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SHAREHOLDER’S EQUITY

DEFINITION & COMPONENTS OF SHAREHOLDER’S EQUITY

- Shareholder’s equity or stockholder’s equity is the residual interest of owners in the net assets of a corporation
measured by the excess of assets over liabilities.

Share Capital (Ordinary and Preferred)

Subscribed Share Capital (Ordinary and Preferred)

Contributed Capital
Share Premium

Less: Subscriptions Receivable

Unappropriated RE
Accumulated Profit or Loss
Accumulated (Retained Earnings)
Components of
Comprehensive Appropriated RE
Shareholder’s Equity
Income
Accumulated Other
Comprehensive Income
and Losses

Treasury Shares

Deductions from SHE Discount on Share Capital

Capital Liquidated

KEY NOTES REGARDING COMPOSITION OF SHE

1. Presentation of Subscription Receivable

General Rule and if silent as to maturity: Subscription Receivable is presented as a deduction from
contributed capital (specifically subscribed share capital)
Exception: If the maturity date of the receivable is within 12 months, it is presented as a current asset rather
than deduction from contributed capital.

2. Share Premium is not just the portion of the paid-in capital representing the excess over the par or stated value.
Broadly, the common sources of share premium are:
 Excess over par value or stated value
 Capital gains (from treasury shares transactions, retirement, conversion and etc.)
 Distribution of stock dividend (when market value of share is more than par or stated value)
 Ordinary Share Warrants Outstanding and Bond Conversion Privilege (under the topic of Compound
Financial Instruments) and Ordinary Share Options Outstanding (under the topic Share-based Payments)
 Donated Capital
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 Quasi-reorganization
 Forfeited subscription

3. Accumulated Other Comprehensive Income and Losses are presented separately as a line item for each type of OCI
or OCL. They are as follow:
 Unrealized gain or loss from a derivative instrument designated as cash flow hedge. (Advance Financial
Accounting and Reporting subject)
 Unrealized gain or loss from translation of foreign currency financial statements. (Advance Financial
Accounting and Reporting subject)
 Unrealized gain or loss from change in fair value of debt and equity instrument measured at FVOCI.
 Revaluation Surplus (PPE topic)
 Remeasurement of employee benefits. (Employee Benefits topic)
 Unrealized gain or loss from change in fair value of financial liability due to credit risk.

4. Distinction between Ordinary Shares and Preferred Shares

Ordinary Shares Preference Shares
Return on Investment (Income) Residual Fixed
Priority during Liquidation Least priority High priority
Rights and privileges granted to shareholders of corporation Same May vary
Can be issued with no par value? Yes No
With voting rights? Yes No
Other features None Convertible Redeemable
or with warrants

5. Par value and No Par value shares

 Par Value shares
o one with specific value fixed in the Articles of Incorporation and appearing on the Share
Certificate.
o the purpose of the par value is to fix the minimum issue price of the share.
 No Par Value shares
o one without any value appearing on the face of the Share Certificate.
o but a no-par value share has always an “issued price” or “stated value” which may be fixed
by the Articles of Incorporation or Board of Directors. The minimum stated value of no-par
share is Php 5.00.

6. Share capital and subscribed share capital

 Subscribed share capital – is the portion of the unauthorized share capital that has been subscribed but
not yet fully paid and therefore still unissued.
 Share Capital – is the portion of the authorized share capital already issued (i.e. already fully paid)

7. Legal Capital
 Legal Capital – is the portion of the paid-in capital arising from the issuance of share capital which cannot
be returned to the shareholders in any form during the lifetime of the corporation.
NOTE: Subscription Receivable is ignored in computing legal capital.
 The amount of legal capital is determined as follows:
Par Value Shares No Par Value Share
Share Capital (Ordinary or Preferred)  
Subscribed Share Capital (Ordinary or Preferred)  
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Share Dividends Payable  

Share Premium (in excess of par or stated value) 

8. Reserves
 Reserves – is a grouping required by PAS 1 as a minimum line item and computed as follows:
Total Share Premium x
Total Other Comprehensive Income or Losses x(x)
Appropriated Retained Earnings x
TOTAL RESERVES x

9. Discount on Share Capital

 This account exists if shares are issued for consideration less than par or stated value.
 The journal entry includes:
Cash x
Discount on Share Capital x
Share Capital (@ par value) x

ISSUANCE, SUBSCRIPTION AND RETIREMENT

In journalizing issuance and subscription transactions, two methods may be used namely:
1. Memorandum Entry Method
o The most common method used. In this method, no entry is made during authorization. During issuance,
one principal account will be used, namely “Share Capital”.
2. Journal Entry Method
o In this method, one principal account and contra-account will be used. The principal account is the
“Authorized Share Capital” which remains generally constant while the contra-account is the “Unissued
Share Capital” which decreases every time there is an issuance of share.

TRANSACTIONS MEMORANDUM ENTRY METHOD JOURNAL ENTRY METHOD

Unissued Share Capital x
Authorization Date No entry
Authorized Share Capital x
Cash x Cash x
Issuance Date
Share Capital x Unissued Share Capital x
Subscription Receivable x Subscription Receivable x
Subscription Receivable
Subscribed Share Capital x Subscribed Share Capital x
Cash x Cash x
Collection Date (Partial)
Subscription Receivable x Subscription Receivable x
Issuance Date of Previous Cash x Cash x
Subscription (upon full collection) Share Capital x Unissued Share Capital x

MEASUREMENT OF CONSIDERATION
Types of Consideration
 Cash - Face Value
 Non-Cash Assets 1. Fair Value of Shares
Fair Value , if none:
 Services 2. Par Value of Shares

SHARES TO BE ISSUED
 One Class Par Value Shares
- Ordinary Shares
No Par Value Shares (stated value > Php 5.00)
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- Preference Shares
1. Fair Value Approach
 Two Classes of Shares for a Lump Sum Consideration – split the consideration
2. Residual Approach
Fair Value Approach – fair value of all class of shares is available.
Residual Approach – not all fair value of shares is available.

RELATED COSTS OF ISSUANCE

RELATED COSTS SHARE ISSUANCE COSTS (SIC) LISTING COSTS (LC) JOINT COSTS (JC)
Transaction costs that relate
Costs of public offering
jointly to the concurrent
of shares NOT directly
Nature of Costs Direct costs to sell equity shares. listing and issuance of new
attributable to the
shares, and listing of old
issuance of new shares.
existing shares.
Contra equity account as a
deduction from the following in
Allocated (No. of Shares)
the order of priority: Expense in the income
Accounting Treatment - Issuance (SIC)
1. Share Premium from statement.
- Listing (LC)
previous share issuance.
2. Retained Earnings
- Audit and other
- Underwriting and Commission professional advice
- Accounting and Legal Fees relating to prospectus
- Road show
- Printing Costs - Opinion of counsel
presentation
Examples - Documentary Stamps - Tax Opinion
- Public relations
- Filling Fees with SEC - Fairness opinion and
consultant fees
- Costs of Advertising or valuation report
Promoting the issue. - Prospectus design and
printing

DELINQUENT SUBSCRIPTIONS

If a subscriber of shares does not pay on the date fixed by the Board of Directors, the subscriptions are declared
delinquent and the delinquent shares will be sold at a public auction to a HIGHEST BIDDER.

The highest bidder is the person who is willing to pay the offer price of the delinquent shares for the smallest
number of shares. The offer price includes:
 Balance due on the subscription
 Interest accrued on the subscription due
 Expenses of advertising and other costs of sale

Example: 10,000 shares are delinquent. Bidders: A – 7,000 shares

B – 8,000 shares
C – 4,000 shares

Here, the highest bidder is C since he/she is willing to pay the offer price for the smallest number of
shares. Then the 10,000 shares will be shared by the following:
Delinquent Subscriber – 6,000 shares
Highest Bidder – 4,000 shares
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If there is NO highest bidder, the Corporation may purchase for itself the delinquent shares and will be part of
Treasury Shares. The purchase must be backed up by sufficient balance of Unrestricted Retained Earnings in
accordance to the Trust Fund Doctrine.

[Under the Trust Fund Doctrine, the capital stock, property, and other assets of a corporation are regarded
as equity in trust for the payment of corporate creditors, who must first be paid before any corporate
assets may be distributed among stockholders.]

If such happens, the delinquent subscriber shall be released from any liability with regard to his or her subscription
but will not share to any number of delinquent shares unlike if there is a highest bidder.

RETIREMENT OF SHARES
- Retirement of shares is known as cancellation of issued shares.
- In accordance with the Trust Fund Doctrine, before you retire shares, there should be an Unrestricted Balance of
Retained Earnings.

Original Issue Price > Retirement Price
 GAIN ON RETIREMENT (Share Premium)
Journal Entry:
Share Capital
Share Premium – excess of par
Cash (retirement price)
Share Premium – retirement
Original Issue Price < Retirement Price
 LOSS ON RETIREMENT, charged to:
1. Related share premium
(share premium – retirement)
2. Retained Earnings
Journal Entry:
x Share Premium – retirement x
x Retained Earnings (in excess) x
x Share Capital x
x Share Premium – excess of par x
Cash (retirement price) x

TREASURY SHARES
- Entity’s own shares NOTE: Limitation on acquisition of Treasury Shares
- Issued shares and were not cancelled available balance of Unrestricted Retained Earnings
- Not outstanding shares (Trust Fund Doctrine)

ACCOUNTING FOR TREASURY SHARES

1. Reacquisition
o Treasury Shares are measured at COST, the value of consideration given up to acquire the Treasury Shares.
o The cost is:
 Cash – Face Value
 Non-Cash – Carrying Amount
o Journal Entry:
Treasury Shares (at cost) x
Cash / Non-Cash Asset x

2. Reissuance
o The main concern of reissuance would be the gain or loss on reissuance of treasury shares.
Cash – Face Value
Selling Price (a) x
Cost of Treasury Shares sold (b) x Non-Cash Assets – Fair Value
Gain or Loss from Reissuance (c) x Specific Identification
FIFO
Weighted Average
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a. The selling price depends on the consideration received for the issuance of treasury shares. It could be:
 Cash – face value
 Non-Cash Assets – fair value of non-cash consideration

b. The cost to be assigned to treasury shares depends on the method used in accounting for the movement of
treasury shares. These methods are as follows:
 Specific Identification
- The problem stated from what reacquisition date the treasury shares sold are attributable.
 First In, First out
- If silent, use FIFO. The treasury shares sold will be coming from the earliest acquisition.
 Weighted Average
- The value of all treasury shares are equal on the point of view that the cost to be used will be
the weighted average amount.
- Weighted Average Cost = Total Amount of Treasury Shares available for sale in Peso amount
Treasury Shares available for sale

c. Gain on Reissuance (capital gain) = credited to Share Premium – Treasury Shares

Loss on Reissuance (capital loss) = debited to:
1. Share Premium – Treasury Shares
2. Retained Earnings

Example: Jan 1 Acquired 1,000 shares @ Php 20 = Php 20,000

Jan 15 Acquired 1,000 shares @ Php 30 = Php 30,000
Jan 25 Reissue 1,000 shares @ Php 50

Required: Compute the Cost of Treasury Shares

a) For Specific Identification: The cost of reissued 1,000 shares came from January 15 acquisition.
Cost of Treasury Shares 1,000 x Php 30 = Php 30,000
b) For FIFO:
Cost of Treasury Shares 1,000 x Php 20 = Php 20,000
c) For Weighted Average:
Cost of Treasury Shares Total Cost of T.S. available for Issuance
Total Number of T.S. available for reissuance
= Php 50,000
2,000 shares
= Php 25/share
= 1,000 x Php 25 = Php 25,000
3. Retirement

Cost of Treasury Shares < Original Issue Price Cost of Treasury Shares > Original Issue Price
 GAIN ON RETIREMENT (Share Premium)  LOSS ON RETIREMENT, charged to:
1. Share Premium – Treasury Shares
2. Retained Earnings
Journal Entry: Journal Entry:
Share Capital x Share Premium – Treasury Shares x
Share Premium – excess of par x Retained Earnings x
Treasury Shares (@cost) x Share Capital x
Share Premium – Treasury Shares x Share Premium – Excess of PA x
Treasury Shares (@ cost) x
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OTHER EQUITY INSTRUMENTS

REDEEMABLE PREFERENCE SHARES vs. CALLABLE PREFERENCE SHARES

REDEEMABLE PREFERENCE SHARE CALLABLE PREFERENCE SHARE

Acquisition Option With the Holder With the Issuer (Corporation)
Redemption Date Mandatory (Maturity Date) Indefinite
Classification Financial Liability Equity Instrument
Effect of Redemption Extinguishment of Liability Retirement of Shares
Gain on Redemption Profit or Loss Share Premium – Retirement
1. Share Premium Retirement
Loss on Redemption Profit or Loss
2. Retained Earnings
Interest Expense Dividends

Dividends Journal Entry: Journal Entry:

Interest Expense x Retained Earnings x
Liability x Liability x

RIGHTS, WARRANTS AND OPTIONS

a. Rights – are issued to entitle the general stockholders in relation to their pre-emptive right, to protect their
proportional interest whenever corporations issue new shares.
b. Warrants – are issued as an attachment to a principal security (bond or preference shares) as an inducement
to buyers of the principal securities.
c. Options – are issued to key executives and officers as additional compensation for either past of future
services provided to the company.

CONVERTIBLE PREFERENCE SHARES

- A Convertible Preference Share is one which gives the holder the right to exchange the holdings for other securities
of the issuing corporation.
- A preference share may be converted into Ordinary Shares or Bond Payable.

- If the preference shares are converted into Ordinary Shares, the Preference Shares are retired.
- Thus, the step-by-step procedure for Retirement will apply.
- Then the Ordinary Shares will be issued, the Issuance will apply.

Journal Entries:
If conversion resulted to Gain (Capital Gain), it is credited to Share Premium – Ordinary.
Preference Share Capital x
Preference Share Premium x
Ordinary Share Capital x
Ordinary Share Premium x

If conversion resulted to Loss (Capital Loss), it is debited to Retained Earnings.

Preference Share Capital x
Preference Share Premium x
Retained Earnings x
Ordinary Share Capital x
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DONATION

FORM OF DONATION SOURCE MEASUREMENT

Cash Third party or shareholders Face Value
Non-Cash Assets Third party or shareholders Fair Value
Entity’s Own Shares Shareholders Not Applicable; Memo Entry only

If the donation came from a third party, the credit is Other Income.
If the donation came from a related party or shareholder, the credit is Donated Capital.

Upon reissuance of the donated shares (Treasury Shares), the entry is:
Cash or Non-Cash Asset x
Donated Capital x

RETAINED EARNINGS

BASIC CONCEPTS OF AND TYPES OF RETAINED EARNINGS

- Retained Earnings represent the cumulative profits and losses which are retained and not yet distributed as
dividends to the shareholders.
- Total Retained Earnings may be:
o Unappropriated Retained Earnings – represents the free portion that can be declared as dividends to
stockholders.
o Appropriated Retained Earnings – represents the restricted portion that cannot be available for any dividend
declaration unless the restriction is subsequently reversed.

TYPES OF APPROPRIATION
- Legal Appropriation
o Are required by law as in the case of Treasury Shares.
o Retained Earnings must be appropriated to the extent of the cost of treasury shares.
- Contractual Appropriation
o Are required by contract such as appropriation for Bond or Preference Share Redemption.
- Voluntary Appropriation
o A matter of discretion on the part of management such as appropriations for plant expansion or
appropriations for contingencies.

The appropriation of retained earnings is recorded as follows:

Retained Earnings – Unappropriated x
Retained Earnings – Appropriated x

Appropriations of Retained Earnings do not affect Shareholder’s Equity as well as the Total Retained Earnings since both
types of retained earnings comprise the total retained earnings.

NEGATIVE BALANCES IN EQUITY

- When the retained earnings account has a debit balance, it is called a “deficit”
- This is presented as a deduction from Total SHE.
- When the total SHE has a negative balance, this is described as “capital deficiency”
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COMPONENTS OF RETAINED EARNINGS

Retained Earnings – Beginning x
+/- Adjustments for Retrospective Restatement of Prior Period Errors x/(x)
+/- Adjustments for Retrospective Application of Change in Accounting Policy x/(x)
Adjusted Retained Earnings – Beginning x
Net Income (Loss) x/(x)
Dividends (x)
+/- Movements in Appropriations x/(x)
Unappropriated Retained Earnings – End x

DIVIDENDS
- Dividends are distributions of earnings or capital to shareholders in proportion to their shareholdings. If the entity
has a deficit, it is illegal to pay dividends.

RELEVANT DATES IN ACCOUNTING FOR DIVIDENDS

1. Date of Declaration
o The date when the Board of Directors formally announces the distribution of dividends.
2. Date of Record
o The date on which the stock and transfer book of the corporation is closed for registration.
o Only those who are listed as of this date is entitled to receive dividends.
3. Date of Payment
o The date when the dividends declared are distributed to the shareholders.

ACCOUNTING FOR DIVIDENDS

- Only Outstanding Shares are entitled to dividends.
- Outstanding Shares = Issued Shares + Subscribed Shares – Treasury Shares

TYPES OF DIVIDENDS

1. Cash Dividends
o Most common form of dividends.
o It can be declared as a certain amount per share or a certain percentage of the par value of shares.
2. Property Dividends
o These are dividends in the form of Non-Cash Assets (inventory, investments in shares of another entity,
property, plant and equipment, etc.)
o Aka the “dividends in kind”
3. Share Dividends
o The distribution of the earnings of the entity in the form of the entity’s own shares.
o Declaration for this type of dividend in effect results to capitalization of retained earnings.
o Aka the “bonus issue”
o It is not a liability but an addition to the share capital in the stockholder’s equity.
o Share Dividends are accounted for as:
 20% or more (Large Stock Dividend) – par or stated value
 Less than 20% (Small Stock Dividend) – fair value
4. Scrip or Liability Dividends
o These are measured at Face or Present Value of the dividend.
o If scrip dividends bear interest, the interest portion of the cash payment should be debited to Interest
Expense and should not be treated as dividends.
o Aka the “deferred cash dividends”
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5. Liquidating Dividends
o Distribution of the return of capital to shareholders.
o This type of dividend can legally be paid under the following circumstances:
 When the entity is undertaking a complete dissolution and liquidation.
 When the entity is engaged in the exploitation of natural resources.

DIVIDENDS TO PREFERENCE SHARES

1. Preference over Assets

o Preference shares are settled first upon corporate liquidation and after the creditor’s claims.
o Any remaining amount is paid to the ordinary shareholders.
o If the preference shares are not preferred as to assets, the remaining amount after the settlement of liability
Is shared proportionately by preference and ordinary dividends.
2. Preference over Dividends
o When dividends are declared, preference shares are paid first before the ordinary shareholders.
o Preference over dividends may be:
 Non-Cumulative Preference Share
- One in which the right to receive dividends is forfeited in any one year in which dividends
are not declared.
 Cumulative Preference Share
- One on which any undeclared dividends accumulate each year until paid.
- Accordingly, the cumulative preference share is entitled to a “dividend in arrears”.
 Non-Participating Preference Share
- One that is entitled to receive only the dividends equal to the fixed preference rate.
 Participating Preference Share
- One which is entitled to receive dividends in excess of the basic or fixed dividend rate.
o If silent, use Noncumulative and Nonparticipating.
o If there are 2 or more classes of participating preference shares, use the lowest participation rate to
determine the basic dividend the ordinary share should receive first.

RECAPITALIZATION
- Refers to the change in the capital structure of an entity brought about by the cancellation of old shares and issuance
of new shares as replacement.
- After recapitalization, total SHE remains the same.
- Recapitalization is accomplished through any of the following:
1. Change from par to no par and vice versa
2. Reduction of par or stated value
3. Share splits or reverse splits
- For numbers (1) and (2), a journal entry is involved, it is accounted for as if the retirement of old shares and issuance
of new shares.
- On the other hand, number (3) is accounted for by issuing a memorandum entry.
o Split-Up – increase the number of shares but decreasing the par value of shares
o Split-Down – decreases the number of shares but increasing the par value of shares.

QUASI – REORGANIZATION
- Is a permissive but not mandatory procedure under which a financially troubled entity restates its accounts and
establishes a “fresh start” in accounting sense.
- The main goal of the procedure is to eliminate the deficit in retained earnings. Quasi-reorganization is effected
through:
o Revaluation of Property, Plant and Equipment
o Recapitalization
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- The accounting steps and procedures for quasi-reorganization are as follows:

1. Assets and liabilities are revalued upwards or downwards.
2. Any resulting credit balance in revaluation surplus is to be used to wipe out the deficit.
3. If recapitalization is made, any resulting share premium shall also be used to wipe out the deficit.