Chapter 17: Stockholders Equity

Perspective and Issues

The IASC's Framework for the Preparation and Presentation of Financial Statements defines equity as the residual interest in the assets of an enterprise after deducting all its liabilities. Stockholders' equity is comprised of all capital contributed to the entity (including share premium, also referred to as capital paid-in in excess of par value) plus retained earnings (i.e., the entity's accumulated earnings less any distributions that have been made therefrom).

Stockholders' equity (referred to as equity in IAS 1) also includes reserves, such as statutory or legal reserves, general reserves and contingency reserves, and revaluation surplus. IAS 1 categorizes stockholders' interests into three broad subdivisions: issued capital, reserves, and accumulated profits or losses. This standard also sets forth requirements for disclosures about the details of share capital for corporations and the various capital accounts of other types of enterprises.

Stockholders' equity represents an interest in the net assets (i.e., assets less liabilities) of the entity. It is not a claim on those assets in the sense that liabilities are. On liquidation of the business, an obligation arises for the entity to distribute any remaining assets to the shareholders after the creditors are paid.

Earnings are not generated by transactions in an entity's own equity (e.g., by the issuance, reacquisition, or reissuance of its common or preferred shares). Depending on the laws of the jurisdiction of incorporation, distributions to shareholders may be subject to various limitations, such as to the amount of retained (accounting basis) earnings.

A major objective of the accounting for stockholders' equity is the adequate disclosure of the sources from which the capital was derived. For this reason, a number of different paid-in capital accounts may be presented in the balance sheet. The rights of each class of shareholder must also be disclosed. Where shares are reserved for future issuance, such as under the terms of stock option plans, this fact must also be made known.

Sources of IAS

IAS 1, 8, 16, 32

SIC 5, 16, 17