Shareholder's Equity Disclosures - Footnote ExamplesIn addition to the measurement accounting principles that guide the values placed on the shareholder’s equity in a Balance Sheet, there are accounting principles specifying the informative disclosures that are necessary because, without the information they provide, the financial statements would be misleading. IAS 1 sets forth requirements for disclosures about the details of share capital for corporations and of the various capital accounts of other types of enterprises.

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This post provides guideline to wide range shareholder’s equity disclosure according to IFRS. They are accompanied with footnote examples. But, before that, it is worth discussing about disclosure techniques used for contemporary financial statement in general. Enjoy!

 

5 Disclosure Techniques Used to Explain Financial Statements

The following five disclosure techniques are used in varying degrees in contemporary financial statements:

  • Technique-1. Parenthetical explanations – Information is sometimes disclosed by means of parenthetical explanations appended to the appropriate balance sheet caption.
  • Technique-2. Notes to financial statements – If the information cannot be disclosed in a relatively short and concise parenthetical explanation, a note disclosure is used.
  • Technique-3. Cross-references – Cross-referencing is used when there is a direct relationship between two accounts on the balance sheet. For example, among the current assets, the following might be shown if $1,500,000 of accounts receivable were pledged as collateral for a $1,200,000 bank loan.
  • Technique-4. Valuation allowances – Valuation allowances are used to reduce or increase the carrying amounts of certain assets and liabilities. Accumulated depreciation reduces the carrying value of property, plant, and equipment, and a bond premium (discount) increases (decreases) the face value of a bond payable.
  • Technique-5. Supporting schedules – A supporting schedule might be used to provide additional detail about an item in the financial statements. For example, consolidating schedules might be included in addition to the basic consolidated financial statements or a five-year summary of selected financial data might be included. In general, supporting schedules are not used to provide information required by GAAP because those schedules are not part of the basic financial statements and are typically subjected to only limited procedures by auditors.

 

Next are type of disclosures required by IFRS for shareholder’s equity. Each type comes with example. Read on…

 

Disclosure of Capital Structure

The financial statements should include a footnote describing the number of shares authorized, issued, and outstanding, their par values, and the rights and privileges associated with each class of shares. A description of these rights and privileges should include dividend preferences and special privileges or unusual voting rights. Here is an example:

“As of October 31, 2010, the company capital structure consisted of common shares and Series A preferred shares. There were 10 million common shares authorized and 4.2 million shares outstanding, while there were 1 million preferred shares authorized and 800,000 shares outstanding. Both classes of shares have par values of $0.01 per share. The Series A preferred shareholders are entitled to a full return of their original investments in the event of a liquidation or sale of the company as well as an additional 100% return, before any distributions are made to common shareholders. These shareholders also are entitled to dividend payments matching any declared for shares of common shares. In addition, a two-thirds majority of the Series A shareholders must approve any sale of the company or a significant portion of its assets. Also, Series A shareholders are entitled to elect two members of the company’s board of directors. Common shareholders are entitled to elect all other members of the board.”

 

Disclosure of Subsequent Equity Transactions

If a company enters into any equity-related transactions subsequent to the date of the financial statements but before their issuance, these transactions should be described in a footnote. Examples of typical transactions falling into this category include share splits, share issuances, and purchases of shares back into the treasury. Here is an example:

“Subsequent to the reporting period, the company issued an additional 100,000 common shares at an average price of $24 per share, resulting in receipts, net of transaction fees, of $2,250,000. Management intends to use the funds to renovate its headquarters building”.

 

Disclosure of Change in the Number of Authorized Shares

If a company elects to either increase or decrease its number of authorized shares through a change in its certificate of incorporation, a footnote should disclose the board’s approval of this action, the change in the number of authorized shares, and any impact on the par value of the shares. An example follows.

“On April 17, 2010, the board authorized the amendment of the company’s certificate of incorporation to increase the number of authorized shares of common shares by 90 million from the prior level of 10 million. There was no change in the stated par value of the shares as a result of this transaction.”

 

Disclosure of Shares Sale

If a company sells shares, a footnote should disclose the type and number of shares sold, the price at which the shares were sold, and the general use of the proceeds. An example follows:

“During May 2010, the company sold 4,210,000 shares of its Series B preferred shares at a price of $12 per share, netting $48,500,000 after sale and issuance costs. Management intends to use the proceeds to fund several anticipated acquisitions.”

 

Disclosure of Share Subscriptions

If investors have subscribed to company shares, the company should reveal the number of subscribed shares not yet issued. An example follows:

“The company offered its common shares for sale to a limited group of investors during the reporting period. The investors subscribed to $4,250,000 of shares at $20.00 per share. Of the amount subscribed, $3,650,000 has been received, resulting in the issuance of 182,500 shares. The share issuance is reflected in all earnings per share information in these financial statements. The unpaid $600,000 of subscriptions will result in the issuance of an additional 30,000 shares when payment is received, which would have reduced earnings per share in the reporting period by $.03 if the subscription payments had been received during the period.”

 

Disclosure of Converted Bonds

If the holders of convertible bonds have elected to convert their bonds into shares, one should disclose the dollar amount of bonds converted, the conversion ratio, and the resulting number of shares issued. An example follows:

“During the past quarter, 45% of the holders of the company’s convertible 8% bonds elected to convert their holdings into the company’s common shares. The debt converted was $32 million, leaving $39 million still outstanding. The bond conversion transaction resulted in the issuance of 3,764,705 shares, which is an increase in the company’s outstanding common shares of 4.2%.”

 

Disclosure of Redeemable Preferred Shares

If there are any outstanding redeemable preferred shares, a footnote should itemize any determinable redemption requirements in each of the next five years, including call prices and the dates on which they are effective. An example follows:

“The company has 50,000 redeemable preferred shares outstanding. Under the sale agreement for these shares, the company is obligated to repurchase 10,000 shares per year under the following pricing schedule:

Year Shares to repurchase Aggregate price
2010 10,000 50,000
2008 10,000 53,000
2009 10,000 56,000
2010 10,000 59,000
2011 10,000 62,000

 

Disclosure of Cash Dividends

If a company issues a cash dividend, a footnote should reveal the amount of the dividend, the date on which the dividend was declared, the date on which the dividend will be payable, and the date on which shareholders of record will be identified for the distribution. An example follows:

“On September 10, 2010, the board declared a cash dividend of $1.07 per share, payable on November 2, 2010, to shareholders of record on September 25, 2010. This dividend distribution does not violate any covenants associated with the company’s existing loans.”

 

Disclosure of Non-cash Dividends

If a company chooses to pay shareholders dividends with assets other than cash, a footnote should disclose the nature of the assets being used for payment, the fair market value of the amount distributed, any gain or loss recognized by the company as part of the transaction, and how the transaction was handled in the financial statements. An example follows:

“The company distributed inventory dividends to its shareholders of record on April 30, 2010, issuing 10 pounds of its hard candy for every 100 shares of common shares held. The candy had a fair market value of $2,000,000 at the time of the dividend distribution. The company recorded no gain or loss on the transaction. It reduced the inventory asset by the amount of the distribution.”

 

Disclosure of Dividends Deferred

If the decision is made to defer payment of declared dividends, a footnote should reveal the reason for the decision while also specifying which dividends were deferred and the aggregate amount of the deferral, as well as the amount of cumulative and per share dividends in arrears. Here is an example:

“The company has deferred payment of its last two dividend declarations, which total $729,000 in deferred dividends. Based on the number of shares outstanding as of the date of the statement of financial position, there is $1.29 of deferred dividends per share. Due to its declining cash flows, the company is unable to predict when the deferred dividends will be distributed to shareholders.”

 

Disclosure of Employee Share Ownership Plan

If a company has set up an employee share ownership plan (ESOP), it should disclose which employees participate in the plan, how dividends received by the plan are used, the formula used to make contributions to the ESOP, how contributed shares are used as collateral on any ESOP debt, how share valuations are assigned to employees, and how the company treats ESOP transactions in its financial reports. The footnote should also disclose any compensation cost recognized during the period. Here is an example:

“The company makes monthly contributions to its employee share ownership plan (ESOP) sufficient to make principal and interest payments on its outstanding debt. Shares held by the plan are used as collateral on the debt, but a portion of the shares are released as collateral at the end of each year in proportion to the amount of debt paid down. At that time, the shares are allocated to qualified employees, who are defined as those working at least 30 hours per week as of year-end. Once allocated, shares are included in earnings-per-share calculations. The company records compensation expense each month based on the market value of the shares expected to be released from collateral at year-end. The compensation expense thus recorded in the past year was $189,000. The fair value of shares still held as collateral as of year-end was $4,050,000. At yearend, the ESOP contained 410,000 shares, of which 270,000 was used as collateral and 140,000 had been released from collateral and recorded as compensation expense.”

 

Disclosure of Employee Share Purchase Plan

If an employee share purchase plan is in place, a footnote should disclose the amount of any discounts granted to employees, how the discount is calculated, and maximum amounts employees are allowed to purchase. The number of shares reserved for this purpose and the actual number purchased should also be disclosed. Here is an example:

“The company operates an employee share purchase plan that allows its employees to purchase the company’s common shares at below-market rates, subject to certain restrictions. Shares are offered at a discount of 10% of the shares’ fair market value at the end of each month, as determined by the posted Euro next share price on that date. Employees may purchase shares up to a maximum of 15% of their gross pay. Under the plan, 2.5 million common shares have been reserved for purchase by employees, of which 312,987 shares have thus far been purchased, leaving 2,187,013 available for purchase. In the past year, 82,067 shares were purchased at an aggregate price of $15.85 each.”

 

Disclosure of New Type of Shares

If a company is creating a new type of shares, a footnote should disclose the rights of the new shares, the date on which it was authorized, the number of shares authorized, and the number of any shares issued. Here is an example:

“The board authorized an amendment to the certificate of incorporation that created a new Series B preferred share in the amount of 10 million shares, with a par value of $0.01 per share. The share has preferential liquidation rights of 200% of the initial investment prior to the participation of common shareholders and is also entitled to the same dividend granted to common shareholders. Two million shares of the Series B preferred share were issued on December 15, 2010, at $8.10 per share, resulting in total proceeds of $16.2 million. The company expects to use these funds to pay down its existing debt.”

 

Disclosure of Par Value Change

Though rare, companies will sometimes alter their certificates of incorporation to change the par value of their shares. This change is typically in a downward direction, resulting in the shifting of funds from the shares account to the additional paid-in capital account. When this happens, a footnote should include the date and amount of the change as well as the aggregate amount of funds shifted into or out of the shares account. Here is an example:

“A majority of the company’s shareholders voted on October 10, 2010, to amend the company’s certificate of incorporation to reduce the par value of its common shares to $0.01 from $1.00. Due to this change, $990,000 was shifted from the Common Shares account to the Additional Paid-in Capital account.”

 

Disclosure of Retained Earnings Segregation

The board of directors may set aside some portion of retained earnings for a specific purpose. If so, a footnote should describe the amount segregated as well as the reason for and amount of the segregation. An example follows:

“The company has been judged liable for asbestos claims amounting to $14,500,000. The company intends to contest this initial judgment vigorously and has appealed the decision. Nonetheless, the board of directors has segregated the full amount of the initial judgment from retained earnings, so that the company will not find itself with negative retained earnings in the event that the appeal is denied and it must pay the full amount of the claim.”

 

Disclosure of Reserved Shares

A company may set aside un-issued shares for specific purposes, such as the expected exercise of options or warrants or the conversion of shares from a debt instrument. In these cases, one should disclose the number of shares set aside and the reason for the reservation. An example follows:

“The board authorized the reservation of 4,025,000 shares as of May 14, 2010. Of this amount, 2 million shares were set aside in expectation of the conversion of the company’s 5 7/8% bonds to share capital by its bondholders. The remaining 2,025,000 shares were set aside in expectation of the exercise of share options by employees.”

 

Disclosure of Share Capital Repurchase Program

One should describe the date on which a share capital repurchase program was authorized by the board of directors, the maximum number of shares to be repurchased, and the current status of the repurchase program. An example follows:

“The company’s board of directors authorized a share capital repurchase program for its Series A preferred shares on June 30, 2010, up to a maximum of 2 million shares. As of the statement of financial position date, the company had repurchased 1,255,000 shares for a total of $58,500,000. The repurchased shares are held in the corporate treasury and cannot be released without board approval.”

 

Disclosure of Treasury Shares Held

One should reveal the cost basis used to record any shares held by a company. An example follows:

“The company records the value of its common and preferred shares held in the treasury at cost.”

 

Disclosure of Greenmail Share Repurchase

If a company elects to buy back shares at a high price under the threat of a takeover or similar situation, it should note the market price of its shares on the date of the transaction, the price per share actually paid, and the amount of the transaction charged to expense. An example follows:

“The company repurchased 450,000 shares from a major shareholder on May 15, 2010. The shareholder had indicated that he was willing to pursue a change of corporate ownership if the company did not agree to pay a premium for his shares. The board elected to do so, and paid $15 per share for shares having a market price of $11.50 on the date of the transaction. The company charged the difference between the purchase and market prices of $1,575,000 to expense in the current period.”

 

Disclosure of Sale of Treasury Shares

If a company elects to sell some portion of its treasury shares, a footnote should reveal the number of shares sold, the aggregate sale price, the aggregate price at which the shares were originally purchased by the company, and the treatment of any gain or loss on the sale. An example follows:

“The company sold 450,000 common shares for a total of $8,565,000. The company had previously purchased these shares for $8,750,000 and stored them as treasury shares. Since the sale price exceeded the original purchase price by $185,000, the difference was charged to the Additional Paid-in Capital account.”

 

Disclosure of Share-Based Compensation

If a company has paid employees or outside entities compensation in the form of shares, the number of shares granted, the effective date of the transaction, and its fair market value should be itemized in a footnote. Here is an example:

“The board authorized the granting of 10,000 shares of common shares with a fair value of $52,000 to the company’s legal advisor. The advisor accepted this payment in lieu of a cash payment for ongoing legal services performed.”

 

Disclosure of Share Contribution

If a company donates shares to a nonprofit organization, a footnote should disclose the date of the contribution, the number of shares involved, their aggregate market value, how the transaction was handled in the financial statements, and the amount of any gain or loss recognized as a result. An example follows:

“The company contributed its entire share holdings in XYZ Corporation to the My Way Foundation, including 500,000 common shares and 125,000 preferred shares. The market value of the contribution on the transaction date was $842,000. Of this amount, $200,000 was recognized as a pretax loss, while the remaining $642,000 was charged to the Donations Expense account.”

 

Disclosure of Share Redemption Agreements

If a company has agreements with its shareholders to buy back their shares upon the occurrence of certain events, a footnote should describe the terms of the arrangement and the potential monetary impact. Here is an example:

“The company redeemed 100,000 shares of its Series A preferred shares, which it issued as part of a financing package arising from its bankruptcy proceedings in 2009. As per the redemption agreement, the company paid a 100% premium over the original $10 sale price of each share, resulting in a total payment of $20 per share or $2,000,000 in aggregate. The incremental increase over the original share price of $1,000,000 was charged to the Additional Paid-in Capital account.”

 

Disclosure of Share Splits

All share splits and reverse share splits should be fully documented in a footnote, itemizing the date on which board of directors approval was granted, the ratio of the share split, and the date on which the split took effect. The footnote also should contain assurances that all share-related information in the financial statements has been adjusted to reflect the share split. Here is example:

“The company’s board of directors authorized a three-for-one share split on November 15, 2010, to take effect on December 20, 2010. Each shareholder of record on November 25, 2010, received two additional shares of common shares for each share held on that date. Additional funds were shifted from the Additional Paid-in Capital account to the Common Shares account to equal the amount of additional par value represented by the additional shares issued under the share split. All share and related option information presented in these financial statements and accompanying footnotes has been adjusted retroactively to reflect the increased number of shares resulting from this action.”

 

Disclosure of Share Options

If a company has a share option plan, it must give a general description of the plan, report the number of shares authorized for option grants, and note vesting requirements and maximum option terms. Here is an example:

“The company maintains a share option plan under which all employees are awarded option grants based on a combination of performance and tenure. All options may be exercised for a period of 10 years following the grant date, after which they expire. All options fully vest after recipients have worked for the company subsequent to the grant date in a full-time capacity for a period of four years. The board has authorized the use of 2 million shares for option grants.”

 

Disclosure of Share Appreciation Rights (SAR)

If a company issues share appreciation rights, it should indicate in a footnote the group of people covered by the SAR plan, the terms of the plan, the amount of compensation expense accrued, and the amount of compensation expense to be accrued in future vesting periods. An example follows:

“The company has issued a total of 150,000 share appreciation rights to the executive management team, using a baseline share price of $4.50 per share. Subsequent share appreciation has resulted in an increase in the value of the SAR of $129,400, of which one-half has vested, resulting in the recognition of compensation expense of $64,700. Of the unvested portion of the increase in share value, $32,350 will be recognized in 2010 and an additional $32,350 will be recognized in 2008, assuming no further changes in the share price. No cash payments have yet been made to the SAR holders, which are at the option of the holders until the termination of the plan in 2014.”

 

Disclosure of Warrants Issued

Warrants to purchase shares may be issued, so a footnote should be included to disclose the reason for the transaction, the number of warrants issued, the exercise price at which they can be used to purchase shares, and the vesting period and expiration date. Here is example:

“The company issued 80,000 warrants to a group of venture capital firms. The warrants allow the firms to purchase the company’s common shares at an exercise price of $5.10. There is no vesting period, and the warrants expire in 10 years. The warrants were issued as part of the compensation package earned by the firms in assisting the company in the placement of a recent issuance of common shares.”