“The capacity to

learn is a gift; the

ability to learn is a
skill; the willingness
to learn is a choice.”
– Brian Herbert,
author CHAPTER 21
TREASURY SHARES, RIGHT ISSUE,
SHARE SPLIT

E.F.M.
What are treasury shares?

E.F.M.
Let’s review!

Treasury shares are an entity's own shares that have been issued and
then reacquired but not canceled.

Legal limitation on treasury shares

“No corporation shall redeem, repurchase or reacquire its own shares, of what
ever class, unless it has adequate amount of unrestricted retained earnings to
support the cost of said shares.”(Corporation Code)

• Acquiring treasury shares with no retained earnings balance or when it has a

deficit would be tantamount to indirectly returning capital to shareholders,
which is a violation of the trust fund doctrine.
• Therefore, in order to preserve the legal capital, the retained earnings must be
appropriated to the extent of the cost of treasury shares, and the same must
not be declared as dividend until the treasury shares are subsequently reissued.

E.F.M.
Accounting for treasury shares

• Treasury shares are accounted for using the cost method.

• Cost method is used due to legal limitation on acquisition of treasury
shares
• Under this method the reacquisition and subsequent reissuance of
treasury shares are recorded at cost, regardless of whether the
shares are acquired below or above the par or stated value.
• If the treasury shares are acquired for cash, the cost is equal to the
cash payments.
• PAS 32, p.33 provides that no gain or loss shall be recognized on the
purchase, sale, issue or cancelation of an entity’s equity instrument.
• Accordingly, if the treasury shares are acquired for non cash
consideration, the cost is usually measured by the carrying
amount of the noncash asset surrendered.
• Treasury shares are presented as deduction in the shareholder’s
equity(i.e., contra equity account)

E.F.M.
Illustrative problem:
An entity acquired 1,000 shares, P100 par at P80 per share.

Journal entries:
To record the acquired shares at cost of acquisition
Treasury Shares P80,000
Cash P80,000

Retained Earnings- unrestricted P80,000

Retained Earnings- appropriated P80,000

Case 1 – Reissuance at cost

Subsequently the treasury shares are reissued at P80.
Cash P80,000
Treasury Shares P80,000

Retained Earnings- appropriated P80,000

Retained Earnings- unrestricted P80,000

E.F.M.
Case 2 – Reissuance at more than cost
Subsequently the treasury shares are reissued at P110.

Cash P110,000
Treasury Shares P80,000
Share Premium-Treasury Shares 30,000

Retained Earnings- appropriated 80,000

Retained Earnings- unrestricted 80,000

Notes:
• When treasury shares are reissued, the related retained earnings appropriated are reverted
back to unrestricted retained earnings.
• When treasury shares are reissued at more than the reacquisition cost, the excess of the
reissuance price over the cost is credited to share premium-treasury shares. This forms
part of the entity’s total share premium.

E.F.M.
Case 3 – Reissuance at below cost
• Subsequently the treasury shares are reissued at P70.

Cash P70,000
Retained Earnings 10,000
Treasury Shares P80,000

Retained Earnings- appropriated 80,000

Retained Earnings- unrestricted 80,000

Note:
• When treasury shares are reissued at below the reacquisition cost, the excess of
the cost over the reissuance price is debited to the following in the order of
priority:
a. Any balance in share premium-treasury shares arising from the same
class of share capital.
b. If the balance in share premium-treasury shares is insufficient or it
has no outstanding balance, any excess is debited to retained earnings.

• Retained earnings is debited in this case, because there is no outstanding

balance in share premium – treasury shares

E.F.M.
Question to ponder-
What is the effect of reacquisition and reissuance
of treasury shares?

E.F.M.
Retirement of shares
• Shares are considered retired if they have been reacquired and cancelled in
accordance with Securities and Exchange Commission regulations. (e.g.
treasury shares that are subsequently retired)
• Unlike treasury shares which can be reissued, retired shares cannot be reissued
anymore.
• When shares are retired , the total par value and the related share premium of
the retired shares are removed from the books of accounts.
• Any difference between the total amount removed and the retirement cost is
accounted for as follows:
a. If the par value and the related share premium of the retired
shares exceed the retirement cost, the difference is credited to share
premium – retirement.
b. If the par value and the related share premium of the retired
shares is less than the retirement cost, the difference is debited to
to the following in the order of priority:
a. Share premium-treasury shares
b. Retained earnings

E.F.M.
Illustrative problem:
The statement of financial position of XYZ Corp. shows the following information:
Share capital, 40,000 shares at P100 par P4,000,000
Share premium- issuance 800,000
Share premium- treasury shares 100,000
Retained Earnings 1,000,000

Case 1: Retirement cost is less than original issuance price

An entity acquired 4,000 shares, P100 par at P80 per share.
 To record the reacquisition
Treasury Shares (4,000 x P80) P320,000
Cash P320,000

Retained Earnings- unrestricted P320,000

Retained Earnings- appropriated P320,000

Subsequently the treasury shares are retired.

 To record the retirement
. Share Capital (4,000 x P100) P400,000
Share premium-original issuance(4,000xP20) 80,000
Treasury Shares P320,000
Share premium –retirement 160,000

Retained Earnings- appropriated P320,000

Retained Earnings- unrestricted P320,000

Computation of share premium: Share premium-original issuance P800,000 ÷ 40,000 shares = P20

E.F.M.
Case 2: Retirement cost is more than original issuance price
An entity acquired 4,000 shares, P100 par at P150 per share immediately retires them.
Journal entry to record the transaction
. Share Capital (4,000 x P100) P 400,000
Share premium-original issuance(4,000xP20) 80,000
Share premium- treasury Shares 100,000
Retained Earnings 20,000
Cash 600,000

Note:
• When shares are reacquired and immediately retired, there is no need to set up a
treasury share account. The par value and the related share premium of the retired
shares are immediately debited with a corresponding to credit to cash.
• If the par value and the related share premium of the retired shares is less than the
retirement cost, the difference is debited to the following in the order of priority:
a. Any balance in share premium-treasury shares arising from the same
class of share capital.
b. If the balance in share premium-treasury shares is insufficient or it has
no outstanding balance, any excess is debited to retained earnings.

E.F.M.
RIGHTS ISSUE

• Right issue is granted to existing shareholders to enable them to acquire

new shares at a specified price during a specified period.
• The Philippine term for right issue is stock right.
• The stock rights enable existing shareholders to protect their current
ownership by acquiring new shares issued by the corporation before such
shares are offered to the public.
• This is the legal right of shareholders which is called the right of
preemption or preemptive rights.
• Share warrants are the certificates or instruments evidencing ownership
over the right issue.
• The share warrants evidencing the rights issue state the number of share
the holder may purchase as well as the exercise price. Exercise price is
normally lower than the current market value of such shares.
• Share warrants issued are exercisable only within a definite period of time
and shall expire thereafter.

E.F.M.
Accounting for stock rights(right issue)

 Issuance of rights – No entry is required, only a memorandum entry. This

is because stock rights are issued to existing shareholders without
consideration.
 An entry is made only when the rights are exercised or recalled.
 If the stock rights are subsequently recalled, any consideration paid is
debited to share premium.
 No entry is made if the stock rights expire but not recalled, only a
memorandum entry.

E.F.M.
Illustrative problem:
An entity issued 20,000 stock rights to shareholders which entitle them to
purchase one ordinary share with par value of P100 for each stock right held at
a subscription price of P130. The fair value of the share is P150.
Journal entries:
 No entry for the issuance of the stock rights, only a memorandum entry as
follows:
“Issued 20,000 stock rights to shareholder enabling them to purchase 20,000
ordinary share with par value of P100 for a subscription price of P130 .”

 Subsequently, 60 percent of the stock rights issued were exercised.

Cash (20,000x60%xP130) P1,560,000
Ordinary Share Capital (20,000x60%xP100) P1,200,000
Share premium-ordinary share 360,000

E.F.M.
Journal entries:
Case 1:Assume that the entity recalls the other 40% at P1 per stock right.
Share Premium – ordinary share 8,000
Cash 8,000
(20,000x40%xP1)

Case 2: assumed that the other 40% expires but not recalled.
 The entity must prepare a memo entry to indicate that the unexercised stock
rights have been canceled.

E.F.M.
Preference shares issued with share warrants

• When issuing different types of securities such as bonds and preference

shares, warrants may be included in the issuance to make the securities
more attractive to the prospective investors.
• When share warrants are issued together with preference shares, there is
actually a sale of two securities- the preference share and the share
warrants.
• Thus, the consideration received or the issued price should be allocated
between the preference share and the warrants on the basis of their
market value.
• When both the preference shares and the warrants do not have available
fair values, the allocation of the issue price is based on the intrinsic
value of the warrants computed as the difference between the fair
value of the ordinary shares and the subscription price.
• The warrants are assigned their intrinsic value and any excess of the
issue price is allocated to the preference shares.

E.F.M.
Illustrative problem no. 1:
An entity issued 2,000 preference shares with par value of P100 for
P350,000. The preference shares included 2,000 share warrants that
give the holder the right to acquire 1,000 ordinary shares with par
value of P50 for P80 per share. The fair values are:
Preference share ex warrant P130
Warrant 10

How much of the issued price should be allocated to the preference

shares and the warrants?

E.F.M.
Allocation of issue price:

Fair value Allocated

per unit Fair value Fraction issue price
Preference
share 2,000 130 260,000 26/28 325,500
Warrants 2,000 10 20,000 2/28 24,500
280,000 350,000

Entry to record the issuance of the preference shares and the warrants:

Cash 350,000
Preference Share Capital(2,000 x 100) 200,000
Share Premium-Preference shares(325,500-200,000) 125,500
Share Warrants Outstanding 24,500
Note:
Share warrants outstanding is reported as part of share premium.

E.F.M.
Case 1:
Subsequently, all of the warrants were exercised.
Entry
Cash (2,000x 80) 160,000
Ordinary Share Capital 100,000
Share Premium-Ordinary Share 60,000

Share Warrants Outstanding 24,500

Share Premium-Ordinary Share 24,500
Case 2:
All of the warrants were not exercised.
Entry
Share Warrants Outstanding 24,500
Share Premium-Ordinary Share 24,500
Note:
When share warrants are not exercised, the share premium outstanding account is
simply closed to the share premium account

E.F.M.
Illustrative problem no. 2:
An entity issued 2,000 preference shares with par value of P100 for
P350,000. The preference shares included 2,000 share warrants that
give the holder the right to acquire 1,000 ordinary shares with par value
of P50 for P80 per share.

The fair value of the preference share ex warrant and the warrants are
not available but the ordinary share has a market value of P110 per
share .

How much of the issued price should be allocated to the preference

shares and the warrants?

E.F.M.
Allocation based on intrinsic value:
The basis of allocation would be the fair value of the ordinary share.
Fair value of ordinary share P 110
Subscription price 80
Intrinsic value per share of warrant P 30
Multiply by the number of ordinary shares
under the warrants 1,000
Total value of share warrants P30,000

Issue price P350,000

Assigned value of share warrants 30,000
Value assigned to preference shares P320,000

Entry to record the issuance of the preference shares and the warrants:

Cash 350,000
Preference Share Capital(2,000xP100) 200,000
Share Premium-Preference shares 120,000
Share Warrants Outstanding 30,000

E.F.M.
Recapitalization
• Recapitalization refers to the change in the capital structure of the
entity brought about by the cancellation of the old shares and
issuance of new shares as replacement.
• Recapitalization is brought about by any of the following:
a. Change from par to no par or vice versa
b. reduction of par value or stated value
c. share splits or reverse splits

Question to ponder:
How does recapitalization affect assets, liabilities and the total
shareholder’s equity?

E.F.M.
Illustrative problem 1: Change from par to no par
The shareholder’s equity of Ace Corp. before recapitalization is as
follows:
Share Capital, P100, 20,000 shares P2,000,000
Share premium 300,000
Retained earnings 800,000

Case 1: Ace Corp. recall and cancels the 20,000 shares and replaces
them with 40,000 no par shares with stated value of P20 per share:

Entry to record the above transaction:

Share Capital P2,000,000
Share Premium 300,000
Share Capital(40,000x P20) P 800,000
Share Premium 1,500,000

E.F.M.
Case 2: Ace Corp. recall and cancels the 20,000 shares and replaces them
with 40,000 no par shares with stated value of P60 per share:

Entry to record the above transaction:

Share Capital P2,000,000
Share Premium 300,000
Retained Earnings 100,000
Share Capital(40,000x P60) P2,400,000

Notes:
• If the stated value of the new shares is more than the original issue price
of the par value share, the difference is charged to retained earnings
because in this case, there is capitalization of the retained earnings.
• Changes in the par value of share capital shall be charged or credited to
share premium.
• If increases in share capital exceed share premium, the excess is charged
to retained earnings.

E.F.M.
Illustrative problem 2: Reduction of par

The shareholder’s equity of Ace Corp. before recapitalization is as follows:

Share Capital, P100, 20,000 shares P2,000,000
Share premium 300,000
Retained earnings 800,000
Ace Corp. reduces the par value to P85.

Entry to record the above transaction:

Share Capital P2,000,000
Share Premium 300,000
Share Capital(20,000x P85) P1,700,000
Share Premium-recapitalization 600,000

Or
Share Capital(20,000 x P15) P300,000
Share Premium –recapitalization P300,000

E.F.M.
Share split

• Share split may be in the form of

a. split up or share split
b. split down or reverse share split

• Split up happens when old shares are cancelled and replaced by a larger
number of new shares but with a reduced par (stated) value per share.
• Share split is used by entities as an equity financing tool.
• Share split increases the number of shares available for issuance while
decreasing the fair value per share. This is because, after a share split, the fair
value of the entity’s net assets will be divided by a large number of outstanding
shares. With a decreased fair value per share, the entity’s shares become more
affordable to potential investors.

• Split down is the opposite of split up whereby old shares are canceled and
replaced by a small number of new shares but with an increase in par(stated)
value per share.

E.F.M.
Examples of split up and split down:
Ace Corp. has 20,000 shares of P100 par value per share.

Case 1: Split up
Ace Corp. declare a 2 for 1 share split.
The memo entry to record the split up.
“Issued 40,000 shares with par value of P50 as a result of a 2 for 1 split of 20,000 old
shares with par value of P100. “

Case 2: Split down

Ace Corp. declare a 1 for 2 reverse share split.
The memo entry to record the split up.
“Issued 10,000 shares with par value of P200 as a result of a 1 for 2 split of 20,000 old
shares with par value of P100. “

Question to ponder –
How does share split affect share capital?

E.F.M.
 God Bless!

Stay Safe and Healthy!

Sources:
Valix, Conrado T., Peralta, Jose F. and Valix, Christian Aries M. (2020) Intermediate Accounting Volume 2/
Phils: GIC Enterprises (prescribed textbook)
Milan, Zeus Vernon B., Intermediate Accounting 2(2019) (reference textbook)

E.F.M.