RECAPITALIZATION

Recapitalization occurs when there is a change in the capital structure of the entity. The old

shares are canceled and new shares are issued.4

Typical recapitalizations

a) Change from par to no-par

b) Change from no-par to par

c) Reduction of par value

d) Reduction of stated value

e) Split up

f) Split down

A. CHANGE FROM PAR TO NO-PAR

✓ The old par value share is called in and replaced by new no-par share.

Ordinary share capital, P100 par, 50,000 shares

Share premium

Retained earnings 2,500,000

Case 1

All the 50,000 shares are called in for cancelation. Instead, 50,000 no-par shares with stated value of

P50 are issued.

Ordinary share capital 5,000,000

Share premium 500,000

Ordinary share capital (50,000 x 50) 2,500,000

Share premium-recapitalization 3,000,000

Case 2

All the 50,000 shares are called in for cancelation. Instead, 50,000 no-par shares with stated value of

P150 per share are issued.

Ordinary share capital 5,000,000

Share premium 500,000

Retained earnings 2,000,000

Ordinary share capital (50,000 x 150) 7,500,000

Note:

✓ If the aggregate stated value of the new shares is more than the original issue price of the par

value shares, the difference is charged to retained earnings, there is capitalization of the

retained earnings.

✓ Changes in the par value of share capital shall be charged or credited to share premium.

✓ If the increase in share capital exceeds share premium, the excess is charged to retained

earnings