CORPORATION  Investment of corporate funds in another

corporation or business in accordance with this

“Revised Corporation Code of the Philippines”
Code
 Artificial being  Dissolution of the corporation
 Created by operation of law
The shares or series of shares may or may not have a par
 Having the right of succession and the powers,
value, provided, that banks, trust, insurance and preneed
attributes and properties expressly authorized by
companies, public utilities, building and loan associations,
law or incident to its existence.
and other corporations authorized to obtain or access
Classes of Corporations funds from the public, whether publicly listed or not, shall
be permitted to issue no-par value shares of stock.
 Stock – have capital stock divided into shares and
are authorized to distribute to the holders of such Preferred Shares of Stock
shares, dividends, or allotments of the surplus
 Distribution of dividends
profits on the basis of the shares held.
 Distribution of corporate assets in case of
 Non-Stock
liquidation
Corporators – those who compose a corporation
* may be issued only with a stated par value
(stockholder or member)
Shares of capital stock issued without par value shall be
Incorporators – stockholders or members mentioned in
deemed fully paid and nonassessable and the holder of
the articles of incorporation as originally forming and
such share shall not be liable to the corporation or its
composing the corporation and who are signatories
creditors, provided that no-par value shares must be
thereof.
issued for a consideration of at least 5 pesos per share.
Classification of Shares The entire consideration received – capital and not
available for dividends.
Classification of shares, their corresponding rights,
privileges, or restrictions, and their stated par value, if any, Founders’ Shares
must be indicated in the articles of incorporation.
 Given certain rights and privileges
Each share shall be equal in all respects to every other  Exclusive right to vote and be voted for in the
share, except otherwise provided in the articles of election of directors – limited period not to exceed
incorporation and in the certificate of stock. 5 years from the date of incorporation
 Not allowed if it will violate “Anti-Dummy Law”;
The shares in stock corporations may be divided into
“Foreign Investments Act of 1991”
classes or series of shares, or both.
Redeemable Shares
No share may be deprived of voting rights except
“preferred” or “redeemable” shares, unless otherwise  Issued by the corporation when expressly provided
provided in this Code: Non-voting shares shall be entitled in the AOI
to vote on:  Shares which may be purchased by the corporation
from holders upon expiration of a fixed period
 Amendment of the articles of incorporation
 Adoption and amendment of bylaws Number and Qualifications of Incorporators
 Sale, lease, exchange, mortgage, pledge, or other
 Not more than 15
disposition of all or substantially all of the
 Purpose of practicing a profession – not allowed
corporate property
 Each must own or be a subscriber to at least 1
 Incurring, creating, or increasing bonded
share of the capital stock
indebtedness
 One Person Corporation – single stockholder
 Increase or decrease of authorized capital stock
 Legal age
 Merger or consolidation of the corporation with
another corporation or other corporations; Corporate Term

 Perpetual existence unless its AOI provides

otherwise
  May be extended or shortened by amending AOI
 No extension earlier than 3 years prior the original
or subsequent expiry
Minimum Capital Stock Not Required of Stock
Corporations
except otherwise specifically provided by special law
Articles of Incorporation
Such terms and conditions shall be effective upon filing of a
certificate thereof with the SEC
Contents of the Articles of Incorporation:
a. Name of the Corporation
b. Specific purpose or purposes
c. Place of principal office (within PH)
d. Term to exist if not perpetual existence
e. Names, nationalities, residence of the
incorporators
f. Number of directors (not more than 15) or trustees
(may be more than 15) with names, nationalities,
residence
g. Stock corporation: authorized capital stock,
number of shares, par value, name, nationality,
and residence of original subscribers, amount
subscribed and paid, statement that some are
without par
h. Nonstock corporation: amount of capital, names,
nationalities, and residence of contributors and
amount contributed
i. Such other matters consistent with law and which
the incorporators may deem necessary and
convenient
Amendment
Any provision or matter may be amended by a majority
vote of the board of directors/trustees and the vote or
written assent of the stockholders representing at least 2/3
of the outstanding capital stock. Take effect upon approval
by Commission or from date of filing if not acted upon
within 6 months.
The Commission may disapprove the articles of
incorporation or any amendment thereto if the same is not
compliant with the requirements of this Code: Provided,
That the Commission shall give the incorporators,
directors, trustees, or officers a reasonable time from
receipt of the disapproval within which to modify the
objectionable portions of the articles or amendment
a. Not substantially in accordance with the form
prescribed
b. unconstitutional, illegal, immoral or contrary to
government rules and regulations
c. certification concerning the amount of capital
stock subscribed and/or paid is false
d. required percentage of Filipino ownership of the
capital stock under existing laws or the
Constitution has not been complied with
Amendment to articles of incorporation of banks, banking
and quasi-banking institutions, preneed, insurance and
trust companies, NSSLAS, pawnshops, and other financial
intermediaries shall be accompanied by a favorable
recommendation of the appropriate government agency.
Corporate Name
No corporate name shall be allowed by the Commission if
it is not distinguishable from that already reserved or
registered for the use of another corporation, or if such
name is already protected by law, or when its use is
contrary to existing law, rules and regulations.
Not distinguishable even if it contains:
a. The word “corporation”, “company”,
“incorporated”, “limited”, “limited liability”, or an
abbreviation of one of such words; and
b. Punctuations, articles, conjunctions, contractions,
prepositions, abbreviations, different tenses,
spacing, or number of the same word or phrase.
Commission may summarily order the corporation to
immediately cease and desist from using such name and
require the corporation to register a new one. The
Commission shall also cause the removal of all visible
signages, marks, advertisements, labels, prints and other
effects bearing such corporate name. Upon the approval of
the new corporate name, the Commission shall issue a
certificate of incorporation under the amended name.
It refers to an act outside or beyond corporate powers,
including those that may ostensibly be within such powers
but are, by general or special laws, prohibited or declared
illegal.
a. Intra-vires act.
b. Doctrine of limited capacity.
c. Ultra-vires act.
d. Doctrine of piercing the veil of corporate fiction.
How would the following ratios or measures be affected if
a company issued additional capital stock for cash?
a. Total Debts to Total Assets (Increase); Working
Capital (Increase)
b. Total Debts to Total Assets (Increase); Working
Capital (Decrease)
c. Total Debts to Total Assets (Decrease); Working
Capital (Increase)
d. Total Debts to Total Assets (Decrease); Working
Capital (Decrease)
The limitations on dividends are the following, except:
a. The right to dividends is based on duly recorded
stockholdings.
b. The right to dividend accrues only if there is SEC
approval.
c. Dividends among stockholders of the same class must
always be pro rata equal and without discrimination and
regardless of the time when the shares were acquired. The
right of the stockholder to be paid dividends accrues as
soon as the declaration is made.
d. Declaration of dividends is discretionary upon the board
of directors.
Par value has NO direct relationship to the market value of
the common stock.
Retained Earnings is the amount stockholders have
invested in the company. FALSE – PAID-IN CAPITAL
We usually record preferred stock as equity and report it in
the stockholders' equity section of the balance sheet just
above common stock
The following are the limitations on the right of inspection
by a stockholder, except:
a. The right can be exercised only by the common
stockholders.
b. The right must be exercised during reasonable hours on
business days.
c. The person demanding the right has not improperly used
any information obtained through any previous
examination of the books and records of the corporation.
d. The demand is made in good faith or for a legitimate
purpose.
I. One of the rights of a stockholder is the right to
participate in the control and management of the
corporation which is exercised through his vote.
II. The right to vote is a right inherent in and incidental to
the ownership of corporate stock, but as such is not a
property right.
Cumulative preferred stock means that dividends
accumulate interest during the year. FALSE – no interest
In addition to the functions designated by the One Person
Corporation, the corporate secretary shall:
a. Be responsible for maintaining the minutes book and/or
records of the corporation.
b. Notify the nominee or alternate nominee of the death or
incapacity of the single stockholder, which notice shall be
given no later than five (5) days from such occurrence.
c. Notify the SEC of the death of the single stockholder
within five (5) days from such occurrence and stating in
such notice the names, residence addresses, and contact
details of all known legal heirs.
d. All of the above.
The stockholders' equity section of the balance sheet b. Minutes of all meetings of directors or trustees.
shows how each equity account changed during the year.
c. Stock and transfer book, in case of stock corporations.
FALSE
d. Daily time record
The statement of stockholders' equity shows how each
equity account changed during the year TRUE

We can estimate the average purchase cost of treasury

stock per share by dividing the treasury stock balance by
The amount of retained earnings equals net income minus
the number of shares repurchased. TRUE
dividends for the current year. FALSE

Deposits on subscriptions to a proposed increase in share

Stock corporation must also keep a stock and transfer
capital shall be reported as
book, which shall contain:
a.Part of liabilitie
a. A record of all stocks in the names of the stockholders
alphabetically arranged. b.Part of shareholders’ equity
b. The installments paid and unpaid on all stocks for which c.Memorandum only
subscription has been made, and the date of payment of
any installment. d.Part of retained earnings

c. A statement of every alienation, sale or transfer of stock

made, the date thereof, by and to whom made.

d. All of the above.

The One Person Corporation shall submit the following

within such period as the SEC may prescribe:

a. Annual financial statements.

b. A report containing explanations or comments by the

president on every qualification, reservation, or adverse
remark or disclaimer made by the auditor in the latter’s
report.

c. A disclosure of all self-dealings and related party

transactions entered into between the One Person
Corporation and the single stockholder.

d. All of the above.

Not every stockholder or officer can bind the corporation

Shareholders’ Equity
considering the existence of a corporate entity separate
from those who compose it. TRUE  Contributed Capital (Paid-in Capital)

The amount of resources received by a corporation

as a result of investments by shareholders,
The books and records required to be kept by the
donations or other share capital transactions.
corporation are the following, except:
The shares to be subscribed and paid in or secured
a. Minutes of meetings of stockholders or members.
to be paid in by the shareholders, either in money,
property or services, at the time of organization of
the corporation or afterwards, and upon which it is
to conduct its operations.
o Legal Capital
Capital contributed by shareholders comes
from the sale of shares of stocks
Shares of Stocks issued by the corporation
Portion of the contributed capital or the
minimum amount of paid-in capital, which
must remain in the corporation for the
protection of corporate creditors.
Cannot be returned to stockholders in any
form
“Trust fund doctrine”
 Par Value Shares
Shares with fixed amount per share
printed on the stock certificate.
The par value establishes the nominal
value
Per share and is the minimum amount
that must be paid by each shareholder.
Legal capital is the aggregate par value of
all issued and subscribed shares
(a) Share Capital
(b) Subscribed Share Capital
 No-Par Value Shares
Shares with no amount printed on the
stock certificate.
These shares may be given with stated
value or without stated value.
Legal capital is the total consideration
received by the corporation for the
issuance of its shares to the shareholders
including the excess of issue price over
the stated value.
(a) Share Capital
(b) Subscribed Share Capital
(c) Share Premium – Excess over Stated
Value
o Additional Paid-In Capital (Share
Premium)
Portion of the paid-in capital representing
amount paid by shareholders in excess of par.
May result from transactions involving treasury
stocks, retirement of shares, donated capital,
share dividends and any other gain on the
corporation’s own stock transactions.
 Retained Earnings (Accumulated Profits or Losses)
The amount of capital accumulated and retained through
the profitable operations of the business
SHAREHOLDERS’ EQUITY
Share Capital
Subscribed Share Capital
(Subscription Receivable)
Share Premium
(Treasury Shares)
Donated Capital
Retained Earnings
Revaluation Surplus
Revaluation Reserves
Ordinary Share Option Warrants
(Capital Liquidated Account)
LEGAL CAPITAL
With par value:
Share Capital
Subscribed Share Capital
No par value:
Share Capital
Subscribed Share Capital
Paid in Capital in Excess of Stated Value
Preference Shares – always issued with par value
CONTRIBUTED CAPITAL
 Preference Share Capital
Share Premium – PSC
Ordinary Share Capital
Share Premium – OSC
Subscribed Share Capital (Less: Subscription
Receivable)
Donated Capital
Subscription receivable and other receivable from sale of
share should be reflected in the shareholders’ equity
section as a reduction from the related subscribed share
capital. However, subscriptions receivable collectible
within one year may be shown as current assets.
Two Basic Types of Shares
Share capital is divided into transferable shares of stocks.
A share of stock represents the interest or right of a
shareholder in a corporation and is evidenced by a
certificate of stock. Share capital includes all types of
ownership shares in a corporation.
 Ordinary Share. This share represents the basic
ownership class of the corporation. When only
one class of share is issued, it must be ordinary
share. Ordinary shares are the entity’s residual
equity.
 Preferred Share. This share gives its owners
certain advantages over ordinary shareholders.
These special benefits relate either to the receipt
of dividends when declared before the ordinary
shareholders (preferred as to dividends) or to
priority claims on assets in the event of corporate
liquidation (preferred as to assets).
Types of Preference Shares
o Cumulative Preference Share
The holder is entitled to any dividends not
declared in the prior period (dividends in
arrears), such that when dividends are
declared in the current period, the dividends in
arrears are to be satisfied first.
o Participating Preference Share
The holder is entitled to additional dividends
proportionate to the ordinary shareholders
on the basis of the total par value, in excess of
a fixed amount or rate.
o Convertible Preference Share
The holder is entitled to exchange the share
into an ordinary share, at the option of the
shareholder.
o Callable Preference Share
The type of preference share that gives the
issuing corporation the right, but not the
obligation, to reacquire and retire the share at
a fixed or determinable call price.
o Redeemable Preference Share
The type of preference share that must be
retired or reacquired by the issuing
corporation, either at the option of the
shareholder, or in most cases, at a certain or
determinable date. This is in substance a
financial liability of the issuing corporation.
TERMS RELATED TO SHARE CAPITAL
Authorized Share Capital
The number of authorized shares indicates the maximum
number of shares the corporation can issue as specified in
the article of incorporation. This maximum number of
shares when multiplied by the par value of the share will
yield the authorized share capital.
Note that any increase or decrease in the authorized
shares capital requires prior approval of the SEC and
formal amendment to the articles of incorporation.
Issued Share Capital
These are shares which have been sold and paid for in full.
Issued share may include treasury shares. Share Capital,
either Ordinary Shares account or 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 Share Issuance Costs Deduction from equity, net
treasury shares. of any related income tax
benefit
Treasury Stock

These are issued shares acquired by the corporation but Debited:

1. Share Premium –
not retired and are therefore, awaiting to be reissued at a
Issuance
later date.
2. Retained Earnings
- No Share premium
- Share Premium in
insufficient
Issued at more than par:

Share Premium

Cash

Issued at par:

Share Issuance Costs

Cash

Cost of Public Offering of Shares

Expensed immediately in the income statement

1. Road Show presentation

Issuance of Share Capital
Cash/Asset/Expense (consideration)
Share Capital (par value/stated value)
Share Premium (excess of par/stated value)
Consideration Valuation
Cash Face Value
Non-cash asset or service 1. FV of non-cash
rendered consideration received
2. FV of share capital
issued
3. Par value of share
capital issued
Liability extinguished 1. FV of share capital
extinguished
2. FV of liability
extinguished
3. CA of liability
extinguished
2. Public relations consultant’s fees
Share Listing Fee
Cash
Joint Costs
Concurrent listing and issuance of new shares, and listing
of old existing shares – allocated
Share Premium
Stock Listing Fee
Cash
Two methods of accounting for Share Capital:
1. Memorandum Method – Share Capital
2. Journal Entry Method – Unissued Share Capital
Subscription of Shares
Subscription Receivable
Subscribed Ordinary Shares

Accounting for Costs related to Share Capital Share Premium

Organization Costs Expensed

Indirect Costs Expensed
Cash
 Subscription Receivable Consideration received is less than par/stated value, but
the share capital is issued as fully paid

Asset = overstated; Capital = overstated

Subscribe Ordinary Shares
Land
Share Capital
Discount on Share Capital
Delinquent Subscription
Share Capital
Highest bidder – person who is willing to pay the “offer
price” which includes the full amount of the subscription SECRET RESERVE
balance + accrued interest, cost of advertisement and
Reverse of watered share
expenses for the smallest number of shares.
Asset = understated / Liability = overstated ; Capital =
Subscription Receivable
understated
Subscribed Ordinary Shares
1. Excessive provision for depreciation, depletion,
Share Premium amortization and doubtful accounts
2. Excessive writedown of receivables, inventories
and investments
Cash 3. Capital expenditures are recorded as outright
expense
Subscription Receivable 4. Fictitious liabilities are recorded

SHAREHOLDERS’ EQUITY (PT. 2)

Receivable from Highest Bidder REACQUISITION OF SHARE CAPITAL
Interest Revenue Reacquired to:

 retire
Receivable from Highest Bidder  reissue

Cash Treasury Shares or Stocks

equity instruments that are held for reissue.

Cash the corporation’s own shares that have been reacquired

after having been issued and fully-paid, but not retired.
Receivable from Highest Bidder
not an asset – reduction to capitalization.
Subscription Receivable
 Issuance for New Stockholders
 Share Dividends
Subscribe Ordinary Shares Three Requisites to qualify as TS:
Share Capital 1. The shares must be the entity’s own shares
No bidder: 2. The shares must have been issued originally

Treasury Stock TS can be legally reissued at discount without any

discount liability while unissued shares must be
Receivable from Highest Bidder issued at least at par or stated value.
Subscription Receivable 3. The shares are reacquired but not canceled.
WATERED SHARE A corporation reacquires its own shares for any of the
Share capital issued for inadequate or insufficient following reasons:
consideration.
  To improve earnings per share by reducing the
number of shares outstanding.
 To support the market price for the share capital.
 To invest cash temporarily. (do not want to pay
dividends or controls the number of shareholders)
 To obtain shares in anticipation of the conversion
of other securities (convertible preference shares)
 To obtain shares in anticipation of the exercise of
share options granted to executives and key
employees of the company (share-based
compensation)
These treasury shares are accounted for at cost (regardless
of whether the shares are acquired above or below the par
value or the stated value, whichever is applicable). The
reason is the legal limitation on acquisition of treasury
shares.
Acquisition of Treasury Shares:
Treasury Shares (at cost)
Cash in Bank
 Cash – cost = face amount of the cash payment
 Non-Cash – cost = PAS 32 does not provide explicit
guidelines; usually measured by the carrying
amount (original cost less: accumulated
depreciation or accumulated ??) of the non-cash
asset surrendered.
No gain or loss shall be recognized on the
purchase, sale, issue, or cancellation of an entity’s
equity instrument.
Reissuance of Treasury Shares above cost:
Cash in Bank
Treasury Shares
Share Premium – Treasury Shares
Reissuance of Treasury Shares below cost:
Cash in Bank
(1) Share Premium – Treasury Shares
(2) Retained Earnings
Treasury Shares
Limitation on Treasury Shares
The corporation can acquire treasury shares only to the
extent of retained earnings balance.
An appropriation of retained earnings and reversal
thereof should be made as well in accordance with the
Corporation Code.
A corporation can reacquire or repurchase treasury shares
provided that the corporation has unrestricted retained
earnings in the books of account of the corporation to
cover the cost of the shares to be purchased or acquired.
Thus, when a corporation has treasury share recorded at
cost, an amount of retained earnings equal to such cost
should be appropriated for that purpose. This
appropriation of retained earnings is necessary so as not to
impair the legal capital, even with the purchase of the
treasury shares.
This must not be declared as dividend until the treasury
shares are subsequently reissued.
Appropriation of Retained Earnings:
Retained Earnings – Unappropriated
Retained Earnings – Appropriated
Disclosure of Treasury Shares
 The number of shares held in the treasury (not the
value)
 The restriction on the availability of retained
earnings for distribution of dividends equal to the
cost of treasury shares (appropriation of retained
earnings)
PAS 32, paragraph 33 provides that if an entity reacquires
its own equity instruments, the treasury shares shall be
deducted from equity – the cost of treasury shares shall be
deducted from the total shareholders’ equity. (not
included in the computation of contributed capital, legal
capital, share premium or retained earnings)
(reduction in total outstanding shares, but not a reduction
in issued shares)
Under Application Guidance 36 of PAS 32, an entity’s own
equity instruments are not recognized as financial assets
regardless of the reason for which the equity shares are
reacquired.
DONATED TREASURY SHARES
No cost on the part of the corporation
Donation made by shareholders in favor of the corporation
Shares received by the entity from the shareholders by deemed to be the cost) is credited to Donated Capital, or
way of donation. Share Premium from Donated Shares:

There are actually treasury shares and may therefore be Resale of Donated Shares
reissued at any price without any discount liability.
Cash
It enables the company to raise capital by reselling the
Treasury Shares (FV of donated shares)
shares without any cost on the part of the company as the
transaction does not affect the assets, liabilities, and Donated Capital
equity of the corporation.
Donated Treasury Shares – the total amount of
However, the reissue or resale of donated shares shareholders’ equity is not affected by the choice of the
increases assets and donated capital or share premium. method used to account for the donated treasury shares.
Although the receipt of donated shares does not affect the
total issued shares, it decreases the outstanding shares of
the corporation If the donated shares are retired or canceled prior to
reissuance:
1.
Ordinary Share Capital
The receipt of the donated shares is recorded by means of
a memorandum entry if the market price of the share Donated Capital
capital is not known at the time of donation:

Donation of Shares: Donated Capital - part of total shareholder’s equity

Memorandum Entry. XXX number of shares of PXX par
value / stated value shares were received as a donation
from various shareholders. TREASURY SHARE SUBTERFUGE

If the receipt of the donated shares was recorded by a
memorandum entry, the entire proceeds from the
subsequent resale of these donated shares are credited to
Donated Capital, or Share Premium from Donated Shares:
Resale of Donated Shares:
Occurs when excessive shares are issued for a property
with the understanding that the shareholders shall
subsequently donate a portion of their shares.
The resale/reissue of the treasury donated shares is not
credited entirely to donated capital.

Cash The sale price shall be used in correcting the overvalue

asset and share capital.
Donated Capital (part of total shareholder’s equity)
Land (overvalued)
2.
Ordinary Share Capital
When the market price of the share capital is known at
the time of donation, the receipt may be recorded by
debiting Treasury Shares and crediting Donated Capital or Reissuance:
Share Premium appropriately described, for an amount
equal to the market value of the donated shares: Cash (selling price)

Donation of Shares: Land (overstatement)

Treasury Shares (FV) Donated Capital (excess)

Donated Capital

If the receipt of the donated shares was recorded at fair
value, only the excess of the reissue price over the
recorded fair value at the date of donation (which is
DONATION ON CAPITAL
Contributions, including shares of an entity, received from
shareholders shall be recorded at fair value with the credit
going to donated capital.

Entities sometimes receive from nonshareholders gifts
grants of funds or other assets that are restricted for
property and equipment additions.
Capital gifts or grants shall be recorded at fair value when
received or receivable.
Such capital gifts or grants from nonshareholders are
generally subsidies and credited to income.
In the rare case where such items are not subsidies, the
offsetting credit shall be a liability account until the
restrictions are met.
At that time when the restrictions are met, the capital or
grants are transferred to income.
ASSESSMENTS ON SHAREHOLDERS
Assessment may be levied on shareholders when shares
are originally issued at discount or when the corporation
is in dire need of financial assistance.
When shares are originally issued at a discount, the
discount is actually a receivable from the shareholder.
Cash or Share Assessment Receivable
Discount on Share Capital
When the corporation is in dire need of financial
assistance, the shareholders can vote to assess themselves
a certain amount per share owned.
Cash or Share Assessment Receivable
Share Premium – Assessments
RETIREMENT OF SHARES
Maybe made by a corporation if the shares have not been
issued in the first place or reacquiring the shares previously
issued.
Shares are previously issued but subsequently reacquired
by the corporation to be subsequently retired.
Acquisition of Treasury Shares:
Treasury Shares (at cost)
Cash in Bank
Retirement at a “gain”:
Share Capital (at par or stated value)
Share Premium – Original Issuance
Treasury Shares/Cash (not prev. issued)
Share Premium – Retirement
Retirement at a “loss”:
Share Capital (at par or stated value)
(1) Share Premium – Original Issuance
(2) Share Premium – Treasury Shares
(3) Retained Earnings
Treasury Shares/Cash (not prev. issued)
SHARE SPLIT
Changes the value of the shares issued and outstanding
Share Split is the issue of new shares in exchange for
original shares will.
The par value is reduced in proportion to the increased
number of shares (split up); the par value increased in
proportion to the decreased / reduced number of shares
(reverse split).
(Example,
split up (2 for 1):
10,000 shares issued and outstanding → 20,000
par value - P10 -> P5
reverse split (1 for 2):
10,000 shares issued and outstanding → 5,000
par value - P10 -> P20)
The total peso value of share capital, share premium, and
accumulated profits and losses (retained earnings) do not
change. (no changes in the shareholder’s equity but there
will be changes in the book value per share)
Stock/share split (split up or reverse split) does not require
an accounting entry for the recall of all shares and
issuance of new shares, as it only requires a corresponding
memorandum entry.
Before and after the split, the recorded value of the Share
Premium account will not be affected
RETAINED EARNINGS
Retained earnings represent the cumulative balance of the
following:
1. Net income or loss for the period
2. Dividend distributions
3. Prior period errors
4. Changes in accounting policy
5. Reclassifications of some components of other
comprehensive income
6. Other capital adjustments
The IFRS term for retained earnings is accumulated profits.
Kinds of retained earnings
1. Unappropriated retained earnings - represent that
portion which is free and can be declared as
dividends to shareholders.
2. Appropriated retained earnings - represent that
portion which has been restricted and therefore is
not available for any dividend declaration.
When the retained earnings account has a debit balance, it
is called a deficit.
A deficit is not an asset but a deduction from
shareholders' equity.
The IFRS term for deficit is accumulated losses.
DIVIDENDS
Distribution of earnings paid to shareholders based on the
number of shares owned.
1. Dividends out of earnings
2. Dividend out of capital
DIVIDENDS OUT OF EARNINGS
Legally, dividends can be declared only from retained
earnings.
If the entity has a deficit, it is illegal to pay dividends or if
the entity declares dividend in excess of the retained
earnings balance, the excess is a return of capital and
therefore violates the trust fund doctrine.
The Securities and Exchange Commission has ruled
however, that stock dividends may be declared from
premium on par value share.
Dividends are typically recognized as income by the
investor/shareholder, unless it is a liquidating dividend,
the equity method is being applied or the dividends are in
the form of shares.
Dividends are recognized as income at the date of
declaration. Meaning, dividends receivable shall be
debited and a corresponding credit to dividend income.
But to determine whether the shareholder should get a
dividend, you need to look at two important dates. They
are the "record date/date of record” and the “ex-dividend
date/ex-date”
Three important dates are noted in a formal dividend
announcement:
Under IFRIC 17 – Distribution of non-cash assets to owners,
paragraph 10, the liability to pay dividends shall be
recognized when the dividend is appropriately authorized
and is no longer at the discretion of the entity, which the
date:
 When the dividend is declared by management or
the board of directors if the local jurisdiction does
not require further approval. – in the Philippines,
the declaration by the board of directors does not
require further approval.
 When the declaration of the dividend by
management or the board of directors is approved
by the relevant authority, e.g., the shareholders, if
the local jurisdiction requires such approval.
Thus, the liability for dividends must be recognized on the
date of declaration.
Date of Declaration – date when the board of directors
formally approves and announces the dividend (reduction
in retained earnings)
Retained Earnings
Dividend Payable
Date of Record – a list of current shareholders who will be
entitled to the dividend is prepared and the dividend
payment will be based on the said list.
--No Journal Entry--
Date of Payment or Distribution – entry will be made in
the books of accounts of the corporation to record the
settlement of the dividend either by payment of cash or
distribution of non-cash assets or the company’s own
shares
Dividends Payable
Cash / Asset / Share Capital
When a company declares a dividend, it sets a record date
when the shareholder must be on the company's books as
a shareholder to receive the dividend.
Once the company sets the record date, the ex-dividend
date is set based on stock exchange rules.
The ex-dividend date is usually set for stocks two business
days before the record date.
If a buyer purchases the stock on its ex-dividend date or
after, they will not receive the next dividend payment.
Instead, the seller gets the dividend.
If the buyer purchases before the ex-dividend date
meaning “dividend on,” the buyer will get the dividend.
CASH DIVIDENDS
Cash Dividends are recognized as income regardless
whether the dividends comes from the cumulative net
income after the date of the investment (post acquisition
retained earnings) or net income prior to the acquisition
of the investment (pre-acquisition retained earnings).
Previously, it was addressed in a PFRS that dividends from
pre-acquisition retained earnings are liquidating dividends.
This treatment has now been superseded by revisions to
PAS 27.
Considered the most common type of dividend.
May be expressed as a percentage of the share capital or
as a peso amount per share.
For a cash dividend to occur, a corporation must have
retained earnings and adequate cash to pay the dividend.
The declaration of the dividends decreases the total
shareholders’ equity, while the payment of the dividends
decreases the total assets of the corporation.
Declaration of Cash Dividends
Retained Earnings (or Dividends)
Dividend Payable
Upon Payment of Cash Dividends:
Dividends Payable
Cash
SHARE DIVIDENDS
Share Dividends (Bonus Issue) is a pro rata distribution of
a corporation’s own shares to its shareholders. (additional
number of shares for the existing shareholders)
This usually consists of the same class of shares – ordinary
share dividends will be declared on ordinary shares
outstanding.
Special share dividend or Special bonus issue applies
when the distribution is of a different class of share
capital, e.g., preference share dividends will be declared
on ordinary shares outstanding.
The declaration and settlement of share dividends (bonus
issue) do not affect the total assets and total
shareholders’ equity since there will only be a transfer of
capital from retained earnings to contributed capital.
Share Dividends (Bonus Issue) are measured as:
 Small share dividends (less than 20%) – at the fair
value of the shares declared.
Declaration:
Retained Earnings (or Dividends) (% x Outstanding Shares)
x FV of the Shares
Share Dividends Payable (% x Outstanding Shares)
x Par Value of the Shares
Share Premium – Outstanding (Excess)
Payment:
Share Dividends Payable
Share Capital
 Large share dividends (20% or more) – at the par
value of the shares declared.
Declaration:
Retained Earnings (or Dividends) (% x Outstanding Shares)
x Par Value of the Shares
Share Dividends Payable (% x Outstanding Shares)
x Par Value of the Shares
Payment:
Share Dividends Payable
Share Capital
When a statement of financial position is prepared, the
share dividend payable is an addition to share capital.
The share dividend payable cannot be classified as a
liability because a share dividend never reduces assets.
In Share Dividends (Bonus Issue), the Standard does not
address share dividends. Thus, guidance is based on local
GAAP in accounting for share dividends.
If the share dividend is less than 20%, the amount charged
to retained earnings is equal to the fair value on the date
of declaration.
However, the fair value of the shares must not be lower
than par or stated value. Otherwise, the amount debited
to retained earnings is equal to the par or stated value of
the shares.
FRACTIONAL SHARE DIVIDENDS
When share dividends are issued, it is usually impossible
to issue full shares to all of the shareholders.
Example: a 10% bonus issue for a shareholder who holds
555 shares means that the said shareholder would be
entitled to receive 55 full shares and a fractional one-half
share as a bonus issue (share dividends).
With respect to the issuance of the full shares, no
accounting problem is involved.
The accounting problem arises with respect to the
fractional shares which may be addressed through the
following options given on the part of the corporation
issuing a bonus issue (share dividends):
 Issue fractional share warrants;
 Pay the shareholder an amount equal to the
market price of the fractional shares; or
 Require the shareholder to pay sufficient amount
(balance) to receive a full share (issuance of a
share)
Declaration:
Retained Earnings (or Dividends) (% x Outstanding Shares)
x Par/Fair Value of the Shares
Share Dividends Payable (% x Outstanding Shares)
x Par Value of the Shares
Payment:
Share Dividends Payable
Share Capital
Share Premium – Fractional Share Warrants
Outstanding
Fractional Shares Issued and Expired:
Share Premium – Fractional Share Warrants Outstanding
Ordinary Share Capital
Share Premium – Expired Warrants
The fractional warrants outstanding account is part of the
share premium.
Any unexercised fractional warrants shall be transferred to
share premium.
TREASURY SHARES AS SHARE DIVIDENDS
Treasury shares may be declared as share dividends.
Treasury shares may be reissued as dividends in which case
the cost of the shares shall be charged to retained
earnings.
The declaration of treasury shares as dividends is termed
as a property dividend under the Philippine Corporation
Code.
However, it is believed that the declaration of treasury
shares as dividends may be considered as share dividends
since the entity’s obligation is not to convey non-cash
asset but to reissue its own share capital. Thus, no
accounting liability arises.
Under PAS 32, treasury shares are a component of
shareholders’ equity and not a financial asset – an
example of economic substance of a transaction prevailing
over the legal form.
Declaration:
Retained Earnings
Share Dividends Payable
Issuance of Treasury Shares:
Share Dividends Payable
Treasury Shares
SPECIAL CASES ON SHARE DIVIDEND
1. When shareholders may elect to receive cash in
lieu of share dividend, the amount to be charged
to retained earnings should be equivalent to the
optional cash dividend.
2. In certain cases, share dividends are declared on
the basis of a proposed increase in authorized
share capital, the application for which has been
filed but not yet approved by SEC at the end of the
reporting period.
The proposed increase and such dividend
declaration generally shall not be reflected in the
 statement of financial position prior to SEC
approval. However, these matters should be
disclosed in the notes to financial statements.
If the proposed increase in authorized share capital
is approved by SEC after the end of the reporting
period and the share dividends are subsequently
effected before release of statements, the new
authorized share capital may be presented.
The share dividend may be shown as part of issued
share capital.
However, disclosure is necessary in such a case.
3. In closely held entities, if share dividends are
declared, retained earnings shall be capitalized
only to the extent of par value or stated value of
the shares.
SCRIP DIVIDENDS
Scrip dividends are declared when a corporation has
adequate balance in retained earnings to meet the legal
dividend requirements but has insufficient funds to justify
a current cash dividend.
The declaration of scrip dividends is done through the
issuance of a promissory note which is called “scrip”
which requires a corporation to pay a dividend at some
future date.
Scrip dividends usually bear interest.
Any interest that accrues on scrip dividend should be
recorded as interest expense.
Declaration:
Retained Earnings
Scrip Dividends Payable
Accrual of Interest:
Interest Expense
Interest Payable
Redemption of the Scrip Dividends:
Scrip Dividends Payable
Interest Payable (no reversal)
Interest Expense
Cash
BOND DIVIDENDS
(supported by a written document, unlike scrip dividends)
A bond is a formal unconditional promise, made under
seal, to pay a specified sum of money at a determinable
future date, and to make a periodic interest payment at a
stated rate until the principal sum is paid.
It is a contract of debt whereby one party called the issuer
(entity) borrows money from another party called the
investor (shareholder).
A bond is evidenced by a certificate and the contractual
agreement between the issuer and investor is contained in
another document known as bond indenture.
Initial recognition and measurement
An entity shall recognize a financial asset or a financial
liability in its statement of financial position when, and
only when, the entity becomes a party to the contractual
provisions of the instrument.
Except for trade receivables, at initial recognition, an entity
shall measure a financial asset or financial liability at its fair
value plus or minus, in the case of a financial asset or
financial liability not at fair value through profit or loss,
transaction costs that are directly attributable to the
acquisition or issue of the financial asset or financial
liability.
Contract Rate / Stated Rate / Nominal Rate of Interest
The rate of interest on the face of the bond.
Market Rate / Yield Rate / Effective Interest Rate
The interest rate that investors are willing to accept on a
bond at the time of issuance
The sale of bonds at face value implies an agreement
between the bond’s stated rate of interest and the
prevailing market rate of interest.
Declaration:
Retained Earnings (or Dividends)
Bond Dividends Payable
Issuance:
Bond Dividends Payable
Bond Payable
Payment of Periodic Interest: amount of the assets distributed and the carrying amount
of the dividend payable in profit or loss.
Interest Expense (Nominal Rate)
Declaration:
Cash
Retained Earnings (or Dividends) (FV at the time of
Redemption of the Bonds:
declaration)
Bond Payable
Property Dividends Payable
Cash
Reclassification of equipment:
PROPERTY DIVIDENDS
Assets held for distribution (CA at the time of declaration)
Property dividends or dividends in kind are the distribution
Accumulated depreciation
of earnings to the shareholders in the form of non-cash
assets. Equipment

Two accounting issues related to the declaration and Remeasurement of the liability at FV of the asset
payment of property dividends:
Decrease:
 Measurement of the property dividend payable.
Property Dividends Payable
 Measurement of the non-cash asset to be
distributed as property dividends Retained Earnings
The International Financial Reporting Interpretations Increase:
Committee (IFRIC) Interpretation No. 17, Distribution of
Retained Earnings
Non-cash Assets to Owners, requires an entity to
recognize a liability for the dividend payable when it Property Dividends Payable
declares a distribution.
*measured: lower between CA and FV less cost to
The liability to be recognized in relation to the declaration distribute
of property dividends shall be measured at the fair value
of the assets to be distributed. Distribution:

The asset, if previously classified as non-current, shall be Property Dividends Payable (FV of property)
reclassified as current using the account title “Assets Held Loss on Disposal of Assets or
for Distribution” account, and shall be measured following
IFRS 5 – Non-current Assets Held for Sale and Discontinued Gain on Disposal of Assets
Operations. Assets held for distribution (CA of property)
At the end of each reporting period and at the date of DIVIDENDS OUT OF CAPITAL
settlement, the entity shall review and adjust the carrying
amount of the dividend payable to equal the fair value of When capital is returned to shareholders, it is known as
the assets to be distributed, with any changes in the dividend out of capital or liquidating dividend.
carrying amount of the dividend payable recognized in
As a rule, liquidating dividends are paid to the shareholders
equity as an adjustment to the amount of the
when the entity is dissolved and liquidated.
distribution.
However, wasting asset corporations may declare
In the amendment to IFRS 5, an entity shall classify the
dividends which are in part distribution of earnings and in
assets held for distribution as property dividends and shall
part distribution of capital.
measure these assets at the lower of their carrying
amount and fair value less cost to distribute. – there may
be a difference between the measurement of the liability
This rule is in conformity with wasting asset doctrine
and the measurement of the asset.
which holds that a wasting asset entity can declare
When an entity settles the dividends payable, it shall dividends not only to the extent of the retained earnings
recognize the difference, if any, between the carrying
balance but also to the extent of the accumulated
depletion balance.
A wasting asset entity is an entity engaged solely or
substantially in the exploitation of natural resources.
Note that any amount declared in excess of the retained
earnings balance is treated as liquidating dividends and
charged to the capital liquidated account which is a
deduction from the total shareholders' equity
Retained Earnings (part distribution of earnings)
CHOICE OF EITHER NON-CASH OR CASH DIVIDENDS
If an entity gives its owners a choice of either a noncash
asset or a cash alternative, the entity shall estimate the
dividend payable by considering both the fair value of
each alternative and the associated probabilities of
owners selecting each alternative. (IFRIC 17, paragraph
12.)
At the end of each reporting period and at the date of
settlement, the entity shall adjust the dividend payable
based on the alternative chosen through equity or
retained earnings.

Capital Liquidated (Accumulated Depletion) (part

distribution of capital) (liquidating dividend)

Dividends Payable
FV of Cash x estimated %

FV of Non-Cash x estimated %
LIQUIDATING DIVIDENDS
Dividend Payable
Liquidating dividends represent a return of contributed
capital rather than a distribution of earnings which are
usually declared when a corporation is ceasing and/or Retained Earnings
reducing its normal business operations.
Dividend Payable
During the lifetime of the entity, it is illegal to return
capital to the shareholders in conformance with the trust
fund doctrine. Choice of Cash:
However, wasting asset corporations may declare Increase:
dividends which are in the part distribution of earnings
and in the part distribution of capital. Retained Earnings

 The wasting asset doctrine holds that a wasting Dividend Payable

asset entity can declare dividends not only up to Dividend Payable
the extent of the retained earnings balance but
also to the extent of the accumulated depletion Cash
balance. Decrease:
 A wasting asset entity is an entity engaged solely
or substantially in the exploitation of natural Dividend Payable
resources Retained Earnings
Liquidating dividends may be recorded by a charge to Dividend Payable
either:
Cash
 Share premium account
 A special contra-contributed capital account

Retained Earnings (balance of RE) Choice of Non-Cash:

Share Premium (excess) (liquidating dividend) Increase:

Cash (total cash dividends) Retained Earnings

Dividend Payable
Dividend Payable

Non-Cash Asset CALLABLE PREFERENCE SHARE

Gain (Loss) on Distribution One which can be called in for redemption at a specified
price at the option of the corporation.
Decrease:
As distinguished from a redeemable preference share, a
Dividend Payable
callable preference share has no definite redemption date
Retained Earnings since the actual redemption of the shares is dependent on
the “call” of the issuer.
Dividend Payable
A callable preference share is an “equity instrument”
Non-Cash Asset rather than a financial liability since the option of the
Gain (Loss) on Distribution issuer to redeem the share for cash does not satisfy the
concept and definition of a financial liability under PAS 32
and PFRS 9
*Gain = FV > CA Issuance:
*Loss = FV < CA Cash

Preference Share Capital

DIVIDENDS AS EXPENSE Share Premium – PS
PAS 32, paragraph 35, provides that distributions to
holders of an equity instrument shall be debited by the
entity directly to equity. Call:

In other words, dividends out of earnings are charged to Preference Share Capital
retained earnings. 1. Share Premium – PS
However, Paragraph 36 provides that distributions to 2. Retained Earnings
holders of an equity instrument classified as financial
liability are recognized in the same way as interest Cash
expense on a bond.
or
Paragraph 40 further provides that dividends classified as
Preference Share Capital
an expense may be presented in the income statement
either with interest on other liabilities or as a separate Share Premium – PS
line item.
Cash
The best example of an equity instrument classified as
Share Premium - OS
financial liability is a redeemable preference share.
The excess of the call price over the par value of the
preference shares will be charged to the following:
Dividend Payment:
1. Share premium from the original issuance of the
Interest Expense preference shares; and
2. Retained earnings
Cash
When preference shares are called in at less than original
issue price, the difference is simply credited to share
premium related to ordinary shares
REDEEMABLE PREFERENCE SHARE CONVERTIBLE PREFERENCE SHARE

 A preference share that provides for mandatory One which gives the holder the right to exchange the
redemption by the issuer for a fixed or holdings for other securities of the issuing corporation.
determinable amount at a future date.
A preference shareholder may convert the preference
 A preference share that gives the holder the right
share into an ordinary share because operations are
to require the issuer to redeem the instrument for
successful and earnings on the ordinary share are
a fixed or determinable amount at a future date.
unlimited.
A redeemable preference share shall be classified as
A preference shareholder may convert the preference
current or noncurrent financial liability depending on the
share into bonds which is a change of status from an
expected redemption date of the preference shares.
owner to a creditor.
Issuance:
Normally, preference share is convertible into ordinary
Cash shares

Redeemable Preference Shares Preference Share Capital

Dividend paid: Share Premium – PS

Interest Expense Ordinary Share Capital

Cash Share Premium – OS

Redemption:

Redeemable Preference Shares Preference Share Capital

Loss on Redemption Share Premium – PS

Cash Retained Earnings

The difference between the redemption price and the Ordinary Share Capital
financial liability is accounted for as gain or loss on
redemption.
*Issuer – Corporation
The classification of a financial instrument as a financial
liability or an equity instrument determines whether *Holder – Issuer
interest, dividends, losses and gains relating to that
BOOK VALUE PER SHARE
instrument are recognized as income or expense in profit
or loss. The amount that would be paid on each preference share
and ordinary share assuming the entity is liquidated and
Thus, dividend payments on shares wholly recognized as
the amount available.
liabilities are recognized as expenses in the same way as
interest on a bond. It represents the equity that a shareholder has in the net
assets of the company from being an owner of at least one
Similarly, gains and losses associated with redemptions or
share of stock of the company.
refinancings of financial liabilities are recognized in profit
or loss, whereas redemptions or refinancings of equity This measurement serves as a factor in evaluating the
instruments are recognized as changes in equity. Changes value or worth of a share of stock.
in the fair value of an equity instrument are not recognized
in the financial statements. (PAS 32, par. 36)

The difference between the redemption price and the Book Value per Share takes the ratio of a firm's common
financial liability is accounted for as gain or loss on equity divided by its number of shares outstanding.
redemption of the preference shares.
It effectively indicates a firm's net asset value (total assets
- total liabilities) on a per-share basis.
When a stock is undervalued, it will have a higher book
value per share in relation to its current stock price in the
market.
BVPS is used mainly by stock investors to evaluate a
company's stock price.
The book value per share (BVPS) metric can be used by
investors to gauge whether a stock price is undervalued by
comparing it to the firm's market value per share. If a
company’s BVPS is higher than its market value per share
—its current stock price—then the stock is considered
undervalued. If the firm's BVPS increases, the stock should
be perceived as more valuable, and the stock price should
increase.
In theory, BVPS is the sum that shareholders would
receive in the event that the firm was liquidated, all of
the tangible assets were sold and all of the liabilities were
paid. However, as the assets would be sold at market
prices, and book value uses the historical costs of assets,
market value is considered a better floor price than book
value for a company.
BVPS is measured based on:
 One class of outstanding share capital
'
Total Shareholder s Equity
BVPS=
Number of Outstanding Shares
Outstanding Shares = Issued Shares – Treasury Shares
When shares have been subscribed for but are unissued,
the amount of share capital subscribed is included in the
total shareholders’ equity and the number of shares
subscribed is added to the number of shares outstanding.
For purposes of computing the book value per share, any
balance of subscription receivable is NOT deducted to
arrive at the total equity of the shareholders.
Thus, in the event of a corporate liquidation, the
corporation shall collect the amount relating to unpaid
subscription to make it available for payment of creditors’
and shareholders’ interests
 More than one class of share capital
Total Shareholder s' Equity−LV
BVPS=
Number of Ordinary Outstanding Shares
The equity of the preference shareholders should be
determined first. Any excess of the total shareholders’
equity over the equity of the preference shareholders is
the equity of the ordinary shareholders.
 The book value per ordinary share is equal to the
total ordinary shareholders’ equity divided by the
total ordinary shares outstanding.
 The book value per preference share is equal to
the total preference shareholders’ equity divided
by the total preference shares outstanding.
The equity of the preference shareholders would be the
amount distributable to them in the event of corporate
liquidation.
The equity of the preference shareholder considers the
liquidation value and the special dividend rights of the
preference shares.
The liquidation value is the amount that the preference
shareholders normally receive upon liquidation of the
entity.
The liquidation value may be more than the par or the
stated value of the preference shares.
In the absence of liquidation value, the preference
shareholders shall receive an amount equal to the par or
stated value of the preference shares
HOW TO INCREASE THE BVPS
 Repurchase Common Stocks
 Increase Assets and Reduce Liabilities
RECAPITALIZATION
Recapitalization occurs when there is a change in the
capital structure of the corporation.
Recapitalization occurs through the cancellation of the old
shares and the subsequent issuance of the new shares.
Recapitalization may occur in the following form (aside
from split up and reverse split):
 Change from par to no-par
If the aggregate stated value of the new shares is lower
than the original issue price of the par value shares, the
difference is charged to the “share premium on
recapitalization” account.
As a rule, changes in the par value of share capital shall be
charged or credited to the share premium.
Ordinary Share Capital (par value)
Share Premium
Ordinary Share Capital (stated value)
Share Premium – recapitalization
However, if the aggregate stated value of the new shares
is higher than the original issue price of the par value
shares, the difference is charged to the “retained
earnings” account.
If the increase in share capital exceeds the share premium,
the excess is charged to retained earnings.
Ordinary Share Capital (par value)
Share Premium
Retained Earnings
Ordinary Share Capital (stated value)
 Change from no-par to par
If the par value of the new shares is lower than the
original issue price of the stated value shares, the
difference is charged to the “share premium on
recapitalization” account.
Ordinary Share Capital (stated value)
Ordinary Share Capital (par value)
Share Premium – Recapitalization
If the par value of the new shares is higher than the
original issue price of the stated value shares, the
difference is charged to the “retained earnings” account
Ordinary Share Capital (stated value)
Retained Earnings
Ordinary Share Capital (par value)
 Reduction of par value
If the par value of the new shares is lower than the par
value of the originally issued shares, the difference is
charged to the “share premium – recapitalization”
account
Ordinary Share Capital (par value) (amount to reduce the
new OSC (new pv))
Share Premium – Recapitalization
 Reduction of stated value
If the stated value of the new shares is lower than the
stated value of the originally issued shares, the difference
is charged to the “share premium – recapitalization”
account
Ordinary Share Capital (stated value) (amount to reduce to
the new OSC (new sv))
Share Premium – Recapitalization
*New Issuance < Original Issuance = Cr. Share Premium -
Recapitalization
*New Issuance > Original Issuance = Dr. Retained Earnings
SHARE RIGHTS
A corporation may issue rights, warrants, or options that
permit the purchase of the company’s shares for a
specified period (exercise period) at a certain price
(exercise price).
The terms “rights”, “warrants” and “options” are normally
beings used interchangeably. For accounting purposes,
though, these terms are distinct and separate from each
other.
Rights issue is granted to existing stockholders to enable
them to acquire new shares at a specified price during a
specified period.
In the Philippine setting, the appropriate term for rights
issue is share right.
SHARE RIGHTS
Rights issued to existing shareholders entitling them to
maintain a proportionate interest in the ownership of the
corporation when new shares are to be issued.
Whenever the share capital of a corporation is increased
and new shares are issued, the new issue must be offered
first to the existing shareholders in proportion to their
shareholdings before subscriptions are received from the
general public.
This stock right (PH term) or share right gives the holders
the privilege to purchase shares at a price lower than the
prevailing market price of the shares of stock.
Such legal right of the shareholders is called as the right of
preemption or pre-emptive right.
The said pre-emptive right prevents the dilution of voting If the cash to be paid by the holders of the share or stock
rights without the consent of the existing shareholders. rights is higher than the par value of the shares at the
time of exercise of the said share or stock rights, the entry
is:
Share warrants represent the certificate or instrument
Cash
evidencing ownership over the rights issue.
Share Capital
For every rights issue (share right), there is a
corresponding share warrant. Share Premium

The share warrants evidencing the rights issue state the

number of shares the holder may purchase as well as the
PREFERENCE SHARE ISSUED WITH SHARE WARRANTS
exercise price.
When issuing different types of securities, such as bonds
The exercise price is typically lower than the market value
and preference share, warrants may be included in the
of the shares at the time of the exercise of the share rights.
issuance as a "sweetener" to make the securities more
attractive to the prospective investors.

Issuance of Share Rights When share warrants are issued together with preference
share, there is actually a sale of two securities - the
No journal entry is required to be recorded in the books of
preference share and the share warrants.
accounts of the issuing corporation when share rights are
issued to existing shareholders because the share rights The proceeds shall be assigned first to the shares, at their
are usually issued without any consideration. market value if sold without the warrants; then the
remainder of the issue price is assigned to the warrants as
Only memorandum entry is required – to indicate the
part of equity.
number of share rights issued to shareholders and the
number of shares that can be purchased through the Issue Price = Equity (Shares) + Equity (Warrants)
exercise of the share rights
Residual Approach
The memorandum entry is necessary so that the
Thus, the consideration received shall be allocated
corporation may hold a sufficient number of unissued
between the preference share and the warrants on the
shares that may be exercised by the holders of share or
basis of their market value.
stock rights
Issuance:

Cash
Expiration of Share Rights
Preference Share Capital
Only a memorandum entry is required for the expiration
of share or stock rights. Share Premium – PS

Share Warrants Outstanding

Exercise of Share Rights * Share Warrants Outstanding – part of Share Premium
The usual journal entry is required to be recorded in the Exercised:
books of accounts of the issuing corporation to record the
issuance of the shares of stocks for cash consideration. Cash

If the cash to be paid by the holders of the share or stock Share Warrants Outstanding
rights is equivalent to the par value of the shares at the Ordinary Share Capital
time of exercise of the said share or stock rights, the entry
is: Share Premium – OS

Cash Not Exercised:

Share Capital Share Warrants Outstanding

 Share Premium – Unexercised Share Warrants Liabilities are also valued at fair value with any resulting
offsets going to the retained earnings deficit.

Quasi-reorganizations are controversial since they are not

QUASI-REORGANIZATION
a change of the economic reality, but rather a method to
A corporate readjustment that eliminates the accumulated make books appear more favorable.
deficit from past unprofitable operations without
Approval of:
undergoing a legal reorganization.
 SEC
It is a procedure in which a financially troubled company
 Stockholders
restates its accounts and establishes a fresh start in
 Creditors
accounting sense.
RECAPITALIZATION
Accounting rules permit quasi-reorganizations when there
has been a significant change in an existing business, Retained Earnings
either through a discontinuance of a substantial portion of
a business or a substantial new direction to an existing The deficit will be eliminated against the share premium
business. from recapitalization.

OBJECTIVE: In general, the principal effect of the quasi- 1. Adjustment in the fair value of the PPE
reorganization is to eliminate the accumulated deficit,  Carrying Amount > Fair Value
giving the company a “new starting point” with a zero Accumulated Depreciation
balance in retained earnings.
Retained Earnings
A quasi-reorganization is only permissive (allowed but not
obligatory; optional) but not a mandatory procedure that Property, Plant, and Equipment
can be taken by a financially troubled corporation – or
requires the approval of the SEC.
Retained Earnings
A quasi-reorganization is a relatively obscure provision
under generally accepted accounting principles (GAAP), Property, Plant, and Equipment
which states that under certain circumstances, a firm may
 Carrying Amount < Fair Value
eliminate a deficit in its retained earnings account by
restating assets, liabilities, and equity in a manner similar Property, Plant, and Equipment
to a bankruptcy.
Accumulated Depreciation
A firm's stockholders must agree to allow the accounting
Retained Earnings
change, which essentially resets the firm's books as though
a new company had incurred the assets and liabilities of or
the old firm.
Property, Plant, and Equipment
A quasi-reorganization (sometimes referred to as a
readjustment) resembles a legally executed Retained Earnings
reorganization, but the procedure is accomplished without 2. Adjustment in the fair value of other assets and
formal court proceedings and does not contemplate the liabilities
creation of a new legal entity, a change in ownership, or a  ↓ Value of Assets, ↑ Value of Liabilities
change in the rights and interests of creditors or
shareholders. Retained Earnings

The main goal of a quasi-reorganization is to bring the Assets/Liabilities

retained earnings balance to zero by writing down  ↑ Value of Assets, ↓ Value of Liabilities
overvalued assets to their fair value with a direct
reduction in retained earnings. Assets/Liabilities

Retained Earnings
 3. Reduction of the Share Capital Assets/Liabilities

Share Capital Retained Earnings

Share Premium 3. Resulting deficit to be charged against the

revaluation surplus
4. Resulting deficit to be charged against the share
premium arising from the recapitalization Revaluation Surplus

Share Premium Retained Earnings (zero)

Retained Earnings (zero) Retained earnings subsequent to the quasi-reorganization

shall be restricted to the extent of the deficit wiped out
during the quasi-reorganization and thus, cannot be
REVALUATION OF PPE declared as dividend.

No revaluation of PPE = cannot do this method
The deficit will be eliminated against the revaluation
surplus
1. Adjustment in the fair value of the PPE
The appraisal must be made by an independent expert or
specialist
 Carrying Amount > Fair Value
Accumulated Depreciation
(example: deficit = 5,700,000, net income = 6,000,000,
dividends up to 300,000)
Losses subsequent to quasi-reorganization cannot be
charged against the remaining revaluation surplus.
(example: RS = 5,700,000, loss = 2,000,000 (cannot be
charged to RS))
The quasi-reorganization shall be disclosed for at least
three (3) years – the date, mechanics, purpose and effect
of quasi-reorganization on the financial statements.

Revaluation Surplus

Property, Plant, and Equipment

or

Revaluation Surplus

Property, Plant, and Equipment

 Carrying Amount < Fair Value

Property, Plant, and Equipment

Accumulated Depreciation

Revaluation Surplus

or

Property, Plant, and Equipment

Revaluation Surplus

2. Adjustment in the fair value of other assets and

liabilities
 ↓ Value of Assets, ↑ Value of Liabilities

Retained Earnings

Assets/Liabilities

 ↑ Value of Assets, ↓ Value of Liabilities