RETAINED EARNINGS b.

Dividends out of capital

DIVIDENDS OUT OF EARNINGS
Retained earnings represent the cumulative balance of the following,
among others: 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
a. Net income or loss for the period
dividend in excess of the retained earnings balance, the excess is a return
b. Dividend distribution
of capital and therefore violates the trust fund doctrine.
c. Prior period errors
d. Changes in accounting policy
e. Reclassifications of some components of other comprehensive
income (OCI) Three (3) dates are essential for accounting purposes, namely:
f. Retirement of preference shares in excess of original issue price a. Date of declaration is the date on which the directors authorize the
g. Loss on sale of treasury shares in excess of share premium from payment of dividends to shareholders.
treasury shares b. Date of record is the date on which the stock and transfer book of
h. Loss on retirement of treasury shares in excess of share premium the corporation shall be closed for registration. Only those
from original issuance and share premium from treasury shares. shareholders registered as of such date are entitled to receive
- the IFRS term for retained earnings is accumulated profits. dividends. No entry is required on this date but a list of the
shareholders entitled to receive dividends is made.
c. Dare of payment is the date on which the dividend liability is to be
paid.
KINDS OF RETAINED EARNINGS:
The dividends out of earnings are usually in the form of the following:
 Unappropriated retained earnings
 Appropriated retained earnings a. Cash dividends
b. Property dividends
Unappropriated retained earnings represent that portion which is free
c. Liability dividends in the form of bond and scrip
and can be declared as dividends to shareholders.
d. Share dividends or bonus issue
Appropriated retained earnings represent that portion which has been
CASH DIVIDENDS
restricted and therefore is not available for any dividend declaration.
Cash dividends are the most common type of dividend. The term dividend
Deficit is called when retained earnings account has a debit balance. It is a
standing alone normally implies the distribution of cash. Dividends may be
deduction from shareholders’ equity. The IFRS term for deficit is
expressed as:
accumulated losses.
DIVIDENDS
a. A certain amount of peso per share – for example, the dividend is P5
Dividends are distributions of earnings or capital to the shareholders in
per share.
proportion to their shareholdings. Dividends are broadly classified into two
b. A certain percent of the par or stated value – thus, if a 7% dividend is
namely:
declared , a P200 par value share shall receive P14 as dividend.
a. Dividends out of earnings
When cash dividends are declared, a current liability is recognized on the Accordingly, if the fair value less cost to distribute is lower than the carrying
date of declaration by: amount of the asset at the end of the reporting period, the difference is
accounted for as impairment loss.
Retained earnings xxx
Dividend payable xxx
Choice of either noncash or cash:
When the dividends declared are paid, the entry is debit Dividend payable
then credit cash. IFRIC 17, par. 12, provides that if an entity gives its owners a choice of
either a noncash asset or a cash alternative, the entity shall estimate the
PROPERTY DIVIDENDS
dividend payable by considering both the fair value of each alternative and
Property dividends or dividends in kind are distribution of earnings to the the associated probabilities of owners selecting each alternative.
shareholders in the form of noncash assets.
LIABILITY DIVIDENDS IN THE FORM OF BOND AND SCRIP
Measurement of property dividend payable:
Scrip or liability dividends – A.K.A deferred cash dividends. This are
IFRIC 17, par. 11, provides that an entity shall measure a liability to measured at face or present value of the dividend. If scrip dividends
distribute noncash as a dividend to its owners at the fair value of the bear interest, the interest portion of the cash payment should be
asset to be distributed. debited to interest expense and should not be treated as dividends.
Par. 13 further provides that at the end of each reporting period and at the
SHARE DIVIDENDS OR STOCK DIVIDENDS
date of settlement, the entity shall review and adjust the carrying amount
of the dividend payable with any change recognized in equity as adjustment
Share dividends are distribution of the earnings of the entity in the
to the amount of distribution.
form of the entity’s own shares.
Simply stated, the dividend payable is initially recognized at the fair value When share dividends are declared, the retained earnings of the
of the noncash on date of declaration and is increased or decreased as a entity are in effect capitalized, meaning transferred to share capital.
result of the change in fair value of the asset at year- end and date of
settlement. The asset of the entity remain the same before and after the
issuance of the share dividends.
The offsetting debit or credit is through equity or directly retained earnings.
The share dividends create only change in the components of the
Settlement of property dividends payable: shareholders’ equity : decrease in retained earnings but increase in
share capital.
IFRIC 17, par. 14, provides that when an entity settles the dividend
payable, the difference between the carrying amount of the dividend  If the share dividend is LESS THAN 20 % : the amount charged
payable and the carrying amount of the asset distributed shall be to retained earnings is equal to the fair value on the date of
recognized in profit or loss. declaration. It is conceived as a small share dividend .
Measurement of noncash asset distributed: The fair value must not be lower than par or stated value. Otherwise ,
the amount debited to retained earnings is equal to par or stated
Par. 15A further provides that an entity shall measure a noncurrent asset value.
classified for distribution to owners at the lower of carrying amount
and fair value less cost to distribute.
  If fair value, the difference of FV and PAR is credited to Share
premium.

 If the share dividend is 20% or more, the par or stated value is

capitalized because this is conceived to materially effect a
reduction in the share market value. It is considered as large
share dividend.
TREASURY SHARES AS SHARE DIVIDEND
- 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 dividend is termed as property
dividend under the Philippine Corporation Code. COMPONENTS OF RETAINED EARNINGS
- However, the authors believe that such declaration shall be
Retained earnings unappropriated – beg
accounted for as share dividend because the entity’s obligation is not to
xx
convey noncash asset but to reissue its own share capital, and therefore no
+/- adjustments for Retrospective restatement of prior period errors
accounting liability arises.
xx/(xx)
To record the declaration: +/- adjustments for Retrospective application of change in accounting policy
xx/(xx)
Retained earnings XXX Adjusted Retained Earnings Unappropriated – beg
Share dividend payable XXX xx
To record the issuance of the treasury shares: +/- Net income (loss)
xx/(xx)
Share dividend payable XXX - Dividends
Treasury shares XXX (xx)
+/- movement in appropriation
DIVIDENDS OUT OF CAPITAL xx/(xx)
Unappropriated Retained Earnings – end
- When capital is returned to shareholders, it is known as dividend out of xx
capital or liquidating dividend.
-As a rule, liquidating dividends are paid to the shareholders when the COMPONENTS OF SHAREHOLDER’S EQUITY
entity is dissolved and liquidated. Share capital issued:
- During the lifetime of the entity, it is illegal to return capital to the Ordinary shares xx
shareholders in conformance with the trust fund doctrine. Preference shares xx
Subscribed share capital:
Subscribed ordinary shares xx
 Subscribed preference shares xx
Less : subscription receivable (xx)
Share premiums:
Share premium – excess over par xx
Share premium- treasury shares xx
Share premium- convertible bonds xx
Donation capital xx
Share premium- warrants outstanding xx
Share premium- Option outstanding xx
Other comprehensive income (OCI):
Revaluation surplus xx
Unrealized gain or loss on FVTOCI xx (xx)
Remeasurement gain or loss xx (xx)
Translation gain or loss xx (xx)
Effective portion of cashflow hedge xx (xx)
Change in FV due to credit risk xx (xx)
Retained earnings xx
Treasury shares (xx)

Total shareholder’s Equity xxx