Chapter 10

EQUITY
Part 1
 Learning Outcomes
After studying this chapter, you should be able to:

• Explain the types of organizations and the

various forms of owners’ equity
• Differentiate between ordinary shares and
preference shares, and their embedded rights
and privileges
• Describe the issuance of share on application

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 Definition

Equity
Equityisisthe
theresidual
residualinterest
interestin
inthe
theassets
assetsof of the
the
company
companyafter
after deducting
deducting all
allliabilities
liabilities

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 Owners’ Equity of an Enterprise

Sri Asnat Enterprise

Statement of Owners’ Equity
For the Year Ended 31 December 2017
RM
Capital, 1 January 20,000
Add: Net Profit 3,400
23,400
Less: Drawings 1,800
Capital, 31 December 21,600

Financial Accounting and Reporting 1 4

 Example of Owners’ Equity of a Company
Group Company

2017 2017
Note RM’000 RM’000

EQUITY AND LIABILITIES

Capital and Reserves

Share capital 33 2,515,438 2,515,438

Treasury shares (160) (160)

Foreign exchange reserve 196,050 -

Retained earnings 34(a) 5,404,393 5,083,137

Other reserves 34(b) (67,608) (25,183)

Equity attributable to the owners of the company

8,048,113 7,573,232

Non-controlling interest 12 (1,338,033) -

Total Equity 59,318,485 7,573,232

Source: AirAsia Berhad

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 Criteria of Business Organizations
Sole Proprietor Partnership Company

Capital Small Pooled among partners Large

Ownership Individual Partners Shareholders

Legal entity No No Yes

Liability Unlimited Jointly unlimited Limited

Business tax No No Yes

Owners’ equity Simple – one owner Simple – pooled Complex

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 Forms of Corporate Organizations

Public Company Private Company

Share Capital Issued to public Issued to related

persons
Shareholders Unlimited Limited to 50 persons

Designation Bhd Sdn Bhd

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 Share Capital Structure
Two main forms of share capital:
o Ordinary shares
o Preference shares

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 Ordinary Share Capital
 Main component of capital structure in a company
 Section 71(1) Companies Act 2016 confers on the holder of ordinary
share:
o The right to attend, participate and speak at the meeting.
o The right to vote on a show of hands on any resolution of the
company.
o The right to one vote for each share on a poll on any resolution
of the company..
o The right to an equal share in the distribution of the surplus
assets of the company.
o The right to an equal share in dividends authorised by the Board.

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 Preference Share Capital
 In general, preference shareholders have
some preferential rights such as:
oo privilege to receive dividends.
oo Capital refund in the case of liquidations.
oo Fixed rate of dividend
 But no voting rights.
 Type of preference shares????

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 Preference Share Capital
 In general, preference shareholders have
some preferential rights such as:

 privilege to receive dividends.
 Capital refund in the case of liquidations.

 Fixed rate of dividend

 But no voting rights.
 Types of preference shares

 Cumulative preference shares

 Eligible
Eligible to
to receive
receive fixed
fixed annual
annual dividends
dividends even
even when
when the
the
company
company cannot
cannot pay
pay dividends
dividends for
for aa particular
particular year,
year, by
by
way
way ofof accumulating
accumulating that
that dividends
dividends to the
the following
year.
year.

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 Preference Share Capital

o Non-cumulative preference shares

• Have no right to claim any unpaid dividends, in the future.
o Participating preference shares
• Have rights to receive additional dividends over and above the specified
dividend rate.
o Convertible preference shares
• Can be converted into ordinary shares after a predetermined date.
o Redeemable preference shares
• Allows the issuing company to buy back the shares at a specified maturity
date.

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 Cumulative or
Noncumulative Dividend
Example: Consider the following partial
Statement of shareholders’ Equity
Common shares, $5 par value; 40,000 shares
authorized, issued and outstanding $ 200,000
Preferred share, 9%, $100 par value; 1,000
shares authorized, issued and outstanding 100,000
Total contributed capital $ 300,000

The Board of Directors did not declare or pay

dividends in 2004. In 2005, the Board of Directors
declare and pay cash dividends of $42,000.

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 Cumulative or
Noncumulative Dividend
If Preferred Share is Noncumulative: Preferred Common
Year 2004: No dividends paid. $ - $ -
Year 2005:
1. Pay 2005 preferred dividend. $ 9,000
2. Remainder goes to common. $ 33,000

If Preferred Share is Cumulative: Preferred Common

Year 2004: No dividends paid. $ - $ -
Year 2005:
1. Pay 2004 preferred dividend in arrears. $ 9,000
2. Pay 2005 preferred dividend. 9,000
3. Remainder goes to common. $ 24,000
Totals $ 18,000 $ 24,000
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 Accounting for the issuance of
shares

 Company invites the public to buy shares.

 Anybody who is interested to buy the shares will
express his interest by applying to the company with
full payment for the shares.

 Shares will be allotted to successful applicants, while
unsuccessful applicants will be refunded.

 The total shares allotted are known as issued
share capital.

Financial Accounting and Reporting 1 15

 Example
Assume Medaniaga Bhd issues 40,000 shares at RM 1
each during the year ended 31 December 2008. The
applications are received with full payment on
October 31, 2008 for 100,000 shares. The shares are
subsequently allotted on December 31, 2008 to the
successful applicants, while unsuccessful applicants
are refunded at the same date. The entries to record
the transactions are as follows:

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 Journal Entries
Step 1 : Upon Application

Date Details Ref Debit Credit

31/10 Cash 100,000

Share application 100,000

(record share
application)

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 Journal Entries
Step 2 : Upon Allotment
Date Details Ref Debit Credit
31/12 Share application 40,000

Ordinary share capital 40,000

Share application 60,000

Cash 60,000

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 Accounting for the issuance of
shares
 Example:
 Issue 100,000 units of shares at RM1 per
share.
 Journal entry:

Cash 100,000
Contributed share capital 100,000

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 Accounting for the issuance of
shares
 Example:
 Issue 100,000 shares at the price of RM2.85
per share.
 Journal entry:
Cash (100,000xRM2.85) 285,000
Contributed share capital 285,000

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Shares
Shares Issued
Issued in
in exchange
exchange for
for an
an asset
asset

The general rule: Companies should record shares

issued for services or property other than cash at the
 fair value of the goods or services received.
 If the fair value of the goods or services cannot be
measured reliably, use the fair value of the shares
issued.

LO 3 Explain the accounting procedures for issuing shares.

 Shares Issued in exchange for an asset
Example: The following series of transactions illustrates the
procedure for recording the issuance of 10,000 ordinary
shares for a machine for Marlowe Company, in various
circumstances.

1. The market value of the machine and the shares are

RM140,000 and RM150,000, respectively.

Dr Machine 140,000
Cr. Contributed share capital 140,000

LO 3 Explain the accounting procedures for issuing shares.

 Shares Issued in exchange for an asset

2. Marlowe cannot readily determine the fair value of the

machine, but it knows the fair value of the shares is
RM130,000.
Machine 130,000
Contributed share capital 130,000

Financial Accounting and Reporting 1 23

 Share Issue Expenses
• Example: underwriters' fees, legal fees
• Not an operating expenditure
• Need to be set off directly in equity
• Example: BG Bhd incurs RM30,000 share issue
expense. Journal entry:

Dr. Retained profits 30,000

Cr. Cash 30,000

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 Disclosure of Owners’ Equity
According
According to MFRS 101 paragraph 76, Presentation
Presentation of
of Financial
Financial
Statements,
Statements, anan enterprise
enterprise should
should disclose
disclose the
the following, either on
the
the face of the balance sheet or in the
the notes:

 For
For each
each class
class of
of share
share capital:
capital:
-- the
the number
number of of authorized
authorized shares
shares
-- the
the number
number of of shares
shares issued
issued and
and fully
fully paid,
paid, and
and issued
issued but
but not
not fully
fully paid
paid
-- par
par value
value per
per share,
share, oror that
that the
the shares
shares have
have nono par
par value
value
-- aa reconciliation
reconciliation ofof the
the number
number of of shares
shares outstanding
outstanding at at the
the beginning
beginning andand at
at
the
the end
end of
of the
the year
year
-- the
the rights,
rights, preferences,
preferences, and and restrictions
restrictions attaching
attaching toto that
that class
class including
including
restrictions
restrictions onon the
the distribution
distribution ofof dividends
dividends andand the
the repayment
repayment of of capital
capital
-- shares
shares in
in the
the enterprise
enterprise held
held by
by the
the enterprise
enterprise itself
itself or
or by
by subsidiaries
subsidiaries oror
associates
associates of of the
the enterprise
enterprise
-- shares
shares reserved
reserved forfor issuance
issuance under
under options
options and
and sales
sales contracts,
contracts, including
including the
the
terms
terms and
and amounts.
amounts.
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 Disclosure of Owners’ Equity

 AA description
description of
of the nature and purpose of each reserve within
owner’s equity.


 When
When dividends have been proposed but notnot formally
formally approved
approved
for
for payment,
payment, the
the amount
amount included
included (or
(or not
not included)
included) in
in liabilities.
liabilities.


 The
The amount of
of any
any cumulative
cumulative preference dividends not
recognized.
recognized.
An
An enterprise
enterprise without
without share
share capital,
capital, such
such as
as partnership,
partnership, should
should disclose
disclose
information
information equivalent
equivalent to
to that
that required
required above,
above, showing
showing movements
movements during
during the
the
period
period in
in each
each category
category ofof equity
equity interest
interest and
and rights,
rights, preferences,
preferences, and
and restrictions
restrictions
attaching
attaching toto each
each category
category ofof equity
equity interest.
interest. The
The standard
standard further
further emphasizes
emphasizes
that
that equity
equity capital
capital and
and reserves
reserves are
are analyzed
analyzed showing
showing separately
separately the
the various
various
classes
classes of
of paid-up
paid-up capital,
capital, share
share premium,
premium, andand reserves.
reserves.

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