SHAREHOLDERS’ EQUITY

INTERMEDIATE
ACCOUNTING 2
 SHAREHOLDERS’ EQUITY
 SHAREHOLDERS’ EQUITY IS THE RESIDUAL INTEREST OF OWNERS IN THE NET
ASSETS OF A SSETS OVER LIABILITIES.
 ELEMENTS OF SHAREHOLDERS’ EQUITY
PHILIPPINE TERM IAS TERM

CAPITAL STOCK SHARE CAPITAL

SUBSCRIBED CAPITAL STOCK SUBSCRIBED SHARE CAPITAL
COMMON STOCK ORDINARY SHARE CAPITAL
PREFERRED STOCK PREFERENCE SHARE CAPITAL
ADDITIONAL PAID IN CAPITAL SHARE PREMIUM
RETAINDED EARNINGS(DEFICIT) ACCUMULATED PROFITS(LOSSES)
RETAINED EARNINGS APPROPRIATED APPROPRIATIONS RESERVED
REVALUATION SURPLUS REVALUATION RESERVE
TREASURY STOCK TREASURY SHARE
 DEFINITION OF TERMS
 THE TERMS CAPITAL STOCK, COMMON STOCK, PREFFED
STOCK AND TREASURY STOCK ARE THE TERMS USED IN OUR
PHILIPPINE CORPORATION CODE
 SHARE CAPITAL IS THE PORTION OF THE PAID IN CAPITAL
REPRESENTING THE TOTAL PAR OR STATED VALUE OF THE
SHARES ISSUED.
 SUBSCRIBED SHARE CAPITAL IS THE PORTION OF THE
AUTHORIZED SHARE CAPITAL THAT HAS BEEN SUBSCRIBED
BUT NOT YET FULLY PAID AND THEREFORE STILL UNISSUED
 DEFINITION OF TERMS
 THE SUBSCRIBED SHARE CAPITAL IS REPORTED MINUS THE
SUBSCRIPTION RECEIVABLE STILL UNCOLLECTED.
 SHARE PREMIUM IS THE PORTION OF THE PAID IN CAPITAL
REPRESENTING EXCESS OVER THE PAR OR STATED VALUE.
 DEFINITION OF TERMS
 COMMON SOURCES OF SHARE PREMIUM
EXCESS OVER PAR VALUE OR STATED VALUE
RESALE OF TREASURY SHARES AT MORE THAN COST
DONATED CAPITAL
ISSUANCE OF SHARE WARRANTS
DISTRIBUTION OF SHARE DIVIDENDS
QUASI-REORGANIZATION
RECAPITALIZATION
 DEFINITION OF TERMS
 RETAINED EARNINGS REPRESENT THE CUMULATIVE
BALANCE OF PERIODIC EARNINGS, DIVIDENDS
DISTRIBUTIONS, PRIOR PERIOD ERRORS AND OTHER
CAPITAL ADJUSTMENTS.
 REVALUATION SURPLUS-IS THE EXCESS OF REVALUED
AMOUNT OVER THE CARRYING AMOUNT OF THE
REVALUED ASSETS.
 TREASURY SHARES ARE THE CORPORATION’S OWN
SHARES THAT HAVE BEEN ISSUED AND THEN
REACQUIRED BUT NO
 DEFINITION OF TERMS
Deposits on subscriptions to a proposed increase
in share capital may be reported as part of
shareholders’ equity as a separate item in the equity
section
Capital stock is the amount fixed in the articles of
incorporation to be subscribed and paid in or secured
to be paid in by the shareholders of the corporation,
either in money, property or services, at the
organization of the corporation and upon which the
corporation is to conduct its operation.
 DEFINITION OF TERMS
 Authorized share capital the amount fixed in the
articles of incorporation.
 Share certificate evidenced of share capital divided
into shares. It is the instrument that evidences
ownership of a share. Issued only upon full
payment.
 Par value share is one with specific value fixed in the
articles of incorporation and appearing on the share
certificate.
 No par share is one without value appearing on share
certificate. Minimum consideration is P 5
FOUR RIGHTS OF SHAREHOLDERS

 SHARE IN THE EARNINGS

 VOTING RIGHT
 PREEMPTIVE RIGHT
 SHARE IN NET ASSETS ON LIQUIDATION
ORDINARY SHARE CAPITAL

 Implied when there is only one class of shares.

 Have the same rights and privileges
 No fixed or specific return on investment
 Financial reward is dependent on the operating
performance of the firm.
 If profitable, favorable to ordinary shareholders.
 If not profitable, unfavorable to ordinary shareholders.
PREFERENCE SHARE CAPITAL

 PREFERENCE OVER DIVIDENDS AND NET ASSETS

 LIMITED OR FIXED RETURN ON INVESTMENT
PRO-FORMA SHAREHOLDER’S EQUITY
PRO-FORMA STATEMENT OF
SHAREHOLDERS’ EQUITY
LEGAL CAPITAL

 THE PORTION OF THE PAID IN CAPITAL ARISING FROM

ISSUANCE OF SHARE CAPITAL WHICH CANNOT BE
RETURNED TO SHAREHOLDERS DURING THE LIFETIME OF
THE ENTITY.
 DETERMINED AS FOLLOWS:
PAR VALUE SHARE-AGGREGATE PAR VALUE OF
SHARES ISSUED AND SUBSCRIBED
NO-PAR VALUE SHARE- TOTAL CONSIDERATION
RECEIVED FROM SHAREHOLDERS INCLUDING THE
EXCESS OVER THE STATED VALUE
TRUST FUND DOCTRINE

 LEGAL CAPITAL IS A TRUST FUND TO PROTECT CREDITORS

 IT IS ILLEGAL TO RETURN LEGAL CAPITAL
 CORPORATIONS CAN PAY DIVIDENDS OUT OF RETAINED
EARNINGS
 IT IS ILLEGAL TO PAY DIVIDENDS IF THE FIRM HAS DEFICIT
ILLUSTRATION
 XYC Corporation revealed the following information on December 31, 2021 under the
shareholder’s equity section of its balance sheet:
 Ordinary share capital, P 100 par 3,500,000
 Share premium-ordinary share 1,500,000
 Preference share capital, P 200 2,500,000
 Share premium-preference share 500,000
 Subscribed preference share capital 1,000,000
 Retained earnings 2,000,000
 Subscriptions receivable-preference shares 800,000
Required: Compute the legal capital.
Answer:
Ordinary share capital 3,500,000
Preference share capital 2,500,000
Subscribed preference share capital 1,000,000
Total legal capital 7,000,000
ACCOUNTING FOR SHARE CAPITAL

 MEMORANDUM METHOD – NO ENTRY IS MADE TO RECORD AUTHORIZED

SHARE CAPITAL, ONLY MEMORANDUM ENTRY.
 WHEN SHARE CAPITAL IS ISSUED,IT IS CREDITED TO SHARE CAPITAL ACCOUNT
 JOURNAL ENTRY METHOD- THE AUTHORIZATION TO ISSUE SHARE OF STOCK IS
RECORDED BY DEBITING UNISSUED SHARE CAPITAL AND CREDITING
AUTHORIZED SHARE CAPITAL
 WHEN SHARE CAPITAL IS ISSUED , IS IS CREDITED TO UNISSUED SHARE CAPITAL
ACCOUNT.
ISSUANCE OF SHARES AT A DISCOUNT

 BELOW PAR OR STATED VALUE

 CORPORATION CODE PROHIBITS
 SHAREHOLDER IS HELD LIABLE
 ISSUE IS NOT CANCELLED, BUT THE SHAREHOLDER MUST PAY FOR THE
DISCOUNT OR WHAT IS CALLED “ DISCOUNT LIABILITY”
 FOR EXAMPLE,IF 10,000 SHARES OF p 100 PAR VALUE ARE SOLD FOR P
800,000, THE JOURNAL ENTRY IS
 CASH 800,000
 DISCOUNT ON SHARE CAPITAL 200,000
SHARE CAPITAL 1,000,000
ISSUANCE OF SHARES AT A DISCOUNT –
CONT’D
 THE ACCOUNT “ DISCOUNT ON SHARE CAPITAL” IS A DEDUCTION FROM
TOTAL SHAREHOLDERS’ EQUITY
 THE PROHIBITION REFERS TO THE ORIGINAL ISSUE , NOT SUBSEQUENT
TRANSFER OF SUCH SHARE.
 HENCE, TREASURY SHARES MAY BE SOLD OR ISSUED AT LESS THAN PAR OR
STATED VALUE WITHOUT VIOLATING THE PROVISION OF THE LAW.
ISSUANCE OF SHARE CAPITALFOR NONCASH
CONSIDERATION

 DETERMINED BY THE INCORPORATORS OR BOARD OF DIRECTORS AND

APPROVED BY THE SEC.
 FAIR VALUE OF THE PROPERTY RECEIVED
 PFRS 2, PAR. 10 –THE ENTITY MEASURES THE GOODS AND SERVICES RECEIVED
AT THE FAIR VALUE OF THE GOODS AND SERVICES RECEIVED.
 ORDER OF PRIORITY
 FAIR VALUE OF THE NONCASH CONSIDERATION RECEIVED
 FAIR VALUE OF THE SHARES ISSUED
 PAR VALUE OF THE SHARES ISSUED
ISSUANCES OFSHARE CAPITAL FOR
SERVICES
 SERVICES ARE RENDERED
 PFRS 2, FAIR VALUE OF SERVICES OR FAIR VALUE OF SHARES ISSUED,
WHICHEVER IS RELIABLY DETERMINABLE
SHARE ISSUANCE COSTS

 DIRECT COSTS TO SELL SHARE CAPITAL

 INCLUDE LEGAL FEES, CPA FEES, UNDERWRITING FEES, COMMISSIONS, COST
OF PRINTING CERTIFICATES, DOCUMENTARY STAMPS, FILING FEES, COST OF
ADVERTISING AND PROMOTION, NEWPAPER ADS, ETC.
 PAS 32, PAR. 37 TRANSACTIONS COSTS DIRECTLY ATTRIBUTABLE TO SHARE
ISSUANCE SHALL BE DEDUCTED FROM EQUITY, NET OF RELATED INCOME TAX
BENEFIT.
 SHARE ISSUANCE COSTS SHALL BE DEBITED TI SHARE PREMIUMS ARISING
FROM SHARE ISSUANCE
SHARE ISSUANCE COSTS

 IF THE SHARE PREMIUM IS INSUFFICIENT, DEBIT TO “ SHARE ISSUANCE COSTS” IS

PERMITTED BY THE PHILIPPINE INTERPRETATION COMMITTEE TO BE REPORTED
AS A “ CONTRA EQUITY ACCOUNT”
 ORDER OF PRIORITY
 SHARE PREMIUM FROM PREVIOUS SHARE ISSUANCE
 RETAINED EARNINGS
COSTS OF PUBLIC OFFERING OF SHARES

 NOT DIRECTLY ATTRIBUTABLE TO ISSUANCE

 RECOGNIZED AS EXPENSE
 INCLUDE THE FOLLOWING
 ROAD SHOW PRESENTATION
 PUBLIC RELATIONS CONSULTANT’S FEES
JOINT COSTS

 PAS 32, PAR. 38, REQUIRES THAT TRANSACTIONS COSTS THAT RELATE JOINTLY
TO THE CONCURRENT LISTING AND ISSUANCE OF NEW SHARES AND LISTING
OF OLD EXISTING SHARES
 PHILIPPINE INTERPRETATION COMMITTEE CONCLUDED THAT JOINT COSTS
SHALL BE ALLOCATED PRO-RATA ON THE BASIS OF OUTSTANDING NEWLY
ISSUED AND LISTED SHARES AND OUTSTANDING NEWLY LISTED OLD EXISTING
SHARES.
EXAMPLES OF JOINT COSTS

 AUDIT AND OTHER PROFESSIONAL SERVICE RELATING TO PROSPECTUS

 OPINION OF COUNSEL
 TAX OPINION
 FAIRNESS OPINION AND VALUATION REPORT
 PROSPECTUS DESIGN AND PRINTING
WATERED SHARE

 SHARE CAPITAL ISSUED FOR INADEQUATE OR INSUFFICIENT CONSIDERATION.

 THE CONSIDERATION RECEIVED IS LESS THAN PAR OR STATED VALUE, BUT THE
SHARE CAPITAL IS ISSUED AS FULLY PAID.
 ASSET IS OVERSTATED AND CAPITAL IS ALSO OVERSTATED
 FOR EXAMPLE, LAND WITH A FAIR VALUE OF P 800,000 IS RECEIVED FOR 10,000
SHARES OF P 100 PAR VALUE. TO CREATE A WATER IN THE SHARE CAPITAL , THE
ISSUANCE OF 10,000 SHARES IS RECORDED AS FULLY PAID
 LAND 1,000,000
 SHARE CAPITAL 1,000,000
 IT IS ILLEGAL, SO TO CORRECT THE ENTRY
 DISCOUNT ON SHARE CAPITAL 200,000
 LAND 200,000
SECRET RESERVE

 REVERSE OF WATERED SHARE

 ARISES WHEN ASSET IS UNDERSTATED OR LIABILITY IS OVERSTATED AND
CAPITAL IS UNDERSTATED.
 ARISES FROM THE FOLLOWING:
 EXCESSIVE PROVISION FOR DEPRECIATION, DEPLETION, AMORTIZATION AND
DOUBTFUL ACCOUNTS
 EXCESSIVE WRITEDOWN OF RECEIVABLES, INVENTORIES AND INVESTMENTS
 CAPITAL EXPENDITURES ARE RECORDED AS OUTRIGHT EXPENSE
 FICTITIOUS LIABILITIES ARE RECORDED
DELINQUENT SUBSCRIPTION

 THE BOARD OF DIRECTORS DELARES DUE AND DEMANDABLE UNPAID

SUBSCRIPTIONS
 OFFICIAL DECLARATION IS CALLED “ CALL” IN A BOARD RESOLUTION
STATING THE DUE DATE AND THE AMOUNT
 IF NOT PAID ON DUE DATE, THE SHAREHOLDER IS DECLARED DELINQUENT
AND THE DELINQUENT SHARE IS SOLD AT PUBLIC AUCTION.
 UNPAID SUBSCRIPTION, INTEREST ACCRUED, EXPENSES OF ADS AND OTHER
COSTS WILL BE SOLD TO THE HIGHEST BIDDER
DELINQUENT SUBSRIPTIONS

 WHO IS THE HIGHEST BIDDER?

 THE PERSON WHO IS WILLING TO PAY THE OFFER PRICE OF THE DELINQUENT
SHARES FOR THE SMALLEST NUMBER OF SHARES. THE OFFER PRICE INCLUDES
 BALANCE DUE ON SUBSCRIPTION
 INTEREST ACCRUED ON THE SUBSCRIPTION DUE
 EXPENSES OF ADVERTISING AND OTHER COSTS OF SALE

 NO BIDDERS
 THE CORPORATION MAY BUY THE DELINQUENT SHARES
CALLABLE PREFERENCE SHARE

 OPTION OF THE CORPORATION

 NO DEFINITE REDEMPTION DATE UNLIKE REDEEMABLE PREFERENCE SHARE

 AN EQUITY INSTRUMENT BECAUSE IT DOES NOT MEET THE DEFINITION OF A

FINANCIAL LIABILITY
REDEEMABLE PREFERENCE SHARE

 PAS 32, PAR.18 DEFINES REDEEMABLE PREFERENCE SHARES AS

 A PREFERENCE SHARE THAT PROVIDES FOR MANDATORY REDEMPTION BY THE

ISSUER FOR A FIXED OR DETERMINABLE AMOUNT AT FUTURE DATE

 A PREFERENCE SHARE THAT GIVES THE HOLDER THE RIGHT TO REQUIRE THE ISSUER
TO REDEEM THE INSTRUMENT FOR A FIXED OR DETERMINABLE AMOUNT AT A
FUTURE DATE

 SHALL BE CLASSIFIED AS CURRENT OR NONCURRENT FINANCIAL LIABILITY

DEPENDING ON THE REDEMPTION DATE
CONVERTIBLE PREFERENCE SHARES

 GIVES THE HOLDER THE RIGHT TO EXCHANGE THE HOLDINGS FOR OTHER
SECURITIES OF THE ISSUING CORPORATION.

 CONVERSION TO ORDINARY SHARES WHEN OPERATION IS SUCCESSFUL AND

EARNINGS ON ORDINARY SHARES ARE UNLIMITED

 CONVERSION INTO BONDS WHICH IS A CHANGE IN EQUITY FROM THAT OF

AN OWNER TOTHAT OF A CREDITOR
TREASURY SHARES

 Treasury shares are entity’s own shares that have been issued and then
reacquired but not cancelled.
 Three requisites to qualify as treasury shares:
 The shares must be the entity’s own shares
 The shares must have been issued originally.
 The shares are reacquired but not cancelled.
LEGAL LIMITATIONS ON TREASURY
SHARES
 ADEQUATE UNRESTRICTED RETAINED EARNINGS TO SUPPORT THE COST OF
TREASURY SHARES
 PRESERVE THE LEGAL CAPITAL
 IF TREASURY SHARES IS ACQUIRED WHEN THERE IS A DEFICIT, THAT IS A RETURN
OF CAPITAL; VIOLATION OF TRUST FUND DOCTRINE.
ACCOUNTING FOR TREASURY SHARES

 THE COST METHOD IS USED DUE TO LEGAL LIMITATION

 TREASURY SHARES SHALL BE RECORDED AT COST WHETHER ACQUIRED
BELOW OR ABOVE PAR OR STATED VALUE
 IF ACQUIRED FOR CASH, THE COST IS EQUAL TO CASH PAYMENT.
 IF ACQUIRED FOR NON-CASH, PAS 32 DOES NOT PROVIDE ANY GUIDANCE.
 PAS 32, PAR. 33 PROVIDES NO GAIN OR LOSS SHALL BE RECOGNIZED FOR
THE PURCHASE, SALE, ISSUE OR CANCELLATIONOF AN ENTITY’S EQUITY
INSTRUMENTS.
 IF ACQUIRED FOR NON-CASH, THE COST IS THE CARRYING AMOUNTOF THE
NON-CASH SURRENDERED.
ILLUSTRATION

 AN ENTITY ACQUIRED 2,000 SHARES WITH PAR AT P 100 AT P 150 PER SHARE.
 TREASURY SHARES…………..300,000
 CASH………………………………………300,000
The treasury shares is recorded at cost and may be reissued or sold at cost,
more than cost or below cost.
Reissuance at cost
CASH………………………………300,000
TREASURY SHARES……………………300,000
ILLUSTRATION

 Reissuance at more than cost

 The treasury shares are subsequently reissued at P 200 per share.
 CASH …………………….400,000
 TREASURY SHARES……………….300,000
 SHARE PREMIUM-TS………………100,000
 Reissuance at below cost
 The treasury shares are subsequently reissued at P 100 per share.
 CASH ……………………..200,000
 RETAINED EARNINGS….100,000
 TREASURY SHARES……………………300,000
 The excess of the cost over the issue price is charged to either share premium or retained
earning in that order of priority. In this case it is assumed no share premium is available.
PAR VALUE OR STATED VALUE METHOD

 It is also known as the retirement method.

 The treasury shares account is debited at par value or stated value.
 For example, if 2,000 shares with par value of P 100 are acquired for a total
consideration of P 150,000, the journal entry is
 Treasury shares, at par…………200,000
 Cash……………………………………..150,000
 Share premium-TS……………………….50,000
 The cost method is the acceptable method in accounting for Treasury
Shares.
RETIREMENT OF TREASURY SHARES

 The share capital account is debited at par value or stated value and the
treasury shares account is credited at cost.
 Par value or stated value>cost=gain, credited to share premium from
treasury shares
 Cost>par value or stated value=loss, debited to the following in the order of
priority:
 Share premium from original issuance
 Share premium from treasury shares
 Retained earnings
ILLUSTRATION-PAR VALUE>COST

 For example, if 1,000 shares with par value of P 100 are held as treasury at a
cost of P 80,000, and subsequently retired, the journal entry is
 Ordinary share capital…………100,000
 Treasury Shares………………………….80,000
 Share Premium-TS……………………….20,000
 ILLUSTRATION-PAR VALUE<COST
Ordinary share capital, 50,000 shares , P 100 par 5,000,000
Share premium-original issuance 500,000
Share premium-treasury shares 100,000
Retained earnings 1,000,00
Treasury shares, 5,000 shares at cost 750,000

Ordinary share capital (5,000 x 100)……………… 500,000

Share premium-issuance………………………………50,000
Share premium-TS……………………………………..100,000
Retained Earnings……………………………………..100,000
Treasury Shares…………………………………………. 750,000
Note that the share premium from the original issuance is cancelled on a
prorata basis in the absence of specific amount identified with treasury
shares.
DISCLOSURE OF TREASURY SHARES

 THE NUMBER OF SHARES HELD IN THE TREASURY

 THE RESTRICTION ON THE AVAILABILITY OF RETAINED EARNINGS FOR
DISTRIBUTION TO DIVIDENDS EQUAL TO THE COST OF TREASURY SHARES
 PAS 32, PAR. 33 PROVIDES…”TREASURY SHARES SHALL BE DEDUCTED FROM
EQUITY”
 PRESENTATION OF TREASURY SHARES
ORDINARY SHARE CAPITAL, 50,000 SHARES, P 100 PAR 5,000,000
SHARE PREMIUM 500,000
RETAINED EARNINGS (OF WHICH P 600,000 IS APPROPRIATED FOR THE
COST OF TREASURY SHARES) 2,000,000
TREASURY SHARES, 5,000 SHARES AT COST (600,000)
TOTAL SHAREHOLDERS’ EQUITY 6,900,000
DONATED SHARES

 Shares received by the business entity from its shareholders by way of

donation
 Like treasury shares may be reissued at a discount without any discount
liability
 Assets, liabilities and equity are not affected because secured without cost,
but the number of outstanding shares is reduced.
 The reissue of donated shares increases asset and donated capital or share
premium
DONATED SHARES-ILLUSTRATED

 Shareholders donated to the entity an aggregate of 10,000 ordinary shares

with P100 par value.

 The receipt of the donated shares by the entity is recorded as a

“Memorandum Entry”.

 The 10,000 donated shares were subsequently issued at P 150.

 Cash…………………………….1,500,000
 Donated Capital…………………………….1,500,000
TREASURY SHARES SUBTERFUGE

 Occurs when excessive shares are issued in exchange of property on

condition that the shareholders shall donate a portion of the shares
 The donated shares may be reissued at a discount without any liability on
the part of the shareholders
 The reissue of donated shares is not entirely credited to donated capital.
 The sales price shall be used to correct the overvalued asset and capital.
TREASURY SHARES SUBTERFUGE-
ILLUSTRATED
 For example an entity issued ordinary shares of 10,000 shares with P 100 par
value for a piece of land with a fair value of only P 800,000.
 Land ……………………….1,000,000
 Ordinary Share Capital……………….1,000,000
 If subsequently the shareholders donated 3,000 shares which were then
sold by the entity for P 90.
 Cash………………………270,000
 Land…………………………………200,000
 Donated capital…………………… 70,000
DONATIONS BY NONSHAREHOLDERS

 Restricted for property or equipment additions

 Credited to income
 In rare occasion, credited to liability until the restriction is lifted and credited
to income
ASSESSMENT ON SHAREHOLDERS

 Shares were issued at a discount

 Entity is in financial distress

 For example, shareholders have a discount of P 100,000
which the board of directors assess
 Cash or share assessment rec…..100,000
 Discount on share capital……….100,000
ASSESSMENT ON SHAREHOLDERS

 For example, the entity is in financial difficulty and the

shareholders agreed to be assessed for additional P 50
for their 100,000 issued and outstanding ordinary shares.

 Cash / share assessment rec…………….500,000

Ordinary share premium assessment……….500,000
 RECAPITALIZATION
 Recapitalization occurs when there is a change in the capital structure of
the entity.
 The old shares are cancelled and the new shares are issued.
 Typical recapitalizations
Change from par to no par
Change from no par to par
Reduction of par value
Reduction of stated value
Split up
Split down
 ILLUSTRATIVE CASES
Ordinary share capital, P 100 par, 50,000 shares 5,000,000
Share premium 500,000
Retained earnings
 Change from par to no par 2,500,000

CASE 1 –All the 50,000 shares are called for cancellation. Instead 50,000 no-par
shares with stated value of P 50 are issued.

Ordinary share capital…………….5,000,000

Share premium…………………… 500,000
Ordinary share capital (50,000 x 50) …………..2,500,000
Share premium-recapitalization………………………3,000,000
 ILLUSTRATIVE CASE
 CASE 2
 All the 50,000 shares are called in for cancellation. Instead 50,000 no par
shares with stated value of P 150 per share are issued.

 Ordinary share capital…..5,000,000

 Share premium………….. 500,000
 Retained earnings……….2,000,000
 Ordinary share capital(50K x 150) 7,500,000
 ILLUSTRATIVE CASE
 Change from no par to par value share
 Ordinary share capital, no par P 100 stated value,
50,000………………………....5,000,000
 Retained earnings……………2,500,000
 Case 1
 All the 50,000 shares are called in for cancellation. Instead 50,000 shares of
P 50 par value are issued.
 Ordinary share capital…………5,000,000
 Ordinary share capital (50K x 50) 2,500,000
 Share premium-recapitulation 2,500,000
 ILLUSTRATIVE CASE
 Case 2
 All the 50,000 shares are called in for cancellation. Instead 50,000
shares of P 150 par value are issued.

 Ordinary share capital 5,000,000

 Retained earnings 2,500,000
 Ordinary share capital ( 50K x 50) 7,500,000
 ILLUSTRATIVE CASE
 Reduction of par value
 Ordinary share capital, 50,000 shares , P 100 par
…………………………………………..P 5,000,000
 Share premium……………………….. 500,000
 Retained earnings……………………. 2,000,000
 A recapitulation is effected whereby the par value of P 100 is reduced
to P 80 per share.
 Ordinary share capital ( 50K x 20) 1,000,000
Share premium recapitulation…………….1,000,000
 ILLUSTRATIVE CASE
 Reduction of stated value
 Ordinary share capital, 50,000 shares, P 100 stated value
……………….5,000,000
 A recapitulation is effected whereby the stated value of P 100 is
reduced to P 80.
 Ordinary share capital ( 50,000 x 20) 1,000,000
 Share premium recapitalization 1,000,000
 ILLUSTRATIVE CASE
 Share split
Split up or share split proper
Split down or reverse share split
 Split up is a transaction whereby the original shares are called in for
cancelation and replaced by a larger number accompanied by a
reduction in the par value or stated value.
 Purpose is mainly to increase the number of outstanding shares and
reduce unit market price.
 ILLUSTRATIVE CASE
 Split up
 For example, an entity has 10,000 shares issued and outstanding, with
P 100 par value. If the shares are split up 5 to 1, the new recapitulation
would be 50,000 shares with P 20 par value.
 The share capital remains the same.
 No formal entry is made.
 Only memorandum entry.
 ILLUSTRATIVE CASE
 Split down is the reverse of split up.
 For example, an entity has 10,000 shares issued and outstanding, with
P100 par value. If the shares are split down 5 to 1, the new
capitalization would be 2,000 shares with P 500 par value.
 The share capital remains at P 1,000,000.
 The number of shares has decreased to 2,000 ( 10,000/5) shares and
the par value has increased to P 500 (P 100 x 5)
 RIGHT ISSUE
 Rights issue is granted to existing shareholders to enable them to
acquire new shares at a specified price during specified period.
 The Philippine term is “ stock right”.
 Share warrants represent the certificate or instrument evidencing
ownership over the right issue.
 Right of preemption
 Normally, the exercise price is less than the current market value of
such shares.
 ISSUANCE OF RIGHTS
 No entry because the issue has no consideration.
 Only memorandum entry is required to indicate
The number of shares issued
The number of shares that can be purchase through the exercise of
the rights
 Only memorandum entry is required upon expiration of the rights.
EXERCISE OF RIGHTS

 A memorandum entry is required for the decrease in number of shares

claimable through the exercise of the rights.
 The sale of shares through the exercise of the rights is then recorded normally.
 For example, cash is received , P 1,000,000, is equal to the par value of the
share capital, the entry is
 Cash…………………….1,000,000
 Share capital……………………1,000,000
 If cash received, P 1,200,000,is more than par value of P 1,000,000, the entry is
 Cash……………………...1,200,000
 Share capital ……………………1,000,000
 Share premium……………………200,000
 PREFERENCE SHARES ISSUED WITH
SHARE WARRANTS
 Sweetener to make securities attractive.
 Sale of two securities-the preference share and the share warrant
 The consideration received is allocated.
 For example, an entity issued 20,000 preference shares of P 100 par
value for P 3,250,000 with 20,000 warrants to acquire 10,000, P 50 par
value ordinary shares at P 60 per share. On the date of the issuance, the
market values are:
 Preference share ex-warrant………………120
 Warrant………………………………………….10
 PREFERENCE SHARES ISSUED WITH
SHARE WARRANTS
Market value fraction Allocated issue
price

Preference share (20,000 x 120) 2,400,000 24/26 3,000,000

Warrants ( 20,000 x 10) 200,000 2/26 250,000
2,600,000 3,250,000
The fractions are developed from the market value and multiplied by P 3,250,000 to
arrive at the allocated price.

Cash …………………………3,250,000
Preference Share Capital ( 20,000 x 100) ………2,000,000
Share premium-PS…………………………………...1,000,000
Share warrants outstanding…………………… …. 250,000

The share warrants outstanding is reported as share premium.

 PREFERENCE SHARES ISSUED WITH
SHARE WARRANTS
 If subsequently, all 20,000 warrants are exercised requiring the issuance of
10,000 ordinary shares at P 60 per share , the journal entry is:

 Cash (10,000 x 60) 600,000

 Share warrants outstanding 250,000
 Ordinary share capital ( 10K x 50) 500,000
 Share premium 350,000
 The share warrants outstanding account is simply closed and credited to
share premium if the warrants are not exercised.
 RETAINED EARNINGS
 RETAINED EARNINGS represent that cumulative balance of the
following
Net income or loss for the period
Dividend distributions
Prior period errors
Changes in accounting policy
Reclassifications of some components of other comprehensive
income
Other capital adjustments
 ACCUMULATED PROFITS-IFRS term
 KINDS OF RETAINED EARNINGS
 Unappropriated Retained Earnings
Free portion
Can be declared as dividends

 Appropriated Retained Earnings

Restricted
Not available for dividends

 Deficit-debit balance in retained earnings

Also known as accumulated losses
Not an asset but a deduction from equity
 DIVIDENDS
 Dividends are distribution of earnings or capital to the shareholders in
proportion to their shareholdings
 Classification of dividends
Dividends out of earnings- legal
Dividends out of capital- return of capital that violated the trust fund
doctrine
 Stock dividends may be declared from share premium per SEC
THREE ESSENTIAL DATED FOR
ACCOUNTING OF DIVIDENDS
1. Date of Declaration- board of directors authorization

2. Date of Record- stock and transfer book is closed for

registration

3. Date of Payment-dividend liability ispaid

ILLUSTRATION
 The board of directors at their meeting on December 31,
2020 declared a dividend of P 5 per share payable March
31,2021, to shareholder of record on January31,2021.
Date of declaration is December 31, 2020
Date of record is January 31, 2021
Date of payment is March 31,2021
 Note: Dividend liability is recognized on date of declaration.
 FORM OF DIVIDENDS OUT OF EARNINGS
1. Cash
dividends
Certain amount of pesos per share

Certain percent of the par value or stated value

Debit retained earnings/dividends and credit dividends payable –

date of declaration

Debit dividends payable and credit cash-date of payment

2. Property Dividends
3. Liability Dividends-bond and scrip
4. Share dividends or bonus issue
 ILLUSTRATION
 The board of directors at their meeting on November 30, 2020
declared a dividend of P 20 per share payable April 30, 2021, to
shareholders of record on December 31, 2020. The entity had 20,000
shares issued and outstanding with par value of P 100.
 2020
 Nov. 30 Retained earnings 400,000
Dividends payable 400,000
 Dec. 31 No entry
 2021
 April 30 Dividends payable 400,000
Cash 400,000
 FORM OF DIVIDENDS OUT OF EARNINGS
 Property dividends or dividends in kind are distribution of earnings of
the entity to shareholders in the form of non-cash assets (IFRIC 17)
 Two accounting issues
Measurement of property dividends payable(IFRIC 17, par 11)
Initial recognition-fair value of non-cash asset on date of
declaration
Subsequent recognition-change in fair value at year-end and
date of settlement
The offsetting debit or credit is through equity or directly
retained earnings
Measurement of non-cash asset to be distributed as property
dividends (PFRS 15 A)
 ILLUSTRATION
 An entity owned 50,000 unquoted shares of another entity
accounted for under the cost method. The carrying amount of
the investment is P 1 million. On December 1, 2020, the entity
declared these shares as property dividend to be distributed on
January 31, 2021the investment had the following fair value less
cost to distribute.
December 1, 2020………………….1,500,000
December 31, 2020…………………1,800,000
January 31, 2021………………….. 1,900,000
 ILLUSTRATION
 Journal entries
1. To recognize the dividend payable on the date of declaration
on December 31, 2020
Retained earnings………………1,500,000
Dividend payable…………………1,500,000
2. To recognize the increase in dividend payable at the end of the
reporting period on December 31, 2020
Retained earnings……………….300,000
Dividend payable……………………300,000
 ILLUSTRATION
3The carrying amount of the investment of P 1 million is not adjusted
because this is lower than the fair value of P 1.8 million on
December 31,2020.
4. To recognize the increase in dividend payable on the date of
settlement on January 31, 2021
Retained earnings…………….100,000
Dividends payable…………………………100,000
5. To record the settlement of dividend payable on January 31, 2021.
Dividend payable……………1,900,000
Investment in equity……………………..1,000,000
Gain on distribution of dividend 900,000
 CHOICE OF EITHER NONCASH OR CASH

 IFRIC 17, par. 12 provides that the entity shall estimate the dividend
payable based on fair value of each alternative and the
associated probabilities of owners selecting each alternative.
 At the end of each reporting period and at the date of settlement,
the entity shall adjust the dividend payable based on the
alternative chosen through equity or retained earnings.
ILLUSTRATION
 On December 31,2020, an entity declared dividends on
ordinary shares payable on March 31, 2021. The entity
decided to give the shareholders a choice between P 2
million cash dividend or property dividend with carrying
amount of P 2.5 million and fair value less cost to
distribute of P 3 million. The entity estimated that 70% will
take cash, while 30% will take property. If there is a
choice of cash or noncash the entity shall estimate the
dividend payable by considering all associated
probabilities.
 Cash alternative(70% of P 2 million) 1,400,000
 Non-cash alternative(30% of P 3 million) 900,000
 Dividend payable……………………………...2,300,000
 ILLUSTRATION
 The declaration of the dividend is recognized on December 31,2020
Retained earnings………………..2,300,000
Dividends payable……………………………2,300,000
 Cash alternative-payment of dividends
Dividend payable………….2,300,000
Cash……………………………………….2,000,000
Retained earnings………………………... 300,000
 Non-cash alternative
To recognize increase in dividend payable
Retained earnings…………………700,000
Dividends payable……………………………700,000
 SCRIP DIVIDEND
 Example: A scrip dividend are declared in the amount of P 200,000
payable in six months at 12% interest. The journal entry on the date
of declaration is.
Retained earnings 200,000
Script dividend payable 200,000
 The scrip dividends are redeemed
Script dividend payable 200,000
Interest expense (200,000 x.12x1/2) 12,000
Cash 212,000
 BOND DIVIDEND
 Example: Dividends are declared in the amount of P 1 million
payable in entity’s own bonds, 12%, P1 million face value. The
bonds mature in 5 years.
 To record the declaration of dividends
Retained earnings 1,000,000
Bonds dividends payable 1,000,000
 To record the issuance of the bonds in payment for the dividends
Bonds dividends payable 1,000,000
Bonds payable 1,000,000
BOND DIVIDEND

 To record the payment of periodic semi-annual interest on bonds

Interest expense 60,000
Cash ( 1,000,000 x .12x ½) 60,000
 To record the redemption of bond on maturity date
Bond payable 1,000,000
Cash 1,000,000
 SHARE OR STOCK DIVIDEND
 The IFRS term is bonus issue.
 Share dividends are distribution of the earnings of the entity in the
form of the entity’s own shares.
 Retained earnings are capitalized or transferred to share capital
 The assets of the entity remains the same
 Share dividends create only a change in owners’ equity
 Ordinary share dividends – ordinary shares to ordinary shareholders
or preference shares to preference shareholders
 Special share dividends- ordinary shares to preference
shareholders or preference shares to ordinary shareholders
 SHARE DIVIDEND
 How much retained earnings should be capitalized?
 Small share dividend-less than 20%: the amount charged to
retained earnings is equal to the fair value on the date of
declaration. The fair value must not be lower than par or stated
value
 Large share dividend- 20% or more: the par or stated value is
capitalized because this is conceived to materially effect a
reduction in the share market value.
 ILLUSTRATION-SHARE DIVIDEND
 Share capital, P 100 par, 20,000 shares authorized, 10,000 shares issued
and outstanding… 1,000,000
 Share premium 500,000
 Retained earnings 500,000
 The entity declared a 20% share dividend or 2 shares for every 10 shares
held, or a total 2,000 shares as share dividend.
 Journal entry
Retained earnings( 2,000 shs x 100) 200,000
Share dividends payable 200,000
 ILLUSTRATION
 Note: the amount capitalized is equal to par value of the shares.
 The share dividend payable is an addition to share capital in the
presentation to the balance sheet
 It cannot be classified as a liability because a share dividend never
reduces assets
 Journal only- share dividends are issued
Share dividends payable 200,000
Share capital 200,000
 ILLUSTRATION#2 SHARE PREMIUM

 Share capital, P 100 par, 20,000 shares authorized, 10,000 shares issued
………………………………1,000,000
 Share premium………………………… …. 500,000
 Retained earnings……………………..… 700,000
 10% share dividend is declared and the market value of the
share is P 150
 Retained earnings(1,000 shs x 150)…150,000
Share dividend payable(1,000 x 100)………….100,000
Share premium………………………………………. 50,000
 ILLUSTRATION#2 SHARE PREMIUM
 50 % share dividend is declared and the market value of the
share is P 150
 Retained earnings ( 5,000 shs x 100) 500,000
Share dividends payable………………………500,000
 Share dividends payable………...500,000
Share capital…………………………………..500,000
 If the share dividends is declared and immediately issued
 Retained earnings………………500,000
Share capital………………………………….500,000
 FRACTIONAL SHARE DIVIDENDS
 Example: If 10% share dividend is declared, it means that a
shareholder shall receive one share for every ten shares held. Thus
a shareholder owning 45 shares shall be entitled to receive 4 full
shares and a fractional one-half share.
 Accounting for the full shares-no problem
 Accounting for the fractional share-steps
 issue warrants and to accumulate warrants for the full share.
pay cash if the source is retained earnings, not share premium
(illegal)
 FRACTIONAL SHARE DIVIDEND-
ILLUSTRATED
 Share capital , P 100 par, 10,000 issued 1,000,000
 Share dividends declared 50%
 Full shares issued 4,000
 Fractional shares issued 1,000

 When the share dividends are declared:

Retained earnings ( 5,000 x 100) 500,000

Share dividends payable 500,000
FRACTIONAL SHARE DIVIDEND-
ILLUSTRATED
 When the full share and fractional share dividends are
issued:

 Share dividends payable 500,000

Share capital (4000 x 100) 400,000
Fractional warrants outstanding 100,000

 The fractional warrants outstanding is part of share

premium.
FRACTIONAL SHARE DIVIDEND-
ILLUSTRATED
 When only 600 full shares are issued through the
surrender of fractional warrants and the remaining
warrants expired:

 Fractional warrants outstanding 100,000

Share capital (600 x 100) 60,000
Share premium 40,000
 TREASURY SHARES AS SHARE DIVIDEND
 The cost of the shares shall be charged to retained earnings.
 Referred to as property dividend under Philippine Corporation Code
 The author believes it is a share dividend because the obligation is not
to pay noncash asset but to reissue own share capital.
 Under PAS # 2 treasury shares are component of shareholders’ equity
not a financial asset
 Substance over legal form
 ILLUSTRATION
 An entity distributed as share dividend 1,000 treasury shares with
cost of P 100,000 and market value of P 120,000
 To record the declaration
 Retained earnings 100,000
Share dividend payable 100,000
 To record the payment
 Share dividend payable 100,000
Treasury shares 100,000
 DIVIDENDS OUT OF CAPITAL
 Known as liquidating dividend
 The entity is dissolved and liquidated
 Wasting assets corporations may declare dividends out of
earnings and out of capital
 A wasting asset company engages in exploration of natural
resources.
 Illustration: Financial information of a wasting asset entity:
Resource property 10 million
Accumulated depreciation 2 million
Retained earnings 3 million
 DIVIDENDS OUT OF CAPITAL
The maximum dividends that may be declared is only
P 5 million.

Retained earnings 3,000,000

Capital liquidated 2,000,000
Dividend payable 5,000,000

The capital liquidated account is a deduction from

the total stockholders’ equity
 DIVIDENDS AS EXPENSE
 PAS 32, par. 35 –dividends are charged against Equity
 PAS 32, par. 36 – dividends are charged to expense re distribution of
dividends to holders of equity instruments classified as financial
liability.
Recognized in the same way as interest expense on bond
Presented in the income statement as either with interest on
other liabilities or separate line item (par. 40)
Example is redeemable preference share
 RETAINED EARNINGS-APPROPRIATIONS AND
QUASI-ORGANIZATION

Appropriated and Unappropriated

In the absence of evidence, retained earnings
can be declared as dividends
Appropriation of retained earnings
Legal appropriation
Contractual appropriation
Voluntary or discretionary
LEGAL APPROPRIATIONS
 Legal capital cannot be returned until the entity is
dissolved and liquidated
 Acquisition of own shares must be covered by sufficient
retained earnings
 Appropriation must be equal to the cost of treasury
shares
 Called as” Retained Earnings Appropriated for Treasury
Shares”
CONTRACTUAL APPROPRIATIONS

 Bond issue and preference share issue may impose

restriction on payment of dividends
 Ensure repayments
 Described as “ Retained Earnings Appropriated for
Sinking Fund or Bond Redemption” or “ Retained
Earnings for the Redemption of Preference Shares”
VOLUNTARY OR DISCRETIONARY
APPROPRIATION
Discretion of management
Management wishes to preserve funds
for
Expansion
Covering losses or contingencies
Increase working fund
Capital expenditures
VOLUNTARY OR DISCRETIONARY
APPROPRIATION
The intent is to limit declaration of dividends
Accounting for appropriation
Retained earnings xxx
Retained earnings appropriated xxx
If the appropriation is unnecessary
Retained Earnings Appropriated xxx
Retained Earnings xxx
 STATEMENT OF RETAINED EARNINGS
 No longer required
 Part of Statement of Changes in Equity
 Items affecting Retained Earnings
Net income or loss
Prior period errors
Dividends declared
Effect of change in accounting policy
Appropriations of retained earnings
Components o comprehensive income reclassified to
retained earnings
SAMPLE STATEMENT OF CHANGES IN EQUITY

SHARE CAPITAL SHARE RETAINED

PREMIUM EARNINGS

BALANCE-JAN.1, 2018 5,000,000 2,000,000 1,000.000

ISSUANCE,10,000 SHS., P 100 PV AT P 1,000,000 500,000

150

NET INCOME 1,550,000

DIVIDEND PAID (200,000)

BALANCE-DECEMBER 31, 2018 6,000,000 2,500,000 2,350,000

COMPREHENSIVE ILLUSTRATION-STATEMENT OF
CHANGES IN EQUITY
SHARE CAPITAL RESERVES RETAINED
EARNINGS

BALANCE-JAN. 1 5,000,000 2,000,000 1,000,000

PRIOR YEAR UNDERDEPRECIATION (100,000)

AVERAGE TO FIFO 300,000

ISSUANCE OF SHARES, 10,000 SHS, 1,000,000 500,000
P 100 PV AT P 150
NET INCOME 1,550,000
OTHER COMPREHENSIVE INCOME 50,000

DIVIDEND PAID (400,000)

CURRENT APPROPRIATIONFOR 200,000 (200,000)
CONTINGENCIES

BALANCE-DECEMBER 31 6,250,000 3,000,000 2,150,000

 QUASI REORGANIZATION
 Permissive not mandatory
 Restates the accounts and establishes a “ fresh start”
 Restating assets, liabilities, and equity at fair value to
eliminate deficit
 Also called corporate readjustment
 May be accomplish thru
Recapitulation
Revaluation of property, plant and equipment
 JUSTIFICATION FOR QUASI-
REORGANIZATION
 Large deficit exists
 Approved by shareholders and creditors
 Cost method for accounting PPE is unrealistic
An entity in financial distress may be allowed by SEC to revalue if
the PPE current value is substantially more than their cost.
 When a “ fresh start” is desirable to all parties concerned.
 A quasi-reorganization must be approved by SEC.
 ILLUSTRATION-THRU RECAPITALIZATION

 An entity provided the following statement of financial position at year-end

CURRENT ASSET
prior to quasi-reorganization 1,000,000
PROPERTY, PLANT AND EQUIPMENT 7,500,000
ACCUMULATED DEPRECIATION (1,000,000) 6,500,000
7,500,000

LIABILITIES 4,500,000
SHARE CAPITAL, P 100 PAR, 50,000 SHS 5,000,000
RETAINED EARNINGS (DEFICIT) (2,000,000)
7,500,000
ILLUSTRATION-THRU RECAPITALIZATION
 The shareholders and creditors agreed to a quasi-
reorganization. The following restatements should be
made:
The PPE shall be recorded at fair value, P 6 million
The overstatement of P 250,000 in inventory shall be
revalued.
The share capital is reduced to P 2 million, 20,000
shares , P 100 par value
The resulting deficit is charged to the share premium
arising from reorganization.
 ILLUSTRATION-THRU RECAPITALIZATION
 Adjustments
a. Accumulated depreciation 1,000,000
Retained earnings 500,000
Property Plant and Equipment 1,500,000
b. Retained earnings 250,000
Inventory 250,000
c. Share capital 3,000,000
Share premium 3,000,000
d. Share premium 2,750,000
Retained Earnings 2,750,000
 ILLUSTRATION-THRU RECAPITALIZATION
CURRENT ASSETS 750,000
PROPERTY, PLANT of
 Statement AND EQUIPMENT
financial position after quasi-reorganization 6,000,000
TOTAL ASSETS 6,750,000

LIABILITIES 4,500,000
SHARE CAPITAL, P 100 PAR, 20,000 SHS 2,000,000
SHARE PREMIUM 250,000
TOTAL LIABILITIES AND EQUITY 6,750,000
 QUASI-REORGANIZATION THRU
REVALUATION
CURRENT ASSETS 1,000,000
PPE  PRIOR TO REORGANIZATION 5,000,000
ACCUMULATED DEPRECIATION (1,500,000) 3,500,000
GOODWILL 100,000
TOTAL ASSETS 4,600,000

CURRENT LIABILITIES 1,100,000

SHARE CAPITAL, P 100 PAR 5,000,000
SHARE PREMIUM 500,000
RETAINED EARNINGS (2,000,000)
TOTAL LIABILITIES AND EQUITY 4,600,000
 QUASI-REORGANIZATION THRU
REVALUATION
 SEC recommended that PPE be revalued by an independent expert
The PPE are determined to have replacement cost of P 9 million
The inventory be written down by P 400,000
The goodwill is written off
Unrecorded accounts payable of P 200,000.
Any resulting deficit is charged against revaluation surplus
 QUASI-REORGANIZATION THRU
REVALUATION
 Adjustments
1. Property, Plant and Equipment 4,000,000
Accumulated Depreciation 1,200,000
Revaluation Surplus 2,800,000
COST REPLACEMEN INCREASE
T COST
PROPERTY, PLANT AND EQUIPMENT
ACCUMULATED DEPRECIATION (30%) 5,000,000 9,000,000 4,000,000

1,500,000 2,700,000 1,200,000

3,500,000 6,300,000 2,800,000
QUASI-REORGANIZATION THRU
REVALUATION
2. Retained earnings 400,000
Inventory 400,000
3. Retained earnings 100,000
Goodwill 100,000
4. Retained earnings 200,000
Accounts payable 200,000
5. Revaluation surplus 2,700,000
Retained earnings 2,700,000
 QUASI-REORGANIZATION THRU
REVALUATION
 Statement of financial position after quasi-reorganization

Current assets 600,000

Property, plant and equipment 9,000,000
Accumulated depreciation (2,700,000)
Total assets 6,900,000

Current liabilities 1,300,000

Share capital 5,000,000
Share premium 500,000
Revaluation surplus 100,000
Total liabilities and equity 6,900,000
 QUASI-REORGANIZATION THRU
REVALUATION
 SEC REQUIREMENTS
Appraisal by independent expert
Increase in PPE value credited to “ Revaluation Surplus”
Adjustments of other assets thru “ Retained Earnings”
The resulting deficit is offset against Revaluation Surplus.
Retained earnings after reorganization cannot be declared as
dividends
Losses after quasi-reorganization cannot be charged to remaining
revaluation surplus
The quasi-reorganization shall be disclosed for at least 3 years- the
date, mechanics, purpose, ad effect in the FSs
 SHARE-BASED COMPENSATION
 Shares in exchange for services
 Common for directors, senior executives and other key employees
 Tied up with performance
 PFRS 2 sets the measurement and specific requirements
Equity settled-share options
Cash settled- share appreciation rights
 SHARE OPTIONS
 Part of remuneration of key officials and personnel
 Options to acquire shares during specified period at specified
price subject to certain conditions
 Two questions:
How is the compensation measured?
When is the compensation recognized?
 Measurement
Fair value method- date granted (PFRS 2)
Intrinsic value method=excess of market value over the
option price (PFRS 2, par. 24, allowed if FMV doesn’t exist.
 SHARE OPTIONS
 Recognition of compensation

Vest immediately-expense in full with increase in equity

Do not vest- expense over the service period ( date of grant
to exercise date)
 ILLUSTRATION-NO VESTING PERIOD
 On January 1,2020, share options are granted to employees to purcha
100,000 ordinary shares of P 50 par value at P 60 per share. On this dat
the fair value of each share option is P 20.
 The options are exercised immediately on Dec. 31,2020
 The compensation is recognized in full on Jan 1, 2020.

 Salaries –share option (100,000 x 20) 2,000,000

Share premium outstanding 2,000,000
 ILLUSTRATION-NO VESTING PERIOD

 The exercise of the share option on December 31, 2020 is

recorded as
 Cash ( 100,000 x 60) 6,000,000
 Share options outstanding 2,000,000
Ordinary share capital (100,000 x 50) 5,000,000
Share premium 3,000,000
 ILLUSTRATION-WITH VESTING PERIOD
 On January1,2020 share options are granted to officers to purchase
100,000 ordinary shares of P 50 par value at P 60 per share. The fair
value of each share option is P 15. The officers are only entitled after
completing two-years of service. The option can be exercised starting
January 1, 20222 and expire one year after. All shares options are
exercised on December 31, 2022.
 Total compensation or fair value of share options (100,000 x 15) -
1,500,000
 Annual compensation ( 1,500,000/2)- 750,000
 ILLUSTRATION-WITH VESTING PERIOD
 2020
 Dec. 31 Salaries-share options 750,000
 Share options outstanding 750,000
 2021
 Dec. 31 Salaries-share options 750,000
 Share options outstanding 750,000
 2022
 Dec 31 Cash (100,000 x 60) 6,000,000
Share options outstanding 1,500,000
Ordinary share capital (100,000 x 50) 5,000,000
Share premium 2,500,000
 ILLUSTRATION- SOME EMPLOYEES LEFT

 On Jan. 1,2020, an entity granted 100 share options each to

500 employees who will remain during the vesting period of
three year. On grant date, the share option has a fair value of
P 30. By Dec. 31, 2020, 30 employees left and further 30
employees are projected to leave during the vesting period.
By Dec. 31, 2021, 28 employees have left and further 25
employees are expected to leave during 2022. By Dec. 31,22,
22 employees have left and therefore 420 employees shall
receive share options at the end of 2022.
 COMPUTATION OF COMPENSATION
EXPENSE
NUMBER OF EMPLOYEES 500
2020 LEFT IN 2020
EMPLOYEES WHO (30)
EMPLOYEES EXPECTED TO LEAVE DURING THE VESTING
PERIOD (30)
EMPLOYEES ENTITLED TO SHARE OPTIONS 440
MULTIPLY BY SHARE OPTIONS PER EMPLOYEE 100
TOTAL SHARE OPTIONS 44,000
MULTIPLY BY FAIR VALUE 30
TOTAL COMPENSATION 1,320,000
COMPENSATION EXPENSE FOR 2020( 1,320,000/3) 440,000
 COMPUTATION OF COMPENSATION
EXPENSE
Number of employees 500
 2021
Employees who left in 2020 (30)
Employees who left in 2021 (28)
Employees expected to leave in 2022 (25)
Employees entitled to share options 417
Multiply by share options per employee 100
Total share options 41,700
Multiply by fair value 30
Total compenstion 1,251,000

Cumulative compensation-Dec. 31,2021( 1,251,000/3 x 2 years

Compensation recognized in 2020 834,000
Compensation expense in 2021 (440,000)
394,000
 COMPUTATION OF COMPENSATION
EXPENSE
NUMBER OF EMPLOYEES 500
EMPLOYEES WHO
2022 LEFT IN 2020 (30)
EMPLOYEES WHO LEFT IN 2021 (28)
EMPLOYEES WHO LEFT IN 2022 (22)
EMPLOYEES ENTITLED TO SHARE OPTIONS 420
MULTIPLY BY SHARE OPTION PER EMPLOYEE
TOTAL SHARE OPTIONS 100
CUMULATIVE COMPENSATION-12/31/22/(42,000 X 30) 42,000
CUMULATIVE COMPENSATION -12/31/21
COMPENSATION EXPENSE FOR 2022 1,260,000
(834,000)
426,000
END OF PRESENTATION

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