Equity

Shareholders equity

• Equity is typically referred to as shareholder equity (also known as shareholders'

equity), or owners equity (for privately held companies), which represents the
amount of money that would be returned to a company’s shareholders if all of
the assets were liquidated and all of the company's debt was paid off.

• Equity is found on a company's balance sheet and is one of the most common
financial metrics employed by analysts to assess the financial health of a
company. Shareholder equity can also represent the book value of a company.
Equity can sometimes be offered as payment-in-kind.
Components of Shareholder Equity

1. Retained earnings: Retained earnings are part of shareholder equity and

are the percentage of net earnings that were not paid to shareholders as
dividends. Think of retained earnings as savings since it represents a
cumulative total of profits that have been saved and put aside or retained
for future use. Retained earnings grow larger over time as the company
continues to reinvest a portion of its income.
2. Treasury shares or stock : It represent stock that the company has bought
back from existing shareholders. Companies may do a repurchase when
management cannot deploy all the available equity capital in ways that
might deliver the best returnes.
Example of Shareholder Equity
Below is a portion of Exxon Mobil Corporation's (XOM) balance sheet as
of September 30, 2018:
• Total assets were $354,628 (highlighted in green).
• Total liabilities were $157,797 (1st highlighted red area).
• Total equity was $196,831 (2nd highlighted red area).
• The accounting equation whereby assets = liabilities + shareholder
equity is calculated as follows:
• Shareholder equity = $196,831 or $354,628, (total assets) - $157,797
(total liabilities). 
Shareholder’s Equity Disclosures and
Footnotes Examples
• Shareholder's Equity Disclosures - Footnote Examples
In 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.
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.
Disclosure of Subsequent Equity Transactions and Disclosure
of Change in the Number of Authorized Shares

• 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.

• 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.
Two types of equity stock
• What is common stock?
• When investors talk about "stock," they're almost always talking about a company's
common stock, and they simply drop the "common" because it's unusual for a
company to have preferred stock. All those reports you hear about a 3% rise at
Company X are referring to common stock and never about preferred stock.
• Common stock is the most typical vehicle companies use for equity financing to raise
money for their businesses. A company issues common stock in an initial public
offering, or IPO , which is a company's first time selling stock to the public, giving
buyers an ownership stake in the business in exchange for cash. A company may
subsequently issue more stock in a follow-on stock offering if it needs cash for some
other reason, such as to acquire assets or otherwise expand. As owners,
stockholders have the right to vote in any shareholders' meetings, such as the annual
meeting, as well as any other votes that arise. They also have the right to receive
dividends, if the company pays them.
Two types of stock
• What is preferred stock?
Like a bond, preferred stock pays set distributions on a regular schedule, usually
quarterly. Because whenever the company pays dividends or other distributions,
preferred stock receives its full payout before common stock receives anything, but
after the company's bonds receive their payout and anything else they're due. If the
company is unable to pay a distribution on the preferreds, then common stock receives
no payout and will continue to receive no payout until the preferred stock receive its
due. This seniority structure makes this class of stock preferred over common.
But while preferreds and bonds share some similarities, preferreds have some other
interesting features that investors should be aware of. Preferreds often pay more than
a company's bonds. That's because they're perceived as being riskier than the bonds.
And it's true, because preferred stock receives distributions only if the bonds receive
their payouts. But riskier doesn't necessarily mean risky . For example, the bonds and
preferred stock of a highly rated company can both be considered safe, even though
the preferreds are relatively riskier than the bonds.
Preferreds can be perpetual. Unlike bonds, preferreds can remain issued in
perpetuity, with no maturity date. In other words, they can remain outstanding
forever. For a company that needs permanent capital, this feature can be useful.
Because preferred stocks can be perpetual, the company may never redeem the
stock, meaning the owner can hold it indefinitely, enjoy the payout, and not risk it
being bought back.

Dividends can be skipped and postponed indefinitely. One of the most unusual
features on preferreds is that the issuing company can skip the dividend, and it can
do so indefinitely. That will cause the preferred stock to drop in value, and it will
mean the common stock won't receive a dividend. But it's not a default, as it would
be with a bond.

Preferred dividends can be cumulative or non-cumulative. If a company does

decide to skip a dividend, it may or may not have to pay that dividend back later.
That depends on whether the preferred stock is cumulative or non-cumulative.
Cumulative stocks require the issuing company to pay all missed dividends, while
non-cumulative stocks don't have this provision.
Types of dividend
Dividend refers to the portion of the profit of the company
which distributes to the shareholders as a reward for the
investments made by them in the company

• Cash Dividend: This is the most common type of dividend under

which there is the actual payment of the cash by the company to its
shareholders directly. Generally, the shareholder’s payment is done
electronically but the same may be given in the form of cash or check.
Thus this type of dividend is the which board of directors of the
company resolves to pay on the date of the declaration to the
investors who are holding the stock of the company on the specified
date.
• Stock Dividend: This is the type of dividend under which the company issues
the common stock to the present common shareholders without taking any
form of consideration. The treatment of the stock dividend depends on the
percentage of an issue with respect to the number of the total previous
share issue. If the issue is less than 25 percent, then the transaction will be
treated as the stock dividend whereas if an issue is more than 25, then it
will be treated as the stock split

• Property dividend: Rather than giving a cash dividend or stock dividend to

the investors, the company may give a non-monetary dividend. The
company, in that case, has to record the distribution of non-monetary
dividend at distributed asset’s fair market value. In case the fair market
value of the assets distributed is different from the book value of assets,
then the company has to record the variance in form of the gain or loss as
applicable in the case.
• Scrip Dividend: This is the type of dividend under which the Company
issues the scrip dividend in a case as per the situation it is prevailing
that in near future company might not have sufficient funds for
issuing the dividends. Thus this type of dividend is a promissory note
to pay the shareholders of the company at the later date. This scrip
dividend creates the note payable which may include interest or may
not include.
• Liquidating dividend: This type of dividend is where the
originally contributed capital is returned back to the shareholders
mainly at the time of the shutting down of the business.
 Book value per share
The book value of assets and shares are the value of these items in a
company's financial records. These values can be found in the
company's balance sheet and accounting tools such as journals and
ledgers
• The book value per share is a market value ratio that weighs
stockholders' equity against shares outstanding. In other words, the
value of all shares divided by the number of shares issued. Book value
of an asset refers to the value of an asset when depreciation is
accounted for. Depreciation is the reduction of an item's value over
time
• Generally, the book value per share is of use to investors for
determining whether a share is undervalued. Avoid confusing this
measurement with the market value per share. Market value per
share is the price a share is being traded on the market, influenced by
the impressions investors have of the future of that share.
Here is the calculation of the book value per share:
Book Value per Share = Shareholders' Equity ÷ Average Number of Common
Shares
Solution