Professional Documents
Culture Documents
Liabilities vs Equity
Liabilities - claims against assets from creditors
Equity - claims against assets from owners
POV: issuer Liabilities Equity
Obligation to pay cash/other assets Yes No
Liquidation Priority Residual
Changes in fair value May be recognized Not recognized
Returns Interest (P/L) Dividends (equity)
Subscription of Shares
Date of subscription:
Cash (for downpayment) xx
Subscription Receivable xx
Subscribed Share Capital (at par) xx
Share Premium xx
Collection (partial):
Cash xx
Subscribed Receivable xx
Upon full payment:
Cash xx
Subscribed Receivable xx
Retirement of Shares
- Immediate retirement (no issuance of shares)
- Effect: decrease in total SHE
Retirement price < par value: difference is credited to Share Premium
Share Capital (at par) xx
Cash (retirement price) xx
Share Premium xx
Retirement price > par value: in hierarchy (1) Share Premium from original issuance related to retired shares (2)
retained earnings
Share Capital (at par) xx
Share Premium from issuance xx
Retained earnings xx
Cash (retirement price) xx
Treasury Shares
- Measured at cost (will be reissued)
- Remaining amount is subject to appropriation
Issue price > cost: difference is credited to Share Premium – Treasury
Cash (issue price) xx
Treasury shares (at cost) xx
Share Premium – Treasury xx
Issue price < cost: difference in hierarchy (1) Balance of SP-treasury (if any) (2) Retained Earnings
Cash (issue price) xx
SP-treasury xx
Retained earnings xx
Treasury shares (at cost) xx
Retained Earnings – total net profits less total dividends (accumulated profits)
Deficit – excessive losses (accumulated losses)
Components:
1. Unappropriated – free to distribute
Unappropriated Retained Earnings
Loss Beginning Balance
Dividends Profit
Direct transfers of OCI-losses Direct transfers of OCI-gains
Charges from retired shares Decrease in appropriation
Increase in appropriation Prior period errors
Prior period errors
Ending balance
2. Appropriated – restricted
a. Legal – remaining cost of unsold treasury shares
- Amount of deficit wiped out in quasi-reorganization
b. Contractual – loan covenants
c. Voluntary – decision of the entity; examples – self-insurance, contingencies, capital expenditures
Appropriated Retained Earnings
Decrease in appropriation Beginning Balance
Ending balance Increase in appropriation
Accounting of Dividends
Dividends – generally, limited to unappropriated RE
Types of Dividends
1. Cash Dividends – in the form of cash; most common; return on investment
Ordinary shares – dividend per share
Total dividends = dividend per share x outstanding shares
Outstanding shares = (issued shares – treasury shares) + subscribed shares
Preference shares - % of par value of outstanding shares
a. Cumulative – unpaid dividends from prior years can be paid in the succeeding years
b. Participating – additional dividends
c. Noncumulative & nonparticipating (if silent) –
Date of declaration:
Retained earnings xx
Cash Dividend Payable xx
Date of record: memo entry
Date of payment:
Cash Dividend Payable xx
Cash xx
2. Property Dividends – in the form of noncash assets; least common; return on investment
Property Dividend Payable – recorded at FV of the noncash asset on the date of declaration; updated with
changes in FV of the noncash assets until the date of payment
Increase in FV: Retained earnings xx
Property Dividend Payable xx
Decrease in FV: Property Dividend Payable xx
Retained earnings xx
Noncash Asset to be distributed – generally, recorded at lower of carrying amount and FV less costs to distribute
Date of settlement:
If payable > CA of asset – gain
If payable < CA of asset – loss
Property Dividend Payable xx
Loss on settlement xx
Noncash asset xx
Gain on settlement xx
3. Share Dividends – in the form of additional shares; return on investment; no effect on total SHE
Large share dividends (at least 20%) – based on par value
Small share dividends (less than 20%) – based on fair value
Dividends = outstanding shares x par/fair value
Date of declaration:
Retained earnings xx
Share dividend payable xx
*Share dividend payable is part of equity.
Date of record: memo entry
Date of distribution:
Share dividend payable xx
Share capital xx
SP (if small share dividends) xx
4. Liquidating Dividends – in the form of cash or property dividends for the return of capital; in excess of RE
Excess of total dividends over RE – debited to Capital Liquidated account (contra-equity); decrease in total SHE
Dates
1. Date of declaration – announcement where it arises obligation to distribute dividends; deduction from RE
Retained earnings xx
Dividends Payable xx
2. Date of record – identities of recipients are identified; memo entry
3. Date of payment – actual payment or distribution
Dividends Payable xx
Cash/NCA xx
Quasi-reorganization
- Gives fresh start from the company
- Wipes out the large accumulated losses
1. Update the CA of assets and liabilities equal to their fair value
2. Adjustments are directly recorded to RE
3. Updated deficit amount can be wiped out using either of the following:
a. Decrease in par value – charged to the increase in share premium
b. Increase in revaluation surplus - charged to revaluation surplus
Employee Services
- share-based compensation
- shares will be given to employees
- Share options – right but not an obligation; to buy shares at an exercise price; exercise price < fair value of
shares
Compensation expense xx
SP-Share options xx
Measurement of Benefit – FV as of grant date (will not reflect the changes in FV)
Recognition as compensation expense:
1. Vested immediately – recognize the expense on the grant date
2. Vesting conditions – recognize the expense over the vesting period
a. Service conditions – certain number of years of employment or services
b. Performance conditions – have a service condition element and performance target
i. Market condition – reaching a certain fair value of shares
ii. Non-market condition – reaching certain value of profit, sales, ROI
Compensation (cumulative) = value x number x period
Value = FV as of grant date
Number = expected number of options that will vest
Period = number of years elapsed over vesting period
Compensation expense for the year = cumulative compensation this year – cumulative compensation last year
Actual exercise of share options: (if silent: one option = one share)
Cash (exercise price x number of options exercised) xx (net increase in SHE)
Add: Full or partial balance of SP-share options xx
Total issue price xx
Less: total par value of issued shares xx
SP-issuance xx
Pro-forma entry:
Cash xx
SP-share options xx
Share capital xx
SP-issuance xx
Acceleration
- Recognize during the current period the supposed amounts of compensation expense during the remainder of
the vesting period
- Payments will be deducted from SP-share options (direct deduction from equity)
Share Alternatives
- Choice between cash-settled and equity-settled
- Choice is within entity – if no obligation to pay cash/noncash assets = equity-settled
- Choice is with counterparty = as if compound financial instruments
o Allocated to liability to the extent of FV (remeasured/updated) – cash-settled
o Residual to equity (not remeasured) – equity-settled
Cash alternative:
Liability xx
Cash xx
SP-share alternative xx
SP-others xx
Share alternative (like conversion of bonds – no gain or loss):
Liability xx
SP-share alternative xx
Share capital xx
SP-issuance xx