Name: KING, Alexis O.

Course and Year: BSA 3C

Accounting for Shareholder’s Equity

Shareholder’s equity or stockholder’s equity is the residual interest of owners in the

net assets of a corporation measured by the excess of assets over liabilities.

Issuance of share capital

The corporation code provides that a share shall not be issued for a consideration less
than the par or stated value.

The law further provides that shares without par value cannot be issued for less than
P5.

Thus, in the Philippines, the no-par share must have a stated value of at least P5.

When shares with par value are sold, the proceeds shall be credited to the share capital
account to the extent of the par value, with any excess being reflected as share
premium.

Example:
If 1,000 ordinary shares are P10 par value are sold at P15 per share.

Journal Entry:
Cash 15,000
Ordinary share capital (1,000×10) 10,000
Share premium 5,000

Share issued at discount

When shares are sold at a price which is below par or stated value, they are said to be
issued at a discount.

Our Corporation Code prohibits the issue of share at a discount.

Thus, when a share is sold at a discount, the discount is not considered a loss to the
issuing corporation but the shareholder is held liable therefor.

Note that the issue itself is not void but the agreement that the share shall be paid for
less than par value or stated value is illegal and cannot be enforced.
The issue of the share therefore is not cancelled but the shareholder must pay for the
discount. This is called the discount liability of the shareholder.

Since a discount is an investment deficiency, it should be accounted for separately.

Example:
If 1,000 shares of P10 par value are sold for P80, 000 cash.

Journal Entry:
Cash 8,000
Discount on share capital 2,000
Share capital 10,000

The account discount on share capital is a deduction from total shareholders' equity.

It should be pointed out that the prohibition to issue share at a discount refers to the
original issue of a share but not to a subsequent transfer of such share by the
corporation.

Issuance of share capital for noncash consideration

The Corporation Code provides that "where consideration for the issuance of share
capital is other than actual cash or consists of property such as patent or copyright, the
valuation thereof shall be initially determined by the incorporators or the board of
directors subject to the approval of the Securities and Exchange Commission"

PFRS 2, paragraph 10, provides that for equity-settled share-based payment

transactions, the entity shall measure the goods and services received and the
corresponding increase in equity directly at the fair value of the goods and services
received.

However, if the entity cannot estimate reliably the fair value of the goods and services
received, the entity shall measure their value and the corresponding increase in equity
indirectly by reference to the fair value of the equity instruments issued.

Accordingly, if share capital is issued for noncash consideration such as tangible

property, intangible property and services, the share capital is recorded at an amount
equal to the following in the order of priority:

a. Fair value of the noncash consideration received

b. Fair value of the shares issued
c. Par value of the shares issued

Illustration:
An entity issued 10,000 ordinary shares of P10 par value in exchange for land with a fair
value of P150,000.

The fair value of the shares issued is P18 per share or a total of P180,000.

Journal Entry (FV of the land)

Land 150,000
Ordinary share capital 100,000
Share premium 50,000

Journal entry (FV of the shares)

Land 180,000
Share capital 100,000
Share premium 80,000

Journal entry (Par value of the shares):

Land 100,000
Share capital 100,000

Issuance of share capital for services

Shares may be issued for services as long as the services are already rendered.

In conformity with the legal provision and PFRS 2, if shares are issued for services, the
shares shall be recorded at the fair value of such services or fair value of the shares
issued, whichever is reliably determinable.

Illustration:

An entity issued 1,000 ordinary shares of P10 par value to lawyers for their legal
services in getting the corporation organized.

The fair value of such services is reliably determined to be P12,000.

Legal expenses 12,000

Ordinary share capital 10,000
Share premium 2,000

Share issuance costs

Share issuance costs are direct costs to sell share capital which normally include legal
fees, CPA fees, underwriting fees, commissions, cost of printing certificates,
documentary stamps, filing fees with SEC and cost of advertising and promotion, or
newspaper publication fee.

PAS 32, paragraph 37, provides that transaction costs that are directly attributable to
the issuance of new shares shall be deducted from equity, net of any related income tax
benefit..

If the share premium is insufficient to absorb such expenses, the Philippine

Interpretations Committee or PIC concluded that the excess shall be debited to "share
issuance costs" to be reported as a contra equity account as a deduction from the
following in the order of priority:

a. Share premium from previous share issuance

b. Retained earnings

Costs of public offering of shares

The Philippine Interpretations Committee concluded that "costs that relate to stock
market listing, or otherwise are not incremental costs directly attributable to the
issuance of new shares, shall be recorded as expense in the income statement.

The costs of listing shares are not considered as costs of an "equity transaction" since
no equity instrument has been issued. Therefore, such costs are recognized
immediately as an expense when incurred.

Costs of listing shares include the following:

a. Road show presentation

b. Public relations consultant's fees

Joint costs

PAS 32, paragraph 38, requires that transaction costs that relate jointly to the
concurrent listing and issuance of new shares, and listing of old existing shares shall be
allocated between the newly issued and listed shares, and the newly listed old existing
shares.

However, PAS 32 provides no further guidance as to what basis of allocation should be

followed.

Examples of joint costs include the following:

a. Audit and other professional advice relating to prospectus

b. Opinion of counsel
c. Tax opinion
d. Fairness opinion and valuation report e Prospectus design and printing

Watered share

Watered share is share capital issued for inadequate or insufficient consideration.

Secret reserve

The term secret reserve is the reverse of watered share. Secret reserve arises when
asset is understated or liability is overstated with a consequent understatement of
capital. Secret reserve usually arises from the following:

a. Excessive provision for depreciation, lepletion. Amortization and doubtful accounts.

b. Excessive writedown of receivables, inventories and investments.
c. Capital expenditures are recorded as outright expense.
d. Fictitious liabilities are recorded.

Delinquent subscription

The Corporation Code provides that the board of directors may at any time declare due
and payable unpaid subscriptions.

This official declaration is called a call usually expressed in the form of a board
resolution stating the date fixed for payment of the unpaid subscriptions.

If the shareholder does not pay on the date fixed, the shareholder is declared delinquent
and the delinquent share will be sold at public auction.

At the public auction, so many delinquent shares as may be necessary to cover the
unpaid subscription, interest accrued on the subscription, expenses of advertisement
and other costs of sale will be sold to the highest bidder.

Callable preference share

A callable preference share is one which can be called in for redemption at a specified
price at the option of the corporation.

As distinguished from a redeemable preference share, a callable preference share has

no definite redemption date as this is dependent on the "call" of the issuer.
A callable preference share is an "equity instrument" rather than a financial liability
because the option of the issuer to redeem the share for cash does not satisfy the
"textbook" definition of a financial liability.

Redeemable preference share

a. A preference share that provides for mandatory redemption by the issuer for a
fixed or determinable amount at a future date.
b. A preference share that gives the holder the right to require the issuer to redeem
the instrument for a fixed or determinable amount at a future date.

A redeemable preference share shall be classified as current or noncurrent financial

liability depending on the redemption date.

Convertible preference share

A convertible preference share is one which gives the holder the right to exchange the
holdings for other securities of the issuing corporation.

A preference shareholder may convert the preference share into ordinary share
because operations are successful and earnings on the ordinary share are unlimited.

A preference shareholder may convert the preference share into bonds which is actually
a change of equity from that of an owner to that of a creditor. Normally, preference
share is convertible into ordinary share

Treasury shares
An entity’s own shares that have been issued and then reacquired but not cancelled.

Accounting for Treasure shares

 Cost method is used
 Recorded at cost regardless whether the shares are acquired below or above the
par or stated value.
 If acquired for cash, the cost is equal to the cash payment.
 If acquired for noncash consideration, the cost is usually measured by the
carrying amount of the noncash asset surrendered.

Retirement of treasury shares

If treasury shares are subsequently retired, the share capital account is debited at par
value or stated value and the treasury shares account is credited at cost.
If the retirement results in a gain, meaning the par value exceeds the cost of treasure
shares, such gain credited to share premium from treasury shares.

If the retirement results in loss such loss is debited to the following in the order of
priority:
a. Share premium from original issuance
b. Share premium from treasury shares
c. Retained earnings.

Stock right
Granted to existing shareholders to enable them to acquire new shares at a specified
price during specified period.

Issuance of rights
No entry is required when share warrants are issued to existing shareholders.

Expiration of rights
Only memorandum entry is required for the expiration of rights.

Exercise of rights
If the rights are exercised, a memorandum is made for the decrease in the number of
shares claimable through the exercise of the rights.

The sale of shares through the exercise of the rights is then recorded normally.

Preference share issued with share warrants

When share warrants are issued together with preference share, there is actually a sale
of two securities- the preference share and the share warrants.

The consideration received shall be allocated between the preference share and the
warrants on the basis of their market value.

Retained Earnings
Represent the cumulative balance of the following:
a. Net income or loss for the period
b. Dividend distributions
c. Prior period errors
d. Changes in accounting policy
e. Reclassifications of some components of other comprehensive income
f. Other capital adjustments
Dividends
Are distributions of earnings or capital to the shareholders in proportion their
shareholdings.

Dividends out of earnings

Cash dividends
 distribution of cash
 may be expressed as a certain amount of pesos per share or a certain percent of
the par or stated value
 when cash dividends are declared, a current liability is recognized on the date of
declaration by debiting retained earnings (or dividends) and crediting dividends
payable

Property dividends
 distribution of earnings of the entity to the shareholders in the form of noncash
assets.

Measurement of property dividends payable

Initially recognized at the fair value of the noncash asset on the of declaration and is
increased or decreased as a result of the change in fair value of the asset at year-end
and date of settlement.

Measurement of noncash asset distributed

 Entity shall measure a noncurrent asset classified for distribution to owners at

lower of carrying amount and fair value less cost to distribute
 Difference is accounted for as impairment loss Scrip dividend

Scrip dividend
Is like a note which is a formal evidence of indebtedness to pay a sum of money
at some future time.

Bond dividend

Share dividend or stock dividend

Are distributions of the earnings of the entity in the form of the entity's own
shares.

When share dividends are declared, the retained earnings of the entity are in
effect capitalized, meaning transferred to share capital.

Assets of the entity remain the same before and after the issuance of the share
dividends.
 Share dividends create only a change in the components of the shareholders
equity - decrease in retained eamings but increase in share capital.

Dividends out of capital

When capital is returned to shareholders, it is known as dividends out of capital
or liquidating dividend.

Liquidating dividends are paid to the shareholders when the entity is dissolved
and liquidated.

Dividends as expense

Distributions to holders of an equity instrument classified as financial liability are

recognized in the same way as interest expense on a bond.

Dividends classified as an expense may be expense may be presented in the

income statement either with interest on other liabilities or as a separate line
item.

SHARE-BASED COMPENSATION

A compensation arrangement established by the entity whereby the entity's employees

shall receive shares of capital in exchange for their services or the entity incurs liabilities
to the employees in amounts based on the price of its shares.

Philippine Financial Reporting Standard 2 sets out the measurement principles and
specific requirements for accounting of the following share-based compensation:

a. Equity settled
The entity issues equity instruments in consideration for services received, for
example, share options.

b. Cash settled

The entity incurs a liability for services received and the liability is based on the
entity's equity instruments, for example, share appreciation rights. Recognition of
compensation

The following accounting procedures should be observed in the recognition of

compensation expense:
a. If the share options vest immediately, the employee is not required to complete a
specified period of service before unconditionally entitled to the share options.

b. If the share options do not vest until the employee completes a specified service
period, the compensation is recognized as expense over the service period or vesting
period, meaning, from the date of grant to the date on which the options can first be
exercised.

IFRIC 11

Share-based payment transactions in which the employees of a subsidiary are granted

rights to the equity instrument of the parent shall also be accounted for as equity-
settled.

The subsidiary shall measure the services received from its employees on the basis of
the fair value of the share options at grant date.

An increase in equity is recognized as contribution from the parent in the financial

statements of the subsidiary.

CASH SETTLED TRANSACTION

Is a share-based payment transaction whereby an entity incurs a liability for services

received and the liability is based on the entity's equity instruments.

Until the liability is settled, the entity shall remeasure the fair value of the liability at each
reporting date and at the date of settlement with any changes in fair value recognized in
profit or loss for the period.

Share appreciation right

Entitles an employee to receive cash which is equal to the excess of the market value of
the entity's share over a predetermined price for a stated number of shares.

Unlike in a share option, the entity shall recognize a liability because a share
appreciation right is actually an obligation on the part of the entity to pay cash in the
future on exercise date.

Simply stated, a share appreciation right creates a liability.

Measurement of compensation
The compensation is based on the fair value of the liability at the reporting date and
shall be remeasured at every year-end until it is finally settle.

Basically, the compensation in a share appreciation right is the cash paid by the entity.

Recognition of compensation

a. If the share appreciation right vests immediately, the compensation is recognized

immediately on the date of grant.

b. If the share appreciation right does not vest until the employee completes a definite
vesting period, the compensation is recognized over the service or vesting period.

Cash and share alternative

Some share-based payment transactions allow the employee the choice as to whether
to settle the transaction in cash, or by issuing equity shares.

An employee may have the right to choose between:

a. Cash alternative-cash payment equal to the market value of a certain number
of shares subject to certain conditions.
b. Share alternative - equity shares given to the employee.

The accounting for this type of instrument depends on which party has the choice of
settlement.

If the entity has the choice of settlement, there is no accounting problem.

The equity component is usually the fair value of the whole compound financial
instrument minus the fair value of the liability component.

The equity component is always the residual amount.