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    Corporation - Basic Considerations and Accounting

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    ACCOUNTING FOR CORPORATIONS Basic Considerations Learning Objectives: after studying this chapter, you should be able to: hots ne one of the general law on corporations. ident and explain the Shnoge identify apd expla e advantages and disadvantages of acorporation. e the classes of corporations under the Revised Corporation Code of the Philippines. Identify and describe the other classifications of corporations. Detail the components of a corporation. Define independent director. Describe the classes of shares. 10. Summarize the essential contents of the articles of incorporation a laws. 11. Compare the contents of the AOI per RCCP and Corporation Code. the minimum capital stock requirement at the time of incorporation. veer e Penge nd the by- 12. Determine 13. Interpret the basic corporate organizational structure. 14. List some of the rights of a shareholder. 15. Name the corporate books and records. 16. Define a one person corporation and discuss its salient features. The Pareto principle or the 80-20 rule states that for many events roughly 80% of the effects come from 20% of the causes. In 1906, Italian economist Vilfredo Pareto observed that 80% of the land in Italy was owned by 20% of the population. Quality management pioneer, Dr. Joseph Juran, working in.the US in the 1930s and 40s recognized a universal principle that he called the "vital few and trivial many." In Dr. ‘ed that 20% of the defects caused 80% of the problems. Juran's initial work, he identifi It can also be stated that 80% of outcomes can be attributed to the top 20% of the players, In the Philippine enterprise sector, the interesting numbers are not 80-20 but ‘onomy’s total output can be attributed just to the largest 68-0.40. That is, 68% of our ec! 0.40% of Philippine enterprises or 3,023 out of a total 777,687 firms counted in 2010. —the 99.6% composed of micro-enterprises (making uP 91.6%) and smajj ay The rest: -ount for less than a third (32%) of», n medium enterprises or SMEs (comprising 89)—acc country’s gross domestic product (GDP). Dr. Habito recently cited figures from a 2008 study that showed Philippine micrg, enterprises and SMEs contributing a smaller share to GDP than those of our neighbor. with the share reaching up to 57% in Indonesia. The same holds for contribution tg total jobs: Philippine SMEs account for 61%, versus 68% in singapore, 73% in Cambodia 77% in Thailand, 81% in Laos and 97% in indonesia. These comparisons show that Breat scope remains for strengthening the role of SMEs in the Philippine economy if the traditional hurdles in, access to finance; technology, raw materials and markets can be overcome, Adapted portions from “Small Business and ASEAN Integration,” By Dr. Cielito Habito of Philippine Daily Inquirer, Sept. 30, 2014 ne way in which corporations raise new capital is by issuing shares of stock. In the early months of 1992, General Motors Corporation, the major car— Chevrolet, Pontiac, Buick and Cadillac—maker in North America, successfully issued 55 million ordinary shares at US$39.0 per share, raising more than US$2.1 billion. It was the fourth time in two years that G.M. had raised funds by issuing shares. What are some of the possible reasons why G.M. would have chosen a share issue over other ways of raising capital? There are definite advantages to financing with share g—the method of obtaining funds by issuing ordinary or preference shares—is less risky than debt financing—issuance of bonds, notes or mortgage, because dividends on ordinary shares are not paid unless declared by the board of directors. In contrast, if the interest on bonds, notes or mortgage payable is not paid, a corporation may be forced into bankruptcy. capital. First, equity financin, second, when a corporation does not declare cash dividends, the cash from profitable operating activities may be invested to finance expanded operations. Third, a corporation may néed the proceeds from an ordinary share issue to improve the balance between liabilities and shareholders’ equity. It is important for accountants to understand: the nature and characteristics of corporations as well as the process of accounting for a share issue and other types of.share transactions. Adapted from “Big GM. Issue Lands and Price Holds Up,” By Susan Antilla of New York Times, May 21, 1992. REVISED CORPORATION CODE Republic Act 11232, otherwise known as the Revised Corporation Code of the Philippines {RCCP), was signed into law by President Rodrigo Duterté on Feb. 20, 2019 and became effective Feb. 23, 2019. . Z 5-2 | WIN Ballada’s Partnership and Corporation Accounting over 39 years, the Corporation Code of the Philippines (Corporation Code) le) or Batas Fol was the law that governed corporations. The Corporation Code took pambansa Big. 68, effect on May 1, 1980. wot all of the provisions of the Corporation Code were amended by the RCCP, but Congress decided to re-enact the unchanged provisions and include new provisions in prder to pass a complete Revised Corporation Code of the Philippines. The first general law on corporations in the Philippines, which was practically 2 codification of the American law on corporations, was the Corporation Law or Act 1459. The Philippine Commission passed this law and it took effect on Apr. 1, 1906. ‘The RCCP aims to introduce the following reform: Policies that would enhance the ease of doing business in the Philippines; ules that prioritize corporate and stockholder protection; yonsibility; and «Provisions that instill corporate and civic resp {Amendments that will strengthen the country's policy and regulatory corporate framework. DEFINITION f law, having the right of ssly authorized by law or Sec. 2). cial being created by operation o attributes and properties expre: d Corporation Code of the Philippines, ‘A corporation is an artifi succession and the powers, incident to its existence (Revise ATTRIBUTES OF A CORPORATION oration is an artificial being with a personality separate and apart from its 1. A corp embers. individual shareholders or m w. It cannot come into existence by mere agreement 2. Itis created by operation of la of the parties as in the case of business partnerships. Corporations require special authority or grant from the State, either by a special incorporation law that directly creates the corporation or by means of 2 general corporation law (Le., The Revised Corporation Code of the Philippines). * erpetual’ existence nA corporation ‘shall have p des otherwise (Sec. 11, RCCP). The death, he individual shareholders or members will fF ownership of shi successia corporation provi capacity of tl The transfer of 3. It enjoys the right of unless its articles of in withdrawal, insolvency or inc not dissolve the corporation. dissolve the corporation. ares of stock does not nd properties expressly authorized by law or incident 4, Ithas the powers, attributes a to its existence. vyears per Sec. 11 of the Corporation Code was deleted in the RCCP. Chapter 5: Basic Considerations | 5-3 —————— — t—‘a_OOOOOOOCSY _— ADVANTAGES OF A CORPORATION sign has the legal capacity to act as a legal entity have limited liability. ity of existence thores of stock can be transferred without the consent of the other shareholders, er anagement is centralized in the board of directors: Shareholders are not general agents of the business. Greater ability to acquire funds. The corporal shareholders f Ithas continu NOWEwKE DISADVANTAGES OF A CORPORATION is relatively complicated in formation and management. of government control and supervision. igh cost of formation and operation. than other forms of business organizations nt to the wishes of the majority. have been separated from A corporation is There is a greater degre It requires a relatively hi itis subject to heavier taxation Minority shareholders are subservie! €. in large corporations, management and control : ownership. ’ : 7. Transferability of shares permits the uniting of incompatible and_ conflicting elements in one venture. neat CLASSES OF CORPORATIONS Section 3 of the RCP classified private corporations into: Stock corporation. Corporations which have share capital divided into shares and 1. distribute to the holders of such shares, dividends or allotments of are authorized to the surplus profits on the basis of the shares held. Non-stock corporation. A non-stock corporation is one where no part of its income is distributable as dividends to its members, trustees or officers. Any profit that a non-stock corporation may obtain as an incident to its operation shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized (Sec. 86). Non-stock corporations may be formed or organized for charitable, religious, educational, professional, cultural, recreational, fraternal, literary, scientific, social, civic service, or similar purposes, like trade, industry, agricultural and like chambers or any combination (Sec. 87). 5-4 | WIN Ballada’s Partnership and Corporation Accounting OTHER CLASSIFICATIONS OF CORPORATIONS ‘According to number of persons: Corporation aggregate. A corporation consisting of more than one corporater. Corporation sole or a special form of corporation usually associated with the orporation which consists of only one member or corporator and A B. clergy. Itisac his successors such as a bishop. 2. According to nationality: ‘ation organized under Philippine laws. ‘on formed, organized or existing under laws d whose laws allow Filipino citizens and try or State (Sec. 140). ‘A. Domestic corporation. A corpor B. Foreign corporation. A corporati other than the Philippines’ an corporations to do business in its own count urpose: or organized for the government of a municipalities and barangays). rivate aim, benefit or purpose. ‘According to whether for public or private p ‘A. Public corporation. A corporation formed portion of the state (e.g., provinces, cities, 8. Private corporation. A corporation created for p! ‘According to whether for charitable purpose or not: A. Ecclesiastical corporation, Those organized for religious purposes. B. Eleemosynary corporation. Those established for public charity. C. Civil corporation. Those established for business or profit. 5, According to their legal right to corporate existence: A. De jure corporation. A corporation existing in fact and in law. It is organized in strict conformity with the law. B. De facto corporation. A corporation existing in fact but not in law. 6. According to degree of public participation with regard to share ownership: ‘A. Close corporation. A corporation whose share ownership is limited to selected persons or members of a family not exceeding 20 persons. 8. Open corporation. A corporation where the share is available for subscription or purchase by any person. C. Publicly-held corporation. A corporation with a class of equity securities listed on an exchange or with assets in excess of P50,000,000 and having 200 or more holders, at least 200 of which are holding at least 100 shares of a class of its equity securities (SRC Rule 3-1.M, Amended IRR of the Securities Regulations Code (R.A. 8799)). Chapter 5: Basic Considerations*| 5-5 7. According to their relation to another corporation: A. Parent or holding corporation. A corporation that is related to 4, corporation that it has the power to either directly or indirectly enh majority of the directors of a subsidiary corporation. * the 8. Subsidiary corporation. A corporation controlled by another corporation as a parent corporation. NOW, COMPONENTS OF A CORPORATION 1. Corporators are those who compose a corporation, whether as stockholde shareholders in a stock corporation or as members in a nonstock corporation fe if ec 5). 2. Incorporators are those stockholders or members mentioned in the Articles Incorporation (AOI) as originally forming and composing the corporation and yi are signatories to said articles of incorporation, (Sec. 5). ° Section 10 of the RCCP provides that any person, partnership, association corporation, singly or jointly with others but not more than fifteen (15) in numbe,_ may organize a corporation for any lawful purpose or purposes. p Natural persons who are licensed to: practice a profession, and partnerships o, associations organized for the purpose of practicing a profession, shall not be allowed to organize as a corporation unless otherwise provided under special laws, Incorporators who are natural persons must be of legal age. Each incorporator of 2 stock corporation must own or be a subscriber to at /east one (1) share of the capital stock. A corporation with a single stockholder is considered a One Person Corporation (OPC; will be discussed later) Incorporators are no longer confined to natural persons (i.e. human beings). ‘a partnership, association or ‘corporation) can be incorporators. Under the old Corporation Code, the minimum number of incorporators was five Under the RCCP, one person can form a corporation, the OPC. The requirement of “not less than five (5) nor more than fifteen (15) trustees” were retained in the case of educational corporations (Sec. 106, and that “the number of trustees shall be in multiples of five (5)") and religious societies (Sec, 114). Note: All incorporators (if they continue to be shareholders) are corporators of @ corporation, but not all corporators are incorporators. An incorporator will always retain his status as such though no longer having an interest in the corporation. 5-6 |. WIN Ballada’s Partnership and Corporation Accounting 1s or stockholders are corporators in a stock corporation (Sec. 5) Shareholde Shareholders may be natural or juridical persons. Members are corporators of a non-stock corporation (Sec. 5). greed to take and pay for original, unissued ersons who have ai ration formed or to be formed. Note: All incorporators are n incorporator. subscribers are Pp shares of a cérpot subscribers but a subscriber need not be a promoter is a person who, acting alone or with others, takes initiative in founding and organizing the corporation and receives consideration therefor. underwriters are usually investment Bankers who have- agreed, alone or with others, to buy at stated terms an entire or a substantial part of an issue of securities; or - guaranteed the sale of an issue by agreement to buy from the issuing corporation any unsold portion at a stated price; or use his best efforts to market all or part of an issue; OF ma controlling stockholder. » agreed to offered for sale shares he has purchased fro Independent director is a person who, apart from shareholdings and fees received from the corporation, is independent of management and free from any business oF other relationship which could, or could reasonably be perceived to, materially interfere with the exercise of independent judgment in carrying out the responsibilities as a director (Sec. 22). The board of the following corporations vested with public interest shall have independent directors constituting at least 20% of such board: a. Corporations covered by Section 17.2 of Republic Act 8799, “The Securities Regulation Code,” namely those whose securities are registered with the SEC, corporations listed with an exchange of with assets of at feast PS0M and having 200 or more holders of shares, with at least 100 shares of a class of its equity shares; Banks and quasi-banks, non-stock savings and loan associations (NSSLAs), . pawnshops, corporations engaged in money service business, pre-need, trust and insurance companies, and other financial intermediaries; and Other corporations engaged in business vested, with public interest similar to the above, as may be determined by the Commission, after taking into account relevant factors which are germane to the objective and purpose of requiring the election of an independent director, such as the extent of minority ownership, type of financial products or securities issued or offered to investors, Chapter 5: Basic Considerations | 5-7 5 operations, and public interest involved in the nature of busines a Other analogous factors. incorporated uni ation incorp' der the Every corpor ‘ership, joint venture, or ap, 9. Additional General Powers per RCCP. RCCP is expressly given the power to enter into partn' “under BP68, commercial agreement with natural or juridical persons (Note: Also, d only to, enter into merger or consolidation with other CO OOo arty oF nda corporations are allowed to give donations in aid of any politica! PO“) 1” candidate or for purposes of partisan political activity (Sec. 35). These were not allowed in the Corporation Code. CLASSES OF SHARES ixed in the articles of specific amount Is fi The par value is the 1. Par value shares. One in which a sj f stock. incorporation and appearing on the certificate 0} minimum issue price of the shares. Section 6 of the Code states that preference (or issued only as par value shares. preferred) shares of stock may be 2. No-par value shares. One without any value appearing on the face of the certificate of stock. A no-par value share may have a stated value which may be fixed in the articles of incorporation or by the board of directors or the shareholders. Thus, the issue price may vary from time to time as it is usually fixed based on the book value of the corporation's shares. the minimum stated value of a no-par value share is five: pesos (P5.00) 3. However, value are deemed fully paid. per share. In addition, shares issued without par Banks, trust, insurance, and preneed companies, public utilities, orations authorized to obtain or access funds from the building and loan associations, and other corp public, whether publicly listed or not, shall not be permitted to issue no-par value shares of stock (Sec. 6). Voting shares. Those issued with the right to vote. Non-voting shares. Those issued without the right to vote. Ordinary shares. These shares entitle the holder to an equal pro-rata division of profits without any preference. Preference shares. These shares entitle the holder to certain advantages or benefits cover the holders of ordinary shares. 8. Founders’ shares may be given certain rights and privileges not enjoyed by ‘the owners of other stocks (Sec. 7). 9. Redeemable shares may be issued by the corporation when expressly provided in the articles of incorporation. They are shares which may be purchased by the corporation from the holders of such shares upon the expiration of a fixed period, regardless of the existence of unrestricted retained earnings in the books of the 5-8 | WIN Ballada’s Partnership and Corporation Accounting er corpors n, and upon such other terms and conditions stated in the articles of incorporation and the certificate of stock representing the shares (Sec. 8). 10. i. incorporation of Treasury shares. A stock that has been issued by the corporation as fully paid and later reacquired but not retired. promotion shares. Those issued to promoters as compensation in promoting the corporation, or for services rendered in launching or promoting the welfare of the corporation. 12. Col nvertible shares. A stock which'is convertible or changeable from one class to another class. ARTICLES OF INCORPORATION (Aol) Contents section 13 provides that all corporati securities and Exchange Commission ranguages duly signed and acknowledged or authen may be al ions organized under this Code shall file with the (SEC) articles of incorporation in any of the official \ticated, in such form and manner as lowed by the SEC, containing substantially the following matters, except as otherwise prescribed by this Code or by special law: L 2. 3 The name of the corporation; The specific purpose or purposes for which the corporation is formed; The principal place of business (specific address’ must be specified per SEC Memorandum Circular No. 3, Series of 2006) which must be within the Philippines; ° The term of existence /f the corporation has not elected perpetual existence; The names, nationalities and residences of the incorporators; The number of directors, which shall not be more than fifteen (15) or the number of trustees, which may be more than fifteen (15); The names, nationalities and residences of the persons who shall act as directors or trustees until the first regular directors or trustees are elected and qualified. If it be a stock corporation: 2. Amount of authorized share capital in pesos, b. Number of shares into which it is divided, ©. Incase the shares are par value shar + the par value of each share, + names, nationalities and residences of the original subscribers, x” the amount subscribed and paid by each subscriber on his subscription. 2 weit SEC Memorandum Circular No. 6, Series of 2016, there is no need to amend the AOI if the corporation serrate spinal fie within the same ty or ‘municipality. Only an amended General Information ett) equred tobe submited to the SEC within 15 days from the transfer. ithe transfer toa nt city or municipality, then there is a need to amend the AOI. Chapter 5: Basic Considerations | 5-9 CC OUESSSZ OO > I Jes need only state such face and the numg, 7 d. Incas of yar value, the artic! eines tis divided. hares in id share capital ' shares into which sa nt of its capital, the n, oul eam jount contributeg butors and the am nich the incorporators may en, 9. If it be @ non-stock corporation, the nationalities and residences of the contri 10. Such other matters consistent with law and necessary and convenient. 1d in the articles of 'MCOrporatig, 11. An arbitration agreement: may be provide Pursuant to Section 181 of the RCCP. o may The articles of incorporation and applications for amendments ee pe bd With the Commission in the form of an electronic document, in ith the Commission’s rules and regulations on electronic filing. No articles of incorporation or amendment to articles of incorporation of banks, bank, and” quasi-banking institutions, preneed, insurance and trust comPanies, Non-stoc, savings and loan associations (NSSLAs), pawnshops, and other financial intermediaries shall be approved by the SEC unless accompanied by a favorable recommendation of the appropriate government agency to the effect that such articles or amendment js in accordance with law (Sec. 16). Prescribed Form Per Section 14, unless otherwise prescribed by special law, the articles of incorporation of all domestic corporation's shall comply substantially with the following form: Articles of Incorporation of (Name of Corporation) The undersigned incorporators, all of legal age, have voluntarily agreed to forma (stock}/(non-stock) corporation under the laws of the Republic of the Philippines and ° certify the following: First: That the name of said corporation shall be “__* _,In¢., Corporation or OPC"; : Second: That the purpose or purposes for which such Corporation is incorporated are: (If there is more than one purpose. indicate primary and secondary purposes}; Third: That the principal office of the corporation is located in the City/Municipaliy , Province of | Philippines; of oe That the corporation shall have perpetual existence or a term of Fourt years from the date of issuance of the certificate of incorporatior Fifth: That the names, nationalities, and residence addresses of the incorporalos of the corporation are as follows: 5-10 | WIN Ballada’s Partnership and Corporation Accounting Name Nationality sith: That the number of directors or trustees of th : © cor estos ortustees of the corporation are as flows: eee pane Nationaity Residence seventh: That the authorized capital stock of the corporation is ESOS (P. J, divided into shares with the par value of _______ PESOS. Per share. (In case all the shares are without par value): That the capital stock of the corporation is shares without par vaive. (In case sore hares have par value and some are without par valve): That the capital stock of shares, of — which sy corporation consists of = soe shares hove © por valve of PESOS P each, and of which __ shares are without par value. Eighth: That the number of shares of the authorized capital stock above stated has been subscribed as follows: Nationality | No. of Shares ‘Amount “Amount Paid Nome of Subscriber Subscribed _| _ Subscribed or {modify No. 8if shares are with no par valve. In case the corporation s non-stock, Nos.7 aa 8 of ihe above articles may be modified accordingly, and it's sufficient fhe ae oe te the omount of capital or money contribuied or donated by specified persons, stafing the names, nationalities, and residence addresses of the contributors or donors and the respective amount given by each.) ~ nas been elected by the subscribers as Treasurer atter the successor is duly elected and qualified in 5 been given to receive in the contributions or donations information set forth in the 1e subscription in has been duly* Ninth: That —— of the Corporation to act as such until ‘accordance with the by-laws, that as Treasurer, authority ha: name and for the benefit of the corporation, ‘all subscriptions, paid or given by the subscribers or members, who certifies the seventh and eighth clauses above, and that the paid-up portion of th on enclor property for the benefit and credit of the corporation ived, e name of the corporation that another corporation, such name, that the name immacg Tt: That the incorporators undertake to change thi ; priediy upon receipt of notice from the Commission Partnership or person has acquired a prior right to the use of Chapter 5: Basic Considerations | 5-11 — —™ has been declared not di use of another corporatio! public policy. Filipino citizens shalll provide q “No transfer of stock or interest which shalll reduce the ownership of Fil equired percentage of capital stock as provided by existing ited to be recorded in the proper books of the corporatio Sicated in all stock cerlficates issued by the corporation.” to less than the r allowed or permit restriction shall be ins IN WITNESS WHEREOF, we have hereunto signed these Articles of incorpor | 20. in the City/Municipality of 7 — Republic of the Philippines. ____. day of Province of Comparison of the Articles of Incorporation per Ri To facilitate comparison of the requirements Eleventh: (Corporations which will engage in any business or activity "ser, ed 5 he following): islinguishable from a name already registered or re: n, or that it is contrary to law, public morals, go, Seed fy GOO cy thy Stone “N Dino cy ls shag hd jy HON, tg — [Names and Signatures of the Incorporators) ae (Name and Signature of Treasurer) CCP and Corporation Code under the RCCP and the Corporation Code ion (AOI), a table is prepared as follows; as to the contents of the Articles of Incorporati RCCP Corporation Code (RA 11232) (BP 68) Name If the corporation is an OPC, the OPC is not allowed. letters “OPC” is included in the 2 corporate name. Z Who Can Be An | Any natural person, partnership, Incorporator corporation, or association _ Only natural persons | Number of ‘One incorporator is enough. ‘At least five (5) incorporators Incorporator(s) | _ _ +: needed Residence of. ‘No residency requirement for ‘A majority of the incorporators Incorporators | incorporators. must be residents of the 4 _ Philippines. | Term Shall have perpetual term by default unless the AO! provides. | Not exceeding 50 years. _ otherwise. _* _| Number of No minimum number of Directors directors/trustees except for | Minimum number of directors educational corporations and is five (5). Pare “religious societies. | Es gen Residence of fency requirement for ‘A majority of the directors __Directors_- | ______dlirectors._ |___must be Phil. residents. 5-12 | WIN Ballada’s Partnership and Corporation Accounting jount o} | At least 25% ofthe aut ‘Amount of At least 25% of the authorized subscribed and f oe Capital Bas 'SO no minimum capital stock mustbe | scribed capital and no Poe and at least 25% of | 5 caatemeT 7 mnimum pai | the subscribed capital Fiaiement of | Subscribed a be apts in the 8th clause of th Cay ae — subscribed and _ pays are | In two (2) separate clauses (8th _Paid-in Capital | 14, RCC), (See. | and ath) ofthe AOL, (sec. 15, | Treasurer's A separate treasurer's she mrt | sur Sbarate treasurer's affdavitis | Aseparcts Coe aa longer required tut tha rate treasurer's affidavi Certification of the treasurer is — |___Part of the AOI (9th Trdertaking to | mita | Thersiea pas Ka E ng longer Tequired to submit a | There isa separate undertaking | | Parate undertaking seethe | to change the corporate name a lth Clause of the a tobe signed by directors. incorporators and the Only incorporators sign the treasurer sign the AOI ‘AOL. REGISTRATION, INCORPORATION AND COMMENCEMENT OF CORPORATE EXISTENCE ; Under Section 18, a person or group of persons desiring to incorporate shall submit the intended corporate name to the SEC for verification. If the Commission finds that the name is distinguishable from a name already reserved or registered for the use of another corporation, not protected by law and not contrary to law, rules and regulations, the name shall be reserved in favor of the incorporators. The incorporators shall then submit their articles of incorporation and by-laws to the Commission. if the Commission finds that the submitted documents and information are fully compliant with the RCCP and other relevant laws, rules and regulations, SEC shall issue the certificate of incorporation. The private corporation commences its corporate existence and juridical personality from the date the SEC issues the certificate of incorporation under its official seal. NON-USE OF CORPORATE CHARTER [AND CONTINUOUS INOPERATION 2 3 Ea i tion does not formally organize and commence i fertin, 24 states the oe (No co (2) years in the Corporation Code) from the business within five (5) years (Note: tw date of hea ‘te certificate of incorporation shall be deemed revoked a5 of 4 i d. the day following the end of the five-year Perio : it iness but subsequently becomes mmenced its business fr least five (5) consecutive years, the SEC may, after due oration under delinquent status. However, if a corporation inoperative for a period of 2! Notice and hearing, place the corp! Chapter 5: Basic Considerations | 5-13 to resume operations ang (2) years period of we rescriDe: upon compliance by the SEC shall P' us. Failure to comp) inquent stat iting the de riod given by the SEC shay 5 wil , ificate of in A delinquent corporation shall have 2 comply with all requirements that the corporation, the SEC shall issue an order with the requirements and resume operation: cause the revocation of the corporation’ cert! 7 ; tus in case Of failure to felinquent sta i under consecutively of intermittent, The SEC may also place the corpora oo submit the reportorial requirements three (3) 1 within a period of five (5) years (Sec. 177) BY-LAWS con for its internal government ang orati aa Under Section 46, a These are the rules of action adopted by the rhe gover ‘olders or members. for the government of its officers, shareh private corporation thay provide in its by-laws for: of calling and conducting regular Or special meetings of the 1. The time, place and manner directors or trustees; ‘The time and manner of calling and conducting regular oF special meetings and mode* of notifying the stockholders or members thereof; ings of stockholders or members and the manner of voting 3, The required quorum in meetit therein; 4, The modes* by which a stockholder, member, director, or trustee may attend meetings and cast their votes; 5, The form for proxies of stockholders and members and the manner of voting them; 6. The directors’ or trustees’ qualifications, duties and responsibilities, the guidelines for setting the compensation® of directors or trustees and officers, and the maximum number of other board representations that an independent director* or trustee may have which shall, in no case, be more than the number prescribed by the SEC; 7. The time for holding the annual election of directors of trustees and the mode or manner of giving notice thereof; 7 8 The manner of election or appointment and the term of office of all officers other than directors or trustees; 9. The penalties for violation of the bylaws; 10. In the case of stock corporations, the manner of issuing stock certificates; and 11. Such other matters as may be necessary for the proper or convenient transaction of its corporate affairs for the promotion of good i ee governance and anti-graft and corruption 12, Anarbitration agreement may be provided in the /-| * New provisions in the RCCP. by-1aws pursuant to Section 181". 5-14 | WIN Ballada’s Partnership and Corporation Accounti ing yo MINIMUM CAPITAL STOCK qhere is also no minimum subscribed capi ent. The requit capital and no minim ii ! rations, which stated! "ae under Section 13 of the corset Cte Sf the etal stock 35 stated in the ideas 7 incorporation, at least 25% ofthe authorived oi incorporation must be subst the total sub: : subscribed and at /east ie ne scription must be paid upon subscription,” have been deleted in Note that the 25% subscribed and 259% or paid-up rule is i i corporation increases its capital stock (Sec. 37). . fest seplicanle when te BASIC CORPORATE ORGANIZATIONAL STRUCTURE The ultimate control of the corporation rests with the shareholders. They are the owners of the corporation. The shareholders elect the top governing body of the corporation, the members of the board of directors. The board of directors is responsible for:the formulation of the overall policies for the corporation and for the exercise of corporate powers. The board also elects a chairman of the board. Directors shall be elected for a term of one (1) year from among the holders of stocks registered in the corporation’s books (Sec. 22). Independent directors (as defined earlier) must be elected by the shareholders present or entitled to vote in absentia during the election of directors (Sec. 22). anagement team or the administrative officers is entrusted to the board. This team may include the president; executive vice-president; vice-presidents in charge of sales, manufacturing, accounting, finance, administration and other key areas; secretary; treasurer; and controller. These officers implement the tively manage the day-to-day affairs of the Policies of the board of directors anda £ holds the shareholders’ meeting during which the corporation. Annually, a corporation : shareholders elect their directors and make other decisions. Hierarchy of Corporate Structure ee 7 The election of the professional m: «Chapter 5: Basic Considerations | 5-15 ion must be @ director Section 24 states that the president of a SO aty OF as president and te, Corporation, but he cannot act as president and secre! Urey ne by law to be a directo, at the same time. The president is the only officer required by ines, The corporate secretary must be a resident and a citizen a ie ee thea! be a director unless required by the corporate by-laws. It ms entries of the tte Secretary to make and keep its records and to make prop’ incthel mares Votes, resolutions and proceedings of the shareholders and ae entrintan Ment of the corporation. The corporate treasurer is the proper office debane a the authority to receive and keep the money of the corporation and to disburse them aS he may be authorized. The treasurer may or may not be a director but is required per see 24 of the RCCP to be a resident of the Philippines. Not If the corporation is vested with public interest, the board shall also.elect a Compliance Officer (Sec. 24), There is no prohibition in the law against a shareholder being a director or officer of two oF more corporations. The Corporation Code does not prohibit a corporate officer from occupying the same position in. another corporation organized for the same purpose However, such situation may be prohibited by special law, the articles of incorporation or the corporate by-laws. There is a particular case involving a business tycoon whe - wanted to become a San Miguel Corporation director although he was already ‘occupying the same post in two corporations directly competing with the food and beverage giant. At that time, San Miguel amended its by-laws to provide for the disqualification of a shareholder from being a director of the corporation if the former already occupies the same position in a competing firm. The Supreme Court later upheld the decision of San Miguel. Thus, a corporation is authorized to prescribe Qualifications for its directors (Gokongwei vs. SEC, 89 SCRA 336). RIGHTS OF A SHAREHOLDER The following are some of the rights of a shareholder: 1. Right to be issued certificate of stock or other evidence of share ownership and to transfer such shares. 2. Right to vote via remote communication by proxy only) at shareholders’ meetings 3. Right to elect and remove directors, Right to adopt, amend or repeal the by-laws, 5. Right to purchase a portion of any new shares issued to Maintain the same percentage of stock ownership. This right is known as the Pre-emptive right. However, this right is not absolute arid may be denied, B 6. Right to receive dividends when declared, 7. Right to inspect corporate books and records, and to Feceive financial reports of the corporation's operations. A or in absentia (Note: under BP68, in person oF (Sec. 57). FS 8. Right to participate in the distribution of corporate assets upon dissolution. 5-16 | WIN Ballada’s Partnership and Corporation Accounting Ge conPORATE BOOKS AND RECORDS very private corporation, stock or non-stock, is 1 reptincial office of the following: i L fequired to keep books and records at Minutes book. [t contains the minutes of the meetings of the directors and shareholders, Stock and transfer book. It is a record of the names of shareholders, installments paid and unpaid by shareholders and dates of payment, any transfer of stock and dates thereof, by whom and to whom made. Books of accounts. These represent the record of all business transactions. The books of accounts normally include the journal and the ledger. Subscription book. It is a book of printed blank subscription, Shareholders’ ledger. It is a ledger which details the number of shares issued to each shareholder, Subscribers’ ledger. It is a subsidiary ledger for the subscriptions receivable account; it reports the individual subscriptions of the subscribers. Stock certificate book. It is a book of printed blank certificates of stock. Section 73 provides that every corporation shall keep and carefully preserve at its principal office all information relating to the corporation including, but not limited to: 1 2 6 ‘The articles of incorporation and by-laws of the corporation and all their amendments; ‘The current ownership structure and voting rights of the corporation, including lists of . stockholders or members, group structures, intra-group relations, ownership data, and beneficial ownership; ‘The names and addresses of all the members of the board of directors or trustees and the executive officers; Arecord of all business transactions; Arecord ofthe resolutions of the board of directors or trustees and of the stockholders or members; Copies of the latest reportorial requirements submitted to the Commission; and ‘The minutes of all meetings of stockholders or members, and of the board of directors or trustees. . Section 74 states that a corporation shall furnish a stockholder or member, within-ten (10) days from receipt of their written request, its most recent financial statement, in the form and substance of the financial reporting required by the SEC. At the regular Meeting of stockholders or members, the board of directors or trustees shalll present to Such stackholders or members a financial report of the operations of the corporation for * the preceding year, which shall include financial statements, duly signed and certified in cordance with the RCCP, and the rules the SEC may prescribe. However, if the total *Ssets or total liabilities of the corporation is less than P600,000, or such other amount % may be determined appropriate by the Department of Finance, the financial “‘etements may be certified under oath by the treasurer and the president. Chapter 5: Basic Considerations | 5-17 ONE PERSON CORPORATION (OPC) The Revised Corporation Code of the Philippines added @ "eM" type of corporation, ty, One Person Corporation (OPC). OPC is a corporation with a single stockholder, w,, may be a natural person, a trust or an estate (Sec. 116). One person May incorporat, two or more OPCs. Banks and quasi-banks, pre-need, trust, insurance, public and publicly-listed companies and non-chartered government-owned and -controlled corporations May no incorporate.as OPCs. A natural person who is licensed tO exercise a profession may no, organize as.an OPC for the purpose of exercising such profession except as otherwise provided under special laws (Sec. 116) .ct from the single stockholder. The sole The OPC has a personality separate and distin: ‘ent, He has the burden of affirmatively shareholder’s liability is limited to his investm showing that the corporation was adequately financed. Where the single stockholder canniot prove that the property of the OPC is independent of the stockholder’ personal property, the stockholder shall be jointly and severally liable for the debts and other liabilities of the OPC. The principle of piercing the corporate veil applies with equal force to OPC as with other corporations (Sec. 130). ‘Am OPC shall not be required to have a minimum authorized capital stock except as otherwise provided by special law (Sec. 117). If the-corporation is an OPC, the letters “OPC” is included, either below or at the end of its corporate name (Sec. 120). The OPC is not required to submit and file corporate by-laws (Sec. 119). But, the OPCis required to file the AOI in accordance with Section 14. It shall likewise substantially contain the following: 4. If the single stockholder is a trust or an estate, the name, nationality, and residence of the trustee, administrator, executor, guardian, conservator, custodian, or other persot exercising fiduciary duties together with the proof of such authority to act on behatf of the trust or estate; and 2. Name,nationality, residence of the nominee and alternate nominee, and the extent, coverage and limitation of the authority (Sec. 118). ‘The single stockholder shall be the sole director and president of the OPC (sec 121) Within fifteen (15) days from the issuance of its certificate of incorporation, the 07 shall appoint a treasurer, corporate secretary, and other officers as it may deem necessary, and notify the SEC thereof within five (5) days from appointment. The single stockholder may not be appointed as the corporate secretary. The single stockholde! tmay be the treasurer. The single stockholder who is likewise the self-appointe treasurer of the corporation, shall give a two-year term bond to the SEC in such 2 su * may be required (Sec. 122). 5.18 | WIN Ballada’s Partnership and Corporation Accounting ingle stockholder cannot by tre sine “notify eo eorPorate secr der Section 123 (c}, “notify the SEC f a days from such occurrence ang st”'® Heath ofthe single stockholder within five and statin i i aqaresses and contact details ofall knoy.s legal hes” Movee the names, residence tary in view of its special function Tresingle eraeeea eu designate “Romine and an alternate nominee who shall,in the eve’ ’lder’s death or incapacity, take the place of the single The articles of leath soctholder as director and shall manage «n incorporation shall state the nam, rominee and alternate nominee, a in managing the affairs of the op; nominee shall be attached to th, 3€ the corporation’s affairs. SS residence addresses and conta S well as the extent and fi PC (See. 127). Records in Lieu of Meetings. — it shall be sufficient to prepare a written REVIEW QUESTIONS. Define corporation. What are the essential attributes of corporations? % Identify five advantages of a corporation. Identify four disadvantages of a Corporation. 3. Differentiate a stock from a non-stock corporation. 4. Identify the components of a corporation and briefly describe each, 5. Identify the kinds of Corporation as to nationality and purpose: 6. Differentiate a public from a private corporation. 7. What is the purpose of having independent directors in the board? 8. What is an articles of incorporation? State at least seven (7) important provisions included in this instrument. ®. Distinguish par value stock from no-par value stock. 10. Explain the compositions and functions of the basic corporate organizational structure. i What are some of the rights of a shareholder? Define one person corporation. How is it similar and dissimilar with the corporation 88 discussed in question number 1 above? Chapter 5: Basic Considerations | 5-19 bh oor. # = True or False we ~e~ 15. 16. 17. 18. 19. 20. 24. 22, 23. 24, 25. 5-20 | WIN Ballada’s Partnership and. Corporation Account ing 4 with par or no-par Value: rtnership- apart eof corporation nt of a portion of the state, .d not be an incorporator. Preference shares of stock may be issue ‘A corporation can be a general partner I The board of directors shall exercise the cOrPOr A public corporation is one formed for the govern All incorperators are subscribers but a subscriber n° Apartnership can be a corporator in a corporatibn. ig No-par value shares may not be issued without bene rata fans corpora A shareholder in a corporation does not have the rig business or to intervene in the management of the business. , A corporation can come into existence by mere agreement of the parties as in the case of partnerships. ‘A corporation can be held liable for personal i Shareholders may be natural or juridical persons. No-par value shares have a minimum stated value Each of the incorporators of a stock corporation mi least two (2) shares of the share capital of the corporation. The board of directors is responsible for the formulation and implementation of the overall policies for the corporation. Eleemosynary corporations are those organized for public charity. ‘A corporation isan artificial being with a personality separate and apart from its individual shareholders or members. Shares of stock cannot be transferred without the consent of the other shareholders. Shareholders of a corporation elect the board of directors, who in turn appoint the top officers of the corporation. Under the RCCP, at least twenty five percent of authorized share capital must be subscribed and at least twenty-five percent of the total subscription must be paid upon subscription. In no case shall the paid-up capital be less than P5,000. A corporation has continuity of existence which permits the business to continve regardless of changes in ownership or the death of a shareholder. Only natural persons can be incorporators. 3 Any individual shareholder in a corporat * debts incurred by the corporation. poration may personally be held liable for a! Non-stock corporations may, be formed or o educational, professional, cultural, recreational civic service, or similar purposes. ‘ Acorperation is created by agreement of the shareholders ° incorporators (if they continue to be shareholder: corporation. ena indebtedness of a shareholder. of P5.00 per share. ust own or be a subscriber to at rganized for charitable, religious fraternal, literary, scientific, sociah Iders) are corporators of # B. 2. 20 3. 32. 2. 34. B. 36. 31, 38, 39. a 2, 8, 44, 45. 46, 47, 48, 49, all corporations issue shares of stock and are sock corporations have ther share ata edt shores aoe authored a Cs Se eect eho dividends or allotments of the accumulated ‘he president of a corporation must be a incorporators can be artificial beings, Death of a shareholder will not dissolve the corporat preference shares of stock should only be ised as ce val hi oes without par value may be issued for a consideration less than P5.00 per share. The liability of the shareholders for the pa men ‘eh gain obshelt iar: Payment of corporate debts is limited to the A corporation shall have a corporate term of 50 years unless its articles of incorporation states it as of perpetual existence. Any person, partnership, association or corporation, singly or jointly with others but not more than fifteen (15) in number, may organize a corporation for any lawful purpose er purposes. Natural persons who are licensed to practice a profession, and partnerships or associations organized for the purpose of practicing a profession, are allowed to organize as a corporation. Under the old Corporation Code, the minimum number of incorporators was five. Under the RCCP, one person can form a corporation, the one person corporation. Corporations vested with public interest shall have independent directors constituting at least 25% of such board. Foreign corporations are allowed to give donations in aid of any political party or candidate or for purposes of partisan political activity. In the articles of incorporation, the principal place of business must be a specific address within the Philippines. ‘A majority of the incorporators must be residents of the Philippines. The incorporators and the treasurer sign the articles of incorporation. If a corporation. does nat formally organize and commence its business within 3 years from the date of its incorporation, its certificate of incorporation shall be deemed revoked as of the day following the end of the 3-year period: If the corporation is vested with public interest, the board has the option to elect a compliance officer. OPC is a corporation with person, a trust or an estate The OPC has a personality separa the sole shareholder’s liability is al The treasurer who may or may not be ‘the Philippines. The single stockholder sha The single stockholder may be ap! director of the corporation. a single stockholder, who may be a natural or artificial ‘te and distinct from the single stockholder as such iways limited to his investment. ‘a director is not required to be a resident of II be the sole director and president of the OPC. pointed as the corporate secretary of the OPC. Chapter 5: Basic Considerations | 5-21 Multiple Choice 1 because he emi can , ae Aan ordinary or preference shareholder is similar tO lose no more than the value of the investment. . general partner limited partner sole proprietor |. nominal partner peaore stockbroker jetorship and a partnershiy What is the primary disadvantage of both a sole proprietorship ip that a corporation overcomes? a. No access to capital b. Taxing complications ¢. Unlimited liability d._ Ease of start-up e. Lack of secrecy 7 ‘A corporation whose stock can be purchased by anyone and is traded in stock markets is known as a(n) a. government-owned corporation. b. close corporation. ‘ ¢. open corporation. d. not-for-profit corporation. Shares of 1st Global StratDev stock cannot be purchased in any stock exchange or by just any individual. This means that 1st Global StratDev is a(n) a. partnership. b. open corporation. c. family corporation. d. close corporation. When organizing a corporation, the incorporators submit articles of incorporation to a. ajudge. b. the Securities and Exchange Commission. c. the National Bureau of Investigation, d. the Board of Investments. 5-22 | WIN Ballada’s Partnership and Corporation Accounting 10. it ordinary shares carry all the following ri ights except the right to share in profits. ° receive information about the corporation, receive part of the profit before othe attend the annual shareholders! mee of shares, How can the following statement b eb ined: * activities of a corporation"? est explained: "Shareholders control the a. Allsshareholders vote on all th rarity bask 'e major issues and problems that a corporation faces on @ be emcee are intricately involved in the daily operations of a corporation. «SI ari elect ve board of directors, and this board is responsible for appointing corp icers who manage the daily business of the corporation. 4. Shareholders vote for the rembers of the board of directors and this board makes all the daily business decisions for the corporation. e. Shareholders, usually call corporati , ion management and tell executives better ways to run the organization. i 7 The top governing body of a corporation is known as the a. incorporators. b: shareholders. c. management. d. officers. e. board of directors. Corporate officers are elected by shareholders, appointed by the board of directors. appointed by management. elected by incorporators. Which of the following is not a disadvantage of the corporate form of ownership? a. Difficulty of formation b. Limited liability ©. Expense of incorporation and selling stock d. Lack of secrecy the order of difficulty and expense, from most to least, when forming a business organization is as follows: : orship, partnership. corporation, sole propriet 6. corporation, partnership, sole proprietorship. ©. partnership, corporation, sole proprietorship. . 4. partnership, sole proprietorship, partnership. S corporation. sole proprietorship, partnershin, Chapter 5: Basic Considerations | 5-23 PROFESSOR: Multiple Che e one may be elect, der that 1. Which of the following qualifications is necessary in or president of the corporation? He must be a citizen and a resident of the Philippines: He must be a director of the corporation. rporation, He must not be a shareholder or director of a competitor corps He must not be a president of any other corporation. All of the above. peaoge 2. Itis the supreme authority in matters of management of the regular and busines, affairs of a corporation. board of directors majority shareholders minority shareholders none of the above aooe 3. The following are the steps in the creation and organization of a corporation except a. incorporation. b. promotion. ¢. formal organization and commencement of business operations. d. none of the above. 4, The par value of ordinary shares is equal to the amount received by the corporation when the share was originally issued. a. b. the amount at which the share is currently trading in an organized market ©. adesignated peso amount per share established in the articles of incorporation d._ the book value of the ordinary shares. 5. The arbitrary value assigned to a share of stock is called a, market value. b. par value. c. liquidation value. d, book value. 6. Right of the corporation to continue’as a juridical entity for the period stated in th Articles of Incorporation despite the death of any shareholder: a. right of succession ¢. right of existence b. right of pre-emption d. none of the above 5-24 | WIN Ballada’s Partnership and Corporation Accounting jirectors of a corpor; 7, thed Poration are responsible for 10. 1, R, declaring dividends, maintaining shareholder records. the day to day managing of the business preparation of accounting records and financial statements, aoge corporation has the following attributes except an artificial being with a pers created by operation of law enjoys the right of succession has the powers, attributes a incident to its existence, e. none of the above Onality separate and apart from its shareholders eoce The owners of shares in a stock corporation are called a. incorporators. b. promoters. ¢. members. d. shareholders. - Refers to an equitable right of shareholders to subscribe to newly issued shares of the corporation in proportion to their present shares in order to maintain their equity in their surplus as well as proportionate standing in the corporation. right of redemption pre-emptive right c right to be sued concept of corporate entity pe oe The advantage of a corporation from a partnership is 2. The death of a shareholder will not dissolve the corporation because of its power of succession. Its management is centralized on the board of directors. b. ¢. Shareholders have limited liability. d. Shareholders are not general agents of the business. e. all of the above The most powerful person in a corporation is the . incorporator. president. vice-president. chairman of the board. Chapter 5: Basic Considerations | 5-25 of Incorporation origin, atories thereof are cajgy articles 13. The shareholders or members mentioned in a are sign: forming and composing the corporation and wi incorporators. corporators promoters. subscribers. poo ‘ te form of organizatioy 14. One of the following is not a characteristic of the corpora uh a. limited liability of shareholders b. mutual agency ¢. continuous existence d. centralized authority 15. The ordinary stock of the corporation entitling the owner to prosrata) dividends without any priority over ahy other shareholders but equally with all other shareholders except preference shareholders is a. preference share, b. guaranteed share. c.- convertible share. d. ordinary share. 16. One who has agreed to take shares from the corporation on the original issue of such share is called a. incorporator. b. member. c. promoter. d. subscriber. e. none of the above 17. No par value shares cannot be issued a., for less than P5.00. b. with preference as to assets or as to dividends. c. without being fully paid. d._by banks, trust, insurance and preneed companies, public utilities, building and loan associations and other corporations obtaining funds from the publ all of the above. me Puc © 18. Which of the following is a disadvantage of the Corporate form of business? a, Corporations lack mutual agency, b, There is a greater degree of government Control and su; isi c. Ownership shares can be easily transferred, pervision: d. Owners’ liability is limited, 5-26 | WIN Ballada’s Partnership and Corporation Accounting Acc OUNTING FoR CORPORATIONS Share Capital earning Objectives: aiter studying this chapter, you should be able to: Identify the basic com; ponents of sh: 5 Explain the characteristics of the cae an Distinguish the terms related to share copieg i a Differentiate par value from no-par valu 4 re Tht le shares. Recor are issuances for cash. Illustrate the share Clasify end onde Process including delinquency sale. Safe tha mie 'e features of the types of share-based payments. € measurement rules for equity-settled share-based payment transactions. 9. Illustrate share-based payments to non-employees and to employees. 10. Record share capital authorization and issuance using the journal and the memorandum entry methods. 11. Define treasury stock. 12. Record purchase, reissuance and retirement of treasury stocks. 13. Show the treatment of donated capital. 14, Identify and discuss the other share capital transactions. PN OV eenE A corporation that has produced such renowned successes as,the Model T, Mustang, Taurus, F150, Lynx, Galaxy, Chateau, Expedition and Explorer, and such a dismal failure as the Edsel, would have some interesting tales to tell. Henry Ford was 2 defiant Vsionary from the day Ford Motor Company was formed in 1903. His goal from day 1 vias to design a car he could mass-produce and sell at,a price that was affordable to the masses, He accomplished this goal, and by 1920, 60% of all vehicles on American road were Fords. between him'and success. In the early finance the corporation’s exponential nance expansion, the corporation The shareholders sued, Henry did not see things his way, he Henry Ford was intolerant of anything that stnod Years, Ford issued shares to the public in order *9 funds to fit ee cided that, to retain Saale aise tt to its shareholders. would skip a dividend. paymen | Ford's reaction was swift and direct: if the shareholder urchased 100% of the OUtstandi, Y ” It was over 35 years befogt e would get rid of them. in 1919, the Ford ta ane. shares of Ford; thus, eliminating any outside “inter shares were again issued to the public. ars while at the same tim, ration Henry p,, publicly tradeq ford Ford Motor Company has continued to evolve over the VEE Wr Sometimes has appeared to become even more like shares of Originally dreamed of. Today, there are nearly a billion s ot even @ member of shares outstanding, The President and Chief Executive is the Ford family. eit However, the Ford family still retains a significant stake in od een ee Henry Ford might have supported, top management decide ivent, father me making—that is, to have more key decisions made by top manage! yah than by division managers. Moreover, reminiscent of Henry Ford’s most a fe car, the corporation is attempting to make a global car—a mass-produced car that can be soiy around the wold with only minor changes. Why did Henry Ford originally choose to form a corporation” rather than a soe Proprietorship? Why did Ford Motor Company purchase all of its outstanding shares? What advantages and disadvantages of being organized as a corporation are illustrated by Ford? OVERVIEW Generally, the type of business, organization—sole proprietorship, partnership or corporation, does not affect the asset and liability sections of the statement of financial Position. The only difference is in the owners’ equity sections. Sole proprietorships and Partnerships use capital accounts and ultimately combine the owners’ contributions and accumulated earnings. Corporations separately report contributed capital and accumulated profits in accordance with some legal provisions. The owners’ equity section of a corporatio n’s statement of financial position is called shareholders’ equity. Shareholders’ equity has two major components—share capital (contributed or paic 2 result of investment By shareholders, donations or other sharé capital transactions, Retained earnings (or accumulated Profits or losses) is the amount of capital accumulated and retained through the profitable operations of the business. The Philippine Accounting Standards (PAS) has adopted the terminology used in the International Accounting Standards, 6-2 | WIN Ballada’s Partnership and Corporotion Accounting ro ing is the shareholders’ re follow! 1B lers’ equity section of a statement of financial position: Shareholders’ Equity share Capital preference Shares—P50 par, 1,000 sh: issued and outstanding shares authorized, ordinary Shares—P5 par, 30,000 sh; , 30,000 share: 20,000 shares issued and outstanding aaa share Premium—Ordinary Total Share Capital Retained Earnings Total Shareholders’ Equity SHARE CAPITAL itis the shares to be subscribed and paid in or secured to be paid in by the shareholders, aither in money, Property or services, at the time of organization of the corporation or zfterwards, and upon which if is to conduct its operations. The share, contributed or paidin capital is further divided into the following: Legal Capital. Capital contributed by shareholders comes. from the sale of shares of stock. The shares of stock issued are generally referred to as share capital. Lege! capital js that portion ‘of the contributed capital or the minimum amount of paid-in capital, wihich must remain in the corporation for the protection of corporate creditors. The amount of legal capital is determined as follows: : In case of par value shares, legal capital is the aggregate par value of all issued and subscribed shares. Incase of no-par shares, legal capital isthe total consideration recelved by the corporastot for the issuance of its shares to the, shareholders including ‘the excess of issue price over the stated value (Sec. 6, RCP). Share Premium (or Additional Paid-in Capital). It is the portion of the paid-in capital representing amounts paid by shareholders in excess of par. It may also result from transactions involving treasury stocks, retirement of shares, donated capital, share dividends and any other “gain” on the corporation's own stock transactions. TWO BASIC TYPES OF SHARES : : fed into transferable shares of stock. ‘A share of stock represents ation and is evidenced by a certificate of Share capital is divid the interest or ight of a shareholder in a corporé ; | types of ownership shares in a corporation. asic types of share capital: stock. Share capital includes a Shareholders acquire either of the following Chapter 6: Share Capital | 6-3 Oretinary Share. This share represents the basic ownership ass Ordinary shan, | When only one class of share is issued, it must be ordinary SES ape | the entity's residual equity dvantages over o-. “Preference Share, This share gives its owners certain receipt of dividend 29 shareholders. These special benefits relate either to the re nS Whe dividends) oF to pyr declared before the ordinary shareholders (preferred - es, Siancel © rir claims on assets in the event of corporate liquidation (pr class of the corpo TERMS RELATED TO SHARE CAPITAL Authorized Share Capital. The number of authorized shares Die the maximum, number of shares the corporation can issue as specified in the article o incorporation This maximum number of shares when multiplied by the par value of the share will yieg the authorized share capital. Note that any increase or decrease in the authorized share capital requires prior approval of the SEC and formal amendment to the articles of: incorporation. |ssued Share Capital. These are shares which have been sold and paid for in full 'ssueg shares may include treasury shares. Share Capital, either Ordinary Shares account of Preference Shares account, is credited for the total par value of fully collected subscriptions or in the case of no-par value shares, for the total consideration received in relation to the issue. Share Capital is debited only when the issued shares are retired, redeemed or canceled by the corporation. Subscribed Share Capital. It is the portion of the authorized share capital that has been Subscribed but not yet fully paid. This shareholders’ equity account is credited for the total par value of the shares subscribed and debited for the total par value of the fully collected subscriptions. : Outstanding Share Capital. These are issued shares, which are in the hands of the shareholders. The number of outstanding shares will equal the difference between the issued shares and the treasury shares, Treasury Stock. These are issued shares acquired by the corporation but not retired and are therefore, awaiting to be reissued at a later date. ACCOUNTING FOR ISSUANCE OF ‘SHARE CAPITAL The entry to record the issuance of share capital depends on whether the stock is with or without par value, 6-4 | WIN Ballada’s Partnership and Corporation Accounting when shares without share capital account. 1f th e No Procee overstated value may ait MP2" stock ee : ‘ds should be credited to the "natively be credited t, es value, the excess proceeds '0 share premium, jon 64 of the RCCP it section Prohibits the of ‘einal is onsideration less than the par Sue of share capi a the par value of thee chi Stated value (ie, cerita (or capital stock) for a f tered in the sh; ital tet Value, ft Sane Sores fobe en © share capital account. ™e*elv indicates the amount per share re capital may be issued i share capi y ‘Sued in exchange for any of the following considerations: Actual cash paid to the corporation; Tangible or intangible properties Labor already performed for Previously incurred indebted, 1 2 Actually received by the corporation; 4 5. Amounts transferred from u 6. 7. 8 neg, ices actualy rendered to the corporation; ness by the corporation; inrestricted retai it Outstanding shares exchang. ined earnings to stated capital; fed for stocks in the event of i Shares of stock in another corporation; and/or feegen ee Other generally accepted form of consideration (See. 61 RCP). underwrite a share issue which means that the banker agrees to buy the shares of the corporation and to sell them to investors. The corporation considers the shares as sold because the underwriter will buy the shares that he is not able to sell, The underwriter bears this risk in return for gains from selling the shares at a price higher than that paid tothe corporation. An investment banker who is not willing to underwrite may handle a share issue on a best efforts basis. ‘In this case, the banker undertakes to sell as many shares as possible at a set price but the corporation-bears the risk on unsold shares. Share issue costs can be quite substantial given the work involved. _The costs include costs associated with preparing, printing and filing the relevant documentation and Marketing the share issue. Various experts are consulted to ensure a successful issue. Accounting for share issue costs is covered in paragraph 37 of International Accounting Standards (IAS) No. 32, Financial Instruments: Presentation: s various costs in issuing or acquiring its own equity instruments. Those costs might include registration and other regulatory fees, amounts paid to legal, se cos i i \d stamp dutigs. The advisers, printing costs anc P peedeiccueneaed a acter are accounted for as a deduction from equity « janmaction costs of 80 oe Pena to the extent they are incremental costs directly {eet ane reas at transaction that otherwise would ave been eid, The stab he cat a vets abandoned are recognized as an expense. costs of an equity ‘An entity typically incurs Chapter 6: Share Capital | 6-5 4 pic), the costs of listing shares in the Sy ( “wequity transaction” since no cain re recognized 85 an expense road show presentation, big Per Philippine Interpretations Committee Market are not considered as costs of an instrument has been issued and, hence, such costs 3 Profit or loss when incurred, They are as follows: relations consultant's fees, and stock exchange listing fees- intly tO MOre than op, relate joi Per IAS 32, paragraph 38, transaction costs that ime shares and a0 ing of so transaction (for example, costs of a concurrent offeri eae conskitane exchange listing of other shares) should be allocated on rofessional advice relat) fe Examples of joint costs are as follows: Audit and other p' snd soluotion repae® prospectus, opinion of counsel, tax opinion, fairness opinion 7 and prospectus design and printing. SHARE ISSUANCES FOR CASH . Most share issues are for cash since the primary reason for issuing hares is to raise | capital for a corporation’s operating activities. The entries to recor: " issuance of | shares for cash will depend on whether the share is with or without par value. With Par Value Issuing Share Capital at Par Illustration. Narsan Holdings is authorized to issue P1,000,000 ordinary shares divided into 10,000 shares, with a par value of P100 per share. The diversified corporation issued on cash basis 2,000 shares at par. The share issuance entry will be Cash 200,000 Ordinary Shares 200,000 The amount of P200,000 invested in the corporation is called paid-in capital or Contributed capital. The credit to Ordinary Shares increases the share capital of the corporation. Issuing Share Capital Above Par Mlustration. Suppose the 2,000 shares were sold at P150 per share, the entry follows Cash 300,000 Ordinary Shares 200,000 Share Premium, 100,000 This sale of shares increases the corporation’s contri the shares with par value are sold, the proceeds s| Shiares account to the extent of the par value—in thi be reflected in the Share Premium account, The exes ibuted capital by P300,000. When hould be credited to the Ordinary S case, P200,000; with any excess to 85 Of P100,000 is not a “gain”. The 6-6 | WIN Ballada’s Partnershio and Corporation Accounting ral poration can neither earn Fa 8 profit nop ares orn its shareholders, . 3 ine “r2 loss when it issues shares to or acquires Without Par’ Vi 1g No-Par Share Capital ewe Isst tion. Morning Star Traye| usta 'Sa domestic izing tour packages for a Reitnie om is located at . Bom, sum Te PEA Visitors to the Philippines, The entity a spat areiiary shares, 5 000 sae has two classes of shares—preference shares tprecord the issue of these No-par shares wl a Sa agnor ion engaged in the business of Cash Ordinary Shares 85,000 value are sold \

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