Accounting: The Language of Business - Vol. 2 (Intermediate: Part 67)

It is crucial that we develop real awareness of ourselves as citizens of Earth, linked by mutual and indissoluble bonds. When we clearly recognize this reality and ground ourselves in it, we are compelled to take a strict accounting of our way of life.

Daisaku Ikeda

Statements of Financial Position and Cash Flows and the Annual Report (Part E)

by

Charles Lamson

Stockholders' Equity

Stockholders' equity, also referred to as shareholders' equity and owners' equity, is generally separated into four major categories: contributed capital, retained earnings, accumulated other comprehensive income, and noncontrolling interest. We will expand our discussion of stockholders' equity in a later post to include transactions such as treasury stock and dividends.

Contributed Capital. Contributed capital (also called paid-in capital) primarily represents the amounts invested by shareholders. It includes the stock sold by the entity at face or par value and amounts received above par value, known as additional paid-in capital or paid-in capital in excess of par. The face or stated value on the share certificate is its par value which is an arbitrary value that the organizers of the corporation place on the stock. We discuss capital stock in greater detail in a later post.

Retained Earnings. Retained earnings are the cumulative earnings (losses) of the company that have not been distributed as dividends to shareholders.

Accumulated Other Comprehensive Income. Comprehensive income is the change in an entity's equity during the period resulting from transactions with nonowners. In other words, it includes all changes in equity during a period except those changes that result from investments and distributions to owners. Comprehensive income is the sum of net income and other comprehensive income. Other comprehensive income includes revenues, expenses, gains, and losses that are excluded from net income but included in comprehensive income.

Accumulated other comprehensive income (or loss) is the cumulative amount of other comprehensive income (or loss) over the life of the entity. International financial reporting standards (IFRS) uses the term reserves for accumulated other comprehensive income. 

Noncontrolling Interest. A noncontrolling interest exists when one company controls another company (e.g, a subsidiary) but owns less than 100% of its voting shares. The controlling company adds all of the subsidiary assets and liabilities to its own balance sheet. However, because it does not own 100% of the voting shares, it must separate the amount that is owned by outside shareholders. [The noncontrolling interest is the amount of the company's net assets owned by outside shareholders. The noncontrolling interest is a required classification in the stockholders' equity section of corporate balance sheets. The accounting for the ownership and control of other companies will be covered in detail in Vol. 3 (Advance Accounting) of this analysis.] To illustrate, assume a parent company owns 90% of the voting shares of a subsidiary that reports $100 in assets and $40 in liabilities. The shareholders' equity (net assets) of the subsidiary is equal to $60 with $6 (10% * $60) of the net assets owned by the noncontrolling interest.

IFRS Balance Sheet Classification

 International Financial Reporting Standards (IFRS) has additional requirements for the presentation of specific asset and liability line items.

Assets: IFRS. As an additional requirement, IFRS specifies that, at a minimum, companies report the following asset categories [This list is from IASC, International Accounting Standard I, "Presentation of Financial Statements" (London UK: International Accounting Standards Committee, Revised). Paragraph 54. Although the Financial Accounting Standards Board (FASB) does not require that any particular asset categories be reported, the U.S. Securities and Exchange Commission (SEC) does have this requirement. See regulation S-X Rule 5-02.]:

• Cash and cash equivalents

• Trade and other receivables

• Investments accounted for using the equity method (We discuss these investments in detail in a later post.)

• Financial assets (other than those included in investments, receivables, and investment properties)

• Inventories

• Property, Plant, and Equipment

• Biological assets (i.e., living animals or plants)

• Investment properties

• Intangible assets

• Receivables related to current taxes

• Deferred tax assets

Similar to Generally Accepted Accounting Principles (GAAP or U.S. GAAP), IFRS defines current assets as resources that the firm expects to convert to cash, use, or consume within one year or one operating cycle, whichever is longer. However, IFRS also requires that current assets be held primarily for trading or cash and cash equivalents (unless they are restricted for use).

Liabilities: IFRS. IFRS specifically requires that at a minimum, companies report the following liabilities [This list is from International Accounting Standards Committee (IASC), International Accounting Standard I, "Presentation of Financial Statements," Paragraph 54. Although FASB does not require that any particular liability categories be reported, the SEC does have this requirement. See regulation S-X Rule 5-02.):

• Trade and other payables

• Provisions (such as warranty liabilities and pension benefits)

• Financial liabilities (other than the above)

• Taxes payable

• Deferred tax liability

 

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IFRS defines current liabilities similarly to U.S. GAAP as obligations that the firm expects to liquidate through the use of current assets or the creation of other current liabilities that will typically be paid within one year or operating cycle, whichever is longer. In addition, IFRS specifies that current liabilities are obligations held primarily for trading and for which a company does not have the right to defer settling beyond the current year. 

*GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED., PP. 240-241*

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