Equity - IAS, US - GAAP, GoB

Table of contents

1. The different parts of equity
1.1. What is equity?
1.2. With regard to the GCC (German Commercial Code)
1.3. With regard to the IAS (International Accounting Standards)
1.4. With regard to the US-GAAP

2. The definition of these parts
2.1. With regard to the GOB & GCC
2.2. With regard to the IAS
2.3. With regard to the US-GAAP

3. The most important differences in regulation
3.1. With regard to the GCC, IAS and US-GAAP

4. Bibliography

5. Graphs
5.1. An example of a German balance sheet in the sector of equity
5.2. An example of a balance sheet according to the IAS and US-GAAP
5.3. Relationship of the different accounts concerning the parts of the GoB
5.4. Relationship of the different accounts concerning the parts of the IAS

6. Exercises
6.1. General questions
6.2. With regard to the GCC and GoB
6.3. With regard to the IAS
6.4. With regard to the US-GAAP

7. Answers to exercises
7.1. No. 6.1.
7.2. No. 6.2.
7.3. No. 6.3.
7.4. No. 6.4.

1. The different parts of equity

1.1. What is equity?

Before trying to explain this expression used in accounting you should know where you usually find it in a financial statement. Equity is part of the liabilities and is mentioned in the first place. Usually the liabilities are mentioned in order of expiration and divided into two sectors. The first position is the equity and the second position is the borrowed capital (liabilities).

I have to say that equity is a very inexact expression. Indeed it consists of the following items, which have to been treated and stated differently concerning the various regulations.

1.2. The different parts of equity with regard to GCC

First of all, it is important to know that the equity is influenced by the legal form of a company. This text only refers to the legal form of a corporation or an incorporation. That means that always the stockholder´s equity is meant when we use the inaccurate expression of equity.

Furthermore, equity is regulated by the GCC in § 272.

According to the GCC, the equity of a company is divided into following items:

1. The capital stock
2. The capital reserves
3. The retained income
4. The accumulated losses or reserved surplus
5. The profit of the year or annual loss

An example of a German balance sheet in respect to equity can be seen in 5.1.

1.3. The different parts of equity with regard to the IAS

The different parts are similar to the parts of the equity mentioned above and that’s the reason why they are compatible with the German system. There is no strict balance sheet format compared to the GCC regulations in respect to the equity sector except the following items:

1. The capital stock and the capital reserves have to be separated from the capital raised by doing a company´s business.
2. Further stock capital accounts have to be used if certain standards require them.
3. Changes in the stock capital have to be stated separately

An example of a balance sheet according to the regulations of the IAS can be seen in 5.2.

1.4. The different parts of equity with regard to the US-GAAP

The US-GAAP is similar to the GOB and the IAS. A strict format in the balance sheet doesn’t exist as well as in the IAS. The exceptions are the same as the three exceptions mentioned in the IAS.

An example for the format: (usually this format is used)

1. Contributed capital
2. Additional paid-in capital
3. Retained earnings
4. Treasury stock

Please refer to the example in 5.2.

2. The definition of these parts

2.1. The definition of these parts with regard to the GOB & GCC

General definition:

Equity is the difference between the balance positions on the assets side and the positions of operating reserves, liabilities and end of year adjustment.

The definition of the capital stock:

The owners of a corporation are the shareholders. Every shareholder is part owner of the company and exactly with that percentage of stocks he owns compared to the whole amount of shares placed. In fact, the capital stock consists of the money of the shareholders. The capital stock has the same value as the nominal value of all shares placed.

This part of the equity concerning the value can never be changed. It is a constant account and if there are earnings that are not given away to the shareholders or there are investments exceeding the nominal price of the placed shares, they don’t influence this part of the equity. The capital stock has always to be carried to liabilities in respect of nominal prices.

The following accounts are all part of the reserves.

The definition of the additional paid-in capital accounts:

All parts of these accounts are variable accounts. This means that these accounts change their value over the time the company does their business.

Above it was mentioned that in case of investments exceeding the nominal price of placed shares, they wouldn’t influence the capital stock. That’s the reason why this part of equity plays a role in that case. If there is a rise in the capital stock, no matter why, this raised value is stated in the sub-accounts of the additional paid-in capital accounts. The same applies if there is a decline in the value of the capital stock, and then this account will be reduced by this value.

Now there are different accounts for a different use. Let’s have a closer look on them:

1. The account: capital reserves

In regard to the definition it is the same as mentioned above. It is used if the value of the investments exceeds the value of the nominal price of all shares. You usually call it the goodwill of a company what means the purchase price of a share exceeds the fair market value. The sum of the value of all shares minus the nominal price of all shares or the capital stock is the goodwill or the capital reserve of a company.

Furthermore, the value of the investment exceeds the value of the nominal price in the following cases:

1. Placing shares over par value or selling convertible debentures
2. Additional paid-in capital from shareholders for preferences they get
3. Money that is free because of simple reduction of capital

The capital reserves are regulated in § 272 of the GCC.

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