1、Chapter 8The Analysis of the Statement of ShareholdersEquityLinksChapter 7 gave a design for financial statements that prepares them for analysis.Link to Previous ChapterThis chapter reformulates the statement of owners equity according to the design in Chapter 7. The reformulation highlights compre
2、hensive income.This ChapterChapters 9 continues the reformulation with the balance sheet and the income statement.Link to Next ChapterLink to Web PageHow is the statement of owners equity reformulated to highlight the information it contains ?How is dirty -surplus income treated in the reformulation
3、 ?What is hidden dirty-surplus income ?What you will learn from this chapterHow statements of shareholders equity are reformulated to distinguish comprehensive income from transactions with shareholdersHow dirty-surplus statements are placed on a clean-surplus basisThe ratios that are calculated fro
4、m the reformulated statement of shareholders equity.How GAAP accounting misses some of the value effects on shareholders altogether so called hidden dirty surplus accountingAccounting issues that arise with respect to stock compensation and convertible securitiesStandard Statement of Shareholders Eq
5、uityOpening book value of equity + Net share transactions with common stockholders + Capital contributions (paid in capital from share issues) - Share repurchases (into treasury stock) + Net share transactions with preferred shareholders + Capital contributions (share issues) - Share redemptions + C
6、hange in retained earnings + Net income - Common dividends - preferred dividends Dirty surplus items Other dirty surplus items Closing book value of equity After FASB Statement No. 130, most dirty surplus items are grouped into other comprehensive income, usually within the statement of shareholders
7、 equity. Reformulated Statement of Stockholder EquityOpening book value (CSEt-1) + Net transactions with common shareholders + Capital contributions (share issues) - Share repurchases - Common dividends + Comprehensive Income + Net Income + Other Comprehensive Income - Preferred dividends Closing bo
8、ok value (CSEt) Note that preferred equity is taken out of the common shareholders equity statement (and treated as a financial obligation). Dirty Surplus Accounting in the USOperating Income: Some income-increasing accounting changes (APB No. 20) a. change from LIFO valuation of inventory b. change
9、 in long-term contract accounting c. change to or from full cost accounting in extractive industries d. a change triggered by a red line in an accounting standard (e.g. change from cost to equity method for long-term equities) e. a change made for the first time in conjunction with a IPO or business
10、 combination Changes in accounting for contingencies (FASB No. 11) Foreign currency transaction gains and losses (FASB No. 52) Minimum pension liability adjustment (FASB No. 87) Tax benefits of loss carry forwards acquired (FASB No. 109) Tax benefits of preferred dividends paid to ESOPS (FASB No. 10
11、9) Unrealized gains and losses on equity securities available for sale (FASB No. 115) Financing Income or Expenses: Preferred Dividends Unrealized gains and losses on debt securities available for sale (FASB No. 115) Losses on redemption of preferred stock Operating or Financing Income Items: Foreig
12、n currency translation gains and losses (FASB No. 52) Unrealized gains and losses on derivative instruments (FASB No. 133) Balance Sheet Items to be Reclassified: Deferred compensation relating to grant of (APB No. 25 and FASB No. 123) employee stock options and stock Dividends payable Employee stoc
13、k ownership plan (ESOP) loan (SOP 76-3 and SOP 93-6) or loan guarantee A Reformulation:VF Corporation, 1998 GAAP Statement of Equity COMMON STOCK ADDITIONAL PAID-IN CAPITAL ACCUMULATED OTHER COMPREHENSIVE INCOME RETAINED EARNINGS BALANCE JANUARY 3, 1998 $121,225 $744,108 $ (36,110) $1,037,546 Net in
14、come 388,306 Cash dividends: Common Stock (97,943) Series B Preferred Stock (3,717) (1) Tax benefit from Preferred Stock dividends 568 (3) Redemption of Preferred Stock (2,763) (4) Restricted Common Stock 19 208 (37) (5) Purchase of treasury shares (3,223) ($144,175) Common Stock held in trust for d
15、eferred compensation plans (233) (6,728) Exercise of stock options, net of shares surrendered 1,678 57,195 (87) Foreign currency translation, net of $5,638 deferred income taxes _ _ 10,471 _ (2) BALANCE JANUARY 2, 1999 $119,466 $801,511 $ (25,639) $1,170,970 _ (Flagged items involve dirty surplus ac
16、counting) Reformulation for VF Corporation (continued) Reformulated Statement of Common Equity _ BALANCE, JANUARY 3, 1998 1,866,769 Transactions with shareholders Stock issues 59,013 Stock repurchases (154,359) Common dividends (97,943) (193,289) Comprehensive income Net income 388,306 Tax benefit o
17、f preferred dividends 568 Loss on redemption of preferred stock (2,763) Foreign currency translation gain 10,471 Preferred dividends (3,717) 392,865 Net addition to deferred compensation (37) BALANCE, JANUARY 2, 1999 2,066,308 2,066,308 A Further Example: VF Corporation, 1991-1994An Example: VF Corp
18、orationBalance January 2, 1993 $1,153,971 Sale of Common Stock $232,068 Sale of stock in exercise 14,731 246,799 of stock options Comprehensive income $225,931 Cash dividends (78,540) 147,391 Deferred compensation (761) Balance January 1, 1994 $1,547,400 The final book value is not affected by the c
19、hanges. However, the earnings are modified as follows: Net income reported in income statement $246,415 Tax benefit from preferred dividends 1,180 Loss on redemption of preferred stock (264) Foreign currency translation loss, (17,109) less deferred taxes Preferred dividends (4,291) Comprehensive inc
20、ome to common $225,931 Ratio AnalysisIncome iveComprehensDividends Payout Dividend Income iveComprehenssRepurchaseStock DividendsRatioPayout Total purchasesReStockDividendsfCSEBookValueoDividendsValueBook -to-Dividends purchasesReStockDividendsfCSEBookValueopurchsesReStockDividendsValueBook -to-Payo
21、ut Total Income iveComprehensDividends - Income iveComprehensRatioRetention RatioPayout Dividend1 Payout and Retention RatiosRatio Analysis (continued)1tttCSECSE21Earnings iveComprehensROCE Shareholder Profitability RatioGrowth RatiosCSE BeginningCSEin ChangeCSE of Rate GrowthCSE of ValueBook Beginn
22、ingrsshareholde with nsTransactioRate Investment Net CSE BeginningrsShareholde with nsTransactio NetIncome iveComprehens A Hidden Dirty Surplus ItemShareholders lose when shares are issued at less than the market price (e.g. exercise of options)This loss, however, is not recorded as expense. What is
23、 the nature of this loss? If options are part of a compensation package, this loss is an employee compensation expense. If from a conversion of a bond, preferred stock or warrants, the loss is a financing expense.What is the amount of the loss? Market price - exercise price.Special case: options gra
24、nted in the money are recorded as deferred compensationFASB Statement No. 123Statement 123 requires an expense to be recognized at option grant date, equal to the value of the option that dateA pro forma net income, including the expense, is reported in footnotes. The expense can be reported in the
25、income statement, but rarely is.No expense recorded as the option moves into the money or at exercise date.Firms record a tax benefit for (non-qualified options) at exercise date and credit this to shareholders equity.VF Corporation: Stock Option Footnote, 1998NOTE L STOCK OPTIONS The Company has gr
26、anted nonqualified stock options to officers, directors and key employees under a stock compensation plan at prices not less than fair market value on the date of grant. Options become exercisable one year after the date of grant and expire ten years after the date of grant. Activity in the stock co
27、mpensation plan is summarized as follows: SHARES UNDER OPTIONS WEIGHTED AVERAGE EXERCISE PRICE Balance December 30, 1995 9,524,098 $24.49 Options granted 1,965,400 34.49 Options exercised (2,982,576) 22.87 Options canceled (342,450) 24.86 Balance January 4, 1997 8,164,472 26.21 Options exercised (2,
28、521,346) 25.78 Options canceled (131,510) 29.88 Balance January 3, 1998 5,511,616 28.21 Options granted 1,940,000 43.30 Options exercised (1,680,000) 27.26 Options canceled (69,310) 25.41 Balance January 2, 1999 5,702,306 $33.65 Stock options outstanding at January 2, 1999 are summarized as follows:
29、 RANGE OF EXERCISE PRICES NUMBER OUTSTANDING WEIGHTED AVERAGE REMAINING CONTRACTUAL LIFE WEIGHTED AVERAGE EXERCISE PRICE $ 6-10 16,600 1.9 years $ 8.09 16-20 65,220 2.6 years 17.75 21-25 765,896 5.5 years 23.41 26-30 1,609,290 5.4 years 27.27 31-35 1,329.100 7.9 years 34.49 40-45 1,916,200 9.1 years
30、 43.30 $ 6-45 5,702,306 7.2 years $33.65 The Analysts ChecklistYou should understand the following from this chapter:How GAAP statements of shareholders equity are typically laid outWhy reformulation of the statement is necessaryWhat is reported in other comprehensive income and where it is reported
31、What dirty-surplus items appear in the statement of shareholders equityHow stock options work to compensate employeesHow stock options and other contingent equity claims result in a hidden expenseHow management can create value for shareholders with share transactions You should be able to do the fo
32、llowing after reading this chapter:Reformulate a statement of shareholders equityDistinguish the creation of value from the distribution of value in the equity statementCalculate the net payout to shareholdersCalculate comprehensive income and comprehensive ROCE from the equity statementCalculate payout and retention ratiosCalculate a growth rate for common shareholders equity and analyze its componentsCalculate the compensation expense from exercise of stock options
