Issue of Shares and Debentures by Prof

Prof. Dr. Carsten Berkau page: 1 CONTROLLING

Issue of Shares and Debentures by Prof. Dr. Carsten Berkau

Source : 165. 1 This slide can be accessed at my website: www.Prof-Berkau.de ; FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

Karmann CONTROLLING

Source : 165. 3 This slide can be accessed at my website: www.Prof-Berkau.de ; FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

- Controlling - Prof. Dr. Carsten Berkau page: 2 CONTROLLING

to the lesson ...

Source : 165. 14 This slide can be accessed at my website: www.Prof-Berkau.de ; FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

Structure

SUNNY AG HPG GmbH McToy AG

Int. Financial Accouting CONTROLLING

International Financial Reporting Standards (IFRS)

Source : 165. 15 This slide can be accessed at my website: www.Prof-Berkau.de ; FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

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Equity

Source : 165. 17 This slide can be accessed at my website: www.Prof-Berkau.de ; FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

Legal Forms of an Organization There are several different legal forms of organization . However, these can be all grouped into two categories, known as bodies sole (sole traders, partnerships) and bodies corporate . A key feature of bodies corporate (= incorporate bodies) is that they are recognized by law as being a legal entity CONTROLLING separate from their members.

There are four types of company: (1) Companies whose liability is limited by shares A Public limited company (plc) must be registered as such. The principal reason for forming a public limited company is to gain access to greater amounts of capital from investment institutions and members of the public. All other limited companies are private companies . These are not allowed to offer their shares for sale to the general public and thus do not have stock exchange quotations . Forming a private company enables the owners to keep control of the business. (2) Companies with unlimited liability (3) Companies whose liability is limited by guarantee (4) Companies whose liability is limited by shares and guarantee.

Source : 165. 18 This slide can be accessed Thomas, A.: Introduction to Financial Accounting. 5th edition. London et al. at my website: www.Prof-Berkau.de ; (McGraw-Hill): 2005, pg. 362. FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

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Characteristics of Companies Limited by Shares

(1) A company is a legal entity separated from its shareholders (= owners). This means that companies enter into contracts as legal entities in their own CONTROLLING right. Thus, creditors and others cannot sue the shareholders of the company but must take legal proceedings against the company. (2) A company has a perpetual existence . (3) The liabilitity of a company‘s shareholders is limited to the normal value or their shares . Limited liability means that if a company‘s assets are insufficient to pay its debts the shareholders cannot be called upon to contribute more than the nominal value or their shares towards paying those debts. (4) The shareholders of a company do not have the right to take part in its management as such. (5) Each voting share carries one vote at general meetings of the company‘s shareholders (6) A limited company must have at least two shareholders .

Source : 165. 19 This slide can be accessed Thomas, A.: Introduction to Financial Accounting. 5th edition. London et al. at my website: www.Prof-Berkau.de ; (McGraw-Hill): 2005, pg. 362. FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

Capital Structure (Gearing , Leverage )

Capital structure refers to the relationship between equity capital and loan

capital . Gearing is a key measure of a company‘s financial structure, CONTROLLING referring to the relative proportions of equity capital and loan capital. If the proportion of loan capital to equity is high , the company is said to be high geared . Generally, the dividing line between high and low gears companies can be taken as 50%.

SUNNY AG's Example Sunny AG (20X5): A B/S as at 31 Dec 20X5 C,L N-cur Assets [EUR] SH's capital [EUR] P,P,E 2.357.000 Issued capital 600.000 The gearing is the loan capital Int, assets Reserves 1.085.342 (3,823,588.00 EUR) expressed Fin, assets Retained ear. 0

as a percentage of the total cur Assets Liabilities capital (5,509,930.00 EUR). This Inventory Int. bear. liab. 271.078 Receivables 1.098.960 Payables 3.289.006 works out as 69.4%, and is high Prepaid exp. Provisions Cash 2.052.970 Def. income geared. Tax liabilities 263.504 5.508.930 5.508.930

simplified B/S

Source : 165. 20 This slide can be accessed compare with: Whiteley, J.: Mastering at my website: www.Prof-Berkau.de ; Financial Management. Houndsmills FI .ppt use: FHOSStudent (Remarque) (Palgrave): 2004, page 182. based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

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Sunny AG‘s equity as at End of 20X5

SUNNY AG's CONTROLLING A B/S as at 31 Dec 20X5 C,L N-cur Assets [EUR] SH's capital [EUR] P,P,E 2.357.000 Issued capital 600.000 Int, assets Reserves 1.085.342 Fin, assets Retained ear. 0

cur Assets Liabilities Inventory Int. bear. liab. 271.078 Receivables 1.098.960 Payables 3.289.006 Prepaid exp. Provisions Cash 2.052.970 Def. income Tax liabilities 263.504 5.508.930 5.508.930

simplified B/S

Source : 165. 21 This slide can be accessed Berkau, C.: Bilanzen. Stuttgart (UTB): 2008. at my website: www.Prof-Berkau.de ; FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

IDS Scheer AG (Group Statement), Saarbruecken 2005 CONTROLLING

Source : 165. 22 This slide can be accessed at my website: www.Prof-Berkau.de ; FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

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IDS Scheer AG (Group Statement), Saarbruecken 2005 CONTROLLING Total of loan capital: 122,216,000.00 EUR Total capital: 307,995,000.00 EUR .: Gearing 39,68%

IDS Scheer AG is low geared. Guess why?

Source : 165. 23 This slide can be accessed at my website: www.Prof-Berkau.de ; FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

Capital Structure CONTROLLING

The structure of a company‘s capital is the devision between the shareholders , who are the members of the company, and the lenders , who are creditors of the company. Interest paid on loan capital is deductable from the company‘s profit for tax purposes, whereas dividend payments are not. They have to be paid out of profits.

Source : 165. 24 This slide can be accessed compare with: Whiteley, J.: Mastering Financial Management. Houndsmills at my website: www.Prof-Berkau.de ; (Palgrave): 2004, page 183. FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

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IAS 1.68 and 1.71 1.68 As a minimum, the face of the balance sheet shall include line items that present the following amounts to the extent that they are not presented in accordance with paragraph 68A: CONTROLLING (a) property, plant, and equipment (b) investment property (c) intangible assets (d) financial assets [...] (e) investments accounted for using the equity method (f) biological assets (g) inventories (h) trade and other receivables (i) cash and cash equivalents (j) trade and other payables (k) provisions (l) financial liabilities [...] (m) liabilities and assets for current tax, as defined in IAS 12 (n) deferred tax liabilities and deferred tax assets, (o) minority interest, presented within equity (p) issued capital and reserves attributable to equity holders of the parent 1.71 This standard does not prescribe the order or format in which items are to be presented. Paragraph 68 simply provides a list of items [...]

Source : 165. 25 This slide can be accessed at my website: www.Prof-Berkau.de ; FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

B/S along IAS 1

Homepage Company's balance sheet as at 31 Dec 20X4 20X3 CONTROLLING non-current assets [EUR] [EUR] property, plant and equipment 102.712,40 91.091,72 investment property 0,00 0,00 intangible assets 40.000,00 0,00 financial assets 2.800,00 2.800,00 investment accounted [...] 0,00 0,00 total of non-current assets 145.512,40 93.891,72

current assets inventories 23.475,00 900,00 trade and other receivables 422.400,00 415.200,00 cash and cash equivalents 120.989,04 40.612,00 prepaid expenses 1.000,00 1.000,00 total of current assets 567.864,04 457.712,00 Total assets 713.376,44 551.603,72

liabilities [...] interest bearing liabilities 75.000,00 60.000,00 trade and other payables 187.958,61 125.696,55 provisions 18.782,87 0,00 liabilities and assets [...] IAS 12 61.662,28 126.322,96 deferred tax liabilities [...] IAS 12 14.154,71 344,15 deferred income 8.620,69 8.620,69 total of liabilities 366.179,16 320.984,35

Capital issued capital 40.000,00 40.000,00 other reserves 193.619,37 9.283,25 retained earnings 113.577,91 181.336,12 total of shareholder's equity 347.197,28 230.619,37 Total equity and liabilities 713.376,44 551.603,72 Source : 165. 26 This slide can be accessed at my website: www.Prof-Berkau.de ; FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

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B/S along IAS 1 ( greater ) CONTROLLING

Source : 165. 27 This slide can be accessed at my website: www.Prof-Berkau.de ; FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

SCE along IAS 1 CONTROLLING

subscribed revaluation profit cumulated shareholder's capital reserves equity as at Dec 20X2 40.000,00 9.283,25 49.283,25 profit (income statement 20X3) 181.336,12 181.336,12 as at Dec 20X3 40.000,00 190.619,37 230.619,37 revaluation (car) 3.000,00 3.000,00 profit (income statement 20X4) 113.577,91 113.577,91 as at Dec 20X4 40.000,00 3.000,00 304.197,28 347.197,28

Source : 165. 28 This slide can be accessed at my website: www.Prof-Berkau.de ; FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

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Major Internal Sources of Finance

Short-term Long-term CONTROLLING

Reduced Retained Stock Profit Levels

Delayed Total Payments to Internal Creditors Finance

Tighter Credit Control

Source : 165. 29 This slide can be accessed McLaney, E.; Atrill, P.: Accounting. 3rd edition. Harlow et al. (Prentice Hall): at my website: www.Prof-Berkau.de ; FI .ppt 2005, pg. 516. use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

Major Sources of External Finance

Ordinary Loans/

Shares Debentures CONTROLLING

Long- term

Preference Leases Shares

Bank Debt Overdraft Factoring

Short-Short- termterm Invoice Discounting

Source : 165. 31 This slide can be accessed McLaney, E.; Atrill, P.: Accounting. 3rd edition. Harlow et al. (Prentice Hall): at my website: www.Prof-Berkau.de ; FI .ppt 2005, pg. 519. use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

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Risk and Ratings

Lenders have a prior claim on the assets of the company, and to that CONTROLLING extent, their risk is lower than shareholder‘s risk. However, there is always a certain degree of risk inherent in investing money in a company, in whatever form. Independent credit-rating agencies , such as Moody‘s or Standard and Poor, make assessments of the risk categories of loan capital of companies. Their categorizations follow similar lines to each other – from AAA (S&P) or Aaa (Moody‘s) to C (both companies). The triple A rating indicates the lowest risk, and the C rating indicates the highest risk. In this context the risk being assessed is the risk of interest payments not being made, and the repayment or the capital being defaulted on. The common name given to the lower risk grades is „ Junk Bonds “. In order to compensate for the degree of risk, the interest rate offered on higher risk loans is generally higher than that offered on the least risky loans.

Source : 165. 32 This slide can be accessed compare with: Whiteley, J.: Mastering Financial Management. Houndsmills at my website: www.Prof-Berkau.de ; (Palgrave): 2004, page 184f. FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

Share Capital

Ordinary Shares The ordinary shares represent the investment in the business of people who are willing to take commercial risks . The liability of shareholders for company debts is limited to CONTROLLING the amount they have invested in the company. Ordinary shareholders form the bulk of the membership of the company, and they control the company by their votes . The management of the company is delegated to directors , who are answerable to the shareholders. Ordinary shareholders can only receive dividends out of the profits left after the prior claims of other investors (loan creditors, preference shareholders) have been met. Preference Shares They have a prior claim on the profits and assets (liquidation) of the company, but no voting rights unless cumulative dividends are in arrears. They rank before ordinary shares in paying dividends , and in the distribution of assets in the case of the winding up of the company. Typically, preference shares carry the right to a fixed dividend , which is usually cumulative . (1) Participating preference shares give shareholders the right to participate in the variable dividend paid to ordinary shareholders after their fixed dividend has been paid. (2) Redeemable preference shares have a fixed repayment date. (3) Convertible shares carry the right to convert into ordinary shares. Deferred shares They rank after ordinary shares in the pecking order. (high risk) They will therefore only receive their dividends, or capital repayments on liquidation after the claims of the ordinary shareholders are met.

Source : 165. 33 This slide can be accessed compare with: Whiteley, J.: Mastering Financial Management. Houndsmills at my website: www.Prof-Berkau.de ; (Palgrave): 2004, page 194 and Faul, M.A.; Everingham, G.K.; Lomax, A.C.: FI .ppt use: FHOSStudent (Remarque) Financial Accounting. 5th edition, pg. 446. based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

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Question CONTROLLING

Would you expect the returns to preference shares to be higher or lower than of ordinary shares

Source : 165. 34 This slide can be accessed McLaney, E.; Atrill, P.: Accounting. 3rd edition. Harlow et al. (Prentice Hall): at my website: www.Prof-Berkau.de ; 2005, pg. 520 FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

Question CONTROLLING

Would you expect the market price of ordinary shares or preference shares to be the more volatile?

Source : 165. 36 This slide can be accessed McLaney, E.; Atrill, P.: Accounting. 3rd edition. Harlow et al. (Prentice Hall): at my website: www.Prof-Berkau.de ; 2005, pg. 521 FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

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Case Study Sunny AG before Appropriation of Profit CONTROLLING SUNNY AG's A B/S as at 31 Dec 20X5 C,L N-cur Assets [EUR] SH's capital [EUR] P,P,E 2.357.000 Issued capital 600.000 Int, assets Reserves 868.040 Fin, assets Retained ear. 413.908

cur Assets Liabilities Inventory Int. bear. liab. 271.078 Receivables 1.098.960 Payables 3.092.400 Perpaid exp. Provisions Cash 2.052.970 Def. income Tax liabilities 263.504 5.508.930 5.508.930

simplified B/S

Source : 165. 38 This slide can be accessed Berkau, C.: Bilanzen. Stuttgart (UTB): 2008. at my website: www.Prof-Berkau.de ; FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

Dividend

Dividends are a distribution of profits from the company to shareholders in the same ratio in which shares are held. CONTROLLING Dividend may only be paid from profits which are legally available for distribution . The company should be financed sound and have adequate cash resources to pay the dividends. The directors of a company normally propose the dividend, which is then approved by a general meeting of shareholders . It is usual not to distribute all the profits by way of dividend. A proportion of the profits is normally retained in the company for future growth. A dividend is only due and payable once it has been declared by the company. The liability for the payment of the dividend is therefore raised in the books of the company on the declaration date . The shareholders to whom dividends are paid are established by identifying a date on which share registers are closed. All shareholders registered on the date of the closing of registers will receive a dividend.

Source : 165. 39 This slide can be accessed Flynn, D.; Koornhof, C.: Fundamental Accounting. 5th edition. Cape at my website: www.Prof-Berkau.de ; FI .ppt Town (Lebone) 2005. use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

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Dividend Example (2007) CONTROLLING

Seattle’s Plum Creek Timber pays a dividend of close to 4.2 percent, and it also expects earnings to expand about 6 percent in the next year. General Motors has a seemingly healthy dividend of 5.8 percent. But the big car manufacturer has a loss of $1.1 billion in a recent quarter, and it is having trouble reducing its onerous health care benefits. There is concern that GM may be forced to trim its dividend at some point to conserve cash.

Source : 165. 40 This slide can be accessed Kieso, D.E.; Weygandt, J.J.; Warfield, T.D.: Intermediate Accounting. at my website: www.Prof-Berkau.de ; 12th edition. Wiley 2007. FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

Distribution of Profit

At time of incorporation (1.01.20X1) Sunny AG issued 120,000 ordinary CONTROLLING shares par value 5.00 EUR/share . During fiscal years 20X1 ... 20X5 Sunny AG paid a dividend to shareholders 50% of profit attributable to shareholders. (§ 150 German AktG considered)

20X120X1 20X2 20X2 20X3 20X3 20X4 20X4 20X5 20X5 addadd toto legallegal Earn.ResEarn.Res 20.652,27 20.652,27 20.662,08 20.662,08 20.672,52 20.672,52 20. 20.683,61683,61 20.695,40 20.695,40 addadd toto otherother earnearn resres 196.196,56 196.196,56 196.289,81 196.289,81 196.388,93 196.388,93 196.494,30196.494,30 196.606,31 196.606,31 DividendDividend 196.196,56 196.196,56 196.289,81 196.289,81 196.388,93 196.388,93 196.494,30 196.494,30 196 196.606,31.606,31

Dividends were paid at the beginning of the following fiscal year to ordinary shareholders.

Source : 165. 41 This slide can be accessed Berkau, C.: Bilanzen. Stuttgart (UTB): 2008. at my website: www.Prof-Berkau.de ; FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

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Case Study Sunny AG after Appropriation of Profit CONTROLLING SUNNY AG's A B/S as at 31 Dec 20X5 C,L N-cur Assets [EUR] SH's capital [EUR] P,P,E 2.357.000 Issued capital 600.000 Int, assets Reserves 1.085.342 Fin, assets Retained ear. 0

cur Assets Liabilities Inventory Int. bear. liab. 271.078 Receivables 1.098.960 Payables 3.289.006 Prepaid exp. Provisions Cash 2.052.970 Def. income Tax liabilities 263.504 5.508.930 5.508.930

simplified B/S

Source : 165. 42 This slide can be accessed Berkau, C.: Bilanzen. Stuttgart (UTB): 2008. at my website: www.Prof-Berkau.de ; FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

SCE after Appropriation of Profit CONTROLLING

subscribedsubscribed CapitalCapital ReservesReserves leg. leg. ReservesReserves Reserves Reserves shareholder'sshareholder's capitalcapital cumulatedcumulated equityequity asas atat DecDec 20X020X0 600.000,00600.000,00 0,000,00 0,000,00 600.000,00600.000,00 asas atat DecDec 20X120X1 ProfitProfit 20.652,2720.652,27 196.196,56 196.196,56 600.000,00600.000,00 20.652,2720.652,27 196.196,56196.196,56 816.848,82816.848,82 asas atat DecDec 20X220X2 ProfitProfit 20.662,0820.662,08 196.289,81196.289,81 600.000,00600.000,00 41.314,3541.314,35 392.486,36392.486,36 1.033.800,721.033.800,72 asas atat DecDec 20X320X3 ProfitProfit 20.672,5220.672,52 196.388,93 196.388,93 600.000,00600.000,00 61.986,8761.986,87 588.875,29588.875,29 1.250.862,171.250.862,17 asas atat DecDec 20X420X4 ProfitProfit 20.683,6120.683,61 196.494,30 196.494,30 600.000,00600.000,00 82.670,4882.670,48 785.369,60785.369,60 1.468.040,081.468.040,08 asas atat DecDec 20X520X5 ProfitProfit 20.695,4020.695,40 196.606,31196.606,31 600.000,00600.000,00 103.365,89103.365,89 981.975,91981.975,91 1.685.341,801.685.341,80

Source : 165. 44 This slide can be accessed Berkau, C.: Bilanzen. Stuttgart (UTB): 2008. at my website: www.Prof-Berkau.de ; FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

- Controlling - Prof. Dr. Carsten Berkau page: 15 CONTROLLING

Issue of Shares

Source : 165. 45 This slide can be accessed at my website: www.Prof-Berkau.de ; FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

Issue of Ordinary Shares

Sunny AG issues on 31.12.20X5 24,000 ordinary shares by rights . It offers to their shareholders 1 share for 5 shares hold. The Fair Market Value ( FMV )

for the Sunny AG share is at moment of issuing 14.50 EUR. The new shares CONTROLLING have got a selling price 12.80 EUR . Face value or the new shares is 5.00 EUR. The booking entries for that issue are: DR Cash 307,200.00 EUR CR Share Capital 120,000.00 EUR CR Share Premium 187,200.00 EUR

SUNNY AG's A B/S as at 31 Dec 20X5 C,L N-cur Assets [EUR] SH's capital [EUR] P,P,E 2.357.000 Issued capital 720.000 Int, assets Reserves 1.272.542 Fin, assets Retained ear. 0

cur Assets Liabilities Inventory Int. bear. liab. 271.078 Receivables 1.098.960 Payables 3.289.006 Prepaid exp. Provisions Cash 2.360.170 Def. income Tax liabilities 263.504 5.816.130 5.816.130

simplified B/S

Source : 165. 46 This slide can be accessed Berkau, C.: Bilanzen. Stuttgart (UTB): 2008. at my website: www.Prof-Berkau.de ; FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

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Sunny AG‘s SCE CONTROLLING subscribed Capital Reserves leg. Reserves Reserves shareholder's capital cumulated equity as at Dec 20X0 600.000,00 0,00 0,00 600.000,00 as at Dec 20X1 Profit 20.652,27 196.196,56 216.848,82 600.000,00 20.652,27 196.196,56 816.848,82 as at Dec 20X2 Profit 20.662,08 196.289,81 216.951,89 600.000,00 41.314,35 392.486,36 1.033.800,72 as at Dec 20X3 Profit 20.672,52 196.388,93 217.061,45 600.000,00 61.986,87 588.875,29 1.250.862,17 as at Dec 20X4 Profit 20.683,61 196.494,30 217.177,92 600.000,00 82.670,48 785.369,60 1.468.040,08 as at Dec 20X5 Issue of Shares 120.000,00 187.200,00 307.200,00 Profit 20.695,40 196.606,31 217.301,72 720.000,00 187.200,00 103.365,89 981.975,91 1.992.541,80

Source : 165. 47 This slide can be accessed Berkau, C.: Bilanzen. Stuttgart (UTB): 2008. at my website: www.Prof-Berkau.de ; FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

Exercise Issue of Shares CONTROLLING

A company has share capital 5 million EUR split up to 100,000 shares. Fair market value is 340.00 EUR/share. The board of directors issues 20,000 new ordinary shares with a price 100.00 EUR/share. The par value of the new shares is 50.00 EUR/share. (1) Compute the ex-right value (2) Compute the value of the right (3) Determine the value of share capital and capital reserves. (4) Compute the value of the shareholder holding 10 shares (a) before issue, (b) after issue when he/she sells the right (c) after issue using the rights to by new shares.

Source : 165. 49 This slide can be accessed at my website: www.Prof-Berkau.de ; FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

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Different Ways to Issue Shares

Issue Price and Share Premiums Shares may be issued at their face value . However, shares may be issued at a premium . The shareholders pays more than the nominal value of the shares. The company must account for that premium . CONTROLLING Public offers The mechanism is that the company makes an offer of sale of its shares by advertisement, and publication of a prospectus . This sets out the details of the shares on offer and other relevant details of the company‘s finance. Underwriting This means than an exterior organization , either stockbroakers or merchant bankers act as the issuing house. They guarantee to buy any shares not taken up by the general public or the existing shareholders. Issue by tender The public is invited to make bids to offer to buy a specified number of shares at a price which the buyer offers. When the deadline for bids has passed the company works out the striking price . All offers at or above the striking price will be accepted at the striking price. Rights issue Only shareholders get the right to buy new shares or can sell these rights. Script issue, capitalization shares (bonus issue) Issue of free fresh shares to existing shareholders to make shares more marketable .

Source : 165. 50 This slide can be accessed at my website: www.Prof-Berkau.de ; FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

Disclosure of Equity on the Face of the B/S

CAPITAL EMPLOYED ORDINARY SHARE CAPITAL 180.000

- 180,000 Ordinary shares at R1.00 each CONTROLLING SHARE PREMIUM ACCOUNT 12.000 NON DISTRIBUTABLE RESERVES 60.000 - Reserve arising on revaluation 35.000 - Surplus on sale of land and building 25.000 DISTRIBUTABLE RESERVES - Returned income 146.000 ORDINARY SH's INTEREST 398.000 PREFERENCE SHARE CAPITAL - 60,000 12% Preference shares at R1.00 each 60.000 SHARE CAPITAL AND RESERVES 458.000 LONG TERM LIABILITIES 32.000 - 320 14% Mortgage debentures at R100.00 each 32.000 less: Short term portion (8.000) 24.000 - Other unsecured loans 8.000 490.000

Source : 165. 51 This slide can be accessed Flynn, D.; Koornhof, C.: Fundamental Accounting. 5th edition. Cape at my website: www.Prof-Berkau.de ; FI .ppt Town (Lebone) 2005. use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

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Authorized Shares CONTROLLING

A distinction is made between the authorized share capital , being shares which a company may issue in terms of its articles, and the issued share capital , representing the number of shares which a company has actually issued. A company has to report on its authorized share capital in the notes.

Source : 165. 52 This slide can be accessed Faul, M.A.; Everingham, G.K.; Lomax, A.C.: Financial Accounting. 5th edition, at my website: www.Prof-Berkau.de ; Durban (Butterworths): 1999, pg. 106. FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

Stock Right (Warrant) CONTROLLING Every share carries the right to share proportionately in any new issues of stock of the same class – called the preemtive right (= stock right, “warrant”). The stock right is used to protect each stockholder‘s proportional interest in the company. The preemptive right protects an existing stockholder from involuntary dilution of ownership interest . Without his right, stockholders might find their interest reduced by the issuance of additional stock without their knowledge, and at prices unfavorable to them. (In case all shareholders take the offer to buy shares for rights they have received, the voting structure does not change.) However, many corporations have eliminated the preemtive right , because this right makes it inconvenient for corporations to issue lage amounts of additional stock , as they frequently do in acquiring other companies.

Source : 165. 53 This slide can be accessed Kieso, D.E.; Weygandt, J.J.; Warfield, T.D.: Intermediate Accounting. 12th at my website: www.Prof-Berkau.de ; edition. Wiley 2007, pg. 727. FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

- Controlling - Prof. Dr. Carsten Berkau page: 19

Question 1

LERATO Ltd. was formed with an authorized share capital of:

100,000 ordinary shares of R1.50 each 150,000.00 CONTROLLING 50,000 8% preference share (no par value) all shares are issued for cash. Required: Record the journal entries for the issue of the shares under each of the sets of conditions. Draft the balance sheet of LERATO Ltd. in each case after the shares issue to comply with the minimum disclosure requirements of the Companies Act and GAAP.

Case 1: Issue of par value shares at par The founders of the company (also called subscribers to the memorandum) subscribe and pay for 30,000 ordinary shares at par. The other 70,000 ordinary shareholders are offered to the public at par. Applications are received for 70,000 shares and these shares are allotted.

Source : 165. 54 This slide can be accessed see: Flynn, D.; Koornhof, C.: Fundamental Accounting. 5th edition. Cape Town at my website: www.Prof-Berkau.de ; (Lebone) 2005, 20-8 FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

Task 1

LERATO Ltd. was formed with an authorized share capital of:

100,000 ordinary shares of R5.00 each 500,000.00 CONTROLLING 50,000 8% preference share (no par value) all shares are issued for cash. Required: Record the journal entries for the issue of the shares under each of the sets of conditions. Draft the balance sheet of LERATO Ltd. in each case after the shares issue to comply with the minimum disclosure requirements of the Companies Act and GAAP.

Source : 165. 55 This slide can be accessed see: Flynn, D.; Koornhof, C.: Fundamental Accounting. 5th edition. Cape Town at my website: www.Prof-Berkau.de ; (Lebone) 2005, 20-8 FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

- Controlling - Prof. Dr. Carsten Berkau page: 20

Question 1

LERATO Ltd. was formed with an authorized share capital of:

100,000 ordinary shares of R1.50 each 150,000.00 CONTROLLING 50,000 8% preference share (no par value) all shares are issued for cash. Required: Record the journal entries for the issue of the shares under each of the sets of conditions. Draft the balance sheet of LETATO Ltd. in each case after the shares issue to comply with the minimum disclosure requirements of the Companies Act and GAAP.

Case 2: Issue of par value shares at a premium – issue oversubscribed The founders of the company subscribed and paid for 40,000 ordinary shares at par. A further 60,000 ordinary shares were offered six month later to the public at a premium of 50c per share. Applications and payments were received for 60,000 shares. The 40,000 shares were allotted and all unsuccessful applicants were refunded.

Source : 165. 56 This slide can be accessed see: Flynn, D.; Koornhof, C.: Fundamental Accounting. 5th edition. Cape Town at my website: www.Prof-Berkau.de ; (Lebone) 2005, 20-8 FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

Task 1

LERATO Ltd. was formed with an authorized share capital of:

100,000 ordinary shares of R1.50 each 150,000.00 CONTROLLING 50,000 8% preference share (no par value) all shares are issued for cash. Required: Record the journal entries for the issue of the shares under each of the sets of conditions. Draft the balance sheet of LETATO Ltd. in each case after the shares issue to comply with the minimum disclosure requirements of the Companies Act and GAAP.

Case 2: Issue of par value shares at a premium – issue oversubscribed The founders of the company subscribed and paid for 40,000 ordinary shares at par. A further 50,000 ordinary shares were offered six month later to the public at a premium of R1.00 per share. Applications and payments were received for 60,000 shares. The 40,000 shares were allotted and all unsuccessful applicants were refunded.

Source : 165. 57 This slide can be accessed see: Flynn, D.; Koornhof, C.: Fundamental Accounting. 5th edition. Cape Town at my website: www.Prof-Berkau.de ; (Lebone) 2005, 20-8 FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

- Controlling - Prof. Dr. Carsten Berkau page: 21

Question 1

LERATO Ltd. was formed with an authorized share capital of:

100,000 ordinary shares of R1.50 each 150,000.00 CONTROLLING 50,000 8% preference share (no par value) all shares are issued for cash. Required: Record the journal entries for the issue of the shares under each of the sets of conditions. Draft the balance sheet of LETATO Ltd. in each case after the shares issue to comply with the minimum disclosure requirements of the Companies Act and GAAP.

Case 3: Issue of no par value shares – issue under subscription The founders of the company subscribe and pay for 20,000 ordinary shares at par. Six month later the public is offered 50,000 ordinary shares at a premium of 25c and 50,000 8% preference shares of no par value at 50c per share. Subscriptions are received for 30,000 ordinary shares and 50,000 8% preference shares and all shares are allotted. Share issue expense of R5,000.00 were incurred and written off against the share premium account.

Source : 165. 58 This slide can be accessed see: Flynn, D.; Koornhof, C.: Fundamental Accounting. 5th edition. Cape Town at my website: www.Prof-Berkau.de ; (Lebone) 2005, 20-8 FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

Task 1

LERATO Ltd. was formed with an authorized share capital of:

100,000 ordinary shares of R1.50 each 150,000.00 CONTROLLING 50,000 8% preference share (no par value) all shares are issued for cash. Required: Record the journal entries for the issue of the shares under each of the sets of conditions. Draft the balance sheet of LETATO Ltd. in each case after the shares issue to comply with the minimum disclosure requirements of the Companies Act and GAAP.

Case 3: Issue of no par value shares – issue under subscription The founders of the company subscribe and pay for 20,000 ordinary shares at par. Six month later the public is offered 50,000 ordinary shares at a premium of 50c and 50,000 8% preference shares of no par value at 50c per share. Subscriptions are received for 10,000 ordinary shares and 50,000 8% preference shares and all shares are allotted. Share issue expense of R5,000.00 were incurred and written off against the share premium account.

Source : 165. 59 This slide can be accessed see: Flynn, D.; Koornhof, C.: Fundamental Accounting. 5th edition. Cape Town at my website: www.Prof-Berkau.de ; (Lebone) 2005, 20-8 FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

- Controlling - Prof. Dr. Carsten Berkau page: 22

Stated Capital Account

Shares can be issued par value or no par value shares (NPV). Par value

means there is a face value for each share as its nominal value and the CONTROLLING product of face value and amount of shares issued equals the share capital to be recognized in the B/S.

par value share: Share capital 50.000 50,000 Ordinary shares of R1.00 each)

no par value shares Stated capital 50,000 Ordinary shares 60.000 (No nominal value has been given to each share)

To distinguish on the B/S whether shares are par value or no par value, the term “Share Capital” is used for par value shares and the term “Stated Capital” is used for no par value shares.

Source : 165. 60 This slide can be accessed at my website: www.Prof-Berkau.de ; FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

Conversion of Par Value Shares to No Par Value Shares CONTROLLING The company can convert par value shares plus the share premium to the stated capital account . This is related to all ordinary and/or all preference shares. In the other direction no par value shares can be converted to par value shares. In that case there is no share premium account to be credited.

par value par value no par value

Share Cap Stated Capital Share Cap (R100,000) (R120,000) (R120,000)

Share Prem. (R20,000)

Source : 165. 61 This slide can be accessed at my website: www.Prof-Berkau.de ; FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

- Controlling - Prof. Dr. Carsten Berkau page: 23

Question 2 BETA Ltd. has the following balances in their records as at 31.12.20X2 – DR(CR)

Ordinary Shares (50,000 of R2.00) (100.000) Share premium - ordinary shares (12.000) Share premium - preference shares (8.000) CONTROLLING Retained income (50.000) Preference Shares (30,000 of R 1.00) (30.000) Non-current assets 120.000 Net current assets 70.000 Share issue expenses 10.000

Additional information not recorded in the T/B: (1) At a meeting of the directors held on 30.06.20X2 it was decided: (a) to issue a further 50,000 ordinary shares to the public at a premium of 50c per share on 31.08.20X2. Share issue expense amounted to R 6,000.00. ABLE UNDERWRITERS Ltd. underwrote the entire issue for a commission of 5%. Applications were received for 40,000 shares. (b) To convert the authorized and issued ordinary share capital to no par value shares with effect from 30.09.20X2. Only the ordinary share premium should be transferred to the stated capital account. (2) On 1.06.20X2, at the annual general meeting, the directors were given a general authority to issue the unissued shares of the company until the next annual meeting. (3) Share premium expense are written off to profits. (4) The authorized share capital consists of 150,000 ordinary shares of R 2.00 each and 50,000 8% redeemable preference shares of R 1.00 each.

Source : 165. 62 This slide can be accessed see: Flynn, D.; Koornhof, C.: at my website: www.Prof-Berkau.de ; Fundamental Accounting. 5th edition. FI .ppt use: FHOSStudent (Remarque) Cape Town (Lebone) 2005, 20-8 based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

Task 2 BETA Ltd. has the following balances in their records as at 31.12.20X2 – DR(CR)

Additional information not recorded in the T/B: (1) At a meeting of the directors held on 30.06.20X2 it was decided: (a) to issue a further 100,000 ordinary shares to the public at a premium of 50c per share on 31.08.20X2. Share issue expense amounted to R 6,000.00. ABLE UNDERWRITERS Ltd. underwrote the entire issue for a commission of 5%. Applications were received for 70,000 shares. (b) To convert the authorized and issued ordinary share capital to no par value shares with effect from 30.09.20X2. Only the ordinary share premium should be transferred to the stated capital account. (2) On 1.06.20X2, at the annual general meeting, the directors were given a general authority to issue the unissued shares of the company until the next annual meeting. (3) Share premium expense are written off to profits. (4) The authorized share capital consists of 150,000 ordinary shares of R 2.00 each and 50,000 8% redeemable preference shares of R 1.00 each.

Source : 165. 63 This slide can be accessed see: Flynn, D.; Koornhof, C.: Fundamental Accounting. 5th edition. Cape Town (Lebone) at my website: www.Prof-Berkau.de ; 2005, 20-8 FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

- Controlling - Prof. Dr. Carsten Berkau page: 24

How to Debit Equity Accounts ( Dissolving ) ...

Share capital, share premium, and reserves are SH‘s equity. In case no par value shares have been issued the stated share capital account and reserves

are SH‘s equity. Accounts can be used for: CONTROLLING

par value situation

Share premium account : Capital redemtion (1) issue bonus shares reserve fund : (2) write off preliminary (1) Issue bonus shares expenses (3) write off expenses, commissions, discounts allowed (4) write off premium Distributable reserve : payable on the redemption (1) Issue bonus shares of pref. shares (5) write off the premium paid on treasury* shares

*Treasury shares are own shares hold by the company – not allowed in SA, see Companies Act Sec.85!

Source : 165. 64 This slide can be accessed at my website: www.Prof-Berkau.de ; FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

How to Debit Equity Accounts ( Dissolving ) ...

Share capital, share premium, and reserves are SH‘s equity. In case no par value shares have been issued the stated share capital account and reserves

are SH‘s equity. Accounts can be used for: CONTROLLING

no par value situation

Stated capital account : (1) write off expenses, or the commission paid on the shares issued (2) write off preliminary Note: expenses (no discounts) The issue of bonus shares, and premium payable on redemtion of preference shares can not be provided out of the stated capital account.

Think about how you can protect retained earnings account!

Source : 165. 65 This slide can be accessed at my website: www.Prof-Berkau.de ; FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

- Controlling - Prof. Dr. Carsten Berkau page: 25

Question 3

The T/B of Themba Ltd. included the following balances as at 31.12.20X3 – DR(CR) CONTROLLING

Ordinary shares (150,000 of R1.00) (150.000) Share premium (20.000) Non-distributable reserves - Redemption fund (25.000) Retained earnings (90.000) Net other assets 285.000

At a meeting of directors on 20.12.20X3 it was decided to issue on 31.12.20X3 capitalization shares of one ordinary share for every three ordinary shares already held. This is to be arranged so that there is a minimum effect on distributable reserves such as retained income. Required: Prepare the journal entry in Themba Ltd‘s books to record the above decision.

Source : 165. 66 This slide can be accessed see: Flynn, D.; Koornhof, C.: Fundamental Accounting. 5th edition. Cape Town (Lebone) at my website: www.Prof-Berkau.de ; 2005, 20-12 FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

Question 4

The T/B of DHARMA Ltd. included the following balances as at 31.12.20X2 – DR(CR) CONTROLLING Ordinary shares (150.000) Share premium (20.000) Retained earnings (80.000) Redeemable preference shares (55.000) Share issue expenses - ordinary 9.000 Share issue expenses - preference 3.000 Debenture discount 10.000 Preliminary expenses 15.000 Underwriters Comm. - ordinary 6.000 Underwriters Comm. - preference 2.000 Net other assets 260.000

The directors require all expenses to be written off in a manner that would least affect the retained income. Required: Complete the journal entries for the above decision.

Source : 165. 67 This slide can be accessed see: Flynn, D.; Koornhof, C.: Fundamental Accounting. 5th edition. Cape Town (Lebone) at my website: www.Prof-Berkau.de ; 2005, 20-12 FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

- Controlling - Prof. Dr. Carsten Berkau page: 26 CONTROLLING

Redemption of Shares

Source : 165. 68 This slide can be accessed at my website: www.Prof-Berkau.de ; FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

Effects of back buying CONTROLLING

Firstly, it should be clear that there is no gain or loss to a company as a result of buying back its own shares, as the transaction represents a transfer between those shareholders who have sold their shares, and those who continue to hold their shares, rather than a gain or loss to the company.

Source : 165. 69 This slide can be accessed •Faul, M.A.; Everingham, G.K.; Lomax, A.C.: Financial Accounting. 5th edition, at my website: www.Prof-Berkau.de ; Durban (Butterworths): 1999, pg. 119. FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

- Controlling - Prof. Dr. Carsten Berkau page: 27

Redemption of Preference Shares CONTROLLING

There is a Capital Maintenance Rule to protect the interest of creditors: The original capital base of a company is to be maintained . In adopting this rule the Company Act prohibits companies from purchasing its own shares . (This would be a decrease in cash and a decrease in capital base) An exception to this rule is the redemption of redeemable preference shares which is specifically allowed. One requirement for that is that a non-distributable reserve called the capital redemption reserve fund ( CRRF ) is created when preference shares are redeemed without the fresh issue of shares to replace them. A credit balance of the CRRF is only be used to issue bonus shares .

Source : 165. 70 This slide can be accessed see: Flynn, D.; Koornhof, C.: Fundamental Accounting. 5th edition. Cape Town at my website: www.Prof-Berkau.de ; (Lebone) 2005, 20-14 FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

B/S after Issue of 100 EUR Preference Shares CONTROLLING

AA B/S B/S as as at at 31 31 Dec Dec 20X5 20X5 C,LC,L [EUR][EUR] [EUR] [EUR] NetNet other other assets assets 200200 Issued Issued capital capital 100 100 ReservesReserves PreferencePreference Shares Shares 2020 RetainedRetained ear. ear. 80 80 200200 200 200

SH‘s equity is 120.00 EUR

Source : 165. 71 This slide can be accessed at my website: www.Prof-Berkau.de ; FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

- Controlling - Prof. Dr. Carsten Berkau page: 28

Capital Redemption Reserve Fund CONTROLLING

The Companies Act. requires that a non-distributable reserve, called the Capital Redemption Reserve Fund (CRRF) be created when preference shares are redeemed.

Source : 165. 72 This slide can be accessed at my website: www.Prof-Berkau.de ; FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

B/S after Redemtion of Half of Shares

Half of preference shares have been bought back and redeemed.

DR Preference Shares 10 CONTROLLING CRNet other assets 10 DR Retained Earnings 10 CR Capital redemption reserve fund 10

AA B/S B/S as as at at 31 31 Dec Dec 20X5 20X5 C,LC,L [EUR][EUR] [EUR] [EUR] NetNet other other assets assets 190190 Issued Issued capital capital 100 100 CRRFCRRF 10 10 PreferencePreference Shares Shares 1010 RetainedRetained ear. ear. 70 70 190190 190 190

SH‘s equity is 120.00 EUR

Source : 165. 73 This slide can be accessed at my website: www.Prof-Berkau.de ; FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

- Controlling - Prof. Dr. Carsten Berkau page: 29

Redemption of Preference Shares CONTROLLING Capital Premium on Dividend (nominal Value) Redemption

Replaced by Written off to Written off to

New Share Retained Share Retained Retained Issue Income Premium Income Income

Transferred Combination to

CRRF

Combination

Source : 165. 74 This slide can be accessed see: Flynn, D.; Koornhof, C.: Fundamental Accounting. 5th edition. Cape Town at my website: www.Prof-Berkau.de ; (Lebone) 2005, 20-14 FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

Question 5 Redemption of redeemable preference shares. The T/B of Echo Ltd. at 31.03.20X4 is as follows: CONTROLLING Ordinary share capital (250.000) Share premium - ordinary (15.000) Share premium - preference (5.000) Retained income (130.000) 14% Redeemable preference shares (60.000) Cash 160.000 Net other assets 300.000

Authorized share capital: (1) 300,000 ordinary shares of R2.00 each (= R600,000.00), (2) 60,000 14% redeemable preference shares of R1.00 each (= R60,000.00) According to the term of issue, the 14% redeemable preference shares is redeemable on 31.03.20X4 at a premium of 25c per share. Ignore taxation implications Required: Prepare the disclosures arising from the share repurchase to be presented in the annual financial statements of Blush Limited for the year ended 31.12.20X5 in regards to case A...D

Source : 165. 75 This slide can be accessed Stainbank, L.; Oakes, D.: A Student‘s at my website: www.Prof-Berkau.de ; Guide to International Financial FI .ppt Reporting. 2nd. edition, KwaZulu-Natal, use: FHOSStudent (Remarque) based on: South Africa (S & O): 2005, pg. 2-19. University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

- Controlling - Prof. Dr. Carsten Berkau page: 30

Question 5 A: 30,000 ordinary shares issued R2.00 at a premium 30c

B: Fully redemption out of retained income ( Note: In terms of section 98 of the Companies

Act, redeemable preference shares may be redeemed (replaced) from the preceeds of a fresh issue – CONTROLLING R60,000 (R69,000) .)

C: Issue 20,000 ordinary shares R2.00 at a premium 25c ( Note: The Companies Act Section 98 states that the proceeds (nominal value and premium) of a new share issue may be offset against the nominal value of the preference shares to be redeemed.) D: To illustrate the redemption of redeemable preference shares by the issue of no par value shares, the T/B of ECHO Ltd. is altered as below. Issue of 15,000 ordinary shares at R2.50 per share and replacing the residue from distributable reserves (minimum effect on distributable reserves required):

Stated Capital (125,000 ordinary npv shares) (265.000) Share premium - preference (5.000) Retained income (130.000) 14% Redeemable preference shares (60.000) Cash 160.000 Net other assets 300.000

Source : 165. 76 This slide can be accessed Stainbank, L.; Oakes, D.: A Student‘s at my website: www.Prof-Berkau.de ; Guide to International Financial FI .ppt Reporting. 2nd. edition, KwaZulu-Natal, use: FHOSStudent (Remarque) based on: South Africa (S & O): 2005, pg. 2-19. University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

Share buy backs

South African reacquisition is regulated by: (1) South African Companies Act and (2) JSE Securities Exchange . CONTROLLING A company can buy back own shares under the following conditions: (a) repurchase must be authorized by special resolution, (b) company must be authorized by its articles, (c) company must be solvent , (d) company must be able to pay its debts , (e) shares acquired must be cancelled as issued shares and restored to the status of unissued share capital, and (f) the entire issued share capital of the company may not be repurchased. JSE Securities Exchange requires additionally: (g) specifically approved share buy backs are limited to 20% or the company‘s issued share capital, and (h) generally approved share buy-backs are limited to 10% of the company‘s issued share capital and may not be contracted at a price in excess of 5% above the weighted average of the market price of the security for the preceding 5 working days. The Companies Act requires (i) the par value of shares bought back is to be paid from the share capital account , (k) the premium over the par value is to be paid from reserves , (l) a specified proportion of the no par value shares is to be paid from the stated capital account , and (m) the balance over the amount paid from the stated capital account is to be paid from reserves .

Source : 165. 77 This slide can be accessed Stainbank, L.; Oakes, D.: A Student‘s Guide to International Financial Reporting. at my website: www.Prof-Berkau.de ; 2nd. edition, KwaZulu-Natal, South Africa (S & O): 2005, pg. 2-19. FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

- Controlling - Prof. Dr. Carsten Berkau page: 31

Writing off Difference between Reacquisition Value and Nominal Value CONTROLLING The company acquires its own shares from its shareholders at a market price agreed to by the two parties. If the shares acquired are par value shares , the issued share capital is decreased . Where applicable, the premium paid on reacquiring the shares are written off against : (1) the capital redemption reserve fund (CRRF) (2) the share premium account (3) retained income If the shares acquired are no par value shares , the stated capital account of these shares is decreased by the average price of the NPV shares . When the company paid more than average price the difference may be written off against the accounts mentioned above. All entries are to be shown in the SCE .

Source : 165. 78 This slide can be accessed Stainbank, L.; Oakes, D.: A Student‘s Guide to International Financial Reporting. at my website: www.Prof-Berkau.de ; 2nd. edition, KwaZulu-Natal, South Africa (S & O): 2005, pg. 2-25. FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

Example 20.6 Share buy back CONTROLLING TSUMI Ltd. has the following share capital:

Share Capital (100,000 ord. shares R1.50) (150.000) Share premium - ordinary (50.000) Preference shares (50,000 NPV 8%) (75.000) CRRF (15.000)

The directors of TSUMI Ltd. decide to acquire its own shares: (1) 20,000 ordinary shares at R2.50 each or: (2) 10,000 8% preference shares at R2.00 each. The directors require the premiums of the acquired shares to be written off in a manner that least affects the retained income. Show SCE after reacquisition.

Source : 165. 79 This slide can be accessed at my website: www.Prof-Berkau.de ; FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

- Controlling - Prof. Dr. Carsten Berkau page: 32

Example for buy backs On 30.12.20X5 Blush Limited purchased 100,000 own ordinary shares at R 5.00 each. The company‘s summarized T/B at 31.12.20X5 is as follows: CONTROLLING Ordinary share capital (R 1.00 shares) (400.000) Stated capital account (400,000 ordinary shares 0 Share premium account (200.000) Capital redemtion reserve fund (100.000) Revaluation surplus reserve (300.000) Retained earnings at the beginning of year (700.000) Profit for the year (200.000) Suspense account (share buy back) 500.000 Net assets 1.400.000

The secondary tax on companies arising from the share buy-back was determined by an independent tax expert and has been deducted in arriving at net profit for the year. Required: Prepare the disclosures arising from the share repurchase to be presented in the annual financial statements of Blush Limited for the year ended 31.12.20X5.

Source : 165. 80 This slide can be accessed Stainbank, L.; Oakes, D.: A Student‘s Guide to International Financial Reporting. 2nd. at my website: www.Prof-Berkau.de ; edition, KwaZulu-Natal, South Africa (S & O): 2005, pg. 2-19. FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

Example for ReShare buy backs On 30.12.20X5 BLUSH Limited purchased 100,000 own ordinary shares at R 5.00 each. The company‘s summarized T/B at 31.12.20X5 is as follows: CONTROLLING Ordinary share capital (R 1.00 shares) 0 Stated capital account (400,000 ordinary shares (600.000) Share premium account 0 Capital redemtion reserve fund (100.000) Revaluation surplus reserve (300.000) Retained earnings at the beginning of year (700.000) Profit for the year (200.000) Suspense account (share buy back) 500.000 Net assets 1.400.000

Source : 165. 81 This slide can be accessed Stainbank, L.; Oakes, D.: A Student‘s Guide to International Financial Reporting. 2nd. at my website: www.Prof-Berkau.de ; edition, KwaZulu-Natal, South Africa (S & O): 2005, pg. 2-19. FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

- Controlling - Prof. Dr. Carsten Berkau page: 33 CONTROLLING

Loan Capital

Source : 165. 82 This slide can be accessed at my website: www.Prof-Berkau.de ; FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

Types of Loan Capital CONTROLLING • Subordinated loans • Debentures • Redeemable or irredeemable loans • Bearer bonds • Eurobonds • Deep discount bonds • Convertible loans • Warrants • Mortgages

Source : 165. 83 This slide can be accessed compare with: Whiteley, J.: Mastering Financial Management. Houndsmills at my website: www.Prof-Berkau.de ; (Palgrave): 2004, page 186f. FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

- Controlling - Prof. Dr. Carsten Berkau page: 34

Types of Loan Capital

• Subordinated loans

A company may issue different classes of loans or bonds. The rights of some CONTROLLING classes, while still ranking above shareholders, may be subordinated to a higher class of loans or bonds. Subordinated bonds are thus to be of slightly higher risk than the senior loans, and would therefore be expected to carry a higher rate of interest. • Debentures • Redeemable or irredeemable loans • Bearer bonds • Eurobonds • Deep discount bonds • Convertible loans • Warrants • Mortgages

Source : 165. 84 This slide can be accessed compare with: Whiteley, J.: Mastering Financial Management. Houndsmills at my website: www.Prof-Berkau.de ; (Palgrave): 2004, page 186f. FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

Types of Loan Capital

• Subordinated loans

• Debentures CONTROLLING Debentures are a form of loan established by a trust deed. Debentures normally carry a fixed and/or floating charge over some or all assets of the company. For publicity quoted companies, debentures are often quoted on the stock market. • Redeemable or irredeemable loans • Bearer bonds • Eurobonds • Deep discount bonds • Convertible loans • Warrants • Mortgages

Source : 165. 85 This slide can be accessed compare with: Whiteley, J.: Mastering Financial Management. Houndsmills at my website: www.Prof-Berkau.de ; (Palgrave): 2004, page 186f. FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

- Controlling - Prof. Dr. Carsten Berkau page: 35

Types of Loan Capital

• Subordinated loans

• Debentures CONTROLLING • Redeemable or irredeemable loans Redeemable loans have a fixed date on which they are repayable. The repayment is usually at par (that is, the normal amount at which they were issued). Irredeemable loans have no fixed date for repayment, but can often be traded on the stock market. • Bearer bonds • Eurobonds • Deep discount bonds • Convertible loans • Warrants • Mortgages

Source : 165. 86 This slide can be accessed compare with: Whiteley, J.: Mastering Financial Management. Houndsmills at my website: www.Prof-Berkau.de ; (Palgrave): 2004, page 186f. FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

Types of Loan Capital

• Subordinated loans

• Debentures CONTROLLING • Redeemable or irredeemable loans • Bearer bonds If a loan is issued on a bearer bond, the holder is not registered with the company. However, the holder of the bond is regarded as the owner, and coupons attached to the bonds give the right to receive the interest, which is often paid annually. • Eurobonds • Deep discount bonds • Convertible loans • Warrants • Mortgages

Source : 165. 87 This slide can be accessed compare with: Whiteley, J.: Mastering Financial Management. Houndsmills at my website: www.Prof-Berkau.de ; (Palgrave): 2004, page 186f. FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

- Controlling - Prof. Dr. Carsten Berkau page: 36

Types of Loan Capital

• Subordinated loans

• Debentures CONTROLLING • Redeemable or irredeemable loans • Bearer bonds • Eurobonds This term refers to loan capital issued by large companies that wish to raise their capital on the international market. They are often bearer bonds, and usually issued in a different currency from the currency of the home base of the company. Eurobonds are often sold to large banks or other financial institutions which either hold them as their own investment or sell them to their own clients. • Deep discount bonds • Convertible loans • Warrants • Mortgages

Source : 165. 88 This slide can be accessed compare with: Whiteley, J.: Mastering Financial Management. Houndsmills at my website: www.Prof-Berkau.de ; (Palgrave): 2004, page 186f. FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

Types of Loan Capital

• Subordinated loans

• Debentures CONTROLLING • Redeemable or irredeemable loans • Bearer bonds • Eurobonds • Deep discount bonds This is a form of issuing redeemable loan capital which allows the company to offer a lower rate of interest than usual. It compensates for this by offering the bonds at a discount to the nominal value at which they are to be repaid. Investors may often be attracted to this form of bond, because of its tax treatment. • Convertible loans • Warrants • Mortgages

Source : 165. 89 This slide can be accessed compare with: Whiteley, J.: Mastering Financial Management. Houndsmills at my website: www.Prof-Berkau.de ; (Palgrave): 2004, page 186f. FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

- Controlling - Prof. Dr. Carsten Berkau page: 37

Types of Loan Capital • Subordinated loans • Debentures CONTROLLING • Redeemable or irredeemable loans • Bearer bonds • Eurobonds • Deep discount bonds • Convertible loans A convertible loan gives the lender the option to convert the loan to equity shares at a fixed price at specified future dates. The lender remains a creditor of the company until conversion takes place. If the lenders convert the loan into shares, they become members of the company, with the same rights and risks as other shareholders of the same class of shares. Conversion to shares is not compulsory, so the lender only takes advantage of the conversion rights if the share price at the conversion dates are above the conversion price. From the investor‘s point of view, this offers a good opportunity to participate in any future increase in the value of the shares of the company. • Warrants • Mortgages

Source : 165. 90 This slide can be accessed compare with: Whiteley, J.: Mastering Financial Management. Houndsmills at my website: www.Prof-Berkau.de ; (Palgrave): 2004, page 186f. FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

Types of Loan Capital • Subordinated loans • Debentures CONTROLLING • Redeemable or irredeemable loans • Bearer bonds • Eurobonds • Deep discount bonds • Convertible loans • Warrants Warrants are instruments by which the holder has the right (not the obligation) to buy shares in the company at a fixed price at specified future dates. The warrants do not give the right to any other benefit from the company, and no interest is paid on them. In a sense, they represent a form of gamble by the investor that the share price will be favorable at the specified future dates. This method is one way in which the company can raise capital with no immediate cost (in form of interest payments). The cost comes later. Warrants are sometimes issued in conjunction with loan capital, and sometimes to existing shareholders on the basis of their present holding. • Mortgages

Source : 165. 91 This slide can be accessed compare with: Whiteley, J.: Mastering Financial Management. Houndsmills at my website: www.Prof-Berkau.de ; (Palgrave): 2004, page 186f. FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

- Controlling - Prof. Dr. Carsten Berkau page: 38

Types of Loan Capital • Subordinated loans • Debentures CONTROLLING • Redeemable or irredeemable loans • Bearer bonds • Eurobonds • Deep discount bonds • Convertible loans • Warrants • Mortgages A mortgage is a loan secured on the security of freehold property. Normally, mortgages are provided by large financial institutions, and they have strict conditions applied. Mortgages are usually very long-term lending, and raised for the purpose of acquiring of improving the property on which the loan is secured.

Source : 165. 92 This slide can be accessed compare with: Whiteley, J.: Mastering Financial Management. Houndsmills at my website: www.Prof-Berkau.de ; (Palgrave): 2004, page 186f. FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

Debentures , some Characteristics

Debentures do not form part of the owner‘s equity of the company, but are classified as long term liabilities . CONTROLLING A debenture consists of (1) the capital or nominal value which will be repaid on the redemption of the debenture and (2) a periodic (fixed) interest payable, calculated on the nominal value of the debenture. Debenture holders receive a fixed interest irrespective of whether the company makes a profit or not . Debentures have no voting rights . Debentures can be issued at par, at a premium, or at a discount – depending on the difference between market rate and interest rate of the debenture. Debentures are usually offered to the public or financial institutions for subscription . When applications for debentures received exceeds the amount available, the company has got an oversubscription for debentures. Debentures are repayable after at least one year.

Source : 165. 93 This slide can be accessed Flynn, D.; Koornhof, C.: Fundamental Accounting. 5th edition. Cape Town at my website: www.Prof-Berkau.de ; (Lebone) 2005, 21-6. FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

- Controlling - Prof. Dr. Carsten Berkau page: 39 CONTROLLING

Issue of Debentures

Source : 165. 94 This slide can be accessed at my website: www.Prof-Berkau.de ; FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

Question 6

At a meeting of the directors of KILO Ltd. on 10.3.20X3 it was decided to offer

10,000 12% mortgage debentures of R100 each to the public for subscription CONTROLLING on 31.3.20X3. Debentures will be redeemed on 31.3.20X8. The financial year ends 31.12. A first mortgage bond secures debentures over land and buildings Ignore interest calculations. Required: (1) Prepare the necessary journal entries to give effect to the issue of the debentures. (2) Prepare the equity and liability section of the B/S after the issue of the debentures . Distinguish the following situations: (a) The directors decide to issue the debentures at par. Applications are received for 10,000 debentures and all debentures are subsequently allotted. (b) The directors decide to issue the debentures at 105% payable in full on application. Applications for 13,000 debentures are received. Unsuccessful applicants are refunded. (c) The directors decide to issue debentures at 97% payable in full on application. Applications for 8,000 debentures are received.

Source : 165. 95 This slide can be accessed Flynn, D.; Koornhof, C.: Fundamental Accounting. 5th edition. Cape Town at my website: www.Prof-Berkau.de ; (Lebone) 2005, 21-6. FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

- Controlling - Prof. Dr. Carsten Berkau page: 40

Allocation of Debenture Discount, Issue Costs and Premiums CONTROLLING

Debenture discount, Issue costs and premiums are related to the useful life of debentures. They are to be considered proportionately over the lifetime of the debentures. There are two alternatives : (1) Debenture discount and issue cost are shown as deferred expenses to be included with other deferred expenses and the debenture premium is shown as a deferred credit (2) Debenture discount and issue costs are deducted from the nominal value of the debentures and the debenture premium is added to the nominal value of the debentures .

Source : 165. 96 This slide can be accessed at my website: www.Prof-Berkau.de ; FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

Question 7

An extract from the T/B of DABULA Ltd. on 1.01.20X4 contained the following: CONTROLLING

Debentures (10,000 12% mortgage at R1.00) (1.000.000) Debenture premium (issued at 105% on 31.3.20X 3) (42.500) Debenture interest accrued (30.000) Net other assets 1.072.500

Interest is payable on 31.03. and on 30.09. Debentures are secured by a first mortage over land and buildings. Debentures are redeemable on 31.03.20X8. (5 years) Required: Prepare the necessary journal entries to record the debenture premium and debenture interest for the year ended 31.12.20X 4. Prepare the equity and liability section of the balance sheet after passing the above journal entries as at 31.12.20X4.

Source : 165. 97 This slide can be accessed at my website: www.Prof-Berkau.de ; FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

- Controlling - Prof. Dr. Carsten Berkau page: 41

Question 8

An extract from the T/B of HASSAN Ltd. on 1.01.20X4 contained the following: CONTROLLING

Debentures (10,000 12% mortgage at R1.00) (1.000.000) Debenture discount (issued at 97% on 31.3.20X 3) 25.500 Debenture interest accrued (30.000) Net other assets 1.004.500

Interest is payable on 31.03. and on 30.09. Debentures are secured by a first mortgage over land and buildings. Debentures are redeemable on 31.03.20X8. (5 years) Required: Prepare the necessary journal entries to record the debenture premium and debenture interest for the year ended 31.12.20X 4. Prepare the equity and liability section of the balance sheet after passing the above journal entries as at 31.12.20X4.

Source : 165. 98 This slide can be accessed at my website: www.Prof-Berkau.de ; FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

Question 9

The T/B of MATLALA Ltd. on 1.04.20X5 is as follows: CONTROLLING

Debentures (600 8% mortgage at R100) (60.000) Debenture discount (issued at 90% on 1.04.20X5) 6.000 Other net assets 54.000

Required: Pass all journal entries up to 31.3.20X7 to record the redemption of the debentures. The financial year end 31.3. The debentures are redeemable on 31.3.20X7 at 106%.

Source : 165. 99 This slide can be accessed at my website: www.Prof-Berkau.de ; FI .ppt use: FHOSStudent (Remarque) based on: University of Applied Sciences IFRS 2006 © Prof Dr Carsten Berkau , 2008

- Controlling -