CHAPTER 22

RETAINED EARNINGS & DIVIDENDS

HIGH-PRECISION STUDY PROTOCOL

Verbatim Definitions • Logic Connectors • Deep Computation Guides

TECHNICAL KNOWLEDGE OBJECTIVES

✦ To define retained earnings

✦ To understand the legal limitation in the declaration of dividends
✦ To identify dividends out of earnings
✦ To recognize and measure cash dividends, property dividends and share dividends
PART I: RETAINED EARNINGS

DEFINITION
Retained earnings represent the cumulative balance of the following, among others:

a. Net income or loss for the period

b. Dividend distributions

c. Prior period errors

d. Changes in accounting policy

e. Reclassifications of some components of other comprehensive income

f. Retirement of preference shares in excess of original issue price

g. Loss on sale of treasury shares in excess of share premium from treasury shares

Loss on retirement of treasury shares in excess of share premium from original issuance and share premium from treasury
h. shares

■ IFRS TERM: The IFRS term for retained earnings is accumulated profits. However, the retained earnings account is
used in succeeding illustrations. The illustrative statement of financial position and statement of changes in equity in IAS 1
and IAS 8 still maintain the title retained earnings.

KINDS OF RETAINED EARNINGS

KIND DEFINITION DIVIDEND AVAILABILITY

a. Unappropriated That portion which is free and can be declared as ✔ AVAILABLE for dividend
Retained Earnings dividends to shareholders. declaration

b. Appropriated Retained That portion which has been restricted and ✘ NOT AVAILABLE for dividend
Earnings therefore is NOT available for any dividend declaration
declaration.

■ When the retained earnings account has a debit balance, it is called a deficit. A deficit is NOT an asset but a
deduction from shareholders' equity. The IFRS term for deficit is accumulated losses.
PART II: DIVIDENDS — OVERVIEW

DEFINITION
Dividends are distributions of earnings or capital to the shareholders in proportion to their shareholdings. Dividends
are broadly classified into two, namely:

CLASSIFICATION SOURCE KEY RULE

a. Dividends out of Earnings Retained Earnings Legally, dividends can be declared ONLY from retained
earnings.

b. Dividends out of Capital Capital / Paid-in Capital Return of capital to shareholders. Illegal during the lifetime
(Liquidating Dividend) of the entity per the trust fund doctrine. Exception:
wasting asset corporations.

THREE CRITICAL DIVIDEND DATES

DATE VERBATIM DEFINITION ACCOUNTING ENTRY?

a. Date of Declaration The date on which the directors authorize the ✔ YES — Debit Retained Earnings
payment of dividends to shareholders. / Credit Dividends Payable

b. Date of Record The date on which the stock and transfer book of the ✘ NO ENTRY — but a list of
corporation SHALL be closed for registration. Only entitled shareholders is made.
those shareholders registered as of such date are
entitled to receive dividends.

c. Date of Payment The date on which the dividend liability is to be ✔ YES — Debit Dividends Payable
paid. / Credit Cash

■ RECOGNITION RULE (IFRIC 17, par. 10): The liability to pay dividend SHALL be recognized when the dividend is
appropriately authorized AND is no longer at the discretion of the entity, which is the date of declaration. Under
Philippine jurisdiction, the declaration by the board of directors does NOT require further approval.
PART III: DIVIDENDS OUT OF EARNINGS — FOUR FORMS

• a. Cash Dividends
• b. Property Dividends
• c. Liability Dividends (Bond and Scrip)
• d. Share Dividends or Bonus Issue

A. CASH DIVIDENDS
Cash dividends are the most common type of dividend. The term dividend standing alone normally implies the
distribution of cash. Dividends may be expressed as:

BASIS DESCRIPTION EXAMPLE

a. Pesos per share A certain amount of pesos per share P5 per share

7% dividend on P200 par → P14 per share

b. % of par/stated value A certain percent of the par or stated value dividend

■ When cash dividends are declared, a current liability is recognized on the date of declaration by debiting
retained earnings or dividends and crediting dividends payable. The account dividends is used when dividends
are declared during the year — such account is closed to retained earnings at the end of the year.

■ ILLUSTRATION — CASH DIVIDEND

Board declared a dividend of P20 per share, payable April 30, 2025, to shareholders of record on December 31, 2024.
Entity had 20,000 shares issued and outstanding with par value of P100.

DATE ACCOUNT DEBIT CREDIT LOGIC / SOURCE

Nov. 30, 2024 Retained Earnings Dividends 400,000 — 20,000 shares × P20/share. Liability
(Declaration) Payable — 400,000 recognized on declaration date.

Dec. 31, 2024 NO ENTRY — — Date of record = no journal entry

(Record Date) required.

Apr. 30, 2025 Dividends Payable Cash 400,000 — Settlement of the recorded liability.
(Payment) — 400,000
B. PROPERTY DIVIDENDS
Property dividends or dividends in kind are distribution of earnings to the shareholders in the form of noncash
assets. These are considered as distribution of noncash assets to owners. The accounting is governed by IFRIC
17.

TWO ACCOUNTING ISSUES FOR PROPERTY DIVIDENDS

a. Measurement of the property dividend payable
b. Measurement of the noncash asset to be distributed as property dividend

MEASUREMENT STANDARD / DETAILS

RULE PARAGRAPH

Dividend Payable — IFRIC 17, par. 11 Measured at fair value of the asset to be distributed on date of
Initial Recognition declaration.

Dividend Payable — IFRIC 17, par. 13 At end of each reporting period AND at settlement date, review and
Subsequent adjust carrying amount. Any change is recognized in equity
Adjustment (retained earnings) as adjustment.

Noncash Asset — PFRS 5, par. 5A & 15A Noncurrent asset classified for distribution measured at lower of
Measurement carrying amount and fair value less cost to distribute. If
FVLCTD < CA → recognize impairment loss.

Settlement of Dividend IFRIC 17, par. 14 Difference between CA of dividend payable and CA of asset
Payable distributed = Gain or Loss on distribution of property dividend
(P&L).

■ DEEP-LOGIC ILLUSTRATION — PROPERTY DIVIDEND (Investment in Shares)

Entity owned 50,000 unquoted shares (cost method). Carrying amount = P1,000,000. Declared as property dividend on
Dec. 1, 2024, payable Jan. 31, 2025.
Fair value less cost to distribute: Dec. 1, 2024 = P1,500,000 | Dec. 31, 2024 = P1,800,000 | Jan. 31, 2025 = P1,900,000

ENT DATE JOURNAL ENTRY AMOUNT DEEP LOGIC

RY
#

1 Dec. 1, 2024 Retained Earnings Dividend 1,500,000 Payable = FVLCTD on declaration date
(Declaration) Payable 1,500,000 (P1,500,000). CA of investment (P1,000,000)
is NOT the basis — IFRIC 17 par. 11
requires fair value.

2 Dec. 31, 2024 Retained Earnings Dividend 300,000 FV increased: P1,800,000 − P1,500,000 =
(Year-end Adj.) Payable 300,000 P300,000 increase → debit RE, credit Div.
Payable. Offsetting entry is through equity
(IFRIC 17 par. 13).

3 Dec. 31, 2024 NO IMPAIRMENT ENTRY — CA of investment (P1,000,000) < FVLCTD

(Asset (P1,800,000). Since CA is lower, no
Measure) impairment. Asset stays at carrying amount.

4 Jan. 31, 2025 Retained Earnings Dividend 100,000 FV increased again: P1,900,000 −
(Settlement Payable 100,000 P1,800,000 = P100,000. Again, debit RE.
Adj.)
 5 Jan. 31, 2025 Dividend Payable Investment in 1,900,000 Gain = Div. Payable CA (P1,900,000) −
(Settlement) Equity Shares Gain on 1,000,000 Asset CA (P1,000,000) = P900,000. IFRIC
distribution 900,000 17 par. 14 — difference goes to P&L; as
gain/loss.

CHOICE: NONCASH ASSET OR CASH ALTERNATIVE (IFRIC 17, par. 12)

If an entity gives its owners a choice of either a noncash asset or a cash alternative, the entity SHALL estimate the
dividend payable by considering both the 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.

FORMULA: Dividend Payable = (% choosing cash × total cash dividend) + (% choosing noncash × FVLCTD of
noncash asset)

EXAMPLE: Cash option = P2,000,000; Noncash FVLCTD = P3,000,000. 70% choose cash, 30% choose noncash. →
Dividend Payable = (70% × P2,000,000) + (30% × P3,000,000) = P1,400,000 + P900,000 = P2,300,000
C. LIABILITY DIVIDENDS: SCRIP AND BOND
TYPE DEFINITION KEY ACCOUNTING

Scrip Dividend A scrip is like a note — a formal evidence of Declaration: Dr. Retained Earnings / Cr. Scrip
indebtedness to pay a sum of money at some Dividends Payable Payment: Dr. Scrip Div.
future time. Declared when the entity has Payable + Dr. Interest Expense / Cr. Cash
earnings but is temporarily short of cash.

Bond Dividend Dividends declared in the form of the entity's Declaration: Dr. RE / Cr. Bond Dividends
own bonds. The bonds carry an interest rate Payable Issuance: Dr. Bond Div. Payable / Cr.
and a maturity date. Bonds Payable Interest: Dr. Interest Expense /
Cr. Cash Maturity: Dr. Bonds Payable / Cr. Cash

■ SCRIP EXAMPLE: Scrip dividends declared = P200,000, payable in 6 months at 12% interest. On payment: Dr. Scrip
Dividends Payable 200,000 / Dr. Interest Expense (200,000 × 12% × 6/12) 12,000 / Cr. Cash 212,000
D. SHARE DIVIDENDS (STOCK DIVIDENDS / BONUS ISSUE)
Share dividends are distributions of the earnings of the entity in the form of the entity's own shares. The IFRS term
is bonus issue. When share dividends are declared, the retained earnings of the entity are in effect capitalized,
meaning transferred to share capital. The assets of the entity remain the same before and after the issuance. The
share dividends create only a change in the components of the shareholders' equity — decrease in retained
earnings but increase in share capital.

TYPES OF SHARE DIVIDENDS

TYPE DEFINITION (VERBATIM)

Ordinary Share Dividends Dividends in terms of ordinary share given to ordinary shareholders OR preference
share given to preference shareholders.

Special Share Dividends Dividends in terms of ordinary share given to preference shareholders OR
preference share given to ordinary shareholders.

HOW MUCH RETAINED EARNINGS TO CAPITALIZE?

■ The IFRS does NOT address share dividend. Thus, guidance is based on local GAAP.

SHARE CLASSIFICATION AMOUNT TO EXCEPTION / NOTE

DIVIDEND % CAPITALIZE

LESS THAN 20% Small share dividend Fair value on the date of Fair value MUST NOT be lower than par
(does not reduce market declaration or stated value. If FV < par → capitalize
price) at par/stated value.

20% OR MORE Large share dividend Par value or stated value —

(materially reduces
market price)

Closely Held N/A Par value or stated value —

Entities (any %) ONLY regardless of the
percentage

■ DEEP-LOGIC ILLUSTRATION — 10% SMALL SHARE DIVIDEND

Share capital P100 par, 10,000 shares issued. Share premium = P500,000. RE = P750,000. A 10% share dividend is
declared when market value = P150 per share on declaration date.

STEP 1 — Compute new shares:

10% × 10,000 shares = 1,000 new shares
STEP 2 — Determine amount to capitalize:
10% < 20% → use fair value on declaration date = P150/share. Total = 1,000 × P150 = P150,000
STEP 3 — Determine credit split:
Share Dividends Payable (par) = 1,000 × P100 = P100,000
Share Premium (excess of FV over par) = 1,000 × P50 = P50,000
STEP 4 — Journal Entry (Declaration):
Dr. Retained Earnings 150,000
Cr. Share Dividends Payable (1,000 × P100) 100,000
Cr. Share Premium (1,000 × P50) 50,000
STEP 5 — Journal Entry (Issuance):
 Dr. Share Dividends Payable 100,000
Cr. Share Capital 100,000

■ NOTE: The share dividends payable account SHALL be recorded only to the extent of the par value. The excess of
fair value over par is credited to share premium. Share dividends payable is NOT a liability because a share dividend
never reduces assets. It is presented as an addition to share capital in the SFP.
FRACTIONAL SHARE DIVIDENDS
When share dividends are issued, it is usually impossible to issue full shares to all shareholders. The following
steps MAY be taken:

a. The entity MAY issue warrants for the fractional shares and give the holders enough time to accumulate
sufficient warrants for a full share.
b. The entity MAY pay cash in lieu of fractional shares. This is possible ONLY IF the source of share dividends is
retained earnings. If the source is share premium, the cash payment is illegal.

■ The fractional warrants outstanding account is part of share premium. Any unexercised fractional warrants SHALL be
transferred to share premium.

TREASURY SHARES AS SHARE DIVIDEND

Treasury shares MAY be declared as share dividend. Treasury shares MAY be reissued as dividends in which case
the cost of the shares SHALL be charged to retained earnings. Under IFRS, treasury shares are a component
of shareholders' equity and NOT a financial asset. Therefore, the declaration shall be accounted for as a share
dividend (economic substance over legal form).

SPECIAL CASES ON SHARE DIVIDENDS

1. When shareholders MAY elect to receive cash in lieu of share dividend, the amount charged to retained
earnings should be equivalent to the optional cash dividend.
2. When share dividends are declared on the basis of a proposed increase in authorized share capital filed but
NOT YET approved by SEC at the end of the reporting period — these SHALL NOT be reflected in the SFP prior
to SEC approval. However, they MUST be disclosed in the notes to financial statements.
3. In closely held entities, if share dividends are declared, retained earnings SHALL be capitalized ONLY to the
extent of par value or stated value of the shares, regardless of the percentage of share dividend.
PART IV: DIVIDENDS OUT OF CAPITAL (LIQUIDATING DIVIDEND)

When capital is returned to shareholders, it is known as dividend out of capital or liquidating dividend. As a rule,
liquidating dividends are paid when the entity is dissolved and liquidated.

■ RULE: During the lifetime of the entity, it is illegal to return capital to the shareholders in conformance with the
trust fund doctrine.

EXCEPTION: WASTING ASSET CORPORATIONS

However, wasting asset corporations MAY declare dividends which are in part distribution of earnings and in part
distribution of capital. A wasting asset entity is an entity engaged solely or substantially in the exploitation of
natural resources.

The wasting asset doctrine holds that a wasting asset entity can declare dividends not only to the extent of the retained
earnings balance but also to the extent of the accumulated depletion balance.

■ DEEP-LOGIC ILLUSTRATION — WASTING ASSET CORPORATION

Resource property = P10,000,000 | Accumulated depletion = P2,000,000 | Retained earnings = P3,000,000 Maximum
dividends that MAY be declared = P5,000,000 (RE + Accumulated Depletion)

STEP 1 — Maximum Dividend:

RE + Accumulated Depletion = P3,000,000 + P2,000,000 = P5,000,000
STEP 2 — Journal Entry (if P5,000,000 declared):
Dr. Retained Earnings 3,000,000
Dr. Capital Liquidated 2,000,000
Cr. Dividends Payable 5,000,000
STEP 3 — Presentation of Capital Liquidated:
The capital liquidated account is presented as a deduction from total shareholders' equity.
Any amount in excess of retained earnings = liquidating dividends → charged to capital liquidated.
PART V: DIVIDENDS AS EXPENSE

STANDA PARAG RULE

RD RAPH

PAS 32 Par. 35 Distributions to holders of an equity instrument SHALL be debited by the entity directly to
equity (i.e., charged to retained earnings).

PAS 32 Par. 36 Distributions to holders of an equity instrument classified as financial liability are recognized
the same way as interest expense on a bond.

PAS 32 Par. 40 Dividends classified as an expense MAY be presented in the income statement either with
interest on other liabilities OR as a separate line item.

■ The best example of an equity instrument classified as financial liability is a redeemable preference share — a
preference share with a mandatory redemption date or a preference share that must be redeemed at the option of the
holder.
PART VI: MASTER COMPARISON — ALL DIVIDEND TYPES

DIVIDEND FORM INITIAL MEASUREMENT EFFECT ON EFFECT ON TOTAL SHE

TYPE ASSETS

Cash Cash Amount of cash per share or ↓ Decreases ↓ Decreases

% of par

Property Noncash Fair value of asset on ↓ Decreases ↓ Decreases

asset declaration date (IFRIC 17)

Scrip Promissory Face amount of note ↓ Decreases ↓ Decreases

note (when paid)

Bond Bond Face amount of bond ↓ Decreases ↓ Decreases

(when redeemed)

Share Own shares Fair value on declaration → No change → No change (RE↓, Share
(<20%) date Capital↑)

Share Own shares Par or stated value → No change → No change (RE↓, Share
(≥20%) Capital↑)

Liquidating Cash Return of capital (charged to ↓ Decreases ↓ Decreases

(usually) contributed capital)

PART VII: LOGIC CONNECTOR QUICK-REFERENCE

These are the critical language signals used throughout the chapter. Knowing these prevents misreading mandatory
vs. discretionary rules.

CONNECT MEANING KEY EXAMPLE IN CHAPTER

OR

SHALL MANDATORY — no "The entity SHALL measure a liability... at the fair value" (IFRIC 17, par. 11)
discretion

MAY OPTIONAL / "The entity MAY issue warrants for fractional shares" or "MAY pay cash in lieu"
PERMISSIVE

AND CUMULATIVE — BOTH "appropriately authorized AND is no longer at the discretion of the entity"
conditions must be met (IFRIC 17, par. 10)

OR ALTERNATIVE — either "either with interest on other liabilities OR as a separate line item" (PAS 32,
condition is sufficient par. 40)

NOT EXCLUSION / "A deficit is NOT an asset"; "share dividends payable cannot be classified as
PROHIBITION liability"

ONLY RESTRICTIVE — no "Legally, dividends can be declared ONLY from retained earnings"
other option allowed

LOWER PICK THE SMALLER — Noncash asset measured at lower of carrying amount and fair value less cost
OF conservative to distribute (PFRS 5)
measurement
 UNLESS / EXCEPTION to the Wasting asset corporations are the exception to the prohibition on capital
EXCEPT general rule dividends

Chapter 22 — Retained Earnings & Dividends | High-Precision Study Protocol | All definitions are verbatim from the source. Logic connectors are
highlighted for deep retention.