Question

Topic Area: Financial accounting standards.

1. Answer the following:

a. What is a “security”?

b. What is a “convertible security”?

c. What is a “stock dividend”?

d. What is a “stock split”?

e. What are “participation rights”?

f. What is “preferred stock”?

2. Identify the authoritative literature that addresses disclosure of information about equity.

3. What information about securities must companies disclose?

4. What information about “Securities with Preferences” (i.e. Preferred Stock) must companies disclose?

Answer 1

a) Financial security refers to the peace of mind you feel when you aren't worried about your income being enough to cover your expenses. It also means that you have enough money saved to cover emergencies and your future financial goals.

A security, in a financial context, is a certificate or other financial instrument that has monetary value and can be traded. Securities are generally classified as either equity securities, such as stocks and debt securities, such as bonds and debentures. The sale of securities to investors is one of the primary ways that publicly-traded companies drive new capital for operations. In the United States, the Securities and Exchange Commission (SEC) oversees securities transactions, activities of financial professionals and mutual fund trading to prevent fraud and intentional deception.

b) Convertible Security- A bond or preferred stock that may be exchanged for common stock in the company issuing the exchangeablesecurity at a certain ratio and/or a certain price. A convertible security gives the holder a great deal of flexibility. Itreduces risk by guaranteeing a coupon payment or dividend while also allowing the holder to take advantage of apotentially larger return through the ability to convert the security to common stock. It is less commonly called anexchangeable security. See also: Convertible Option.

c) A dividend that is paid in stock or bonds rather than cash. A stock dividend may be declared when the company iscash poor and cannot afford a dividend otherwise. They are generally not considered desirable because one mustpay capitalgains tax on stock dividends, even though there is no cash gain for the shareholder. It is also called ascrip dividend. See also: Payment-in-kind bond.

A dividend made up of shares of the paying firm's stock. A stock dividend is often used in place of or in addition to acash dividend if the firm wishes to conserve cash. Unlike a cash dividend, a stock dividend is usually not taxable to theshareholder when it is received, but rather when it is sold. Stockholders who are supposed to receive a fractionalshare will often receive a check for the amount equal to the market value of the fractional share.

d) When a company declares a stock split, the number of shares of that company increases, but the market cap remains the same. Existing shares split, but the underlying value remains the same. As the number of shares increases, price per share goes down.

Stock split is done to infuse liquidity and to make shares affordable for various investors who could not buy the shares of that company before due to high prices. People often confuse bonus shares with stock split. Distribution of bonus shares only changes its issued share capital whereas stock split splits the company's authorized share capital.

e) These rights are typically equivalent to a shareholder's monetary property rights and include, most notably, the right to receive dividends and liquidation proceeds.Participation rights can qualify as equity or debt instruments, depending on the actual rights conferred.

f) A preferred stock is a class of ownership in a corporation that has a higher claim on its assets and earnings than common stock. Preferred shares generally have a dividend that must be paid out before dividends to common shareholders, and theshares usually do not carry voting rights.

Preferred stockholders have a greater claim to a company's assets and earnings. This is true during the good times when the company has excess cash and decides to distribute money in the form of dividends to its investors.

3) Disclosure is the act of releasing all relevant information pertaining to a company that may influence an investment decision. To be listed on major U.S. stock exchanges, companies must follow all of the Securities and Exchange Commission's (SEC) disclosure requirements and regulations. To make investing as fair as possible for everyone, companies must disclose both good and bad information.