FAR-EQUITY (please duplicate and revise o Preference shares – it gives

this into a more summarized note for preferences to the shareholders,

depa., then re-revise this into a much usually pertain to claims on dividends
more summarized version for qualifying and net assets in the event of
which is maoy I print nimo) liquidation. Preference shares have
only a limited or fixed return of
THEORIES investments.
o Share capital – is the portion of the
equity representing the total par or Accounting for share capital
stated value of the shares issue.
o Memorandum method
o Subscribed share capital – is the - no entry is made to record the
portion of the authorized share capital authorized share capital. Only a
that has been subscribed but not yet memorandum is made for the total
fully paid, and therefore still unissued. authorized share capital.

o Share premium – is the portion of the o Journal entry method

paid in capital representing excess - the authorization to issue share
over the par or the stated value. capital is recorded by debiting unissued
share capital and crediting authorized
o Retained earnings – represent the share capital.
cumulative balance of periodic
earnings, dividend distributions, prior Issuance of Share Capital
period errors and other capital o Par Value shares – issuance of shares
adjustments. in excess of par value shall be credited
to share premium
o Treasury shares – the corporation’s
own shares that have been issued and o No par value – issuance of shares in
then reacquired but not canceled. excess of stated value shall be credited
to share premium
o Par value share – one with specific
value fixed in the articles of Issuance of share capital for noncash
incorporation and appearing on the consideration
share certificate. This is the minimum o the share capital is recorded at an
issue price of the share amount equal to the following order
of priority:
o No – par value shares – one without a. Fair value of the noncash
any value appearing on the face of the consideration received
share certificate. b. Fair value of the shares issued
c. Par value of the shares issued
*Note: The minimum consideration or
issue price for no-par share per the o If shares are issued for services, the
Revised Corporation Code is P5. shares shall be recorded at the fair
value of such services or fair value of
o Ordinary shares – default class of shares issued, whichever is reliably
share capital. It has the same rights determinable.
and privileges, and it has no fixed or
specific return of investment.
Share issuance cost Callable Preference Shares
These are direct costs to sell share capital • can be called in for redemption at
legal fees a specified price at the option of
o CPA fees the corporation.
o underwriting fees • No definite redemption date as
o commissions this is dependent on the issuer
o cost of printing certificates • Is an equity instrument rather
o documentary stamps than a financial liability
o filing fees with SEC
o cost of advertising and promotion Redeemable preference shares
o newspaper publication fee. • provides for mandatory
redemption by the issuer for a
o Transaction costs that are directly fixed or determinable amount at a
attributable to the issuance of new future date.
shares shall be deducted from equity. • It gives the holder the right to
It shall be deducted on the share require the issuer to redeem the
premium arising from the share instrument
issuance. • Classified as current or noncurrent
financial liability
Cost of public offering of shares
• These relate to stock market Convertible Preference Share
listing, not issuance of new shares • gives the holder the right to
• NOT directly attributable to the exchange preference shares into
issuance of new shares ordinary shares.
• EXPENSED in the income • It could also be a conversion of
statement. preference shares into bonds
Examples: which is a change from equity to a
a. Road show presentation liability.
b. Public relations consultant’s fees TREASURY SHARES, RIGHTS ISSUE, SHARE
SPLIT
Joint costs Treasury Shares
PAS 32 requires that transaction costs that -entity’s own shares that have been issued
relate jointly to the concurrent listing and and then reacquired but not cancelled.
issuance of new shares, and listing of old
existing shares shall be allocated between Requisites to qualify as treasury shares:
newly issued shares, and the old listed • The shares must be the entity’s
existing shares own shares
Examples: • The shares must have been issued
1. Audit and other professional originally.
advice relating to prospectus • The shares are reacquired but not
2. Opinion of counsel cancelled.
3. Tax opinion *Note: The corporation can acquire
4. Fairness opinion and valuation treasury shares only to the extent of
report unrestricted retained earnings balance.
5. Prospectus design and printing
Treasury shares shall be recorded at cost.
Subsequently, the treasury shares may be
reissued or sold at cost, more than cost or
below cost.
o Reissuance at more than cost – reissue Usual recapitalizations
price over the cost is treated at share • Change from par to no par
premium. No gain or loss on • Change from no par to par
reissuance since it is an equity • Reduction of par value
instrument. • Reduction of stated value
• Split up
o Reissuance at below than cost – excess • Split down
of cost over the reissue price is
charged to the following order of Change with par value
priority: - charged or credited to share
1. Share premium from treasury premium.
shares However, if the increase in share capital
2. Retained earnings exceeds share premium, the excess is
charged to retained earnings.
Retirement of Treasury Shares
For retirement of treasury shares, entry is Share split
as follows: • Split up (share split proper)
Share capital (par or stated value)xxx • Split down (reverse share split)
Treasury shares xxx note: share split should not change the
total share capital.
 Any excess shall be credited to share
premium – treasury shares. Split up
• original shares are called in for
If the cost of treasury shares retired cancellation and replaced by a
exceeds the par value or stated value, the larger number accompanied by a
difference is allocated to the following (in reduction in the par value or
order of priority): stated value.
a. Share premium from original • Purpose is to increase the number
shares of outstanding shares, in effect, a
b. Share premium from treasury reduction in unit price market.
shares • Share split up should not change
c. Retained earnings the amount of share capital, only
number of shares, and par/stated
Presentation of treasury shares value.
Ordinary share capital XXX • only memorandum entry.
Share premium XXX
Retained earnings XXX Split down
Treasury shares (XXX) • original shares are canceled and
Total Shareholder’s Equity XXX replaced by a smaller number
accompanied by an increase in the
Recapitalization par or stated value.
• Occurs when there is a change in • Purpose is to decrease the
the capital structure of the entity. number of outstanding shares, in
The old shares are canceled and effect, an increase in unit price
new shares are issued. market.
• Share split down should not
change the amount of share
capital, only number of shares,
and par/stated value.
 • only memorandum entry. Thus, the consideration received shall be
allocated between the preference shares
Rights Issue and the share warrants on the basis of
• stock rights enable existing their market value.
shareholders to protect their
current ownership interest by Retained earnings
acquiring new shares issued Composed of:
before such shares are offered to a. Profit/Loss
new investors. b. Dividends
• Stock rights normally enable c. Prior period error
existing shareholders to purchase d. Changes in accounting policy
new shares at a price lower than e. Retirement of preference shares in
the shares’ market value. excess of original issue price
• Shareholders who are granted the f. Loss on sale of treasury shares in
rights issue are issued share excess of share premium from
warrants. treasury shares
• Also known as right of preemption g. Loss on retirement of treasury
shares in excess of share premium
Issuance of Share Rights from original issuance and share
• usually without consideration. premium from treasury shares
• Only a memorandum entry to
indicate: Kinds of retained earnings
1. number of share rights a. Unappropriated retained earnings
issued to shareholders - unrestricted portion and can be
2. number of shares that can declared as dividends to
be purchased through shareholders
exercise of the share b. Appropriated retained earnings
shares. - restricted portion, not available
• Only a memorandum entry is need for any dividend declaration.
as well for the expiration of rights.
Dividends
Exercise of share rights -are distributions of earnings or capital to
• If the share rights are exercised, a the shareholders in proportion to their
memorandum is made for the shareholdings. Classified into:
decrease in the number of shares a. Dividends out of earnings
claimable b. Dividends out of capital
• But for the issuance of shares
through the exercise of rights, Dividends out of earnings
then it is recorded normally. - these are dividends declared only from
retained earnings.
Preference shares issued with share 3 essential dates for accounting purposes:
warrants a. Date of declaration – directors
When preference shares are issued with authorize the payment of
share warrants, there is actually a sale of dividends to shareholders
two securities b. Date of record – only shareholders
1. Preference shares registered on such date are
2. Share warrants entitled to receive dividends
c. Date of payment – dividend
liability is to be paid
 Scrip dividends and Bond dividends
Usual dividends out of earnings: • Scrip dividends – a formal
a. Cash dividends evidence of the indebtedness to
b. Property dividends pay a sum of money at some
c. Liability dividends in the form of future time.
bond and scrip • Bond dividend – the company will
d. Share dividends or bonus issue issue bonds in payment of the
dividends
Cash dividends
- most common type of dividends Share dividend
- expressed as a certain amount of pesos • These are distributions of the
per share, or certain precent of the par or earnings of the entity in the form
stated value of the entity’s own shares.
• When share dividends are
Property dividends declared, the retained earnings of
-are distribution of earnings in form of the entity are in effect capitalized,
noncash assets meaning transferred to capital.
Measurement • It increases the share capital, and
-dividend payable should be measured at decreases the retained earnings.
fair value of the asset to be distribution
-increased or decreased as a result of fair How much of the retained earnings
value changes of the asset shall be should be capitalized?
recognized in equity as an adjustment to Guidance from local GAAP:
the retained earnings • If the share dividend is less than
20%, it is the fair value of shares
Settlement on the date of declaration.
-when an entity settles the dividend However, the FV must not be
payable, the difference between the lower than par or stated value,
carrying amount of the dividend payable otherwise, the amount debited to
and the carrying amount of the asset retained earnings is equal to par
distributed shall be recognized in profit or or stated value.
loss • If the share dividend is 20% or
more, the par or stated value is
Measurement of noncash asset capitalized is because this is
distributed conceived to materially affect a
-an entity shall measure a noncurrent reduction in the share market
asset classified for distribution at the value.
lower of carrying amount and fair value
less cost to distribute. Dividends out of Capital liquidating
dividends)
Choice of either noncash or cash - when the capital is returned to
• the entity shall estimate the dividend shareholders
payable by considering both the fair -this is paid to shareholders when the
value of each alternative and the company is dissolved and liquidated
associated probabilities of owners -during the lifetime of the entity, it is
selecting each alternative. illegal to return capital to the shareholders
in conformance with the trust fund
doctrine
-exceptions: wasting asset corporations
Retained Earnings o distributable equity – the portion that
o Unappropriated earnings – available can be distributed to shareholders as
retained earnings, can be declared as dividends without impairing the legal
dividends. capital of the entity.
o Appropriated earnings – could be o Non-distributable equity – cannot be
legal, contractual or voluntary distributed to the shareholders in any
form during the lifetime of the entity.
- Legal appropriation – legal capital
that cannot be returned to the Non-distributable equity reserves
shareholders until the entity is • Share premium
dissolved and liquidated. • Appropriate reserve/retained
- Contractual appropriation – terms earnings
of the bonds issue and preference • Asset revaluation reserve
share issue may impose restriction • Other comprehensive income
on dividends, eventual payment of reserve
bonds payable, and redemption of
preference shares Quasi-reorganization
- Voluntary appropriation – could be • It is a permissive but not
due to expansion or for covering mandatory procedure under
losses or contingencies. which a financially troubled entity
restates its accounts and
Accounting for appropriation establishes a fresh start in
To establish appropriation of funds: accounting sense.
Retained earnings xx • in conformity with fair value for
Retained earnings-appropriated xx the purpose of eliminating a
deficit.
When appropriation is no longer
necessary: Accomplished through:
Retained earnings-appropriated xx a. Recapitalization
Retained earnings xx - the deficit is eliminated against
the share premium from recapitalization
Items affecting directly retained earnings a. Revaluation
• Net income or loss for the period - the deficit is eliminated against
• Prior period errors the revaluation surplus
• Dividends to shareholders
• Effect of change in accounting Circumstances that may justify quasi-
policy reorganization
• Appropriation of retained earnings • When a large deficit exists
• Retirement of treasury shares • When approved by the shareholders
• Recognition of share issuance cost and creditors
• Call of preference shares • When the cost basis of the accounting
• Conversion of preference shares for property, plant and equipment
into ordinary shares becomes unrealistic.
• SEC will allow to revalue the entity’s
Reserves PPE if the current value is substantially
• It forms part of the equity on the more than their cost.
entity • When a fresh start appears to be
• Could be distributable equity or desirable or advantageous to all
non-distributable equity parties.