Solutions Manual - © John Wiley and Sons Australia, Ltd 2015 1.1...

Solutions Manual For Company Accounting 1 0e prepared by Ken Leo John Hoggett John Sweeting Jeffrey Knapp Sue McGowan 1 / 4

Chapter 1: Nature and regulation of companies

© John Wiley and Sons Australia, Ltd 2015 1.1 Chapter 1 – Nature and regulation of companies

REVIEW QUESTIONS

1.Outline the advantages of incorporation over other forms of organisation such as partnerships.The corporate form of organisation permits individuals to have "limited liability". This confers on shareholders a limit on their liability in the event of a winding up of the company to the amount (if any) unpaid on their shares. (S516).In the case of a partnership no such limitation applies (unless the partnership specifically adopts limited liability) and the insolvency of one or more partners can result in other solvent partners having to contribute any losses and debts out of their own private assets.

2.Distinguish between a proprietary company and a public company.A public company is one in which there is usually a substantial public interest in that the ownership of the company's share capital is widely spread. Public companies are entitled to raise capital through a share issue by issuing a disclosure document which entitles them to have their shares or debentures etc. listed on a stock exchange, such as the Australian Securities Exchange, to facilitate transferability.Proprietary companies on the other hand have specific limitations in terms of the amount and restrictions on its fundraising activities.Specific features of a proprietary company include the need to have a share capital (unlike a

public company which may be limited by guarantee and not merely shares):

•a requirement to have at least one shareholder and only one director (three directors for a public company) and not more than 50 shareholders (not including employee shareholders) •not required to restrict the transfer of its shares (however it may elect to do so) •the use of the designation "Pty" or “Proprietary” in its name •a requirement not to engage in any fundraising activity which would require it to lodge a disclosure document with ASIC. 2 / 4

Solutions Manual to accompany Company Accounting 10e

© John Wiley and Sons Australia, Ltd 2015 1.2

• Distinguish between a large and a small proprietary company. What are the

implications of being classified large rather than small?

A small proprietary company is defined in Section 45A of Corporations Act 2001, as amended,

as one which meets 2 of the following three criteria:

• consolidated annual revenue less than $25 million#
• consolidated gross assets at the end of the financial year is less than $12.5 million#
• the companies and the entities it controls have fewer than 50 employees^ at the end of the

financial year.#These figures must be determined in accordance with accounting standards ^ Part-time employees measured at appropriate fraction of full-time

If these criteria are not met the company will be a large proprietary company.

Small proprietary companies do not have to prepare formal financial statements or have them audited. However, they must keep sufficient accounting records to allow preparation and audit of accounts if either 5% of their voting shareholders or ASIC request this to be done.Large proprietary companies, must prepare financial reports in accordance with accounting standards, have them audited, send them to shareholders and lodge them with ASIC (Section 292)

• Outline the special features of a no liability company.

Companies engaged in the more speculative area of mining exploration are most often registered as no liability. Such companies have NL at the end of the company name and have the advantage of being more attractive to potential investors as unlike companies limited by the unpaid amount on their shares; there is no such liability on the part of shareholders to contribute to the debts and liabilities of the companies.

• What is the purpose of a certificate of registration?

A certificate of registration is issued by ASIC as a part of the registration procedure.

Provided the company complies with S117 of the Corporations Act, ASIC will:

• give the company an ACN Number • register the company • issue a certificate that states the company's name, ACN No. etc.Once registered, the company is capable of performing all the functions of a corporate body.

• What are replaceable rules and how do they differ from a constitution?

Replaceable rules are the set of internal rules (contained in the Corporations Act) governing the conduct of its operations between the company and its member directors and between members themselves [see example of such rules in ch 1 Section 1.3.3].If the rules are not adopted by the company then they must draw up a constitution which will cover much of the same issues covered by the replacement rules but may be extended or modified by the promoters of the company. 3 / 4

Chapter 1: Nature and regulation of companies

© John Wiley and Sons Australia, Ltd 2015 1.3

• Outline the main features and purpose of a disclosure document.

A disclosure document, particularly the prospectus, contains all the information necessary for investors to make an informed assessment of the company's future prospects and other

relevant matters including:

• rights and liabilities attaching to securities • financial position, performance and prospects of the body issuing the securities • interests of each director, proposed director, promoter, stockbroker and their professional advisers in any property acquired or proposed to be acquired with the funds derived from the securities issue.• whether the securities issued will be quoted on a Stock Exchange.

• In administering a company, the Corporations Act requires the keeping of various

books, registers and records. Outline these and briefly discuss their content.

There are a range of records required to be maintained by a company including:

• Minute books of the proceedings and decisions made at all directors’ and shareholders’ meetings as well as all resolutions passed without a meeting (s. 251A).If the company is a proprietary company with only one director, any declarations by this director must be minuted.• Financial records that will enable financial statements to be prepared and audited from time to time in accordance with the Act (ss. 286, 292, 302 and 303).• Register of members, or share register, giving each member’s name and address, and the date on which the entry of the member’s name is made on the register. If the company has a share capital, the register must also show the date on which an allotment of shares takes place, the number of shares in each allotment, the shares held by each member, the class of shares held, the share numbers (if any), the amount paid on the shares, and whether or not the shares are fully paid (s. 169).• Register of option holders to record the names and addresses of the holders of options over the shares of a company. The register must include the number and description of the shares over which options were granted, details of any event that must happen before the options can be exercised, and any consideration for the grant of the options and for the exercise of the options (s. 170). Copies of documents which grant an option over shares must be kept with this register.• Register of debenture holders to record each debenture holder’s name and address, and the amount of the debentures held (s. 171).

• Outline the differences between shares and debentures.

Ordinary shares attract no fixed rate of dividend, carry voting rights and may participate in surplus assets and profits of the company – they represent ownership of x% of the company.Ordinary shares are classified as equity. The company may issue shares either fully paid or partly paid (s. 254A). If partly paid shares are issued, the shareholder is liable to pay calls on the shares (except in the case of no liability companies).

A company also has the right to issue preference shares, but may only do so either if there is a statement in its constitution setting out the rights of these shareholders or if these rights have been approved by a special resolution of the company.

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