STOCKHOLDER’S EQUITY

Share issue

➢ issuance of Share Capital for cash – preference or ordinary shares are credited equal to par and
the excess to additional paid in capital (APIC)
➢ Share Issuance costs – include registration fees, underwriter, commissions, legal fees, accounting
fees, share certificate costs, promotional costs and postage.
Generally, for SUBSEQUENT issuances – charged to APIC relative to that particular issue.
For INITIAL issuance – charged to ORGANIZATIONAL EXPENSE
➢ Issuance of preference or ordinary shares for a LUMP-SUM price, this is accounted for as follows:
a. If preference are effectively equity securities, use pro-rata approach in reference to the
aggregate market value of preference or ordinary shares
b. If preference are effective debt securities (e. g redeemable), use residual approach assigning
the fair value of the preference shares first with the residual value assigned to the ordinary shares
➢ Issuance of Share Capital on a Subscription Basis – The agreed purchase price is debited to
Subscription Receivable. Share Capital Subscribed is credited at par and the difference is credited
to APIC. Upon full payment, the Share Capital Subscribed is closed to Share Capital.
The Subscription Receivable is presented as a current asset if collection is expected within one
year of the balance sheet date. If there is no definite due date for Subscription Receivable, it is
shown as a contra to Stockholder’s Equity, an offset against the Ordinary Shares Subscribed
account.
DEFAULT ON SUBSCRIPTIONS:
a. Shares are offered in an auction
b. The entire amount collected is returned to the defaulting subscriber
c. The entire amount collected is returned to the defaulting subscriber less any costs incurred by
the corporation in reissuing the shares
d. A corresponding number of shares is issued to the defaulting subscriber based upon the total
amount collected
e. The entire amount collected is forfeited
➢ Issuance of Share Capital for Non-Cash considerations (PFRS 2)
➢ Non-cash consideration (asset or service) received shall be valued at their fair market
value, unless the fair value of shares is more clearly determinable (as when the shares
are actively traded in the market)
Treasury Shares

➢ Acquisition of Treasury Shares, use cost model

Treasury Stock at cost xx
Cash xx
➢ Sale of Treasury Shares – when treasury shares are reissued, the journal entry is:
a. Sold at a price higher than the cost, resulting in a “capital gain”
Cash xx
Treasury shares (at cost) xx
APIC from TS transactions/Reacquired shares(‘gain’) xx
b. At a price less than cost, resulting in a “capital loss”
Cash xx
APIC from TS transactions (until balance is exhausted) xx
Retained Earnings xx
Treasury Shares (at cost) xx
Note: When treasury shares are acquired at different costs, specific shares may be identified. Otherwise a
FIFO or average cost per share is used to determine the cost of the treasury shares sold

➢ Retirement of Treasury shares

 Retire treasury shares at their carrying value, which is the original issue price:
If Original Issue Price (carrying value) > Cost of Treasury shares: “CAPITAL GAIN”
Ordinary Share (at par) xx
Paid in capital in Excess of Par (from orig. issue/pro-rata) xx
Treasury shares (at cost) xx
APIC from Treasury Shares Transactions/Retirement xx

If Original Issue Price (carrying value) < Cost of Treasury shares: “CAPITAL LOSS”
Ordinary Share (at par) xx
Paid in capital in Excess of Par (from orig. issue/pro-rata) xx
Paid in capital from TS transactions (until balance is exhausted) xx
Retained Earnings xx
Treasury shares (at cost) xx
➢ Restrictions of Retained Earnings for Treasury Shares – has to appropriate Retained Earnings equal
to the balance of its Treasury Shares (Appropriation = Cost of TS)

Rights, Warrants and Options

➢ These securities entitle holders to acquire shares at an exercise rate ordinarily lower than the
prevailing market rate. The following illustrate how to account for their issuance, exercise and
expiration.
Issuance Exercise Expiration
RIGHTS- are issued to No entry (memo entry Normal entry for No entry (memo entry
entitle the general only) issuance of shares: only)
stockholders in relation
to their pre-emptive 1 right for every 1 Cash (Ex. P) xx
rights, to protect their stock issued OS xx
proportional interest Share Prem xx
whenever corporations
issue fresh new shares
WARRANTS – PS with warrants:
normally issued Cash xx Cash xx OSWO** xx
attached to a principal PS xx OSWO** xx Share Premium
security (Bond or Share Prem xx OS xx from expired warrants
Preference Shares) as OSWO xx Share Prem xx xx
an inducement to
buyers of the principal *use pro-rata or **debit OSWO at the
securities residual approach carrying value of the
warrants exercised.
Bonds with warrants:
Cash xx
Discount xx
Premium xx
Bonds Payable xx
OSWO xx

*Use residual
approach
OPTIONS – normally Comp Exp. xx Cash (Ex P) xx OSOO** xx
issued to key OSOO xx OSOO** xx Share Premium
executives and officers OS xx from expired options
as additional At FMV of options or Share Premium xx
compensation for either the intrinsic value, xx
past or future services
 provided to the whichever is **debit OSOO at the
company appropriate carrying value of the
warrant exercised
(see note below)

Notes on Accounting for Option Issuance (Equity-settled share based payment):

1. Determine if options VESTED IMMEDIATELY or NOT VESTED IMMEDIATELY.

a. If options vest immediately (charge compensation/salaries expense for the entire valuation of
the options)
**The value of option should be at FAIR VALUE of option, otherwise at INTRINSIC VALUE
➢ If fair value method is used, value of the option shall be fixed at whatever is the fair value
of the options on the grant date.
➢ If intrinsic value (FMV of stocks – Exercise Price) is used, the intrinsic value is updated
at each balance sheet date before and after the vesting period, until the options are
exercised. Any changes in intrinsic value shall be treated as mere change in estimate
(current and prospective), charged to profit or loss.
2. If options are not vested immediately, determine if option plan is FIXED or VARIABLE
a. If options are under FIXED OPTION PLAN (the only vesting condition is the vesting period),
charge compensation expense to the vesting period by allocating the valuation of the options
to the said vesting period (Options/VP)
b. In estimating the compensation expense for each period, always consider in the analysis the
estimated number options which will become exercisable based on number of employees who
shall remain within the company’s employs until the end of the vesting period. Any changes in
the number of employees remaining with the company until the options vest (thus number of
options that will become exercisable) shall be accounted for as a mere change of estimate.)
3. If options are under VARIABLE OPTION PLAN (if apart from the vesting period, there is an
additional vesting condition), determine what is the nature of the additional vesting condition
(MARKET BASED OR NON-MARKET BASED)
a. If additional vesting condition is MARKET BASED (e.g share price), account for the option as
if it is FIXED. That is, compensation expense shall be recognized over the vesting period
regardless whether the additional market condition is achieved or not. This is because the
determination of the fair valuation of the options considers the probability that market-based
condition cannot be directly influenced by key employees.
4. If additional vesting condition is NONMARKET BASED (e.g target sales, earnings, increase in sales
etc.), consider whether the additional nonmarket based condition is achieved or not in vesting the
options. This means that compensation expense shall only be recognized if the additional vesting
condition (apart from the vesting period) is achievable/achieved. In addition, ascertain which among
the following items are variable/varies in response to the nonmarket based condition:
a. Number of options
b. Vesting period
c. Fair value of options
If non market based vesting condition is not achieved, the option shall revert to the company.
Stock Appreciation Rights (Cash-settled share-based payments)

SARs are accounted for similar with options (follow the same steps above) with the following exceptions:

➢ SAR Payable is liability to pay in cash

➢ Measurement: the value of the SAR Payable (at fair value or intrinsic value) shall be updated
at the end of each reporting year during and after the vesting period until the liability is settled.
➢ The liability is settled at the prevailing fair/intrinsic of the SAR on the settlement date.
 ➢ Any changes in fair valuation at each balance sheet date and on the settlement date shall be
treated as mere change in the accounting estimate (current and prospective), charged to profit
or loss.
Retained Earnings

RETAINED EARNINGS
RE, beginning
Prior period adjustments
(a) PPErrors (a) PPErrors
(b) Change in Policies (b) Change in Policies
(c) Capital loss from TST
(d) Capital loss from Recapitalizations
(e) Dividends declared from earnings (h) Reversal of appropriations
(f) Appropriations (legal, contractual, (i) Net Income
voluntary)
(g) Net Loss
RE, end
Cash Dividend

Computation of Cash dividends payable:

Number of Shares outstanding and subscribed x (% of cash dividend x PAR per share)

Property Dividend (IFRIC 17)

➢ A dividend payable should be recognized only when the dividend is appropriately authorized and
is no longer at the discretion of the entity.
➢ An entity should measure the dividend payable at Fair value of the assets to be distributed.
➢ At the end of each reporting period and at the date of the settlement, the entity shall review and
adjust the carrying amount of the dividend payable (restate at fair value), with any changes in the
carrying amount of the dividend payable recognized in equity as adjustments to the amount of the
distribution.
➢ Upon distribution, an entity should recognize the difference between the dividend payables and the
carrying amount of the asset distributes in the profit or loss.
Stock Dividends or Capitalization or Bonus Issue

➢ An ordinary stock dividend is a stock dividend of the same class; i.e., ordinary shares to ordinary
shareholders. A special stock dividend is a stock dividend of a different class;; i.e., preference
shares to ordinary shareholders.
a. Less than 20% of the shares previously outstanding and subscribed, the stock dividend is
termed small, in which case the amount to be charged to retained earnings is equal to its
current market value.
b. At least 20% of the shares previously outstanding and subscribed, the stock dividend is termed
large in which case the amount charged against Retained Earnings is equal to par value.
Scrip Dividends - a corporation may declare a scrip dividend by issuing promissory notes called scrip.
This arises when the corporation may have adequate retained earnings to meet the legal dividend
requirements but has insufficient funds to disburse. If the promissory note bears interest, this is charged to
Interest Expense.

Balance Sheet Classification – Dividends Payable, Property Dividends Payable and Scrip Dividends
Payable are classified as liabilities whereas Stock Dividends Distributable is an ADDITION in the
Stockholder’s Equity.
AUDIT OBJECTIVES:

To determine:

1. Proper authorization of transactions involving shareholders’ equity accounts.

2. Proper accounting treatment of transactions involves shareholders’ equity.
3. Compliance with legal requirements related to corporate capitalization.
4. Propriety of financial statement presentation and adequacy of disclosure
AUDIT PROCEDURES:

1. Obtain a copy of the latest articles of incorporation and determine, for each class of share capital,
the:
o Authorized share capital;
o Par or stated value; and
o Preference and limitations, if any

2. Obtain a schedule of the share capital, subscribed share capital, and treasury share accounts
indicating the number of shares and amounts for the:
o Beginning-of-year balances
o Additions and deductions for the current years; and
o End-of-year balances

3. Foot and cross-foot the schedule.

4. Verify accuracy of the schedule.
o Trace beginning balances to last year’s working papers or in case of an initial audit,
establish accuracy of beginning balances by:
▪ Test-tracing prior years’ recordings and supporting documents
▪ Tracing beginning balances to general ledger balances
o Trace proceeds to cash receipts records for additional issues or subscriptions to share
capital and reissues of treasury shares
o Trace payments for share capital retirements and acquisitions of treasury shares to cash
disbursements records and cancelled checks
o Agree working paper ending balances with the general ledger balances
o Trace authorization by reference to minutes of meetings of the board of directors and
shareholders

5. Where the client is being services by an independent transfer agent or registrar

o Confirm share capital issued and treasury shares
o Arrange for the inspection and count of treasury shares

6. Where the client does not maintain an independent transfer agent or registrar:
o Obtain from the corporate secretary a schedule of
▪ Shareholders;
▪ Subscribers;
▪ Subscription receivable; and
▪ Treasury shares
o Foot and cross-foot the schedule
o Test-trace to stock and transfer book
o Trace balances per schedule to general ledger balances.
o Inspect and account for unissued, cancelled, treasury share certificates
o Determine if the treasury shares had been properly endorsed in favor of the corporation
7. Confirm subscriptions receivable and consider collectability.

8. Review articles of incorporation, by-laws, and minutes of meetings of the board of directors and
shareholders relating to share capital and related accounts.
9. Obtain schedules of other equity accounts, indicating:
o Beginning-of-year balances
o Additions and deductions during the current year; and
o End-of-year balances
10. Foot and cross-foot the schedule.
11. Verify the accuracy of the schedule.
o Trace beginning balances to last year’s working papers or, in case of an initial audit,
establish accuracy of beginning balances by:
▪ Test-tracing to prior year’s recordings and supporting documents
▪ Tracing beginning balances to general ledger balances
o For current year transactions:
▪ Ascertain authorization; and
▪ Determine propriety of accounting treatment
o Agree working paper ending balances with general ledger balances

12. Reconcile dividends paid to rates authorized in directors’ minutes of meetings.

13. Ascertain compliance with the requirements of the Securities and Exchange Commission (SEC)
and other regulatory bodies and contractual obligations relating to capitalization of retained
earnings.
14. Determine propriety of financial statement presentation and adequacy of disclosure.