This assignment will allow you to become familiar with the FASB Accounting Stand
ID: 2489059 • Letter: T
Question
This assignment will allow you to become familiar with the FASB Accounting Standards Code (ASC).
Prepare responses after reading the following 2 exercises. Provide Codification references for your responses.
Exercise #1: Merliss Company (a specialty boat-accessory manufacturer) is expecting growth in sales of certain low price products. Merliss is thinking about a preferred stock issue to help finance this expansion. The company is leaning toward issuing participating preferred stock so as not to dilute ownership. Investors will get an extra dividend if the company does well. Merliss wants to be sure that all reporting for this transaction is proper and transparent. The company asks you to research disclosure requirements related to its capital structure.
A .Identify the authoritative literature that addresses disclosure of information about capital structure.
B. Find definitions for the following: 1. Securities. 2. Participation Rights 3. Preferred Stock
C. What information about securities must companies disclose? Discuss how Merliss should report the proposed preferred stock issue.
Exercise #2: A. Access the glossary ("Master Glossary") to answer the following:
1. What is the definition of "basic earnings per share"?
2. What is "dilution"?
3. What is a "warrant"?
4. What is a "grant date"?
B. For how many periods must a company present EPS data?
C. For each period that an income statement is presented, what must a company disclose about its EPS?
D. If a company's outstanding shares are increased through a stock dividend or a stock split, how would that alter the presentation of its EPS data?
Explanation / Answer
A. Disclosure of information about capital structure is established in SFAS # 129 - Disclosure of information about Capital structure and Contingently convertible securities issued in FEB 1997
B. Definitions:
a. Securities - —the evidence of debt or ownership or a related right. For purposes of this Statement, the term securities includes options and warrants as well as debt and stock.
b. Participation rights—contractual rights of security holders to receive dividends or returns from the security issuer’s profits, cash flows, or returns on investments.
c. Preferred stock—a security that has preferential rights compared to common stock.
C. Disclosure required about securities:
a. Dividend and liquidation preferences
b. Participation rights
c. Call prices and dates
d. Conversion rates and dates
e. Excercice price and dates
f. Sinking find requirements
g. Unusual voting rights
h. Contracts to issue additional shares
i. Number of shares issued on conversion exercise
j. Changes in the number of shares of stock
k. Liquidation preference for preferred stock
l. Amounts at which preferred stock may be called
m. Amouts at whihc preferred stock is suject to redemption
n. Amounts of arrearages in cumulative preferred dividends
o. Amounts of redemption requirements for redeemable stock
Merliss should disclose the following:
a. Dividend and liquidation preferences
b. Participation rights
c. Call prices and dates
d. Conversion rates and dates
e. Excercice price and dates
f. Unusual voting rights
g. Contracts to issue additional shares
h. Number of shares issued on conversion exercise
j. Changes in the number of shares of stock
k. Liquidation preference for preferred stock
l. Amounts at which preferred stock may be called
m. Amouts at whihc preferred stock is suject to redemption
n. Amounts of arrearages in cumulative preferred dividends
o. Amounts of redemption requirements for redeemable stock
2:
1. Basic EPS - The amount of earnings for the period available to each share of common stock outstanding during the reporting period.
2. Dilution - A reduction in earnings per share resulting from the assumption that convertible securities were converted, that options or warrants were exercised, or that other shares were issued upon the satisfaction of certain conditions
3. Warrant - A security that gives the holder the right to purchase shares of common stock in accordance with the terms of the instrument, usually upon payment of a specified amount
4. Grant date - The date at which an employer and an employee reach a mutual understanding of the key terms and conditions of a share-based payment award. The employer becomes contingently obligated on the grant date to issue equity instruments or transfer assets to an employee who renders the requisite service. Awards made under an arrangement that is subject to shareholder approval are not deemed to be granted until that approval is obtained unless approval is essentially a formality (or perfunctory), for example, if management and the members of the board of directors control enough votes to approve the arrangement. Similarly, individual awards that are subject to approval by the board of directors, management, or both are not deemed to be granted until all such approvals are obtained. The grant date for an award of equity instruments is the date that an employee begins to benefit from, or be adversely affected by, subsequent changes in the price of the employer’s equity shares.
B. EPS data should be presented for all periods covered by income statement
c. Companu should present the following:
1. Basic EPS
2. Diluted EPS if potential dilution exists in any period
3. Reconciliation of both numerator and denominator for both basic and diluted EPS
4. Effect of preferred dividend of EPS calculation
5. Securities that may potentially dilue EPS in the future
6. Transactions occuring after the end of current period but before issuance of financial statements whihc would have materially affected number of common shares outstanding