Understanding Net Assets, Capital, and Retrospective Accounting Changes

Chapter 18: Net Assets and Capital

Net assets are defined as total assets minus total liabilities. Paid-in Capital and Retained Earnings are two of the three primary accounts classifications for Shareholders' Equity.

Corporate Form Disadvantages

• Paperwork is expensive
• Double taxation

Corporate Form Advantages

• Corporation is a separate legal entity - separate & distinct from its owners
• Ownership interest is easily transferred
• Shareholders do not have mutual agency relationship
• Limited liability - owners are not personally liable for debts of the corporation
• Ease of raising capital

Corporations have articles of incorporation (corporate charter) that describe the nature of the firm's business activities, the shares to be issued, and the composition of the initial board of directors. The board of directors establishes corporate policies and appoints those who manage the corporation.

Common stock = number of shares X Par Value. Accumulated other comprehensive income is reported on the balance sheet as part of the Shareholders' Equity section. Outstanding common stock refers to a company's stock currently held by all its shareholders, including share blocks held by institutional investors and restricted shares owned by the company's officers and insiders. Outstanding shares are shown on a company's balance sheet under the heading 'Capital Stock'.

Chapter 19: Restricted Stock Unit

Restricted Stock Unit is compensation offered by an employer to an employee in the form of company stock. The employee does not receive the stock immediately but instead receives it according to a vesting plan and distribution schedule after achieving required performance milestones or upon remaining time with the employer.

• Any compensations associated with RSU are allocated to an expense over the service period
• The compensation associated with executive stock options is estimated at par value

Chapter 20: Retrospective and Prospective Accounting Changes

Retrospective

• Change in accounting principle: Change in a method used, such as using a different depreciation method or switching from LIFO to FIFO.
• Error correction
• Change in reporting entity

Prospective

• Change in accounting estimate

Under the use of retrospective accounting, prior year financial statements are revised to reflect the change in new principles. Regardless of the type of accounting change, the most important thing is to communicate. The cumulative effect is no longer used.