Company Accounts

(1)

College of Humanities

School of Business

2015/2016

Accounting for Companies

(2)

Learning Objectives

Explain and discuss the nature of limited liability companies

according to the Company’s Act, 1963 (Act 179).

Explain the capital structure of a company.

Explain the differences between the different classes of shares.

Account for the issuance of shares.

Explain the purpose of and prepare an income surplus account.

Prepare the Income Statement and Statement of Financial

Position of a limited liability company.

(3)

Definition of a Company

•

A company is “a body corporate formed and registered under

this code or an existing company”.

–

A body corporate is “a corporation formed under (the

company’s Act) or otherwise and whether in Ghana or

elsewhere”. (First Schedule)

–

“No company, association or partnership consisting of more

than twenty persons shall be formed for the purpose of

carrying on business … unless it is registered as a company

under (the company’s Act) or formed in pursuance of some

other enactment for the time being in force. (Section 5)

(4)

Characteristics of Companies

•

Separate legal Entity

–

A company formed under the Act assumes the status of natural

person with full capacity, except to the extent that its Regulations

otherwise provide, for the furtherance of its objects and of any

business carried on by it and authorized by its Regulations.

–

As a body corporate, it exists as a legal entity separate and distinct

from its members. (Section 24)

•

Separation of management and ownership

•

Limited liability

•

Perpetual succession

•

Transferability of interests

•

Legal personality

(5)

Formation of Companies

•

The minimum number of persons who can form a company is one.

•

The total number of members and debenture holders for a private company is

restricted to fifty. (Section 8)

•

Section 180 requires a minimum number of two (2) directors.

•

Formation requires:

–

Compliance with the provisions in the Act and satisfying the registrar

general.

–

Certificate of Incorporation issued to the Promoters after meeting

the minimum capital requirement

–

Certificate of Commencement of Business will be issued to start

trading.

–

Regulations of the company - content includes the name of the

company, nature of business(es), status (section 24), names of first

directors and their powers.

(6)

Types of Companies (Section 9)

•

Company limited by shares

–

liability of members is limited to the amount, if any, unpaid

on the shares respectively held by them.

•

Company limited by guarantee

–

liability of its members is limited to the amount the

members may respectively undertake to contribute to the

assets of the company in the event of it being wound up.

•

Unlimited company

–

the liabilities of its members is not limited.

•

Private and Public companies

(7)

Private And Public Companies

•

A private company shall be a company which by its

regulations:

–

restricts the right to transfer its shares

–

the total number of members and debenture holders is restricted to

50, excluding the bona fide current and former employees.

–

prohibits the company from making any invitation to the public to

acquire any shares or debentures of the company.

–

prohibits the company from making any invitation to the public to

deposit money for fixed period or payable at call, whether bearing or

not bearing interest.

•

The Act in section 9 (4) says that “any other company shall be

a public company”.

(8)

Accounting and Audit Requirements

(Section 123-136)

•

Keeping of books of account

•

Circulation of profit and loss account, Statement of Financial

Position and reports

•

Profit and loss account

•

Statement of Financial Position

•

Group accounts

•

Particulars of Directors emoluments and pensions

•

Particulars of amounts due from officers

•

Signing and publication of accounts

•

Directors’ report

•

Auditors’ report

•

Appointment and remuneration of auditors

•

Removal of auditors

•

Duties and powers of auditors

(9)

Shares

•

A share represents the right of ownership in a company.

–

The ownership is in proportion to the number of shares

held.

–

The amount paid for the shares is not the basis of claiming

more ownership but the number of shares acquired.

•

“All shares created after the commencement of the Act

shall be

shares of no par value

”. (Section 40)

–

Shares in Ghana do not have a fixed amount or price

attached to it upon its creation, hence;

–

Shares can neither be issued at a premium nor discount.

(10)

Types of Shares

•

Preference Shares

–

They are shares that do not entitle the holder thereof to any right to

participate beyond a specified amount in any distribution whether by way

of dividend, or on redemption, in a winding up or otherwise.

–

They have priority over equity/ordinary shares in the distribution of

dividend and capital in the event of winding up.

•

Ordinary Shares

–

They are not entitled to a fixed amount of dividend and can only be paid

after preference shareholders have been paid.

–

They are also entitled to residual capital (i.e. rank after preference shares)

in the event of winding up. i.e. they bear the residual risk of the company.

–

They have unrestricted voting rights

(11)

Issuance of Shares

•

Company may issue shares up to the total number

authorized by its regulations (Section 41).

–

Shares may be issued at such times and for such

consideration as the company may determine and

shall be paid for at such times as agreed by the

members and the company or as may be specified in

the regulations, except in capitalization issue.

•

Shares shall be issued for valuable consideration and

paid for in cash, except otherwise agreed. (Section

42)

(12)

Forms of Issuing Shares

•

Initial Public Offer

–

Sale of shares by a private company for the first time to the public.

•

Private Placement

–

The sale of shares of companies to private investors without the

use of public market exchanges.

•

Capitalization/Bonus/Scrip Issue

–

Monies in a company’s reserve is converted into capital and then

distributed to shareholders as new shares in proportion to their

existing shareholdings.

•

Rights Issue

–

Shares are issued to existing shareholders in proportion to their

current shareholding, respecting their pre-emption rights and

usually at a lower price than the current share price of the

company.

(13)

Procedure for Issuance of Shares

•

Invitation to the Public to apply for shares

–

Through the circulating of Prospectus and advertising in the mass media,

which gives the conditions of the offer.

•

Application (offer from the public to the company accompanied

by cash from the public)

–

States the number of shares desired by the applicants.

–

Application remains an offer to buy shares in the company until the

company accepts or rejects this offer.

•

Allotment of shares (acceptance or rejection by the company)

–

Process of allocating shares to applicants.

–

Acceptance of the offer, Rejection of the offer or Acceptance of part of

the offer.

•

Calls for arrears on share values

•

Forfeiture of shares

(14)

Treasury Shares

•

Shares which have been once issued but have been

recalled by the company through:

–

Forfeiture

–

Redemption

–

Purchase/Acquisition

•

Any issue of shares while there are shares in treasury,

is deemed to be an issue first of treasury shares

before any fresh issue

(15)

Share Deals Account

•

An account required by the Act for certain dealings in

treasury shares

–

When shares are reissued, the proceeds are credited to this

account.

–

When the company redeems or acquires it own shares, the

transfer from Income Surplus account is also credited to

this account.

–

All expenses incurred in the redemption and acquisition of

shares are charged to this account.

•

This is the reserve that prevents the company’s stated

capital from reducing.

(16)

Components of Owner’s Equity

•

The total resources owned by the members or owners of the company.

It consists of:

•

Stated Capital

–

Either from the cash or other consideration from the issue of shares

or transfers made into the stated capital account from the income

surplus (capitalization issue)

•

Share Deals Account

•

Income Surplus

–

Retained earnings of the company over the years. All distributions

from profits are made in this account.

•

Capital Surplus

–

Usually results from revaluation of non-current assets

(appreciation). It is not intended to be distributed as dividend as

they are unrealized surpluses.

(17)

Payment of Dividends

•

A company can only pay dividend to shareholders if:

–

After such payment the company will be able to pay

its debts as they are due

–

The amount of such payment does not exceed the

income surplus of the company prior the payment.

•

Dividend payment could be:

–

Cash or non-cash

–

Interim or/and proposed

(18)

Shares Payable by Installments

•

Accounting for shares payable by installments will be

discussed by considering the procedure for issuance

of shares:

–

Invitation to the Public to apply for shares

–

Application (offer from the public to the company

accompanied by cash from the public)

–

Allotment of shares (acceptance or rejection by the

company)

–

Calls for arrears on share values

–

Forfeiture of shares

(19)

Application Stage

•

When cash/cheque is received on application

Dr Bank/cash Account

Cr Application Account

with the total amount of cash received

•

When consideration other than cash is received

Dr The relevant asset account

Cr Application account

with the agreed value of the consideration received

(20)

Allotment Stage

•

Transfer to Stated Capital Account

Dr Application Account

Cr Stated Capital Account

with the total application amount received in respect of

shares allotted

•

Refund of money for rejected applications

Cr Bank/Cash account

with the amount received on applications in respect of total

applications rejected.

(21)

Allotment Stage

•

Retention of excess funds for other stages (partly successful

applicants)

Cr Allotment Account

with amounts received in respect of rejected portions of

applications

•

On receipt of allotment monies (cash/cheque) due on shares

issued

Dr Cash/Bank Account

Cr Allotment Account

with monies received on allotment

(22)

Allotment Stage

•

Transfer to the stated capital

Dr Allotment account

Cr Stated capital account

with the total sum received on allotment

(23)

On Calls Stage

•

On receipt of cash/cheque

Dr Bank/cash account

Cr Call account

•

Refund of excess money to applicants, if any, after full payment.

Dr Call account

Cr Bank account

•

Transfer to Stated Capital account

Dr Call account

(24)

Forfeiture

•

Upon forfeiture of shares; no entry is made

•

On Re-issue of forfeited shares

Dr Cash account

Cr Share Deals account

•

Capitalization/Bonus issue

Dr Income Surplus account

(25)

Shares Payable on Application

•

Receipt of monies on application

Dr Cash/Bank Account

Cr Application account

with the total amount received with applications

•

Refunds of rejected applications

Dr Application account

Cr Cash/Bank account

with amount refunded to rejected applicants

(26)

Shares Payable on Application

•

Transfer to Stated Capital

Dr Application account

Cr Stated Capital account

with amount received for shares issued

(27)

Issuance of Treasury Shares

•

Treasury shares have all rights and obligations

attached to shares of similar class in the company.

•

Full payment on application method is adopted.

•

Accounting entries:

Dr Cash/Bank account

Cr Share Deals account

with the total amount received in respect of shares

issued

(28)

Financial Statements of a Company

•

Income Statement

•

Income Surplus Account

•

Statement of Cash flow

•

Notes to the Financial Statements

(29)

Income Statement

Notes

2015

2014

¢m

Turnover

1

xxxxx

xxxx

Cost of sales

2

(xxx)

Gross profit

xxxx

General administrative and selling expenses

3

(xxx)

Operating profit

xxxx

Other income

4

xxxx

Profit Before Interest and Taxation

xxxx

Interest/financial charges

5

(xxx)

(xxxx)

Profit before taxation

xxxx

Taxation

6

(xxx)

Profit after taxation transferred to income

surplus

xxxx

(30)

Income Surplus Account

¢

2015

¢

2014

Balance b/fwd

xxx

Profit for the year

xxx

xxxx

Less: proposed dividend-interim

xxx

Final

xxx

Transfers to capital surplus a/c

xxx

Balance c/fwd

xxxx

(31)

Notes 2015 2014

¢m ¢m ¢m ¢m

Non-current Assets 7 xxxx xxxx

Investments 8 xxx xxx

Current Assets

Inventory xxx xxx

Receivables 9 xxx xxx

Short-term investments xxxx xxxx

Cash and bank balance xxxx xxxx

Current Liabilities

Bank overdraft 10 xxx xxx

Payables 11 xxx xxx

Dividends payable 12 xxx xxx

Taxation payable 13 xxx xxxx

xxxx xxxx

Net current Assets/(Liabilities) xxxx xxxx Long term Liabilities

Term loan 14 (xxx) (xxx)

Net Assets xxxx xxxx

Financed By:

Stated Capital 15 xxxx xxxx

Income Surplus xxx xxx

Share Deals xxx xxx

Capital Surplus 16 xxx xxx

xxxx xxxx

(32)

International Financial Reporting Standards

(IFRS)

•

IFRS

is the collection of financial reporting standards

developed by the International Accounting Standards

Board (IASB), an independent International

Standards setting organization

•

The aim of IFRS is to provide “a single set of high

quality, global accounting standards that require

transparent and comparable information in general

purpose financial statements

(33)

Structure of IFRS

•

IFRS comprise:

–

IASs (written by the IASC from 1973 to 2000; amended by IASB)

–

IFRS (written from 2001 by the IASB)

–

Standards Interpretation Committee (SIC)’s interpretations

–

IFRIC’s interpretations

IASs, IFRSs, SICs, IFRICs all have full authority

•

IFRS are considered a “

principle based”

set of standards in

that they establish broad principles as well as dictate

specific treatments

(34)

What is the structure of the international standard setters?

International

Accounting

Standards

Board (IASB)

IFRS

and

IFRS for SMEs

IFRS

Advisory

Council

IFRS

Foundation

IFRS

Interpretations

Committee

Monitoring

(35)

IFRS adopted in Ghana

•

Full IFRSs

–

required or permitted for financial reporting

•

listed companies

•

Unlisted which are not SMEs (banks, etc)

•

The

IFRS for SMEs

–

issued in July 2009

–

required or permitted for financial reporting

•

SMEs

36

(36)

37

The IFRS Objective

IFRS to be :

The single set of accounting standards used

worldwide providing high-quality, transparent

and comparable information for investors and

other users of financial information.

37

(37)

38

Why IFRS?

•

Investors are acting on a global market !!

•

National standards don’t work on a

global market

•

Cross boarder business is hindered by

national standards

(38)

39

Benefits to Capital Markets

•

Credibility of local market to foreign investors

•

More cross-border investment

•

Efficient capital allocation

•

Comparability across political boundaries

•

Facilitates global education and training

(39)

40

Benefit to companies

•

Lower cost of capital

•

Facilitates raising capital abroad

•

Integrated IT systems

•

“One set of books” + easier consolidation

•

Better understanding of financial statements

from business partners abroad

(40)

Implementing IFRS: Challenges

•

Commitment => Decision: leaders, law, regulation

•

Responsibility

•

Stakeholders involvement

•

Solid financial system

•

Training

•

Educational programs

•

Divergencies between local GAAP and IFRS

•

Transition: systems, processes, professionals

•

Tax neutrality (identified as key in many countries)