Download - Shareholders' Equity Statement
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1The Analysis of the Statement of Shareholders Equity
GAAP Statement of Shareholders EquityGAAP Statement of Shareholders EquityOpening book value of equity (common and preferred)
+ Net share transactions with common stockholders
+ Capital contributions (paid in capital from share issues)- Share repurchases (into treasury stock or against paid-in capital)
+ Net share transactions with preferred shareholders
+ Capital contributions (share issues)- Share redemptions
+ Change in retained earnings
+ Net income- Common dividends- Preferred dividends
+ Accumulated other comprehensive income
+ Change in unearned (deferred) stock compensation
Closing book value of equity (common and preferred)
TheGoverningAccountingRelation
Bookvalue,beginningofperiod
+ Comprehensive income+Comprehensiveincome
Netpayouttoshareholders
=Bookvalue,endofperiod
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2ReformulatedStatementofStockholdersEquity
Opening book value if common equity (CSEt-1)
+ Net transactions with common shareholders
+ Capital contributions (share issues)
- Share repurchases
- Common dividends
+ Comprehensive income to common shareholders
+ Net income
+ Other comprehensive income
- Preferred dividends
Closing book value of common equity (CSEt)
Note that preferred equity is taken out of the common shareholders' equity statement (and treated as a liability).
Reformulation:TheSteps1. Restatebeginningandendingbalancesforitemsincorrectlyincludedin
orexcludedfromcommonequity Preferredstock Dividendspayable Unearned(deferred)compensation
2. Calculatenettransactionswithshareholders
Cashdividends+sharerepurchases shareissues
3. Calculatecomprehensiveincome
Netincome+OthercomprehensiveincomePreferreddividends
TheGAAPStatement:NikeInc.,2004
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3Nike:TheReformulatedStatementBalance, May 31, 2003 $4,028.2
Transaction with Shareholders
Stock issues 308.1 Stock repurchases (416.3) Common dividends (179.2) (287.4)
Comprehensive Income
Net income reported 945.6 Currency translation gains 27.5 Gains on hedge derivatives 125.9 1099.0
Balance, May 31, 2004 4,839.8 Balances: 2003 2004
Reported $3,990.7 4,781.7Dividends payable 36.9 52.6Unearned compensation 0.6 5.5Restated balance $4,028.2 $4,839.8
TheGAAPStatement:ReebokInternationalLtd.,2004
Reebok:ReformulatedStatementBalance, December 31, 2003 $1,034.9
Transaction with Shareholders
Stock issues $62.3 Stock repurchases (88.1) Common dividends (17.8) (43.6) Comprehensive income Net income reported 192.4 Currency translation gains 37.7 Gains on hedge derivatives 4.4 234.5
Balance, December 31, 2004 1,225.8
Balances:
2003 2004Reported 1,033.7 1,220.0Unearned compensation 1.2 5.8Restated balance 1,034.9 1,225.8
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4Dirty Surplus Accounting in the USDirty Surplus Accounting in the US
Operating Income:
Some income-increasing accounting changes (APB No. 20) a. change from LIFO valuation of inventory b. change in long-term contract accounting c. change to or from full cost accounting in extractive industries d. a change triggered by a red line in an accounting standard (e.g. change from cost to equity method for long-term equities) e. a change made for the first time in conjunction with a IPO or business combination Changes in accounting for contingencies (FASB No. 11) Foreign currency transaction gains and losses (FASB No. 52) Minimum pension liability adjustment (FASB No. 87) Some write-downs of deferred tax valuation allowances (FASB No. 109) Tax benefits of loss carry forwards acquired (FASB No 109) Tax benefits of loss carry forwards acquired (FASB No. 109) Tax benefits of preferred dividends paid to ESOPS (FASB No. 109) Unrealized gains and losses on equity securities available for sale (FASB No. 115) Financing Income or Expenses:
Preferred Dividends Unrealized gains and losses on debt securities available for sale (FASB No. 115) Operating or Financing Income Items:
Foreign currency translation gains and losses (FASB No. 52) Gains and losses on derivative instruments designated (FASB No. 133) as cash flow hedges
Balance Sheet Items to be Reclassified:
Deferred compensation relating to grant of (APB No. 25 and FASB No. 123) employee stock options and stock Dividends payable Preferred stock
FASBStatementNo.130
Requiresthereportingofcomprehensiveincomeinoneofthreeways
WithintheincomestatementInseparatestatementWithi th it t t tWithintheequitystatement
Ratio AnalysisRatio Analysis
DividendsDividend Payout = Comprehensive Income
Dividends + Stock RepurchasesTotal Payout Ratio=Comprehensive Income
Payout and Retention Ratios
DividendsDividends-to-Book Value=Book Value of CSE +Dividends +Stock Repurchases
Dividends+StockRepurchsesTotal Payout-to-Book Value=Book Value of CSE + Dividends + StockRepurchases
Comprehensive Income - DividendsRetention Ratio= =1- Dividend Payout RatioComprehensive Income
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5RatioAnalysis(continued)
( )t
t
t t-1
Comprehensive EarningsROCE = 1 CSE +CSE2
Shareholder Profitability Ratio
Growth Ratios
T ti ith h h ldTransactions with shareholdersNet Investment Rate=Beginning Book Value of CSE
Change in CSE Comprehensive Income+Net Transactions with ShareholdersGrowth Rate of CSE= =Beginning CSE Beginning CSE
HiddenDirtySurplus
Shareholderslosewhensharesareissuedatlessthanthemarketprice(e.g.exerciseofoptions)
Thisloss,however,isnotrecordedasexpense.
What is the nature of this loss? If options are part of aWhatisthenatureofthisloss?Ifoptionsarepartofacompensationpackage,thislossisanemployeecompensationexpense.Iffromaconversionofabond,preferredstockorwarrants,thelossisafinancingexpense.
Whatistheamountoftheloss?Marketprice exerciseprice.
Specialcase:optionsgrantedinthemoneyarerecordedasdeferredcompensation
FASBStatementNo.123R Statement123Rrequiresanexpensetoberecognizedatoption
grantdate,equaltothevalueoftheoptionatthatdate
Upto2006,proformanetincome,includingtheexpense,wasreportedinfootnotes.Theexpensemustnowbereportedintheincomestatement.
Noexpenserecordedastheoptionmovesintothemoneyoratexercisedate.
Firmsrecordataxbenefit(fornonqualifiedoptions)atexercisedate,andcreditthistoshareholdersequity.
IFRS2hassimilarrequirements
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6MeasuringtheLossfromExerciseofStockOptions:
Method1(Reebok)Expense is implied from the tax benefit:
Stock option expense $11,477/0.359 $31,969
Tax benefit at 35.9% (11,477)
Stock option expense, after tax $20,492
MeasuringTheLossfromExerciseofStockOptions:
Method2(Reebok)Calculate difference between average stock price and exercise price:
Estimate market value of shares issued 1,751 x $38.00 $66,538
Exercise (issue) price, from equity statement 41,080
Stock option expense before tax 25 458 Stock option expense, before tax 25,458
Tax benefit at 35.9% 9,139
Stock option expense, after tax $16,319
Use when tax benefit is not reported, or for incentive options (where there is no tax benefit).
Reebok:ReformulatedStatementBalance, December 31, 2003 $1,034.9
Transaction with Shareholders
Stock issues (62.3 + 20.5) $82.8 Stock repurchases (88.1) Common dividends (17.8) (23.1) C h i iComprehensive income Net income reported 192.4 Currency translation gain 37.7 Gains on hedge derivatives 4.4 Loss on employee options (20.5) 214.0
Balance, December 31, 2004 1,225.8
Shares are issued at market value, and the difference between the market value and after-tax receipts for the shares issued is a loss from exercise of options.
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7HiddenLossesonPutOptions:DellComputer
From the 2002 equity statement (see Chapter 2): Shares Amount
Repurchase of common shares (millions) 68 $3,000
The Loss:
Market price of shares repurchased $24 x 68 million $1,632 million
Amount paid for shares repurchased 3,000
Loss on exercise of put options $1,368 million
TheGAAPStatementofShareholdersEquity:DellComputer,2002
CommonStock
andCapitalin
ExcessofParValue TreasuryStock
Other
RetainedComprehensive
SharesAmount Shares Amount
Earnings IncomeOther Total
Balanceat
February2,2001 2,6014,795
83962
(74) 5,622Netincome
1,246
1,246Changeinunrealizedgainoninvestments,netoftaxes
(65)(65)
(65)
Foreigncurrencytranslationadjustment
2
2Netunrealizedgainonderivativeinstruments,netoftaxes
39
39Totalcomprehensive incomeforfiscal2002
1,222
Stockissuancesunderemployeeplans,includingtaxbenefits
69843
10 853
Purchasesandretirements
(16) (30)52
(2,249) (721)
(3,000)Other
(3)
3Balancesat
February1,2002 2,654$5,605 52$(2,249) $1,364
$38$(64) $4,694
Dell:ReformulatedStatementDellComputerCorporation
ReformulatedStatementofShareholdersEquity
Balance,February2,2001
$5,696
Transactionswithshareholders:
Sharesissuedinstockoptionexercises(atmarket)$1,747
Sharesrepurchased(atmarket)(1,632)
115
Comprehensiveincome
Comprehensive income reportedComprehensiveincomereported1,222
Lossonexerciseofemployeestockoptions $1,391Taxbenefitforemployeestockoptions 487(904)
Lossonputoptions
(1,368)(1,050)
Other(3)
Balance,February1,2002
$4,758
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8LossesonConvertibleSecuritiesLoss=Marketpriceofcommonissued
Bookvalueofconvertiblesurrendered
The market value method vs. the book value methodThemarketvaluemethodvs.thebookvaluemethod
Themarketvaluemethodrecognizeslossesonconversion
Thebookvaluemethodrecordsthesharesatthebookvalueoftheconvertiblesecurities,withnolossrecognized
Almostallfirmsusethebookvaluemethod.