SHAREHOLDERS’ EQUITY (PART 1) Shareholders’ Equity — residual interest in the assets of 2 corporation after deducting all its liabilities. Transactions affecting corporation's equity: a. Authorization, subscription, issuance, acquisition, reissuance, and retirement of shares b. Origination of other equity instruments, such as share options, detachable warrants, and equity component of compound financial instruments. ©. Distribution to owners (dividends) d. Transactions giving rise to “other components of equity” e. Recapitalization and Quasi-reorganization Accounting for Share Capital 1. Memorandum Method -made only for authorized capitalization. Subsequent issuances of shares ate credited to the share capital account. 2. Journal Entry Method - authorized tion is recorded by crediting ‘authorized share capital” end dabiting ‘unissued share capital”. Subsequent issuances of shares are credited to “unissued share capital’. (difference between the two — issued share capital). ‘Subscribed SC ‘Subscribed SC Subscription — contract between purchaser of shares and issuer in which the former promises to buy shares from the latter. ‘Subscription Receivable — unpaid portion of the subscription price. (Deduction from the related subscribed share capital) Subscribed Share Capital - authorized share capital that is subscribed but not yet issued. Collection of subscription receivable & Issuance of Shares Memorandum. Journal Entry Cash Cash Subscription Rec. Subscription Rec. Subscribed SC Subscribed SC Share Capital Unissued SC Share Capital - portion of the authorized share capital that is already issued. Share Certificate - document that evidences the ‘ownership of a share. Note: Under Corporation Code, shares are Issued to subscribers only upon full payment of the ‘subscription price. Issuance of shares in exchange of promissory notes or future services are prohibited. Cash Subscription Authadzed Capitalization Memorandum Journal Entry Memorandum Journal Entny Cash Cash The authorized | Unissued SC Share Capital Unissued Share Capital capitalization is Authorized SC See cain car GIS Memorandum Journal Entry shares with par value pershawoot_ ‘Share Capital xx | Authorized SC xx s Subscribed sc | Unissued sc x (x) Authorized Share Capital — maximum number of | Subscribed ——-Ree.| issued Share Capita shares that can be subscribed and issued to | Xx xx shareholders Total Share Capital xx | Subscribed sc x Unissued Share Capital - authorized share capital Subscription Ree. not yet issued and is still available for eubscription bo) and issuance. Total Share Capital xx Subscription Memorandum, Journal Entry Cash Cash Subscription Rec. Subscription Rec. Classes of Shares a. Ordinary Share Capital (Common Stock) Scanned with CamScanner- Residual corporele inlerest thal bears ultimate risk of lost and receives benefit of success - Guaranteed neither dividends nor assets upon dissolution Four basic rights of ordinary shareholders: 1. Right to attend and vote in shareholders’ meetings 2. Right to purchase additional shares (preemptive right or stock right) 3. Right to share in the corporates profits (dividends) 4. Right to share in the net assets upon liquidation b. Preference Share Capital (Preferred Stock) + Give holders certain preferences over other shareholders. + Include priority claims over (a) Dividends and/or (b) net assets in the event of liquidation Share Premium (additional paid-in-capital) a. Excess of subscription price over par value or stated value b. Excess of reissuance price over cost of treasury shares issued ¢. Distribution of “small” stock dividends Note: ‘Share Capital’ and ‘Subscribed Share Capital are credited at par value regardless of the subscription price. Share Capital xx Subscribed Share Capital xx Subscription Receivable (xx) Share Premium xx Tota! Contributed Capital xx Par value and No-par value shares Par velue = share with a peso value fixed in the articles of incorporation. = Cannot be issued below its par value (appears on each share certificate issued) No-par value = Share without a peso value fixed in the articles of incorporation + Ithas stated value (Indicated in the articles of incorporation but not on the share cert issued). = Should not be issued for a consideration less than five (P5) pesos per share. Note: Preference shares should only be issued as par value shares. Legal Capital ~ Cannot be distributed to the owners during the lifetime of the corporation unless it is dissolved and all labilities are settled first. = Based on the trust fund doctrine = Computation: a. Par value shares Aggregate par_value of shares issued and subscribed. b. No-par value shares Total consideration (inclusive of any amount excess of stated value) received or receivable from shares issued or subscribed. Share Issuance Cost + Deducted from any resulting share premium from the issuance. if share premium is insufficient, the excess is charged to retained eamings. issued at discount - Shares issued below par or staied value + Shareholder concemed it held liable (discount liability) to the corporation for the discount; otherwise, deemed illegal. + Discount on share capital is a receivable from the shareholder concemed but presented in the fs as contra-equity account (deduction from shareholders’ equity). = Prohibited only on original issuance. Thus, treasury shares may be reissued below par or stated value. Cash x Discount on share capital xx Share Capital xx Watered Stocks = Shares issued for non-cash consideration with fair value that is below par or stated value. - Both shareholders concemed and the director or officer consenting the issuance are held liable for the discount iability. Land > Discount on share capital xx Scanned with CamScannerShare Capital x Secret Reserve = Arises when shares ate issued for non- cash consideration with fair value that is above_par or stated value. It understates assets and equity. ‘Treasury Shares = Eniity’s own shares that were previously issued but are subsequently reacquired but not retired. (Allowed oniy if it has sufficient unrestricted retained eamings). Accounting for Treasury Shares Accounted using the cost method (the reacquisition and subsequent reissuance of treasury shares are recorded at cost) = Presented 23 deduction in the shareholders’ equity Reacquisition Treasury Shares wo Cash wx Retained Earnings - unrestricted 0x Retained Eamings - appropriated xx Reissuance at cost Cash wo Treasury Shares x Relained Earnings - appropriated > Retained Eamings —unrestricied xx Reissuance at more than cost Cash XX Treasury Shares, x Share Premium-Treasury Shares xx Retained Earnings - unrestricted xx Retained Earnings ~ appropriated xx General Rufe: Transactions with owners clo not give fise to income or expense. “No gain ot loss shall be recognized in profit or loss on the purchase, sale, issue or cancellation of an entity's own equity instruments.” Reissuance at below cost Cash xx (a) Share Premium-Treasury Shares xx (b) Retained Earnings xx Treasury Shares x Retained Eamings - unrestricted xx Retained Eamings - appropriated xx Note: Treasury Shares subsequenty reissued at below the reacquisition cost, the excess of the cost over the issuance price is debited to the following order of priority. ‘a. Share premium — treasury shares b. Retained Eamings Effects: © Reacquisition of {resury shares is a decrease in to‘al shareholders’ equity equal lo the cost of the reacquired treasury shares. + Reissuance of treasury shares is an increase in total shereholders’ equity equal to tho relssuance price. Retirement of Shares = Relired if they have been reacquited and canceled in accordance with SEC regulations. + Refired shares cannot be reissued anymore unlike treasury shares, + Tolal par value and the ‘elated sharo promium of the retired shares are removed from the books of accounts. Difference is accounted for as follows: 1. Par value and related share premium of the retired shares exceed the retirement cost, the difference is credited fo “Share Premium — Retirement”, Share Capital xx Share Premium — Orginal Issuance xx Treasury Shares x ‘Share Premium retirement xx 2. Per value and related share premium of the retired shares are fess than the fetirement cost, the difference is debited to the following in the order of priority: @. Share Premium — Treasury Sharos b. Retained Earnings Share Capital xx Share Premium — Original Issuance xx (a)Share Premlum -Treasury Sh. xx Scanned with CamScanner(t)Retained Eamings (bal. figure} »x Cash xx Note: When shares are reacquired and immediately retired, there is no need to set up a treasury account. Par value and related share premium of the retired shares are immediately debited, with a corresponding credit to “Cash’. Par value method of accounting for Treasury Shares (not acceptable for financial reporting) = Reacquired Treasury Shares are accounted for as if they are retired. quent Subse = Subscription remeins unpaid! at a due date set by the enlity’s board of directors: the subscriber is declared delinquent. After 30 days but not exceeding 60 days from the date of shares are declared delinquent, the delinquent shares ere sold at a public auetion to the highest bidder (person who is willing to pay the “offer price” for the smallest number of shares. = Offer Price: a. Unpaid balance on the subscription b. Interest accrued on the subscription . Expenses in public auction, such as advertising and other selling cost. Receipt of Subscription Subscription Receivable x ‘Subscribed Share Capital Share Premium Caltection of Subscription Cash ‘Subscription Receivable x Expenditures on the public auction Due from the highest bidder cd Cash « Becaipt of payment for the offer price Cash 2X Subscription Receivable 1 Due from the highest bidder wx Interest income * tssuance of Shares Subscribed Share Capital > Share Capital xx No Bidders at the Public Auction = Corporation may, subject to the provisions of the Code, bid for the delinquent shares and shall be credited as paid in full in the books of the corporation. Title to aif the shares shall be vested in the corporation as treasury shares. = If there are no bidders, the corporaton may. if it has sufficient unrestricted retained earnings, bid for the shares and hold them. as treasury shares. The subscriber (delinquent) shall be released from its liability regarding the unpaid subscription but will not be entitled for any shares in kis subscription. Record the Expenditures in public auction Due from the highest bidder x Cash Xx Record the acquisition of delinquent_subscription as treasury shares Treasury Shares xx Subscription Receivable Xx Due from the highest bidder xx Record the appropriation_of retained _earnings for the treasury shares acquired Retained Earnings —unrastricted 1x Retained Earnings - appropriated xx R pani of paid ‘Subscribed Share Capital * Share Capital xx No Bidders and the corporation has insufficient Retained Earnings ~ Subscription is cancelled in its entirety. Due from the highest bidder x Cash x Recognized the expenditures made on abandoned equity transaction as expense Expenses on delinquent sale xx Due from the highest bidder x Scanned with CamScannercognized_the equity accounts _on_the abandoned equity transaction ‘Share Premium x ‘Subscribed Share Capital * Subscription Receivable xx Share Premium — Delinquent Subscription xx Note: Cost of an equity transaction that is abandoned are recognized as an expense. Sale of different classes of share capital 1. Proportional Method ~ fair value of all classes of share capital issued are determinable, the lump sum price is allocated to the classes of share capital issued based on their relative fair vaiues. 2. Incremental Method - only one class of shares has a determinable fair value, such class is assigned its fair value and the excess of the lump sum price is assigned to the other class of shares that does not have 2 determinable fair value, ‘Redeemabie Callable Preference Preference Shares Shares = Preferred > Preferred stocks which stocks — which the holder has the issuer has the right to the right to call redeem al a set ata set date. date - Classified as + Classified as equity financial instrument Habitity because the because when right to call is at the holder the description exercises its of the issuer right to redeem, and therefore the issuer is has no mandatorily obligation to obligated to poy unless it pay for the chooses 10 call redemption on the shares. price. Gallable Preference Shares Cash xx Preference Share Capital x ‘Share Premium — Preference Share xx Preference Shares_subsequently called in for redemption above por Preference Share Capital xx ‘Share Premium — Preference Share x Retained Earnings x Cash ~* Preference_Shares_ subsequently _called_in_for odomption balow par Preference Share Capital xx ‘Share Premium = Preference Share xx Cash >*x ‘Share Premium — redemption > Origination of other equity instruments 1. Stock Rights 2. Conversion options included in convertible bonds and convertible preference shares 3. Detachable warrants issued with bonds and preference shares 4, Stock Options Stock Rights = Issued to existing ordinary shareholders in relation to their pro-emptive rights. ~ Enable existing shareholders to protect their current ownership interest by acquiring new shares (at a price lower than the shares’ market value) issued by the corporation before such offers are offered to new investors. = Evidenced by share warrants (certiticates that entitle the holder thereof to acquire shares at a cerlain price within a stated period). Issued in conjunction with the ff: a. Issuance of stock rights In relation to shareholders’ right of preemption. b. Issuance of detachable warrants with other securities as “sweetener” or “equity kicker” to make the principal instrument more attractive to investors. ©, Issuance of share options to employees as additional compensation. Note: Share warrants are exeroszble only within a definite period of time and shall expire thereafter. Share warrants issued for stock rights normally have a shorter duration compared to share warrants issued with other securities. Accounting for Stock Rights - Recorded through memo entry only because stock rights are Issued to existing shareholders without consideration. Scanned with CamScanner= Entry is made only when the rights are exercised or recalled. If the stock righls are subsequently racalled, any consideration paid is debited to share premium. No entry is made if the stock rights expire but not recalled. Stock Rights are issued Cash x Ordinary Share Capital x Share Premium — Ordinary Share 2 Stock Rights were recelled Share Premium — Ordinary Share xx Cash x ‘Stock Rights expires but not recalled Memo Entry Convertible Bonds (components are segregated and accounted separately) (1) Financial Liability for the bonds (2) Equity instrument for the conversion feature Preference Shares convertible to ordinary_shares {no separate accounting is required upon issuance because both the principal instrument (PS) and the conversion option is presented in SHE. (") Equity instrument, but of different classes Bonds with detachable warrants = The entity has in effectissued a compound instrument having two components (segregated and accounted for seperately) (1) Financial liability for bonds (2) Equity instrument for the detachable warrants. Preference Shares with detachable warrants = Delachable warrants are capable of being transferred or sold separately = Issue price should be allocated to the preference shares and the detachable warrants based on their relative (air values on issuance date, > When both preference shares and the warrants do not have avaliable fait values, the allocation of the ssue price is besed on the intrinsic value of the warrants computed as the difference between the fair value of the ordinary Shares and the subscription price. Donated Capital + Gifts received by the corporation from nonreciprocal transactions. (1) Donations from shareholders - credited to share premium (2) Donations from the government — recognized as govemment grants. (8) Donations from other sources — recognized as income when (a) conditions attached to the donation are fullilled or are reasonably expected to be fulfiled, (b) donation becomes receivable, and (c) criteria for asset recognition are met. Cash — amount of cash Noncash Assets ~ fair value Entity's own shares — initially recorded through memo entry. Donated capital 's recognized only when the donated shares are subsequent reissued. Assessment on shareholders = Shareholders of financially troubled corporation may vote to provide additional capital based on their respective shareholdings. The assessment or additional capital providec is credited to share premium. Cash or Assessment Rec. xx Share Premium —Assessment xx Scanned with CamScannerSHAREHOLDERS’ EQUITY (PART 2) Retained Eamings — cumulative profits (aet of losses, distribution to owners, and other adjustments) which are retained in the business and not yet distributed to shareholders. (a) Unrestricted - available for future distribution to the shareholders (b) Appropriated (Restricted) — not available for distribution unless the restriction is. subsequently reversed, Appropriation may be a result of 1. Legal Requirement — for the cost of treasury shares reacquired and those transferred to statutory reserves. 2. Contractual Requirement — in compliance with loan agreements or bond indentures for the protection of creditors. 3. Voluntary — for probable cor business expansion, and the like. encies, Negative Balances in Equity (1) RE account has Negative Balance (dr) — deficit (2) Total SHE has a_ negative balance (Liablities exceed assets) - capital deficiency Dividends (1) Cash Dividends — form of cash (2) Property Dividends — noncash assets (3) Share Dividends - entity's own shares May be declared : a. Out of unrestricted retained eamings (return ‘on capital); or b. Out of capital (retum of capital) Dates relevant to the accounting for dividends fa) Date of declaration — BOD formally announces the distribution of dividends (©) Date of record — only those who are listed as of this date shall be entitled to receive dividends. No entry is made on this date, except when there are adjustments to the initially recognized amount of dividends on the date of declaration. (6) Date of distribution Recognition of lability for dividends = When the dividend is appropriately authorized and is no longer at the discretion of the entity, which is: a. Date when the dividend declared by management is approved by a relevant authority, if further approval is required, or b. Date when management declared dividends, further approval is not required. Accounting for cash dividends = Only outstanding shares are entited to dividends. Shares Issued ‘Shares subscribed Treasury Shares Outstanding Shares BERR Date of declaration x Date of Record (no entry) Date of Distribution Cash Dividends Payable Pd Cash ~ Accounting for property dividends a. Property dividends payable is initially measured at the fair value of the non-cash assets at date of declaration. b. At the end of eech reporting period and also on the settlement date, the property dividends payable is adjusted for changes in fair value. (gain or loss, directly in retained eamings). c. On settlement (distribution) date, difference between the CA of the dividends payable Scanned with CamScannerand the asset distrbuted is recognized in profit or foss. Accounting for non-cash assets declared as property dividends Non current - lower of its canying amount and fair value less cost to distribute FVLCD> CA-loss Subsequent increase of FVLCD recognized as gain but only to the extent of the cumulative Jossos recognized in provious periods. Accounting for Share Dividends a, Small - less than 20% of the outstanding shares, share dividends are accounted for at fair value. Retained earnings is debited for the fair value of the share dividends on declaration date. Difference between FV and par value is credited to share premium. b. Large - 20% or more of the oulstancing shares, shares ere accounted for at par value. Retained eamings |s debited for the par value. No share premium arises. \sury Shares declared as dividends ~ Cost method is used. Retained samings Is debited for the cost of the treasury shares declared. No share premium arises. = Accounting for “smal” or “large” share dividends do not apply. Fractional Shares Corporations may: 1, \ssue fractional share rights (evidenced by share warrants) and give the holders thereof ample time to accumulate sufficient warrants for a full share. 2. Pay cash in leu of fractional share rights but only if the share divicends were declared out of retained eamings. = Accounted for at fair value. Preference Shares 4. Preference in the distibution of assets in case of corporate liquidation (preferred as 10 assets) 2, Preference in the distribution of dividends {prolorred as to dividends). Preference over dividends 1, Noncumulative ~ dividend entitlement for a year is forfeited when dividends are not declared in that year. 2. Cumulative — dividend entitlement accumulates each year until paid, Accumulated unpaid dividends are disciosed as dividends in arrears but not accrued as liability unless the dividends are declared. 3. Nonparticipating - entitled only to fixed amount of dividends. 4. Participating — entitled to an amount ia excess of the fixed amount of dividends. Amount of participation is computed after both the preference and ordinary shares are allocated their basic dividends. Basic dividends of ordinary shareholders is, equal to the aggregate par value of the outstanding ordinary shares mullipliod by the preference shares. If thare is more than one class of preference shares with different reference shares, the Jowest preference rate is used to compute for the basic dividends of ordinary shareholders, a. Fully Participating — pro rata basis b. Partially Participating ~ certain amount or percentage. Dividend entitlement of preference shares may be expressed as: a. Percentage of par value b. Specific monetary amount per share. Dividends recognized as expense Dividends declared on equity instruments are charged to retained eamings. However, dividends declared on financial abilities such as redeemable preference shares, ate charged to profit or loss as interest expense, Liquidating Dividends Dividends doclared out of capital. The wasting asset doctrine permits wasting asset corporations to deciare dividends out of capital during their existence. Scanned with CamScannerDisclosure of dividends Disclose either in the statement of changes in equity or in the notes, Events after the reporting period Not recognized as a liability at the end of the reporting period because no obligation exists at that time. The dividends are disclosed only in the notes. Recapitalization Change in the capital structure of an entity brought about by the cancellation of old shares and Issuance of new shares as replacement. ‘Accomplished through any of the ff: ‘a. Change from par to no-par, or vice versa b. Reduction of par value or stated value ¢. Share splits or reverse splits Note: Recapitalization does not affect assets, liabilities, or total SHE. Share Split (recorded only through memo entry) 1. Splitup or share spl Old shares are cancelled and replaced by a farger number of new shares but with a reduced par value (stated value) per share. 2. Spiltdown or reverse share split Old shares aro cancelled and replaced by a smaller number of new shares but with an increased par value {stated value) pet share. Quasi-reorganization Accounting procedure whereby a financially troubled organization, but with favorable future prospects, is permitted, bul not required, to revelue its assets and liabilities, and realign its equity, subject to the provisions of relevant regulations, in order to establish a “fresh start” in accounting sense. (1) Revaluation of PPE; andfor (2) Recapitalization Scanned with CamScanner