FAR - Shareholder’s Equity Notes

SHAREHOLDER’S EQUITY - the owner’s RE, beg xxx

claims against the assets in a corporation. Add: Net Income xxx
Less: Dividends (xxx)
COMPONENTS OF SHE RE, end xxx
Contributed Capital xxx
Add: Retained Earnings xxx Appropriated RE (Reserves) - restricted as
OCI xxx to dividend distributions
Less: Treasury Shares (xxx) Unappropriated RE - unrestricted;
Contributed Capital xxx declaration of dividends
RE Deficit - negative balance in RE; deducted
1. CONTRIBUTED CAPITAL from total SHE
Components:
Share Capital xxx ISSUANCE OF SHARE CAPITAL
Add: Share Premium/APIC xxx Shares shall not be issued less than par or
Subscribed Share Capital xxx stated value. No par shares cannot be issued
Less: Subscription Receivable (xxx) for less than P5.
Contributed Capital xxx
Shares may be issued either for cash or
Share Capital - already issued; may either be noncash considerations (property or services).
ordinary or preferred; always at par, if no par It cannot be issued in exchange of promissory
then stated value. note or future service.
 Ordinary - has voting rights
 Preference/Preferred - generally do Issued for cash
not have voting rights; has a fixed JE:
value of returns Cash (proceeds) xxx
Share Capital (par) xxx
Share Premium - also called as Additional Share Premium xxx
Paid-in Capital.
Sources: Issued in exchange for noncash
a. Excess over par consideration
b. Resale of treasury shares at above cost Value of shares:
c. Donated capital 1. FV of noncash consideration received
d. Issuance of share warrants 2. FV of shares
e. Issuance of convertible bonds payable 3. Par value/stated value
f. Distribution of small stock dividends
g. Quasi reorganization or recapitalization Issuance of 2 or more equity securities
- allocate the proceeds
Subscribed Share Capital - unissued 1. Relative FV approach (if all FV of securities
capital; not yet fully paid are given) - allocate proceeds based on
relative FV
Subscription Receivable - remaining 2. Residual Approach - (if not all FV are given)
balance or the unpaid balance of subscribed
capital. Watered stock - issuance of share below par;
- if current, treated as part of current illegal
assets JE:
- if noncurrent, treated as a contra Cash xxx
equity account Discount on SC xxx
Share Capital xxx
2. OTHER COMPREHENSIVE INCOME (OCI)
- a real account Discount on share capital is deducted from the
Components: total SHE.
a. Change in revenue surplus (RE)
b. Unrealized gain/loss in FV of investment in ACCOUNTING FOR SHARE CAPITAL
FA@FVOCI 1. Memorandum Method
 Equity investment (RE) 2. Journal Entry Method
 Debt investment (P/L) Memo JE
c. Actuarial gains/losses (remeasurements) Authorizatio - Dr Unissued SC
d. Gains/losses on translation (P/L) n of shares Cr Authorized SC
e. Unrealized gains/losses on forward Issuance of Dr Cash Dr Cash
contracts classified as cash flow hedge (P/L) shares Cr SC Cr Unissued SC

3. RETAINED EARNINGS - also known as

accumulated profits Organizatio Costs of IPO Share
Components: n Costs Issuance
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FAR - Shareholder’s Equity Notes

Costs  If issue price is greater than par of CS,

Costs Costs Costs it is credited to SP-OS
incurred in incurred in incurred in  If issue price is less than par of CS, it is
organizing initially the issuance debited to RE
the business offering the of shares
shares to the PS ISSUED WITH SHARE WARRANTS
public Callable - allocate the proceeds either by RFV
Expensed Expensed Treated as a approach or Residual approach
outright outright contra equity
account Redeemable - treated as a compound
Charged to: financial instrument; proceeds are first
1. SP of allocated to the liability (FV/PV) and then the
current residual amount to the share warrants
issuance
2. SP of DELINQUENT SUBSCRIPTION
previous (DELINQUENCY)
issuance These are offered at a public auction by the
3. RE issuing corporation and is sold to the highest
bidder.
LEGAL CAPITAL
If par value shares: Highest bidder - the person who is willing to
Share Capital xxx pay the offer price for the least number of
Add: Subscribed Share Capital xxx shares.
Legal Capital xxx
Components of Offer Price:
If no par value shares: a. Balance due
Share Capital xxx b. Interest accrued
Add: Subscribed Share Capital xxx c. Expenses and other costs incurred in the
Share Premium xxx public auction
Legal Capital xxx
If there are no bidders, the corporation will
CALLABLE PREFERENCE SHARE purchase the delinquent shares and will be
These are called in for redemption at a put into treasury.
specified price at the option of the
corporation; is an equity instrument (part of TREASURY SHARES
SHE); during declaration of dividends, callable These are the entity’s own shares that have
PS is reduction of RE been previously issued and then reacquired
but not cancelled. All treasury shares are
 If issued at more than the original issue recorded at cost.
price, the excess is debited to RE.
 If issued at more than the par value, the The maximum amount a corporation can
excess is charged to: reacquire its shares is the balance of its RE -
a. SP from original issuance unappropriated.
b. RE
 If issued at less than the original issue Cost:
price, the difference is credited to SP- OS. a. Cash - Face value
b. Noncash asset consideration - CA of
REDEEMABLE PREFERENCE SHARE noncash asset
These are called for mandatory redemption by
the issuer at the option of the holder; is a JE:
financial liability (current or noncurrent); Treasury shares xxx
during declaration of dividends, redeemable Cash/NCA xxx
PS is treated as an interest expense
RE xxx
 Difference between the redemption price RE - appropriated xxx
and the redeemable PS @ par is
accounted for as a gain/loss on REISSUE PRICE vs COST (Reissuance)
redemption Reissue price > Cost Cr SP-
TS
CONVERTIBLE PREFERENCE SHARES Reissue price < Cost Dr to:
These are convertible into other securities of 1. SP-
the issuing corporation, usually into ordinary TS
shares. 2. RE

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FAR - Shareholder’s Equity Notes

ORIGINAL ISSUE PRICE vs COST

(Retirement/Cancellation) Allocate dividends to preference shares first
OIP > Cost Cr SP-TS
OIP < Cost Dr to: Cumulative PS - entitled to both current and
1. SP-TS prior year dividends (dividend in arrears)
2. RE Noncumulative PS - entitled to only current
year dividend
Participating PS - remaining dividends is
DONATED SHARES allocated to ordinary and preference shares
Shares donated back from shareholders and based on their outstanding capital at par
are treated as treasury shares. Nonparticipating PS - remaining dividends is
allocated only to ordinary shares
On the date of receipt, only a memorandum
entry is prepared. 2. Property dividends
Property dividend payable is always equal
Upon receipt, SHE is not affected. to the FV of the asset to be distributed
Remeasurement:
Reissuance (Always reissue price > cost)  On B/S date and date of settlement
JE:  Any increase or decrease is effected in RE
Cash xxx
SP-TS xxx Noncash asset to be distributed is equal
to the CA or FVLCTS whichever is lower; if
Retirement (Always OIP > cost) FVLCTS is lower, recognize an impairment loss
JE: Remeasurement:
SC xxx  Only on B/S date
SP xxx
SP-TS xxx Settlement of Property Dividend Payable
Measuremen > Measurement Gain on
STOCK RIGHTS (Preemptive right) t of PDP of NCA held for distributio
Issuance distribution n (P/L)
Only a memorandum entry because no Measuremen < Measurement Loss on
consideration is received from shareholders t of PDP of NCA held for distributio
distribution n (P/L)
Exercise of right
At par Cash xxx JE:
SC RE xxx
xxx PDP xxx
At above par Cash xxx
SC 3. Share dividends
xxx Declaration of share dividend will have no
SP effect on the total SHE
xxx
Expiry Memo entry JE:
RE xxx
SDP xxx
DIVIDENDS
Share dividend payable is an adjunct account
The distribution of earnings to shareholders or
the distribution of shareholders’ capital upon
Types of Share Dividend:
liquidation.
 Small - declaration of less than 20%;
measurement of shares is issued at par or
A corporation can only declare dividends if RE
FV on date of declaration, whichever is
has a positive balance.
higher
F > Par RE (@ FV) xxx
The maximum amount a corporation can
V SDP (@ par)
declare dividends is the balance of its RE -
xxx
unappropriated.
SP
xxx
TYPES OF DIVIDENDS
1. Cash dividends
 Large - declaration of 20% or more of
Date of Declaration
outstanding shares; measurement of
JE:
shares issued is at par
RE xxx
JE at issuance:
Cash dividend payable xxx
SDP xxx
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 FAR - Shareholder’s Equity Notes

SC xxx to the employees based on the price of its

shares.
4. Scrip dividends - on the date of payment,
debt instrument is issued (bonds or notes) Additional compensation given to employees

5. Liquidating dividends - dividends given KINDS OF SHARE-BASED COMPENSATION

on the event of liquidation (return of capital) 1. Equity settled
Share options - exercise price is normally
RECAPITALIZATION less than the market price of the shares
This occurs when there is a change in the
capital structure of the entity. Measuring share options:
a. FV method - compensation is equal to FV of
Old shares are retired and new shares are share options on date of grant
issued to the shareholders
b. Intrinsic value method
SHE before and after recapitalization is not IV = MV of shares - Option price
affected
Recognition of Compensation:
Typical recapitalizations: a. Share options vest immediately -
1. Change from par to no par employees are not required to complete
2. Change from no par to par service at a specified period, thus total
compensation expense is recognized in
For 1 and 2 full
OIP > Par/Stated Cap Cr SP- b. Share options do not vest immediately -
Recapitalization until employees complete service at a
OIP < Par/Stated Cap Dr RE specified date, thus total compensation
period is recognized as expense over the
3. Reduction of par or stated value vesting period
Reclassification JE:
SC xxx At expiration, share options outstanding is
SP-Recapitalization xxx reclassified to share premium.

4. Split up - no. of shares is increased and Acceleration of vesting - entity cancels or

the par value/stated value is decreased settles the grant of share options during the
vesting period
5. Split down - no. of shares is decreased - compensation expense that would
and the par/stated value is increased have been recognized over the remainder of
the vesting period is immediately expensed
QUASI-REORGANIZATION - payment is made to the employee on
A permissive but non-mandatory procedure the cancelation, thus the excess of the
when a financially-troubled entity restates its payment over the FV of the share option
accounts and establishes a fresh start in an is accounted as an additional
accounting sense. compensation expense

A corporation is financially-troubled if it has a Modification of Condition Procedures:

large amount of deficit a. Entity shall continue to account for the
equity instruments granted based on the
Procedures: original condition and vesting period at the
1. Restate assets & liabilities to conform with date of grant
FV  If new condition is beneficial to
2. Reflect adjustments to RE employees (↑ FV of Share options, ↓
3. If there is still deficit: Option price), increase in FV shall
a) Through recapitalization be treated as an additional
SP xxx compensation expense.
RE xxx b. If new condition is not beneficial,
b) Through revaluation compensation is recognized based on the
Revaluation surplus xxx original condition as if modification never
RE xxx occurred

2. Cash settled
SHARE-BASED COMPENSATION
Until the liability is settled, the entity shall
This is a compensation arrangement
remeasure the FV of the liability at each
established by the entity whereby its
reporting date and at the date of settlement,
employees shall receive shares of capital in
with the changes in FV recognized in P/L.
exchange for their services or incurs liabilities
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FAR - Shareholder’s Equity Notes

Share appreciation rights - entitles an

employee to receive cash equal to the excess
of the MV of the shares over a predetermined
price for a stated no. of shares.
- phantom shares

Measuring liabilities:
FV of liability = MV of shares - Predetermined
price x Phantom shares

If no predetermined shares, multiply MV to the

phantom shares

Cash and Share alternative

If employee has the right to choose the
settlement, entity is deemed to have issued a
compound financial instrument.

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