Know Your Rights!!

How-to distinguish source of funds as a   Debt or Equity? Let’s begin reading this article by knowing the definition of Financial Instruments. A financial instrument is a contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. The essence of the definition lies in contract which we generally understand as a transaction having all the three characteristics: agreement between two or more parties; for an economic consideration and legally enforceable. The definition then highlights financial assets, financial liabilities and equity instrument. Assets, liabilities, equity instrument reminds us of the balance sheet. For example, in credit sales transaction, the entity which sold the goods has a financial asset – trade receivable – while the purchaser has to account for a financial liability – trade payable. Another example is when the entity sources finance by issuing ordinary equity shares. The e...

  Prior to the introduction of IFRS 9, OCI had 5 components and the easier way to remember was the acronym CAART – which is: C – The effective portion of gains/losses on hedging instruments in a C ash flow hedge A - A ctuarial gains and losses on defined benefit pension plans  A - Gains and losses on A vailable-for-sale financial assets R - R evaluation surplus related to property, plant and equipment T - Gains and losses arising from T ranslating the financial statements of a foreign operation Now with IFRS 9 earlier adoption, the acronym has changed from CAART to CRAAFT C – The effective portion of gains and losses on hedging instruments in a C ash flow hedge R - R evaluation surplus related to property, plant and equipment A - A ctuarial gains and losses on defined benefit pension plans  A - Gains and losses on A vailable-for-sale financial assets F - F inancial liabilities designated as at fair value through profit or loss: fair value changes attr...

When a company buys back or reacquires its own shares, such portion of shares are called as Treasury Shares. These are the shares that the company keeps in its own treasury and therefore they will be deducted from equity. These shares don't pay dividends, have no voting rights, and should not be included in shares outstanding calculations for EPS. No gain or loss is recognized in the statement of profit and loss on the purchase, sale, issue or cancellation of an entity’s own equity instruments. Case Study 1: Accounting of buy back of equity shares IStaR Co buys back 100,000 of its own equity shares in the market for INR 10 per share. The accounting entry for recording the purchase of treasury shares as a deduction from equity is as follows: Equity – Treasury Shares a/c………Dr                                 ...

EPS is simply profit amount divided by number of shares. Valuing a company as a whole is crucial during merger negotiations, buyouts or in similar arrangements – relatively rare events in the ongoing life of a company. For day-to-day valuations, many analysts prefer to focus on the value of single equity share. Here the earnings per share (EPS) computation helps to know how much of the company’s total earnings accrue to each share. A simple capital structure exists when a company has no convertibles, no options or no warrants outstanding. The simple formula used to compute earnings per share (EPS) is: To illustrate, IStaR Ltd. discloses the following information in the year 2012: January 1 December 31 Equity shares ( ` 1 face value) 160,000 shares issued and outstanding 160,000 200,000 shares issued and outstanding 200,000 Reserves 12,000,000 16,000,000 Retained earni...