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FINANCIAL ACCOUNTING AND REPORTING ACOUNTING FOR DIVIDENDS AND STOCK RGHTS Dividends – Dividends – Distribution of earnings paid to sharehoders based on the nu!ber of shares o"ned# The !ost $o!!on $o!!on t%pe of di&idend di&idend is a $ash di&idend# di&idend# Di&idend Di&idends s !a% be issued issued in other other for!s su$h as sto$' and propert%# Di&iden Di&idends ds are t%pi$a% t%pi$a% re$ogni re$ogni(ed (ed as in$o!e in$o!e b% the in&estor)sh in&estor)shareh arehod oder* er* uness uness it is a liquidating dividend, the equit !eth"d is #eing a$$lied "% the dividends a%e in the &"%! "& sha%es # Cash Cash dividen dividends ds are are re$o re$ogn gni( i(ed ed as in$o in$o!e !e %ega%dless "het "hethe herr the di&id di&iden ends ds $o!es $o!es fro! fro! the $u!uati&e net in$o!e after the date of the in&est!ent +post a$,uisition retained earnings- or net in$o!e prior prior to the a$,uisit a$,uisition ion of the in&est!en in&est!entt +pre.a$, +pre.a$,uisi uisition tion retained retained earnings-# earnings-# Pre&iou Pre&ious% s%** it "as addressed in a PFR/ that di&idends fro! pre.a$,uisition retained earnings are i,uidating di&idends# This treat!ent has no" been superseded b% re&isions to PA/ 01# 'asi( %ules "n dividends a) Cash di&idends – In$o!e re$ogni(ed at the date of de$aration* "hi$h is the date the board of dire$tors announ$es its intention to pa% di&idends# #) Propert% di&idends – In$o!e at fair &aue# () /to$' or share di&idends – Re$orded as a !e!orandu! entr%* ho"e&er t"o i!portant $ases to ta'e note of2 3# A differ differen entt $ass $ass of shares shares re$ei&e re$ei&ed d othe otherr than than the origin origina a in&es in&est!e t!ent nt 'no"n 'no"n as *s$e(ial st"(+ dividends sha dividends sha be re$ogni(ed as a ne" in&est!ent* therefore the TOTAL TOTAL $ost $ost of the in&est!ent in&est!ent sha be ao$ated using the 4 %elative &ai% value !eth"d# !eth"d # A $o!!on a$$ounting probe! probe! $onside $onsidered red under under these $ases $ases "i be if on% a singe fair &aue &aue is gi&en# gi&en# In this insta instan$ n$e* e* the the a&aia a&aiabe be fair fair &aue &aue sha sha si!p% si!p% be dedu dedu$te $ted d fro! fro! the tota tota $ost $ost and and the the differen$e sha be the &aue ao$ated to the re!aining in&est!ent# Tota $ost of 05 05*555 ordinar% share in&est!ent
6*555*555
Assu!e that* 35*555 preferen$e shares are re$ei&ed "ith a fair &aue of 75 per share and the fair &aue of the 05*555 ordinar% shares that origina% $ost 065 ea$h is 015#
Ordinar% +05*555 9 015Preferen$e +35*555 9 75Tota
Tota Fair 8aue 6*:55*555 755*555 7*555*555
F%a(ti"n - Rati" .)/-0 12345 )0-0 16345
Athough Athough not in$o!e in$o!e and entr% entr% sha be be re$orded re$orded at In&est!ent in preferen$e shares +35; 9 6
655*555 655*555
If the fair &aue of the ordinar% shares is not pro&ided* the preferen$e share in&est!ent in&est!ent sha be re$orded at 755*555 0# /to$' to$' di& di&id iden ends ds 7ill als" %edu(e the ("st $e% sha%e as sha%e as a resut of the sa!e or origina $ost being ao$ated ao$ated to a arger nu!ber of shares# shares# This "i of $ourse be a fa$tor fa$tor in subse,uent subse,uent sae transa$tions reated to the in&est!ent# If an in&est!ent of 65*555 shares is a$,uired at a tota $ost of 6*555*555 re$ei&es a 05; share di&idend distribution or a tota of 35*555 additiona shares* the before and after $ost per share is $o!puted as foo"s2 Cost per share #e&"%e s #e&"%e sh hare di&idends +6*555*555 di&ided b% 65*555Cost per share a&te% sh share di&idends +6*555*555 di&ided b% 75*555-
355 ) share =>#>> ) share
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8hen A%e Sha%eh"lde%s Entitled t" Dividends As !entioned !entioned earier* earier* di&idend di&idends s are re$ogni(ed re$ogni(ed as in$o!e in$o!e at the the date of of de$aration# de$aration#
E9:Dividend Date
Re("%d Date
;aa#le Date
Thursda%* )3)0537
Tuesda%* 35):)0537
Thursda%* 35)7)0537
Tuesda%* 35)06)0537
If shares $ost the in&estor 3*555*555 and a di&idend re$ei&abe of 355*555 is re$orded on the de$aration date* seing the shares for e9a!pe 3*655*555 "i resut in a gain of on% :55*555 if sod bet"een )3)0 )3)053 537 7 and and 35)> 35)>)05 )0537 37 be$au be$ause se it is 4di&id 4di&iden end d on on and and 655*5 655*555 55 if sod sod bet" bet"ee een n 35):) 35):)05 0537 37 and and 35)0:)0537 sin$e it is 4e9.di&idend#
A(("unting &"% St"(+ Rights /to$' rights are issued to sharehoders in order to !aintain their proportionate o"nership interest in the $orporation "hen ne" shares are issued at a dis$ounted pri$e $o!pared to a pubi$ offering and for a i!ited i!ited period period on% usua% se&era se&era "ee's# "ee's# The ratio ratio is one sto$' sto$' right for e&er% share o"ned o"ned b% a sharehoder# sharehoder# o"e&er* o"e&er* the nu!ber nu!ber of sto$' rights to bu% one additiona share sha not be the sa!e# There are opposing &ie"s in a$$ounting for sto$' rights and the iustration beo" "i sho" both# Let us assu!e that a sharehoder sharehoder has 65*555 shares "ith a tota $ost of 6*555*555 or 355 per share and is issued 65*555 sto$' rights rights to a$,uire 35*555 shares shares at 3:5 ea$h# The fair &aue of the shares is 375 ea$h and the sto$' right is 35 ea$h# A(("unted &"% Se$a%atel
N"t A(("unted &"% Se$a%atel
Tota Fair 8a 8aue of /R /R +65*555 9 35-
655*555
On% a 4!e 4!e!o en entr% r% is re re$orded for for the the re$ re$eipt of the sto$' sto$' right rights# s# And the e9er e9er$i $ise se and a$,u a$,uis isit itio ion n of the the shar shares es sha sha on% on% be the the e9er$ise pri$e#
655*555
E9er$ise pri$e +35*555 9 3:5-
ourna Entr%2 In&est!ent in /to$' Rights In&est!ent in /to$'s
655*555
E9er$ise pri$e +35*555 9 3:5Cost of sto$' rights e9er$ise Tota $ost of ne" in&est!ent
3*:55*555 655*555 3*55*555
3*:55*555
ourna Entr%2 In&est!ent in /to$'s Ca C ash
3*:55*555 3*:55*555
ourna Entr%2 In&est!ent in /to$'s Ca Cash In&est!ent in /to$'s
3*55*555 3*:55*555 655*555
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A(("unting &"% st"(+ %ights se$a%atel has been the traditiona approa$h foo"ed for se&era de$ades de$ades aread% athough uni'e before "here the tota $ost of the in&est!ent is !utipied b% the fra$tion that $an be de&eoped b% adding the fair &aue of the share and the sto$' right +e9a!pe2 6*555*555 6*555*555 9 35)315- depending depending "hether the shares are ,uoted ,uoted 4right.on or 4e9.right# The fair &aue is si!p% used as the &aue to be ao$ated as the separate in&est!ent of the sto$' rights based based on the theoreti theoreti$a $a basis under under PFR/ PFR/ that that 4a in&est!en in&est!ents ts and $ontra$ts $ontra$ts on those those instru!ents !ust be !easured at fair &aue If sto$' rights are n"t a(("unted &"% se$a%atel se$a%atel** this is in ine "ith another instru!ent des$ribed in PFR/ 'no"n as e!bedded deri&ati&es "here the sto$' rights $an be rightfu% $assified# E!bedded deri&ati&es sha not be separated fro! the host $ontra$t if the host $ontra$t is a finan$ia asset# Of $ourse the in&est!ent in sto$'s is a finan$ia asset# Thats "h% it "i be "ise to pro$eed "ith $aution and identif% the re,uire!ents spe$ifi$a% !entioned in the probe! on ho" to treat sto$' rights sin$e both treat!ents are a$$eptabe under PFR/ #
The"%eti(al Value "& St"(+ Rights This is a for!ua that sha be appied to deri&e the fair &aue of the sto$' rights in $ase it is not deter!inabe deter!inabe in a spe$ifi$ situation# There are t"o appi$ations appi$ations of the for!ua depending depending "hether "hether the shares are ,uoted *%ight:"n or *%ight:"n or *e9:%ight# *e9:%ight#
RIGHT:ON
E<:RIGHT
=a%+et value "& sha%e less E9e%(ise ;%i(e Nu!#e% "& %ights t" $u%(hase "ne sha%e > 6
=a%+et value "& sha%e less E9e%(ise ;%i(e Nu!#e% "& %ights t" $u%(hase "ne sha%e
The for!uas are identi$a e9$ept for one itte detai* the deno!inator for the *%ight:"n for!ua *%ight:"n for!ua sha ha&e a pus 3 fa$tor to represent the !ar'et &aue of the sto$' right that is in$uded in the !ar'et &aue of the share sin$e it is ,uoted *%ight:"n) Lets assu!e that 65*555 shares are a$,uired for 6*555*5555 and 65*555 rights are issued to pur$hase 30*655 shares shares or : rights to pur$hase pur$hase on share at an e9er$ise e9er$ise pri$e of 355# The shares are ,uoted ,uoted at 306 and sto$' rights sha be a$$ounted for separate%# The !ar'et &aue of the sto$' rights if 4 %ight:"n is %ight:"n is 6 +306 – 355- ) +: H 3- and 7#06 is 4 e9:%ight +306 e9:%ight +306 – 355- ) :# The $ost of the ne" in&est!ent sha be
RIGHT:ON E9er$ise pri$e +30*655 9 355Cost of sto$' rights +6 9 65*555Tota $ost of ne" in&est!ent
E<:RIGHT 3*065*555 065*55 5 3*655*555
E9er$ise pri$e +30*655 9 355Cost Cost of sto$ sto$' ' righ rights ts +7#0 +7#06 6 9 65*5 65*555 55-Tota $ost of ne" in&est!ent
3*065*555 >30* >30*65 65 5 3*670*655
Sha%es in lieu "& (ash dividends and (ash in lieu "& st"(+ dividends Let us assu!e that 65*555 shares are a$,uired at a $ost of >*555*555# /ituation 32 A di&idend per share of 05 is de$ared but 6*555 shares "ith a fair &aue of 365 ea$h is issued /ituation 02 A 05; sto$' di&idend is de$ared but instead $ash di&idends of 755*555 are re$ei&ed Under Under situation situation 3* shares shares in ieu of $ash* this sha be re$ogni( re$ogni(ed ed as a $%"$e%t dividend dividend and be re$orded as in$o!e in$o!e at 165*555 +6*555 +6*555 9 365-* the fair &aue of the shares shares re$ei&ed# If the fair &aue of the shares is not a&aiabe* the a!ount of in$o!e sha be 3*555*555 +65*555 9 05Under situation nu!ber 0* $ash in ieu of sto$' di&idends* the *as i& s"ld a$$%"a(h sha a$$%"a(h sha be foo"ed# /tep 3 "i be to $o!pute for the ne" $ost per share if the share di&idends "ere re$ei&ed "hi$h is 65 per share +>*555*555 +>*555*555 ) 65*555 H 35*555 +05; 9 65*555--# Then the nu!ber nu!ber of share di&idends that "oud ha&e been re$ei&ed sha be !utipied b% 65 and $o!pared to a!ount of $ash di&idends re$ei&ed and a gain or oss on sae sha be re$ogni(ed# The%e&"%e the gain is 633,333 1033,333 less 1.3 9 63,33355
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