The Review School of Accountancy ‘BTel. No. 735-9807 & 734-3989 C. Uberita/C. Espenilla Financial Accounting and Reporting G. Macariola/S. Binaluyo it Lial ies — Leases PAS 17 OPERATING LEASE and Lessor The periodic rental is to be recognized as an expense (lessee) income (lessor) Any lease bonus should be amortized over the term of the lease and recognize as additional expense ditional income (lessor) 3. When the periodie rental is unequal and/or has a provision fora rent holiday/rent free the total rentals Jhout the term of the lease is determined and mortised on a straight-line method unless another ic and rational basis is more appropriate. y additional rental that is contingent on ihe revenue of the lessee oF any other factors, should be recognized as additional expense (lessee) additional income (lessor). 5. Any security deposit isa prepaid rent (lessee) uncamed rental income (lessor). 6. Expenses on the lease asset are bore by the lessor. 7. Any direct associated with contract of lease is being deferred and amortize over the lease term 8. The leased asset is reported in the books of the lessor FINANCE LEASE Finance Lease in the books of the Lesse Recognition and Measurement: PAS 17, par. 12 lessces should recognize finance leases as assets and liabilities in their balance sheets at amounts equal at the inception ofthe lease o the fair valve ofthe leased property or, ifJower, at the present value of the minimum lease payments. In calculating the present value of the minimum lease payments the discount factor is the interest rate implicit in the lease, ithis i practicable to determin: ino, the lesec’s incremental borrowing rate should be used Accontract of lease may lead to a finance lease if any of the following criteria is met: "a The ease transfers ownership of th asst the ssc y the co the fase lem, b. The lessee has the option to purchase the asset ata price, which is expected to be sufficiently lower than the fair value at the date the option becomes exercisable such that, atthe inception of the lease, itis reasonably certain that the option will be exercised cc. The length is for the major part of the economic life of the asset even if title lease should include any secondary rental. secondary rental gives the les Atte inception ofthe lease, the presen vale f the mini ease payments amount the eased ast: nd not transferred. ‘The length of an option for renewal, cast substan all ofthe fie vluc of The leased assets are of a specialized nature such that only the lessee can use them without major modifications being made. Indicators of situations that individually or in combination could also lead to a lease being classified as a finance lease: If the lessee can cancel the lease, the lessor’ losses associated withthe cancellation are borne by the lessee. Gains oF losses from the Muctuation in the fair value of the residual accrue to the lessee (for example, in the form ofa rent rebate equaling most ofthe sales proceeds atthe end ofthe ease), and cc. The lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent. Finance lease in the books of the Lessor: Recognition and Measurement: ‘a, The lessor should recognize the lease as a receivable. ‘The carrying value will be the lessor’s net investment in the lease. b. The net investment in the lease will equal: 2 The present value of the minimum lease payments receivable, plus The present value of any unguaranteed residual accruing to the lessor (e.g. the residual value of the leased asset when itis repossessed at the end of the lease).ReSA / Financial Accounting & Keoorting: _ Liabilities-Leases Tn practice, the fessor's investment in the leose will be the same as the Tessee's lease liability c.The lease receipts will be split hetween finance income and a repayment of the principal. ‘The finance income is calculated using a constant periodic rate of interest Sale and leaseback Ifa sale and leaseback transaction resuits saa fisanes lease, any excess of sales proceeds over the carrying amount should not be recognized immedistely as aicom by « sclieressee, Instead, the excess is deferred and amortized fover the lease term (PAS 17 par. $9), 1a sale and leaseback transsetion results ga operat 1) Uf wis evident that the transucuion is establish smmeduately If sales price 1s not established at fair valine # sf sales price is below fair valu, ars profit oe Loss should be recogniced immediately, except that when a loss 1s to be compensated by loetow fair markt future rentals, the lass should be deferred and amortized in proportion tothe rental pavimens aver the sertnd the asset i expected 10 be wsed ‘at fair value, any profit or lass should be recognized eferred and amortized over the period 1 If sales price is above fair value Fe excess ever ht value should be should be jed to he used The ffencrce between the fait value and the carrying value the asset is expe recognized, Lial ies ~ Leases PFRS 16 Lessee Finance lease model - At the commen liability bt the lease, a lessee shall recognize a rightof-use asset and a lease Operating lease model (IFRS 16 par S) povtdes inat a lessee is permitted to make an accounting policy 10 apply the operating lease model. Under the operating lease nwouel the lessee does not recognize an asset and lease liability The lessee may or may not use the operating lease model iF the lease is short-term (has a tern of 12 months oF less) or if the underlying asset is of low vaize. The lessee shail recognize the lease payments as an expense in either a ine basis over the lease «erm or another systematic basis. The accounting standard does not provide a uantitative threshold as to the amount of a iow value lease, Low value asset is a matter of professional judgment Low value of underlying asset inclide personal computers, office equipment and office furniture. | Measurement The right-of-use ass ‘ust should comprise ‘a, The amount of the initial measuremont of thc lease liability b. Any lease payments made at a before the ccromencement date, less any lease incentives received Any initial direct costs incurred by the lessee and 4. An estimate of costs to be incurred by she lessee in dismantling and removing the underlying asset, restoring the site on which i is ;ocoted or restoriug the asset to the eondition required by the terms and conditions of the lease, unless thos. costs are incurred to produce inventories. The lessee incurs the obligation for those costs either at the commencement date or as a consequence of having used the ‘underlying asset during a particular period Ini is measured at cost fhe Lease liability is measured at the present value of the lease payments that are not paid at that date. The lease payments shall be discounted using the in:erest rmplicit in the lease, if that rate ean be readily determined. If that rate cannot be readily determined, the lessee hall use the lessee’s incremental borrowing rate. At the commencement date. the lease payments inciude in the steasurement of the lease lability comprise the Following. payments for the right to use the underly tring the tease term that are not paid at the commencement date ‘a. Fixed payments (inc sarc: fixed payments less any lease incentives receivable (such as payment by the lessor to the lessee associated with a Lease or the reimbursement oF assumption by the lessor of the costs of the lessee. b. Variable lease payments tha depe ually measured using the index oF rate as at the commencement date (example, payments linked to a consumer price index, payments linked 10 a benchmark interest rate (such as LIBOR) ot payments that vary to reflect changes in market rental rates) Amounts expected to be payable hy the fesiee under residual value guarantees, and 4d. Payments of penalties for terminating the lease. if the lease term reflects the lessee exercising an option to terminate the lease. Subsequent measurement The right-of-use asset (under the cost model} is measured at cost less any accumulated depreciation and impairment loss, The lessee shall apply normal depreciation policy for right-of-use asset The lessee shall depreciate the right-of use asset aver the useful life of the underlying asset under the following condition (a) the ‘onan index or rate, ResA ‘The Review Shou! or Accountancy ‘WTel. No. 735-9807 & 734-3989i lease transfers ownership of the underlying asset to the lessee at the end of the Tease term, and (b) the lessee is reasonably certain to exercise a purchase option. If there is no transfer of ownership t0 the lessee or if the ‘purchase option is not reasonably certain to be exercised, the lessee shall depreciate the right-of-use asset over the shorter between the useful life ofthe asset and the lease term. al recognition, the lease liability should be measured increasing the amount urying amount to reflect the lease payments and W oF lease modifications oF to reflect revised in- The lease liability ~ subsequent 10 to reflect interest on the lease liability, reducing the remeasuring the carrying amount to reflect any: reassess substance fixed lease payments Lessor At the commencement date. the lessor shall classify the lease as either an operating lease of finance lease. A lease is classified as a finance lease if i transters substantially all the risks and rewards incidental to ownership of an underlying asset, A lease 1s an operating lease if does not transfer substantially all the risks and rewards incidental ‘o ownership of an underlying asset. Examples of situations that individually or in combination would normally fead to a lease classified as an operating lease The lease transfers ownership of the underlying asset to the lessee by the end of the lease tern 5. The lessee has the option to purchase the underlying asset ata price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain, at the inception date, thatthe option will be exercised The lease term is for the major part of the economic Iie ofthe underlying asset even if title is not transferred. 4 At the inception date, the present value of the lease payments amounts to atleast substantially all of the fair value of the underlying asset and © The underlying asset is of such a specialized nature that only the lessee can use it without major modification Andicators of situations that individually or in combination could also lead to a lease being classified as a finance tease are: __ I the lessee can cancel the lease. the lessor’s losses associated with the cancelation are bome by the lessee 'b Gains or losses from the fluctuation in the fair value of the residual value accrue to the less and © The lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than ‘market rent initial measuremer 2 AL the commencement date, the lessor shall recognize assets held under Finance lease in its statement of financial Position and present them as a receivable at an amount equal to the net investment in the lease. The lessor shall use the interest rate implicit mm the lease to measure the net investment in the lease. In the case of a sublease. if the interest rate implicit in the sublease cannot be readily determined, an intermediate lessor may use the discount tate used for the head lease (adjusted for any initial direct costs assoclated with the sublease) to measure the net investment in the sublease Initial direct cost, other than those incurred by manufacturer or dealer lessore, are included in the inittal measurement of the net investment in the lease and reduce the amount of income recognized over the lease term, AI the commencement date, the lease payments included in the measurement of the net investment in the lease ‘comprise the following payments for the right ose the under! he lease term that are not received at the commencement date: 2. Fixed payments (including in-substance fixed payments less any’lease incentives 'b. Variable lease payments that depend on a inde or rat, initially measured using the inde or rate as at the commencement date Any residual value guarantees provided by the lessor by the lessee. a party related Wo the lessee or a turd unrelated to the lessor that is Financially capable of discharging the obligation under the euarantes The exercise price of a purchase option ifthe lessee is reasonably certain to exercise the option Payments of penalties for terminating the lease. i the fase term reflects the essce exereising an option to terminate the lease jurer or Dealer lessor AL the commencement date, a manufacturer or dealer lessor shall recounize the follow for each of its finance leases. Revenue being the fair value of the underlying asset or i lower. the present value ofthe leave payments accruing to the lessor, discounted using a market rate of int b- The cost of sale being the cost or carrying amount if different. ofthe underlying asset less the present vale of the unguaranteed residual value and © Selling profit or loss (being the difference between reven and the cost of sale ibsequent measurement sor shall recognize finance income over the k ‘etum om the lessor’s net investment in the lease sc term, based on a patter reflecting a constant periodic rate of — ReSA The Review School of Accountancy ‘BTel. No. 735-9807 & 734-3989A lessor shall account for a modi ase ay a separate lease if both The modification increases the scope of the lease by adding the right to use one or more underlying assets and b. The consideration for the lease 1 increase in seope and any arp the particular contract es by en amount commensurate with the stand-alone price for the that stand-alone price to reflect the circumstances off ustren For a modification to a finance lease that's not accounted for as a separate lease, a lessor shall account for the ‘modification as follows: a If the lease would have been ¢ inception date, the lessor shal 1 Account for the tease modi 2. Measure the carrying amount of the underlying asset as the betore the effective date of the icae ma Sification b. Otherwise, the lessor shall apply Ue roytetemen lied Js ais opetating, lease had the modification been in effect at the fication 25 a cw tease from the effective date of the modification and investment in the lease immediately RS 9 Operating leases (lessor) A lessor shall recognize lease payinenis tiem sper’ ng leases as mneome on either a straight-line basis or another systemtatic basis, ‘The lessor shall apply ancvicr systematic basis sf that hasis is more representative of the patter in Which benefit from the use of the underlying asset 1S diminished. 1. A lessor shall recognize costs, including depreciation, incurred in caming the lease income as an expense. 2. ‘The lessor shall add initial direct costs incurred in obtaining an operating lease to the carrying amount of the underlying. asset and recognize those costs 2+ and expense over the Icase term on the basis as the lease income. The depreciation policy for depreciable underiying assets subjcct te operating leases shall be consistent with the {essor's normal depreciation policy for similar assets 4. A lessor shall apply IAS 36 to deternine whether sn and to account for any impairment los: identified S.A manufacturer or dealer lessor does not revs it is not the equivalent of a sale 6. A lessor shall account tor a modification to an opeteting lease as a new lease from the effective date of the ‘modification considering any prepaid or acecued lease payments relating to the original lease as part af the lease payments for the new leas iying asset subject to an operating lease is impaired ny selling profit on entering into an operating lease because ResA ‘The Review Schoo! of Accountancy ‘WTel. No. 735-9807 & 734-3989PRACTICAL ACCOUNTING 1____ -- a 1 ReSA The Review School of Accountancy ‘BTel. No. 135-9807 & 734-3989 . Uberita/C. Espenilla/G. Macariola ED EARNINGS/ACCUMULATED PROFIS &LOSSES The more common items that either incr sase(deeresse) retained eamings are: Net income (1088) Pav (xy) Prior period adjustments (error corrections and certain changes in acetg. principle) xx 0X) Dividends out of earings (cash, property und liability and share dividends) (we) 5 Adjustment as a result of quasi-reorganization xx (00) "Appropriation or restriction of reained earnings ow) Reversal of appropriation ~ Loss on share capital (irc reasury) bansaction (on) -aton or distribution of con,pany's earnings be recognized on the date ‘accumulated profits and losses. The amount or Dividends out of earnings» ¢e of declaration as. charged (debit) to the eeta.ned ear ‘measure depends on the type of dividends, «ct as Cash dividends — is measured atthe face value of the dividends. If the cash dividend is based on the number of shares outstanding, the charge 1 retained earnings does not include treasury shares. When itis necessary to allocate total dividends between common (ordinary shares) and preference, Allocation is dene by considering the prc orentual tdhts of the preference shares, such as: Non-cumulative rights — any undeciar-d dividend is forfeited but the current year dividend be assigned to the preference shateholde. Cumulative rights. enit'rd 1 receive any undeclared d'vidend as well asthe current year dividend, Nonparticipating rights ler assigning the dividends due on either the cumulative or non Cumulative rights, any remaining divider anes to ordinary shareholders. Participating rights ~ lier assigning the dividends due on either the cumulative or non-cumulative rights, the ordinary shiarcholders will receive a “Tike” percentage of par value outstanding, if there is a remainder of the declared dividends for participation for the preference shares and ordinary Shares, it should be allocated in proportion to the yar value peso outstanding in each elass of stock The “like” percemage is the dividend rate of the parneipating preference share, f there are 60 or more preference shares wtih cifferent rates and both ave parncipating then the rate or percentage 10 be used isthe lower rae Property dividends On January 1. 2008, 1FRIC jsued draft interpretation D23, “Distribution of non- ccash to owners’. 23 proposes that all types cf distributions of non-cash assets to owners acting in their Capacity as owners are measured at the fair value of the assets distributed, The difference between the ‘anping value of the assets and the fair value is taken €0 the income statement. ‘The interpretation would apply to all types of distributions of au asset to another entity within the same consolidated group. At the time of writing D23 is under deliberation by the IFRIC and both book and fair value treatments are acceptable. IFRIC foterpretation 17 Distributions of Noa-rash Assets to Owners was issued 27 November 2008, IFRIC 17 Distributions of Non- ash assets lo Owners applies to the entity making the distribution, not to the recipient. applies when non-sssh assets are distributed fo owners or when the owner is given a choice of taking cash in Tew of the nun-cash assets, IFRIC 17 clarifies that: © adividend payable should be recognized when the dividend is appropriately authorized and is no longer atthe diseretion of the entity fan entity should measure the dividend payable atthe fair value of the net assets to be distributed an entity should remeasure ine lability at each reporting date and at settlement, with changes recognized directly in equity # anentity should recognize assets distributed in pros an entity should provide adcitio ‘meet the definition ofa discort c difference between the dividend paid and the carrying amount of the net ss Mud showkt disclose it separately closures if the et assets being held for distribution to owners vation . IFRIC 17 applies to pro rata distributions of non-cash assets (all owners are treated equally) but does not apply to common control transac‘ions Fiffective Date and Transition ‘© IFRIC 17 is to be applied prospectivelyReSA / PRACTICAL ACCOUNTING 1. © TFRIC 17 iseffective for annual periods beginning on oF permitted, with some restrictions. Scrip oF liability dividends (defersed cash dividends) - measured at face value of the dividend, Ifa scrip dividend bears interest, the inter tne eash payment should be debited to Interest Expense and not treated as dividends. ‘Share dividends — dividends involving ao transfer of cash or any other asset to shareholders but a dlistribution of additional shares to existing shareholders. On the distribution of additional shares, istinction is made between a small and 4 large stock dividend. Small share dividend (represents below 20% outstanding shares) is measured ai the fair market value of the shares on declaration date, while a large share dividend (representing 20% to 25% of outstanding shares) is measured at the par value of shares, Prior Period Adjustments - rors nade in the past are discovered and corrected in the current year by an adjustment (o the reiaines camings aceon referred to as a prior period adjustment. Most errors can ‘occur in measurins the result of operation and financial ststus of the enterprise. Some errors can be of mathematical mistakes, failure to apply appropriate accounting procedures, or misstatement or ‘omission of certain information and also a ckange from an accounting principle that is not generally accepter to one that is generally accepted Some errors are discovered during the accounting period prior to the closing of books, if this is the case, correction can be made by making correcting entries directly to the accounts. These corrections will not affect the retained earings Some errors go undetected during the current reriod but they are offset by an equal misstatement in the subsequent period. Whee this happens, the under or overstatement of income in one period is counterbalanced by an equat over sr understatement of income in the next period. Afier the closing process is completed for the second yeer, the retained earnings account is correctly stated. When errors of the past are not counterbalancing, retained earnings will be misstated until a correction is made in the accounting records, 4. Restrictions or Appropriation of Retained Furnings transferring retained earnings to appropriation is only a reclassification of earnings so that this reclassified earnings can not be declared as dividends, and it is also a way of disctesing in the face or in the notes to financial statement that the company does not want to distribute the same amount of funds because they are needed for a specific purposes) such asthe following: As a legal purpose ~ the company should appropriate retained earnings equal to the remaining cost of treasury stock. ‘© Asa contractual requirement ~ sore bond indentures require appropriation of retained earnings ata specified amount over the term of the bond + Asa protection of working capital ~ when it is necessary to maintain a strong current position so the company must disclose that the working capital is not available for dividend declaration equal to the amount of appropriation, + For existence of possible or expected losses - eppropriation maybe created for estimated losses arising from lawsuis, unfavorable eortractual obligations, and other contingencies. 5, Reversal of Appropriation ~ when the purpose of the appropriation has been met like when the treasury Stock has been re-issued, wien bonds oe aiready pid, when there has been a final decision on the lawsuit, when the asset being, consiructad has been compiessd, when contingencies no longer exist, ete then it would be necessary 10 reverse ibe appropriation back tothe retained earings. 6. Quasireorganization —-may be accomplished under two accounting procedures such as the following: 1. Deficit reclasification ~ results solely in eliminating a deficit in retained earings without restating assets oF liabilities, The procedus> is limited to reckssification of a deficit in reported retained earnings as a reduction of paid-in capital. (ex. change from par to no-par or from no-par to par; reduction of par or reduction of stated value and stock split) ‘reorganization - involves restanig the assets of the enterprise to their fair values and liabilities to their present values with the nei ariount ofthese adjustments added to or deducted from the deficit. The balance in the retaiied earnings account (debit or credit) is then closed to other capital account, usually Additional Paid In Capital, so that the company has a “fresh sian with a zero balance in retained earings. 1 stock transaction ~ any gain on the reissue ((reasury stock), retirement, conversion of stock is credited to the account Additional Paid In Capital, any loss is charged against APIC (for the reissue of treasury), if any, any remaining loss to Relained Eamings, any loss identified other capital stock transaction other than re-issue of treasury. is dchited directly to the account Retained Earnings ReSA ‘The Review Schoo! of Accountancy Tel. No. 735-9507 & 734-3989The Review Schoo! of Accountancy Tel. No. 735-9807 & 734-3989 C. Uberita/C. Espenilla/G. ri PRACTICAL ACCOUNTING 1 - : iC Fspenilo/6, Macariole "Lecture- Book Value And Earnings Per Share ich share assuming the company is liquidated and the Book Value Per Share - the amount that woud be pais o mula to compute book value per ‘when there is only ane class of stock: {otal stockholders’ equity wes total common shares » BY! share Pax 2. when there are twa classes of stocks: Jota Preferred Stockholders’ Equity Prs total number of preferred shares w BV) share: Pew Fotal Common Stockholders” Fguity Pax total number of common shares x BV/ share Pex Number of shares to he used as denominator for hook value computation: ures issued and outstanding x Inscribed. i Ibseribed but forfeited i a wo ny ws Important Notes for book value computation: subscription receivable should not be included m the Sickhold.ey” equity U 2. treasury stock, if any, should be as retired (sce Keciure om retirement 3. when there are two classes of stocks and the preferred is none participating, con 'd by deducting total preferred stockholders’ equnty. the preferred stockholders’ 6 non stockholders” equi y includes the determi following: “Votal par value of outstanding preferred stan Pree Liquidation premiuns (Liquidation preminn x sties. , * {otal dividends duc (eum inive righ a Total preferred stockholders’ equity pa 4. when there are two classes of stocks and the proterres! © partierpating, common stockholders’ equity and preferred stockholders’ equity are determined by the fatal excess im the equity. The excess is determined as follows: Total stockholders’ equity pst {otal par of preferred stock outstandin (xx) Total par of common stock outstandia (xx) Total excess Pax 5, The total excess is allocated Between prefered stocks sand Gomta yn stocks By dive to preferred stocks. like © fe or norcumulii”s ane sarieips formation as to the preferred risats tae prefered stock ia mon-cumu absence of at participating, ount attributable to every 6 on stock ons er Share ~ is the ynwa shre outstanding during the period. Lamings. n should be on con Earnings per share comp Structure of the enterprise is simple — when there Formula to compute the earnings per share: When the ¢ securities : (Only the Basie Parnines PerReSA/PRACTICAL ACCOUNTING} Lecture on BV and EPS a. One class of stock: Pxx ‘common shares ©) x Basie Hamings Per Share Pax Use the WACSO if there ia cha 1b, Two classes of stocks: a the number of common shares during, the Net income after tax Pax ‘Less: Preferred dividends during, *he yar xx Ne ~ Number of common shares oi ls average cemnion shares euiandoip (WACSO) xx Hasie taming. Yer Shave Pax Formuks to compute are dilutive se e eumiings per bars. Whew the's cs: (Basic Earnings Ver Shar Diluted Earnings Per Share: ital Steuctare of the enterprise is simple ~ when there sl Dilute Parnes Per Share) Net Income after tax Pax ‘Addless): adjustment on the inclusion sf diluive securities « Net Pxx = Number of common shares cutstandiny oF 9 average conimon sae outstanding (WACSO) xx Number of common shares on the as ffeniv era, and or Exercise option or rights x Xx Diluted Earnings Per Share Pax + When a company has a complex capital structure (a complex eapitil convertible securities, options, warrants or rights) both icture exists when a corporation has jc and diluted earnings per share are reported. + Diluted carnings per share is sinsi jon of the basic EPS, however, DEPS includes the effect of dilutive securities on the net invome as well as he sHeet ot the common shares on the possible conversion of dilutive securities + Convertible securities such as honds aud preferred tyke are © decrease in the basic EPS or anerease the Isic loss per shy inclusion will inerease the BEPS or deveswe basic hess por in the computation of LPS. idered dilutive if in their inclusion will cause a c but they are considered anti dilutive “Options and warrants are considered dilutive if their exereise price is lower thar stock but they are considered since their assumed exercise leads uge matket price of the jdilutive if the exorcise price is higher than average market price of the stock fan inevease tn the basic LPS, itive se pultipie po Steps in Determining | 1. Compute the basie EPS. HL. Determine whether the convertible securities. stock options. warrants or rights are pot fa, Stock options, warrants or price: b. For convertible securities - when the incsemsntal FPS for cach security i less than the BEPS, the are dilutive but after considering any stock options, warrants or rights. But if the iner EPS is ‘greater than te BLPS. she security .s antillutive and it should be excluded. ly dilutive sare dhlutive when the exereise price is less than the average market I, Compute the DEPS ‘4. Include all dilutive stock optioas, warrants or rights b. Include potentially dilutive convertibte ». hha the lowest ineremestas FPS. 6. Compute a new EPS Tigure. ¢ ng the treasury stock method. ying convertible-secutit Security in the list has un s.eremental LPS value greater than the last computed EPS. Discontinue the process athe point AH cil securitics n the Ist sre anti-dilutive es until the next IV. Report BEPS and DEPS on the face of the income statement. ReSA The Reviews Schoo! of Accountancy ‘Brel, No. 735-9807 & 734-3989ReSA The Review School of Accountancy BTel, No. 725-207 & 734-3989 C. Uberita/C. Espenilla/G. Macariola PRACTICAL ACCOUNTING 1 = Sharchofders’ Equity Lecuave: 1 Measure of eapital when issued a wih par without par hat with = Di. at stated value any excess to Share Prema 2. at otal amount or proceeds Measure of the consideration received on the issue of share capital: 4 Torcash or rxeivatle at ee fh tarmoncash al the FMV ot the souvent EMV othe shares sued whichever is clearly deter Roovred oF market sae of the slock issued whichever is clearly For sersices rendered atthe EMV’ ot th determinable + When the stock issued is tively faded in he market. the macht value of the stock wil be the fasr micas of the consideration recerved 3. Issuance of Ordinary and Preference Shares tor Basket Price: Both Securities are treated as equity: fa) Ifthe markst values of hosh equity shares ae 1b) When only one security has known market value. the hasket price or proceeds is allocated to the securities By Geducting the market value of the scuty wetl a known marke! salve (the market value of that seeurity will be ts “signed value) the excess will te assipnee! walt oF the seeunity without a known market value ova. the hashst pre allocated using thei market Preference Shares are treated as Dxbt: The residual method 15 used 1 allocate the proce. us Share (debt). The fair value ofthe Profersnce shay © tech is dedue’ed from the total proceeds it ‘ofthe Ordinary Share Capital (equity) swect the Ondinary Share Capital (equity) and the Preference artving al the fair value Issuance of Preference Share with a Share Warrant: Preference Share is treated as Equity 4). Ir the market value of the preference share and the market value of the warrants are known ~ the proceeds 1s allocated tothe securities using the yaashetvslve rae 1b) When only one security has known marks! sais the proccess allocated wo the securities by deducting the market sale ofthe security with & known tacks? vale he anaihet value of that seeurity will be sts assigned value) the excess will the assigned value 0! jo 9 hanoun market sale Preference Share is treated as Debt: he esidual method is ed te allocate ie penoxeds Mtv sen the Share Warrants (equity) and the Preference Share (debt). The fae value ofthe Preference Share alot dete! form the total peogceds in ariving atthe far value of the Share ‘Warrants (equity) 1s. Measure of Treasury Share ~at cost which equal to the face valve of eash oF fir market value oF non-cash asset surrendered in reaequiting shares ofthe company Disposal of treasury share thru reissuaace - shore. Any positive excess is credited to Share Premivme fram Treesury. Aw se Premium Treasury tothe exten of ah Stwting credit balance prior to verssunce ay vemning negative exes Is charged to Retained Earnings o¢ ‘Recumulated Profits ne Losses account se pre Fess ‘eveess debated Disposal of treasury share thru retireme at ~ compare the carry vale oF the share to which fo the treasury share belonos against the cost of the tcastry —»\3) positive excess 15 eFedited to Share Premium- from Retirement Any negative exeess is changed 10 the © asuty, if way and the remaining amount to Retained Farming Accumulated Profits und Losses © he carrying value of the share intudes te Par and the Share Premium at the time the shares were ongznally sued 6. Retirement of Share Capital — compare the cry. vine oF the share capital retired (par and share premium) agannst the retirement pre any postive cxcess iS cere Stes 1749 equity aecount (share premium — ret ‘the results nepative evcess is dcbited savcts tres earnings + Conversion of « Class of Own Eauity to anothoy Chis of Owe Equity ~ compere the carrying value of the share Goat converted apart the par or stated waptal ef shoves sued the diference ts eredited to share premium axsount ‘any tranenction gost ancurred 1 charge! Uh share pa 1479 aksouRt 8. Shore Rights - san isue of new shares with the tem vse siving Shareholder the right Yo an additional mamier of Shares in plopurtion wo their current sharsholdings Rights suc muy he renounceable or mon-renounceable IfReSA/ PRACTICAL ACCOUNTING 1 Lecture - Shareholders’ Equity |. Cash-Settled Share-Based renounceable. existing shareholders may sell sir Fuhis tothe new shares To another party dor Fights issue #s non-renounceable, a shareholder is not allowed to sell is or her accept or reject the ofler to acquis new shares 1 the company i the offer period. Ifthe 3S 10 the new shares and must either ‘Accounting for Share Rights: 48) Upon issuance ~no forma! entry is noosssery. only a memorandum entry is required b) Upon exereise ~ formal eniry is retard recon the issue of new shares. ©) Upon redemption ~ formal crs +: reoutred to resod the “as it” payment of eash dividends. d) Upon expiration — no formal entry is sevessory onus issue — isan issue of shares to existing shareholders in proportion to their current shareholdings at no cost 10 the shareholders. The company uses its reserves balances oF retained carmings to make the issue. The bonus issue is a transfer from one equity account to another, 50 t does not increase or decrease the shareholders’ equity ofthe enterprise. Bonus issue isa transaction that will only affect the components of the equity ora transaction inside the sharcholders’ ‘equity. The result ofthe bonus issu inoreases the share capital and decreases another equity account of the entity Equity-Settied Share-Based Payment: (Share Options): The emuty shall measure the service: reeves, and the corresponding inerease in equity. directly, atthe fair value of the services received, unless the fair valu: ean bo esinsted reliably. Ifthe entity cannot estimate reliably the fait value of| the services received. the entity shall tmcavste dit fair value and tie corresponding increase in equity, indirectly, by reference to the ir value of the equity mstruagnts granted, Because of the difficulty of directly measuring the cost of the service directly, the entity shall naeasue the far valu: ofthe employee services received by reference tothe fair value of the equity instruments granted. However, is rare cases, the entity may be unable fo estimate reliably the fir value of the equity instruments granted at the measurement date, the eatity shall stead measure the equity instruments at theit intrinsic value. Accounting for share options: 1. Measurement - is done on the date of grant and i during the vesting period Ren estimates. cessary 1 is re-measured at each accounting reporting date rement # siszewaty when subsequent information differs from previous. ‘The following are the factors in uncaring the cos of services: a) numberof share tobe issues Fixed - no performance condition but det Variable consider any performance cone mine number of employes with vested benefits on and determine number of employees with vested benefits. 'b) Value of the option ~ its determinable Fair Market Value (for value model) or its Intrinsic Value (Intrinsic Model). The Intrinsic Value isthe differance of the Fair Market Value of shares on the date of grant over the Option Price. The intrinsic edt is uss only whew te fir value of the option is not clearly determinable ©) Vesting period Fixed ~ no porformance cond Variable ~ consider performance eto Already vested ~ revognize mediately bb. Has yet to vest ~the fair value ofthe secice is umontize over the vesting period and recognize as an expense in each year-end during the vesting period .yments “The entity shall measure the goods or services acquiced ad the ability incurred atthe fait value ofthe liability. Until the liability is settled, the entity shall re-messure the fat value of the liability at each reporting date and at the date of settlement. wth any changes in fair va'ue vecopmzc profi or Toss for the period Accounting for cash-setled share-based uaviment Measurement — ‘a) For future services to be rendered -ai each year-end during the vesting period and amortize over the total or remaining required service period. 11 the compensation has yet to be exercised after the vesting period but before the expiration ofthe required everised perid further re-measurement is required ‘The following are the factors in measuring the cost of services ') number of shares to be issues Fixed —no performance condision bot determi Variable ~ consider any perfortnance corti ¢ number oF employees with vested benef 12 und determine number of employees with vested benefits. b) Value of the option ~ ts dcteraunable Fair Market Valle (or value model) oF its Intrinsic Value (Intrinsic Model). The Intrinsic Vale 1 the dileremce of she Fair Market Value of shares in each accounting reporting date over the pre-determined mackst price. The envinsic model used only when the far value ofthe option 1s, not cleatly determinable ©) Vesting period — Fixed ~ no performance condition Variable ~ consider performance comlition ReSA The Review School of Accountancy ‘Wiel. No. 735-9807 & 734-3989ReSA/PRA' 2, Recognition — fa Already vested ~ recognize iramecis B fasyecto went. ie fr sla ote reviews amortize cr the vesting period and recognize as an expense in teach yearend during the vesting pecs 12, Share-Based Payment with Cash Alternatives: Pe chare based payment transactions in which the terms ofthe aangement provide either the entity or the counter arty Tat the choice of whether the entity sete: the trnsaction in cash (or other asset) or by issuing equity instruments, the itty shall sceount for that rancaction, er the compenents ofthat transactions, a5 a cashsetled shar-besed payment Tractions if and tothe extent tha, thc entity has incurred iabiity to setle in eash or other asses, or as equity-setled ‘hare-based payment transtction if, an io the extent tha such liability has been incurred. 13, Share-Based Payment-The Courter Party with 2 Choice of Settlemen incon enity granted the coumterpuy the uh to choose wheter ashare-baed payment transaction is sted in cash or ty tuing equity insruments the en has ranted w compoun¢ financial instrument. which includes ¢ debt component td equity component. For transactcn With artes other than cwapoyees, in which the fir value of Une goods or services fascived tsmeaeured dtecly the entity shall messure the equity component ofthe compound financial instrument asthe Uifference between the fair value of the goods or services recived and the fair value of the debt component, atthe date ‘when the goods or services ae received For transactions, including transactions with employees, the entity shall measure the far value of the compound financi instrument at the measurement das, king into sccvtant the terms and conditions on which the rights to exsh or equity instruments were granted. The enity all frst measure she fair value ofthe debt component and then measure the fair value ofthe equity component, taking int wecourt that ne ecaunteparty must forfeit the right to recive cash in order 0 receive the equity instruments rs yare-Based Payment — The Entity with » Choice of Settlement: I the terms of the urangement provide an city with the choice of whether to setle in cash or by issuing equity Instruments the enty shall determine wheiner has « present obligation to settle in cash and account forthe share-based has a present obligation to settle in cash if the choice of setlement in equity ‘peeause the entity is legally prohibited from issuing shares), or the entity hia a past prctice or a stated policy of senting in cash, or generally setles in cash whenever the counterparty asks for ash settlement. Ifthe entity has presen: vbligation to sete cash, it shall account forthe transaction in accordance swith the requirements applying casi-scles hare-based pyment transactions. If no such obligation, the entity shall tecount for transaction in wccordance with 1: requitements applying equty-settled share-based payment transactions. 15. Reserves — is the generic term for all equity secounts other than contibuted equity. A major component is the ‘Accumulated ProfituLosses (Reusined Lamings) account. Other items included in the reserves account are the following: ‘Revaluation of property, plant and e4uiprit: foreign exchange reserves; Unrealized gain/loss on available for sale securities: 16. CONTRACTS INVOLVING AN ENTITY'S OWN ROUITY Net Settlement Derivative Contrast ysical Setlement (Net cash or net shares) _ Counterparty choice Forward to buy Liobilty for the share Derivative asset (net Liability for the share redempiion scant (gross) amount redemption amount (ess) Forward to sell Equiv Derivativeiabtty (net Derivatveriabity (net amount) amount) Writen cat Equity Derivativefiabiity (net Derivativeniaitty (net amount) amount) Purchased pul Fauity Derivative asset (net Derivativeliabitity (net amount) amount) Writen put bitty Derivativeiability (net Liab mount) ‘Toalretum swap Derivative ReSA ‘The Review School of Accountancy Tel. Ho, 735-9807 & 734-3989