SHAREHOLDER’S EQUITY

CONCEPT
Issued shares The number of shares (shares that are fully paid for) that the corporation has
issued to its shareholders as of a specific date.
Subscribed shares The number of shares that has been subscribed but not yet fully paid and
therefore still unissued.
Outstanding shares The shares of stock that have been issued and are still in the hands of the
shareholders as of a specific date.
Treasury shares These are issued to shareholders & reacquired by corporation but not retired

Legal Capital vs. Contributed Capital

Par Value Shares Legal Capital* Contributed

Capital
Preference Share Capital Added Added
Premium: Preference Share Capital Ignored Added
Subscribed Preference Share Capital Added Added
Premium: Subscribed Preference Share Capital Ignored Added
Ordinary Share Capital Added Added
Premium: Ordinary Share Capital Ignored Added
Subscribed Ordinary Share Capital Added Added
Premium: Subscribed Ordinary Share Capital Ignored Added
Subscription Receivable current Ignored Ignored
Subscription Receivable noncurrent Ignored Deducted
Treasury Shares at cost Ignored Ignored
* Legal capital is the total consideration received (inclusive of excess over stated value) in case of no-par
value shares.

Issued Shares vs. Outstanding Shares

Par Value Shares Issued Shares Outstanding

Shares
Issued Shares Added Added
Subscribed Shares Ignored Added
Treasury Shares Ignored Deducted
Share Split-Up Added Added
Share Split-Down Deducted Deducted
Stock Dividends Added Added
 STATEMENT OF CHANGES IN EQUITY

Capital Stock Subscription Additional Other

(Issued & Receivable Paid-in Comprehensive Retained Earnings Treasury Total
Sample Format Subscribed) Capital income Shares Equity
Appropriated Unappropriated
Beginning Balance xx (xx) xx xx xx xx (xx) xx
Net Income xx xx
Other Comprehensive xx xx
Income
Issuance/subscription to xx xx xx
capital stock
Grant of stock options xx xx
Cash dividends (xx) xx
Appropriations xx (xx) xx
Ending Balance xx xx xx xx xx xx xx xx
ISSUANCE/SUBSCRIPTION OF SHARE CAPITAL
How to account for shares issued?
➢ For cash consideration
o Cash received shall be absorbed first by total par or stated value ; excess shall be
credited to share premium
➢ For noncash consideration
o Shares issued shall be measured following this order of priority:
▪ Fair value of the noncash consideration received
▪ Fair value of shares issued
▪ Par value of shares issued (no share premium)

How to account for incurrence of share issuance costs?

It shall be debited following this order of priority:
➢ Share premium
➢ Retained earnings

Note: If there is subscription receivable, check the collectability from the reporting date:
❖ If collectible within a year, part of current other receivable
❖ If collectible more than a year, deduction from equity

TREASURY SHARE TRANSACTIONS

➢ Reacquisition

Cost method is used in accounting for treasury shares. In other words, treasury shares are
measured at cost.
Consideration Given Cash Noncash
What is the cost? Cash Payment Carrying Amount of Asset
Surrendered

➢ Subsequent Reissuance
Reissue Price = Cost Reissue Price > Cost Reissue Price < Cost
Cash xx Cash xx Cash xx
Treasury Shares xx Treasury Shares xx Share Premium-TS xx
Share Premium –TS xx Retained Earnings xx
Treasury Shares xx
Note: Cash represents reissue price of TS; Treasury shares represent cost of TS

➢ Subsequent Retirement
Par (Stated Value) = Cost Par (Stated Value) > Cost Par (Stated Value) < Cost
Share Capital xx Share Capital xx Share Capital xx
Treasury Shares xx Treasury Shares xx Share Premium-OS xx
Share Premium –TS xx Share Premium-TS xx
Retained Earnings xx
Treasury Shares xx

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DONATION OF CAPITAL

Donation of shares from:

➢ Shareholders: recorded at fair value of donation & credited to donated capital (share
premium)

Transactions Donation of Shares of Donations other than shares

Entity
Memorandum entry; Appropriated account xx
Donation shares outstanding is Donated Capital xx
reduced
Reissuance Cash xx Not Applicable
Donated Capital xx

Share outstanding is
increased
Retirement/Cancellation OS Capital xx Not Applicable
Donated Capital xx

➢ Nonshareholders: recorded at fair value of donation & credited to income or liability (in
rare cases)

RECAPITALIZATIONS

➢ Change from par to no-par & vice versa

o Journal entry is made
o Cancel the previous shares including the related share premium
o If debit > credit = goes to share premium
o If credit > debit = goes to retained earnings

➢ Split Up/Split Down

o Memorandum entry only
o If split-up, number of shares increases ; par (stated) value decreases
o If split-down, number of shares decreases ; par (stated) value increases

➢ Reduction of par value (stated value)

o Journal entry is made
o Reduce shares at total par value only ( excluding related share premium)
o Charge to share premium

DIVIDENDS

Kinds of Dividends Journal Entry Measurement of Dividends

Retained Earnings xx
Cash Dividends Payable xx Amount of cash to be paid

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Cash dividends
Cash Dividends Payable xx
Cash xx
Retained Earnings xx Fair value of asset to be distributed at
Property Dividends Payable xx date of declaration

Retained Earnings xx Adjust the carrying amount of property

Property Dividends Payable xx dividends payable to the new fair value
or of the noncash asset to be distributed
Property dividends Property Dividends Payable xx
Retained Earnings xx

Impairment Loss xx An entity shall measure a noncurrent

Noncash Asset xx asset classified for distribution to
owners at the lower of carrying amount
and fair value less cost to distribute.

The difference between the carrying

amount of property dividends payable
Property Dividends Payable xx & the carrying amount of noncash asset
Noncash Asset xx to be distributed is recognized in profit
Profit/Loss xx or loss as “Gain on distribution of
property dividend”.

Stock Dividends
(addition to share
capital)
Retained Earnings xx Fair value on the date of declaration
Less than 20% Stock dividends distributable xx
Share premium xx

Stock dividend distributable xx

Share capital xx

20% or more Retained Earnings xx

Stock dividends distributable xx Par/stated value on the date of
declaration
Stock dividend distributable xx
Share capital xx

Retained Earnings xx The entity shall estimate the dividend

Dividends Payable xx payable by considering both the fair
value of each alternative and the
associated probabilities of owners
Shareholders have a selecting each alternative.
choice of either a
noncash asset or cash Dividends Payable xx
alternative Cash xx If shareholder chooses cash alternative
Retained Earnings xx

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 Dividends Payable xx If shareholder chooses noncash
Noncash asset xx alternative
Gain on distribution of div. xx
Scrip Dividend Retained Earnings xx
(scrip is like a note Scrip Dividends Payable xx
which is a formal
evidence of Scrip Dividends Payable xx
indebtedness to pay a Interest Expense xx
sum at some future Cash xx
date)

RETAINED EARNINGS

➢ can either be appropriated or unappropriated

➢ any appropriation has no effect to the computation of total retained earnings or
shareholder’s equity

SHARE-BASED COMPENSATION

Share Based Compensation

Without Cash & Share With Cash & Share

Alternative Alternative

Equity Settled Cash Settled Fair value of whole compound financial instrument
Less: Fair value of liability component
Equity component
Fair value method Fair value of liability

Intrinsic Value
method

Equity settled (Share Options)

➢ Fair value method is used. If the fair value cannot be estimated reliably, intrinsic value
is used to measure compensation expense

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 ➢ If fair value method is used, measure compensation expense at fair value of share options
at the date of grant.
➢ If intrinsic value method is used, measure compensation expense at its intrinsic value
(market value of the share – option price of the share). Note that intrinsic value changes
over time so you must recompute intrinsic value from time to time.

Cash settled
➢ measure compensation expense at the fair value of the liability (market price of share –
predetermined price of share) subject to remeasurements. Similar to using intrinsic value
under equity settled compensation, that fair value of liability changes over time. In other
words, you must recompute fair value of liability from time to time.

Cash & share alternative

Fair value of compound financial instrument : Fair Value of the share alternative
Fair value of liability component : Fair Value of liability at grant date
Equity Component : Equity Component

BOOK VALUE PER SHARE

Book Value/ Share the amount to be paid for each share assuming liquidation of entity happens

Formulae:

Once Class Total Shareholder’s Equity

No. of Shares Outstanding

Two Classes Preference Shareholder’s Equity

No. of Preference Shares Outstanding

Ordinary Shareholder’s Equity

No. of Ordinary Shares Outstanding

IMPORTANT NOTE

For purposes of computing book value per share, the following must be considered:

1.Treasury share are treated retired

2.Retained earnings, share premium, & revaluation surplus are available for dividends
3.Call price of preference shares is ignored
4.If problem is silent, preferenceEARNINGS PER
is assumed SHARE
noncumulative & nonparticipating
5.When two preference share exists with different rates & both are participating, lower
Computation
rate shall be chosen
6. Noncurrent subscription receivable is not deducted from subscribed capital
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Preference Shares
1. Preference as to assets – entitlement to liquidation value & dividend in arrears
2. Preference as to dividends
a. Noncumulative - only current year dividends
b. Cumulative - current year dividend & dividends in prior years
c. Nonparticipating - receives dividends only at fixed rate
d. Participating - receives dividends beyond fixed rate
i. Fully participating
ii. Participating to a certain percentage

EARNINGS PER SHARE

Formula
Net Income – Preference Share Dividend*
Weighted Average Ordinary Shares Outstanding

*1. If preference share is cumulative, current year preference dividend is deducted whether declared or
not.
2. If preference share is noncumulative, current year preference dividend is deducted only when
declared.

IMPORTANT NOTE

EPS pertains only to ORDINARY SHARES

DILUTED EARNINGS PER SHARE

The computation of diluted earnings per share assumed that:
➢ Convertible bonds payables were converted into ordinary shares from the moment of its
issuance
➢ Convertible preference shares were converted into ordinary shares from the moment of
its issuance
➢ Share options & warrants were exercised upon grant

Incremental Shares Computation:

Option Shares xx
Less: Assumed Treasury Shares xx
Proceeds ÷ Average Market Price
Incremental Shares xx

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 INCREMENTAL SHARES CONCEPT

At first analysis, you may think that the “options shares” (the exact equivalent number shares
to be issued out of exercise or share options/warrants) should be the amount to be added to
shares outstanding for Diluted EPS computation & not the “incremental shares”. But, it
should not be the case. To make it easier to understand, assume these transactions:

1. You receive the proceeds from exercise of share options/warrants

2. You issued the number of options shares. Note that options shares are issued usually
below market price.
3. Afterwards, you used the proceeds to reacquire back the shares issued on no. 2 but,
this time, you can only reacquire it at average market price. You will find out that,
out of the same proceeds, the number of shares assumed reacquired is lesser than
the number of option shares issued on no. 2.
4. Therefore, in substance, your “net issued shares” or “incremental shares” is simply
options shares minus assumed treasury shares.

MULTIPLE POTENTIAL ORDINARY SHARES

- combination of two or all of the following:
a. convertible bonds payable
b. convertible preference shares
c. share options/warrants

STEPS:
1. Compute for Basic Earnings per Share ( Basic EPS)
2. Compute for Incremental EPS for each potential ordinary shares
3. Rank the potential ordinary shares from the lowest incremental EPS to highest EPS.
Potential ordinary shares related to share options/warrants should always be ranked first.
Incremental EPS > Basic EPS = anti-dilutive: ignored in the ranking
Incremental EPS < Basic EPS = dilutive: included in the ranking

4. Compute diluted EPS following the ranking.

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