Hincapie Co., a specialty bike-accessory manufacturer, is expecting growth in sa

Question

Hincapie Co., a specialty bike-accessory manufacturer, is expecting growth in sales of some products targeted to the low-price market. Hincapie is contemplating a preferred stock issue to help finance this expansion in operations. The company is leaning toward participating preferred stock because ownership will not be diluted, but the investors will get an extra dividend if the company does well. The company management wants to be certain that its reporting of this transaction is transparent to its current shareholders and asks you to research the disclosure requirements related to its capital structure.

For each question, provide the FASB ASC citation number (topic and subtopic) that addresses the question and answer the question with the corresponding information from the FASB ASC citations.

(a) Identify the primary authoritative guidance that addresses disclosure of information about capital structure.

(b) What information about securities must companies disclose? Discuss how Hincapie should report the proposed preferred stock issue.

Explanation / Answer

a) The authoritative literature that addresses the disclosure of information about capital structure is FAS 129, titled “Disclosure of Information about Capital Structure, SFAS No. 129” which was issued in February 1997. The FAS is related to Codification 505-10-50.

b)

General disclosure on the face of the financial statement by way of parenthetical disclosure or in the Notes of the financial statements.

"o 505-10-50-2: If the financial position and results of operations are shown, disclosure of changes in the separate accounting consists shareholder’s equity and the changes in the number of equity shares securities during the most recent annual fiscal period and subsequent interim period is required to make the financial statements sufficiently informative. Disclosure of such changes may take the form of separate statements or made in the basic financial statements.

"o 505-10-50-3: An entity shall explain, in summary form within its financial statements, the pertinent rights and privileges of the various securities outstanding.

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