1

The Analysis of the Statement of Shareholders Equity

GAAP Statement of Shareholders Equity GAAP Statement of Shareholders Equity
Opening book value of equity (common and preferred)
+Net sharetransactionswithcommonstockholders
+Capital contributions (paid in capital from share issues)
- Share repurchases (into treasury stock or against paid-in capital)
+Net sharetransactionswithpreferredshareholders
+ Capital contributions (share issues)
- Share redemptions
+Changeinretainedearnings
+ Net income
- Common dividends
- Preferred dividends
+Accumulatedother comprehensiveincome
+Changeinunearned(deferred) stock compensation
Closing book value of equity (common and preferred)
TheGoverningAccountingRelation
Bookvalue,beginningofperiod
+ Comprehensive income +Comprehensiveincome
Netpayouttoshareholders
=Bookvalue,endofperiod
2
ReformulatedStatementof
StockholdersEquity
Opening book valueif common equity (CSEt-1)
+Net transactions with common shareholders
+ Capital contributions (share issues)
- Share repurchases
- Common dividends
+Comprehensiveincometo common shareholders
+ Net income
+ Other comprehensive income
- Preferred dividends
Closing book valueof common equity (CSEt)

Notethat preferred equity is taken out of thecommon
shareholders' equity statement (and treated as a
liability).
Reformulation:TheSteps
1. Restatebeginningandendingbalancesforitemsincorrectlyincludedin
orexcludedfromcommonequity
Preferredstock
Dividendspayable
Unearned(deferred)compensation
2. Calculatenettransactionswithshareholders
Cashdividends+sharerepurchases shareissues
3. Calculatecomprehensiveincome
Netincome+Othercomprehensiveincome
Preferreddividends
TheGAAPStatement:NikeInc.,2004
3
Nike:TheReformulatedStatement
Balance, May 31, 2003 $4,028.2

Transaction with Shareholders

Stock issues 308.1
Stock repurchases (416.3)
Commondividends (179.2) (287.4)

Comprehensive Income

Net incomereported 945.6
Currency translationgains 27.5
Gainsonhedgederivatives 125.9 1099.0

Balance, May 31, 2004 4,839.8


Balances: 2003 2004
Reported $3,990.7 4,781.7
Dividendspayable 36.9 52.6
Unearnedcompensation 0.6 5.5
Restatedbalance $4,028.2 $4,839.8
TheGAAPStatement:ReebokInternationalLtd.,2004
Reebok:ReformulatedStatement
Balance, December 31, 2003 $1,034.9

Transaction with Shareholders

Stock issues $62.3
Stock repurchases (88.1)
Common dividends (17.8) (43.6)

Comprehensive income

Net incomereported 192.4
Currency translation gains 37.7
Gains on hedgederivatives 4.4 234.5


Balance, December 31, 2004 1,225.8

Balances:
2003 2004
Reported 1,033.7 1,220.0
Unearnedcompensation 1.2 5.8
Restatedbalance 1,034.9 1,225.8
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Dirty Surplus Accounting in the US Dirty Surplus Accounting in the US
Operating Income:
Someincome-increasingaccountingchanges (APB No. 20)
a. changefromLIFO valuationof inventory
b. changeinlong-termcontract accounting
c. changetoor fromfull cost accountinginextractiveindustries
d. achangetriggeredbyaredlineinanaccountingstandard
(e.g. changefromcost toequitymethodfor long-termequities)
e. achangemadefor thefirst timeinconjunctionwithaIPO
or businesscombination
Changesinaccountingfor contingencies (FASB No. 11)
Foreigncurrencytransactiongainsandlosses (FASB No. 52)
Minimumpensionliabilityadjustment (FASB No. 87)
Somewrite-downsof deferredtaxvaluationallowances (FASB No. 109)
Taxbenefitsof losscarryforwardsacquired (FASB No 109) Taxbenefitsof losscarryforwardsacquired (FASB No. 109)
Taxbenefitsof preferreddividendspaidtoESOPS (FASB No. 109)
Unrealized gains and losses on equity securities available for sale (FASB No. 115)

Financing Income or Expenses:
PreferredDividends
Unrealized gains and losses on debt securities available for sale (FASB No. 115)

Operating or Financing Income Items:
Foreign currency translation gains and losses (FASB No. 52)
Gains and losses on derivative instruments designated (FASB No. 133)
as cash flow hedges

Balance Sheet Items to be Reclassified:
Deferredcompensationrelatingtogrant of (APB No. 25andFASB No. 123)
employeestockoptionsandstock
Dividendspayable
Preferredstock
FASBStatementNo.130
Requiresthereportingofcomprehensive
incomeinoneofthreeways
Withintheincomestatement
Inseparatestatement
Withi th it t t t Withintheequitystatement
Ratio Analysis Ratio Analysis
Dividends
DividendPayout =
ComprehensiveIncome

Dividends+Stock Repurchases
Total Payout Ratio=
ComprehensiveIncome

Payout and Retention Ratios
Dividends
Dividends-to-Book Value=
Book Valueof CSE +Dividends+Stock Repurchases

Dividends+StockRepurchses
Total Payout-to-Book Value=
Book Valueof CSE +Dividends+StockRepurchases

ComprehensiveIncome- Dividends
RetentionRatio= =1- DividendPayout Ratio
ComprehensiveIncome



5
RatioAnalysis(continued)
( )
t
t
t t-1
ComprehensiveEarnings
ROCE =
1
CSE +CSE
2



Shareholder Profitability Ratio
Growth Ratios
T ti ith h h ld Transactionswithshareholders
Net Investment Rate=
BeginningBook Valueof CSE
ChangeinCSE ComprehensiveIncome+Net TransactionswithShareholders
GrowthRateof CSE= =
BeginningCSE BeginningCSE



HiddenDirtySurplus
Shareholderslosewhensharesareissuedatlessthanthemarket
price(e.g.exerciseofoptions)
Thisloss,however,isnotrecordedasexpense.
What is the nature of this loss? If options are part of a Whatisthenatureofthisloss?Ifoptionsarepartofa
compensationpackage,thislossisanemployeecompensation
expense.Iffromaconversionofabond,preferredstockor
warrants,thelossisafinancingexpense.
Whatistheamountoftheloss?Marketprice exerciseprice.
Specialcase:optionsgrantedinthemoneyarerecordedasdeferred
compensation
FASBStatementNo.123R
Statement123Rrequiresanexpensetoberecognizedatoption
grantdate,equaltothevalueoftheoptionatthatdate
Upto2006,proformanetincome,includingtheexpense,was
reportedinfootnotes.Theexpensemustnowbereportedinthe
incomestatement.
Noexpenserecordedastheoptionmovesintothemoneyorat
exercisedate.
Firmsrecordataxbenefit(fornonqualifiedoptions)atexercise
date,andcreditthistoshareholdersequity.
IFRS2hassimilarrequirements
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MeasuringtheLossfromExerciseofStock
Options:
Method1(Reebok)
Expense is implied fromthe tax benefit:
Stock optionexpense $11,477/0.359 $31,969
Tax benefit at 35.9% (11,477)
Stock optionexpense, after tax $20,492
MeasuringTheLossfromExerciseofStock
Options:
Method2(Reebok)
Calculatedifferencebetween averagestock priceand exerciseprice:
Estimatemarket valueof sharesissued 1,751x $38.00 $66,538
Exercise(issue) price, fromequity statement 41,080
Stockoptionexpense beforetax 25458 Stock optionexpense, beforetax 25,458
Tax benefit at 35.9% 9,139
Stock optionexpense, after tax $16,319
Usewhen tax benefit is not reported, or for incentiveoptions (wherethereis no
tax benefit).
Reebok:ReformulatedStatement
Balance, December 31, 2003 $1,034.9

Transaction with Shareholders

Stock issues (62.3+20.5) $82.8
Stock repurchases (88.1)
Commondividends (17.8) (23.1)

C h i i Comprehensive income

Net incomereported 192.4
Currency translationgain 37.7
Gainsonhedgederivatives 4.4
Loss onemployeeoptions (20.5) 214.0


Balance, December 31, 2004 1,225.8

Sharesareissuedat market value, andthedifferencebetweenthemarket valueandafter-tax
receiptsfor thesharesissuedisalossfromexerciseof options.
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HiddenLossesonPutOptions:Dell
Computer
Fromthe 2002 equity statement (see Chapter 2):
Shares Amount
Repurchaseof common shares (millions) 68 $3,000
The Loss:
Market priceof shares repurchased $24 x 68 million $1,632 million
Amount paid for shares repurchased 3,000
Loss on exerciseof put options $1,368 million
TheGAAPStatementofShareholdersEquity:
DellComputer,2002
CommonStock
and Capital in
Excessof Par Value Treasury Stock
Other
Retained
Comprehensive
Shares
Amount Shares Amount
Earnings Income
Other Total
Balance at
February2, 2001 2,601
4,795

839
62
(74) 5,622
Net income

1,246

1,246
Change in unrealized gain on
investments, net of taxes

(65) (65)

(65)
Foreign currencytranslation
adjustment

2
Net unrealized gain on
derivative instruments, net of
taxes

39

39
Totalcomprehensive income
for fiscal2002

1,222
Stockissuances under
employee plans, includingtax
benefits
69
843

10 853
Purchases and
retirements
(16) (30)
52
(2,249) (721)

(3,000)
Other

(3)

3
Balances at
February1, 2002 2,654
$5,605 52
$(2,249) $1,364
$38
$(64) $4,694
Dell:ReformulatedStatement
Dell Computer Corporation
ReformulatedStatementof Shareholders Equity
Balance, February2, 2001
$5,696
Transactionswith shareholders:
Sharesissuedinstockoptionexercises(atmarket)
$1,747
Sharesrepurchased(atmarket)
(1,632)
115
Comprehensive income
Comprehensive income reported Comprehensive income reported
1,222
Lossonexercise of employee stockoptions $1,391
Taxbenefitfor employee stockoptions 487
(904)
Lossonputoptions
(1,368) (1,050)
Other
(3)
Balance, February1, 2002
$4,758
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LossesonConvertibleSecurities
Loss=Marketpriceofcommonissued
Bookvalueofconvertiblesurrendered
The market value method vs. the book value method Themarketvaluemethodvs.thebookvaluemethod
Themarketvaluemethodrecognizeslossesonconversion
Thebookvaluemethodrecordsthesharesatthebookvalue
oftheconvertiblesecurities,withnolossrecognized
Almostallfirmsusethebookvaluemethod.