Shareholders Equity

What is Shareholders Equity?

Shareholder’s equity is the residual interest of the shareholders in the company and is calculated as the difference between Assets and Liabilities. Shareholders’ Equity Statement on the balance sheet shows the details of the change in the value of shareholder’s equity during a particular accounting period from its beginning till the end.

Explanation

The assets of the company are either financed by creditors or brought in by shareholders. Now, the creditors will be entitled to get paid to the extent they have contributed toward financing the assets. And the rest will be enjoyed by the shareholders. Shareholders are valued most because they share both profits and losses.

All the creditors who have invested in the assets are “liabilities” of business because they need to be paid irrespective of profit or loss of business. So they will be paid first. And then whatever is left remains intact for the shareholders.

Thus, we can express assets in the following manner –

Assets = Liabilities + Shareholders Equity

If we can interchange the equation a bit, we will get the definition of shareholders’ equity formula

Assets – Liabilities = Shareholders Equity

This residual interest (the difference between assets and liabilities) is called “capital” in the sole proprietorship business. The same is called the “sum of individual capital” in the partnership business.

Toshiba Shareholder's Equity 1

Components of Shareholders Equity

The following are components of shareholder’s equity.

Components of Shareholders Equity

Instead of looking into a formula, we will look at the components which will help us understand what we need to take into account. Below is the snapshot of Amazon’s Shareholder’s Equity of 2015 and 2016

Amazon Shareholder's Equity

source: Amazon SEC Filings

#1 – Common Stock

Common Stock is the first and most important component. Common stockholders are the owners of the company. They are the ones who will receive the profits and deal with losses after the company pays interest and dividends to preference shareholders. And they also have voting rights.

Here’s how to calculate common stock –

Common Stock = Number of shares issue * Par value per share

There are two things to consider here – the number of authorized share capital and the number of shares issued. Numbers of authorized share capital represent the number of shares the company can issue legally. And the number of shares issued means the actual number of shares that the company has issued.

In Amazon, common stock outstanding is $5 million in both 2015 and 2016.

#2 – Additional paid-up capital

Additional means more than the share price. That means when the company receives a premium on the shares, we would call it additional paid-up capital. Here’s how to calculate it –

Additional paid-up capital = (Share Price – Par Value) * Number of shares issued

Additional paid-up capital for Amazon is $13,394 million and 17,186 million in 2015 and 2016, respectively.

#3 – Preferred Stock

Preferred stockholders are shareholders who have secondary rights in the net assets. They don’t have voting rights, but they enjoy a fixed dividend even before anything is given to the common stockholders. Here’s how it is calculated –

Preferred Stock = Number of preferred shares issued * Par Value per share

There is no preferred stock in Amazon.

#4 – Retained Earnings

Retained earnings or losses are accumulated from the previous period. In simple terms, retained earnings are the amount the company keeps after paying the dividend from net income. This amount is reinvested in the company. Here’s how we would calculate retained earnings for the end of the period –

Particulars
Retained Earnings at the beginning ***
(+) Net Income for the year **
(-) Dividend paid **
(+/-) Any change in accounting policy *
Retained Earnings at the ending ***

Retained Earnings for Amazon is $2,545 million and 4,916 million in 2015 and 2016, respectively.

#5 – Treasury shares

Treasury shares are the sum total of all the common shares that have been purchased back by the company. Thus, treasury shares are the opposite of common equity shares. Common stock has a credit balance, whereas treasury shares have a debit balance. That’s why all treasury shares are required to deduct from all equity components. Treasury Stock for Amazon is -$1,837 million for both 2015 and 2016.

#6 – Accumulated Other Comprehensive Income

Accumulated Other comprehensive income contains unrealized gains/losses that do not flow through the income statement. Examples are unrealized gains or losses from investments classified as available for sale, foreign currency translation gain/losses, pension plan gains/losses, etc.

Accumulated Other Comprehensive Income for Amazon is -$723 million and -$985 million in 2015 and 2016, respectively.

#7 – Minority interest

This is an important part of shareholders’ equity. They have a minority stake in the company and no controlling power in the company like common stockholders. Minority shareholders are equity attributed to owners who are not of the parent company. Minority interest comes in the consolidated balance sheet. We can calculate it in the following way –

Minority Interest = Total Equity – Shareholders Equity attributed to the parent

So, now we can have a look at the formula –

Shareholders Equity
Paid-in Capital:  
Common Stock ***
Preferred Stock ***
Additional Paid-up Capital:  
Common Stock **
Preferred Stock **
Retained Earnings ***
(-) Treasury Shares (**)
(-) Translation Reserve (**)
Minority Interest ***

There is no minority interest in Amazon.

Nestle Example

Equity    
Share Capital 319 322
Treasury shares (7489) (3918)
Translation reserve (21129) (17255)
Retained Earnings & other reserves 90637 90981
Total equity attributable to shareholders of the parent 62338 70130
Non-controlling interest 1648 1754
Total Equity 63986 71884

 

Total liabilities and equity 123992 133450

source: Nestle 2015 Financial Statements

We note that Shareholder’s Equity of Nestle is 63,986 million CHF and 133,450 million CHF in 2015 and 2014, respectively.

Please note that red highlighted items are what we deduct, i.e., treasury shares and translation reserve.

Once we add share capital and retained earnings and deduct treasury shares and translation reserve, we get the total equity attributable to shareholders of the parent company. Also, note that since it is a consolidated balance sheet, we need to take into account the non-controlling interest (minority interest), so we add minority interest to the total equity attributable to shareholders of the parent company. And as a result, we got total equity.

Shareholders Equity Examples

Example # 1

Mr. A has got hold of the balance sheet of Q Company. But while traveling, Mr. A lost the last part of the balance sheet. So how would he get to know about shareholder’s equity?

Here’s the remainder of the document.

Balance Sheet of ABC Company

2016 (In US $) 2015 (In US $)
Assets    
Current Assets 300,000 400,000
Investments 45,00,000 41,00,000
Plant & Machinery 13,00,000 16,00,000
Intangible Assets 15,000 10,000
Total Assets 61,15,000 61,10,000
Liabilities    
Current Liabilities 200,000 2,70,000
Long term Liabilities 1,15,000 1,40,000
Total Liabilities 3,15,000 4,10,000

Here the calculation is easy. Though we would not be able to get the particulars of each item in shareholder’s equity, we will be able to find out the total amount.

All Mr. A needs to do is to deduct the total liabilities from the total assets.

2016 (In US $) 2015 (In US $)
Total Assets (A) 61,15,000 61,10,000
Total Liabilities (B) 3,15,000 4,10,000
SE (A – B) 58,00,000 57,00,000

Mr. A later went back to the office, sourced the whole balance sheet and saw the missing part of the balance sheet of Q company –

SE
Preferred Stock 550,000 550,000
Common Stock 50,00,000 50,00,000
Retained Earnings 250,000 150,000
Total Shareholders  Equity 58,00,000 57,00,000
Total liabilities & Shareholders Equity 61,15,000 61,10,000

And he found that his calculation of total shareholder’s equity was absolutely correct.

Example # 2

Mr. S has the following information about Company Y –

Particulars In US $
Common Stock 40,00,000
Preferred Stock 800,000
Retained Earnings 410,000
Accumulated Comprehensive Income (loss) (50,000)
Treasury Shares 110,000
Minority Interest 600,000

Calculate shareholder’s equity for Mr. S.

Here we have all the information we need. Now we will put the values according to the formula.

SE
Paid-in Capital:  
Common Stock ***
Preferred Stock ***
Additional Paid-up Capital:  
Common Stock **
Preferred Stock **
Retained Earnings ***
(-) Treasury Shares (**)
(-) Translation Reserve (**)
Minority Interest ***

According to the formula, here’s the calculation below –

Particulars In US $
Common Stock 40,00,000
Preferred Stock 800,000
Retained Earnings 410,000
Accumulated Comprehensive Income (loss) (50,000)
Treasury Shares (110,000)
Minority Interest 600,000
Shareholders Equity 56,50,000

Example # 3

Mr. T has the following information about Company W –

Particulars In US $
Number of Common Shares 80,000
Number of Preferred Shares 20,000
Share Price (Common Shares) 150 per share
Share Price (Preferred Shares) 130 per share
Par Value (Common Shares) 100 per share
Par Value (Preferred Shares) 100 per share
Treasury Shares 100,000
Minority Interest 300,000

Additional information for retained earnings are also given –

Particulars
Retained Earnings at the beginning 200,000
Net Income for the year 500,000
Dividend paid 100,000
Amount appreciated due to change in accounting policy 50,000

Calculate the shareholder’s equity for Mr. T.

Let’s start with the calculation of retained earnings first, and then we will look at other items one by one.

Particulars
Retained Earnings at the beginning 200,000
(+)Net Income for the year 500,000
(-)Dividend paid (100,000)
(+)Amount appreciated due to change in accounting policy 50,000
Retained Earnings at the ending 650,000

Now, we will calculate the common stock.

Particulars In US $
Number of Common Shares (A) 80,000
Par Value (Common Shares) (B) 100
Common Stock (A * B) 80,00,000

Now, we will calculate the preferred stock.

Particulars In US $
Number of Preferred Shares (A) 20,000
Par Value (Preferred Shares) (B) 100
Preferred Stock (A * B) 20,00,000

We will look at the additional paid-up capital for common stock and preferred stock one by one.

To calculate the additional paid-up capital, we need to use the following formula –

Additional paid-up capital = (Share Price – Par Value) * Number of shares issued

Particulars In US $
Number of Common Shares (A) 80,000
Share Price (Common Shares) (B) 150
Par Value (Common Shares) (C) 100
Difference (B – C) 50
Additional Paid-up Capital (Common Stock)

[A * (B – C)]

40,00,000

 

Particulars In US $
Number of Preferred Shares (A) 20,000
Share Price (Preferred Shares) (B) 130
Par Value (Preferred Shares) (C) 100
Difference (B – C) 30
Additional Paid-up Capital (Preferred Stock)

[A * (B – C)]

600,000

Now we have all the information required to calculate shareholder’s equity. Let’s calculate it –

SE
Paid-in Capital: In US $
Common Stock 80,00,000
Preferred Stock 20,00,000
Additional Paid-up Capital:
Common Stock 40,00,000
Preferred Stock 600,000
Retained Earnings 650,000
(-) Treasury Shares (100,000)
Minority Interest 300,000
Total Shareholders’ Equity 1,54,50,000

Statement of Changes in Shareholder’s Equity

Statement of Changes in Shareholder’s Equity provides a detailed breakup and explains the changes in Common Stock Shares, Treasury Stock, Additional Paid-in Capital, Accumulated Other comprehensive income, Retained Earnings, etc.

Let us look at Amazon’s Statement of Changes in Shareholder’s Equity.

Statement

Let us take an example of Retained Earnings from the above statement and see how it got changed over the years. We note from above that as of the

  • As of 1st January 2014, Retained Earnings Balance was $2,190 million.
  • During 2014, the company reported a net loss of $241 million.
  • This resulted in a decrease in Retained Earnings to $1949 million, as reported on 31st December 2014.
  • This Retained Earnings of $1949 million becomes the starting balance for 2015.
  • During 2015, Amazon reported a profit of 596 million, resulting in an increase in Retained earnings to $2,545 million on 31st December 2015.
  • In 2015, Amazon reported a profit of $2,371 million, which increased its retained earnings further to $4,916 million.

Shareholders Equity Statement Video

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