The Analysis of the Statement of ShareholdersEquity

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Chapter 8
The Analysis of the Statement of
ShareholdersEquity
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The Analysis of the Statement of Shareholders
Equity
Link to Previous Chapter
Chapter 7 gave a design for
financial statements that
readies them for analysis.
This Chapter
How is the
How is dirty
-
What is hidden
This chapter reformulates the
surplus income
dirty
-
surplus
statement of
statement of owners equity
income ?
owners equity
treated in the
according to the design in
reformulated
reformulation ?
Chapter 7. The reformulation
to highlight the
information it
highlights comprehensive
contains ?
income.
Link to Next Chapter
Chapters 9 continues the
reformulation with the balance
sheet and the income
statement.
For more applications, visit the website
Link to Web Page
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What you will learn from this Chapter

• How GAAP statements of shareholders' equity
• are typically laid out
• Why reformulation of the statement is
• necessary
• What is reported in "other comprehensive
• income" and where it is reported
• What "dirty-surplus" items appear in the
• statement of shareholders' equity
• How stock options work to compensate
• employees
• How stock options and other contingent equity
• claims result in hidden expenses
• How management can create value for

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Standard Statement of Shareholders Equity
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Reformulated Statement of Stockholders Equity
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Reformation The Steps

• Restate beginning and ending balances for items
  incorrectly included in or excluded from common
  equity
• Preferred stock
• Dividends payable
• Unearned (deferred) compensation
• Calculate net transactions with shareholders
• Cash dividends share repurchases share
  issues
• Calculate comprehensive income
• Net income Other comprehensive income
• 
  Preferred dividends

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Nike- The GAAP Statement
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Nike The Reformulated Statement
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Reebok The GAAP Statement
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Reebok Reformulated Statement
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Restating Balances Reebok
Beginning balances
Ending balance
Reebok ceased paying dividends in 1996
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Dirty Surplus Accounting in the US
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Another Reformulation VP Corporation, 1998
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Reformulation for VF Corporation (continued)
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A Further Example VF Corporation, 1991-1994
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An Example VF Corporation
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FASB Statement No. 130

• Requires the reporting of comprehensive income
• in one of three ways
• Within the income statement
• In separate statement
• Within the equity statement
• Most firms choose the last alternative

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Ratio Analysis
Payout and Retention Ratios
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Ratio Analysis (continued)
Shareholder Profitability Ratio
Growth Ratios
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Hidden Dirty Surplus

• Shareholders 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 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 granted in the money are
  recorded as deferred compensation

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FASB Statement No. 123

• Statement 123 requires an expense to be
  recognized at option grant date, equal to the
  value of the option that date
• A pro forma net income, including the expense, is
  reported in footnotes. The expense can be
  reported in the 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.

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Reebok Stock Option Footnote 1996
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Reebok Stock Option Footnote, continued
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Measuring the Loss from Exercise of Stock
Options Method 1 (Reebok)
Expense is implied from the tax benefit
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Measuring The Loss from Exercise of Stock
Options Method 2 (Reebok)
Calculate difference between market price
and exercise price
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Hidden Losses on Put Options Dell Computer
From the 2002 equity statement (see Chapter 2)
The Loss
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Losses on Convertible Securities

• Loss Market price of common issued book
• value of convertible surrendered
• The market value method vs. the book value method