End":"04:04.925","Text":"the Tesco or Sainsbury\u0027s example, I\u0027ve just mentioned,"},{"Start":"04:04.925 ","End":"04:10.705","Text":"that par value of 5p or 28.5714p,"},{"Start":"04:10.705 ","End":"04:13.130","Text":"would it be in set when the shares were issued,"},{"Start":"04:13.130 ","End":"04:15.680","Text":"sometimes many years ago and clearly"},{"Start":"04:15.680 ","End":"04:20.720","Text":"the share price has risen in the case of a successful company,"},{"Start":"04:20.720 ","End":"04:25.740","Text":"to way above that original issued at par value."},{"Start":"04:25.740 ","End":"04:32.915","Text":"Therefore, when further shares are issued as the years go by,"},{"Start":"04:32.915 ","End":"04:38.960","Text":"that excess over par value is recorded in equity,"},{"Start":"04:38.960 ","End":"04:43.805","Text":"but as a different class of equity called shape premium,"},{"Start":"04:43.805 ","End":"04:49.130","Text":"as opposed to the share capital where the par value is recorded."},{"Start":"04:49.130 ","End":"04:52.850","Text":"Now a point which often students of"},{"Start":"04:52.850 ","End":"04:56.270","Text":"accounting don\u0027t fully understand what they\u0027re looking at"},{"Start":"04:56.270 ","End":"04:58.490","Text":"the equity section on the statement of"},{"Start":"04:58.490 ","End":"05:04.325","Text":"financial position that record shares which are issued by the entity."},{"Start":"05:04.325 ","End":"05:08.945","Text":"In other words, in the simple transaction accounting entry of"},{"Start":"05:08.945 ","End":"05:14.210","Text":"debit cash and assuming the shares issued at par value,"},{"Start":"05:14.210 ","End":"05:17.130","Text":"a credit to share capital."},{"Start":"05:17.450 ","End":"05:28.295","Text":"Now, when issued shares are traded on the market and shareholders buy and sell shares,"},{"Start":"05:28.295 ","End":"05:31.250","Text":"that is not recorded by the entity."},{"Start":"05:31.250 ","End":"05:34.895","Text":"There\u0027s no record at all in the company\u0027s accounting records"},{"Start":"05:34.895 ","End":"05:40.590","Text":"for each shares that are traded on the stock exchange."},{"Start":"05:42.640 ","End":"05:45.245","Text":"Now, as I\u0027ve said as well,"},{"Start":"05:45.245 ","End":"05:49.970","Text":"the proceeds on issuing shares are recorded in the share capital account,"},{"Start":"05:49.970 ","End":"05:52.850","Text":"to the extent of the par value of the shares,"},{"Start":"05:52.850 ","End":"05:57.460","Text":"and in the share premium account to the extent of the share premium."},{"Start":"05:57.460 ","End":"06:01.070","Text":"That we will examine in the examples that follow."},{"Start":"06:01.070 ","End":"06:06.080","Text":"Looking firstly, to calculate the balance at 31 December 20X1,"},{"Start":"06:06.080 ","End":"06:12.910","Text":"the first year, we need to take into account what has happened during that 20X1 year."},{"Start":"06:12.910 ","End":"06:16.745","Text":"Here you see a repeat of the question."},{"Start":"06:16.745 ","End":"06:19.550","Text":"We know that the company issued,"},{"Start":"06:19.550 ","End":"06:21.125","Text":"as we said before,"},{"Start":"06:21.125 ","End":"06:30.050","Text":"the 100,000 shares, with a $0.10 par value with a proceeds of 260,000."},{"Start":"06:30.050 ","End":"06:33.680","Text":"We\u0027ll come back to the issue costs in a moment."},{"Start":"06:33.680 ","End":"06:41.855","Text":"What we can see here is that the total proceeds amounted to 260,000 currency units."},{"Start":"06:41.855 ","End":"06:45.005","Text":"This is the proceeds on the issue of the shares."},{"Start":"06:45.005 ","End":"06:48.050","Text":"Now, for those proceeds,"},{"Start":"06:48.050 ","End":"06:53.315","Text":"the company issued a quantity of 100,000 shares."},{"Start":"06:53.315 ","End":"07:02.630","Text":"Which means therefore that each share was issued at an amount of 2.60."},{"Start":"07:02.630 ","End":"07:07.770","Text":"Therefore, if each share was issued for 2.60,"},{"Start":"07:07.770 ","End":"07:13.925","Text":"and we know that the par value of the shares are $0.10,"},{"Start":"07:13.925 ","End":"07:23.680","Text":"we can therefore compute that the share premium on this issue amounted to 2.50 per share."},{"Start":"07:23.680 ","End":"07:30.390","Text":"Now in terms of the total of the 2.60 is the issue price,"},{"Start":"07:30.390 ","End":"07:34.950","Text":"and we know again that we issued 100,000 shares,"},{"Start":"07:34.950 ","End":"07:39.715","Text":"that gives us a total cash received of 260,000."},{"Start":"07:39.715 ","End":"07:47.405","Text":"The 260,000 would go as a debit to increase the cash account."},{"Start":"07:47.405 ","End":"07:52.445","Text":"Now the amount, the par value determined the credit to share capital."},{"Start":"07:52.445 ","End":"07:57.905","Text":"The same 100,000 shares that we issued at the par value"},{"Start":"07:57.905 ","End":"08:03.340","Text":"of $0.10 gives an amount of 10,000."},{"Start":"08:03.340 ","End":"08:09.755","Text":"That goes as the credit to the share capital account as part of owner\u0027s equity."},{"Start":"08:09.755 ","End":"08:17.865","Text":"The excess of 2.50 clearly also multiply by the 100,000 shares issued,"},{"Start":"08:17.865 ","End":"08:21.370","Text":"gives an amount of 250,000."},{"Start":"08:21.370 ","End":"08:26.173","Text":"That amount goes as the credit to the share premium account,"},{"Start":"08:26.173 ","End":"08:29.135","Text":"also, as I said, part of equity."},{"Start":"08:29.135 ","End":"08:31.580","Text":"It\u0027s looking at this table over here,"},{"Start":"08:31.580 ","End":"08:36.305","Text":"we know the share capital has a par value,"},{"Start":"08:36.305 ","End":"08:39.260","Text":"and I\u0027ll put it in here of $0.10,"},{"Start":"08:39.260 ","End":"08:45.065","Text":"we know that the share premium amounts to 2.50."},{"Start":"08:45.065 ","End":"08:48.245","Text":"Therefore, let\u0027s complete the table."},{"Start":"08:48.245 ","End":"08:50.945","Text":"The share issue in 20X1,"},{"Start":"08:50.945 ","End":"08:52.955","Text":"we know in terms of quantity,"},{"Start":"08:52.955 ","End":"08:59.690","Text":"they were 100,000 shares issued and this gave rise to a 10,000,"},{"Start":"08:59.690 ","End":"09:02.270","Text":"credit to the share capital account,"},{"Start":"09:02.270 ","End":"09:05.870","Text":"and an amount of 250,000,"},{"Start":"09:05.870 ","End":"09:08.435","Text":"credit to the share premium account."},{"Start":"09:08.435 ","End":"09:10.735","Text":"The total share capital,"},{"Start":"09:10.735 ","End":"09:15.520","Text":"the total equity rather amounting to 260,000."},{"Start":"09:15.520 ","End":"09:19.730","Text":"Now coming back to this issue costs of 10,000,"},{"Start":"09:19.730 ","End":"09:26.195","Text":"the issue costs are paid in cash and are in fact charge the share premium account."},{"Start":"09:26.195 ","End":"09:32.450","Text":"The issue costs of 10,000 are deducted from the share premium account,"},{"Start":"09:32.450 ","End":"09:37.820","Text":"and also clearly therefore deducted from the total equity."},{"Start":"09:37.820 ","End":"09:40.385","Text":"The accounting entry here,"},{"Start":"09:40.385 ","End":"09:46.340","Text":"we\u0027re told somebody that\u0027s put in green over here would be a debit to share premium and"},{"Start":"09:46.340 ","End":"09:52.685","Text":"a credit to cash because the share issue costs would have been paid in cash."},{"Start":"09:52.685 ","End":"09:54.815","Text":"Therefore, the end of the period,"},{"Start":"09:54.815 ","End":"09:59.150","Text":"the total quantity of shares is 100,000."},{"Start":"09:59.150 ","End":"10:05.855","Text":"The balance, which we can see in share capital is 10,000 currency units."},{"Start":"10:05.855 ","End":"10:11.630","Text":"The balance in share premium is therefore 240,000 currency units."},{"Start":"10:11.630 ","End":"10:18.325","Text":"The total equity, the share capital plus the share premium, amounts to 250,000."},{"Start":"10:18.325 ","End":"10:23.885","Text":"The next slide, we will pick up these balances at the end of 20X1"},{"Start":"10:23.885 ","End":"10:30.380","Text":"and go on to look at the transaction in the 20X2 year."},{"Start":"10:30.380 ","End":"10:32.030","Text":"As a starting point here,"},{"Start":"10:32.030 ","End":"10:33.890","Text":"we will just fill in the balances we had at"},{"Start":"10:33.890 ","End":"10:37.325","Text":"the end of the X1 year from the previous slide,"},{"Start":"10:37.325 ","End":"10:39.925","Text":"100,000 shares and issue."},{"Start":"10:39.925 ","End":"10:44.474","Text":"There was a 10,000 balance in share capital,"},{"Start":"10:44.474 ","End":"10:50.975","Text":"a 240,000 balance in share premium and the total equity,"},{"Start":"10:50.975 ","End":"10:54.140","Text":"as I said, was 250,000."},{"Start":"10:54.140 ","End":"10:57.470","Text":"Now, looking what happened in 20X2,"},{"Start":"10:57.470 ","End":"11:00.425","Text":"we said a further 50,000 shares were issued."},{"Start":"11:00.425 ","End":"11:07.230","Text":"The proceeds, what were 152,000 and there were 2,000 issue costs."},{"Start":"11:07.230 ","End":"11:09.180","Text":"As we did previously,"},{"Start":"11:09.180 ","End":"11:15.240","Text":"we can look at the proceeds and the proceeds are 152,000,"},{"Start":"11:15.240 ","End":"11:23.215","Text":"and that 152,000 was for the issue of 50,000 shares."},{"Start":"11:23.215 ","End":"11:30.556","Text":"That therefore means each share was issued at a price of 3,04."},{"Start":"11:30.556 ","End":"11:39.505","Text":"Therefore, we can look at the total issue price of 3,04,"},{"Start":"11:39.505 ","End":"11:47.020","Text":"compare it to the par value which we know as before hasn\u0027t changed, it\u0027s $0.10."},{"Start":"11:47.020 ","End":"11:54.195","Text":"Therefore the share premium amounts to this case, 2.94."},{"Start":"11:54.195 ","End":"11:59.980","Text":"There were 50,000 shares issued at a price of 3.04."},{"Start":"11:59.980 ","End":"12:07.390","Text":"This gives a total proceeds of 152,000 which as we saw in the previous slide,"},{"Start":"12:07.390 ","End":"12:11.780","Text":"is in fact the debit that goes to cash."},{"Start":"12:12.930 ","End":"12:21.580","Text":"The par value of $0.10 at the 50,000 number of shares issued,"},{"Start":"12:21.580 ","End":"12:24.280","Text":"gives an amount of 5,000,"},{"Start":"12:24.280 ","End":"12:29.380","Text":"which goes as a credit to share capital as part of owner\u0027s equity."},{"Start":"12:29.380 ","End":"12:34.015","Text":"The share premium, the excess of the issue price over par value,"},{"Start":"12:34.015 ","End":"12:37.420","Text":"this case of 2.94 again,"},{"Start":"12:37.420 ","End":"12:45.025","Text":"multiply by the 50,000 shares issued gives us an amount of 147,000,"},{"Start":"12:45.025 ","End":"12:51.500","Text":"which goes as a creditor to share premium also part of owner\u0027s equity."},{"Start":"12:53.280 ","End":"12:58.510","Text":"We can therefore record this in the table,"},{"Start":"12:58.510 ","End":"13:01.435","Text":"the quantity of shares issued,"},{"Start":"13:01.435 ","End":"13:04.150","Text":"we know is the 50,000 shares."},{"Start":"13:04.150 ","End":"13:09.250","Text":"We know share capital is taking a credit of 5,000,"},{"Start":"13:09.250 ","End":"13:15.535","Text":"we know share premium is taking a credit of 147,000,"},{"Start":"13:15.535 ","End":"13:22.390","Text":"and therefore the total increase in equity is 152,000."},{"Start":"13:22.390 ","End":"13:27.370","Text":"Again, the issue costs will recap the entry over here,"},{"Start":"13:27.370 ","End":"13:30.025","Text":"the issue costs are charged to share premium,"},{"Start":"13:30.025 ","End":"13:33.955","Text":"not as an expense charged against equity,"},{"Start":"13:33.955 ","End":"13:35.950","Text":"debit share premium,"},{"Start":"13:35.950 ","End":"13:38.320","Text":"and credit goes to cash."},{"Start":"13:38.320 ","End":"13:46.870","Text":"Issue cost here, we are told was 2,000 of the total as well of 2,000."},{"Start":"13:46.870 ","End":"13:52.075","Text":"We can then see what is the balance at the end of the 20X2 year."},{"Start":"13:52.075 ","End":"13:56.710","Text":"We clearly now have 150,000 shares, and issue."},{"Start":"13:56.710 ","End":"14:00.940","Text":"The amount in share capital is 15,000,"},{"Start":"14:00.940 ","End":"14:06.910","Text":"and the amount in the share premium account is 385,000,"},{"Start":"14:06.910 ","End":"14:11.485","Text":"giving a total equity of 400,000."},{"Start":"14:11.485 ","End":"14:13.540","Text":"To complete this example,"},{"Start":"14:13.540 ","End":"14:18.640","Text":"we can look at what the statement of financial position or balance sheet will look like,"},{"Start":"14:18.640 ","End":"14:21.460","Text":"at the 20X1,"},{"Start":"14:21.460 ","End":"14:24.595","Text":"and X2 financial year ends."},{"Start":"14:24.595 ","End":"14:30.820","Text":"At the top here, we see a summary of the solution developed in the previous slides."},{"Start":"14:30.820 ","End":"14:34.495","Text":"Looking at the 20X1 year as a starting point,"},{"Start":"14:34.495 ","End":"14:37.795","Text":"we know that at the end of 20X1,"},{"Start":"14:37.795 ","End":"14:42.640","Text":"the amount of share capital was 10,000,"},{"Start":"14:42.640 ","End":"14:47.950","Text":"and the amount of the share premium was 240,000,"},{"Start":"14:47.950 ","End":"14:53.935","Text":"which would have given a total of 250,000 equity on the balance sheet,"},{"Start":"14:53.935 ","End":"14:58.270","Text":"that came from this 20X1 line over here."},{"Start":"14:58.270 ","End":"15:00.535","Text":"At the end of 20X2,"},{"Start":"15:00.535 ","End":"15:05.245","Text":"we know the share capital is now an amount of 15,000,"},{"Start":"15:05.245 ","End":"15:11.740","Text":"share premium an amount of 385,000."},{"Start":"15:11.740 ","End":"15:14.650","Text":"Therefore, the balance sheet would record it or would"},{"Start":"15:14.650 ","End":"15:18.085","Text":"record at the end of December of 20X2 year,"},{"Start":"15:18.085 ","End":"15:22.780","Text":"a total equity of 400,000."},{"Start":"15:22.780 ","End":"15:25.600","Text":"We now look at the concept of a share split."},{"Start":"15:25.600 ","End":"15:29.200","Text":"If a company wants to increase the number other words,"},{"Start":"15:29.200 ","End":"15:32.500","Text":"the quantity of shares in issue,"},{"Start":"15:32.500 ","End":"15:36.205","Text":"it goes through the process of having a share split,"},{"Start":"15:36.205 ","End":"15:40.000","Text":"when in fact it splits the par value of the shares."},{"Start":"15:40.000 ","End":"15:45.535","Text":"Why would a company want to split or divide up the par value of its shares?"},{"Start":"15:45.535 ","End":"15:47.800","Text":"This would come about when for example,"},{"Start":"15:47.800 ","End":"15:53.170","Text":"the share price of the shares in the market rises to such a level,"},{"Start":"15:53.170 ","End":"16:00.595","Text":"that the shares become too expensive for shareholders to buy parcels of shares,"},{"Start":"16:00.595 ","End":"16:02.980","Text":"and therefore, by splitting the shares,"},{"Start":"16:02.980 ","End":"16:07.795","Text":"the company achieves the effect of making the shares more tradable."},{"Start":"16:07.795 ","End":"16:10.810","Text":"As I\u0027ve said, the effect of the shear split in"},{"Start":"16:10.810 ","End":"16:14.760","Text":"fact reduces the market price of the share."},{"Start":"16:14.760 ","End":"16:19.590","Text":"But importantly, because the quantity of shares is being increased,"},{"Start":"16:19.590 ","End":"16:23.935","Text":"there is no effect on the total value on the stock market,"},{"Start":"16:23.935 ","End":"16:28.090","Text":"and also no effect on the balance sheet amount of"},{"Start":"16:28.090 ","End":"16:33.715","Text":"the share capital or in fact the balance sheet amount of the share premium."},{"Start":"16:33.715 ","End":"16:37.480","Text":"Now also, therefore, because simply the quantity is being split,"},{"Start":"16:37.480 ","End":"16:41.905","Text":"there\u0027s no cash received in their share split transaction."},{"Start":"16:41.905 ","End":"16:44.350","Text":"There\u0027s no accounting entry in"},{"Start":"16:44.350 ","End":"16:49.130","Text":"the records of the company which is effecting the share split."},{"Start":"16:49.230 ","End":"16:52.045","Text":"When we\u0027re looking at a share split,"},{"Start":"16:52.045 ","End":"16:56.395","Text":"it\u0027s important to understand the terminology involved."},{"Start":"16:56.395 ","End":"17:02.110","Text":"Here in this example, we say what happens if there\u0027s a 4 for 1 share split?"},{"Start":"17:02.110 ","End":"17:06.535","Text":"Let\u0027s write that out for 4 for 1."},{"Start":"17:06.535 ","End":"17:08.350","Text":"What does this meaning is,"},{"Start":"17:08.350 ","End":"17:10.360","Text":"for every 1 share,"},{"Start":"17:10.360 ","End":"17:14.035","Text":"the company has currently an issue,"},{"Start":"17:14.035 ","End":"17:20.245","Text":"there will in fact be 4 shares an issue of the share split."},{"Start":"17:20.245 ","End":"17:26.260","Text":"Therefore an additional 3 shares are issued to each shareholder."},{"Start":"17:26.260 ","End":"17:29.905","Text":"Looking in at an example of a share split,"},{"Start":"17:29.905 ","End":"17:33.145","Text":"we\u0027re told that on 31 12 20X1,"},{"Start":"17:33.145 ","End":"17:36.475","Text":"this company B, has share capital as follows."},{"Start":"17:36.475 ","End":"17:39.040","Text":"There are 100,000 shares,"},{"Start":"17:39.040 ","End":"17:41.965","Text":"and those shares have a $0.10 par value,"},{"Start":"17:41.965 ","End":"17:44.290","Text":"and when those shares were issued,"},{"Start":"17:44.290 ","End":"17:48.940","Text":"there were issued for 250,000 currency units."},{"Start":"17:48.940 ","End":"17:51.880","Text":"What we can see from here is the starting point,"},{"Start":"17:51.880 ","End":"17:54.145","Text":"as we\u0027ve learned in the previous slides."},{"Start":"17:54.145 ","End":"17:58.780","Text":"That is if the issue price was 250,000,"},{"Start":"17:58.780 ","End":"18:05.817","Text":"and that was for the issue of 100,000 shares,"},{"Start":"18:05.817 ","End":"18:12.800","Text":"the issue price per share was an amount of 2,50."},{"Start":"18:12.810 ","End":"18:17.530","Text":"If the par value of the shares as we\u0027re told is $0.10,"},{"Start":"18:17.530 ","End":"18:18.850","Text":"these shares were, therefore,"},{"Start":"18:18.850 ","End":"18:22.435","Text":"issued at a premium of 2.40."},{"Start":"18:22.435 ","End":"18:25.765","Text":"We\u0027re then told in the 20X2 year,"},{"Start":"18:25.765 ","End":"18:30.505","Text":"the company has a 2 for 1 share split."},{"Start":"18:30.505 ","End":"18:34.120","Text":"Let\u0027s understand what that means as we said before,"},{"Start":"18:34.120 ","End":"18:39.070","Text":"it\u0027s a [inaudible] out over here, 2 for 1."},{"Start":"18:39.070 ","End":"18:42.700","Text":"That means for every 1 share in existence,"},{"Start":"18:42.700 ","End":"18:46.135","Text":"that 1 share will in fact become 2 shares,"},{"Start":"18:46.135 ","End":"18:52.100","Text":"and therefore an additional 1 share will be issued to each shareholder."},{"Start":"18:52.170 ","End":"18:59.530","Text":"Looking in total, if the company has 100,000 shares in issue,"},{"Start":"18:59.530 ","End":"19:02.910","Text":"and this is 2 for 1 share split,"},{"Start":"19:02.910 ","End":"19:11.455","Text":"that 100,000 shares will in effect become 200,000 shares in the share split,"},{"Start":"19:11.455 ","End":"19:18.830","Text":"and therefore an additional 100,000 shares will be issued to shareholders."},{"Start":"19:20.100 ","End":"19:26.500","Text":"Let\u0027s now record that on this table."},{"Start":"19:26.500 ","End":"19:30.385","Text":"What we see over here is that at December X1,"},{"Start":"19:30.385 ","End":"19:33.760","Text":"we know the quantity of shares was 100,000,"},{"Start":"19:33.760 ","End":"19:37.960","Text":"and we\u0027ve just computed that the share split result"},{"Start":"19:37.960 ","End":"19:41.560","Text":"in an additional 100,000 shares being issued,"},{"Start":"19:41.560 ","End":"19:47.650","Text":"and therefore, the total number of shares at the end of 20X2 is turned to 1000."},{"Start":"19:47.650 ","End":"19:51.370","Text":"Remember what we\u0027ve just looked at over here is the quantity."},{"Start":"19:51.370 ","End":"19:55.615","Text":"Let\u0027s look at the effect on the financial statements."},{"Start":"19:55.615 ","End":"19:57.925","Text":"At December X1,"},{"Start":"19:57.925 ","End":"19:59.860","Text":"and remember over here,"},{"Start":"19:59.860 ","End":"20:03.025","Text":"this in fact is the share capital."},{"Start":"20:03.025 ","End":"20:07.915","Text":"The share capital at a $0.10 par value,"},{"Start":"20:07.915 ","End":"20:10.660","Text":"we know was 10,000."},{"Start":"20:10.660 ","End":"20:15.760","Text":"We\u0027ve computed the share premium to be 240,000,"},{"Start":"20:15.760 ","End":"20:20.680","Text":"and the total equity is 250,000."},{"Start":"20:20.680 ","End":"20:23.215","Text":"When we have the share split,"},{"Start":"20:23.215 ","End":"20:26.905","Text":"as you\u0027ve just seen the number of shares increases,"},{"Start":"20:26.905 ","End":"20:29.260","Text":"this was the 2 for 1 split,"},{"Start":"20:29.260 ","End":"20:33.625","Text":"and 100,000 shares became 200,000 shares,"},{"Start":"20:33.625 ","End":"20:37.415","Text":"an addition as I said 100,000 shares issued."},{"Start":"20:37.415 ","End":"20:40.920","Text":"Note there is no effect on the value of"},{"Start":"20:40.920 ","End":"20:44.250","Text":"the share capital or the share premium or in fact,"},{"Start":"20:44.250 ","End":"20:47.315","Text":"no effect on the total equity."},{"Start":"20:47.315 ","End":"20:51.775","Text":"All that\u0027s happening is that the share capital,"},{"Start":"20:51.775 ","End":"20:56.080","Text":"which had a par value of $0.10 per share,"},{"Start":"20:56.080 ","End":"21:00.490","Text":"now, in fact, has a par value of $0.05 per share."},{"Start":"21:00.490 ","End":"21:05.410","Text":"In a fit, all we are doing is we are canceling out the"},{"Start":"21:05.410 ","End":"21:10.405","Text":"10,000 share capital of $0.10 par value,"},{"Start":"21:10.405 ","End":"21:17.510","Text":"and replacing it with share capital of 10,000 being $0.05 par value."},{"Start":"21:17.510 ","End":"21:20.775","Text":"The total share capital remains at 10,000,"},{"Start":"21:20.775 ","End":"21:25.140","Text":"the total share of premium remains at 240,000,"},{"Start":"21:25.140 ","End":"21:29.885","Text":"and total equity remains at 250,000."},{"Start":"21:29.885 ","End":"21:34.150","Text":"Looking at this on the balance sheet at the 2 dates,"},{"Start":"21:34.150 ","End":"21:36.640","Text":"at December of 20X1,"},{"Start":"21:36.640 ","End":"21:38.905","Text":"and December of 20X2,"},{"Start":"21:38.905 ","End":"21:43.825","Text":"I\u0027ve repeated the solution from the previous slide at the top here,"},{"Start":"21:43.825 ","End":"21:46.915","Text":"the share capital December X1,"},{"Start":"21:46.915 ","End":"21:50.925","Text":"we know is this amount here of 10,000,"},{"Start":"21:50.925 ","End":"21:56.730","Text":"and the share premium December X1 is 240,000,"},{"Start":"21:56.730 ","End":"22:01.700","Text":"with a total equity of 250,000."},{"Start":"22:01.700 ","End":"22:03.880","Text":"Now, December X2,"},{"Start":"22:03.880 ","End":"22:08.574","Text":"and remembering that this here represents the share capital,"},{"Start":"22:08.574 ","End":"22:10.540","Text":"the share capital doesn\u0027t change,"},{"Start":"22:10.540 ","End":"22:12.415","Text":"the share premium doesn\u0027t change."},{"Start":"22:12.415 ","End":"22:13.750","Text":"As we said before,"},{"Start":"22:13.750 ","End":"22:16.435","Text":"the balance sheet amounts do not change,"},{"Start":"22:16.435 ","End":"22:20.005","Text":"to share capital you\u0027ll notice remains at 10,000."},{"Start":"22:20.005 ","End":"22:23.795","Text":"The share premium remains at 10,000,"},{"Start":"22:23.795 ","End":"22:28.345","Text":"and the total equity remains at 250,000."},{"Start":"22:28.345 ","End":"22:32.650","Text":"What has changed is remember that the quantity of shares,"},{"Start":"22:32.650 ","End":"22:34.165","Text":"I\u0027ll just put it at the bottom here,"},{"Start":"22:34.165 ","End":"22:42.325","Text":"at December X1 was 100,000 shares with a par value of $0.10,"},{"Start":"22:42.325 ","End":"22:50.660","Text":"and now we have a December X2 is 200,000 shares with a par value of $0.05."}],"ID":31062},{"Watched":false,"Name":"Preference Shares","Duration":"13m 31s","ChapterTopicVideoID":29453,"CourseChapterTopicPlaylistID":294469,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.620 ","End":"00:05.024","Text":"In this video, we will discuss preference shares."},{"Start":"00:05.024 ","End":"00:11.700","Text":"Now you know that the residual interest in the assets after subtracting liabilities,"},{"Start":"00:11.700 ","End":"00:14.130","Text":"is referred to as equity,"},{"Start":"00:14.130 ","End":"00:18.570","Text":"and preference shares carry different rights to"},{"Start":"00:18.570 ","End":"00:23.670","Text":"that residual interest compared to ordinary shareholders."},{"Start":"00:23.670 ","End":"00:26.565","Text":"What does the word preference mean?"},{"Start":"00:26.565 ","End":"00:35.070","Text":"The word preference means a priority over the ordinary shares in receiving that residual."},{"Start":"00:35.070 ","End":"00:40.235","Text":"Remember the residual is the assets less the liabilities."},{"Start":"00:40.235 ","End":"00:45.185","Text":"Now that manifests itself when we look at dividends."},{"Start":"00:45.185 ","End":"00:48.500","Text":"Dividends must be paid firstly to"},{"Start":"00:48.500 ","End":"00:55.385","Text":"preference shareholders before any dividends are paid to ordinary shareholders."},{"Start":"00:55.385 ","End":"01:00.230","Text":"Looking at the dividend of preference shareholders,"},{"Start":"01:00.230 ","End":"01:05.225","Text":"they can be expressed either as a percentage of par value."},{"Start":"01:05.225 ","End":"01:11.855","Text":"For example, 5 percent preference shares, in which case,"},{"Start":"01:11.855 ","End":"01:18.234","Text":"the preference shareholders will receive 5 percent of the par value of the shares,"},{"Start":"01:18.234 ","End":"01:21.965","Text":"or it could be on a per-share basis."},{"Start":"01:21.965 ","End":"01:29.000","Text":"In other words, 10 cents or pens or currency units per share."},{"Start":"01:29.000 ","End":"01:31.535","Text":"In return for this preference,"},{"Start":"01:31.535 ","End":"01:36.039","Text":"many preference shareholders do not have voting rights in the company."},{"Start":"01:36.039 ","End":"01:40.340","Text":"Unlike ordinary shareholders, which typically do have voting rights,"},{"Start":"01:40.340 ","End":"01:45.485","Text":"and this implies clearly a reduced say in how the company is run."},{"Start":"01:45.485 ","End":"01:48.185","Text":"However, there are some preference shares,"},{"Start":"01:48.185 ","End":"01:50.720","Text":"which may include voting rights."},{"Start":"01:50.720 ","End":"01:54.395","Text":"Let us now look at some features of preference shares."},{"Start":"01:54.395 ","End":"02:00.940","Text":"Preference shares could be redeemable or non-redeemable. What does this mean?"},{"Start":"02:00.940 ","End":"02:06.955","Text":"Redeeming a preference share means returning the capital to the preference shareholder."},{"Start":"02:06.955 ","End":"02:11.245","Text":"Now, although shares are equity from a legal point of view,"},{"Start":"02:11.245 ","End":"02:17.530","Text":"we must classify them based on their substance rather than their legal form."},{"Start":"02:17.530 ","End":"02:21.160","Text":"Therefore, whether the shares, in this case,"},{"Start":"02:21.160 ","End":"02:25.210","Text":"the preferences, are redeemable or non-redeemable,"},{"Start":"02:25.210 ","End":"02:29.395","Text":"will affect whether the shares are to be classified as"},{"Start":"02:29.395 ","End":"02:34.655","Text":"equity or as a financial liability."},{"Start":"02:34.655 ","End":"02:37.800","Text":"Now, if the preference shares are redeemable,"},{"Start":"02:37.800 ","End":"02:40.195","Text":"that redemption could be mandatory,"},{"Start":"02:40.195 ","End":"02:41.845","Text":"other words compulsory,"},{"Start":"02:41.845 ","End":"02:45.250","Text":"or could be optional."},{"Start":"02:45.250 ","End":"02:49.610","Text":"Optional either be at the discretion of the entity,"},{"Start":"02:49.610 ","End":"02:53.390","Text":"or the discretion of shareholders."},{"Start":"02:53.390 ","End":"02:56.270","Text":"Now, that discretion will impact on"},{"Start":"02:56.270 ","End":"02:59.825","Text":"the classification of the shares as equity or liability,"},{"Start":"02:59.825 ","End":"03:02.900","Text":"which we\u0027ll see in a later slide."},{"Start":"03:02.900 ","End":"03:06.529","Text":"Preference shares could also be convertible."},{"Start":"03:06.529 ","End":"03:15.990","Text":"This means converting the preference shares into bonds or ordinary shares."},{"Start":"03:15.990 ","End":"03:22.075","Text":"Again, the conversion could be mandatory or it could be optional,"},{"Start":"03:22.075 ","End":"03:24.075","Text":"and again optional,"},{"Start":"03:24.075 ","End":"03:29.975","Text":"a discretion of the entity or discretion of the shareholders."},{"Start":"03:29.975 ","End":"03:36.740","Text":"Now, preference shares could also be either cumulative or non-cumulative."},{"Start":"03:36.740 ","End":"03:39.375","Text":"If preference shares are cumulative,"},{"Start":"03:39.375 ","End":"03:42.395","Text":"this means that the preference dividend,"},{"Start":"03:42.395 ","End":"03:44.465","Text":"if not paid in 1 year,"},{"Start":"03:44.465 ","End":"03:50.960","Text":"is accumulated and when the preference dividend is declared in a later year,"},{"Start":"03:50.960 ","End":"03:58.685","Text":"all past dividends must be paid along with that future year\u0027s current dividend."},{"Start":"03:58.685 ","End":"04:03.574","Text":"Looking at the classification of preference shares,"},{"Start":"04:03.574 ","End":"04:05.730","Text":"if they are redeemable,"},{"Start":"04:05.730 ","End":"04:08.668","Text":"or possibly convertible,"},{"Start":"04:08.668 ","End":"04:12.140","Text":"that means the preference shares may mature at"},{"Start":"04:12.140 ","End":"04:16.860","Text":"a certain point in time, unlike ordinary shares."},{"Start":"04:16.860 ","End":"04:18.725","Text":"That brings us back to the question,"},{"Start":"04:18.725 ","End":"04:23.840","Text":"are these redeemable or convertible preference shares in substance,"},{"Start":"04:23.840 ","End":"04:28.055","Text":"are they equity or a liability?"},{"Start":"04:28.055 ","End":"04:32.915","Text":"Now we will classify preference shares as liability,"},{"Start":"04:32.915 ","End":"04:35.300","Text":"if they are, number 1,"},{"Start":"04:35.300 ","End":"04:39.080","Text":"redeemable at the discretion of shareholders."},{"Start":"04:39.080 ","End":"04:43.505","Text":"Other words, if shareholders have the option to"},{"Start":"04:43.505 ","End":"04:48.080","Text":"require or force the redemption of the preference shares in effect,"},{"Start":"04:48.080 ","End":"04:51.365","Text":"therefore, the company has no say in the matter,"},{"Start":"04:51.365 ","End":"04:55.219","Text":"and therefore the preference shares become a liability."},{"Start":"04:55.219 ","End":"05:00.980","Text":"Or secondly, if they are mandatorily redeemable, other words,"},{"Start":"05:00.980 ","End":"05:04.310","Text":"there\u0027s a requirement that the company has"},{"Start":"05:04.310 ","End":"05:08.180","Text":"to redeem the preference shares at a certain future date."},{"Start":"05:08.180 ","End":"05:10.025","Text":"In BOGOs scenarios,"},{"Start":"05:10.025 ","End":"05:13.234","Text":"the preference shares would be classified as liability."},{"Start":"05:13.234 ","End":"05:17.540","Text":"Preference shares are also classified as liability if they"},{"Start":"05:17.540 ","End":"05:22.130","Text":"are convertible to a variable number of ordinary shares,"},{"Start":"05:22.130 ","End":"05:30.040","Text":"either mandatorily, or at the discretion of those preference shareholders."},{"Start":"05:30.040 ","End":"05:36.610","Text":"In other cases, the preference shares are classed as equity."},{"Start":"05:36.610 ","End":"05:45.400","Text":"For example, if the redemption is at the discretion of the issuing company,"},{"Start":"05:45.400 ","End":"05:48.085","Text":"it means that the issuing company has the right to"},{"Start":"05:48.085 ","End":"05:51.460","Text":"choose whether or not to redeem the shares."},{"Start":"05:51.460 ","End":"05:55.060","Text":"In other words, the company can avoid the redemption."},{"Start":"05:55.060 ","End":"05:57.460","Text":"If it can avoid the redemption,"},{"Start":"05:57.460 ","End":"06:00.745","Text":"the company does not have a present obligation,"},{"Start":"06:00.745 ","End":"06:05.380","Text":"and therefore, those shares represent equity."},{"Start":"06:05.380 ","End":"06:08.269","Text":"Turning now to an example,"},{"Start":"06:08.269 ","End":"06:12.390","Text":"you see here on the 1st of January in the 20X1 year,"},{"Start":"06:12.390 ","End":"06:17.775","Text":"this Company B issues 100,000 as the quantity,"},{"Start":"06:17.775 ","End":"06:20.535","Text":"5 percent preference shares."},{"Start":"06:20.535 ","End":"06:24.410","Text":"Now that reference to 5 percent preference shares mean"},{"Start":"06:24.410 ","End":"06:28.325","Text":"that is the dividend rate attached to the preference share."},{"Start":"06:28.325 ","End":"06:34.095","Text":"These preference shares have a par value of 1,"},{"Start":"06:34.095 ","End":"06:38.195","Text":"and are issued for 2 currency units each,"},{"Start":"06:38.195 ","End":"06:42.680","Text":"other words, at a premium of 1 currency unit per share."},{"Start":"06:42.680 ","End":"06:44.730","Text":"At the end of 20X1,"},{"Start":"06:44.730 ","End":"06:49.550","Text":"the Company C pays 100,000 as ordinary dividends,"},{"Start":"06:49.550 ","End":"06:53.275","Text":"and it pays the preference dividend."},{"Start":"06:53.275 ","End":"06:56.330","Text":"We required you to calculate how much cash,"},{"Start":"06:56.330 ","End":"07:00.770","Text":"number 1, B raises from issuing the preference shares,"},{"Start":"07:00.770 ","End":"07:04.610","Text":"and number 2, what is the total dividend, other words,"},{"Start":"07:04.610 ","End":"07:06.635","Text":"both ordinary and preference,"},{"Start":"07:06.635 ","End":"07:10.055","Text":"that is paid at the end of the 20X1 year?"},{"Start":"07:10.055 ","End":"07:12.695","Text":"Let\u0027s take a look at the solution."},{"Start":"07:12.695 ","End":"07:17.405","Text":"We are told that there are 100,000 preference shares,"},{"Start":"07:17.405 ","End":"07:23.125","Text":"which are issued and they issued for 2 currency units each."},{"Start":"07:23.125 ","End":"07:27.770","Text":"How much cash is raised would be 100,000 preference shares,"},{"Start":"07:27.770 ","End":"07:31.730","Text":"the quantity multiplied by the issue price of 2."},{"Start":"07:31.730 ","End":"07:33.215","Text":"Other words, a total of"},{"Start":"07:33.215 ","End":"07:40.290","Text":"200,000 currency units is raised from issuing the preference shares."},{"Start":"07:40.420 ","End":"07:42.875","Text":"In terms of the dividend,"},{"Start":"07:42.875 ","End":"07:46.925","Text":"we\u0027re told that there are 100,000 in ordinary dividends."},{"Start":"07:46.925 ","End":"07:50.930","Text":"The ordinary dividend is clearly 100,000."},{"Start":"07:50.930 ","End":"07:57.060","Text":"The preference dividend, we are told are 5 percent preference dividends,"},{"Start":"07:57.060 ","End":"08:02.375","Text":"and that 5 percent will be based on the par value,"},{"Start":"08:02.375 ","End":"08:03.890","Text":"not the issue price, other words,"},{"Start":"08:03.890 ","End":"08:07.735","Text":"this par value of 1 currency unit."},{"Start":"08:07.735 ","End":"08:13.330","Text":"We have 100,000 preference shares as the quantity,"},{"Start":"08:13.330 ","End":"08:18.085","Text":"multiplied by a par value of 1 currency unit,"},{"Start":"08:18.085 ","End":"08:21.375","Text":"multiplied by the 5 percent,"},{"Start":"08:21.375 ","End":"08:23.175","Text":"and that gives us therefore,"},{"Start":"08:23.175 ","End":"08:28.030","Text":"5,000 as the amount of the preference dividend."},{"Start":"08:28.030 ","End":"08:33.220","Text":"The total dividend is clearly 105,000."},{"Start":"08:34.220 ","End":"08:37.140","Text":"In this next example,"},{"Start":"08:37.140 ","End":"08:40.755","Text":"on 1 January the 20X0 year,"},{"Start":"08:40.755 ","End":"08:44.250","Text":"this Company C, issues 100,000,"},{"Start":"08:44.250 ","End":"08:48.670","Text":"in this term, there are no par value preference shares,"},{"Start":"08:48.670 ","End":"08:54.016","Text":"and the issue price is 5 currency units each."},{"Start":"08:54.016 ","End":"08:58.835","Text":"The preference shares entitled the shareholders to"},{"Start":"08:58.835 ","End":"09:05.690","Text":"4 currency unit cents dividends per share at the end of each year,"},{"Start":"09:05.690 ","End":"09:13.225","Text":"and note importantly, you\u0027re told that these are in fact cumulative preference shares."},{"Start":"09:13.225 ","End":"09:16.330","Text":"Now in the 20X0 year,"},{"Start":"09:16.330 ","End":"09:18.545","Text":"the company reported loss,"},{"Start":"09:18.545 ","End":"09:21.485","Text":"and therefore there is no preference dividend paid."},{"Start":"09:21.485 ","End":"09:24.110","Text":"But the company then was able to declare"},{"Start":"09:24.110 ","End":"09:28.460","Text":"a preference dividend in the following year in 20X1."},{"Start":"09:28.460 ","End":"09:32.480","Text":"We require now to compute what is the amount of"},{"Start":"09:32.480 ","End":"09:36.190","Text":"their preference dividend in the 20X1 year."},{"Start":"09:36.190 ","End":"09:40.010","Text":"Or remember, because the preference shares are cumulative,"},{"Start":"09:40.010 ","End":"09:43.640","Text":"any past preference dividend that was not paid,"},{"Start":"09:43.640 ","End":"09:48.020","Text":"must be paid along with the current year\u0027s preference dividend."},{"Start":"09:48.020 ","End":"09:49.910","Text":"We can compute this."},{"Start":"09:49.910 ","End":"09:56.640","Text":"We know there are 100,000 quantity of preference shares,"},{"Start":"09:56.810 ","End":"10:01.430","Text":"and we know there are 100,000 preference shares."},{"Start":"10:01.430 ","End":"10:08.675","Text":"We know the dividend is 4 cents dividends per share each year."},{"Start":"10:08.675 ","End":"10:12.095","Text":"Therefore, the dividend to pay in the current year,"},{"Start":"10:12.095 ","End":"10:15.050","Text":"which is 20X1, just note here,"},{"Start":"10:15.050 ","End":"10:21.635","Text":"20X0, there was 0 preference dividend because of the loss."},{"Start":"10:21.635 ","End":"10:24.755","Text":"When we come to 20X1 year,"},{"Start":"10:24.755 ","End":"10:29.360","Text":"the amount of the preference dividend will be the quantity of shares,"},{"Start":"10:29.360 ","End":"10:38.675","Text":"which is 100,000 multiplied by the 4 currency cents per share,"},{"Start":"10:38.675 ","End":"10:44.780","Text":"but now multiplied by 2 years to make up last year and the current year, and therefore,"},{"Start":"10:44.780 ","End":"10:48.020","Text":"the total amount of the preference dividend declared in"},{"Start":"10:48.020 ","End":"10:52.660","Text":"the current year will be 8,000 currency units."},{"Start":"10:52.660 ","End":"10:54.995","Text":"Now in this last example,"},{"Start":"10:54.995 ","End":"10:57.785","Text":"also, on 1 January of 20X0,"},{"Start":"10:57.785 ","End":"11:04.025","Text":"Company D issues 100,000 3 percent convertible,"},{"Start":"11:04.025 ","End":"11:08.915","Text":"that they\u0027re convertible preference shares of no-par value,"},{"Start":"11:08.915 ","End":"11:13.440","Text":"and the issue price is 5 currency units each."},{"Start":"11:13.900 ","End":"11:19.740","Text":"Therefore, clearly, the amount of cash raised is 500,000."},{"Start":"11:20.600 ","End":"11:27.289","Text":"The preference share contract you\u0027re told specifies they will be mandatorily converted,"},{"Start":"11:27.289 ","End":"11:35.040","Text":"so require to be converted to ordinary shares on 31 December of 20X4 year."},{"Start":"11:36.140 ","End":"11:40.610","Text":"We\u0027re asked now to decide how the Company D should"},{"Start":"11:40.610 ","End":"11:46.445","Text":"classify these preference shares if number 1,"},{"Start":"11:46.445 ","End":"11:49.535","Text":"the conversion rate is 1 to 1."},{"Start":"11:49.535 ","End":"11:54.110","Text":"In other words, there is a fixed conversion rate."},{"Start":"11:54.110 ","End":"11:57.425","Text":"1 ordinary share for 1 preference share."},{"Start":"11:57.425 ","End":"12:05.015","Text":"But number 2, the conversion rate requires that D issues a sufficient number."},{"Start":"12:05.015 ","End":"12:08.510","Text":"This number could vary depending on the value of the ordinary shares,"},{"Start":"12:08.510 ","End":"12:13.265","Text":"such that the total value of the new shares equals 500,000."},{"Start":"12:13.265 ","End":"12:19.355","Text":"In this case, there\u0027s going to be a variable number of ordinary shares issued."},{"Start":"12:19.355 ","End":"12:21.439","Text":"In looking at the solution,"},{"Start":"12:21.439 ","End":"12:25.970","Text":"recall what we discussed earlier about convertible preference shares."},{"Start":"12:25.970 ","End":"12:29.885","Text":"If we\u0027re looking at convertible preference shares,"},{"Start":"12:29.885 ","End":"12:38.025","Text":"we need to look at whether the conversion is into a variable number of ordinary shares,"},{"Start":"12:38.025 ","End":"12:41.260","Text":"or into a fixed number of ordinary shares."},{"Start":"12:41.260 ","End":"12:45.425","Text":"If a conversion is into a variable number of ordinary shares,"},{"Start":"12:45.425 ","End":"12:49.579","Text":"then these preference shares are regarded as a liability."},{"Start":"12:49.579 ","End":"12:53.510","Text":"Whereas if the conversion isn\u0027t a fixed number of ordinary shares,"},{"Start":"12:53.510 ","End":"12:57.230","Text":"then these preference shares are regarded as owner\u0027s equity."},{"Start":"12:57.230 ","End":"13:00.600","Text":"Therefore, in this particular case,"},{"Start":"13:00.600 ","End":"13:03.310","Text":"because in scenario number 1,"},{"Start":"13:03.310 ","End":"13:07.460","Text":"the conversion rate is 1 to 1, in other words,"},{"Start":"13:07.460 ","End":"13:09.410","Text":"a fixed number of ordinary shares,"},{"Start":"13:09.410 ","End":"13:12.874","Text":"these preference shares will be regarded as equity."},{"Start":"13:12.874 ","End":"13:15.020","Text":"Whereas in scenario number 2,"},{"Start":"13:15.020 ","End":"13:18.950","Text":"because depending upon the value of the ordinary shares,"},{"Start":"13:18.950 ","End":"13:23.360","Text":"there\u0027ll be a variable sufficient number of ordinary shares issued."},{"Start":"13:23.360 ","End":"13:29.280","Text":"In this scenario, the preference shares are regarded as a liability."}],"ID":31063},{"Watched":false,"Name":"Share Buyback","Duration":"27m 34s","ChapterTopicVideoID":29454,"CourseChapterTopicPlaylistID":294469,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:01.080 ","End":"00:03.655","Text":"In this video presentation,"},{"Start":"00:03.655 ","End":"00:08.365","Text":"we will look at the concepts relating to the buyback of shares."},{"Start":"00:08.365 ","End":"00:14.575","Text":"Companies do in fact buy back their shares from time to time."},{"Start":"00:14.575 ","End":"00:18.460","Text":"The reasons vary, but include, for example,"},{"Start":"00:18.460 ","End":"00:22.540","Text":"supporting the market in the company\u0027s shares."},{"Start":"00:22.540 ","End":"00:28.120","Text":"Here, an example would be ensuring that the share price is in fact not too low,"},{"Start":"00:28.120 ","End":"00:31.045","Text":"to increase the earnings per share."},{"Start":"00:31.045 ","End":"00:37.555","Text":"Remember, earnings per share is based on a formula divided by the number of shares."},{"Start":"00:37.555 ","End":"00:41.335","Text":"Clearly therefore of shares are being bought back."},{"Start":"00:41.335 ","End":"00:43.980","Text":"Number of shares is being decreased."},{"Start":"00:43.980 ","End":"00:47.614","Text":"The earnings per share will in fact increase."},{"Start":"00:47.614 ","End":"00:49.520","Text":"Earnings per share, as you know,"},{"Start":"00:49.520 ","End":"00:56.485","Text":"is a key measurement number closely followed by analysts and investors."},{"Start":"00:56.485 ","End":"01:03.485","Text":"Lastly, the share buyback clearly can also regulate the number of shares in circulation."},{"Start":"01:03.485 ","End":"01:06.350","Text":"When a company buys back its own shares,"},{"Start":"01:06.350 ","End":"01:09.510","Text":"that buyback could in fact be temporary,"},{"Start":"01:09.510 ","End":"01:11.210","Text":"or it could be permanent."},{"Start":"01:11.210 ","End":"01:13.655","Text":"If the share buyback is temporary,"},{"Start":"01:13.655 ","End":"01:20.540","Text":"the amounts relating to the buyback is reported in what we know as treasury shares."},{"Start":"01:20.540 ","End":"01:23.255","Text":"Treasury shares you\u0027ll see an example on fact,"},{"Start":"01:23.255 ","End":"01:26.490","Text":"a contract or negative equity account."},{"Start":"01:26.490 ","End":"01:28.887","Text":"If the share buyback is permanent,"},{"Start":"01:28.887 ","End":"01:31.765","Text":"this case, the shares therefore clearly canceled,"},{"Start":"01:31.765 ","End":"01:35.590","Text":"and there\u0027s a corresponding reduction in the amount of"},{"Start":"01:35.590 ","End":"01:39.895","Text":"the balance sheet share capital and balance sheet share premium account."},{"Start":"01:39.895 ","End":"01:42.475","Text":"Those we will see in the examples that follow."},{"Start":"01:42.475 ","End":"01:45.510","Text":"Focusing then on treasury shares."},{"Start":"01:45.510 ","End":"01:48.684","Text":"Here, as we\u0027ve said, the shares are repurchased,"},{"Start":"01:48.684 ","End":"01:51.880","Text":"and the repurchase is of a temporary nature."},{"Start":"01:51.880 ","End":"01:57.310","Text":"Therefore, the aim is to resell them on the open market at some point in the future."},{"Start":"01:57.310 ","End":"02:02.665","Text":"When those shares are resold, that negative equity,"},{"Start":"02:02.665 ","End":"02:04.690","Text":"the amount in the treasury account,"},{"Start":"02:04.690 ","End":"02:08.740","Text":"gets reduced or canceled out, reversed in effect."},{"Start":"02:08.740 ","End":"02:11.730","Text":"Then 2 scenarios can arise."},{"Start":"02:11.730 ","End":"02:15.325","Text":"When those treasury shares are re-issued,"},{"Start":"02:15.325 ","End":"02:17.000","Text":"the amount on re-issue of"},{"Start":"02:17.000 ","End":"02:22.055","Text":"the treasury shares could in fact be greater than the repurchase cost."},{"Start":"02:22.055 ","End":"02:26.450","Text":"In this case, the difference goes to the share premium account."},{"Start":"02:26.450 ","End":"02:29.225","Text":"In other words, the difference increases,"},{"Start":"02:29.225 ","End":"02:32.080","Text":"increases that share premium."},{"Start":"02:32.080 ","End":"02:38.840","Text":"On the other hand, when the company reissues the treasury shares,"},{"Start":"02:38.840 ","End":"02:45.305","Text":"in this case, the re-issue the treasury shares is in fact less than the repurchase cost."},{"Start":"02:45.305 ","End":"02:50.120","Text":"The difference now is in fact debited to the share premium,"},{"Start":"02:50.120 ","End":"02:52.430","Text":"to reduce the share premium."},{"Start":"02:52.430 ","End":"02:57.965","Text":"Note here, if the share premium account is not large enough,"},{"Start":"02:57.965 ","End":"03:02.489","Text":"then the difference goes to retained earnings."},{"Start":"03:04.000 ","End":"03:09.230","Text":"We will now look at some examples in relation to share buybacks."},{"Start":"03:09.230 ","End":"03:11.089","Text":"In this first example,"},{"Start":"03:11.089 ","End":"03:12.845","Text":"you will see the company here,"},{"Start":"03:12.845 ","End":"03:15.930","Text":"accompany E had issued 100,000"},{"Start":"03:15.930 ","End":"03:21.290","Text":"ordinary shares for a total amount of 1 million currency units."},{"Start":"03:21.290 ","End":"03:28.120","Text":"You\u0027re told each share has a par value of 1 currency unit."},{"Start":"03:28.120 ","End":"03:32.885","Text":"We\u0027ll come back and look at that issue transaction in a moment."},{"Start":"03:32.885 ","End":"03:35.495","Text":"Then on 1 December X4,"},{"Start":"03:35.495 ","End":"03:40.250","Text":"the company repurchases 10 million ordinary shares and"},{"Start":"03:40.250 ","End":"03:46.315","Text":"the re-purchase amount repurchase price is 12 currency units each."},{"Start":"03:46.315 ","End":"03:50.030","Text":"Then at the end of the following year on December X5,"},{"Start":"03:50.030 ","End":"03:56.885","Text":"the company now resells 6,000 of those treasury shares."},{"Start":"03:56.885 ","End":"04:00.820","Text":"Note that the resale price is 13."},{"Start":"04:00.820 ","End":"04:05.990","Text":"What will be important to recognize is the fact that this resale price of"},{"Start":"04:05.990 ","End":"04:13.000","Text":"13 is greater than the original re-purchase amount of 12."},{"Start":"04:13.000 ","End":"04:15.610","Text":"The financial year-end is 31 December."},{"Start":"04:15.610 ","End":"04:18.995","Text":"Before we look at the transactions related to the repurchase,"},{"Start":"04:18.995 ","End":"04:23.000","Text":"let\u0027s just establish the amounts that belong into"},{"Start":"04:23.000 ","End":"04:27.695","Text":"the share capital and the share premium account from the original issue of shares."},{"Start":"04:27.695 ","End":"04:31.610","Text":"This example here, the company issued shares,"},{"Start":"04:31.610 ","End":"04:38.000","Text":"and you\u0027re told that the total issue price was 1 million currency units,"},{"Start":"04:38.000 ","End":"04:42.805","Text":"and that was for a total of 100,000 shares."},{"Start":"04:42.805 ","End":"04:44.740","Text":"That, therefore,"},{"Start":"04:44.740 ","End":"04:48.050","Text":"tells you that each of these shares,"},{"Start":"04:48.050 ","End":"04:52.225","Text":"were issued at 10 currency units each."},{"Start":"04:52.225 ","End":"05:00.795","Text":"If we know the issue price of the shares is 10,"},{"Start":"05:00.795 ","End":"05:03.590","Text":"and we know that the par value of the shares,"},{"Start":"05:03.590 ","End":"05:06.350","Text":"or you told the par value of the shares as 1."},{"Start":"05:06.350 ","End":"05:13.265","Text":"Therefore, the shares was issued at a premium of 9 currency units each."},{"Start":"05:13.265 ","End":"05:17.210","Text":"Now we know 100,000 shares were issued,"},{"Start":"05:17.210 ","End":"05:23.425","Text":"and this gives us the 1 million cash receipt."},{"Start":"05:23.425 ","End":"05:32.330","Text":"The par value of 100,000 shares at 1 currency unit each gives a credit to"},{"Start":"05:32.330 ","End":"05:41.445","Text":"share capital of 100,000 and the share premium of 9 multiplied by the 100,000 shares,"},{"Start":"05:41.445 ","End":"05:45.935","Text":"it was a credit to share premium of 900,000."},{"Start":"05:45.935 ","End":"05:52.555","Text":"That is similar to the numbers we\u0027ve seen in previous examples."},{"Start":"05:52.555 ","End":"05:54.305","Text":"As a starting point,"},{"Start":"05:54.305 ","End":"05:58.100","Text":"let\u0027s just enter that information we\u0027ve just computed. I\u0027ll say that again."},{"Start":"05:58.100 ","End":"05:59.945","Text":"As a starting point,"},{"Start":"05:59.945 ","End":"06:02.060","Text":"let\u0027s just enter that information we\u0027ve just"},{"Start":"06:02.060 ","End":"06:08.840","Text":"computed as the opening line of this worksheet."},{"Start":"06:08.840 ","End":"06:15.845","Text":"We know the company received a million in cash from the issue of the shares."},{"Start":"06:15.845 ","End":"06:22.355","Text":"That gave rise to a credit to share capital of 100,000 as we saw,"},{"Start":"06:22.355 ","End":"06:27.215","Text":"and a credit to share premium of 900,000."},{"Start":"06:27.215 ","End":"06:31.235","Text":"In terms of the number of shares we issued,"},{"Start":"06:31.235 ","End":"06:35.255","Text":"we know that this was 100,000 shares we issued,"},{"Start":"06:35.255 ","End":"06:39.110","Text":"and we\u0027re not looking at retained earnings in this particular scenario."},{"Start":"06:39.110 ","End":"06:44.850","Text":"We then come to the 1st of December 20X4 and look at the share buyback."},{"Start":"06:44.850 ","End":"06:46.850","Text":"We are told, as you recall,"},{"Start":"06:46.850 ","End":"06:53.155","Text":"that the company repurchase 10,000 shares at 12 currency units each."},{"Start":"06:53.155 ","End":"06:59.615","Text":"That obviously equals a total re-purchase amount of 120,000."},{"Start":"06:59.615 ","End":"07:02.090","Text":"To repurchase the shares,"},{"Start":"07:02.090 ","End":"07:05.150","Text":"the company will have to pay out cash."},{"Start":"07:05.150 ","End":"07:08.800","Text":"Decrease in cash of 120,000,"},{"Start":"07:08.800 ","End":"07:13.580","Text":"which in fact is a credit going to the cash account to decrease the asset cash."},{"Start":"07:13.580 ","End":"07:16.070","Text":"As we have previously said,"},{"Start":"07:16.070 ","End":"07:21.785","Text":"the other side of the entry is to create the treasury shares account as"},{"Start":"07:21.785 ","End":"07:27.470","Text":"a contra account with inequity of contract or negative equity account."},{"Start":"07:27.470 ","End":"07:31.895","Text":"Therefore, the treasury shares account is in fact debited."},{"Start":"07:31.895 ","End":"07:39.745","Text":"In terms of quantity of shares that relates to 10,000 shares being repurchased."},{"Start":"07:39.745 ","End":"07:47.395","Text":"Balance at that point in time will give an amount of 880,000 in the cash account."},{"Start":"07:47.395 ","End":"07:52.560","Text":"The amount of the share capital has not changed,"},{"Start":"07:52.560 ","End":"07:54.712","Text":"it remains at 100,000,"},{"Start":"07:54.712 ","End":"08:00.400","Text":"and the amount share premium note also has not changed at 900,000."},{"Start":"08:00.400 ","End":"08:06.680","Text":"But we do have this negative equity of R120,000,"},{"Start":"08:06.680 ","End":"08:13.820","Text":"and we do have this negative equity of 120,000 as the treasury shares."},{"Start":"08:13.820 ","End":"08:17.900","Text":"As I said, there\u0027s no retained earnings application in this example."},{"Start":"08:17.900 ","End":"08:21.950","Text":"The quantity of shares in issue now,"},{"Start":"08:21.950 ","End":"08:25.600","Text":"at the end 20X4 is in fact 90,000."},{"Start":"08:25.600 ","End":"08:30.570","Text":"We now come a year later at 30 December of the 20X5 year."},{"Start":"08:30.570 ","End":"08:35.655","Text":"We are now told the company resells"},{"Start":"08:35.655 ","End":"08:41.979","Text":"6,000 to those 10,000 treasury shares at an amount of 13."},{"Start":"08:41.979 ","End":"08:45.610","Text":"What we see here is that the resale price of"},{"Start":"08:45.610 ","End":"08:51.445","Text":"13 is in fact greater than the buyback amount of 12."},{"Start":"08:51.445 ","End":"08:55.240","Text":"That will mean you see that the excess of"},{"Start":"08:55.240 ","End":"09:00.890","Text":"1 currency unit per share will have to go into the share premium accounts."},{"Start":"09:00.890 ","End":"09:04.095","Text":"What is the amount of cash raised on the buyback?"},{"Start":"09:04.095 ","End":"09:10.090","Text":"The amount of cash raised in the buyback will clearly be the 6,000 shares,"},{"Start":"09:10.090 ","End":"09:15.715","Text":"which are being repurchased multiplied by the 30 currency units."},{"Start":"09:15.715 ","End":"09:20.320","Text":"Other words, the amount paid or rather the amount received,"},{"Start":"09:20.320 ","End":"09:24.670","Text":"paid by shareholders, received by the company will be 78,000."},{"Start":"09:24.670 ","End":"09:25.840","Text":"There is therefore,"},{"Start":"09:25.840 ","End":"09:32.365","Text":"an increase in debit to cash of 78,000."},{"Start":"09:32.365 ","End":"09:36.160","Text":"There\u0027s a reduction in the treasury shares."},{"Start":"09:36.160 ","End":"09:39.355","Text":"I can\u0027t remember, treasury shares account had a debit balance."},{"Start":"09:39.355 ","End":"09:46.075","Text":"Now in fact, we have to credit the treasury shares account with 72,000,"},{"Start":"09:46.075 ","End":"09:51.175","Text":"which in fact is 6,000 at the 12 currency units and that"},{"Start":"09:51.175 ","End":"09:56.500","Text":"excess of finishing over 12/1 goes into the share premium account."},{"Start":"09:56.500 ","End":"10:02.765","Text":"Here we have a credit to the share premium account of an amount of 6,000."},{"Start":"10:02.765 ","End":"10:04.785","Text":"In terms of the quantity of shares,"},{"Start":"10:04.785 ","End":"10:09.675","Text":"this was an additional 6,000 shares now being resold,"},{"Start":"10:09.675 ","End":"10:16.025","Text":"the balance in the cash account is an amount now the end of the year of 958,000,"},{"Start":"10:16.025 ","End":"10:21.670","Text":"the ordinary share capital has not changed and remains at 100,000."},{"Start":"10:21.670 ","End":"10:24.190","Text":"The share premium account has increased."},{"Start":"10:24.190 ","End":"10:26.635","Text":"It\u0027s now 906,000."},{"Start":"10:26.635 ","End":"10:32.950","Text":"The treasury shares are now down to a negative equity of 48,000,"},{"Start":"10:32.950 ","End":"10:41.245","Text":"and the quantity of shares in issue has gone from 90,000 up to 96,000."},{"Start":"10:41.245 ","End":"10:42.955","Text":"In the second example,"},{"Start":"10:42.955 ","End":"10:44.575","Text":"looking at share buybacks,"},{"Start":"10:44.575 ","End":"10:46.540","Text":"the starting point is the same."},{"Start":"10:46.540 ","End":"10:49.330","Text":"Other words we see here, the company has,"},{"Start":"10:49.330 ","End":"10:51.235","Text":"as in the previous example,"},{"Start":"10:51.235 ","End":"10:54.100","Text":"100,000 issued ordinary shares."},{"Start":"10:54.100 ","End":"10:59.245","Text":"The issue price was a total of 1 million currency units,"},{"Start":"10:59.245 ","End":"11:03.055","Text":"and the par value is 1 currency unit."},{"Start":"11:03.055 ","End":"11:09.400","Text":"Then as before, on 1 December of 20X4 year,"},{"Start":"11:09.400 ","End":"11:17.605","Text":"the company repurchases 10,000 shares and repurchase price is 12 currency units each."},{"Start":"11:17.605 ","End":"11:19.450","Text":"Then a year later,"},{"Start":"11:19.450 ","End":"11:21.760","Text":"in December of the X5 year,"},{"Start":"11:21.760 ","End":"11:26.995","Text":"the company resells 6,000 of those treasury shares."},{"Start":"11:26.995 ","End":"11:32.290","Text":"But note now that the resale price is 11 currency units."},{"Start":"11:32.290 ","End":"11:35.785","Text":"Other words, this 11 currency units is now less."},{"Start":"11:35.785 ","End":"11:40.510","Text":"In other words, this 11 currency units is now less than"},{"Start":"11:40.510 ","End":"11:45.550","Text":"the original repurchase amount of 12 currency units."},{"Start":"11:45.550 ","End":"11:48.220","Text":"That will have an implication on how the transaction is"},{"Start":"11:48.220 ","End":"11:52.135","Text":"recorded when the resale takes place."},{"Start":"11:52.135 ","End":"11:54.670","Text":"Just to recap in the previous example,"},{"Start":"11:54.670 ","End":"11:57.415","Text":"and you should be familiar with this by now."},{"Start":"11:57.415 ","End":"12:05.515","Text":"The issue price is 1 million and the quantity of shares issued was 100,000,"},{"Start":"12:05.515 ","End":"12:12.280","Text":"which gave us the issue price per share of 10 currency units."},{"Start":"12:12.280 ","End":"12:15.835","Text":"Just to recap, as you saw in the previous example,"},{"Start":"12:15.835 ","End":"12:22.495","Text":"the company issued shares for a total of 1 million currency units,"},{"Start":"12:22.495 ","End":"12:26.755","Text":"and that was for 100,000 shares."},{"Start":"12:26.755 ","End":"12:32.215","Text":"Therefore, each share was issued at 10 currency units."},{"Start":"12:32.215 ","End":"12:39.265","Text":"Therefore, the issue price of 10 currency units and a par value of 1,"},{"Start":"12:39.265 ","End":"12:46.255","Text":"the share premium is an amount of 9 currency units per share."},{"Start":"12:46.255 ","End":"12:47.875","Text":"This all gave rise,"},{"Start":"12:47.875 ","End":"12:49.554","Text":"as in the previous example."},{"Start":"12:49.554 ","End":"12:59.605","Text":"Multiply it by the 100,000 shares to 1 million debit going to the cash account of"},{"Start":"12:59.605 ","End":"13:04.480","Text":"an amount of 100,000 going as a credit to"},{"Start":"13:04.480 ","End":"13:11.170","Text":"share capital and amount of 900,000 going as a credit to share premium,"},{"Start":"13:11.170 ","End":"13:16.920","Text":"when I go to the worksheet and record these transactions."},{"Start":"13:16.920 ","End":"13:18.930","Text":"Looking out the worksheet,"},{"Start":"13:18.930 ","End":"13:21.720","Text":"and again, similar to the previous example,"},{"Start":"13:21.720 ","End":"13:24.690","Text":"the amount of the cash account"},{"Start":"13:24.690 ","End":"13:29.240","Text":"increases with the cash received on the original issue of 1 million."},{"Start":"13:29.240 ","End":"13:33.775","Text":"The share capital increases by 100,000,"},{"Start":"13:33.775 ","End":"13:38.525","Text":"and the share premium increases by an amount of 900,000."},{"Start":"13:38.525 ","End":"13:41.489","Text":"Again, no effect and retained earnings in this scenario"},{"Start":"13:41.489 ","End":"13:46.485","Text":"and that represented the initial 100,000 shares in issue."},{"Start":"13:46.485 ","End":"13:50.760","Text":"Just to remind ourselves of the current entry is the debit was to cash,"},{"Start":"13:50.760 ","End":"13:54.315","Text":"credit to share capital of 100,000,"},{"Start":"13:54.315 ","End":"13:58.760","Text":"and a credit to share premium of 900,000."},{"Start":"13:58.760 ","End":"14:01.765","Text":"Then come to the share buyback."},{"Start":"14:01.765 ","End":"14:05.530","Text":"On 1 12 of the 20X4 year,"},{"Start":"14:05.530 ","End":"14:10.200","Text":"10,000 shares at 12 currency units each,"},{"Start":"14:10.200 ","End":"14:17.145","Text":"equals a share buyback of 120,000 currency units."},{"Start":"14:17.145 ","End":"14:22.810","Text":"Therefore, a credit to cash of 120,000 and"},{"Start":"14:22.810 ","End":"14:29.800","Text":"a debit room as in the previous example a debit to the treasury shares of 120,000,"},{"Start":"14:29.800 ","End":"14:33.265","Text":"so debit treasury shares, credit cash."},{"Start":"14:33.265 ","End":"14:35.125","Text":"Remember the treasury shares are"},{"Start":"14:35.125 ","End":"14:41.830","Text":"a contra equity account is our contra owner\u0027s equity account."},{"Start":"14:41.830 ","End":"14:51.385","Text":"The balance at December of the X4 year in cash 880,000 par value of the share capital,"},{"Start":"14:51.385 ","End":"14:56.740","Text":"100,000 the share premium of 900,000."},{"Start":"14:56.740 ","End":"15:02.020","Text":"This should have been a negative,"},{"Start":"15:02.020 ","End":"15:07.540","Text":"the treasury shares of a negative equity of 120,000."},{"Start":"15:07.540 ","End":"15:12.190","Text":"That share buyback was for the amount of 10,000 shares,"},{"Start":"15:12.190 ","End":"15:17.215","Text":"giving us a total of 90,000 shares in issue."},{"Start":"15:17.215 ","End":"15:19.360","Text":"Take a look carefully now how"},{"Start":"15:19.360 ","End":"15:23.860","Text":"the transactions differ in this scenario to the previous example."},{"Start":"15:23.860 ","End":"15:26.710","Text":"On December of X5,"},{"Start":"15:26.710 ","End":"15:31.870","Text":"there are 6,000 treasury shares as we know, which are repurchased."},{"Start":"15:31.870 ","End":"15:34.615","Text":"Again, on December X5,"},{"Start":"15:34.615 ","End":"15:38.845","Text":"there are 6,000 treasury shares resold,"},{"Start":"15:38.845 ","End":"15:41.980","Text":"but this time we sold at 11."},{"Start":"15:41.980 ","End":"15:46.210","Text":"The selling price of 11 currency unit is in fact"},{"Start":"15:46.210 ","End":"15:51.835","Text":"less than the original repurchase price of 12 currency units."},{"Start":"15:51.835 ","End":"15:54.250","Text":"The difference of 1 will be,"},{"Start":"15:54.250 ","End":"15:56.215","Text":"as you have already been told,"},{"Start":"15:56.215 ","End":"15:59.995","Text":"charge now debited to share premium."},{"Start":"15:59.995 ","End":"16:03.865","Text":"When the company resells these 6,000"},{"Start":"16:03.865 ","End":"16:08.935","Text":"treasury shares at an amount of 11 currency units each,"},{"Start":"16:08.935 ","End":"16:15.010","Text":"the company will clearly raise an amount of 66,000 in cash."},{"Start":"16:15.010 ","End":"16:19.900","Text":"Therefore, 66,000 goes as a debit to the cash account."},{"Start":"16:19.900 ","End":"16:22.839","Text":"The credit to share capital."},{"Start":"16:22.839 ","End":"16:28.240","Text":"Again, the credit to the treasury shares is at the amount of"},{"Start":"16:28.240 ","End":"16:35.200","Text":"the original issue of 72,000 debit to the treasury shares,"},{"Start":"16:35.200 ","End":"16:37.119","Text":"reducing the negative equity."},{"Start":"16:37.119 ","End":"16:39.100","Text":"The difference, as we said,"},{"Start":"16:39.100 ","End":"16:42.940","Text":"is now charged to the share premium account,"},{"Start":"16:42.940 ","End":"16:51.790","Text":"a debit of 6,000 going into the share premium account."},{"Start":"16:51.790 ","End":"16:53.395","Text":"Follow the last column,"},{"Start":"16:53.395 ","End":"16:55.045","Text":"in terms of quantity of shares,"},{"Start":"16:55.045 ","End":"16:58.300","Text":"6,000 shares were resold."},{"Start":"16:58.300 ","End":"17:02.065","Text":"The balance at the end of the 20X5 year,"},{"Start":"17:02.065 ","End":"17:06.910","Text":"is an amount of 946,000 in cash."},{"Start":"17:06.910 ","End":"17:13.765","Text":"The balance in the share capital accounts is an amount of 100,000."},{"Start":"17:13.765 ","End":"17:19.570","Text":"The share premium account has a balance of 894,000,"},{"Start":"17:19.570 ","End":"17:25.090","Text":"and the treasury shares are now down to a negative equity"},{"Start":"17:25.090 ","End":"17:31.429","Text":"of 48,000 times the quantity of shares is a cleaner increased."},{"Start":"17:31.429 ","End":"17:35.225","Text":"There are now 96,000 shares in issue."},{"Start":"17:35.225 ","End":"17:38.389","Text":"We now turn our attention to the scenario"},{"Start":"17:38.389 ","End":"17:43.010","Text":"where the share buyback is in fact permanent and therefore,"},{"Start":"17:43.010 ","End":"17:45.920","Text":"the company is going to cancel the shares."},{"Start":"17:45.920 ","End":"17:50.345","Text":"The amount that\u0027s going to be paid for repurchasing the shares,"},{"Start":"17:50.345 ","End":"17:51.770","Text":"which will be a credit to cash,"},{"Start":"17:51.770 ","End":"17:53.780","Text":"you will see in the example,"},{"Start":"17:53.780 ","End":"17:58.535","Text":"will firstly reduce the ordinary share capital"},{"Start":"17:58.535 ","End":"18:01.385","Text":"to the extent of the buyback of the shares."},{"Start":"18:01.385 ","End":"18:03.920","Text":"It will then reduce the share premium,"},{"Start":"18:03.920 ","End":"18:08.585","Text":"extend to the premium on those shares, repurchased and canceled."},{"Start":"18:08.585 ","End":"18:11.090","Text":"Any excess, other words,"},{"Start":"18:11.090 ","End":"18:14.060","Text":"the excess of the par value and premium."},{"Start":"18:14.060 ","End":"18:19.040","Text":"More other the excess of the repurchase amount over the par value and"},{"Start":"18:19.040 ","End":"18:25.050","Text":"premium you will see will reduce retained earnings of the company."},{"Start":"18:25.050 ","End":"18:27.745","Text":"We\u0027ll now look at this on the worksheet,"},{"Start":"18:27.745 ","End":"18:31.420","Text":"recording it as a single transaction."},{"Start":"18:31.420 ","End":"18:34.360","Text":"In the example, it\u0027s the same starting points."},{"Start":"18:34.360 ","End":"18:39.385","Text":"I will not repeat the detailed computation of the original transaction."},{"Start":"18:39.385 ","End":"18:42.400","Text":"It\u0027s the 100,000 ordinary shares,"},{"Start":"18:42.400 ","End":"18:46.000","Text":"which are issued for 1 million currency units,"},{"Start":"18:46.000 ","End":"18:50.320","Text":"and the par value is 1 currency unit."},{"Start":"18:50.320 ","End":"18:54.625","Text":"Then on 1 12 of the 20X4 year,"},{"Start":"18:54.625 ","End":"18:59.110","Text":"the company repurchases 10,000 ordinary shares."},{"Start":"18:59.110 ","End":"19:02.440","Text":"The repurchase price is 12 currency units,"},{"Start":"19:02.440 ","End":"19:04.840","Text":"and note it cancels the shares."},{"Start":"19:04.840 ","End":"19:07.845","Text":"This is the permanent repurchase."},{"Start":"19:07.845 ","End":"19:10.385","Text":"As you saw in the previous examples,"},{"Start":"19:10.385 ","End":"19:15.530","Text":"the initial transaction gave rise to 1 million increase in cash,"},{"Start":"19:15.530 ","End":"19:19.895","Text":"that is a debit to cash at the par value of £1,"},{"Start":"19:19.895 ","End":"19:20.960","Text":"to just remind ourselves,"},{"Start":"19:20.960 ","End":"19:23.210","Text":"we\u0027ll put in here the par value,"},{"Start":"19:23.210 ","End":"19:25.655","Text":"currency units of £1."},{"Start":"19:25.655 ","End":"19:27.560","Text":"I\u0027ll put in while we are here,"},{"Start":"19:27.560 ","End":"19:32.090","Text":"the share premium is equal to 9 currency units."},{"Start":"19:32.090 ","End":"19:37.670","Text":"This gave rise, we know, to 100,000 credit to share capital"},{"Start":"19:37.670 ","End":"19:44.090","Text":"and a 900,000 credit going to the share premium account with a credit there,"},{"Start":"19:44.090 ","End":"19:47.195","Text":"and the credit there, and the debit into cash."},{"Start":"19:47.195 ","End":"19:50.345","Text":"The number of shares in issue,"},{"Start":"19:50.345 ","End":"19:54.170","Text":"we know amount to 100,000."},{"Start":"19:54.170 ","End":"19:56.929","Text":"Now, on 1 December X4,"},{"Start":"19:56.929 ","End":"20:01.760","Text":"there\u0027s a share buyback and cancellation happening at the same time."},{"Start":"20:01.760 ","End":"20:06.110","Text":"We know the amount of shares being repurchased are 10,000"},{"Start":"20:06.110 ","End":"20:10.865","Text":"shares at an amount of 12 currency units each,"},{"Start":"20:10.865 ","End":"20:15.714","Text":"which gives a total of 120,000."},{"Start":"20:15.714 ","End":"20:20.275","Text":"Now, we need to first look at reducing the share capital."},{"Start":"20:20.275 ","End":"20:26.331","Text":"We know that the par value of the shares is in fact 1 currency unit,"},{"Start":"20:26.331 ","End":"20:31.090","Text":"and multiplied by the 10,000 shares being repurchased,"},{"Start":"20:31.090 ","End":"20:37.975","Text":"we will have to reduce the share capital by an amount of 10,000."},{"Start":"20:37.975 ","End":"20:41.605","Text":"That\u0027s going to go as a debit receipt to share capital."},{"Start":"20:41.605 ","End":"20:46.180","Text":"The share premium was an amount of"},{"Start":"20:46.180 ","End":"20:51.550","Text":"non currency units multiplied by the same 10,000 shares being repurchased."},{"Start":"20:51.550 ","End":"20:56.185","Text":"There will be a 90,000 debit going to share premium."},{"Start":"20:56.185 ","End":"20:58.765","Text":"Now we need to make up the excess."},{"Start":"20:58.765 ","End":"21:05.200","Text":"The excess we see relation to the buyback amount of 120,"},{"Start":"21:05.200 ","End":"21:07.585","Text":"we are short of 20,000."},{"Start":"21:07.585 ","End":"21:13.255","Text":"The 20,000 goes as a debit to the retained earnings account."},{"Start":"21:13.255 ","End":"21:16.045","Text":"Looking at the worksheet, then,"},{"Start":"21:16.045 ","End":"21:21.130","Text":"cash is reduced by debited 120,000."},{"Start":"21:21.130 ","End":"21:26.290","Text":"The share capital is debited with 10,000,"},{"Start":"21:26.290 ","End":"21:31.630","Text":"the shared premium debited with 90,000."},{"Start":"21:31.630 ","End":"21:33.610","Text":"We don\u0027t have retained earnings amount,"},{"Start":"21:33.610 ","End":"21:36.835","Text":"so assume any amount in retained earnings"},{"Start":"21:36.835 ","End":"21:41.215","Text":"and the retained earnings is debited with 20,000."},{"Start":"21:41.215 ","End":"21:45.640","Text":"Put the debits and credits in here to credit to cash,"},{"Start":"21:45.640 ","End":"21:47.020","Text":"to repay the cash,"},{"Start":"21:47.020 ","End":"21:49.480","Text":"debit reduces the share capital,"},{"Start":"21:49.480 ","End":"21:51.775","Text":"debit reduces the share premium,"},{"Start":"21:51.775 ","End":"21:54.790","Text":"and debit reduces retained earnings."},{"Start":"21:54.790 ","End":"22:00.955","Text":"The quantity of shares being repurchased we know are 10,000 shares."},{"Start":"22:00.955 ","End":"22:02.785","Text":"Therefore end of the period,"},{"Start":"22:02.785 ","End":"22:06.835","Text":"the balance in cash is the 880,000."},{"Start":"22:06.835 ","End":"22:11.260","Text":"The balance in share capital is the 90,000."},{"Start":"22:11.260 ","End":"22:16.330","Text":"The balancing share premium is 810,000."},{"Start":"22:16.330 ","End":"22:21.580","Text":"Balance of retained earnings is whatever the original balance happened to be,"},{"Start":"22:21.580 ","End":"22:27.670","Text":"less the 20,000 debit going to retained earnings."},{"Start":"22:27.670 ","End":"22:33.730","Text":"Quantity wise, we have 90,000 shares remaining in issue."},{"Start":"22:33.730 ","End":"22:36.655","Text":"Before we conclude this section of share buybacks,"},{"Start":"22:36.655 ","End":"22:39.565","Text":"there\u0027s 1 further principal to discuss,"},{"Start":"22:39.565 ","End":"22:45.400","Text":"and that relates to the issue of a capital redemption reserve."},{"Start":"22:45.400 ","End":"22:52.420","Text":"Now, this capital redemption reserve comes about in countries which"},{"Start":"22:52.420 ","End":"22:55.900","Text":"have legislation that restricts the reduction"},{"Start":"22:55.900 ","End":"22:59.920","Text":"of share capital resulting from the cancellation of shares."},{"Start":"22:59.920 ","End":"23:03.385","Text":"It relates to the principle of capital maintenance."},{"Start":"23:03.385 ","End":"23:06.610","Text":"It requires that an amount equal to"},{"Start":"23:06.610 ","End":"23:12.865","Text":"the par value of the shares that are being canceled to be moved,"},{"Start":"23:12.865 ","End":"23:17.785","Text":"transferred from the company\u0027s retained earnings account,"},{"Start":"23:17.785 ","End":"23:25.420","Text":"which in fact is a distributable reserve to some special restricted reserve,"},{"Start":"23:25.420 ","End":"23:28.315","Text":"which would be non distributable."},{"Start":"23:28.315 ","End":"23:34.615","Text":"In other words, that non distributable reserve cannot be used to pay a dividend."},{"Start":"23:34.615 ","End":"23:37.945","Text":"The name of the reserve varies from country to country,"},{"Start":"23:37.945 ","End":"23:42.505","Text":"but is often called a capital redemption reserve."},{"Start":"23:42.505 ","End":"23:45.340","Text":"Looking back to the previous example,"},{"Start":"23:45.340 ","End":"23:50.920","Text":"the solution will appear as you see on the next slide."},{"Start":"23:50.920 ","End":"23:54.970","Text":"Going back to the example with company G,"},{"Start":"23:54.970 ","End":"24:00.805","Text":"you recall company G originally issued 100,000 ordinary shares for"},{"Start":"24:00.805 ","End":"24:08.065","Text":"a consideration of 1,000,000 and there was a 1 currency unit par value for each share."},{"Start":"24:08.065 ","End":"24:12.775","Text":"You discussed this before so I\u0027ll just fill in the numbers as a starting point."},{"Start":"24:12.775 ","End":"24:19.345","Text":"The original transaction would have resulted in an increase in cash of 1,000,000."},{"Start":"24:19.345 ","End":"24:22.960","Text":"The share capital at 1 par value,"},{"Start":"24:22.960 ","End":"24:29.230","Text":"100,000 shares would give rise to 100,000 in the share capital account."},{"Start":"24:29.230 ","End":"24:34.030","Text":"The excess of the 1,000,000 over the 100,000 would,"},{"Start":"24:34.030 ","End":"24:38.022","Text":"as you remember, go into a share premium account."},{"Start":"24:38.022 ","End":"24:41.920","Text":"There is no retained earnings balance as such in this example."},{"Start":"24:41.920 ","End":"24:45.110","Text":"In terms the quantity of shares,"},{"Start":"24:45.930 ","End":"24:50.125","Text":"we know there are 100,000 shares outstanding."},{"Start":"24:50.125 ","End":"24:53.140","Text":"The share buyback itself is the same."},{"Start":"24:53.140 ","End":"24:55.930","Text":"On 1 December 20X4,"},{"Start":"24:55.930 ","End":"25:02.770","Text":"the company repurchased the 10,000 ordinary shares at repurchase price of 12 each,"},{"Start":"25:02.770 ","End":"25:04.180","Text":"and as you recall,"},{"Start":"25:04.180 ","End":"25:06.730","Text":"and subsequently canceled them."},{"Start":"25:06.730 ","End":"25:15.010","Text":"The share buyback was to pay back to shareholders 120,000 out of cash."},{"Start":"25:15.010 ","End":"25:21.310","Text":"The reduction in the par value of the ordinary shares was the 10,000."},{"Start":"25:21.310 ","End":"25:24.535","Text":"The reduction in the share premium,"},{"Start":"25:24.535 ","End":"25:26.830","Text":"you remember, was the 90,000,"},{"Start":"25:26.830 ","End":"25:34.172","Text":"and because 120,000 was being paid back to shareholders,"},{"Start":"25:34.172 ","End":"25:36.055","Text":"the difference you remember,"},{"Start":"25:36.055 ","End":"25:38.125","Text":"k might have retained earnings so we had"},{"Start":"25:38.125 ","End":"25:43.105","Text":"a subtraction of retained earnings of 20,000 as well."},{"Start":"25:43.105 ","End":"25:45.070","Text":"In terms of the quantity,"},{"Start":"25:45.070 ","End":"25:50.035","Text":"this was the 10,000 shares that will be canceled."},{"Start":"25:50.035 ","End":"25:55.705","Text":"Now, the additional piece of information in this example,"},{"Start":"25:55.705 ","End":"26:01.945","Text":"is that the company is required to transfer for capital maintenance purposes"},{"Start":"26:01.945 ","End":"26:08.687","Text":"the amounts of the par value of the shares canceled from a distributable reserve,"},{"Start":"26:08.687 ","End":"26:10.945","Text":"in this case that would be from"},{"Start":"26:10.945 ","End":"26:16.974","Text":"the retained earnings account into a non distributable reserve."},{"Start":"26:16.974 ","End":"26:19.855","Text":"In this case, the capital redemption reserve."},{"Start":"26:19.855 ","End":"26:24.700","Text":"We therefore move 10,000 out of retained earnings."},{"Start":"26:24.700 ","End":"26:28.240","Text":"That would be a debit to retained earnings and"},{"Start":"26:28.240 ","End":"26:32.350","Text":"put 10,000 into this capital redemption reserve,"},{"Start":"26:32.350 ","End":"26:35.665","Text":"a credit to that particular account."},{"Start":"26:35.665 ","End":"26:38.995","Text":"End of the 20X4 year."},{"Start":"26:38.995 ","End":"26:43.330","Text":"The balance in cash is still 880,000."},{"Start":"26:43.330 ","End":"26:47.440","Text":"The share capital is 90,000."},{"Start":"26:47.440 ","End":"26:53.815","Text":"But note now there is a further 10,000 sitting in the capital redemption reserve."},{"Start":"26:53.815 ","End":"27:00.385","Text":"Therefore, that 10,000 in the capital redemption reserve and the 90,000"},{"Start":"27:00.385 ","End":"27:08.110","Text":"in the share capital equals the original 100,000 the par value of the shares."},{"Start":"27:08.110 ","End":"27:12.490","Text":"Share premium is 810,000."},{"Start":"27:12.490 ","End":"27:17.365","Text":"The retained earnings is down from the original number,"},{"Start":"27:17.365 ","End":"27:18.715","Text":"which isn\u0027t given to us,"},{"Start":"27:18.715 ","End":"27:23.275","Text":"less 30,000 now because of the 20,000"},{"Start":"27:23.275 ","End":"27:26.650","Text":"transfer on the share buyback and additional"},{"Start":"27:26.650 ","End":"27:30.325","Text":"10,000 transfer to the capital redemption reserve,"},{"Start":"27:30.325 ","End":"27:35.090","Text":"and the quantity of the shares is 90,000."}],"ID":31064},{"Watched":false,"Name":"Settled Share Payments","Duration":"18m 58s","ChapterTopicVideoID":29455,"CourseChapterTopicPlaylistID":294469,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.490","Text":"Hello, and welcome to this series of"},{"Start":"00:02.490 ","End":"00:06.915","Text":"video presentations on equity brought to you by Proprep."},{"Start":"00:06.915 ","End":"00:12.435","Text":"In this video, we will discuss the equity-settled share payments."},{"Start":"00:12.435 ","End":"00:18.345","Text":"Now, many companies pay incentives to employees in the form of share options."},{"Start":"00:18.345 ","End":"00:21.870","Text":"This is a scheme whereby companies grant"},{"Start":"00:21.870 ","End":"00:26.400","Text":"their employees an option to purchase shares in the company,"},{"Start":"00:26.400 ","End":"00:30.855","Text":"typically, at a favorable price at some point in the future."},{"Start":"00:30.855 ","End":"00:35.030","Text":"It is common amongst top executives."},{"Start":"00:35.030 ","End":"00:40.250","Text":"A typical option is vested over a few years."},{"Start":"00:40.250 ","End":"00:42.680","Text":"The word vested simply refers to the period of"},{"Start":"00:42.680 ","End":"00:48.305","Text":"time over which the option exists before becomes exercisable."},{"Start":"00:48.305 ","End":"00:53.810","Text":"The option needs to also specify the number of shares that will"},{"Start":"00:53.810 ","End":"00:58.730","Text":"be given for each option at the exercise date and also obviously,"},{"Start":"00:58.730 ","End":"01:01.280","Text":"the cost, which employee has to pay,"},{"Start":"01:01.280 ","End":"01:04.040","Text":"which is known as the exercise price."},{"Start":"01:04.040 ","End":"01:06.815","Text":"It is that cost or exercise price,"},{"Start":"01:06.815 ","End":"01:09.335","Text":"which is typically at a favorable amount,"},{"Start":"01:09.335 ","End":"01:13.790","Text":"meaning that the employee is probably likely to take up"},{"Start":"01:13.790 ","End":"01:18.515","Text":"the option to buy the shares at that future point in time."},{"Start":"01:18.515 ","End":"01:23.689","Text":"Now looking at the accounting for these equity-settled share payments,"},{"Start":"01:23.689 ","End":"01:26.135","Text":"there will be an example that will follow,"},{"Start":"01:26.135 ","End":"01:29.420","Text":"which will clarify this but just as a starting point,"},{"Start":"01:29.420 ","End":"01:35.795","Text":"the value of the options is spread over the vesting period."},{"Start":"01:35.795 ","End":"01:40.310","Text":"Remember the vesting period is the period of time over which option stayed."},{"Start":"01:40.310 ","End":"01:43.985","Text":"It\u0027s called open before they become exercisable."},{"Start":"01:43.985 ","End":"01:47.870","Text":"This is recorded as an expense over that period."},{"Start":"01:47.870 ","End":"01:51.455","Text":"There are various valuation models management can use and we will look"},{"Start":"01:51.455 ","End":"01:56.240","Text":"at the computation of the expense in the next example."},{"Start":"01:56.240 ","End":"01:59.165","Text":"If an option is immediately vested,"},{"Start":"01:59.165 ","End":"02:02.615","Text":"then the value is expensed in the grant year."},{"Start":"02:02.615 ","End":"02:06.725","Text":"The expense of the option is credited to"},{"Start":"02:06.725 ","End":"02:10.940","Text":"equity and in a special type of reserve and equity,"},{"Start":"02:10.940 ","End":"02:14.665","Text":"which we\u0027ll also come across in the next example."},{"Start":"02:14.665 ","End":"02:21.560","Text":"Clearly, options granted to a body of people and part of management,"},{"Start":"02:21.560 ","End":"02:29.810","Text":"all the people who\u0027ve been granted options may not be around for the full vesting period."},{"Start":"02:29.810 ","End":"02:33.440","Text":"Therefore, if certain employees"},{"Start":"02:33.440 ","End":"02:38.544","Text":"leave before the end of the vesting period and therefore,"},{"Start":"02:38.544 ","End":"02:40.535","Text":"option becomes un-exercisable,"},{"Start":"02:40.535 ","End":"02:44.420","Text":"there needs to be an adjustment to the amount of the expense that we record."},{"Start":"02:44.420 ","End":"02:48.169","Text":"That, we will also see in the following example."},{"Start":"02:48.169 ","End":"02:49.850","Text":"Looking at example now,"},{"Start":"02:49.850 ","End":"02:52.595","Text":"there\u0027s quite a bit of information to take into account."},{"Start":"02:52.595 ","End":"02:55.160","Text":"We\u0027ll go through them information now and then revisit"},{"Start":"02:55.160 ","End":"02:58.590","Text":"it when we start preparing the solution."},{"Start":"02:58.960 ","End":"03:05.945","Text":"Company H grants a total of 100 share options."},{"Start":"03:05.945 ","End":"03:13.655","Text":"This is given to 5 staff members of management and therefore, 20 options each."},{"Start":"03:13.655 ","End":"03:18.335","Text":"The date at which the options are granted."},{"Start":"03:18.335 ","End":"03:21.590","Text":"Importantly, note as 1 January 20X1,"},{"Start":"03:21.590 ","End":"03:23.510","Text":"the beginning of the X1 year."},{"Start":"03:23.510 ","End":"03:25.775","Text":"When do the option vest,"},{"Start":"03:25.775 ","End":"03:27.965","Text":"in other words, become exercisable?"},{"Start":"03:27.965 ","End":"03:30.500","Text":"This happens at the end of a 3-year period,"},{"Start":"03:30.500 ","End":"03:33.745","Text":"in other words, 31 December 20X3."},{"Start":"03:33.745 ","End":"03:37.909","Text":"What is important to note is that from 1 January"},{"Start":"03:37.909 ","End":"03:42.800","Text":"\u0027X1 all the way through to 31 December \u0027X3,"},{"Start":"03:42.800 ","End":"03:45.650","Text":"that is the 3-year period and"},{"Start":"03:45.650 ","End":"03:53.675","Text":"the vesting period over which we need to record an expense relating to these options."},{"Start":"03:53.675 ","End":"04:00.500","Text":"Now, you tell the options entitled to hold it to subscribe for 1 share,"},{"Start":"04:00.500 ","End":"04:04.445","Text":"which has a par value of 1 currency unit."},{"Start":"04:04.445 ","End":"04:09.350","Text":"The company determines that the fair value of"},{"Start":"04:09.350 ","End":"04:13.595","Text":"the options at the date of the grant, in other words,"},{"Start":"04:13.595 ","End":"04:23.495","Text":"1 January is equal to 18 currency units and the exercise price at the end of 3 years,"},{"Start":"04:23.495 ","End":"04:25.145","Text":"at the exercise date,"},{"Start":"04:25.145 ","End":"04:31.005","Text":"which is 31 December 20X3 is 10 currency units."},{"Start":"04:31.005 ","End":"04:36.140","Text":"You also told the company expects that all 100 options will vest because it"},{"Start":"04:36.140 ","End":"04:40.700","Text":"expects the share price to increase to 40 currency unit."},{"Start":"04:40.700 ","End":"04:45.995","Text":"This is simply an expectation or estimation by the end of the vesting period,"},{"Start":"04:45.995 ","End":"04:49.710","Text":"in other words, by 31 December 20X3."},{"Start":"04:50.260 ","End":"04:54.365","Text":"You\u0027re also told by the end of 20X2,"},{"Start":"04:54.365 ","End":"04:56.780","Text":"2 of the employees,"},{"Start":"04:56.780 ","End":"05:01.550","Text":"2 of the 5, have now left the company and therefore,"},{"Start":"05:01.550 ","End":"05:03.920","Text":"the options have been forgone."},{"Start":"05:03.920 ","End":"05:13.285","Text":"The remaining 3 did stay beyond the vesting date of 31 December 20X3."},{"Start":"05:13.285 ","End":"05:16.040","Text":"You\u0027ll see in the calculation that followed when"},{"Start":"05:16.040 ","End":"05:20.315","Text":"these 2 employees leave the company at the end of 20X2,"},{"Start":"05:20.315 ","End":"05:23.585","Text":"there need to be an adjustment to the computation we\u0027re making"},{"Start":"05:23.585 ","End":"05:28.099","Text":"for the recognition of the expense relating to the share options."},{"Start":"05:28.099 ","End":"05:32.000","Text":"It required us to analyze the effect of these options on"},{"Start":"05:32.000 ","End":"05:35.720","Text":"the income statement and equity over the vesting period,"},{"Start":"05:35.720 ","End":"05:39.330","Text":"in other words, over 3 years of \u0027X1."},{"Start":"05:39.330 ","End":"05:43.305","Text":"The vesting period, the 3 years being \u0027X1,"},{"Start":"05:43.305 ","End":"05:46.930","Text":"\u0027X2, and \u0027X3."},{"Start":"05:46.960 ","End":"05:53.690","Text":"Looking now at some of the calculations we need to do in order to prepare the solution."},{"Start":"05:53.690 ","End":"05:59.435","Text":"The first point is to look at or to compute at the grant date."},{"Start":"05:59.435 ","End":"06:01.820","Text":"Now, we know the grant date,"},{"Start":"06:01.820 ","End":"06:03.350","Text":"given the question,"},{"Start":"06:03.350 ","End":"06:06.165","Text":"is 1 January 20X1."},{"Start":"06:06.165 ","End":"06:10.265","Text":"1 January of the 20X1 year is the grant date."},{"Start":"06:10.265 ","End":"06:18.550","Text":"We need to first compute the overall cost to be spread over that 3-year vesting period."},{"Start":"06:18.680 ","End":"06:21.590","Text":"This is quite an easy computation."},{"Start":"06:21.590 ","End":"06:27.735","Text":"We know there are 100 options which are granted by the company,"},{"Start":"06:27.735 ","End":"06:30.350","Text":"and we are told that at the grant date,"},{"Start":"06:30.350 ","End":"06:37.675","Text":"the fair value of these options is equal to 18 currency units."},{"Start":"06:37.675 ","End":"06:44.260","Text":"Therefore, the 100 options multiply by 18 currency units is equal"},{"Start":"06:44.260 ","End":"06:51.430","Text":"to a total cost to be spread over the 3-year period of 1,800."},{"Start":"06:51.430 ","End":"06:55.660","Text":"We now come to the 20X1 income statement."},{"Start":"06:55.660 ","End":"07:01.240","Text":"In other words, we\u0027ve now reached the 31st of December of the 20X1 year."},{"Start":"07:01.240 ","End":"07:03.460","Text":"We\u0027re looking now to see what is the amount of"},{"Start":"07:03.460 ","End":"07:08.110","Text":"the expense to go on the income statement for that particular year."},{"Start":"07:08.110 ","End":"07:15.650","Text":"The way we do this is we look at the total cost of 1,800."},{"Start":"07:15.690 ","End":"07:23.495","Text":"We need to now expense for 1 year and because we know it is a 3-year period,"},{"Start":"07:23.495 ","End":"07:26.870","Text":"we\u0027ll expense 1 of those 3 years,"},{"Start":"07:26.870 ","End":"07:30.660","Text":"which amounts to 600."},{"Start":"07:30.920 ","End":"07:35.480","Text":"What I\u0027m going to do here, I\u0027m just going to do something which will help us for"},{"Start":"07:35.480 ","End":"07:39.725","Text":"the following years and ask the question,"},{"Start":"07:39.725 ","End":"07:48.950","Text":"\"How much expense we have in previous years relating to these particular options?\u0027"},{"Start":"07:48.950 ","End":"07:51.095","Text":"Now, because this is the first year,"},{"Start":"07:51.095 ","End":"07:54.800","Text":"clearly, there was zero expense in previous years."},{"Start":"07:54.800 ","End":"08:02.490","Text":"Therefore, the 20X1 expense totals 600."},{"Start":"08:02.750 ","End":"08:08.149","Text":"We\u0027ll now carry on with the computations looking at the 20X2 year."},{"Start":"08:08.149 ","End":"08:10.700","Text":"Before we can compute the amount of"},{"Start":"08:10.700 ","End":"08:16.295","Text":"the expense related to the options to be recorded for 20X2 year,"},{"Start":"08:16.295 ","End":"08:24.620","Text":"we need to take the counter revision of that initial total cost because we told"},{"Start":"08:24.620 ","End":"08:33.665","Text":"in 20X2 that 2 of the 5 option hold employees or managers have now left the company."},{"Start":"08:33.665 ","End":"08:37.335","Text":"Therefore, have forgone the options."},{"Start":"08:37.335 ","End":"08:39.335","Text":"We know that, originally,"},{"Start":"08:39.335 ","End":"08:44.495","Text":"the amount of the cost of the options to be spread over the 3-year period."},{"Start":"08:44.495 ","End":"08:48.110","Text":"We know originally that the cost of the options to"},{"Start":"08:48.110 ","End":"08:52.400","Text":"spread over the 3-year period was 1,800."},{"Start":"08:52.400 ","End":"09:01.115","Text":"Remember, that was the 100 options at a value of 18 each but now,"},{"Start":"09:01.115 ","End":"09:04.595","Text":"because 2 employees have left,"},{"Start":"09:04.595 ","End":"09:09.050","Text":"we need to revise this estimate or revise this amount of"},{"Start":"09:09.050 ","End":"09:13.500","Text":"the cost to spread over the option period to be 1,800,"},{"Start":"09:13.500 ","End":"09:15.315","Text":"multiply by 3 over 5,"},{"Start":"09:15.315 ","End":"09:19.205","Text":"3 being the remaining 3 of the 5 employees."},{"Start":"09:19.205 ","End":"09:24.440","Text":"This gives us a revised cost of 1,080."},{"Start":"09:25.220 ","End":"09:32.690","Text":"Therefore, when we come to the 20X2 computation of the expense to be recognized,"},{"Start":"09:32.690 ","End":"09:35.675","Text":"we take the revised cost,"},{"Start":"09:35.675 ","End":"09:40.260","Text":"1,080, not the original cost of 1,800."},{"Start":"09:41.060 ","End":"09:43.975","Text":"At the end of 20X2,"},{"Start":"09:43.975 ","End":"09:51.605","Text":"remember we\u0027ve now gone from 1 January \u0027X1 all the way through to 31 December of 20X2."},{"Start":"09:51.605 ","End":"09:58.400","Text":"In other words, 2 of the 3 years of the vesting period now gone past."},{"Start":"09:58.400 ","End":"10:03.860","Text":"The total amount of the option cost"},{"Start":"10:03.860 ","End":"10:09.695","Text":"to be recognized as an expense on a cumulative basis is 108,"},{"Start":"10:09.695 ","End":"10:17.780","Text":"multiply by 2/3 equals 720 but previously,"},{"Start":"10:17.780 ","End":"10:19.970","Text":"we recognize an expense."},{"Start":"10:19.970 ","End":"10:24.830","Text":"Remember in the first year of 600 and therefore,"},{"Start":"10:24.830 ","End":"10:34.353","Text":"the 20X2 expense, to recognize there\u0027s an amount of 120."},{"Start":"10:34.353 ","End":"10:38.620","Text":"We then move on to 20X3."},{"Start":"10:38.620 ","End":"10:46.900","Text":"Remember, 20X3 we have now move through from 1 January X1 all the way"},{"Start":"10:46.900 ","End":"10:56.005","Text":"through to 31 December of X3 to go on through 3 of the 3 years of the option period."},{"Start":"10:56.005 ","End":"11:03.160","Text":"Therefore, the amount of the expense will again be the revised cost of 1,080 multiplied"},{"Start":"11:03.160 ","End":"11:11.530","Text":"by all 3 years have now gone past so the total cumulative expense should be 1,080."},{"Start":"11:11.530 ","End":"11:15.990","Text":"That\u0027s the amount be trying to recognize it as an expense in total but again,"},{"Start":"11:15.990 ","End":"11:21.165","Text":"we have to look and say, what was the previous expense recognized?"},{"Start":"11:21.165 ","End":"11:24.355","Text":"We know cumulatively in the past,"},{"Start":"11:24.355 ","End":"11:28.180","Text":"we\u0027ve now recognize the 720 and therefore,"},{"Start":"11:28.180 ","End":"11:40.060","Text":"the 20X3 expense amounts to a number of currency units, 360."},{"Start":"11:40.060 ","End":"11:42.055","Text":"Have we not done the computation?"},{"Start":"11:42.055 ","End":"11:47.320","Text":"We can see how these amounts will be recorded on an accounting equation worksheet."},{"Start":"11:47.320 ","End":"11:49.105","Text":"To start off with,"},{"Start":"11:49.105 ","End":"11:56.305","Text":"we\u0027ve simply assume some balances at the 1st of January of 20X1, nothing in cash."},{"Start":"11:56.305 ","End":"12:06.790","Text":"Let\u0027s just assume 100,000 par value ordinary shares and 900,000 related share premium."},{"Start":"12:06.790 ","End":"12:12.235","Text":"Again, those are assumed numbers for the purposes of putting onto the worksheet."},{"Start":"12:12.235 ","End":"12:18.175","Text":"We then come to the 1st-year end of 31, December 20X1."},{"Start":"12:18.175 ","End":"12:22.810","Text":"You recall we computed that the amount of the expense should be"},{"Start":"12:22.810 ","End":"12:27.970","Text":"600 so we record a decrease in equity and expense of 600,"},{"Start":"12:27.970 ","End":"12:30.295","Text":"which in fact is a debit to"},{"Start":"12:30.295 ","End":"12:38.155","Text":"a share option expense and we put the credit into an equity account,"},{"Start":"12:38.155 ","End":"12:40.990","Text":"which we call somebody like a stock option reserve or"},{"Start":"12:40.990 ","End":"12:46.580","Text":"share option reserve and that gets increased by an amount of 600."},{"Start":"12:47.270 ","End":"12:51.675","Text":"When we come to the next year in December 20X2."},{"Start":"12:51.675 ","End":"12:53.400","Text":"You recall in the previous slide,"},{"Start":"12:53.400 ","End":"12:57.915","Text":"we\u0027d computed the amount of the expense 320 for that year."},{"Start":"12:57.915 ","End":"13:03.940","Text":"Again, we reduce equity 120 debit to the income statement,"},{"Start":"13:03.940 ","End":"13:09.040","Text":"a share option cost and the credit goes"},{"Start":"13:09.040 ","End":"13:15.835","Text":"into that same share option of stock options reserve an amount of 120."},{"Start":"13:15.835 ","End":"13:19.075","Text":"Same again, for the 20X3-year,"},{"Start":"13:19.075 ","End":"13:25.525","Text":"we computed the amount of 360 as the expense to recognize."},{"Start":"13:25.525 ","End":"13:30.340","Text":"We put a 300 so you put an amount of 360"},{"Start":"13:30.340 ","End":"13:35.980","Text":"as the expense debit to share option expense for the 20X3-year and again,"},{"Start":"13:35.980 ","End":"13:39.835","Text":"the credit goes to the equity accounts on"},{"Start":"13:39.835 ","End":"13:47.380","Text":"the balance sheet of 360."},{"Start":"13:47.380 ","End":"13:51.130","Text":"We now come to the end of the period and"},{"Start":"13:51.130 ","End":"13:56.845","Text":"the balance will be whatever the amount of cash happens to be,"},{"Start":"13:56.845 ","End":"14:01.600","Text":"the share capital receiving has not changed the same the share premium,"},{"Start":"14:01.600 ","End":"14:03.760","Text":"it seems it has not changed."},{"Start":"14:03.760 ","End":"14:05.950","Text":"The Share option reserve amounts"},{"Start":"14:05.950 ","End":"14:12.910","Text":"to 1,080 and then the expense amounts in the income statement,"},{"Start":"14:12.910 ","End":"14:16.120","Text":"as you see, will be 600 for the X1 year,"},{"Start":"14:16.120 ","End":"14:18.820","Text":"120 for the X2 year,"},{"Start":"14:18.820 ","End":"14:22.960","Text":"and 360 for the X3 year."},{"Start":"14:22.960 ","End":"14:25.420","Text":"At the end of the vesting period,"},{"Start":"14:25.420 ","End":"14:29.350","Text":"the options then get exercised and the option holder or"},{"Start":"14:29.350 ","End":"14:34.375","Text":"holders will pay the exercise price and then return,"},{"Start":"14:34.375 ","End":"14:37.000","Text":"get the ordinary shares."},{"Start":"14:37.000 ","End":"14:39.415","Text":"Looking at an example,"},{"Start":"14:39.415 ","End":"14:40.885","Text":"this company H,"},{"Start":"14:40.885 ","End":"14:47.425","Text":"had granted 60 share options to 3 members of staff, in other words,"},{"Start":"14:47.425 ","End":"14:53.110","Text":"20 options each and on the 31st of December,"},{"Start":"14:53.110 ","End":"14:57.520","Text":"the 20X4 year the options became fully vested."},{"Start":"14:57.520 ","End":"15:04.280","Text":"In other words, 31 December 20X4 was the end of the vesting period."},{"Start":"15:04.380 ","End":"15:08.830","Text":"Now, we haven\u0027t gotten any information in this example about"},{"Start":"15:08.830 ","End":"15:13.240","Text":"the original offer price so all we\u0027re"},{"Start":"15:13.240 ","End":"15:22.345","Text":"looking at is the entries to process on exercise of the options by the option holders."},{"Start":"15:22.345 ","End":"15:26.425","Text":"This happens, you\u0027re told here on 1 January 20X5,"},{"Start":"15:26.425 ","End":"15:32.830","Text":"all of the 60 options exercised and the employees pay"},{"Start":"15:32.830 ","End":"15:36.055","Text":"10 currency units in return for"},{"Start":"15:36.055 ","End":"15:43.270","Text":"1 ordinary share and those shares have a 1 currency unit par value."},{"Start":"15:43.270 ","End":"15:45.910","Text":"Required asks you to say,"},{"Start":"15:45.910 ","End":"15:49.930","Text":"or to compute how much cash does the company get from the employees upon"},{"Start":"15:49.930 ","End":"15:55.315","Text":"exercise the options and how will this be recorded in the equity section?"},{"Start":"15:55.315 ","End":"15:57.895","Text":"Looking then at the solution,"},{"Start":"15:57.895 ","End":"16:00.925","Text":"we\u0027ll just assume some opening balances."},{"Start":"16:00.925 ","End":"16:02.560","Text":"I will put an X in for cash,"},{"Start":"16:02.560 ","End":"16:11.200","Text":"would assume 100,000 for share capital and will assume 900,000 for share premium."},{"Start":"16:11.200 ","End":"16:19.300","Text":"Now, the stock option reserve would also have an amount sitting in that account."},{"Start":"16:19.300 ","End":"16:21.115","Text":"As I said before,"},{"Start":"16:21.115 ","End":"16:25.390","Text":"we have not been given information about the fair value at"},{"Start":"16:25.390 ","End":"16:28.630","Text":"the date of granting the options so"},{"Start":"16:28.630 ","End":"16:32.650","Text":"we can\u0027t actually compute this amount in the stock option reserve."},{"Start":"16:32.650 ","End":"16:36.490","Text":"Let\u0027s just hold that for a moment and look now at"},{"Start":"16:36.490 ","End":"16:42.200","Text":"the accounting entries for the exercise of these options."},{"Start":"16:43.560 ","End":"16:51.070","Text":"We know that there are 60 options and they\u0027re all being offered to management,"},{"Start":"16:51.070 ","End":"16:56.710","Text":"to employees at an option price of 10 currency units each,"},{"Start":"16:56.710 ","End":"17:00.865","Text":"which gives us a total of 600."},{"Start":"17:00.865 ","End":"17:09.235","Text":"Now, we know that these options have a par value of 1 currency unit each,"},{"Start":"17:09.235 ","End":"17:14.185","Text":"which means that the par value amounts to 60 and"},{"Start":"17:14.185 ","End":"17:19.435","Text":"if the par value is 1 and the issue price is 10,"},{"Start":"17:19.435 ","End":"17:21.250","Text":"is clearly a share premium of"},{"Start":"17:21.250 ","End":"17:28.720","Text":"9 and 9 multiply by the 60 gives us the share premium of 540,"},{"Start":"17:28.720 ","End":"17:31.660","Text":"the total coming to 600."},{"Start":"17:31.660 ","End":"17:35.965","Text":"Therefore, the accounting entries would place a debit,"},{"Start":"17:35.965 ","End":"17:42.430","Text":"the 600 debit would go to cash to increase the asset cash and the other side of"},{"Start":"17:42.430 ","End":"17:49.690","Text":"the entry would be a credit to the share capital account for the par value,"},{"Start":"17:49.690 ","End":"17:54.220","Text":"and a credit to the share premium account for the amount of the premium."},{"Start":"17:54.220 ","End":"17:57.160","Text":"Therefore, on this worksheet,"},{"Start":"17:57.160 ","End":"18:02.260","Text":"there\u0027ll be an increase in the asset cash of 600,"},{"Start":"18:02.260 ","End":"18:08.080","Text":"an increase in the share capital par value part of equity of 60,"},{"Start":"18:08.080 ","End":"18:11.200","Text":"and an increase in the share premium,"},{"Start":"18:11.200 ","End":"18:13.405","Text":"part of equity of 540."},{"Start":"18:13.405 ","End":"18:16.375","Text":"The total cash will therefore be the original amount,"},{"Start":"18:16.375 ","End":"18:19.570","Text":"whatever it is, X plus the 600."},{"Start":"18:19.570 ","End":"18:30.550","Text":"The share capital will now be 100,060 and the share premium will be 900,540."},{"Start":"18:30.550 ","End":"18:32.695","Text":"Now, in this particular scenario,"},{"Start":"18:32.695 ","End":"18:37.570","Text":"the stock option reserve has remained unchanged."},{"Start":"18:37.570 ","End":"18:44.620","Text":"You will see in some of the exercises that relate to the section that is a alternative"},{"Start":"18:44.620 ","End":"18:49.390","Text":"accounting treatments whereby the stock option reserve"},{"Start":"18:49.390 ","End":"18:53.755","Text":"is decreased and allocated as a credit,"},{"Start":"18:53.755 ","End":"18:58.160","Text":"is an increase into the share premium account."}],"ID":31065},{"Watched":false,"Name":"Other Comprehensive Income","Duration":"3m 30s","ChapterTopicVideoID":29446,"CourseChapterTopicPlaylistID":294469,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.260 ","End":"00:03.945","Text":"In this video, we\u0027ll have a brief discussion"},{"Start":"00:03.945 ","End":"00:07.780","Text":"on the concept of other comprehensive income."},{"Start":"00:08.600 ","End":"00:14.565","Text":"Now, you will remember from earlier presentations that all income and"},{"Start":"00:14.565 ","End":"00:20.760","Text":"all expenses come about through changes in the non-equity accounts in the balance sheet."},{"Start":"00:20.760 ","End":"00:26.325","Text":"These non-equity accounts are obviously the assets and the liabilities."},{"Start":"00:26.325 ","End":"00:30.090","Text":"Just to recap, recall the accounting equation of"},{"Start":"00:30.090 ","End":"00:35.340","Text":"assets equals liabilities plus owner\u0027s equity."},{"Start":"00:35.340 ","End":"00:40.180","Text":"We know that income can come about through an increase in assets."},{"Start":"00:40.180 ","End":"00:44.105","Text":"Assets increase, equity increases,"},{"Start":"00:44.105 ","End":"00:46.550","Text":"and income is earned."},{"Start":"00:46.550 ","End":"00:51.860","Text":"We also know income can be earned through a decrease in liabilities."},{"Start":"00:51.860 ","End":"00:55.639","Text":"Liabilities decreased, equity must increase,"},{"Start":"00:55.639 ","End":"00:58.120","Text":"representing the earning of income,"},{"Start":"00:58.120 ","End":"01:01.850","Text":"and the same, we can look at this with expenses."},{"Start":"01:01.850 ","End":"01:05.615","Text":"Expenses can come about through a decrease in assets."},{"Start":"01:05.615 ","End":"01:08.735","Text":"Assets go down, equity goes down,"},{"Start":"01:08.735 ","End":"01:11.600","Text":"resulting in an expense being incurred."},{"Start":"01:11.600 ","End":"01:16.130","Text":"Expenses also come about through an increase in"},{"Start":"01:16.130 ","End":"01:22.760","Text":"liabilities causing equity to decrease and the expense to be incurred."},{"Start":"01:22.760 ","End":"01:26.960","Text":"That just emphasize that all income and all expenses come"},{"Start":"01:26.960 ","End":"01:31.880","Text":"about through changes in the underlying assets and liabilities."},{"Start":"01:31.880 ","End":"01:36.320","Text":"However, the point of this discussion is that there are"},{"Start":"01:36.320 ","End":"01:43.415","Text":"certain changes in assets and liabilities that do not flow through the income statement."},{"Start":"01:43.415 ","End":"01:46.970","Text":"Most of these are beyond the scope of this course,"},{"Start":"01:46.970 ","End":"01:49.250","Text":"but include, for example,"},{"Start":"01:49.250 ","End":"01:52.504","Text":"transactions related to pensions,"},{"Start":"01:52.504 ","End":"01:55.190","Text":"to the effect of changes in exchange rates,"},{"Start":"01:55.190 ","End":"02:00.145","Text":"and to revaluations of property plants and equipment."},{"Start":"02:00.145 ","End":"02:04.280","Text":"Accounting standards require these types of"},{"Start":"02:04.280 ","End":"02:11.470","Text":"changes to be reported as what\u0027s known as other comprehensive income, OCI."},{"Start":"02:11.470 ","End":"02:14.240","Text":"Now, there are 2 ways of presenting"},{"Start":"02:14.240 ","End":"02:19.325","Text":"the other comprehensive income is others shown at the bottom of the income statements."},{"Start":"02:19.325 ","End":"02:21.905","Text":"In other words, a continuation on the income statement,"},{"Start":"02:21.905 ","End":"02:27.560","Text":"but as a separate section called the other comprehensive income section of"},{"Start":"02:27.560 ","End":"02:31.250","Text":"the income statement or presented"},{"Start":"02:31.250 ","End":"02:35.780","Text":"separately as its own statement of comprehensive income."},{"Start":"02:35.780 ","End":"02:42.274","Text":"Any tax expense or later tax benefit relating to these OCI changes"},{"Start":"02:42.274 ","End":"02:50.230","Text":"also appear in the OCI rather than being part of the tax expense on the income statement."},{"Start":"02:50.230 ","End":"02:57.505","Text":"Here you see an example of a statement of comprehensive income from the company Ocado,"},{"Start":"02:57.505 ","End":"02:59.980","Text":"the online grocery retailer,"},{"Start":"02:59.980 ","End":"03:04.010","Text":"showing a separate statement of comprehensive income."},{"Start":"03:04.010 ","End":"03:06.610","Text":"The profit, on this case,"},{"Start":"03:06.610 ","End":"03:11.635","Text":"the loss for the period is brought forward from the income statement."},{"Start":"03:11.635 ","End":"03:16.030","Text":"Then we have listed the items of other comprehensive income"},{"Start":"03:16.030 ","End":"03:21.505","Text":"which are not shown through the income statement itself."},{"Start":"03:21.505 ","End":"03:23.635","Text":"In other words, which did not affect"},{"Start":"03:23.635 ","End":"03:29.580","Text":"the computation of the profit or loss for the period."}],"ID":31066},{"Watched":false,"Name":"Retained Earnings and Reserves","Duration":"10m 58s","ChapterTopicVideoID":29447,"CourseChapterTopicPlaylistID":294469,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:06.420","Text":"In this video, we will examine retained earnings and reserves."},{"Start":"00:06.420 ","End":"00:09.015","Text":"Retained earnings, as you should know,"},{"Start":"00:09.015 ","End":"00:11.205","Text":"is an equity account."},{"Start":"00:11.205 ","End":"00:15.855","Text":"It is the equity account into which the annual profit"},{"Start":"00:15.855 ","End":"00:20.895","Text":"or could be a loss is transferred at the end of each year."},{"Start":"00:20.895 ","End":"00:24.270","Text":"Let\u0027s just take a look at what this means."},{"Start":"00:24.270 ","End":"00:33.525","Text":"If we think of the accounting equation of assets equals liabilities plus owner\u0027s equity,"},{"Start":"00:33.525 ","End":"00:38.175","Text":"we can now identify for the purposes of this example,"},{"Start":"00:38.175 ","End":"00:42.010","Text":"certain familiar categories of equity."},{"Start":"00:42.010 ","End":"00:45.080","Text":"We can have the share capital,"},{"Start":"00:45.080 ","End":"00:47.869","Text":"we can have retained earnings,"},{"Start":"00:47.869 ","End":"00:49.460","Text":"and we can have income,"},{"Start":"00:49.460 ","End":"00:53.795","Text":"and here, we\u0027ll have expenses."},{"Start":"00:53.795 ","End":"01:00.200","Text":"Just for the purposes of balancing this accounting equation worksheet,"},{"Start":"01:00.200 ","End":"01:06.200","Text":"I\u0027ll include an asset which we\u0027ll have as the only asset, cash."},{"Start":"01:06.200 ","End":"01:12.760","Text":"Now, assume there\u0027s a balance in a particular company where cash is equal"},{"Start":"01:12.760 ","End":"01:18.740","Text":"to 1,030 and that is represented by a share capital,"},{"Start":"01:18.740 ","End":"01:24.470","Text":"for example, of 1,000 and income earned in"},{"Start":"01:24.470 ","End":"01:31.385","Text":"the current period of 100 and expenses incurred in the current period of 70."},{"Start":"01:31.385 ","End":"01:38.720","Text":"Now, in terms of transferring that income and expenses into equity and specifically,"},{"Start":"01:38.720 ","End":"01:43.220","Text":"therefore into the retained earnings component of equity,"},{"Start":"01:43.220 ","End":"01:48.515","Text":"the entity as part of a transfer of profit,"},{"Start":"01:48.515 ","End":"01:51.395","Text":"would process the following entry."},{"Start":"01:51.395 ","End":"01:58.880","Text":"The income would be reduced and the income of 100 is then moved into"},{"Start":"01:58.880 ","End":"02:07.070","Text":"the equity account called retained earnings and the expenses of 70 are also reduced to 0."},{"Start":"02:07.070 ","End":"02:10.890","Text":"Note the expenses are in fact,"},{"Start":"02:10.890 ","End":"02:16.110","Text":"a debit balance whereas the income was a credit balance."},{"Start":"02:16.110 ","End":"02:23.975","Text":"Therefore, to cancel out and reduce the income account to 0 required a debit,"},{"Start":"02:23.975 ","End":"02:31.380","Text":"whereas to cancel out and reduce the expense account to 0 requires a credit."},{"Start":"02:31.580 ","End":"02:36.560","Text":"The opposite side of the entry when we debit"},{"Start":"02:36.560 ","End":"02:41.645","Text":"the income account would be to credit retained earnings."},{"Start":"02:41.645 ","End":"02:45.995","Text":"When we credit the expense account,"},{"Start":"02:45.995 ","End":"02:53.135","Text":"there\u0027d be a debit to retained earnings in the amount of 70."},{"Start":"02:53.135 ","End":"02:58.670","Text":"If you look at the balances after these closing transfers,"},{"Start":"02:58.670 ","End":"03:02.495","Text":"cash kitty is not affected, 1,030."},{"Start":"03:02.495 ","End":"03:06.980","Text":"The share capital is also not affected, remains at 1,000."},{"Start":"03:06.980 ","End":"03:12.530","Text":"The income account is correctly reduced to 0 at the end of the period."},{"Start":"03:12.530 ","End":"03:17.930","Text":"The expense account is also correctly reduced to 0 end of the period."},{"Start":"03:17.930 ","End":"03:20.315","Text":"The retained earnings account,"},{"Start":"03:20.315 ","End":"03:25.580","Text":"assuming there was 0 balance in retained earnings at the starting point."},{"Start":"03:25.580 ","End":"03:27.170","Text":"This, for example,"},{"Start":"03:27.170 ","End":"03:29.419","Text":"could be the first period of trading,"},{"Start":"03:29.419 ","End":"03:36.080","Text":"retained earnings now shows a balance of 30 representing the excess of"},{"Start":"03:36.080 ","End":"03:38.450","Text":"income over expenses for"},{"Start":"03:38.450 ","End":"03:43.295","Text":"that particular period and clearly the accounting equation balances."},{"Start":"03:43.295 ","End":"03:49.115","Text":"Then companies typically declare dividends at the end of the period."},{"Start":"03:49.115 ","End":"03:52.475","Text":"Other ordinary dividends or preference dividends."},{"Start":"03:52.475 ","End":"03:56.570","Text":"Dividends are a reduction in retained earnings"},{"Start":"03:56.570 ","End":"04:02.180","Text":"because dividends are a distribution to equity holders."},{"Start":"04:02.180 ","End":"04:07.370","Text":"If a distribution is made from the entity to its shareholders,"},{"Start":"04:07.370 ","End":"04:09.920","Text":"that reduces the amount the business owes to"},{"Start":"04:09.920 ","End":"04:13.280","Text":"the owner and therefore equity must come down."},{"Start":"04:13.280 ","End":"04:18.680","Text":"To illustrate this point using the accounting equation worksheet again,"},{"Start":"04:18.680 ","End":"04:20.255","Text":"we\u0027ll put here the worksheet,"},{"Start":"04:20.255 ","End":"04:25.415","Text":"assets equals liabilities plus owner\u0027s equity."},{"Start":"04:25.415 ","End":"04:31.460","Text":"I\u0027ll set up the same balances that we had at the end of the previous example,"},{"Start":"04:31.460 ","End":"04:34.460","Text":"we had a balance in cash of,"},{"Start":"04:34.460 ","End":"04:36.935","Text":"you recall 1,030,"},{"Start":"04:36.935 ","End":"04:44.620","Text":"and we had balances in share capital and retained earnings."},{"Start":"04:44.620 ","End":"04:47.023","Text":"A share capital balance you recall,"},{"Start":"04:47.023 ","End":"04:51.940","Text":"of 1,000 and retained earnings balance of 30."},{"Start":"04:51.940 ","End":"04:57.655","Text":"We have transferred the income and expenses for the period to retained earnings."},{"Start":"04:57.655 ","End":"05:03.490","Text":"Therefore, there was 0 balance in both the income and expense for the period."},{"Start":"05:03.490 ","End":"05:05.230","Text":"If now, for example,"},{"Start":"05:05.230 ","End":"05:08.445","Text":"the company declares a dividend of 5,"},{"Start":"05:08.445 ","End":"05:12.520","Text":"that dividend of 5 is a liability to shareholders."},{"Start":"05:12.520 ","End":"05:19.315","Text":"Therefore, we have to have a liability account called a dividends payable."},{"Start":"05:19.315 ","End":"05:22.980","Text":"The dividend ability is increased."},{"Start":"05:22.980 ","End":"05:25.529","Text":"I set the mount as 5 as an example,"},{"Start":"05:25.529 ","End":"05:29.060","Text":"and dividends reduce retained earnings."},{"Start":"05:29.060 ","End":"05:32.585","Text":"Thus, after this transaction takes place,"},{"Start":"05:32.585 ","End":"05:34.370","Text":"the declaration, the dividend,"},{"Start":"05:34.370 ","End":"05:37.595","Text":"cash clearly remains the same, 1,030."},{"Start":"05:37.595 ","End":"05:41.560","Text":"The dividend is payable liability of 5,"},{"Start":"05:41.560 ","End":"05:44.150","Text":"the share capital remains 1,000,"},{"Start":"05:44.150 ","End":"05:48.575","Text":"but the retained earnings now goes down to 25."},{"Start":"05:48.575 ","End":"05:51.890","Text":"This is a dividend being declared."},{"Start":"05:51.890 ","End":"05:54.950","Text":"If you want to take it 1 step further and"},{"Start":"05:54.950 ","End":"05:58.145","Text":"look at the dividend being paid in the following period,"},{"Start":"05:58.145 ","End":"06:02.615","Text":"then the payment of the dividend would be a payment out of cash."},{"Start":"06:02.615 ","End":"06:08.015","Text":"Asset cash would come down and the dividend payable would come down with"},{"Start":"06:08.015 ","End":"06:13.580","Text":"obviously no effect in retained earnings at the point of the dividend being paid."},{"Start":"06:13.580 ","End":"06:17.524","Text":"Looking at other issues relating to retained earnings reserves,"},{"Start":"06:17.524 ","End":"06:22.295","Text":"many of these you\u0027ve come across in previous video presentations."},{"Start":"06:22.295 ","End":"06:27.620","Text":"You saw in an earlier presentation regarding share buybacks,"},{"Start":"06:27.620 ","End":"06:32.990","Text":"which are followed by a cancellation of the shares."},{"Start":"06:32.990 ","End":"06:37.430","Text":"You know from there, if the amount paid on the repurchase is"},{"Start":"06:37.430 ","End":"06:42.350","Text":"greater than the original amount raised when those shares were issued,"},{"Start":"06:42.350 ","End":"06:46.965","Text":"that could also lead to reduction in retained earnings."},{"Start":"06:46.965 ","End":"06:53.800","Text":"You also saw in the same video presentation that there may be country-specific laws,"},{"Start":"06:53.800 ","End":"06:57.250","Text":"which requires a transfer of the amounts of"},{"Start":"06:57.250 ","End":"07:01.540","Text":"the par value of canceled shares to some special reserve."},{"Start":"07:01.540 ","End":"07:08.300","Text":"You recall we call this a capital redemption reserve or capital maintenance reserve."},{"Start":"07:09.050 ","End":"07:14.755","Text":"Other reserves also come about without affecting retained earnings specifically."},{"Start":"07:14.755 ","End":"07:18.730","Text":"We\u0027ve seen in other presentations that special reserves"},{"Start":"07:18.730 ","End":"07:23.720","Text":"are created when employee share options are issued."},{"Start":"07:25.410 ","End":"07:32.420","Text":"We will see in the next couple of slides an example of a revaluation of property, plant,"},{"Start":"07:32.420 ","End":"07:35.810","Text":"and equipment to create a specific type reserve"},{"Start":"07:35.810 ","End":"07:40.280","Text":"called a revaluation surplus or a revaluation reserve."},{"Start":"07:40.280 ","End":"07:45.605","Text":"There are also reserves created for currency translations and pensions,"},{"Start":"07:45.605 ","End":"07:48.760","Text":"all which are beyond the scope of this module."},{"Start":"07:48.760 ","End":"07:55.010","Text":"When I examine the creation of a special Tampa reserve,"},{"Start":"07:55.010 ","End":"07:57.830","Text":"a revaluation surplus that comes about"},{"Start":"07:57.830 ","End":"08:01.550","Text":"on the revaluation of property, plant, and equipment."},{"Start":"08:01.550 ","End":"08:04.610","Text":"Now, accounting standards permit companies to"},{"Start":"08:04.610 ","End":"08:09.515","Text":"revalue the carrying amount of their property, plant, and equipment."},{"Start":"08:09.515 ","End":"08:13.925","Text":"This revaluation note does not affect the income statement."},{"Start":"08:13.925 ","End":"08:19.550","Text":"The amount of the revaluation goes directly into equity."},{"Start":"08:19.550 ","End":"08:23.390","Text":"This is because the amount of that revaluation does not"},{"Start":"08:23.390 ","End":"08:27.965","Text":"affect the company\u0027s performance or the measurement of its performance for the period."},{"Start":"08:27.965 ","End":"08:32.510","Text":"Looking then at an example of a revaluation, this company K,"},{"Start":"08:32.510 ","End":"08:38.225","Text":"decides to revalue a plot of land and the carrying amount of the land is"},{"Start":"08:38.225 ","End":"08:44.945","Text":"1 million and it\u0027s revalued to a carrying amount of 2.5 million."},{"Start":"08:44.945 ","End":"08:50.360","Text":"In other words, the amount of the revaluation is 1.5 million."},{"Start":"08:50.360 ","End":"08:53.945","Text":"Let\u0027s look at that in the form of an accounting equation."},{"Start":"08:53.945 ","End":"09:00.035","Text":"We have assets equals liabilities plus owner\u0027s equity."},{"Start":"09:00.035 ","End":"09:03.815","Text":"We\u0027ll include here as an asset,"},{"Start":"09:03.815 ","End":"09:12.890","Text":"we\u0027ll have the asset land and that is sitting at 1 million,"},{"Start":"09:12.890 ","End":"09:14.736","Text":"1,1, 2, 3, 4, 5, 6, 1 million."},{"Start":"09:14.736 ","End":"09:19.025","Text":"Let\u0027s just assume for the purposes of this example,"},{"Start":"09:19.025 ","End":"09:22.800","Text":"the company has got share capital of, for example,"},{"Start":"09:22.800 ","End":"09:30.950","Text":"100,000 and it has retained earnings of 900,000 to balance the accounting equation,"},{"Start":"09:30.950 ","End":"09:34.915","Text":"then the company revalues its land,"},{"Start":"09:34.915 ","End":"09:37.200","Text":"we say about 1.5 million."},{"Start":"09:37.200 ","End":"09:42.235","Text":"The asset land increases by 1.5 million."},{"Start":"09:42.235 ","End":"09:44.495","Text":"There\u0027s no effect on liabilities,"},{"Start":"09:44.495 ","End":"09:47.675","Text":"no effect on retained earnings, note."},{"Start":"09:47.675 ","End":"09:51.920","Text":"But we create a new type of equity account"},{"Start":"09:51.920 ","End":"09:57.979","Text":"called a revaluation surplus or a revaluation reserve."},{"Start":"09:57.979 ","End":"10:03.955","Text":"That account gets increased with the amount of 1,500,000."},{"Start":"10:03.955 ","End":"10:08.195","Text":"After the revaluation has taken place,"},{"Start":"10:08.195 ","End":"10:17.330","Text":"the balances that we see are a land balance of the new carrying amount of 2.5 million."},{"Start":"10:17.330 ","End":"10:19.309","Text":"As I said, no liabilities,"},{"Start":"10:19.309 ","End":"10:22.880","Text":"share capital doesn\u0027t change, remains at 100,000."},{"Start":"10:22.880 ","End":"10:26.455","Text":"Note, no increase in retained earnings."},{"Start":"10:26.455 ","End":"10:32.315","Text":"No part of the revaluation can be applied to either measure performance"},{"Start":"10:32.315 ","End":"10:39.515","Text":"or can be applied to contribute to a dividends to shareholders in the future."},{"Start":"10:39.515 ","End":"10:44.000","Text":"Instead, the effect of the revaluation sits in"},{"Start":"10:44.000 ","End":"10:49.594","Text":"equity and must go in equity because assets have increased, therefore equity increases."},{"Start":"10:49.594 ","End":"10:53.405","Text":"But it sits in a specific type of equity account"},{"Start":"10:53.405 ","End":"10:58.500","Text":"called this revaluation surplus or revaluation reserve."}],"ID":31067},{"Watched":false,"Name":"Statement of Changes in Equity","Duration":"12m 34s","ChapterTopicVideoID":29448,"CourseChapterTopicPlaylistID":294469,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.110 ","End":"00:05.880","Text":"In this video, we will discuss the statement of changes in equity."},{"Start":"00:05.880 ","End":"00:10.365","Text":"The statement of changes in equity is one of the components"},{"Start":"00:10.365 ","End":"00:15.300","Text":"of a set of financial statements alongside the income statement,"},{"Start":"00:15.300 ","End":"00:18.360","Text":"the balance sheet, and the statement of cash flows."},{"Start":"00:18.360 ","End":"00:20.835","Text":"The statement change in equity,"},{"Start":"00:20.835 ","End":"00:24.417","Text":"shows for each components of equity."},{"Start":"00:24.417 ","End":"00:30.165","Text":"Now the components of equity can clearly be items such as the share capital,"},{"Start":"00:30.165 ","End":"00:32.624","Text":"the share premium,"},{"Start":"00:32.624 ","End":"00:35.235","Text":"and any reserves,"},{"Start":"00:35.235 ","End":"00:38.535","Text":"be they non distributable or distributable."},{"Start":"00:38.535 ","End":"00:43.430","Text":"For example, a non distributable reserve could be,"},{"Start":"00:43.430 ","End":"00:46.340","Text":"for example, the revaluation surplus,"},{"Start":"00:46.340 ","End":"00:48.699","Text":"which we\u0027ve discussed before."},{"Start":"00:48.699 ","End":"00:52.595","Text":"A distributable reserve could be, for example,"},{"Start":"00:52.595 ","End":"00:56.630","Text":"the retained earnings or the retained profit,"},{"Start":"00:56.630 ","End":"01:00.485","Text":"which you\u0027ve also came across many times before."},{"Start":"01:00.485 ","End":"01:03.860","Text":"Now, the statement shows for each of these components,"},{"Start":"01:03.860 ","End":"01:11.480","Text":"the opening balance or transactions affecting each component and the closing balance."},{"Start":"01:11.480 ","End":"01:16.700","Text":"Looking specifically at the retained earnings components of equity,"},{"Start":"01:16.700 ","End":"01:18.919","Text":"you will find an opening balance,"},{"Start":"01:18.919 ","End":"01:21.425","Text":"you\u0027ll find the profit for the period,"},{"Start":"01:21.425 ","End":"01:25.865","Text":"which obviously increases retained earnings and equity,"},{"Start":"01:25.865 ","End":"01:28.430","Text":"you\u0027ll find the dividends declared which were"},{"Start":"01:28.430 ","End":"01:31.450","Text":"clearly reduce retained earnings and equity."},{"Start":"01:31.450 ","End":"01:36.410","Text":"For example, any other changes in retained earnings, for example,"},{"Start":"01:36.410 ","End":"01:41.540","Text":"we\u0027ve seen reductions in retained earnings when there have been a repurchase"},{"Start":"01:41.540 ","End":"01:44.150","Text":"of shares during the period which gives"},{"Start":"01:44.150 ","End":"01:48.000","Text":"rise to this and ends up with the closing balance."},{"Start":"01:50.260 ","End":"01:53.600","Text":"We will now look at an example to"},{"Start":"01:53.600 ","End":"01:57.170","Text":"illustrate the preparation of a statement of changes in equity."},{"Start":"01:57.170 ","End":"02:01.160","Text":"In this example, the company LPLC is preparing"},{"Start":"02:01.160 ","End":"02:07.450","Text":"financial statements the year ending 31 December of the 20X1 year."},{"Start":"02:07.450 ","End":"02:10.715","Text":"In the equity section of the balance sheet,"},{"Start":"02:10.715 ","End":"02:18.875","Text":"you see ordinary share capital of 15,000 and you see a share premium of 30,000,"},{"Start":"02:18.875 ","End":"02:24.095","Text":"and because we know the par value of the shares is 1 currency unit,"},{"Start":"02:24.095 ","End":"02:29.360","Text":"the 15,000 in share capital is clearly made up of"},{"Start":"02:29.360 ","End":"02:36.380","Text":"15,000 shares multiplied by the par value of 1 currency unit."},{"Start":"02:36.380 ","End":"02:41.880","Text":"The 30,000 in share premium is clearly made up of the 15,000"},{"Start":"02:41.880 ","End":"02:48.660","Text":"shares multiplied by the share premium of 2 currency units per share,"},{"Start":"02:48.660 ","End":"02:53.675","Text":"is also 32,000 sitting in the retained earnings."},{"Start":"02:53.675 ","End":"02:59.430","Text":"You then have some further information relating to the 20X1 year."},{"Start":"02:59.430 ","End":"03:03.255","Text":"We\u0027ll look at each of these 5 points individually,"},{"Start":"03:03.255 ","End":"03:06.760","Text":"as we start preparing the statement of changes in equity."},{"Start":"03:06.760 ","End":"03:10.100","Text":"Let us start off preparing the statement of changes in equity by"},{"Start":"03:10.100 ","End":"03:15.140","Text":"inserting the opening balances at the beginning of the current period."},{"Start":"03:15.140 ","End":"03:21.290","Text":"From the question, we know that the shared capital amounts to 15,000,"},{"Start":"03:21.290 ","End":"03:25.468","Text":"the shared premium amounts to 30,000,"},{"Start":"03:25.468 ","End":"03:29.814","Text":"and the retained earnings amounts to 32,000,"},{"Start":"03:29.814 ","End":"03:34.620","Text":"giving us a total equity of 77,000."},{"Start":"03:35.110 ","End":"03:38.785","Text":"In looking at transaction number 1,"},{"Start":"03:38.785 ","End":"03:45.185","Text":"where we see 2,000 shares with a nominal value of 1 currency unit,"},{"Start":"03:45.185 ","End":"03:47.915","Text":"we know the 1 currency unit is the nominal value,"},{"Start":"03:47.915 ","End":"03:52.460","Text":"were repurchased for 12,000 in total."},{"Start":"03:52.460 ","End":"04:00.680","Text":"Now, you\u0027re then told that 1,000 shares were canceled."},{"Start":"04:00.680 ","End":"04:06.700","Text":"You\u0027re told the rest were held as treasury shares."},{"Start":"04:06.700 ","End":"04:12.244","Text":"Let\u0027s focus firstly on the 1,000 shares that were canceled."},{"Start":"04:12.244 ","End":"04:15.690","Text":"We have 1,000 shares which have been canceled."},{"Start":"04:15.690 ","End":"04:18.610","Text":"Those 1,000 shares that have been canceled,"},{"Start":"04:18.610 ","End":"04:22.955","Text":"we know were issued at a par value of 1 and"},{"Start":"04:22.955 ","End":"04:27.935","Text":"we know that the share premium attached to those shares was 2."},{"Start":"04:27.935 ","End":"04:32.925","Text":"Therefore the par value of 1 multiplied by 1,000"},{"Start":"04:32.925 ","End":"04:38.510","Text":"means we have to reduce the share capital by an amount of 1,000,"},{"Start":"04:38.510 ","End":"04:43.200","Text":"and the share premium of 2 multiplied by the 1,000"},{"Start":"04:43.200 ","End":"04:49.290","Text":"shares means we have to reduce the share premium by 2,000."},{"Start":"04:49.660 ","End":"04:53.240","Text":"That gives us a total of 3,000."},{"Start":"04:53.240 ","End":"04:59.090","Text":"We know the question that the shares were repurchased for 12,000 in total."},{"Start":"04:59.090 ","End":"05:07.510","Text":"The 12,000 total implies 6,000 currency units for the shares that were canceled,"},{"Start":"05:07.510 ","End":"05:11.055","Text":"half the shares and obviously therefore,"},{"Start":"05:11.055 ","End":"05:16.780","Text":"6,000 currency units for the shares that were not canceled."},{"Start":"05:19.940 ","End":"05:27.500","Text":"If we know that the amount of the consideration was 6,000,"},{"Start":"05:27.500 ","End":"05:30.295","Text":"we have got an additional 3,000,"},{"Start":"05:30.295 ","End":"05:37.415","Text":"which we need to reduce the retained earnings as we\u0027ve seen in previous videos."},{"Start":"05:37.415 ","End":"05:43.030","Text":"Let\u0027s then record this first transaction on the statement of changes in equity."},{"Start":"05:43.030 ","End":"05:48.925","Text":"There\u0027s going to be a credit to cash for the consideration of 6,000."},{"Start":"05:48.925 ","End":"05:51.400","Text":"Will the debit go too?"},{"Start":"05:51.400 ","End":"05:56.695","Text":"We see the share capital has to be reduced by 1,000,"},{"Start":"05:56.695 ","End":"06:01.160","Text":"the share premium has to be reduced by 2,000,"},{"Start":"06:01.160 ","End":"06:06.140","Text":"and the remaining 3,000 reduces the retained earnings,"},{"Start":"06:06.140 ","End":"06:10.465","Text":"giving you a total of 6,000 reduction in equity."},{"Start":"06:10.465 ","End":"06:13.695","Text":"Remember if the 6,000 credit went to cash,"},{"Start":"06:13.695 ","End":"06:18.810","Text":"this is a debit share premium of"},{"Start":"06:18.810 ","End":"06:24.490","Text":"2,000 and a debit to retained earnings of 3,000."},{"Start":"06:24.490 ","End":"06:27.690","Text":"Looking at the other 6,000 shares,"},{"Start":"06:27.690 ","End":"06:30.500","Text":"the shares held as treasury shares,"},{"Start":"06:30.500 ","End":"06:32.750","Text":"and therefore not canceled."},{"Start":"06:32.750 ","End":"06:37.810","Text":"The shares held as treasury shares will"},{"Start":"06:37.810 ","End":"06:45.010","Text":"also have a credit going to cash to repay the shareholders."},{"Start":"06:45.080 ","End":"06:47.540","Text":"The debit, as we know,"},{"Start":"06:47.540 ","End":"06:53.000","Text":"goes to a contra equity account called treasury shares."},{"Start":"06:53.000 ","End":"07:01.310","Text":"The equity is reduced by this negative equity treasury shares of 6,000."},{"Start":"07:01.310 ","End":"07:03.485","Text":"Here\u0027s the credit going to cash,"},{"Start":"07:03.485 ","End":"07:06.640","Text":"here\u0027s the debit going to treasury shares,"},{"Start":"07:06.640 ","End":"07:12.845","Text":"and the total equity also reduces by 6,000."},{"Start":"07:12.845 ","End":"07:15.110","Text":"Then in point number 2,"},{"Start":"07:15.110 ","End":"07:21.105","Text":"you are told 2,000 preference shares were issued"},{"Start":"07:21.105 ","End":"07:28.705","Text":"of no par value and they were issued at an amount of 5 currency units each."},{"Start":"07:28.705 ","End":"07:32.725","Text":"You\u0027re also told because there were issued at the end of the current year,"},{"Start":"07:32.725 ","End":"07:38.420","Text":"there was no dividend entitlement for the current 20X1 year."},{"Start":"07:38.490 ","End":"07:46.225","Text":"The issue of the 2,000 preference shares at 5 current units each."},{"Start":"07:46.225 ","End":"07:50.140","Text":"That clearly means they\u0027ll be going to have an amount of"},{"Start":"07:50.140 ","End":"07:55.555","Text":"10,000 going as a credit into the preference share capital,"},{"Start":"07:55.555 ","End":"07:59.950","Text":"which obviously increases equity by an amount of 10,000."},{"Start":"07:59.950 ","End":"08:05.450","Text":"This is a credit going to preference share capital and clearly the debit,"},{"Start":"08:05.450 ","End":"08:08.375","Text":"I just noted over here, the debit must go to cash."},{"Start":"08:08.375 ","End":"08:10.884","Text":"We can then total"},{"Start":"08:10.884 ","End":"08:16.910","Text":"this first page of statement of change in equity simply for presentation purposes."},{"Start":"08:16.910 ","End":"08:19.570","Text":"I can\u0027t for this all onto 1 slide,"},{"Start":"08:19.570 ","End":"08:24.275","Text":"so I\u0027m doing a subtotal over here with the balances at this point in time,"},{"Start":"08:24.275 ","End":"08:28.965","Text":"you\u0027ll see 14,000 in share capital,"},{"Start":"08:28.965 ","End":"08:32.670","Text":"28,000 share premium, 10,000 preference shares."},{"Start":"08:32.670 ","End":"08:36.270","Text":"There is negative equity of 6,000 for the treasury shares,"},{"Start":"08:36.270 ","End":"08:39.180","Text":"29,000 for the retained earnings,"},{"Start":"08:39.180 ","End":"08:43.070","Text":"and 75,000 for the total equity."},{"Start":"08:43.070 ","End":"08:45.770","Text":"I\u0027ll simply carry this forward onto the next slide."},{"Start":"08:45.770 ","End":"08:53.305","Text":"Consider the remaining transactions. Here we go."},{"Start":"08:53.305 ","End":"08:58.280","Text":"Here are the balances as you\u0027ve seen from the bottom the previous slide."},{"Start":"08:58.280 ","End":"09:02.450","Text":"Now we look at transaction number 3."},{"Start":"09:02.450 ","End":"09:11.235","Text":"Transaction 3 says that we add land which was carried out 30,000 and revalue to 40,000."},{"Start":"09:11.235 ","End":"09:17.555","Text":"The accounting entry must be a debit to the land to increase the asset land."},{"Start":"09:17.555 ","End":"09:22.735","Text":"Remember, the revaluation is an item of other comprehensive income,"},{"Start":"09:22.735 ","End":"09:30.280","Text":"so therefore the credit goes to the revaluation reserve or revaluation surplus account,"},{"Start":"09:30.280 ","End":"09:32.640","Text":"which is part of owner\u0027s equity."},{"Start":"09:32.640 ","End":"09:37.625","Text":"Remember, this account is part of"},{"Start":"09:37.625 ","End":"09:41.210","Text":"other comprehensive income and therefore does not go as"},{"Start":"09:41.210 ","End":"09:45.630","Text":"an income item on the income statement in determining profit."},{"Start":"09:45.630 ","End":"09:50.555","Text":"The credit goes onto the revaluation reserve part of equity."},{"Start":"09:50.555 ","End":"09:52.280","Text":"Here\u0027s the 10,000."},{"Start":"09:52.280 ","End":"09:54.320","Text":"There\u0027s the credit, as I said,"},{"Start":"09:54.320 ","End":"10:02.015","Text":"the debit goes to land and the total equity increases by an amount of 10,000."},{"Start":"10:02.015 ","End":"10:11.894","Text":"Note importantly, there is no effect on retained earnings for this transaction,"},{"Start":"10:11.894 ","End":"10:14.345","Text":"does not affect the amount of"},{"Start":"10:14.345 ","End":"10:18.660","Text":"profits that are available for distribution to shareholders."},{"Start":"10:19.600 ","End":"10:22.640","Text":"In point number 4,"},{"Start":"10:22.640 ","End":"10:28.775","Text":"there was a declaration of an ordinary dividend of 7,000."},{"Start":"10:28.775 ","End":"10:34.250","Text":"This declaration of a dividend we know reduces retained earnings."},{"Start":"10:34.250 ","End":"10:40.940","Text":"The accounting entry over here must be a debit to"},{"Start":"10:40.940 ","End":"10:47.315","Text":"retained earnings and a credit to a dividends payable account,"},{"Start":"10:47.315 ","End":"10:49.210","Text":"which is a liability."},{"Start":"10:49.210 ","End":"10:51.560","Text":"On the statement of changes in equity,"},{"Start":"10:51.560 ","End":"10:53.300","Text":"we just see the debit side,"},{"Start":"10:53.300 ","End":"10:57.380","Text":"a reduction in retained earnings of 7,000."},{"Start":"10:57.380 ","End":"11:00.575","Text":"Total goes down by 7,000 as well."},{"Start":"11:00.575 ","End":"11:03.545","Text":"This is the debit going to retained earnings"},{"Start":"11:03.545 ","End":"11:08.015","Text":"and the credit goes to the dividends payable account."},{"Start":"11:08.015 ","End":"11:09.870","Text":"In point number 5,"},{"Start":"11:09.870 ","End":"11:14.520","Text":"the profit for the year ended 31,"},{"Start":"11:14.520 ","End":"11:17.745","Text":"December 20X1 was 5,000."},{"Start":"11:17.745 ","End":"11:21.605","Text":"That profit needs to increase retained earnings."},{"Start":"11:21.605 ","End":"11:27.965","Text":"Therefore, we put 5,000 into the retained earnings as a positive item,"},{"Start":"11:27.965 ","End":"11:31.325","Text":"which therefore obviously also increases the total."},{"Start":"11:31.325 ","End":"11:37.265","Text":"Remember the profit is the difference between income and expenses."},{"Start":"11:37.265 ","End":"11:44.072","Text":"Because income accounts have credit balances and expense accounts have debit balances,"},{"Start":"11:44.072 ","End":"11:46.957","Text":"when those are closed off for the period."},{"Start":"11:46.957 ","End":"11:48.965","Text":"As you\u0027ve seen in previous examples,"},{"Start":"11:48.965 ","End":"11:50.390","Text":"the net difference,"},{"Start":"11:50.390 ","End":"11:51.710","Text":"in this case the profit,"},{"Start":"11:51.710 ","End":"11:55.520","Text":"is credited to the retained earnings account to"},{"Start":"11:55.520 ","End":"12:01.215","Text":"increase the amount of earnings available for distribution to shareholders."},{"Start":"12:01.215 ","End":"12:05.435","Text":"End of the period. We can total up the statement of changes in equity."},{"Start":"12:05.435 ","End":"12:09.850","Text":"We see the total share capital in this case remains 14,000,"},{"Start":"12:09.850 ","End":"12:12.293","Text":"share premium 28,000,"},{"Start":"12:12.293 ","End":"12:15.275","Text":"the preference share capital 10,000,"},{"Start":"12:15.275 ","End":"12:20.100","Text":"the treasury shares still a contra equity of 6,000,"},{"Start":"12:20.100 ","End":"12:24.140","Text":"the revaluation reserve at 10,000,"},{"Start":"12:24.140 ","End":"12:29.720","Text":"the retained earnings now with the movements sits at 27,000,"},{"Start":"12:29.720 ","End":"12:35.010","Text":"and therefore the total equity at 83,000."}],"ID":31068},{"Watched":false,"Name":"Exercise 1","Duration":"5m 45s","ChapterTopicVideoID":29449,"CourseChapterTopicPlaylistID":294469,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:04.155","Text":"This exercise involves issuing ordinary share capital."},{"Start":"00:04.155 ","End":"00:06.285","Text":"On 31st December 20X1,"},{"Start":"00:06.285 ","End":"00:09.030","Text":"ABC reports share capital as follows."},{"Start":"00:09.030 ","End":"00:11.385","Text":"We have issued shares,"},{"Start":"00:11.385 ","End":"00:15.330","Text":"90,000 of them with a 5 cent par value."},{"Start":"00:15.330 ","End":"00:21.090","Text":"The proceeds from issuing the 90,000 shares were 260,000 currency units,"},{"Start":"00:21.090 ","End":"00:24.060","Text":"but the issuing costs were 8,000."},{"Start":"00:24.060 ","End":"00:26.295","Text":"On 30th of June 20X2,"},{"Start":"00:26.295 ","End":"00:33.870","Text":"ABC issues a further 60,000 5 cent par value shares for 252,000"},{"Start":"00:33.870 ","End":"00:43.634","Text":"currency units and incurs 12,000 currency units in issuing costs."},{"Start":"00:43.634 ","End":"00:51.080","Text":"The required: Calculate the total number of shares in issue on the 30th of June 20X2,"},{"Start":"00:51.080 ","End":"00:53.900","Text":"so immediately after the second issue."},{"Start":"00:53.900 ","End":"00:57.080","Text":"Calculate the total amount issued at par value and"},{"Start":"00:57.080 ","End":"01:00.505","Text":"the total share premium at 30th of June, 20X2."},{"Start":"01:00.505 ","End":"01:05.360","Text":"Then the balance of the cash on the 30th of June 20X2 after the share issue,"},{"Start":"01:05.360 ","End":"01:11.020","Text":"assuming that the balance before the share issue was 118,000 currency units."},{"Start":"01:11.020 ","End":"01:13.195","Text":"Let\u0027s start with Part 1,"},{"Start":"01:13.195 ","End":"01:18.890","Text":"where we are to calculate the total number of shares and issue on the 30th of June, 20X2."},{"Start":"01:18.890 ","End":"01:23.570","Text":"We have a worksheet here with a column for the number of ordinary shares."},{"Start":"01:23.570 ","End":"01:28.310","Text":"We\u0027re going to start with the balance on the 31st of December, 20X1."},{"Start":"01:28.310 ","End":"01:32.005","Text":"That was given to us at 90,000 shares."},{"Start":"01:32.005 ","End":"01:37.980","Text":"We were then told that we issued 60,000 shares on the 30th of June 20X2,"},{"Start":"01:37.980 ","End":"01:43.055","Text":"and thus we have 150,000 shares at the end of that day,"},{"Start":"01:43.055 ","End":"01:45.460","Text":"30th of June, 20X2."},{"Start":"01:45.460 ","End":"01:47.895","Text":"Now let\u0027s move on to Part 2."},{"Start":"01:47.895 ","End":"01:51.920","Text":"Here we are asked to calculate in currency units"},{"Start":"01:51.920 ","End":"01:59.040","Text":"the amount issued at par value and the total shape premium on the same date."},{"Start":"01:59.240 ","End":"02:02.585","Text":"Here we need columns for the par value,"},{"Start":"02:02.585 ","End":"02:05.940","Text":"the share premium, and the total."},{"Start":"02:06.820 ","End":"02:11.360","Text":"The par value of those shares that we had on"},{"Start":"02:11.360 ","End":"02:17.255","Text":"the 31st of December 20X1 will be the 90,000 shares at 5 cents par value each."},{"Start":"02:17.255 ","End":"02:19.730","Text":"That\u0027s 4,500 currency units,"},{"Start":"02:19.730 ","End":"02:21.910","Text":"so we pop that into the column."},{"Start":"02:21.910 ","End":"02:27.785","Text":"We were told that the total proceeds from those 90,000 shares that"},{"Start":"02:27.785 ","End":"02:34.445","Text":"were an issue on the 31st December 20X1 was 260,000 currency units."},{"Start":"02:34.445 ","End":"02:38.480","Text":"We\u0027re also told that the share issue costs were 8,000."},{"Start":"02:38.480 ","End":"02:47.390","Text":"Therefore, the net proceeds for those 90,000 shares was 252,000 currency units."},{"Start":"02:47.390 ","End":"02:50.300","Text":"If you compare it to the par value,"},{"Start":"02:50.300 ","End":"02:52.165","Text":"you\u0027ll get the share premium."},{"Start":"02:52.165 ","End":"02:55.290","Text":"The net proceeds are 252,000,"},{"Start":"02:55.290 ","End":"02:59.008","Text":"the par value of those same shares was 4,500,"},{"Start":"02:59.008 ","End":"03:04.195","Text":"the difference is 247,500 being the share premium."},{"Start":"03:04.195 ","End":"03:05.885","Text":"That\u0027s the opening balance."},{"Start":"03:05.885 ","End":"03:07.775","Text":"Now let\u0027s look at the share issue,"},{"Start":"03:07.775 ","End":"03:10.505","Text":"60,000 shares were issued."},{"Start":"03:10.505 ","End":"03:16.250","Text":"The par value of which 60,000 shares at 5 cents is 3,000 currency units,"},{"Start":"03:16.250 ","End":"03:18.455","Text":"so let\u0027s pop that into the column."},{"Start":"03:18.455 ","End":"03:21.845","Text":"Now, what were the net proceeds from this share issue?"},{"Start":"03:21.845 ","End":"03:25.220","Text":"Well, the proceeds were 252,000,"},{"Start":"03:25.220 ","End":"03:28.480","Text":"the share issue costs were 12,000,"},{"Start":"03:28.480 ","End":"03:35.375","Text":"and the differences and net proceed of 240,000 that 240,000 goes into the total column."},{"Start":"03:35.375 ","End":"03:40.465","Text":"You then compare the total column with the par value to get the share premium,"},{"Start":"03:40.465 ","End":"03:44.240","Text":"240,000 net proceeds less the par value of"},{"Start":"03:44.240 ","End":"03:48.830","Text":"3,000 gives you 237,000 being the share premium."},{"Start":"03:48.830 ","End":"03:51.200","Text":"The last step is to simply calculate"},{"Start":"03:51.200 ","End":"03:55.840","Text":"the closing balances on the 30th of June 20X2 after that issue."},{"Start":"03:55.840 ","End":"03:58.990","Text":"We\u0027ve got par value 7,500,"},{"Start":"03:58.990 ","End":"04:02.780","Text":"the share premium will come to 484,500,"},{"Start":"04:02.780 ","End":"04:06.095","Text":"and the total is the 492,000,"},{"Start":"04:06.095 ","End":"04:09.725","Text":"being the 252 plus the 240,000,"},{"Start":"04:09.725 ","End":"04:18.410","Text":"which is also calculated as 7,500 total par value plus the share premium of 484,500."},{"Start":"04:18.410 ","End":"04:20.425","Text":"Now let\u0027s look at Part 3."},{"Start":"04:20.425 ","End":"04:23.420","Text":"In Part 3, we\u0027re asked to calculate the balance of"},{"Start":"04:23.420 ","End":"04:27.785","Text":"the cash on the 30th of June 20X2 after the share issue."},{"Start":"04:27.785 ","End":"04:33.340","Text":"We assume we had a balance immediately before the share issue of 118,000."},{"Start":"04:33.340 ","End":"04:36.885","Text":"Our opening balances was 118,000."},{"Start":"04:36.885 ","End":"04:40.845","Text":"We then issued the shares for 252,000."},{"Start":"04:40.845 ","End":"04:45.590","Text":"We incurred 12,000 and share issue costs that would have reduced our cash."},{"Start":"04:45.590 ","End":"04:50.580","Text":"That gives us 358,000 cash at the end of the day."},{"Start":"04:51.820 ","End":"04:55.400","Text":"Just for your interest, the balance sheet would also show,"},{"Start":"04:55.400 ","End":"04:58.740","Text":"in addition to the cash of 358,000,"},{"Start":"04:58.740 ","End":"05:02.945","Text":"which show share capital and the share premium and the total equity."},{"Start":"05:02.945 ","End":"05:07.120","Text":"The share capital at the 31st of December 20X1,"},{"Start":"05:07.120 ","End":"05:11.375","Text":"which we\u0027d worked out in the worksheet previously is 4,500 par value,"},{"Start":"05:11.375 ","End":"05:16.790","Text":"247,500 share premium and the total of 252,000."},{"Start":"05:16.790 ","End":"05:20.300","Text":"Those figures we just simply put into the balance sheet as follows."},{"Start":"05:20.300 ","End":"05:22.655","Text":"There we have the share capital 4,500,"},{"Start":"05:22.655 ","End":"05:25.070","Text":"the share premium of 247,500,"},{"Start":"05:25.070 ","End":"05:28.580","Text":"and the total equity of 252,000."},{"Start":"05:28.580 ","End":"05:30.080","Text":"Then going back to the worksheet,"},{"Start":"05:30.080 ","End":"05:31.625","Text":"we can see on the 30th of June,"},{"Start":"05:31.625 ","End":"05:35.210","Text":"we calculated 7,500 was the par value, the share premium,"},{"Start":"05:35.210 ","End":"05:39.940","Text":"44,500, and the total of 492,000."},{"Start":"05:39.940 ","End":"05:46.350","Text":"We just simply pop that into the balance sheet column for 30th of June, 20X2."}],"ID":31069},{"Watched":false,"Name":"Exercise 2","Duration":"6m 16s","ChapterTopicVideoID":29450,"CourseChapterTopicPlaylistID":294469,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.980 ","End":"00:04.485","Text":"This exercise involves a share split."},{"Start":"00:04.485 ","End":"00:07.250","Text":"On 31st December 20X1,"},{"Start":"00:07.250 ","End":"00:10.890","Text":"Company BCD reports share capital as follows."},{"Start":"00:10.890 ","End":"00:18.045","Text":"They had issued shares to 100,000 of them with a 15 cent par value each."},{"Start":"00:18.045 ","End":"00:25.575","Text":"A net proceeds from issuing these above shares was 240,000 currency units."},{"Start":"00:25.575 ","End":"00:31.770","Text":"During 20X2, BCD carries a 3-for-2 share split."},{"Start":"00:31.770 ","End":"00:35.030","Text":"Required: Calculate the total number of shares and"},{"Start":"00:35.030 ","End":"00:39.545","Text":"issue by the end of the year 31st December 20X2,"},{"Start":"00:39.545 ","End":"00:44.060","Text":"how many extra shares were issued, and C,"},{"Start":"00:44.060 ","End":"00:47.090","Text":"calculate the total amount issued at par value and"},{"Start":"00:47.090 ","End":"00:52.585","Text":"the total share premium at that day, 31st December 20X2."},{"Start":"00:52.585 ","End":"00:54.745","Text":"Let\u0027s start with Part A."},{"Start":"00:54.745 ","End":"00:57.890","Text":"Here we\u0027re going to calculate the total number of shares and issue by"},{"Start":"00:57.890 ","End":"01:01.900","Text":"the end of the year, 31st December 20X2."},{"Start":"01:01.910 ","End":"01:06.260","Text":"We need a column for the number of ordinary shares in issue,"},{"Start":"01:06.260 ","End":"01:08.360","Text":"We start with the opening balance,"},{"Start":"01:08.360 ","End":"01:11.060","Text":"which was 100,000 shares at the beginning of the year"},{"Start":"01:11.060 ","End":"01:15.210","Text":"31st December 20X1 being the end of last year."},{"Start":"01:20.800 ","End":"01:24.620","Text":"We\u0027re then told that the 31st December 20X2,"},{"Start":"01:24.620 ","End":"01:26.660","Text":"there is a share split."},{"Start":"01:26.660 ","End":"01:31.980","Text":"The share is split is a 3-for-2 share split."},{"Start":"01:31.980 ","End":"01:35.280","Text":"That means we take the 100,000 and divide by,"},{"Start":"01:35.280 ","End":"01:38.160","Text":"it\u0027s called them packets of 2 shares each."},{"Start":"01:38.160 ","End":"01:40.215","Text":"Every packet of 2 shares,"},{"Start":"01:40.215 ","End":"01:42.315","Text":"we\u0027re going to get 3 in return."},{"Start":"01:42.315 ","End":"01:45.080","Text":"You take your 100,000 divide by the packets of"},{"Start":"01:45.080 ","End":"01:48.740","Text":"2 shares to find out how many packets of 2 shares there are."},{"Start":"01:48.740 ","End":"01:52.820","Text":"You take 100,000 shares and divide it by packets of"},{"Start":"01:52.820 ","End":"01:57.070","Text":"2 shares to find out how many packets of 2 shares there would be."},{"Start":"01:57.070 ","End":"01:58.830","Text":"That would be 50,000,"},{"Start":"01:58.830 ","End":"02:02.420","Text":"and we multiply it by the packets of shares they get in return,"},{"Start":"02:02.420 ","End":"02:05.420","Text":"which are the 3 shares per packet."},{"Start":"02:05.420 ","End":"02:09.990","Text":"We now have 150,000 shares."},{"Start":"02:12.230 ","End":"02:14.825","Text":"Just remember that with the share split,"},{"Start":"02:14.825 ","End":"02:17.420","Text":"there is no currency that changes hands."},{"Start":"02:17.420 ","End":"02:19.385","Text":"The shares simply split,"},{"Start":"02:19.385 ","End":"02:23.400","Text":"for every 2 shares there were suddenly 3."},{"Start":"02:23.680 ","End":"02:28.100","Text":"Part B, how many extra shares were issued?"},{"Start":"02:28.100 ","End":"02:33.725","Text":"Well, that\u0027s a simple case of comparing the closing balance with the opening balance."},{"Start":"02:33.725 ","End":"02:38.340","Text":"We had 150,000 at the end of the year."},{"Start":"02:38.340 ","End":"02:40.470","Text":"We had 100,000 to begin with,"},{"Start":"02:40.470 ","End":"02:47.230","Text":"which meant that 50,000 extra shares were effectively issued through the share splitting."},{"Start":"02:47.230 ","End":"02:52.490","Text":"Part C, calculate the total amount issued at"},{"Start":"02:52.490 ","End":"02:57.830","Text":"par value and the total share premium at 31st December 20X2."},{"Start":"02:57.830 ","End":"03:00.235","Text":"In other words, after the share split."},{"Start":"03:00.235 ","End":"03:04.180","Text":"What they\u0027re looking for here are the currency units."},{"Start":"03:04.180 ","End":"03:07.210","Text":"What is the currency unit in terms of the par value of the shares?"},{"Start":"03:07.210 ","End":"03:11.180","Text":"What\u0027s the currency units In terms of the share premium?."},{"Start":"03:11.180 ","End":"03:16.605","Text":"We had 10,000 shares at 15 cents. We\u0027re given that."},{"Start":"03:16.605 ","End":"03:21.770","Text":"We know that the par value to begin with was 15,000 at 15 cents."},{"Start":"03:21.770 ","End":"03:25.870","Text":"We know that we started with 15,000 currency units."},{"Start":"03:25.870 ","End":"03:28.300","Text":"We were also told that the share capital was"},{"Start":"03:28.300 ","End":"03:33.605","Text":"240,000 in terms of the net proceeds of the shares in issue."},{"Start":"03:33.605 ","End":"03:38.270","Text":"That means that the share premium is the difference between the 2."},{"Start":"03:38.270 ","End":"03:43.050","Text":"That\u0027s balancing 240,000, total equity,"},{"Start":"03:43.050 ","End":"03:49.330","Text":"there\u0027s 15,000 the par value of the equity gives us 225,000 share premium."},{"Start":"03:49.330 ","End":"03:51.275","Text":"Now, as I said with the share split,"},{"Start":"03:51.275 ","End":"03:54.800","Text":"there is no currency that changes hands."},{"Start":"03:54.800 ","End":"03:59.240","Text":"What we need to look at is that par value of 15 cents."},{"Start":"03:59.240 ","End":"04:02.270","Text":"What is the par value per share after the share split?"},{"Start":"04:02.270 ","End":"04:04.400","Text":"It was 15 cents before the share split,"},{"Start":"04:04.400 ","End":"04:08.240","Text":"but what is it after the share split?"},{"Start":"04:08.240 ","End":"04:10.850","Text":"Well, no currency changes hands,"},{"Start":"04:10.850 ","End":"04:13.315","Text":"so the par value is still 15,000,"},{"Start":"04:13.315 ","End":"04:20.610","Text":"but now we have 150,000 shares reflected by that 15,000, not 100,000 shares."},{"Start":"04:20.610 ","End":"04:27.015","Text":"So 15,000 divided by 150,000 shares means that it\u0027s 10 cents per share."},{"Start":"04:27.015 ","End":"04:33.315","Text":"The par value description of 15 cents a share is now no longer accurate."},{"Start":"04:33.315 ","End":"04:37.400","Text":"Now we need to change the heading of par value of 15 cents"},{"Start":"04:37.400 ","End":"04:41.240","Text":"a share to be more accurate at par value,"},{"Start":"04:41.240 ","End":"04:43.090","Text":"10 cents per share."},{"Start":"04:43.090 ","End":"04:46.400","Text":"What we do is we subtract the 15,000 out of"},{"Start":"04:46.400 ","End":"04:50.315","Text":"the column that\u0027s described previously as 15 cents a share,"},{"Start":"04:50.315 ","End":"04:52.910","Text":"move it into the column described as par value,"},{"Start":"04:52.910 ","End":"04:54.790","Text":"10 cents a share."},{"Start":"04:54.790 ","End":"04:59.270","Text":"Since a share split has no currency that changes hands,"},{"Start":"04:59.270 ","End":"05:02.135","Text":"nothing else changes in our worksheet,"},{"Start":"05:02.135 ","End":"05:07.510","Text":"so we simply move the 15,000 out of the column described as 15 cents per value"},{"Start":"05:07.510 ","End":"05:13.100","Text":"shares and move it into a column that we hit up as 10 cents par value shares."},{"Start":"05:13.100 ","End":"05:18.388","Text":"Bearing in mind that share splits don\u0027t have any currency changing hands,"},{"Start":"05:18.388 ","End":"05:21.050","Text":"there\u0027ll be no change to the total equity column,"},{"Start":"05:21.050 ","End":"05:23.420","Text":"and no change to the share premium column."},{"Start":"05:23.420 ","End":"05:27.780","Text":"Therefore, our par value is simply 15,000,"},{"Start":"05:27.780 ","End":"05:30.915","Text":"but it\u0027s [inaudible] as 10 cent shares,"},{"Start":"05:30.915 ","End":"05:33.660","Text":"the share premium is still 2 to 5,000,"},{"Start":"05:33.660 ","End":"05:37.245","Text":"and the total is still 240,000."},{"Start":"05:37.245 ","End":"05:42.560","Text":"Part A, the answer is 150,000 shares is what we now have an issue."},{"Start":"05:42.560 ","End":"05:46.880","Text":"Part B was our shares increased by 50,000 shares."},{"Start":"05:46.880 ","End":"05:50.105","Text":"Part C was to simply show the currency value"},{"Start":"05:50.105 ","End":"05:53.915","Text":"of the par value and the share premium of those shares."},{"Start":"05:53.915 ","End":"05:58.785","Text":"That was 15,000 par value, 225,000 share premium."},{"Start":"05:58.785 ","End":"06:01.220","Text":"For your interest, looking at the balance sheet,"},{"Start":"06:01.220 ","End":"06:03.665","Text":"you\u0027ll see that nothing actually changed."},{"Start":"06:03.665 ","End":"06:07.100","Text":"The share premium remains 225,000."},{"Start":"06:07.100 ","End":"06:09.590","Text":"The only thing that changed was"},{"Start":"06:09.590 ","End":"06:13.500","Text":"the description of the par value as being previously 15 cents,"},{"Start":"06:13.500 ","End":"06:16.600","Text":"and now being 10 cents."}],"ID":31070},{"Watched":false,"Name":"Exercise 3","Duration":"2m 42s","ChapterTopicVideoID":29456,"CourseChapterTopicPlaylistID":294469,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:03.300","Text":"This exercise deals with preference shares."},{"Start":"00:03.300 ","End":"00:10.170","Text":"On 1.1.20X1 CDE issues 80,000 4 percent"},{"Start":"00:10.170 ","End":"00:13.980","Text":"preference shares with a par value of 2 currency units"},{"Start":"00:13.980 ","End":"00:18.165","Text":"each issued for 2.5 currency units,"},{"Start":"00:18.165 ","End":"00:20.625","Text":"each at the end of 20X1,"},{"Start":"00:20.625 ","End":"00:25.544","Text":"CDE pays 78,000 currency units in ordinary dividends,"},{"Start":"00:25.544 ","End":"00:28.950","Text":"and also pays a preference dividend."},{"Start":"00:28.950 ","End":"00:35.460","Text":"Required 1: How much cash does CDE raise from issuing the preference shares?"},{"Start":"00:35.460 ","End":"00:38.590","Text":"How much total dividend, ordinary,"},{"Start":"00:38.590 ","End":"00:43.210","Text":"and preference does CDE pay at the end of 20X1."},{"Start":"00:43.210 ","End":"00:45.210","Text":"It start with part 1."},{"Start":"00:45.210 ","End":"00:48.380","Text":"Part 1 asks us to calculate the cash that"},{"Start":"00:48.380 ","End":"00:52.295","Text":"CDE raises from the issuing of the preference shares."},{"Start":"00:52.295 ","End":"00:54.050","Text":"Well, as you can see here,"},{"Start":"00:54.050 ","End":"00:56.720","Text":"we\u0027ve issued 80,000,"},{"Start":"00:56.720 ","End":"00:59.330","Text":"4 percent preference shares that had a par value of"},{"Start":"00:59.330 ","End":"01:05.280","Text":"2 currency units each for 2.5 currency units each."},{"Start":"01:05.280 ","End":"01:08.570","Text":"The issue price was 2.5 and that\u0027s what we\u0027re looking for,"},{"Start":"01:08.570 ","End":"01:12.255","Text":"the 2.5 so the cash that we raised his than the"},{"Start":"01:12.255 ","End":"01:17.435","Text":"80,000 shares times the issue price of 2.5 currency units."},{"Start":"01:17.435 ","End":"01:20.380","Text":"That gives us 200,000 currency units."},{"Start":"01:20.380 ","End":"01:22.415","Text":"That\u0027s the cash we raised."},{"Start":"01:22.415 ","End":"01:24.440","Text":"Let\u0027s look at Part 2."},{"Start":"01:24.440 ","End":"01:26.750","Text":"How much total dividend, ordinary,"},{"Start":"01:26.750 ","End":"01:30.080","Text":"and preference to CDE pay at the end of 20X1."},{"Start":"01:30.080 ","End":"01:31.490","Text":"Well, first of all,"},{"Start":"01:31.490 ","End":"01:36.905","Text":"let\u0027s look at the ordinary dividend that we were given being 78,000 currency units,"},{"Start":"01:36.905 ","End":"01:39.695","Text":"and then we have to add to that the preference dividend."},{"Start":"01:39.695 ","End":"01:42.770","Text":"Now when we work out the preference dividend we work it out"},{"Start":"01:42.770 ","End":"01:46.100","Text":"using the par value of the share so there were 80,000 shares,"},{"Start":"01:46.100 ","End":"01:48.080","Text":"but this time we don\u0027t use issue price."},{"Start":"01:48.080 ","End":"01:49.220","Text":"We use the par value,"},{"Start":"01:49.220 ","End":"01:54.335","Text":"which was 2 currency units per share and we multiply it by the percentage,"},{"Start":"01:54.335 ","End":"01:58.700","Text":"that\u0027s 80,000 shares multiplied by the par value of the share,"},{"Start":"01:58.700 ","End":"02:00.215","Text":"not the issue price."},{"Start":"02:00.215 ","End":"02:03.080","Text":"Multiply it by the coupon rate or in other words,"},{"Start":"02:03.080 ","End":"02:07.865","Text":"the percentage the preference shares offered and that was 4 per cent in this question,"},{"Start":"02:07.865 ","End":"02:11.525","Text":"that preference dividend would be 6,400."},{"Start":"02:11.525 ","End":"02:13.310","Text":"In this case, it\u0027s"},{"Start":"02:13.310 ","End":"02:15.050","Text":"a full preference dividend because"},{"Start":"02:15.050 ","End":"02:17.690","Text":"the preference shares were issued at the beginning of the year."},{"Start":"02:17.690 ","End":"02:20.930","Text":"Had the preference shares being issued during the year,"},{"Start":"02:20.930 ","End":"02:24.290","Text":"then we would have had to pro rata that preference dividend"},{"Start":"02:24.290 ","End":"02:28.270","Text":"for the number of months the preference shares had been an issue."},{"Start":"02:28.270 ","End":"02:32.030","Text":"In this case, we\u0027ve got 78,000 ordinary dividends plus"},{"Start":"02:32.030 ","End":"02:34.640","Text":"a full year\u0027s worth of preference dividends worked"},{"Start":"02:34.640 ","End":"02:38.090","Text":"out at a 4 percent coupon rate of 6,400,"},{"Start":"02:38.090 ","End":"02:42.360","Text":"giving us a total of 84,400."}],"ID":31071},{"Watched":false,"Name":"Exercise 4","Duration":"1m 58s","ChapterTopicVideoID":29457,"CourseChapterTopicPlaylistID":294469,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:04.065","Text":"This example deals with cumulative preference shares."},{"Start":"00:04.065 ","End":"00:08.520","Text":"On the 1st of January 20X1 company DEF issues"},{"Start":"00:08.520 ","End":"00:13.025","Text":"1,000,000 preference shares at 4 currency units each."},{"Start":"00:13.025 ","End":"00:15.385","Text":"They have no par value."},{"Start":"00:15.385 ","End":"00:19.365","Text":"The preference shares entitled the holders to a cumulative"},{"Start":"00:19.365 ","End":"00:23.835","Text":"0.2 currency unit dividend per share each year."},{"Start":"00:23.835 ","End":"00:27.180","Text":"Owing to reporting a loss in each year,"},{"Start":"00:27.180 ","End":"00:33.480","Text":"the preference dividends were not paid in 20X0 or 20X1."},{"Start":"00:33.480 ","End":"00:38.050","Text":"DEF pays the preference dividend in 20X2."},{"Start":"00:38.050 ","End":"00:42.950","Text":"Required. How much preference dividend does DEF need to"},{"Start":"00:42.950 ","End":"00:47.920","Text":"pay in 20X2 if it wants to pay an ordinary dividend?"},{"Start":"00:47.920 ","End":"00:50.385","Text":"Preference shares are cumulative."},{"Start":"00:50.385 ","End":"00:56.315","Text":"The preference dividend must be paid up in full before an ordinary dividends may be paid."},{"Start":"00:56.315 ","End":"01:01.140","Text":"We\u0027re told that the preference dividend wasn\u0027t paid in 20X0 and it wasn\u0027t paid in"},{"Start":"01:01.140 ","End":"01:07.460","Text":"20X1 and now we\u0027re in 20X2 and the company would like to pay an ordinary dividend."},{"Start":"01:07.460 ","End":"01:11.075","Text":"This means that there are 3 years worth of preference dividends that"},{"Start":"01:11.075 ","End":"01:14.885","Text":"ought to be paid before the ordinary dividend may be paid."},{"Start":"01:14.885 ","End":"01:18.405","Text":"Where we have preference shares and there are cumulative,"},{"Start":"01:18.405 ","End":"01:21.110","Text":"it means that all preference dividends must be"},{"Start":"01:21.110 ","End":"01:23.930","Text":"paid before an ordinary dividends may be paid."},{"Start":"01:23.930 ","End":"01:26.885","Text":"In this case, the company would like to pay an ordinary dividend,"},{"Start":"01:26.885 ","End":"01:29.585","Text":"but it hasn\u0027t paid the preference dividend for 20X0,"},{"Start":"01:29.585 ","End":"01:33.185","Text":"20X1, and now we\u0027re in 20X2."},{"Start":"01:33.185 ","End":"01:36.440","Text":"This means that it needs to pay 3 years worth of"},{"Start":"01:36.440 ","End":"01:40.160","Text":"preference dividends before it can make the ordinary dividend payment."},{"Start":"01:40.160 ","End":"01:42.890","Text":"We have 1,000,000 preference shares."},{"Start":"01:42.890 ","End":"01:45.860","Text":"We must multiply that by the preference dividend per share,"},{"Start":"01:45.860 ","End":"01:50.820","Text":"which is 0.2 currency units per share and we multiply that by 3 years,"},{"Start":"01:50.820 ","End":"01:53.960","Text":"so the preference dividend that we must pay before"},{"Start":"01:53.960 ","End":"01:59.580","Text":"an ordinary dividend maybe paid is 600,000 currency units."}],"ID":31072},{"Watched":false,"Name":"Exercise 5","Duration":"2m 13s","ChapterTopicVideoID":29458,"CourseChapterTopicPlaylistID":294469,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:03.465","Text":"This example involves the classification of preference shares."},{"Start":"00:03.465 ","End":"00:08.895","Text":"On the 1st of January 20X3 company EFG issues 3 percent,"},{"Start":"00:08.895 ","End":"00:14.970","Text":"100,000 convertible preference shares at 6 currency units each, no par value."},{"Start":"00:14.970 ","End":"00:19.890","Text":"As a result, EFG raises 600,000 currency units in cash."},{"Start":"00:19.890 ","End":"00:24.450","Text":"The preference shares contract specifies that they are redeemable at"},{"Start":"00:24.450 ","End":"00:30.825","Text":"6 currency units per share at anytime after the 31st December, 20X6."},{"Start":"00:30.825 ","End":"00:33.165","Text":"In other words, in a few years from now,"},{"Start":"00:33.165 ","End":"00:38.385","Text":"they are redeemable at the same amount that we had raised."},{"Start":"00:38.385 ","End":"00:44.750","Text":"Required: How should EFG classify the 600,000 currency units that it raised with"},{"Start":"00:44.750 ","End":"00:47.540","Text":"the issue of the preference shares if the redemption of"},{"Start":"00:47.540 ","End":"00:51.540","Text":"those preferences shares are at the discretion of EFG?"},{"Start":"00:51.540 ","End":"00:56.225","Text":"If EFG can decide whether to redeem those preferences shares or not,"},{"Start":"00:56.225 ","End":"00:58.940","Text":"in other words, to give the currency units,"},{"Start":"00:58.940 ","End":"01:03.020","Text":"600,000 currency units back to the shareholders,"},{"Start":"01:03.020 ","End":"01:07.070","Text":"then EFG does not have a present obligation."},{"Start":"01:07.070 ","End":"01:11.630","Text":"If EFG does not have a present obligation, in other words,"},{"Start":"01:11.630 ","End":"01:17.780","Text":"it cannot avoid, then EFG does not have by definition a liability."},{"Start":"01:17.780 ","End":"01:20.885","Text":"If EFG does not have a liability,"},{"Start":"01:20.885 ","End":"01:24.890","Text":"then it meets the definition of equity."},{"Start":"01:24.890 ","End":"01:28.280","Text":"The answer in that case would be equity."},{"Start":"01:28.280 ","End":"01:31.580","Text":"The 600,000 that it raised in cash from the issue of"},{"Start":"01:31.580 ","End":"01:34.690","Text":"the preference shares would be classified as equity."},{"Start":"01:34.690 ","End":"01:39.620","Text":"The second part of the required: How should EFG classify the 600,000 currency"},{"Start":"01:39.620 ","End":"01:41.624","Text":"units in cash that it raised if"},{"Start":"01:41.624 ","End":"01:45.215","Text":"the redemption decisions are at the discretion of the shareholders?"},{"Start":"01:45.215 ","End":"01:48.260","Text":"Well, if the shareholders can decide whether or not"},{"Start":"01:48.260 ","End":"01:51.709","Text":"they want their shares to be redeemed in cash,"},{"Start":"01:51.709 ","End":"01:56.270","Text":"then we do not have control over the situation and we"},{"Start":"01:56.270 ","End":"02:00.650","Text":"assume that the shareholders will demand the redemption of their preference shares."},{"Start":"02:00.650 ","End":"02:05.465","Text":"It meets therefore the definition of a present obligation and therefore,"},{"Start":"02:05.465 ","End":"02:10.355","Text":"we would classify the 600,000 in cash as a liability."},{"Start":"02:10.355 ","End":"02:14.250","Text":"In other words, we assume we\u0027re going to have to repay it."}],"ID":31073},{"Watched":false,"Name":"Exercise 6","Duration":"6m 42s","ChapterTopicVideoID":29459,"CourseChapterTopicPlaylistID":294469,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:03.315","Text":"This exercise involves a share buyback."},{"Start":"00:03.315 ","End":"00:06.285","Text":"Upon incorporation, several years back,"},{"Start":"00:06.285 ","End":"00:13.215","Text":"company FGH issued 200,000 ordinary shares for a million currency units."},{"Start":"00:13.215 ","End":"00:17.625","Text":"Each of these shares has a par value of 2 currency units."},{"Start":"00:17.625 ","End":"00:20.580","Text":"On the 1st of December, 20X4,"},{"Start":"00:20.580 ","End":"00:27.525","Text":"FGH repurchases 30,000 of these ordinary shares at 8 currency units each,"},{"Start":"00:27.525 ","End":"00:30.480","Text":"and these are to be held as treasury shares."},{"Start":"00:30.480 ","End":"00:32.055","Text":"In the same month,"},{"Start":"00:32.055 ","End":"00:35.070","Text":"the other end on the 30th of December, 20X4,"},{"Start":"00:35.070 ","End":"00:38.700","Text":"FGH resells 10,000 of these treasury shares,"},{"Start":"00:38.700 ","End":"00:41.625","Text":"selling them at 10 currency units each."},{"Start":"00:41.625 ","End":"00:46.832","Text":"Assume cash was 2,000,000 immediately before the repurchase transaction,"},{"Start":"00:46.832 ","End":"00:51.560","Text":"that there were no treasury shares prior to December 20X4,"},{"Start":"00:51.560 ","End":"00:56.375","Text":"and that there were no other transactions that took place over December 20X4."},{"Start":"00:56.375 ","End":"00:59.315","Text":"The financial year-end is 31st December."},{"Start":"00:59.315 ","End":"01:02.150","Text":"Required: record these transactions in"},{"Start":"01:02.150 ","End":"01:06.110","Text":"the worksheet using the headings as shown on the next page."},{"Start":"01:06.110 ","End":"01:09.890","Text":"We were required to record the transactions given in"},{"Start":"01:09.890 ","End":"01:13.825","Text":"the worksheet using the headings as given on the next page."},{"Start":"01:13.825 ","End":"01:17.345","Text":"The worksheet headings were Cash,"},{"Start":"01:17.345 ","End":"01:19.505","Text":"Share Capital at Par Value,"},{"Start":"01:19.505 ","End":"01:23.139","Text":"Share Capital at the Share Premium amount,"},{"Start":"01:23.139 ","End":"01:27.245","Text":"Treasury Shares, Retained Earnings."},{"Start":"01:27.245 ","End":"01:31.610","Text":"All of these columns were in currency units,"},{"Start":"01:31.610 ","End":"01:37.700","Text":"and then the last column was a memo just indicating the number of shares outstanding."},{"Start":"01:37.700 ","End":"01:40.630","Text":"This one is obviously not currency units."},{"Start":"01:40.630 ","End":"01:45.110","Text":"We start with the first line being from incorporation, so basically,"},{"Start":"01:45.110 ","End":"01:49.770","Text":"our opening balance dated 30th of November, 20X4."},{"Start":"01:49.770 ","End":"01:51.830","Text":"We are told that the cash was 2,000,000."},{"Start":"01:51.830 ","End":"01:55.429","Text":"We are told that we have 200,000 shares,"},{"Start":"01:55.429 ","End":"01:59.300","Text":"each of which have a par value of 2 currency units."},{"Start":"01:59.300 ","End":"02:03.970","Text":"So that means that our par value of the share capital is 400,000."},{"Start":"02:03.970 ","End":"02:11.460","Text":"We\u0027re then told that these 200,000 shares had been issued for 1,000,000 currency units."},{"Start":"02:11.460 ","End":"02:16.190","Text":"So if we subtract the 400,000 par value from the million proceeds,"},{"Start":"02:16.190 ","End":"02:19.040","Text":"we get a 600,000 premium."},{"Start":"02:19.040 ","End":"02:22.100","Text":"We\u0027re then told that there were no treasury shares prior"},{"Start":"02:22.100 ","End":"02:25.120","Text":"to the transactions in December 20X4,"},{"Start":"02:25.120 ","End":"02:28.700","Text":"we were told nothing about the retained earnings and then of course,"},{"Start":"02:28.700 ","End":"02:33.590","Text":"the last column just indicates that we have 200,000 shares outstanding."},{"Start":"02:33.590 ","End":"02:36.080","Text":"Then on the 1st of December, 20X4,"},{"Start":"02:36.080 ","End":"02:39.200","Text":"there was a share buyback of 30,000 shares."},{"Start":"02:39.200 ","End":"02:41.330","Text":"When we bought these shares,"},{"Start":"02:41.330 ","End":"02:44.450","Text":"we paid 8 currency units per share."},{"Start":"02:44.450 ","End":"02:50.130","Text":"Sp that means that our cash decreased by 240,000."},{"Start":"02:50.130 ","End":"02:53.270","Text":"If our cash decreased by 240,000,"},{"Start":"02:53.270 ","End":"02:55.880","Text":"our equity must have decreased by"},{"Start":"02:55.880 ","End":"03:01.265","Text":"240,000 because there was no implication on liabilities."},{"Start":"03:01.265 ","End":"03:04.010","Text":"Now, I\u0027ve put them under the column for treasury shares and"},{"Start":"03:04.010 ","End":"03:06.841","Text":"that\u0027s because we were not canceling these shares."},{"Start":"03:06.841 ","End":"03:09.070","Text":"We were holding them as treasury shares."},{"Start":"03:09.070 ","End":"03:12.020","Text":"So all we are doing is we\u0027re taking them out of circulation."},{"Start":"03:12.020 ","End":"03:14.735","Text":"If you take the share capital columns of"},{"Start":"03:14.735 ","End":"03:17.705","Text":"the share capital par value and the share capital share premium,"},{"Start":"03:17.705 ","End":"03:19.340","Text":"you add those 2 together,"},{"Start":"03:19.340 ","End":"03:21.590","Text":"and you subtract the treasury share column,"},{"Start":"03:21.590 ","End":"03:26.450","Text":"you get the net amount of the share capital that remains in circulation."},{"Start":"03:26.450 ","End":"03:28.580","Text":"Then on the 30th of December,"},{"Start":"03:28.580 ","End":"03:32.840","Text":"20X4, we resold some of those treasury shares."},{"Start":"03:32.840 ","End":"03:35.380","Text":"We bought back 30,000 shares,"},{"Start":"03:35.380 ","End":"03:37.220","Text":"and of those 30,000,"},{"Start":"03:37.220 ","End":"03:40.350","Text":"we\u0027ve now taken 10,000 and resold them."},{"Start":"03:40.350 ","End":"03:43.220","Text":"So they\u0027ve gone back into circulation."},{"Start":"03:43.220 ","End":"03:47.075","Text":"We sold them for 10 currency units per share,"},{"Start":"03:47.075 ","End":"03:51.695","Text":"so that means that our cash went up in value by 100,000."},{"Start":"03:51.695 ","End":"03:54.035","Text":"Our assets have increased by 100,000."},{"Start":"03:54.035 ","End":"03:56.135","Text":"It has nothing to do with liabilities."},{"Start":"03:56.135 ","End":"04:02.585","Text":"So we know our equity must increase by 100,000 based on the accounting equation."},{"Start":"04:02.585 ","End":"04:06.405","Text":"We take the 10,000 that we\u0027ve re-sold."},{"Start":"04:06.405 ","End":"04:08.040","Text":"We take them out of the treasury shares."},{"Start":"04:08.040 ","End":"04:10.280","Text":"Now remember, the treasury shares are reflecting"},{"Start":"04:10.280 ","End":"04:12.830","Text":"the number of shares we\u0027ve taken out of circulation."},{"Start":"04:12.830 ","End":"04:16.910","Text":"That was 30,000 shares that we had originally taken out of circulation."},{"Start":"04:16.910 ","End":"04:19.220","Text":"So 10,000 of those 30,000,"},{"Start":"04:19.220 ","End":"04:21.320","Text":"we\u0027ve now put back into circulation."},{"Start":"04:21.320 ","End":"04:24.980","Text":"So we must take those 10,000 out of the treasury shares."},{"Start":"04:24.980 ","End":"04:27.125","Text":"Now, the treasury shares were valued at"},{"Start":"04:27.125 ","End":"04:31.070","Text":"8 currency units per share because that\u0027s how much we paid for them."},{"Start":"04:31.070 ","End":"04:33.330","Text":"We must take them out at the same value."},{"Start":"04:33.330 ","End":"04:37.150","Text":"The 10,000 shares at 8 currency units is 80,000."},{"Start":"04:37.150 ","End":"04:41.370","Text":"That must come out of the treasury share column."},{"Start":"04:41.370 ","End":"04:43.490","Text":"Notice it doesn\u0027t have brackets."},{"Start":"04:43.490 ","End":"04:45.890","Text":"But now this transaction doesn\u0027t balance at the moment."},{"Start":"04:45.890 ","End":"04:48.665","Text":"We\u0027ve got a 100,000 increase in our cash,"},{"Start":"04:48.665 ","End":"04:51.710","Text":"and our equity is only increased by 80,000."},{"Start":"04:51.710 ","End":"04:53.405","Text":"So we know we\u0027re missing something,"},{"Start":"04:53.405 ","End":"04:56.125","Text":"and that is 20,000 share premium."},{"Start":"04:56.125 ","End":"05:01.235","Text":"The reason for that is we\u0027ve made a 2 currency unit premium per share."},{"Start":"05:01.235 ","End":"05:05.879","Text":"We bought the treasury shares out of circulation at 8 currency units,"},{"Start":"05:05.879 ","End":"05:11.520","Text":"but we\u0027ve now sold them back into circulation at 10 currency units."},{"Start":"05:11.520 ","End":"05:14.310","Text":"So we\u0027ve made 2 currency units per share."},{"Start":"05:14.310 ","End":"05:17.720","Text":"Currency units times 10,000 is 20,000."},{"Start":"05:17.720 ","End":"05:23.250","Text":"2 currency units for each of those 10,000 shares gives us 20,000."},{"Start":"05:23.250 ","End":"05:28.805","Text":"So you can see that our cash went up by 100,000,"},{"Start":"05:28.805 ","End":"05:32.009","Text":"and now our equity has gone up by 100,000,"},{"Start":"05:32.009 ","End":"05:38.440","Text":"80,000 coming out of our treasury shares and 20,000 getting put into the share premium."},{"Start":"05:38.440 ","End":"05:42.290","Text":"The last step is to simply total each of those columns."},{"Start":"05:42.290 ","End":"05:45.320","Text":"Our cash went down by 240,000,"},{"Start":"05:45.320 ","End":"05:47.050","Text":"but it went back up by 100,000,"},{"Start":"05:47.050 ","End":"05:51.110","Text":"so we\u0027re up to 1,860,000."},{"Start":"05:51.110 ","End":"05:55.340","Text":"Our share capital at par value remained unchanged."},{"Start":"05:55.340 ","End":"05:58.940","Text":"But the share premium actually went up by 20,000 because of"},{"Start":"05:58.940 ","End":"06:02.825","Text":"the 2 currency unit per share premium on the treasury shares,"},{"Start":"06:02.825 ","End":"06:05.885","Text":"as we took them out at 8 currency units and then"},{"Start":"06:05.885 ","End":"06:09.915","Text":"resold them back into circulation at 10 currency units."},{"Start":"06:09.915 ","End":"06:11.390","Text":"Our treasury shares,"},{"Start":"06:11.390 ","End":"06:14.720","Text":"we initially took 240,000 out of circulation,"},{"Start":"06:14.720 ","End":"06:17.090","Text":"but we put 80,000 back in."},{"Start":"06:17.090 ","End":"06:20.750","Text":"So our treasury shares are now at 160,000."},{"Start":"06:20.750 ","End":"06:24.800","Text":"We have no impact on retained earnings."},{"Start":"06:24.800 ","End":"06:28.130","Text":"The number of shares that are outstanding are the original"},{"Start":"06:28.130 ","End":"06:32.540","Text":"200,000 less the 30,000 that we took out of circulation,"},{"Start":"06:32.540 ","End":"06:34.375","Text":"but we didn\u0027t cancel them,"},{"Start":"06:34.375 ","End":"06:37.530","Text":"and then we put 10,000 back into circulation."},{"Start":"06:37.530 ","End":"06:42.360","Text":"So we\u0027ve got 180,000 currently in circulation."}],"ID":31074},{"Watched":false,"Name":"Exercise 7","Duration":"6m 39s","ChapterTopicVideoID":29460,"CourseChapterTopicPlaylistID":294469,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.650 ","End":"00:03.705","Text":"Upon incorporation several years back,"},{"Start":"00:03.705 ","End":"00:10.080","Text":"company GHI issued 100,000 ordinary shares for 600,000 currency units."},{"Start":"00:10.080 ","End":"00:13.965","Text":"Each share has a par value of 1 currency unit."},{"Start":"00:13.965 ","End":"00:16.650","Text":"On 30th of November 20X4,"},{"Start":"00:16.650 ","End":"00:20.730","Text":"GHI has a balance of 64,000 currency units under"},{"Start":"00:20.730 ","End":"00:25.185","Text":"the treasury shares, representing 8,000 shares."},{"Start":"00:25.185 ","End":"00:27.825","Text":"That\u0027s 8 currency units per share."},{"Start":"00:27.825 ","End":"00:31.755","Text":"Please note the treasury shares have negative balances."},{"Start":"00:31.755 ","End":"00:33.780","Text":"On 1st December 20X4,"},{"Start":"00:33.780 ","End":"00:39.750","Text":"GHI repurchases a further 10,000 ordinary shares at 7 currency units each."},{"Start":"00:39.750 ","End":"00:43.115","Text":"In the same month, on 30th of December, 20X4,"},{"Start":"00:43.115 ","End":"00:49.115","Text":"GHI resells 16,000 treasury shares at 6 currency units each."},{"Start":"00:49.115 ","End":"00:52.130","Text":"The financial year-end is 31st December."},{"Start":"00:52.130 ","End":"00:55.475","Text":"Required: Record these transactions in the worksheet,"},{"Start":"00:55.475 ","End":"00:58.280","Text":"assuming GHI uses FIFO,"},{"Start":"00:58.280 ","End":"01:01.280","Text":"being first-in-first-out, flow assumptions."},{"Start":"01:01.280 ","End":"01:06.920","Text":"Assume also an opening cash balance of 2,000,000 currency units."},{"Start":"01:06.920 ","End":"01:11.120","Text":"Let\u0027s look at the solution to the share buyback exercise."},{"Start":"01:11.120 ","End":"01:13.895","Text":"We start with the opening balances."},{"Start":"01:13.895 ","End":"01:20.600","Text":"We\u0027re told to assume that the cash opening balance is 2,000,000, so we pop that in."},{"Start":"01:20.600 ","End":"01:23.900","Text":"Then in terms of the share capital par value,"},{"Start":"01:23.900 ","End":"01:26.690","Text":"we were told that we had 100,000 shares,"},{"Start":"01:26.690 ","End":"01:29.971","Text":"an issue with 1 currency unit par value per share,"},{"Start":"01:29.971 ","End":"01:32.720","Text":"so that\u0027s 100,000 currency units."},{"Start":"01:32.720 ","End":"01:36.740","Text":"Then the share premium portion of the share capital,"},{"Start":"01:36.740 ","End":"01:42.800","Text":"we are told that the 100,000 shares have been issued at 6 currency units per share."},{"Start":"01:42.800 ","End":"01:45.155","Text":"So that\u0027s 600,000 currency units."},{"Start":"01:45.155 ","End":"01:47.450","Text":"We subtract the par value of those shares,"},{"Start":"01:47.450 ","End":"01:50.165","Text":"which were 100,000 currency units,"},{"Start":"01:50.165 ","End":"01:53.515","Text":"and that gives us a share premium of 500,000."},{"Start":"01:53.515 ","End":"01:58.465","Text":"We were then told that our treasury shares were 64,000, opening balance."},{"Start":"01:58.465 ","End":"02:01.330","Text":"Remember, treasury shares have a negative balance because"},{"Start":"02:01.330 ","End":"02:04.030","Text":"what they\u0027re doing is they\u0027re telling you how much of"},{"Start":"02:04.030 ","End":"02:10.350","Text":"your share capital and share premium total which comes to 100,000 plus 500,000,"},{"Start":"02:10.350 ","End":"02:11.814","Text":"which is 600,000,"},{"Start":"02:11.814 ","End":"02:16.050","Text":"how much of that 600,000 has actually been taken out of circulation?"},{"Start":"02:16.050 ","End":"02:22.245","Text":"Here we are told that 64,000 currency units worth has been taken out of circulation,"},{"Start":"02:22.245 ","End":"02:24.475","Text":"that is 8,000 shares,"},{"Start":"02:24.475 ","End":"02:26.470","Text":"which means that each of"},{"Start":"02:26.470 ","End":"02:32.180","Text":"those treasury shares had been repurchased at 8 currency units each,"},{"Start":"02:32.180 ","End":"02:36.645","Text":"being 64,000 currency units divide by 8,000."},{"Start":"02:36.645 ","End":"02:42.010","Text":"Then finally, we have a column for the number of shares outstanding."},{"Start":"02:42.010 ","End":"02:45.280","Text":"All of the other columns so far are all in currency units."},{"Start":"02:45.280 ","End":"02:48.895","Text":"But this column is the number of shares outstanding."},{"Start":"02:48.895 ","End":"02:50.361","Text":"That\u0027s 92,000."},{"Start":"02:50.361 ","End":"02:51.985","Text":"Where do I get that from?"},{"Start":"02:51.985 ","End":"02:54.820","Text":"That\u0027s the 100,000 shares that we were told had been"},{"Start":"02:54.820 ","End":"02:58.585","Text":"an issue less the 8,000 treasury shares."},{"Start":"02:58.585 ","End":"03:01.000","Text":"Then on the 1st of December 20X4,"},{"Start":"03:01.000 ","End":"03:06.100","Text":"we\u0027re told that we had a 10,000 share buyback."},{"Start":"03:06.100 ","End":"03:09.910","Text":"So 10,000 shares are now taken out of the number of shares"},{"Start":"03:09.910 ","End":"03:14.320","Text":"outstanding column because we have fewer shares outstanding now."},{"Start":"03:14.320 ","End":"03:15.880","Text":"How much did we pay for these?"},{"Start":"03:15.880 ","End":"03:18.940","Text":"We paid 7 currency units per share."},{"Start":"03:18.940 ","End":"03:22.885","Text":"So that means our cash depleted by 70,000,"},{"Start":"03:22.885 ","End":"03:25.775","Text":"10,000 shares times 7 currency units,"},{"Start":"03:25.775 ","End":"03:29.120","Text":"and that then gets added to our treasury shares."},{"Start":"03:29.120 ","End":"03:31.700","Text":"Then on the 30th of December 20X4,"},{"Start":"03:31.700 ","End":"03:36.305","Text":"we resold 16,000 of our treasury shares."},{"Start":"03:36.305 ","End":"03:38.210","Text":"Now we were told to use the first-in,"},{"Start":"03:38.210 ","End":"03:45.180","Text":"first-out assumption when accounting for the resale of these treasury shares."},{"Start":"03:45.180 ","End":"03:47.750","Text":"So how much did we sell these treasury shares for?"},{"Start":"03:47.750 ","End":"03:51.740","Text":"First and foremost, they were sold for 6 currency units each,"},{"Start":"03:51.740 ","End":"03:55.520","Text":"so 16,000 multiply by 6 currency units each means that"},{"Start":"03:55.520 ","End":"03:59.605","Text":"our cash increased by 96,000 currency units."},{"Start":"03:59.605 ","End":"04:03.515","Text":"Our asset goes up by 96,000."},{"Start":"04:03.515 ","End":"04:07.415","Text":"So our equity is going to have to go up by 96,000."},{"Start":"04:07.415 ","End":"04:11.986","Text":"However, how much is going to be taken out of our treasury shares,"},{"Start":"04:11.986 ","End":"04:14.300","Text":"in other words, reversed out of our treasury shares?"},{"Start":"04:14.300 ","End":"04:16.250","Text":"While using the first-in-first-out principle,"},{"Start":"04:16.250 ","End":"04:20.660","Text":"you must remember that the first 8,000 shares"},{"Start":"04:20.660 ","End":"04:25.760","Text":"had been purchased back by us at 8 currency units per share."},{"Start":"04:25.760 ","End":"04:32.015","Text":"The second 10,000 shares had been purchased back by us at 7 currency units."},{"Start":"04:32.015 ","End":"04:33.733","Text":"That\u0027s the newer shares."},{"Start":"04:33.733 ","End":"04:36.110","Text":"So we\u0027ve got older shares and newer shares."},{"Start":"04:36.110 ","End":"04:38.210","Text":"Using the first-in-first-out principle,"},{"Start":"04:38.210 ","End":"04:40.040","Text":"it means that, when we sell those shares,"},{"Start":"04:40.040 ","End":"04:44.490","Text":"we\u0027re going to sell the older shares first and then the newer shares."},{"Start":"04:44.490 ","End":"04:47.760","Text":"We\u0027ve just sold 16,000 shares,"},{"Start":"04:47.760 ","End":"04:55.200","Text":"so the first 8,000 of those 16,000 cost us 8 currency units per share, so that\u0027s 64,000."},{"Start":"04:55.200 ","End":"04:58.680","Text":"Then remember we\u0027re selling 16,000, not 8,000,"},{"Start":"04:58.680 ","End":"05:05.910","Text":"so 16,000 shares less the older 8,000 shares means that the next"},{"Start":"05:05.910 ","End":"05:08.990","Text":"8,000 shares are the shares that we had originally"},{"Start":"05:08.990 ","End":"05:13.575","Text":"purchased for 7 currency units, so that\u0027s 56,000."},{"Start":"05:13.575 ","End":"05:17.175","Text":"So we take the 64,000 plus the 56,000,"},{"Start":"05:17.175 ","End":"05:19.020","Text":"and that gives us 120,000."},{"Start":"05:19.020 ","End":"05:20.550","Text":"What are we working out here?"},{"Start":"05:20.550 ","End":"05:26.265","Text":"These are the cost of the shares that we have now just sold."},{"Start":"05:26.265 ","End":"05:31.355","Text":"So we take the cost of the shares of 120,000 out of our treasury shares."},{"Start":"05:31.355 ","End":"05:35.750","Text":"Notice that the treasury shares of 64,000 and 70,000 were in"},{"Start":"05:35.750 ","End":"05:37.595","Text":"brackets because those are the shares that were being"},{"Start":"05:37.595 ","End":"05:40.370","Text":"taken out of circulation, called treasury shares."},{"Start":"05:40.370 ","End":"05:43.880","Text":"What we\u0027re doing now is we\u0027re reversing that so they aren\u0027t"},{"Start":"05:43.880 ","End":"05:47.360","Text":"in brackets now because we\u0027re actually putting them back into circulation."},{"Start":"05:47.360 ","End":"05:52.015","Text":"Now, our cash increased by 96,000,"},{"Start":"05:52.015 ","End":"05:55.235","Text":"and our equity increases by 120,000."},{"Start":"05:55.235 ","End":"05:56.966","Text":"That doesn\u0027t balance."},{"Start":"05:56.966 ","End":"06:01.355","Text":"Why is that? That\u0027s because we\u0027ve actually made a loss of 24,000."},{"Start":"06:01.355 ","End":"06:02.780","Text":"Why do I say we\u0027ve made a loss?"},{"Start":"06:02.780 ","End":"06:04.530","Text":"For the first 8,000,"},{"Start":"06:04.530 ","End":"06:07.350","Text":"we\u0027d paid 8 currency units per share,"},{"Start":"06:07.350 ","End":"06:08.730","Text":"and for the next 8,000,"},{"Start":"06:08.730 ","End":"06:11.075","Text":"we\u0027d paid 7 currency units per share."},{"Start":"06:11.075 ","End":"06:15.365","Text":"On both counts, we\u0027ve actually sold at less than they\u0027d cost us"},{"Start":"06:15.365 ","End":"06:19.563","Text":"because we sold the 16,000 shares at 6 currency units."},{"Start":"06:19.563 ","End":"06:20.885","Text":"So we\u0027ve actually made a loss."},{"Start":"06:20.885 ","End":"06:25.565","Text":"That is why you see the difference between what they cost us, 120,000,"},{"Start":"06:25.565 ","End":"06:27.770","Text":"and what we sold them for, 96,000,"},{"Start":"06:27.770 ","End":"06:31.835","Text":"that 24,000 difference coming out of the share premium account."},{"Start":"06:31.835 ","End":"06:35.300","Text":"Then the last step is to simply add up each of those columns to"},{"Start":"06:35.300 ","End":"06:39.750","Text":"give us our closing balances on the 31st, December 20X4."}],"ID":31075},{"Watched":false,"Name":"Exercise 8","Duration":"4m 54s","ChapterTopicVideoID":29461,"CourseChapterTopicPlaylistID":294469,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:03.530","Text":"This exercise involves a share buyback with the cancellation."},{"Start":"00:03.530 ","End":"00:09.810","Text":"On 30th of November 20X4 HIJ has 100,000 ordinary shares outstanding."},{"Start":"00:09.810 ","End":"00:16.305","Text":"This has been reported as a 150,000 in share capital and 850,000 in share premium."},{"Start":"00:16.305 ","End":"00:20.618","Text":"So, that\u0027s a 1,000,000 currency units in total."},{"Start":"00:20.618 ","End":"00:23.360","Text":"If we look at the share capital of a 150,000,"},{"Start":"00:23.360 ","End":"00:28.560","Text":"that means there was 1.5 currency units per share."},{"Start":"00:28.560 ","End":"00:32.465","Text":"If we look at the share premium of 850,000 currency units,"},{"Start":"00:32.465 ","End":"00:36.840","Text":"that means it was 8.5 currency units per share."},{"Start":"00:36.920 ","End":"00:44.030","Text":"The split of 1.5 and 8.5 is important when we\u0027re trying to cancel our shares."},{"Start":"00:44.030 ","End":"00:49.168","Text":"Then we have retained earnings of 1,250,000 currency units,"},{"Start":"00:49.168 ","End":"00:52.315","Text":"and cash of 1,000,000 currency units."},{"Start":"00:52.315 ","End":"00:55.450","Text":"On 1st of December 20X4 HIJ,"},{"Start":"00:55.450 ","End":"01:00.350","Text":"repurchases 12,000 ordinary shares at 14 currency units each."},{"Start":"01:00.350 ","End":"01:04.645","Text":"In other words, we paid 14 currency units each and canceled them."},{"Start":"01:04.645 ","End":"01:07.455","Text":"The financial year-end is 31st December"},{"Start":"01:07.455 ","End":"01:11.810","Text":"required to record these transactions in the worksheet and as usual,"},{"Start":"01:11.810 ","End":"01:14.480","Text":"include a column showing the number of shares."},{"Start":"01:14.480 ","End":"01:19.445","Text":"Let\u0027s look at the solution to the share buyback and cancellation exercise."},{"Start":"01:19.445 ","End":"01:21.499","Text":"We have a column for cash,"},{"Start":"01:21.499 ","End":"01:26.585","Text":"we have a column for the par value of the share capital and the share premium,"},{"Start":"01:26.585 ","End":"01:29.138","Text":"we have a column for retained earnings,"},{"Start":"01:29.138 ","End":"01:32.210","Text":"and then we have a column for the number of shares outstanding."},{"Start":"01:32.210 ","End":"01:36.380","Text":"What you may notice there is that there isn\u0027t a column for treasury shares."},{"Start":"01:36.380 ","End":"01:39.454","Text":"The reason for that is that we\u0027re not keeping our treasury shares,"},{"Start":"01:39.454 ","End":"01:41.270","Text":"we\u0027re going to be canceling them."},{"Start":"01:41.270 ","End":"01:44.745","Text":"We start at their balances on the 30th of November, 20X4,"},{"Start":"01:44.745 ","End":"01:48.695","Text":"cash of a 1,000,000, share capital par value was a 150,000."},{"Start":"01:48.695 ","End":"01:52.355","Text":"The share premium was given as 850,000."},{"Start":"01:52.355 ","End":"01:55.805","Text":"The retained earnings was given as 1,250,000,"},{"Start":"01:55.805 ","End":"01:59.210","Text":"and the number of shares outstanding was given as 100,000."},{"Start":"01:59.210 ","End":"02:02.015","Text":"Then on the 1st of December, 20X4,"},{"Start":"02:02.015 ","End":"02:03.725","Text":"we buy back shares."},{"Start":"02:03.725 ","End":"02:06.080","Text":"We buy back 12,000 shares."},{"Start":"02:06.080 ","End":"02:08.705","Text":"Question is, how much did we pay for them?"},{"Start":"02:08.705 ","End":"02:12.065","Text":"Well, we paid 14 currency units for each year."},{"Start":"02:12.065 ","End":"02:16.310","Text":"So, that means we paid out a 168,000 in cash."},{"Start":"02:16.310 ","End":"02:19.820","Text":"You see our cash being diminished by that sum of money."},{"Start":"02:19.820 ","End":"02:21.425","Text":"Now that\u0027s our assets."},{"Start":"02:21.425 ","End":"02:24.320","Text":"So far our assets have gone down by a 168,000."},{"Start":"02:24.320 ","End":"02:27.425","Text":"Obviously, there\u0027s no implication on liabilities here."},{"Start":"02:27.425 ","End":"02:31.130","Text":"It means that our equity needs to go down by a"},{"Start":"02:31.130 ","End":"02:35.015","Text":"168,000 in order for the accounting equation to balance."},{"Start":"02:35.015 ","End":"02:39.830","Text":"Each of those 12,000 shares had a 1.5 currency unit par value."},{"Start":"02:39.830 ","End":"02:44.055","Text":"We have to reduce our par value account by 18,000."},{"Start":"02:44.055 ","End":"02:50.907","Text":"Our assets have gone down by a 168,000 and our equity is undergone down by 18,000 so far."},{"Start":"02:50.907 ","End":"02:56.030","Text":"That means there\u0027s another 150,000 that our equity needs to be reduced by."},{"Start":"02:56.030 ","End":"03:00.800","Text":"But can we reduce our share premium by a 150,000?"},{"Start":"03:00.800 ","End":"03:02.260","Text":"You\u0027d have to ask yourself,"},{"Start":"03:02.260 ","End":"03:04.790","Text":"how much share premium is in"},{"Start":"03:04.790 ","End":"03:09.392","Text":"that share premium account in relation to those 12,000 shares?"},{"Start":"03:09.392 ","End":"03:16.460","Text":"We worked out earlier that the share premium reflected 8.5 currency units per share."},{"Start":"03:16.460 ","End":"03:18.920","Text":"If we\u0027re canceling 12,000 shares,"},{"Start":"03:18.920 ","End":"03:25.145","Text":"we need to cancel 12,000 multiplied by 8.5 currency units per share,"},{"Start":"03:25.145 ","End":"03:27.740","Text":"and that\u0027s a 102,000."},{"Start":"03:27.740 ","End":"03:33.740","Text":"In other words, you may not reduce your share premium account by 150,000 because there is"},{"Start":"03:33.740 ","End":"03:40.093","Text":"only 102,000 in that share premium account relating to those 12,000 shares."},{"Start":"03:40.093 ","End":"03:43.878","Text":"We reduce the share premium account by a 102,000 instead."},{"Start":"03:43.878 ","End":"03:50.810","Text":"However, that is a problem because we\u0027ve only reduced our equity by 120,000 so far."},{"Start":"03:50.810 ","End":"03:53.345","Text":"Our cash has been reduced by a 168,000,"},{"Start":"03:53.345 ","End":"03:56.930","Text":"our equity has been reduced by a 120,000 so far,"},{"Start":"03:56.930 ","End":"04:00.110","Text":"so we\u0027re looking at 168,000 needs 120,000,"},{"Start":"04:00.110 ","End":"04:03.545","Text":"another 48,000 needs to come out of equity."},{"Start":"04:03.545 ","End":"04:06.455","Text":"You can see what we\u0027ve done there is we\u0027ve taken it out of"},{"Start":"04:06.455 ","End":"04:12.170","Text":"our only other equity account which has our retained earnings."},{"Start":"04:12.170 ","End":"04:15.680","Text":"As you can see, we\u0027ve bought back the shares and we\u0027ve canceled them."},{"Start":"04:15.680 ","End":"04:19.070","Text":"We\u0027ve taken them directly under the par value and share premium account."},{"Start":"04:19.070 ","End":"04:21.455","Text":"We have not debited"},{"Start":"04:21.455 ","End":"04:26.711","Text":"a treasury share account instead because we\u0027re not keeping those shares."},{"Start":"04:26.711 ","End":"04:33.990","Text":"The last thing we have to do is balance each of those columns at the 31st, December 20X4."},{"Start":"04:33.990 ","End":"04:37.200","Text":"Our cash is 832,000,"},{"Start":"04:37.200 ","End":"04:40.985","Text":"our par value of the shares has dropped to a 132,000,"},{"Start":"04:40.985 ","End":"04:44.570","Text":"the share premium has dropped to 748,000,"},{"Start":"04:44.570 ","End":"04:48.050","Text":"our retained earnings has dropped to 1,202,000,"},{"Start":"04:48.050 ","End":"04:54.539","Text":"and the number of shares outstanding has dropped to 88,000."}],"ID":31076},{"Watched":false,"Name":"Exercise 9","Duration":"12m 11s","ChapterTopicVideoID":29462,"CourseChapterTopicPlaylistID":294469,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:04.170","Text":"This exercise deals with equity settled share payments."},{"Start":"00:04.170 ","End":"00:06.915","Text":"On the first of the first 20X2,"},{"Start":"00:06.915 ","End":"00:13.890","Text":"IJK grants a total of 1,200 share options to 6 members of its executive management team."},{"Start":"00:13.890 ","End":"00:16.830","Text":"That\u0027s 200 options each."},{"Start":"00:16.830 ","End":"00:22.050","Text":"These options become exercisable on the first of the first 20X6."},{"Start":"00:22.050 ","End":"00:24.540","Text":"You can see that for years away,"},{"Start":"00:24.540 ","End":"00:27.030","Text":"20X2, 3,"},{"Start":"00:27.030 ","End":"00:29.115","Text":"4, and 5."},{"Start":"00:29.115 ","End":"00:31.260","Text":"Notice it\u0027s the 1st of January,"},{"Start":"00:31.260 ","End":"00:34.830","Text":"20X6, so we exclude 20X6."},{"Start":"00:34.830 ","End":"00:36.210","Text":"There are 4 years."},{"Start":"00:36.210 ","End":"00:42.420","Text":"Each option entitles the holder to 1 share of 1 currency unit per value."},{"Start":"00:42.420 ","End":"00:46.130","Text":"IJK has determined that each option has a fair value"},{"Start":"00:46.130 ","End":"00:49.775","Text":"at the date of grant equal to 14 currency units."},{"Start":"00:49.775 ","End":"00:55.315","Text":"The company expects that all 1,200 options will vest."},{"Start":"00:55.315 ","End":"01:03.910","Text":"During 20X3, 1 of the 5 option holders left the company and another 2 left during 20X4."},{"Start":"01:03.910 ","End":"01:07.740","Text":"The remaining 3 stage beyond the 31st December,"},{"Start":"01:07.740 ","End":"01:12.670","Text":"20X5, which was when these options became exercisable."},{"Start":"01:12.670 ","End":"01:14.455","Text":"Required, A,"},{"Start":"01:14.455 ","End":"01:16.610","Text":"explain the effect of these options on"},{"Start":"01:16.610 ","End":"01:20.300","Text":"the income statement and equity over the vesting period,"},{"Start":"01:20.300 ","End":"01:22.585","Text":"that\u0027s the 4 years."},{"Start":"01:22.585 ","End":"01:28.590","Text":"Then B, complete the transaction worksheet that\u0027s been provided."},{"Start":"01:29.390 ","End":"01:32.200","Text":"Okay. Let\u0027s start with part A."},{"Start":"01:32.200 ","End":"01:36.380","Text":"Explain the effect of these options on the income statement,"},{"Start":"01:36.380 ","End":"01:38.150","Text":"that\u0027s income or expenses,"},{"Start":"01:38.150 ","End":"01:41.680","Text":"and equity over the vesting period."},{"Start":"01:41.680 ","End":"01:43.738","Text":"At the grant date,"},{"Start":"01:43.738 ","End":"01:45.500","Text":"the overall option costs,"},{"Start":"01:45.500 ","End":"01:48.260","Text":"which are going to be spread over the 4-year vesting period."},{"Start":"01:48.260 ","End":"01:52.285","Text":"Remember, these are options that are granted on the 1st of January,"},{"Start":"01:52.285 ","End":"01:56.870","Text":"20X2 and they become exercisable on the 1st of January,"},{"Start":"01:56.870 ","End":"02:00.655","Text":"20X6, so that\u0027s where the 4 years comes from."},{"Start":"02:00.655 ","End":"02:05.595","Text":"At the grant date, the overall option cost is the 1,200"},{"Start":"02:05.595 ","End":"02:12.515","Text":"options measured at the fair value of 14 currency units at grant date."},{"Start":"02:12.515 ","End":"02:14.990","Text":"That gives us 16,800."},{"Start":"02:14.990 ","End":"02:16.745","Text":"That\u0027s your overall option cost."},{"Start":"02:16.745 ","End":"02:18.655","Text":"Now in 20X2,"},{"Start":"02:18.655 ","End":"02:23.469","Text":"the income statement is going to show a proportion of that cost as an expense."},{"Start":"02:23.469 ","End":"02:31.000","Text":"We\u0027re going to take 16,800 and divide by 4 years and expense 4,200."},{"Start":"02:31.000 ","End":"02:32.360","Text":"1 year has gone by,"},{"Start":"02:32.360 ","End":"02:36.830","Text":"so we\u0027re taking 1/4 of that 16,800."},{"Start":"02:36.830 ","End":"02:38.990","Text":"That\u0027s the 1 side of the transaction."},{"Start":"02:38.990 ","End":"02:42.570","Text":"Is the expense of 4,200 and it\u0027s a debit,"},{"Start":"02:42.570 ","End":"02:45.005","Text":"if anyone is interested in the debits and credits."},{"Start":"02:45.005 ","End":"02:48.520","Text":"The other side is going to be the increase in equity."},{"Start":"02:48.520 ","End":"02:54.165","Text":"This is our option reserve account of 4,200 which gets credited."},{"Start":"02:54.165 ","End":"02:56.560","Text":"Then in 20X3,"},{"Start":"02:56.560 ","End":"02:59.840","Text":"we\u0027ve got 1 of our option holders has left the entity"},{"Start":"02:59.840 ","End":"03:03.050","Text":"and they will therefore not be able to exercise their options."},{"Start":"03:03.050 ","End":"03:08.000","Text":"That initial total cost that we expected to have to incur"},{"Start":"03:08.000 ","End":"03:14.080","Text":"is going to be revised downwards because now we only have 5 people instead of 6."},{"Start":"03:14.080 ","End":"03:18.180","Text":"5 out of the 6 are still employed,"},{"Start":"03:18.180 ","End":"03:20.960","Text":"so 5/6 of the 16,800,"},{"Start":"03:20.960 ","End":"03:23.735","Text":"which was the original estimation of the cost,"},{"Start":"03:23.735 ","End":"03:27.565","Text":"gives us a revised cost of 14,000."},{"Start":"03:27.565 ","End":"03:29.700","Text":"Now we\u0027re at the end of 20X3,"},{"Start":"03:29.700 ","End":"03:38.125","Text":"that means we\u0027re 2 years out of the 4 years away from having to exercise these options."},{"Start":"03:38.125 ","End":"03:40.980","Text":"By the end of 20X3,"},{"Start":"03:40.980 ","End":"03:45.540","Text":"the cumulative option cost expense is going to"},{"Start":"03:45.540 ","End":"03:51.090","Text":"be 2 years out of the total 4 years multiplied by 14,000,"},{"Start":"03:51.090 ","End":"03:54.460","Text":"because 14,000 is the latest estimate of the total cost."},{"Start":"03:54.460 ","End":"04:00.065","Text":"That 7,000 is the cumulative expense relating to these options."},{"Start":"04:00.065 ","End":"04:05.900","Text":"Equity will now reflect an option reserve closing balance of 7,000."},{"Start":"04:05.900 ","End":"04:08.015","Text":"How did we get there?"},{"Start":"04:08.015 ","End":"04:12.855","Text":"Well, 4,200 was expensed in 20X2,"},{"Start":"04:12.855 ","End":"04:16.880","Text":"so that means that in 20X3 we\u0027re going to have to expense another"},{"Start":"04:16.880 ","End":"04:22.325","Text":"2,800 because that\u0027s where we get the cumulative expense of 7,000 from."},{"Start":"04:22.325 ","End":"04:26.675","Text":"To put another way, the cumulative expense today it must be 7,000,"},{"Start":"04:26.675 ","End":"04:28.715","Text":"being 2 years out of the 4 years,"},{"Start":"04:28.715 ","End":"04:32.230","Text":"multiplied by the revised cost of 14,000."},{"Start":"04:32.230 ","End":"04:34.770","Text":"It must be 7,000 to date by the end of"},{"Start":"04:34.770 ","End":"04:38.540","Text":"23 and we subtract what we\u0027ve expensed in the past."},{"Start":"04:38.540 ","End":"04:41.540","Text":"There was only 1 year in the past and that was 20X2,"},{"Start":"04:41.540 ","End":"04:44.410","Text":"so 4,200 previous expensed."},{"Start":"04:44.410 ","End":"04:49.530","Text":"That\u0027s where we get our 2,800 expense in 20X3."},{"Start":"04:49.530 ","End":"04:51.660","Text":"Moving on to 20X4."},{"Start":"04:51.660 ","End":"04:56.765","Text":"In 20X4, after 2 more option holders left the entity,"},{"Start":"04:56.765 ","End":"04:59.950","Text":"the initial option cost is revised downwards further."},{"Start":"04:59.950 ","End":"05:04.250","Text":"Now we\u0027ve only got 3 people out of the original 6 who are still employed."},{"Start":"05:04.250 ","End":"05:11.510","Text":"We take 3/6 multiplied by the original cost of 16,800 and that gives us 8,400."},{"Start":"05:11.510 ","End":"05:18.680","Text":"That is the total cost relating to these options that the company is expecting to incur."},{"Start":"05:19.010 ","End":"05:21.720","Text":"In 20X4 however,"},{"Start":"05:21.720 ","End":"05:26.690","Text":"we are 3 years into the 4 years vesting periods."},{"Start":"05:26.690 ","End":"05:29.810","Text":"Now we take 3/4 of the 8,400,"},{"Start":"05:29.810 ","End":"05:31.359","Text":"the revised cost,"},{"Start":"05:31.359 ","End":"05:33.885","Text":"and that gives us 6,300."},{"Start":"05:33.885 ","End":"05:39.110","Text":"That\u0027s the cumulative expense to the end of 20X4."},{"Start":"05:39.110 ","End":"05:44.660","Text":"Therefore, the equity will show an option reserved closing balance of 6,300."},{"Start":"05:44.660 ","End":"05:48.920","Text":"Now, what is the journal entry that we need to process to get"},{"Start":"05:48.920 ","End":"05:55.340","Text":"that cumulative expense of 6,300 or cumulative equity of 6,300?"},{"Start":"05:55.340 ","End":"05:58.895","Text":"We look to see what was expensed previously."},{"Start":"05:58.895 ","End":"06:00.980","Text":"In 20X2 and 20X3,"},{"Start":"06:00.980 ","End":"06:03.500","Text":"we ask ourselves, how much was expensed?"},{"Start":"06:03.500 ","End":"06:07.855","Text":"We know 7,000 was expensed by the end of 20X3,"},{"Start":"06:07.855 ","End":"06:12.845","Text":"that\u0027s more than we need to have expensed cumulatively by the end of 20X4."},{"Start":"06:12.845 ","End":"06:18.875","Text":"That simply means we\u0027re going to have a negative expense in 20X4. How do we get out?"},{"Start":"06:18.875 ","End":"06:23.210","Text":"The cumulative expense to date must be 6,300,"},{"Start":"06:23.210 ","End":"06:25.250","Text":"that\u0027s 3 out of the 4 years,"},{"Start":"06:25.250 ","End":"06:28.670","Text":"multiplied by the latest estimate of 8,400,"},{"Start":"06:28.670 ","End":"06:31.210","Text":"giving us that 6,300."},{"Start":"06:31.210 ","End":"06:34.245","Text":"We subtract what we\u0027ve previously expensed."},{"Start":"06:34.245 ","End":"06:37.265","Text":"Too much. We\u0027ve expensed 7,000,"},{"Start":"06:37.265 ","End":"06:38.930","Text":"so we need to revise some of that."},{"Start":"06:38.930 ","End":"06:40.760","Text":"We\u0027re going to have a negative expense,"},{"Start":"06:40.760 ","End":"06:43.860","Text":"like an income, of 700."},{"Start":"06:45.890 ","End":"06:48.840","Text":"Now moving on to 20X5."},{"Start":"06:48.840 ","End":"06:51.440","Text":"The cumulative expense by the end of 20X5."},{"Start":"06:51.440 ","End":"06:55.730","Text":"Well, we haven\u0027t had any other employees leave,"},{"Start":"06:55.730 ","End":"06:58.460","Text":"so the total cost is still 8,400,"},{"Start":"06:58.460 ","End":"07:01.070","Text":"but we\u0027re now multiplying it by 4 out of 4."},{"Start":"07:01.070 ","End":"07:07.295","Text":"In other words, all 4 years of that vesting period have now passed and therefore,"},{"Start":"07:07.295 ","End":"07:09.230","Text":"we multiply it by 4/4."},{"Start":"07:09.230 ","End":"07:15.400","Text":"That means that the total expense to date cumulatively by the end of 20X5 is 8,400."},{"Start":"07:15.400 ","End":"07:20.675","Text":"The equity balance, cumulatively closing balance in other words,"},{"Start":"07:20.675 ","End":"07:25.130","Text":"must also reflect 8,400. How do we get there?"},{"Start":"07:25.130 ","End":"07:28.010","Text":"Well, what journal entry do we need to process?"},{"Start":"07:28.010 ","End":"07:30.395","Text":"By 20X3, as you can see above,"},{"Start":"07:30.395 ","End":"07:33.310","Text":"6,300 had been expensed to date,"},{"Start":"07:33.310 ","End":"07:36.005","Text":"so that was the cumulative expense to date."},{"Start":"07:36.005 ","End":"07:41.335","Text":"That therefore means that there is a further expense in 20X5 that we need to process."},{"Start":"07:41.335 ","End":"07:45.785","Text":"The cumulative expense to date is 8,400,"},{"Start":"07:45.785 ","End":"07:48.350","Text":"subtract what we\u0027ve previously expensed,"},{"Start":"07:48.350 ","End":"07:57.350","Text":"the 6,300, and we get to an extra expense that needs to be processed in 20X5 of 2,100."},{"Start":"07:57.350 ","End":"08:00.740","Text":"We\u0027ll debit the expense with 2,100 and we credit"},{"Start":"08:00.740 ","End":"08:05.060","Text":"the equity option reserve account plus 2,100."},{"Start":"08:05.060 ","End":"08:09.905","Text":"We get our equity closing balance of 8,400."},{"Start":"08:09.905 ","End":"08:13.850","Text":"Just for interest, this cumulative expense or"},{"Start":"08:13.850 ","End":"08:17.990","Text":"the option reserve equity account of 8,400,"},{"Start":"08:17.990 ","End":"08:19.729","Text":"what does it actually reflect?"},{"Start":"08:19.729 ","End":"08:22.955","Text":"Well, it\u0027s reflecting the cost to the entity."},{"Start":"08:22.955 ","End":"08:24.935","Text":"It\u0027s 3 employees left,"},{"Start":"08:24.935 ","End":"08:28.730","Text":"each of those employees are getting 200 options and each of"},{"Start":"08:28.730 ","End":"08:33.775","Text":"those 200 options is worth a fair value of 14 currency units."},{"Start":"08:33.775 ","End":"08:39.290","Text":"Let\u0027s move on to part B. Complete the transactions worksheet."},{"Start":"08:39.290 ","End":"08:45.890","Text":"I\u0027ve just put some arbitrary figures in for the share capital and the share premium."},{"Start":"08:45.890 ","End":"08:49.490","Text":"Assuming a par value of the share capital of 100,000,"},{"Start":"08:49.490 ","End":"08:52.250","Text":"and we\u0027re assuming a shape premium of 900,000."},{"Start":"08:52.250 ","End":"08:53.990","Text":"We don\u0027t need those figures at all,"},{"Start":"08:53.990 ","End":"08:56.740","Text":"I put them in just for completeness sake."},{"Start":"08:56.740 ","End":"09:01.515","Text":"These are the equity accounts that are more of interest to us."},{"Start":"09:01.515 ","End":"09:03.745","Text":"31st of December,"},{"Start":"09:03.745 ","End":"09:09.370","Text":"20X2, we worked out that we had an expense of 4,200."},{"Start":"09:09.370 ","End":"09:14.660","Text":"We\u0027re putting 4,200 into the share options reserve accounts and if you\u0027re interested,"},{"Start":"09:14.660 ","End":"09:16.175","Text":"that\u0027s a credit entry."},{"Start":"09:16.175 ","End":"09:21.605","Text":"Then we said 4,200 will be our expense in 20X2."},{"Start":"09:21.605 ","End":"09:26.540","Text":"That goes into the income statement column and that reflects an expense."},{"Start":"09:26.540 ","End":"09:29.380","Text":"If you\u0027re interested, that\u0027s a debit entry."},{"Start":"09:29.380 ","End":"09:33.145","Text":"Then the next year, 31st of December, 20X3,"},{"Start":"09:33.145 ","End":"09:37.370","Text":"we increased our share option reserve by 2,800,"},{"Start":"09:37.370 ","End":"09:40.175","Text":"so that\u0027s a credit to the share options reserve account,"},{"Start":"09:40.175 ","End":"09:41.880","Text":"increasing it if you like."},{"Start":"09:41.880 ","End":"09:48.900","Text":"The 2,800 were the additional expense that needed to be processed in 20X3."},{"Start":"09:49.040 ","End":"09:51.800","Text":"That\u0027s reducing our income statement."},{"Start":"09:51.800 ","End":"09:53.855","Text":"In other words, it\u0027s reducing our profit."},{"Start":"09:53.855 ","End":"09:55.925","Text":"Moving on to 20X4."},{"Start":"09:55.925 ","End":"09:59.345","Text":"If you recall, this one was a negative expense,"},{"Start":"09:59.345 ","End":"10:02.585","Text":"so here we are reducing our share option reserve."},{"Start":"10:02.585 ","End":"10:05.190","Text":"If you look at 20X2 and 20X3,"},{"Start":"10:05.190 ","End":"10:12.340","Text":"we\u0027ve got share option reserve of 4,200 and 2,800 which came to 7,000."},{"Start":"10:12.340 ","End":"10:15.430","Text":"Then we needed to reduce it to 6,300,"},{"Start":"10:15.430 ","End":"10:17.825","Text":"so we\u0027re subtracting 700."},{"Start":"10:17.825 ","End":"10:19.850","Text":"If you\u0027re interested in the debits and credits,"},{"Start":"10:19.850 ","End":"10:22.040","Text":"that\u0027s a debit entry in"},{"Start":"10:22.040 ","End":"10:25.615","Text":"the share options reserve account because that reduces your equity."},{"Start":"10:25.615 ","End":"10:27.440","Text":"Now on the other side of it,"},{"Start":"10:27.440 ","End":"10:29.755","Text":"you\u0027ll notice this doesn\u0027t have brackets."},{"Start":"10:29.755 ","End":"10:32.355","Text":"In the income statement 20X4 column,"},{"Start":"10:32.355 ","End":"10:33.880","Text":"we\u0027ve got 700 there,"},{"Start":"10:33.880 ","End":"10:36.740","Text":"doesn\u0027t have brackets and that\u0027s because it\u0027s a negative expense,"},{"Start":"10:36.740 ","End":"10:38.090","Text":"or income if you like."},{"Start":"10:38.090 ","End":"10:42.770","Text":"Then 20X5 we increased our share option reserve."},{"Start":"10:42.770 ","End":"10:49.065","Text":"If you add 4,200 plus the 2,800 and you subtract the 700,"},{"Start":"10:49.065 ","End":"10:52.565","Text":"that had reached 6,300."},{"Start":"10:52.565 ","End":"10:55.985","Text":"But if you remember from the calculations which was done for part A,"},{"Start":"10:55.985 ","End":"10:58.055","Text":"by the end of 20X5,"},{"Start":"10:58.055 ","End":"11:01.595","Text":"we needed our share option reserve to show 8,400,"},{"Start":"11:01.595 ","End":"11:04.730","Text":"so we needed to add another 2,100 there."},{"Start":"11:04.730 ","End":"11:07.115","Text":"That\u0027s a credit to the share option reserve."},{"Start":"11:07.115 ","End":"11:10.550","Text":"Then on this side under the income statements for 20X5,"},{"Start":"11:10.550 ","End":"11:13.020","Text":"we\u0027ve got a negative 2,100,"},{"Start":"11:13.020 ","End":"11:15.195","Text":"which is a further expense."},{"Start":"11:15.195 ","End":"11:19.820","Text":"Then all you have to do now is total each of those columns."},{"Start":"11:19.820 ","End":"11:22.935","Text":"The share capital par value and the share capital share premium."},{"Start":"11:22.935 ","End":"11:25.050","Text":"Remember, those are just assumed figures."},{"Start":"11:25.050 ","End":"11:31.995","Text":"The share option reserve account is now showing the 8,400,"},{"Start":"11:31.995 ","End":"11:36.375","Text":"then the income statement of 20X2 shows the expense of 4,200,"},{"Start":"11:36.375 ","End":"11:40.200","Text":"income statement in 20X3 shows expensive 2,800,"},{"Start":"11:40.200 ","End":"11:45.500","Text":"the income statement of 20X4 shows the income or negative expenses of 700,"},{"Start":"11:45.500 ","End":"11:50.360","Text":"and the income statement of 20X5 shows an expense of 2,100."},{"Start":"11:50.360 ","End":"11:53.855","Text":"Those are all of the amounts that we calculated in part A."},{"Start":"11:53.855 ","End":"11:58.910","Text":"The impact on our equity was 8,400 and"},{"Start":"11:58.910 ","End":"12:04.880","Text":"the impact on the income statement in each of those years is shown as 4,200,"},{"Start":"12:04.880 ","End":"12:07.834","Text":"2,800, income is 700,"},{"Start":"12:07.834 ","End":"12:11.370","Text":"and then a further expense of 2,100."}],"ID":31077},{"Watched":false,"Name":"Exercise 10","Duration":"6m 22s","ChapterTopicVideoID":29463,"CourseChapterTopicPlaylistID":294469,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.830 ","End":"00:05.505","Text":"This exercise deals with employee stock options."},{"Start":"00:05.505 ","End":"00:12.465","Text":"But we are now showing how to account for the exercise of these stock options."},{"Start":"00:12.465 ","End":"00:13.890","Text":"It\u0027s the second stage."},{"Start":"00:13.890 ","End":"00:15.960","Text":"The first stage is where the stock options are"},{"Start":"00:15.960 ","End":"00:18.480","Text":"granted and then they vest over a period of time."},{"Start":"00:18.480 ","End":"00:22.320","Text":"During the period of vesting is where the cost of"},{"Start":"00:22.320 ","End":"00:27.645","Text":"those options get expensed and the options reserve account gets created."},{"Start":"00:27.645 ","End":"00:34.125","Text":"This is the next stage where the option holders exercise their options."},{"Start":"00:34.125 ","End":"00:36.570","Text":"On the 1st of January 20X6,"},{"Start":"00:36.570 ","End":"00:41.355","Text":"the stock options of 3 employees of JKL became exercisable."},{"Start":"00:41.355 ","End":"00:44.905","Text":"Each employee holds 200 options."},{"Start":"00:44.905 ","End":"00:52.055","Text":"Each option entitles the holder to 1 share of 1 currency unit per value per share."},{"Start":"00:52.055 ","End":"00:56.915","Text":"Now the fair value per option was 14 currency units on grant date,"},{"Start":"00:56.915 ","End":"01:01.220","Text":"and the exercise price of each option is 10 currency units."},{"Start":"01:01.220 ","End":"01:03.515","Text":"Now that 14 currency unit,"},{"Start":"01:03.515 ","End":"01:10.630","Text":"fair value on grant date is what we use to measure the cost of those options."},{"Start":"01:10.630 ","End":"01:16.730","Text":"The exercise price of 10 currency units that\u0027s used to calculate the amount of"},{"Start":"01:16.730 ","End":"01:19.400","Text":"cash that we would receive if and when"},{"Start":"01:19.400 ","End":"01:22.975","Text":"the option holder decides to exercise their options."},{"Start":"01:22.975 ","End":"01:27.369","Text":"Let\u0027s move along. During 20X6,"},{"Start":"01:27.369 ","End":"01:34.000","Text":"300 of the 600 options were exercised when the share price was 25 currency units."},{"Start":"01:34.000 ","End":"01:42.200","Text":"That then means that instead of us receiving 600 options times 10 currency units,"},{"Start":"01:42.200 ","End":"01:44.195","Text":"6,000 currency units,"},{"Start":"01:44.195 ","End":"01:48.380","Text":"only 300 of the 600 options were exercised,"},{"Start":"01:48.380 ","End":"01:53.315","Text":"and therefore only 300 times 10 currency units will be received in cash."},{"Start":"01:53.315 ","End":"01:56.390","Text":"The 25 currency units that we\u0027re told about,"},{"Start":"01:56.390 ","End":"01:58.475","Text":"there is really a red herring."},{"Start":"01:58.475 ","End":"02:02.270","Text":"Which means it\u0027s supposed to just simply throw you of course."},{"Start":"02:02.270 ","End":"02:04.640","Text":"But what this means here is that if"},{"Start":"02:04.640 ","End":"02:09.665","Text":"the exercise price is lower than the share price of 25,"},{"Start":"02:09.665 ","End":"02:12.020","Text":"the options are in the money,"},{"Start":"02:12.020 ","End":"02:17.480","Text":"which means that the option holder would potentially exercise their options."},{"Start":"02:17.480 ","End":"02:20.450","Text":"In this case, the options are in the money because"},{"Start":"02:20.450 ","End":"02:26.545","Text":"the exercise price is far cheaper than the current share price or 25 currency units."},{"Start":"02:26.545 ","End":"02:28.430","Text":"The 8,400 currency units,"},{"Start":"02:28.430 ","End":"02:30.455","Text":"we can actually calculate that if you like."},{"Start":"02:30.455 ","End":"02:34.430","Text":"It\u0027s the 200 options times the 3 employees multiply it by"},{"Start":"02:34.430 ","End":"02:39.455","Text":"the fair value of 14 currency units valued on grant date."},{"Start":"02:39.455 ","End":"02:42.470","Text":"Other than the subsequent exercise of the stock options,"},{"Start":"02:42.470 ","End":"02:45.850","Text":"there were no other transactions affecting equity."},{"Start":"02:45.850 ","End":"02:50.525","Text":"Required, complete the worksheet showing the effect on equity."},{"Start":"02:50.525 ","End":"02:54.695","Text":"Let\u0027s look at the solution to the equity settled share payments."},{"Start":"02:54.695 ","End":"02:56.450","Text":"On the first of the first 20X6,"},{"Start":"02:56.450 ","End":"02:58.790","Text":"we\u0027ve got the opening balances of the sheer capsule,"},{"Start":"02:58.790 ","End":"03:01.040","Text":"par value we were told as a 100,000,"},{"Start":"03:01.040 ","End":"03:04.615","Text":"the shape premium we were told was 900,000 and"},{"Start":"03:04.615 ","End":"03:09.130","Text":"stock options reserve we were told was 8,400."},{"Start":"03:09.130 ","End":"03:12.830","Text":"That 8,400 was given to us,"},{"Start":"03:12.830 ","End":"03:17.135","Text":"but we can work it out given the information that the question gave us."},{"Start":"03:17.135 ","End":"03:19.130","Text":"We\u0027ve got 3 employees."},{"Start":"03:19.130 ","End":"03:22.460","Text":"Each of the employees had 200 options, each."},{"Start":"03:22.460 ","End":"03:26.405","Text":"Multiply it by the fair value on grant date of 14 currency units,"},{"Start":"03:26.405 ","End":"03:28.585","Text":"and that gives you the 8,400."},{"Start":"03:28.585 ","End":"03:33.590","Text":"That\u0027s just for interests because you were given that 8,400."},{"Start":"03:33.590 ","End":"03:38.840","Text":"During 20X6, we have 300 stock options that are exercised."},{"Start":"03:38.840 ","End":"03:40.400","Text":"How do we account for that?"},{"Start":"03:40.400 ","End":"03:42.305","Text":"For the 300 stock options,"},{"Start":"03:42.305 ","End":"03:49.155","Text":"each stock option converted to an ordinary share with a 1 currency units par value."},{"Start":"03:49.155 ","End":"03:53.375","Text":"There\u0027s 300 options times a par value of 1 currency units."},{"Start":"03:53.375 ","End":"03:58.600","Text":"That must mean that our share capital par value account increases by 300."},{"Start":"03:58.600 ","End":"04:01.625","Text":"But that\u0027s not all. We received cash."},{"Start":"04:01.625 ","End":"04:03.575","Text":"How much cash did we receive?"},{"Start":"04:03.575 ","End":"04:06.200","Text":"Well, there are 300 options and we were"},{"Start":"04:06.200 ","End":"04:09.320","Text":"told that the exercise price was 10 currency units."},{"Start":"04:09.320 ","End":"04:11.870","Text":"That means that the option holder has to pay"},{"Start":"04:11.870 ","End":"04:15.745","Text":"10 currency units if they want to exercise their option."},{"Start":"04:15.745 ","End":"04:19.905","Text":"That means we receive 3,000 currency units."},{"Start":"04:19.905 ","End":"04:23.660","Text":"If we received 3,000 currency units, our cash,"},{"Start":"04:23.660 ","End":"04:28.160","Text":"our asset, cash, increased by 3,000 currency units."},{"Start":"04:28.160 ","End":"04:31.565","Text":"That therefore means that our equity must go up by 3,000."},{"Start":"04:31.565 ","End":"04:33.005","Text":"All we\u0027ve done at the moment,"},{"Start":"04:33.005 ","End":"04:36.380","Text":"we\u0027ve increased the share capital par value with 300."},{"Start":"04:36.380 ","End":"04:42.435","Text":"That therefore means that our share premium must go up by the balance of 2,700."},{"Start":"04:42.435 ","End":"04:46.310","Text":"The last step is to simply total each of those columns."},{"Start":"04:46.310 ","End":"04:49.280","Text":"Our par value is now sitting at a 100,300,"},{"Start":"04:49.280 ","End":"04:53.498","Text":"our share premium has increased to 902,700,"},{"Start":"04:53.498 ","End":"04:58.135","Text":"and our stock options reserve remains at 8,400."},{"Start":"04:58.135 ","End":"04:59.360","Text":"Now that\u0027s 1 option."},{"Start":"04:59.360 ","End":"05:00.815","Text":"There is an alternative."},{"Start":"05:00.815 ","End":"05:06.710","Text":"The alternative is that we can get rid of that stock option reserve ordinary shares,"},{"Start":"05:06.710 ","End":"05:09.740","Text":"which is the 300 options now converted into ordinary shares,"},{"Start":"05:09.740 ","End":"05:12.230","Text":"multiplied by their par value of 1."},{"Start":"05:12.230 ","End":"05:14.345","Text":"Pop that into the par value column."},{"Start":"05:14.345 ","End":"05:17.600","Text":"The rest of the cash that we receive is over and above"},{"Start":"05:17.600 ","End":"05:22.290","Text":"the par value and therefore we treat that as a share premium. That\u0027s step 1."},{"Start":"05:22.290 ","End":"05:23.660","Text":"Then the second step,"},{"Start":"05:23.660 ","End":"05:25.279","Text":"if you go with this alternative,"},{"Start":"05:25.279 ","End":"05:28.505","Text":"is to reverse out of the stock options,"},{"Start":"05:28.505 ","End":"05:31.100","Text":"the portion of the options that are now exercised."},{"Start":"05:31.100 ","End":"05:35.990","Text":"In this case, remember we had 600 options, 300 were exercised."},{"Start":"05:35.990 ","End":"05:41.390","Text":"That means half of our options have now being converted into ordinary shares."},{"Start":"05:41.390 ","End":"05:46.070","Text":"Half of those stock options need to come out. How do we do that?"},{"Start":"05:46.070 ","End":"05:50.945","Text":"We simply take half of 8,400, which is 4,200,"},{"Start":"05:50.945 ","End":"05:53.720","Text":"deduct that from the stock options reserve,"},{"Start":"05:53.720 ","End":"05:57.025","Text":"and pop that into the share premium account as well."},{"Start":"05:57.025 ","End":"05:59.690","Text":"We take the 4,200 out of"},{"Start":"05:59.690 ","End":"06:04.085","Text":"the stock options reserve and we pop that into the share premium account."},{"Start":"06:04.085 ","End":"06:06.920","Text":"The closing balances are then your last step."},{"Start":"06:06.920 ","End":"06:09.385","Text":"Total the par value column."},{"Start":"06:09.385 ","End":"06:11.985","Text":"We now have 100,300."},{"Start":"06:11.985 ","End":"06:13.940","Text":"The share premium, we now sitting with"},{"Start":"06:13.940 ","End":"06:21.720","Text":"906,900 and the stock options reserve has reduced to 4,200."}],"ID":31078},{"Watched":false,"Name":"Exercise 11","Duration":"9m 37s","ChapterTopicVideoID":29464,"CourseChapterTopicPlaylistID":294469,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.880","Text":"Here we\u0027re going to be given a number of transactions,"},{"Start":"00:02.880 ","End":"00:06.705","Text":"and we\u0027re going to be asked to produce the Statement of Changes in Equity."},{"Start":"00:06.705 ","End":"00:12.100","Text":"KLM prepares it\u0027s financial statements for the year ended 31st, December 20X1."},{"Start":"00:12.100 ","End":"00:13.680","Text":"The balance sheet for 31st,"},{"Start":"00:13.680 ","End":"00:18.044","Text":"December 20x0 last year shows the following amounts in the equity section;"},{"Start":"00:18.044 ","End":"00:21.380","Text":"we have ordinary share capital of 36,000 currency units made up"},{"Start":"00:21.380 ","End":"00:28.150","Text":"of shares of a par value of 1 currency."},{"Start":"00:28.150 ","End":"00:31.280","Text":"We have ordinary share capital of 36,000,"},{"Start":"00:31.280 ","End":"00:35.100","Text":"made up of shares with the par value of 1 currency unit."},{"Start":"00:38.180 ","End":"00:42.017","Text":"Share premium of 45,000,"},{"Start":"00:42.017 ","End":"00:43.890","Text":"retained earnings of 40,000,"},{"Start":"00:43.890 ","End":"00:46.855","Text":"and total equity of 121,000."},{"Start":"00:46.855 ","End":"00:50.330","Text":"The further information we\u0027re given for 20X1,"},{"Start":"00:50.330 ","End":"00:51.935","Text":"starting with Number 1,"},{"Start":"00:51.935 ","End":"00:55.580","Text":"we have 10,000 shares with the par value of 1 currency unit"},{"Start":"00:55.580 ","End":"01:00.220","Text":"each will repurchase for 24,000 currency units in total."},{"Start":"01:00.220 ","End":"01:04.185","Text":"That means 24,000 currency units over 10,000 shares."},{"Start":"01:04.185 ","End":"01:07.355","Text":"We paid 2.4 for currency units per share."},{"Start":"01:07.355 ","End":"01:09.320","Text":"Now off those 10,000 shares,"},{"Start":"01:09.320 ","End":"01:13.125","Text":"3,000 shares were subsequently canceled,"},{"Start":"01:13.125 ","End":"01:16.700","Text":"and the rest same thousand were held us treasury shares."},{"Start":"01:16.700 ","End":"01:19.010","Text":"On 30th of June 20X1,"},{"Start":"01:19.010 ","End":"01:20.255","Text":"halfway through the year,"},{"Start":"01:20.255 ","End":"01:26.045","Text":"15,000 preference shares were issued at 5 currency units each with no par value."},{"Start":"01:26.045 ","End":"01:31.715","Text":"These shares pay 0.75 of a currency unit per share in terms of an annual dividend."},{"Start":"01:31.715 ","End":"01:34.955","Text":"Obviously since they were issued in the middle of 20X1,"},{"Start":"01:34.955 ","End":"01:39.130","Text":"they\u0027ll be entitled to only half the annual dividend in 20X1."},{"Start":"01:39.130 ","End":"01:44.445","Text":"Then land carried a 50,000 was revalued to 65,000."},{"Start":"01:44.445 ","End":"01:48.875","Text":"Number 4 we\u0027ve got ordinary dividends declared of 12,000 currency units,"},{"Start":"01:48.875 ","End":"01:51.905","Text":"and then the preference dividend was also paid."},{"Start":"01:51.905 ","End":"01:53.630","Text":"The profit for the year ended 31st,"},{"Start":"01:53.630 ","End":"01:57.035","Text":"December 20X1 for the company was 53,000."},{"Start":"01:57.035 ","End":"01:59.765","Text":"And the requirement is to prepare a statement of changes in"},{"Start":"01:59.765 ","End":"02:04.405","Text":"equity for the year 20X1 using the worksheet that was provided."},{"Start":"02:04.405 ","End":"02:07.850","Text":"Let\u0027s do the solution for the Statement of Changes in Equity."},{"Start":"02:07.850 ","End":"02:10.430","Text":"We\u0027ve got columns here for the ordinary shares,"},{"Start":"02:10.430 ","End":"02:12.905","Text":"the par value, and the premium,"},{"Start":"02:12.905 ","End":"02:15.335","Text":"preference shares, treasury shares,"},{"Start":"02:15.335 ","End":"02:18.470","Text":"revaluation reserve, retained earnings,"},{"Start":"02:18.470 ","End":"02:20.000","Text":"and a total column."},{"Start":"02:20.000 ","End":"02:24.640","Text":"We\u0027re going to start with the opening balances on the first of the first 20X1."},{"Start":"02:24.640 ","End":"02:27.740","Text":"We were given that information there\u0027s our ordinary share capital,"},{"Start":"02:27.740 ","End":"02:29.960","Text":"the par value 36,000,"},{"Start":"02:29.960 ","End":"02:34.625","Text":"the share premium portion of our ordinary share capital 45,000,"},{"Start":"02:34.625 ","End":"02:40.450","Text":"retained earnings, 40,000, total equity 121,000."},{"Start":"02:40.450 ","End":"02:44.170","Text":"There it is. Par value 36,000,"},{"Start":"02:44.170 ","End":"02:46.050","Text":"share premium 45,000,"},{"Start":"02:46.050 ","End":"02:47.670","Text":"40,000 for retained earnings,"},{"Start":"02:47.670 ","End":"02:50.460","Text":"and 121,000 for total."},{"Start":"02:50.460 ","End":"02:52.740","Text":"Then in terms of the further information,"},{"Start":"02:52.740 ","End":"02:58.080","Text":"Number 1 was 10,000 shares of the par value of 1 were repurchased for 24,000,"},{"Start":"02:58.080 ","End":"03:01.625","Text":"so that was 2.4 currency units per share."},{"Start":"03:01.625 ","End":"03:04.339","Text":"We\u0027re told that 3,000 were subsequently"},{"Start":"03:04.339 ","End":"03:08.135","Text":"canceled and the rest were held as treasury shares."},{"Start":"03:08.135 ","End":"03:12.290","Text":"Let\u0027s first deal with the 3,000 shares that were subsequently canceled."},{"Start":"03:12.290 ","End":"03:17.503","Text":"Those 3,000 shares we paid 2.4 per share. So let\u0027s put that in here."},{"Start":"03:17.503 ","End":"03:22.565","Text":"The repurchasing cancellation of the 3,000 owned shares."},{"Start":"03:22.565 ","End":"03:25.490","Text":"Remember if we\u0027re going to cancel the shares,"},{"Start":"03:25.490 ","End":"03:32.185","Text":"we\u0027re going to take that amount out of the par value and the premium columns directly."},{"Start":"03:32.185 ","End":"03:35.450","Text":"This is not treasury shares, we\u0027re canceling them,"},{"Start":"03:35.450 ","End":"03:38.300","Text":"so we\u0027re taking them directly out of the par value,"},{"Start":"03:38.300 ","End":"03:40.160","Text":"and the premium columns."},{"Start":"03:40.160 ","End":"03:44.730","Text":"3,000 shares at 2.4 currency units per share so,"},{"Start":"03:44.730 ","End":"03:47.595","Text":"we paid 7,200 in cash."},{"Start":"03:47.595 ","End":"03:50.190","Text":"Our cash, in other words our assets goes down by"},{"Start":"03:50.190 ","End":"03:55.675","Text":"7,200 which means our equity also goes down by 7,200."},{"Start":"03:55.675 ","End":"03:58.505","Text":"Now which columns are going to be affected?"},{"Start":"03:58.505 ","End":"04:01.025","Text":"Well, starting with the par value,"},{"Start":"04:01.025 ","End":"04:05.375","Text":"each of those 3,000 shares had a 1 currency unit par value,"},{"Start":"04:05.375 ","End":"04:10.190","Text":"so 3,000 par value comes out of the par value column."},{"Start":"04:10.190 ","End":"04:12.800","Text":"Then we realize well,"},{"Start":"04:12.800 ","End":"04:14.510","Text":"we\u0027ve got to reduce our equity by"},{"Start":"04:14.510 ","End":"04:18.890","Text":"7,200 and all we\u0027ve done is we\u0027ve reduced it by 3,000 so far."},{"Start":"04:18.890 ","End":"04:22.295","Text":"So 4,200 still needs to be taken out."},{"Start":"04:22.295 ","End":"04:24.125","Text":"Is it the share premium?"},{"Start":"04:24.125 ","End":"04:26.450","Text":"Well, we\u0027re going to debit the share premium,"},{"Start":"04:26.450 ","End":"04:28.640","Text":"but it needs to be limited to"},{"Start":"04:28.640 ","End":"04:36.120","Text":"the amount by which those 3,000 shares contributed to the premium of 45,000."},{"Start":"04:38.960 ","End":"04:46.550","Text":"We\u0027ve got 3,000 shares of 36,000 shares that have been repurchased. That\u0027s a fraction."},{"Start":"04:46.550 ","End":"04:51.785","Text":"We multiply that fraction by the 45,000 premium opening balance,"},{"Start":"04:51.785 ","End":"04:57.815","Text":"and we take that portion of that 45,000 premium out of the premium column."},{"Start":"04:57.815 ","End":"05:00.620","Text":"There\u0027s 3,750. So in other words,"},{"Start":"05:00.620 ","End":"05:01.820","Text":"those 3,000 shares,"},{"Start":"05:01.820 ","End":"05:08.975","Text":"what we\u0027re saying is those 3,000 shares contributed 3,750 to the premium of 45,000,"},{"Start":"05:08.975 ","End":"05:14.230","Text":"and therefore we\u0027re taking that 3,750 out of the premium column."},{"Start":"05:14.230 ","End":"05:20.800","Text":"But now that is not yet enough because it\u0027s 7,200 that we need to reduce our equity by,"},{"Start":"05:20.800 ","End":"05:24.305","Text":"so far, we\u0027ve reduced it by 3,000 in terms of the par value,"},{"Start":"05:24.305 ","End":"05:27.860","Text":"another 3,750 in terms of the premium."},{"Start":"05:27.860 ","End":"05:33.140","Text":"We still got another 450 to go and we take that out of retained earnings."},{"Start":"05:33.140 ","End":"05:36.920","Text":"Then we go back to the information we were told about the"},{"Start":"05:36.920 ","End":"05:40.505","Text":"10,000 shares that were repurchased of which 3,000 were canceled."},{"Start":"05:40.505 ","End":"05:42.755","Text":"The rest were held as treasury shares."},{"Start":"05:42.755 ","End":"05:45.190","Text":"That\u0027s 7,000 shares."},{"Start":"05:45.190 ","End":"05:47.655","Text":"10,000 shares were repurchased,"},{"Start":"05:47.655 ","End":"05:52.325","Text":"3,000 were canceled, meaning we have 7,000 treasury shares."},{"Start":"05:52.325 ","End":"05:55.460","Text":"Let\u0027s deal with that. Those 7,000 shares,"},{"Start":"05:55.460 ","End":"05:58.340","Text":"we also pay 2.4 for currency units per share."},{"Start":"05:58.340 ","End":"06:01.655","Text":"That means our cash decreased by 16,800,"},{"Start":"06:01.655 ","End":"06:04.895","Text":"our assets therefore decrease by 16,800,"},{"Start":"06:04.895 ","End":"06:07.130","Text":"and as usual, it didn\u0027t affect liabilities."},{"Start":"06:07.130 ","End":"06:10.085","Text":"That means that to make the accounting equation balanced,"},{"Start":"06:10.085 ","End":"06:13.625","Text":"our equity must have decreased by 16,800."},{"Start":"06:13.625 ","End":"06:16.805","Text":"Now these shares are not being canceled, we\u0027re keeping them."},{"Start":"06:16.805 ","End":"06:19.295","Text":"There are just simply no longer outstanding,"},{"Start":"06:19.295 ","End":"06:22.850","Text":"but we\u0027re keeping them so they are treasury shares."},{"Start":"06:22.850 ","End":"06:27.145","Text":"We put the 16,800 into the Treasury Share column,"},{"Start":"06:27.145 ","End":"06:29.490","Text":"but notice they\u0027re in brackets,"},{"Start":"06:29.490 ","End":"06:32.635","Text":"so it offsets against the ordinary share,"},{"Start":"06:32.635 ","End":"06:34.720","Text":"par value and premium accounts."},{"Start":"06:34.720 ","End":"06:36.520","Text":"But remember their treasury shares,"},{"Start":"06:36.520 ","End":"06:42.370","Text":"so they\u0027re in brackets 16,800 and that\u0027s because we\u0027re not"},{"Start":"06:42.370 ","End":"06:49.120","Text":"taking it out of the par value and the premium columns because they are outstanding."},{"Start":"06:49.120 ","End":"06:50.920","Text":"But we\u0027re still holding onto them."},{"Start":"06:50.920 ","End":"06:52.645","Text":"We\u0027re not canceling them."},{"Start":"06:52.645 ","End":"06:55.600","Text":"Number 2, on the 30th of June, 20X1,"},{"Start":"06:55.600 ","End":"06:59.750","Text":"15,000 preference shares were issued at 5 currency units each."},{"Start":"06:59.750 ","End":"07:03.010","Text":"That\u0027s 15,000 shares at 5 per share."},{"Start":"07:03.010 ","End":"07:07.060","Text":"That means our cash increased by 75,000."},{"Start":"07:07.060 ","End":"07:11.350","Text":"Cash is an asset, so assets go up no impact on liabilities."},{"Start":"07:11.350 ","End":"07:14.390","Text":"Therefore our equity goes up by 75,000."},{"Start":"07:14.390 ","End":"07:18.590","Text":"That 75,000 goes directly into the preference share column."},{"Start":"07:18.590 ","End":"07:22.100","Text":"We\u0027ve just got a subtotal for all of those columns carried"},{"Start":"07:22.100 ","End":"07:26.470","Text":"forward and bring them forward on the next page and off we go again."},{"Start":"07:26.470 ","End":"07:32.790","Text":"Number 3, land carried at 50,000 was revalued to 65,000."},{"Start":"07:32.790 ","End":"07:36.470","Text":"What we have here is an asset increasing in value,"},{"Start":"07:36.470 ","End":"07:39.470","Text":"so our assets went up by 15,000."},{"Start":"07:39.470 ","End":"07:43.505","Text":"Land is an asset and it increased in value by 15,000."},{"Start":"07:43.505 ","End":"07:46.460","Text":"So it has no impact on our liabilities and therefore,"},{"Start":"07:46.460 ","End":"07:49.350","Text":"that means that if assets go up by 15,000"},{"Start":"07:49.350 ","End":"07:53.205","Text":"liabilities remain unchanged equity goes up by 15,000."},{"Start":"07:53.205 ","End":"07:56.840","Text":"15,000 simply gets put into the revaluation reserve."},{"Start":"07:56.840 ","End":"08:00.005","Text":"Sometimes also called a revaluation surplus."},{"Start":"08:00.005 ","End":"08:06.680","Text":"Number 4 ordinary dividend declared was 12,000 and a preference dividend was also paid."},{"Start":"08:06.680 ","End":"08:08.795","Text":"The ordinary dividend, if we payed,"},{"Start":"08:08.795 ","End":"08:11.495","Text":"it means our cash was depleted so,"},{"Start":"08:11.495 ","End":"08:14.620","Text":"our equity was decreased by 12,000"},{"Start":"08:14.620 ","End":"08:19.520","Text":"and that gets reflected in the retained earnings being reduced by 12,000,"},{"Start":"08:19.520 ","End":"08:22.760","Text":"because what is happening when you declare a dividend you"},{"Start":"08:22.760 ","End":"08:26.270","Text":"are distributing your retained earnings,"},{"Start":"08:26.270 ","End":"08:28.520","Text":"which is an accumulation of all your profits."},{"Start":"08:28.520 ","End":"08:31.355","Text":"You\u0027re distributing that to your shareholders."},{"Start":"08:31.355 ","End":"08:36.290","Text":"Remember the preference dividend was also paid. Same thing happens here."},{"Start":"08:36.290 ","End":"08:38.060","Text":"We\u0027ve got 15,000 preference shares,"},{"Start":"08:38.060 ","End":"08:40.310","Text":"but we had to work out the dividend in this case,"},{"Start":"08:40.310 ","End":"08:41.900","Text":"it wasn\u0027t given to us,"},{"Start":"08:41.900 ","End":"08:45.110","Text":"but we were told it was 0.75 currency units per"},{"Start":"08:45.110 ","End":"08:48.365","Text":"share that gets paid and dividends for an annual dividend."},{"Start":"08:48.365 ","End":"08:52.220","Text":"But we had to remember that these shares were issued during the year,"},{"Start":"08:52.220 ","End":"08:54.910","Text":"so we have to pro rata this dividend."},{"Start":"08:54.910 ","End":"09:01.100","Text":"15,000 preference shares by 0.75 multiplied by 6 months out of 12 months and that gives"},{"Start":"09:01.100 ","End":"09:08.405","Text":"us 5,625 in terms of a preference dividend that was actually paid, so cash decreased."},{"Start":"09:08.405 ","End":"09:12.005","Text":"That means our equity decreased by 565,"},{"Start":"09:12.005 ","End":"09:13.490","Text":"works exactly the same as"},{"Start":"09:13.490 ","End":"09:17.015","Text":"an ordinary dividend that goes into the retained earnings column."},{"Start":"09:17.015 ","End":"09:19.580","Text":"Then finally, the profit for the year ended 31st,"},{"Start":"09:19.580 ","End":"09:21.695","Text":"December 20X1 for the company was"},{"Start":"09:21.695 ","End":"09:27.365","Text":"53,000 and that\u0027s simply your equity is going up by 53,000,"},{"Start":"09:27.365 ","End":"09:31.645","Text":"reflected by the increase in retained earnings of 53,000."},{"Start":"09:31.645 ","End":"09:36.690","Text":"Then the last step is simply just to total each of those columns."}],"ID":31079},{"Watched":false,"Name":"Exercise 12","Duration":"11m 50s","ChapterTopicVideoID":29465,"CourseChapterTopicPlaylistID":294469,"HasSubtitles":true,"ThumbnailPath":null,"UploadDate":null,"DurationForVideoObject":null,"Description":null,"MetaTitle":null,"MetaDescription":null,"Canonical":null,"VideoComments":[],"Subtitles":[{"Start":"00:00.000 ","End":"00:02.550","Text":"In this exercise, we\u0027re going to look at"},{"Start":"00:02.550 ","End":"00:05.550","Text":"the preparation of a statement of changes in equity."},{"Start":"00:05.550 ","End":"00:11.655","Text":"LMN, prepares its financial statements for the year ending 31 December 20X1."},{"Start":"00:11.655 ","End":"00:13.860","Text":"Now the balance sheet for the previous year,"},{"Start":"00:13.860 ","End":"00:15.450","Text":"31 December 20X0,"},{"Start":"00:15.450 ","End":"00:18.420","Text":"shows the following amounts in the equity section."},{"Start":"00:18.420 ","End":"00:20.430","Text":"We had ordinary share capital,"},{"Start":"00:20.430 ","End":"00:24.680","Text":"36,000 each of those shares had a 1 currency unit par value,"},{"Start":"00:24.680 ","End":"00:27.370","Text":"share premium of 45,000,"},{"Start":"00:27.370 ","End":"00:31.185","Text":"5 percent cumulative preference shares for 30,000,"},{"Start":"00:31.185 ","End":"00:34.075","Text":"retained earnings of 3,000."},{"Start":"00:34.075 ","End":"00:35.525","Text":"It is a negative,"},{"Start":"00:35.525 ","End":"00:38.420","Text":"that means it\u0027s actually a loss."},{"Start":"00:38.420 ","End":"00:41.345","Text":"We\u0027ve got to retain loss of 3,000,"},{"Start":"00:41.345 ","End":"00:44.435","Text":"total equity of 108,000."},{"Start":"00:44.435 ","End":"00:48.295","Text":"Then we\u0027re given further information for 20X1."},{"Start":"00:48.295 ","End":"00:52.170","Text":"Number 1, we had 10,000 shares of the par value of"},{"Start":"00:52.170 ","End":"00:57.140","Text":"1 currency unit each and these were repurchase for 28,000."},{"Start":"00:57.140 ","End":"01:03.210","Text":"So we repurchase each of those shares for 2.8 currency units per share."},{"Start":"01:03.320 ","End":"01:08.440","Text":"4,000 shares are subsequently reissued at 12,000 so in other words,"},{"Start":"01:08.440 ","End":"01:10.615","Text":"we resold of those 10,000,"},{"Start":"01:10.615 ","End":"01:15.540","Text":"4,000 and we sold them for 3 currency units per share,"},{"Start":"01:15.540 ","End":"01:21.460","Text":"and the rest were held us treasury shares so we repurchased 10,000 shares."},{"Start":"01:21.460 ","End":"01:23.515","Text":"We initially treat them as treasury shares."},{"Start":"01:23.515 ","End":"01:25.540","Text":"We don\u0027t cancel them, in other words,"},{"Start":"01:25.540 ","End":"01:29.260","Text":"and then 4,000 of those get re-issued at 12,000."},{"Start":"01:29.260 ","End":"01:31.355","Text":"In other words, they get resold."},{"Start":"01:31.355 ","End":"01:34.450","Text":"The 10,000 preference shares were issued a few years"},{"Start":"01:34.450 ","End":"01:37.715","Text":"back at a par value of 2 currency units each."},{"Start":"01:37.715 ","End":"01:40.930","Text":"Since LMN reported a loss previously,"},{"Start":"01:40.930 ","End":"01:46.640","Text":"no preference dividend was paid in 20X0 so 20X0 was last year."},{"Start":"01:46.970 ","End":"01:51.715","Text":"On 30th of June 20X1 so halfway through the current year,"},{"Start":"01:51.715 ","End":"01:58.940","Text":"the CEO of LMN was awarded 10,000 stock options valued at 8 currency units each."},{"Start":"01:58.940 ","End":"02:04.095","Text":"These stock options base on the 1st of July, 20X5."},{"Start":"02:04.095 ","End":"02:09.160","Text":"LMN\u0027s profit for the year ended 31 December 20X1 before accounting for"},{"Start":"02:09.160 ","End":"02:14.660","Text":"employee share options expense was 37,000 currency units."},{"Start":"02:16.020 ","End":"02:18.865","Text":"The preference dividend was paid,"},{"Start":"02:18.865 ","End":"02:22.330","Text":"but no ordinary dividend was declared."},{"Start":"02:22.330 ","End":"02:26.230","Text":"Prepare a statement of changes in equity for LMN for"},{"Start":"02:26.230 ","End":"02:30.290","Text":"the year 20X1 using the worksheet provided."},{"Start":"02:30.500 ","End":"02:35.975","Text":"Let\u0027s look at the solution to the Statement of Changes in Equity exercise."},{"Start":"02:35.975 ","End":"02:39.590","Text":"We have columns here for ordinary shares split between the 2 columns,"},{"Start":"02:39.590 ","End":"02:42.800","Text":"that par value column, and the share premium column."},{"Start":"02:42.800 ","End":"02:45.995","Text":"Then we have preference shares, treasury shares,"},{"Start":"02:45.995 ","End":"02:47.480","Text":"share options reserve,"},{"Start":"02:47.480 ","End":"02:50.525","Text":"retained earnings, and the total equity."},{"Start":"02:50.525 ","End":"02:53.930","Text":"We start with the opening balances on the first of the"},{"Start":"02:53.930 ","End":"02:57.395","Text":"first 20X1 so let\u0027s get back to the question."},{"Start":"02:57.395 ","End":"03:02.240","Text":"Then you have all of the balances in the balance sheet at 31st, December 20X0,"},{"Start":"03:02.240 ","End":"03:04.175","Text":"which are opening balances in 20X1,"},{"Start":"03:04.175 ","End":"03:06.290","Text":"ordinary share capital 36,000,"},{"Start":"03:06.290 ","End":"03:08.395","Text":"premium, 45,000,"},{"Start":"03:08.395 ","End":"03:11.070","Text":"ordinary share capital 36,000,"},{"Start":"03:11.070 ","End":"03:14.130","Text":"the premium 45,000, cumulative preference shares,"},{"Start":"03:14.130 ","End":"03:18.780","Text":"30,000 retained earnings being a loss because we can see some brackets,"},{"Start":"03:18.780 ","End":"03:22.620","Text":"3,000 and the total equity of 108,000."},{"Start":"03:22.620 ","End":"03:24.900","Text":"There we have it, 36, 45,"},{"Start":"03:24.900 ","End":"03:27.675","Text":"30, negative 3 and 108."},{"Start":"03:27.675 ","End":"03:30.885","Text":"Then we put them in 36, 45,"},{"Start":"03:30.885 ","End":"03:35.940","Text":"30, negative 3 for the retained earnings and 108,000."},{"Start":"03:35.940 ","End":"03:41.270","Text":"Then, the first piece of information we\u0027re given is 10,000 shares and the par value of"},{"Start":"03:41.270 ","End":"03:46.625","Text":"1 currency unit each were repurchased for 28,000 currency units in total."},{"Start":"03:46.625 ","End":"03:50.350","Text":"So that means we paid 2.8 currency units per share."},{"Start":"03:50.350 ","End":"03:55.970","Text":"Of those 4,000 shares were subsequently reissued at 12,000 currency units,"},{"Start":"03:55.970 ","End":"03:59.800","Text":"which means we sold each of those shares for 3 currency units."},{"Start":"03:59.800 ","End":"04:02.595","Text":"Then the rest were held as treasury shares."},{"Start":"04:02.595 ","End":"04:04.430","Text":"Of those 10,000 shares,"},{"Start":"04:04.430 ","End":"04:09.620","Text":"we initially treat them as treasury shares 4,000 were then subsequently reissued."},{"Start":"04:09.620 ","End":"04:11.605","Text":"Nothing is canceled."},{"Start":"04:11.605 ","End":"04:13.410","Text":"Let\u0027s deal with this part first,"},{"Start":"04:13.410 ","End":"04:17.700","Text":"the 10,000 shares were repurchased for 28,000."},{"Start":"04:17.700 ","End":"04:24.010","Text":"We pop it in here into Statement of Changes in Equity repurchase of the treasury shares."},{"Start":"04:24.010 ","End":"04:26.670","Text":"We\u0027ve purchased them for 28,000,"},{"Start":"04:26.670 ","End":"04:29.610","Text":"let\u0027s say it was paid for in cash so our assets,"},{"Start":"04:29.610 ","End":"04:35.665","Text":"cash accounts would decrease and since it has no implication on our liabilities,"},{"Start":"04:35.665 ","End":"04:37.100","Text":"if assets go down,"},{"Start":"04:37.100 ","End":"04:39.170","Text":"no impact on liabilities,"},{"Start":"04:39.170 ","End":"04:42.475","Text":"it means our equity goes down by 28,000."},{"Start":"04:42.475 ","End":"04:45.120","Text":"There are all treasury shares initially."},{"Start":"04:45.120 ","End":"04:47.285","Text":"So we pop them into the Treasury Share column."},{"Start":"04:47.285 ","End":"04:51.140","Text":"Remember that it\u0027s in brackets to indicate that it\u0027s a set off"},{"Start":"04:51.140 ","End":"04:55.205","Text":"against the ordinary shares in our statement of changes in equity."},{"Start":"04:55.205 ","End":"04:57.065","Text":"We\u0027re not canceling them,"},{"Start":"04:57.065 ","End":"04:59.030","Text":"and that is why we\u0027re not taking the"},{"Start":"04:59.030 ","End":"05:02.290","Text":"28,000 and popping it under the ordinary share columns."},{"Start":"05:02.290 ","End":"05:05.730","Text":"4,000 shares and then subsequently re-issued at"},{"Start":"05:05.730 ","End":"05:10.815","Text":"12,000 with the rest being left in the Treasury shaped column so,"},{"Start":"05:10.815 ","End":"05:15.035","Text":"separate line resale of our treasury shares."},{"Start":"05:15.035 ","End":"05:18.075","Text":"If you sell something for 12,000,"},{"Start":"05:18.075 ","End":"05:19.120","Text":"your assets are going up."},{"Start":"05:19.120 ","End":"05:20.470","Text":"Let\u0027s say we sold them for cash,"},{"Start":"05:20.470 ","End":"05:23.440","Text":"then that would be our cash asset goes up."},{"Start":"05:23.440 ","End":"05:27.370","Text":"Since there\u0027s no liability related to this transaction,"},{"Start":"05:27.370 ","End":"05:28.720","Text":"if your assets go up,"},{"Start":"05:28.720 ","End":"05:31.570","Text":"your equity goes up by 12,000 so you can see we\u0027ve got the"},{"Start":"05:31.570 ","End":"05:35.120","Text":"12,000 and the total column being the total equity."},{"Start":"05:35.120 ","End":"05:37.900","Text":"So we know our equity is going up at 12,000."},{"Start":"05:37.900 ","End":"05:42.130","Text":"What we need to then do is then take those shares that we"},{"Start":"05:42.130 ","End":"05:46.660","Text":"sold out of the treasury shares column because they\u0027re no longer being held in treasury."},{"Start":"05:46.660 ","End":"05:49.795","Text":"We\u0027ve now re-issued them into the public domain"},{"Start":"05:49.795 ","End":"05:54.055","Text":"so how much of those 4,000 treasury shares cost us?"},{"Start":"05:54.055 ","End":"05:59.840","Text":"Well, we paid 2.8 currency units per share so we need to take 4,000 treasury shares"},{"Start":"05:59.840 ","End":"06:07.315","Text":"multiplied by the cost to us of 2.8 and that\u0027s 11,200 comes out of our treasury shares."},{"Start":"06:07.315 ","End":"06:12.920","Text":"We can see that our equity has gone up though by 12,000 and that hasn\u0027t been"},{"Start":"06:12.920 ","End":"06:17.960","Text":"reflected by the adjustment to the treasury shaped column so what\u0027s the missing amount,"},{"Start":"06:17.960 ","End":"06:19.265","Text":"and where do we put it well,"},{"Start":"06:19.265 ","End":"06:21.410","Text":"we\u0027ve made a profit."},{"Start":"06:21.410 ","End":"06:24.880","Text":"We\u0027ve sold these shares for 12,000,"},{"Start":"06:24.880 ","End":"06:29.370","Text":"that only cost us 11,200 and we\u0027re taking that out of the treasury shares."},{"Start":"06:29.370 ","End":"06:32.920","Text":"So that means we\u0027ve got a profit or a premium of 800."},{"Start":"06:32.920 ","End":"06:34.905","Text":"The third piece of information,"},{"Start":"06:34.905 ","End":"06:37.410","Text":"we\u0027re told, in the 30th of June 20X1,"},{"Start":"06:37.410 ","End":"06:42.015","Text":"the CEO was awarded 10,000 stock options valued at 8 currency units"},{"Start":"06:42.015 ","End":"06:47.220","Text":"each and they invest on the 1st of July, 20X5."},{"Start":"06:47.220 ","End":"06:50.360","Text":"That\u0027s 4 years from now and that means that the cost of"},{"Start":"06:50.360 ","End":"06:53.645","Text":"these stock options need to be expensed over the 4 years."},{"Start":"06:53.645 ","End":"06:57.875","Text":"Now, the cost to us is valued at the fair value on the grant date,"},{"Start":"06:57.875 ","End":"07:02.475","Text":"which is 8 currency units per stock option."},{"Start":"07:02.475 ","End":"07:08.190","Text":"So 8 by 10,000 is 80,000 and we\u0027re going to expense it over 4 years."},{"Start":"07:08.240 ","End":"07:10.490","Text":"What we do need to remember is that"},{"Start":"07:10.490 ","End":"07:15.095","Text":"these stock options were issued halfway through the current year."},{"Start":"07:15.095 ","End":"07:18.050","Text":"By the 31st of December 20X1,"},{"Start":"07:18.050 ","End":"07:22.820","Text":"only half years gone by another full year. How do we show this?"},{"Start":"07:22.820 ","End":"07:24.305","Text":"We\u0027ve got our Employee Share option,"},{"Start":"07:24.305 ","End":"07:27.545","Text":"which needs to be reflected in our statement of changes in equity."},{"Start":"07:27.545 ","End":"07:30.110","Text":"So we\u0027ve got 10,000 options that a currency units"},{"Start":"07:30.110 ","End":"07:32.750","Text":"each which has a cost of 80,000 in total,"},{"Start":"07:32.750 ","End":"07:37.145","Text":"which we are going to be writing off over 4 years so it\u0027s 20,000 for a full year."},{"Start":"07:37.145 ","End":"07:40.490","Text":"We\u0027ve only had these stock options in existence for"},{"Start":"07:40.490 ","End":"07:44.150","Text":"half year so we will only expense half of a full year."},{"Start":"07:44.150 ","End":"07:46.580","Text":"That\u0027s 20,000 by 6/12."},{"Start":"07:46.580 ","End":"07:49.505","Text":"10,000 goes into our total equity,"},{"Start":"07:49.505 ","End":"07:54.605","Text":"and that\u0027s reflected by a 10,000 in the share options reserve column."},{"Start":"07:54.605 ","End":"07:58.310","Text":"Those are just our balances carried forward."},{"Start":"07:58.310 ","End":"08:00.559","Text":"Fourth piece of information,"},{"Start":"08:00.559 ","End":"08:02.690","Text":"elements, profit for the year ended 31st,"},{"Start":"08:02.690 ","End":"08:08.485","Text":"December 20X1 before accounting for the employee share options expense was 37,000."},{"Start":"08:08.485 ","End":"08:10.070","Text":"In this piece of information,"},{"Start":"08:10.070 ","End":"08:12.890","Text":"we\u0027re going to show the other side of the entry to the stock options."},{"Start":"08:12.890 ","End":"08:15.530","Text":"Because remember, when you issue stock options,"},{"Start":"08:15.530 ","End":"08:17.314","Text":"you\u0027re increasing your equity,"},{"Start":"08:17.314 ","End":"08:20.285","Text":"but you\u0027re also putting through an expense."},{"Start":"08:20.285 ","End":"08:25.550","Text":"When we showed the 10,000 appearing in our stock option reserved column,"},{"Start":"08:25.550 ","End":"08:27.305","Text":"that was just the 1 side of the entry."},{"Start":"08:27.305 ","End":"08:28.610","Text":"What about the expense?"},{"Start":"08:28.610 ","End":"08:31.285","Text":"Will the expense affected our profit?"},{"Start":"08:31.285 ","End":"08:34.340","Text":"We were told that the profit is 37,000,"},{"Start":"08:34.340 ","End":"08:38.090","Text":"but that\u0027s before taking into account that stock option expense."},{"Start":"08:38.090 ","End":"08:40.265","Text":"So we\u0027ve got our balances carried forward."},{"Start":"08:40.265 ","End":"08:41.915","Text":"Then we show a profit for the year."},{"Start":"08:41.915 ","End":"08:43.900","Text":"The profit was 37,000 before"},{"Start":"08:43.900 ","End":"08:48.290","Text":"the stock option expense so we subtract the stock option expense of the 10,000,"},{"Start":"08:48.290 ","End":"08:50.495","Text":"which we\u0027d worked out on the previous slide,"},{"Start":"08:50.495 ","End":"08:55.520","Text":"and that\u0027s 27,000 profit for the year after the expense."},{"Start":"08:55.520 ","End":"09:01.540","Text":"We show that in the retained earnings column and in the total equity column."},{"Start":"09:01.540 ","End":"09:05.540","Text":"The other side of the stock option reserve or"},{"Start":"09:05.540 ","End":"09:11.495","Text":"the share option reserve entry where we\u0027d increased our share option reserve to 10,000."},{"Start":"09:11.495 ","End":"09:14.885","Text":"The other side of it is hidden in this profit for the year,"},{"Start":"09:14.885 ","End":"09:17.500","Text":"line item of 27,000,"},{"Start":"09:17.500 ","End":"09:19.930","Text":"the expense has been deducted there."},{"Start":"09:19.930 ","End":"09:25.130","Text":"Then the final piece of information is that the preference dividend was paid up-to-date,"},{"Start":"09:25.130 ","End":"09:30.800","Text":"but no ordinary dividend was declared yet so if we pay something up-to-date,"},{"Start":"09:30.800 ","End":"09:32.390","Text":"that\u0027s a little bit of alarm bells,"},{"Start":"09:32.390 ","End":"09:36.235","Text":"so it means do anything outstanding and if so,"},{"Start":"09:36.235 ","End":"09:38.295","Text":"were these preference shares cumulative."},{"Start":"09:38.295 ","End":"09:42.020","Text":"We have a look here and the balance sheet at the end of last year shows"},{"Start":"09:42.020 ","End":"09:46.505","Text":"our preferences are 30,000 and they described as cumulative preference shares."},{"Start":"09:46.505 ","End":"09:50.270","Text":"That means that if there is anything that has not yet been paid,"},{"Start":"09:50.270 ","End":"09:53.030","Text":"and now they\u0027re telling us that it\u0027s up-to-date, well,"},{"Start":"09:53.030 ","End":"09:58.610","Text":"we have to have paid the preference dividends from the prior years."},{"Start":"09:58.610 ","End":"10:02.175","Text":"If we looked at point Number 2,"},{"Start":"10:02.175 ","End":"10:07.235","Text":"it said that due to element having reported a loss previously,"},{"Start":"10:07.235 ","End":"10:09.710","Text":"no preference dividend was paid in 20X0."},{"Start":"10:09.710 ","End":"10:12.620","Text":"All right, we all know in 20X1 and they\u0027re"},{"Start":"10:12.620 ","End":"10:15.590","Text":"telling us the preference dividend has been paid up to date."},{"Start":"10:15.590 ","End":"10:20.135","Text":"So that means we\u0027ve paid 2 years worth of preference dividends."},{"Start":"10:20.135 ","End":"10:23.585","Text":"Going back here, what is the dividend per year?"},{"Start":"10:23.585 ","End":"10:27.215","Text":"Well, it\u0027s 30,000 multiply by the coupon rate,"},{"Start":"10:27.215 ","End":"10:28.940","Text":"which is 5 percent."},{"Start":"10:28.940 ","End":"10:36.210","Text":"So 5 percent times 30,000 so 5 percent times 30,000 is 1,500."},{"Start":"10:36.210 ","End":"10:39.860","Text":"That\u0027s a preference dividend per year but remember,"},{"Start":"10:39.860 ","End":"10:41.960","Text":"these are cumulative preference dividends."},{"Start":"10:41.960 ","End":"10:44.105","Text":"They\u0027re telling us that we\u0027re now up to date."},{"Start":"10:44.105 ","End":"10:48.890","Text":"That means we must have paid 2 years worth of dividends so 20X0 and"},{"Start":"10:48.890 ","End":"10:54.500","Text":"20X1 were paid so that\u0027s 2 years that\u0027s 3,000 is our dividend for the year."},{"Start":"10:54.500 ","End":"10:59.075","Text":"We put the 3,000 into the total and Retained Earnings columns,"},{"Start":"10:59.075 ","End":"11:03.605","Text":"and they are in brackets because there are depleting our equity."},{"Start":"11:03.605 ","End":"11:06.920","Text":"In other words, we are distributing our profits to our shareholders,"},{"Start":"11:06.920 ","End":"11:09.230","Text":"and there were no ordinary dividends."},{"Start":"11:09.230 ","End":"11:10.415","Text":"That was the only dividend."},{"Start":"11:10.415 ","End":"11:12.590","Text":"If they had been ordinary dividends,"},{"Start":"11:12.590 ","End":"11:18.355","Text":"then we would have simply had another line for the ordinary dividend."},{"Start":"11:18.355 ","End":"11:23.725","Text":"Then the last step is just simply total each of those columns."},{"Start":"11:23.725 ","End":"11:27.860","Text":"Notice that the treasury shares and our 16,800,"},{"Start":"11:27.860 ","End":"11:30.470","Text":"that should equal if you pull out a calculator,"},{"Start":"11:30.470 ","End":"11:34.850","Text":"that\u0027s the remaining 6,000 shares that we had bought."},{"Start":"11:34.850 ","End":"11:37.785","Text":"Remember, we\u0027d bought 10,000 and then we reissued 4,"},{"Start":"11:37.785 ","End":"11:39.450","Text":"so we\u0027ve got 6,000 in there,"},{"Start":"11:39.450 ","End":"11:44.040","Text":"and that\u0027s at the cost price and we\u0027d paid 2.8 currency units per share."},{"Start":"11:44.040 ","End":"11:50.410","Text":"That should reflect 6,000 times 2.8 currency units."}],"ID":31080}],"Thumbnail":null,"ID":294469}]

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