Study Note #2 – Contributed
Capital
Introduction to Shareholders’ Eq-
uity
Shareholders’ equity is the residual interest of owners in the
net assets of a corporation, measured by the excess of assets over liabili-
ties.
Components of Equity
Share Capital – portion of the paid-in capital representing the
par or stated value.
o Outstanding Shares – share capital that is issued and
fully paid.
o Treasury Shares – share capital that is issued but not out-
standing.
o Subscribed Shares – share capital that is subscribed but
not yet fully paid.
Share Premium – portion of the paid-in capital in excess of par
value, but may also include amounts arising from other equity
transactions (i.e., transactions with owners).
Retained Earnings – cumulative balance of period earnings,
dividend distribution, prior period errors, and other capital ad-
justments.
Other Reserves – cumulative balance of other comprehensive
income reported in previous periods.
Issuance of Share Capital
Types of Share Capital
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Ordinary Shares – They are the most basic type of share capital.
If there is only one class of capital, it will be an ordinary share. They
have no fixed return, but they do have voting rights.
Preference Shares – These shares will have preferences granted
to the shareholders. Preference can be preference over net as-
sets or preference on dividends. They may have limited returns and
limited voting rights.
Trust Fund Doctrine and Legal Capital
Trust Fund Doctrine – It holds that the share capital of a corpo-
ration is considered a trust fund for the protection of creditors.
Returning the share capital (in the form of liquidating dividends) is
considered illegal. Corporations may only pay dividends when
there are excess earnings.
Legal Capital – It is the amount of capital that cannot be re-
turned to the shareholders.
o If the shares have par value, the legal capital is the aggregate
par value of issued and subscribed shares.
o If the shares have no par value, the legal capital is the aggre-
gate amount received upon issuance.
Methods in Recording Authorized and Is-
sued Shares
Memorandum Method
No entry is made to record authorized share capital.
Upon issuance of capital, the following entry is made:
Cash ₱xxx
Share Capital ₱xxx
Journal Entry Method
Authorized capital is recorded using the entry below:
Unissued Share Capital ₱xxx
Authorized Share Capital ₱xxx
When shares are issued, they will be recorded as follows:
Cash ₱xxx
Unissued Share Capital ₱xxx
Unissued share capital is a contra-equity account against au-
thorized share capital.
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Measurement of Issued Shares
Consideration Measurement Basis
Cash Actual cash received
Noncash assets or services by non- Based on the following hierarchy:
employees
1. Fair value of the non-cash con-
sideration received
2. Fair value of the shares issued
3. Par value of the shares issued
Previous liability of the issuing en- Based on the following hierarchy:
tity
1. Fair value of the liability extin -
guished
2. Fair value of the shares issued
3. Book value of the liability extin -
guished
Services provided by employees According to the provision of PFRS 2 –
Share-based Payment
Cost of Issuing Shares
Direct costs in issuing shares may include, but are not limited to:
o Legal fees
o CPA fees
o Underwriting fees
o Commissions
o Cost of printing certificates
o Documentary stamp tax
o Filing fees
Direct costs of issuing shares shall be debited in the following or-
der of priority:
o Share premium arising from share issuance
o Retained Earnings
Cost of Public Offering Shares
Cost of public offering may include:
o Road show presentation
o Public relations consultant’s fees
The cost of listing shares is not an equity transaction; hence, it will
be expensed as incurred.
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Subscription of Shares
Subscribed Capital
Subscribed capital refers to shares subscribed but not yet fully
paid, hence still unissued.
Upon subscription, the entity shall have it recorded as follows:
Subscription Receivable ₱xxx
Subscribed Share Capital (at Par) ₱xxx
Share Premium (if any) xxx
The balance of subscription receivable serves as a contra-equity
account.
Settlement of Subscription Receivable
Stock certificates will only be issued upon full settlement of
subscription receivable.
Upon collection of subscription receivable, it will be recorded as:
Cash ₱xxx
Subscription Receivable ₱xxx
Upon full payment, the shares will be issued, and they will be
recorded as:
Subscribed Share Capital ₱xxx
Share Capital ₱xxx
Delinquent Subscription
When the subscriber fails to settle the subscription receivable, it will be
declared as a delinquent subscription. Delinquent shares shall then
be issued to the highest bidder.
The highest bidder is the one who is willing to pay the unpaid
subscription balance, interest, and other costs and expenses
for the smallest number of shares. When there is no bidder, the
shares will be considered treasury shares.
Recording Delinquent Subscription
1. Upon delinquency
Due from Highest Bidder ₱xxx
Subscription Receivable ₱xxx
Cash (for costs and expenses) xxx
2. Upon issuance to the highest bidder
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Cash ₱xxx
Due from Highest Bidder ₱xxx
Subscribed Share Capital ₱xxx
Share Capital ₱xxx
3. When there is no highest bidder
Treasury Shares ₱xxx
Due from Highest Bidder ₱xxx
Donated Capital
Donation of Entity’s Shares
When shareholders return shares to the issuing corporation for no con-
sideration, such a transaction will only be recorded through a mem-
orandum entry.
When the donated shares are subsequently reissued, it shall be
recorded with a credit to Share Premium – Donated Capital.
Cash ₱xxx
Share Premium – Donated Capital ₱xxx
Donation of Asset
When a corporation receives an asset through donation, it shall record
the donation as follows:
The asset shall be recognized at its fair value at the time of do-
nation.
The corresponding credit will depend on the identity of the
donor:
o If the donor is a shareholder, it will be credited to Share Pre-
mium – Donated Capital.
o If the donor is not a shareholder, it will be credited to Other In-
come (in profit or loss).
Retirement of Shares
A corporation may purchase shares and immediately retire them.
When the retirement price is equal to par value, it will be recorded by
debiting Share Capital.
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If the retirement price is less than par value, the difference will be
credited to Share Premium – Retirement. If the retirement price is
more than par value, the difference will be charged in the follow-
ing hierarchy:
o Share premium from original issuance of the share (pro-
portionate share)
o Share Premium – Retirement (to the extent of its balance)
o Retained Earnings
Treasury Shares
Treasury shares are the entity’s own shares that have been is-
sued, but were subsequently reacquired but not cancelled.
Requisite of treasury shares:
o Shares are the entity’s own shares.
o Shares have been originally issued.
o Shares are reacquired but not cancelled.
Acquisition of Treasury Shares
Treasury shares are recorded at cost.
The journal entry to record acquisition of treasury shares is:
Treasury Shares ₱xxx
Cash ₱xxx
Reissuance of Treasury Shares
When treasury shares are reissued at cost, it will be recorded by deb-
iting Cash (or other consideration received) and crediting Trea-
sury Shares.
When treasury shares are reissued above cost, the excess shall be
credited to Share Premium – Treasury Shares.
When treasury shares are reissued below cost, the deficiency shall be
credited in the following order of priority:
o Share Premium – Treasury shares of the same class
o Retained Earnings
Retirement of Treasury Shares
When treasury shares are retired, the entity shall debit Share Capi-
tal and credit Treasury Shares.
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If the cost of the retired treasury shares is more than the par value, the
excess shall be debited in the following order of priority:
o Share premium from issuance of shares (proportionate
share if retired share capital)
o Share premium from treasury shares (to the extent of the
balance)
o Retained Earnings
Journal Entries
1. Acquisition of Treasury Shares
Treasury Shares ₱xxx
Cash ₱xxx
2. Reissuance at Par
Cash ₱xxx
Treasury Shares ₱xxx
3. Reissuance Above Par
Cash ₱xxx
Treasury Shares ₱xxx
Share Premium – Treasury Shares xxx
4. Reissuance Below Par
Cash ₱xxx
Share Premium – Treasury Shares (if any) xxx
Retained Earnings (if applicable) xxx
Treasury Shares ₱xxx
5. Retirement of Shares
Share Capital (at Par) ₱xxx
Share Premium – Issuance (Proportionate Share) xxx
Share Premium – Treasury (if any) xxx
Retained Earnings xxx
Treasury Shares ₱xxx
Accounting for Preference Shares
Types of Preference Shares
Cumulative preference shares are equity instruments that are enti-
tled to dividends in arrears, in case the corporation did not declare div-
idends during a particular period.
Participating preference shares are equity instruments that are
entitled to additional dividends, as they will participate with the
ordinary shares on the excess dividends declared.
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Convertible preference shares are shares that allow the holder
to convert the shares into a specified number of ordinary
shares.
o Upon conversion, the par value and corresponding portion
of share premium of the convertible preference shares
will be considered as the issue price of ordinary shares.
Share Capital – Preference – Convertible (at Par) ₱xxx
Share Premium – Preference – Convertible (Portion) xxx
Share Capital – Ordinary (at Par) ₱xxx
Share Premium – Ordinary (Excess) xxx
Redeemable preference shares are equity securities with a
fixed redemption date. Since there is an obligation to pay the
amount invested at the redemption date, these will be classified as fi-
nancial liabilities.
o Dividends paid for redeemable preference shares will be pre-
sented as interest expense.
Recapitalization
Recapitalization occurs when there is a change in the capital
structure of the entity. Old shares are canceled, and new shares are
issued.
Hence, considered equity transactions should not affect profit
or loss. Common recapitalization methods include:
o Change from par to no par, and vice versa
o Reduction in par or stated value
o Split up and split down
Accounting for Recapitalization
1. Change from par to no-par
a. Share Capital and Share Premium of old shares are deb -
ited in full.
b. Share Capital is credit based on issue price, then the dif -
ference is credited to Share Premium – Recapitalization.
2. Change from no-par to par
a. Share Capital based on the issue price of old shares is
debited in full.
b. Share Capital is credit based on the par value of new
shares; then the difference is credited to Share Premium
– Recapitalization.
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3. Reduction in par value – Share Capital is debited, while Share
Premium – Recapitalization is credited for the difference be-
tween the old par value and the new par value.
4. Share split up/down
a. Split-up occurs when original shares are cancelled and re -
placed by a larger number, accompanied by a reduction
in par value. Split down is the reverse of split up.
b. Split up and split down are only recorded through a mem -
orandum entry.
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