The stock market
When a corporation is organized, the Deed of Constitution (Statutes) stipulates the number of shares that have been authorized for issue, as well as the value of each one of them.
A share is a negotiable title of property representative of an aliquot part of the patrimony of a society or company. The action grants rights to its holders who can exercise them collectively or individually.
Shares can be ordinary, preferred or privileged. A share is preferred when it has priority in the payment of dividends or in the reimbursement of capital, in the event of liquidation. The privileged share has an additional economic benefit for a specified period.
The stock market
The Stock Exchange is a private commercial establishment, supervised by the Superintendency of Securities (of the Ministry of Finance and Public Credit) and in charge of putting in contact with bidders and plaintiffs of securities through the intervention of specialized and authorized institutions., called Stockbrokers.
The BVC is divided into five transaction and information modules called: Variable Income, Public Debt, Foreign Exchange and Financial Compliance Term Operations. The equity market refers to securities whose profitability is not associated with a specific interest rate and is made up of shares, bonds convertible into shares, subscription rights and titles from securitization processes.
The Stock Market Value is the result of the brokerage of the shares in the stock market and is widely used to appreciate aggregate values or premiums for placing the shares in the market. While some companies work with a somewhat lower value than the Stock Market Value, others do so using the annual, semi-annual or quarterly average price of the sale of their shares up to the time of the last declaration of dividends. It is also very important for the high, medium or low Bursatility rating, which determines its ability to sell on the Stock Market, while signaling a great impact on the expected liquidity of any capitalization plan.
Frequently, the stock market distorts the stock trading base, which is why entrepreneurs turn to estimates of their company's stock price. When it comes to defining the price or value of the shares for a given negotiation, it is necessary to analyze the different existing systems, which has effects for the fixing of capital, the negotiation of shares, etc...
A share price is considered overvalued when
- The offered price exceeds the average market price
- The published price experiences an accelerated and sustained increase with no financial or strategic fundamentals to support it, but only due to "expectations"
- The share price remains constant or rising while the company's profitability shows a downward trend. It may be that the market has not yet incorporated any negative news about the sector to which the company belongs to the share price.
A share price is considered undervalued when
- The share price is less than its book value
- The relationship between the market price of the share and the earnings per share that the company has generated is low, with respect to the market average
- The company's financial indicators show an upward trend in profitability and the share price remains constant or down.
The Book Value of the Shares
The Nominal Value is that set in the Deed of Incorporation and refers to the value of the aliquots into which the opening share capital of the company is divided.
The intrinsic value is the result of dividing the equity by the number of shares and is useful for comparison purposes with that of the Stock Exchange and for the application of the equity participation method in companies that have subordinates.
The Fiscal Value is the price at which the shares must be included in the income statement and is equal to the fiscal cost adjusted by the inflation index.
The Patrimonial Value is the one estimated by the application of technical valuation methods. According to the requirements of the Superintendencies, it is the basis for calculating the premium by adjusting it by the price index.
Exercise: The company Sigo al Comodín SA, recently formed, has been incorporated with an Authorized Capital of One Billion Pesos, consisting of 10,000 shares each with a nominal value of $ 100,000 and the amount of which may be collected through the issuance and sale of said actions. The first entry of this company before selling any share is:
Tomás Mejía 1000 shares, cash
Salvador Terán 1000 shares, 20% cash, 40% at 6 months and 40% at nine months
Pedro Duba 1000 shares, 30% cash, 40% at 6 months and 30% at nine months
Alexis Borrero 1000 shares, 40% cash, 40% at 6 months and 20% at nine months
There are 1,900 cash and 2,100 on credit (1,200 to 6 months and 900 to 9 months). The seats are:
The nominal value of a share establishes a limit price and no corporation can issue its shares at a lower price, although already issued, the share price is subject to the market price. When it is required to capitalize a corporation, it must be defined if the capital will be obtained from the current shareholders or from new ones. If it is one of the existing ones, there are two options: either receive the contribution in cash or use the system of delivering dividends payable to them through shares, in which case, it must be clarified if the shares delivered are preferred or privileged.
Normally, capitalization from all existing shareholders is carried out in identical proportions and it does not matter whether the new issue is for nominal value or with a premium, since the resulting intrinsic value for each share affects or compensates all equally. However, in the case of shareholders admitted at different times of the company, not all pay the same premium since the new ones correspond to additional minor shares in equity due to the revaluations, and to the surpluses, reserves and accumulated profits. In this case, the shareholders who have made the payment in higher valuations of the shares, will have that the cost paid would not be proportionally compensated with the increase in the intrinsic equity value. In consecuense,it is necessary to set the value with premium based on a technical valuation of the company.
Dividends in Shares
Exercise: The company Sigo al Comodín SA, during its second year of existence obtained profits of $ 192,000,000, allocating 33% to income tax, 10% to the mandatory legal reserve and declared a stock dividend of $ 50,800,000 and in cash for $ 41,776,000 on December 5, 20X1, to be paid at the end of the same month. Make the corresponding accounting entries.
Solution:
Let us suppose that the closing entry of the operations of the period of the company had been:
The share placement premium is a capital surplus and cannot be distributed as a dividend. With the capitalization of the Premium for share issue, it is understood that the obligation to maintain it as non-distributable has been fulfilled. The capitalization of the premium in the placement of shares is an income that does not constitute income or occasional gain for both the company and the shareholders, however, this effect is liable to be lost if there is a decapitalization due to capital withdrawal or repurchase. of own shares during the following immediate year.
Exercise: In the middle of the third year of operation, the company Sigo al Comodín SA, issued 2000 shares at $ 121,016 each. Prior to this issue, there were 4,508 shares each with a par value of $ 108,000. The seats will be the following:
Solution:
No. of Shares in force: 6508 25% of shares in force: 6508 x 25% = 1627
Dividends in shares to distribute: 1627 x 112,000 = 182,224,000
The entries to record the dividends in shares using the market price are:
Treasury Shares
In Colombia, according to Article 88 of Decree 2649 of 1993 or Accounting Statute, for the repurchase of shares, a reserve or patrimonial fund equivalent to at least the cost of the own repurchased contributions must have been created.
In accordance with the concept of the Superintendency of Companies, Official Letter 220-55277 of November 18, 2002, these shares must be accounted for in account 330516 "Treasury shares reacquired" at cost, without valuations or devaluations because these shares cannot be considered as investment..
The D.2649 establishes that the repurchase must be recorded at its cost and its presentation must be made in the balance, within equity, as a subtraction factor of the account 330515 “Reserve for repurchase of shares”.
Accountingly, the difference between the repositioning price of the repurchased contributions and their cost, when the first is higher, must be recorded as " Premium in placement of shares ". In the event that the sale price is lower than the cost, the Reserve for the repurchase of shares must be affected, for the difference.
Exercise: The company Sigo al Comodín SA, during its third year of existence obtained profits of $ 121,417,910 and according to the mandate of the previous General Assembly, after the passive reserve of 33% for income tax and 10% to the Mandatory legal reserve, declares cash dividends at a rate of $ 4,000 for each outstanding share and creates a reserve for reacquisition of 420 shares for $ 47,040,000. At the date of the General Assembly on March 30, the company had sold the repurchased treasury shares for the amount of $ 49,140,000. Make the corresponding seats.
Solution:
Let us suppose that the closing entry of the operations of the period of the company had been:
The new final status of social rights in the assets of the company Sigo al Comodín SA, is as follows:
The commercial value of a good cannot differ markedly from the average commercial price, for goods of the same species, on the date of sale. According to Article 90 of the Tax Statute, taking into account the nature, conditions and status of assets of the same kind and quality, there will be a noticeable difference in valuation when the assigned price is separated by more than twenty-five percent (25%) from the current average commercial price.
There are different regulations on fiscal cost and income not constituting income. From a fiscal point of view, it is important to distinguish the value of the profits that the company has for the purchase, since they can come from profits that would not be taxable if they were distributed among the shareholders. For the shareholder who sells the shares to the company that repurchases them with profits, the difference in the reacquisition price and the fiscal cost yields taxable profit (for individuals, if the shares are more than two years old, it is an occasional profit). Fiscally, loss in the sale of shares is not accepted (Parra, 2007). It will be necessary, therefore, to know the tax cost of the shares and the time of possession of them, due to the tax benefit that operates in each case.
The cost method for recording speculative equity investments
The cost method for the valuation and registration of investments is used when the acquiring or holding company does not have significant influence (that is, when it controls less than 20% of the assets of the acquired or issuing company) and, rather, the Buyer investor intends to speculate in the market to obtain immediate benefits.
The cost method consists of recording this temporary investment in shares at its acquisition value plus the expenses incurred at the time of purchase and recording the dividends of the profits after the acquisition as income when they are collected or credited to the account.
In Colombia, negotiable investments are understood to be the securities and other easily disposable documents on which the investor has the serious purpose of realizing the economic right that they incorporate or document (such as re-selling them), in a period not less than three calendar years.
The acquisition value of ordinary shares refers to the resources delivered in exchange for the investment, whose counterpart is the social rights received by the buyer or holder that are part of the assets of the seller or issuer. These investments in shares or shares of social interest, with the right to vote in other companies, may be presented separately in the investor's financial statements or, they may be consolidated in a single financial statement, applying in both cases, one of two methods: the cost method or equity participation method.
Case 1: Purchase of shares at the same value as books
Exercise: To illustrate the cost method, suppose a) that on January 2, 20X1, the company Molinares SA acquired 650 shares with a nominal value of $ 50,000 per share of the company Solivanes SA b) On March 30, 20X1 Solivanes SA, belonging to the Commercial Sector, based on the profits of 20X0, paid the remaining dividends for $ 10,000,000. In the year 20X0, it had distributed profits of $ 30,000,000.
Solution: It is very important to analyze the social rights in the assets of the Solivanes SA company, by distributing the economic rights, to know the basis of the negotiation:
650 shares x $ 100,000 / share = $ 65,000,000
The percentage of participation negotiated is determined, in this case, dividing the acquired share capital by the total share capital of the selling company:
(650 shares x $ 50,000 / share) / (1,000 shares x $ 50,000 / share)
= $ 32,500,000 / $ 50,000,000
= 0.65, that is, sixty-five percent (65%)
Consequently, the buyer becomes the parent or controlling company and the seller is now a subordinate. The corresponding entry is:
The purchase entry for the shares is:
If at the beginning of the year dividends are decreed based on the previous year's profit of $ 10,000,000, the buyer would have to receive 65% of this distribution. This entry would represent a kind of reimbursement of part of the cost of the investment or a decrease in its participation for the dividends received on profits obtained before the purchase:
($ 6,500,000) /(50,000$/action) = 130 shares, so now you only have:
650 - 130 = 520 shares
And their participation has become:
(520 shares x $ 50,000 / share) / (1,000 shares x $ 50,000 / share)
= $ 26,000,000 / $ 50,000,000
= 0.52, that is, fifty-two percent (52%)
Taking into account all that has been said, the social rights of the new parent or controlling company will remain as follows:
Let us suppose that in the previous year, to the value of the 1000 shares an additional cost of $ 20,000,000 is added, on which Molinares SA acquires the same 52% of the social rights of Solivanes SA, then the new value of the shares and its corresponding seat, will be:
Nominal value: 520 shares x $ 50,000 / share = 26,000,000
Surcharge: 520 shares x $ 20,000 / share = 10,400,000
Commercial value of the shares = 36,400,000
Among the intangible elements of a company, its brands, its possibilities of generating cash flows and its Good Will, its good name or goodwill are recognized. Goodwill consists of the reputation that some companies enjoy, which allows them to have certain commercial advantages over their competitors, in financial terms it is understood as the present value of future activities in excess of profits, that is, higher profits than the average of establishments of the same class, not only for the good treatment of customers, but for other intangible factors such as location, timely deliveries, services, quality and guarantee of products. The valuation of that surplus of productivity of a business against similar businesses, is based on the excess of yield and probable time of subsistence,without assigning any value in your accounting unless a payment has been made to acquire it. There are three types of goodwill, namely:
Formed or Estimated Mercantile Credit, which comes from the construction of the company through the development of its corporate purpose over time. The cost of this intangible made through successive expenditures that have been charged directly to results or through their activation as deferred charges and then amortized. In this case, the goodwill would not be amortizing but the deferred charge. In effect, the Securities Superintendency through External Circular No. 004 of March 9, 2005, instructed about the "formed goodwill" understood as the intangible asset that corresponds to the estimation of future earnings in excess of normal, or to the appreciation of the early valuation of the potential of the business, without its registration in the financial statements being appropriate,since the determination of the cost or value of registration of an economic fact must be linked to clearly identifiable expenditures, which does not occur in this kind of good, without implying that it does not exist, only that it is not subject to accounting recognition, position reiterated by the Technical Council of the Accounting Office. And he adds that "Good Will" is formed throughout the life of society and is reflected by the trust and credibility of consumers towards the goods or services produced by it, and is not always acquired through a specific negotiation, so to determine its value and therefore be appreciated in money, it is necessary to carry out a transaction on it. According to Art. 74 of Decree 624 of 1989,Good Will was accounted for by debiting "Good Will - Official Appraisal" and crediting the Surplus - Good Will - Official Appraisal account. The same in the current legislation in force (D2649 of 1993) corresponds to the intangible asset 1605 Crédito Mercantil and the counter account 3205 Crédito Mercantil, supported by technical appraisal. It should be stated here that in our commercial law there is not properly a specific established method for evaluating Good Will. It is also worth saying that only the estimate would affect the equity account, but in no case can it be carried as a higher capital value. Thus, when the good credit of commercial establishments is disposed of and their potential to produce a higher profit margin than similar businesses,What is truly the subject of negotiation is Good Will or goodwill, which in light of the accounting guidelines should not appear registered in the accounting, since it is recognized for accounting and tax purposes at the time it is acquired or purchased. The precept of article 75 of Law 223 of 1995 (ET) reads: «Article 75. Cost of Incorporated Assets Formed. The cost of intangible assets formed by the taxpayer, concerning industrial property and literary, artistic and scientific property, such as invention patents, trademarks, Good-Will, copyright or other intangibles, is presumed to be made up of fifty per one hundred (50%) of the value of the sale ». In this transcribed norm the tax legislator contemplated for the incorporeal assets formed, among them,Good Will or other intangibles, a presumed cost made up of fifty percent (50%) of the sale value. In other words, the cost of an intangible formed by the taxpayer for tax purposes, is presumed to consist of half (50%) of the sale price.
Commercial Credit Purchased or Acquired, which comes from a third party that formed it or that also acquired it. It has a direct cost associated with its acquisition, therefore, it is a depreciable asset. Now, the intangible assets acquired, demonstrate at the moment they are objects of transaction (sale), their patrimonial value by means of the acquisition cost less the amortizations (Art. 74 and 279 of the ET) while the marketing and financial studies With which the buyers try to verify the ability to generate profits and cash flow in subsequent years, they manage to build another "Good Will" or "goodwill" capable of supporting another kind of over-estimation of the wealth. Hence, goodwill is only registered in the accounting of the company if it comes from an acquisition,where it is accounted for as a higher cost value or as an intangible, that is, as long as it is not a goodwill generated internally in the social entity.
Goodwill generated in the Purchase of Shares or Participations, which is a type of goodwill acquired that results from the difference between the price of acquisition of shares or interests above their book or intrinsic value. In some laws, this goodwill is recognized only above its market value. In Colombia it is redeemable during the time of its recovery, which cannot exceed twenty years. There is also the criterion of charging the entire disbursement at the cost of the investment without repairing the differences with the accounting or market values, and then adjusting their values via valuations or provisions, considering the intention: if it is an investment necessary for business purposes or because it is not an intangible subject to demerit.
Case 3: Purchase of shares at a lower value than books
Suppose that in the previous year, the value of the shares experienced a devaluation of $ 10,000,000, of which Molinares SA acquired 52%. Now, since negative accounting credit is not recognized in Colombian accounting regulations, the new value of the shares and their corresponding entry will be:
Nominal value: 520 shares x $ 50,000 / share = 26,000,000
Impairment: 520 shares x $ 10,000 / share = (5,200,000)
Commercial value of the shares = 20,800,000
HARIED A., IMDIEKE L., SMITH R. (1985) Advanced accounting. New York: Wiley.
MARTINEZ A. (2011). Consolidation of financial statements. Mexico: McGraw Hill.
MINHACIENDA. Decree 2649 of 1993. General Accounting Regulations.
PARRA A. (2008). Tax planning and business organization. Bogotá: Legis.
WARREN C., REEVE J., FESS P. (2000) Financial Accounting, 7th Ed. Mexico: International Thompson Editor.
