Introduction

• The Philippine Corporation Code defines a corporation as “an

artificial being created by operation of law, having the right of
succession and the powers, attributes and properties expressly
authorized by law or incident to its existence.”
• A corporation is formed by at least 5 but not exceeding 15
natural persons, all of legal age and a majority of whom are
residents of the Philippines.
• The entity’s articles of incorporation must be authorized by
the Securities and Exchange Commission (SEC).
 Introduction (Continuation)
• The articles of incorporation states, among other things, the entity’s
authorized capital stock, which is the maximum number of shares that
the entity can issue. Any excess share issued is deemed illegal. In order
to issue shares in excess of the authorized capital stock, the entity must
amend its articles of incorporation.
• To amend the articles of incorporation, a majority vote of the board
plus a vote by shareholders representing at least two-thirds (2/3) of
the outstanding share capital is needed. After ratification, the
amended articles of incorporation are filed with the SEC and shall
become effective only upon approval by the SEC.
• At least 25% of the entity’s authorized capitalization should be
subscribed and at least 25% of the total subscription must be paid upon
subscription. In no case shall the paid-up capital be less than five
thousand pesos (₱5,000).
Components of Stockholders’ Equity
• The following transactions affect the accounting for a
corporation’s equity:
1. Authorization, subscription, issuance, acquisition,
reissuance and retirement of shares
2. Origination of other equity instruments, such as share
options, detachable warrants, and equity component of
compound financial instruments.
3. Distributions to owners
4. Transactions giving rise to “other components of equity”
5. Recapitalization and Quasi-reorganization
Accounting for share capital

1. Memorandum method - Only a memorandum is made for the

authorized capitalization. Subsequent issuances of shares are
credited to the share capital account.

2. Journal entry method - The authorized capitalization is

recorded by crediting “authorized share capital” and debiting
“unissued share capital.” Subsequent issuances of shares are
credited to “unissued share capital.”
Classes of share capital

• Share capital is basically classified into two, namely:

1. Ordinary share capital (common stock); and
2. Preference share capital (preferred stock).
Four basic rights of ordinary shareholders

1. Right to attend and vote in shareholders’ meetings

2. Right to purchase additional shares (also known as
preemptive right or stock right)
3. Right to share in the corporate profits (also known as right to
dividends)
4. Right to share in the net assets of the corporation upon
liquidation
Share premium

• Share premium (additional paid-in capital) arises from various

sources which include the following:
1. Excess of subscription price over par value or stated value.
2. Excess of reissuance price over cost of treasury shares issued.
3. Issuance or origination of other equity instruments, such as share
options, detachable share warrants, and equity components of
compound financial instruments.
4. Distribution of “small” stock dividends.
5. Quasi-reorganization and recapitalization.
Legal capital

• Legal capital is the portion of contributed capital that cannot

be distributed to the owners during the lifetime of the
corporation unless the corporation is dissolved and all of its
liabilities are settled first. Legal capital is computed as follows:
1. For par value shares, legal capital is the aggregate par value
of shares issued and subscribed.
2. For no-par value shares, legal capital is the total
consideration received or receivable from shares issued or
subscribed. Total consideration refers to the subscription price
inclusive of any amount in excess of stated value.
Share issuance costs

• “The transaction costs of an equity transaction are

accounted for as a deduction from equity to the
extent they are incremental costs directly
attributable to the equity transaction that otherwise
would have been avoided.” (PAS 32.7)
Treasury shares

• Treasury shares (treasury stocks) are an entity’s own shares that

were previously issued but are subsequently reacquired but not
retired. Under the Corporation Code, an entity may reacquire its
previously issued shares only if it has sufficient unrestricted
retained earnings.
Accounting for treasury shares

• The cost method is used in accounting for treasury

share transactions. Under this method, the reacquisition
and subsequent reissuance of treasury shares are
recognized and derecognized, respectively, at cost.
Retirement of shares
Stock rights

• Stock rights are issued to existing ordinary shareholders in

relation to their preemptive rights. The stock rights enable
existing shareholders to protect their current ownership
interests by acquiring new shares issued by the corporation
before such shares are offered to new investors.
• Stock rights are recorded through memo entry only because
stock rights are issued to existing shareholders without
consideration. An entry is made only when the rights are
exercised or recalled.
Donated capital
1. Donation from shareholders – recognized directly in equity
(i.e., credited to share premium).
2. Donation from the government – recognized as government
grant (see discussion in Intermediate Financial Accounting Part
1B).
3. Donation from other sources – recognized in profit or loss (i.e.,
income) when (a) the conditions attached to the donation are
fulfilled or reasonably expected to be fulfilled, (b) the donation
becomes receivable, and (c) the criteria for asset recognition is met.
Donated capital (Continuation)

• Cash – recognized at the amount of cash received or receivable.

• Noncash assets – recognized at the fair value of the noncash
assets
• Entity’s own shares – initially recorded through memo entry.
Donated capital is recognized only when the donated shares are
subsequently reissued. This is because no asset is generated
from the donated shares until they are subsequently reissued. If
the donated shares are not to be resold, the entity should effect
a formal reduction of its authorized capital by retiring the
shares received.
Retained earnings

• Retained earnings represent the cumulative profits (net of losses,

distribution to owners, and other adjustments) which are not yet
distributed as dividends but rather retained to be reinvested in the
business or to settle debt.

• Total retained earnings may consist of:

1. Unrestricted – available for future distribution as dividends
2. Appropriated (Restricted) – not available for distribution unless
the restriction is subsequently reversed.
Distributions to owners
1. Cash dividends – distributions in the form of cash.

• Liability dividends – are dividends issued by a corporation that has

a temporary cash shortage. Liability dividends may be either:
o Scrip dividends – short-term and may or may not bear interest
o Bond dividends – long-term and bear interest

2. Property dividends – distributions in the form of noncash assets.

3. Share dividends (bonus issue or stock dividends) – distributions

in the form of the entity’s own shares.
Dates relevant to the accounting for dividends

1. Date of declaration

2. Date of record
o Ex-dividend date – to provide shareholders ample time to
register, they are normally allowed to register about three to five
days prior to the date of record.

3. Date of distribution – the date when the dividends

declared are distributed to the shareholders who are
entitled to the dividends.
Recognition of liability for dividends

• Under IFRIC 17, the liability to pay a dividend shall be

recognized when the dividend is appropriately authorized and
is no longer at the discretion of the entity, which is:
1. The date when the dividend declared by management is
approved by a relevant authority, if further approval
is required, or
2. The date when management declares dividends, if
further approval is not required.
• Outstanding shares pertain to shares issued and held by
shareholders and those that are subscribed. Outstanding
shares exclude unissued shares and treasury shares.
Accounting for property dividends

• The accounting for property dividends is affected by the

following:
1. Accounting for the resulting property dividends payable,
and
2. Accounting for the non-cash assets declared as property
dividends
Accounting for property dividends payable
• The liability recognized on the declaration of property dividends is
accounted for as follows:
1. The property dividends payable is initially measured at the fair
value of the non-cash assets at date of declaration.
2. At the end of each reporting period and also on the settlement
date, the property dividends payable is adjusted for changes in
fair value. The changes are recognized as gain or loss, directly
in retained earnings.
3. On settlement (distribution) date, any difference between the
carrying amounts of the dividends payable and the asset
distributed is recognized in profit or loss.
Accounting for non-cash assets declared as
property dividends
• If the property dividend is a noncurrent asset, it shall be, subject to
the requirements of PFRS 5, reclassified as “Non-current asset held
for distribution to owners” and subsequently accounted for under
PFRS 5. A “Non-current asset held for distribution to owners” is
initially and subsequently measured at the lower of its carrying
amount and fair value less costs to distribute.
• If the property dividend is a current asset, it shall be accounted for
under its previous accounting. No reclassification is needed.
Share dividends

• If the share dividends declared are considered “small” share

dividends (i.e., less than 20% of the outstanding shares), the share
dividends are accounted for at fair value.
• If share dividends declared are considered “large” share dividends
(i.e., 20% or more of the outstanding shares), the shares are
accounted for at par value.
Preference shares

1. Preference in the distribution of assets in case of

corporate liquidation (preferred as to assets)
2. Preference in the distribution of dividends when
declared (preferred as to dividends)
Dividends recognized as expense

• Dividends declared on equity instruments are charged to

retained earnings. However, dividends declared on financial
liabilities, such as redeemable preference shares, are
charged to profit or loss as interest expense.
Dividends out of capital

• Dividends declared out of capital, rather than from retained

earnings, are called liquidating dividends. Liquidating
dividends are normally declared only upon corporate
liquidation. However, the wasting asset doctrine permits
wasting asset corporations to declare dividends out of capital
during their existence.
Disclosure of dividends

• Dividends declared and the related amount per share are

presented either in the statement of changes in equity or
in the notes.

• Dividends declared after the reporting period but before the

financial statements are authorized for issue are not
recognized as a liability at the end of the reporting period
because no obligation exists at that time. The dividends
are disclosed only in the notes.
Other Components of Equity

1. Revaluation surplus
2. Cumulative unrealized gains/losses on fair value changes in
investments in FVOCI equity securities
3. Exchange differences on translating foreign operations
4. Effective portion of cash flow hedges
Recapitalization
• Recapitalization refers to the change in the capital structure
of an entity brought about by the cancellation of old shares
and issuance of new shares as replacement. Recapitalization is
accomplished through any of the following:
1. Change from par to no-par, or vice-versa
2. Reduction of par value or stated value
3. Share splits or reverse splits

• Recapitalization does not affect assets, liabilities, or total

shareholders’ equity.
Share split

1. Split up occurs when old shares are cancelled and replaced

by a larger number of new shares but with a reduced par
value (stated value) per share.
2. Split down is the opposite of split up whereby old shares
are cancelled and replaced by a smaller number of new
shares but with an increased par value (stated value) per
share.
Quasi-reorganization

• Quasi-reorganization is an accounting procedure whereby a

financially troubled corporation, but with favorable future
prospects, is permitted, but not required, to revalue its assets
and liabilities, and realign its equity, subject to the provisions
of relevant regulations, in order to establish a “fresh start” in
accounting sense.
• Quasi-reorganization may be effected through:
1. Revaluation of property, plant, and equipment; and/or
2. Recapitalization
Quasi-reorganization (continuation)

• The basic approach to quasi-reorganization is as follows:

1. Assets (and liabilities) are revalued upwards or downwards.
2. Any resulting credit balance in revaluation surplus is used to wipe
out any deficit (i.e., negative balance in retained earnings).
3. If a recapitalization is made, any resulting share premium shall also
be used to wipe out any deficit.
4. Disclosures required by relevant regulations are provided in the
financial statements for a minimum period of three (3) years.