OCAMPO, MAUREEN JADE V.

ACT205 ➢ Portion of authorized share capital that has been

subscribed but not fully paid.
SHARE PREMIUM
CHAPTER 20 - 21
➢ Portion of the paid in capital representing excess
Definition of shareholders’ equity the total par or stated value.
➢ Sources of SP:
➢ Shareholders’ equity is the residual interest of o Excess over par value or stated value
owners in the net assets of a corporation measured o Resales of TS more than cost
by the excess of assets over liabilities. o Donated capital
o Issuance of Share warrants
Assets = liabilities + shareholders’ equity o Distribution of share dividends
o Quasi-Reorganization
Shareholders’ equity = assets – liabilities

RETAINING EARNINGS
A corporation is an artificial being created by operation ➢ Cumulative balance of earnings/losses, dividend
of law, having the right of succession and the powers, distributions, prior period errors and other capital
attributes, and properties expressly authorized by law or adjustments.
incidental to its existence.
REVALUATION SURPLUS
➢ Excess of revalued amount over the carrying
Shareholder’s Equity amount of the revalued asset.
➢ Residual interest of owners in the net assets of a TREASURY SHARES
corporation measured by the excess of assets over
liabilities. ➢ Corporations have been issued then reacquired
but not cancelled.
COMPONENTS
SHARE CAPITAL
Capital Stock/Share Capital
➢ Capital stock is evidenced by share certificate
Subscribed capital stock/ Subscribed share capital which is issued only upon full payment.
Common stock/ordinary share capital ORDINARY SHARE CAPITAL
Preferred stock/Preferred share capital ➢ Ordinary shareholders having same rights and
APIC/Share Premium privileges.
➢ Have no specific or fixed return on investment.
Retained Earnings/Accumulated Profits
PREFERRED SHARE CAPITAL
RE appropriated/Appropriation reserve
➢ Enjoys preference over ordinary share capital
Revaluation surplus/Revaluation reserve with regard to dividends and net asset.
➢ Have specific or fixed return on investment.
Treasury stock/Treasury share
LEGAL CAPITAL
➢ Portion of the paid in capital arising from
SHARE CAPITAL
issuance of share capital which cannot be
➢ Portion of the paid in capital representing the total returned to the shareholders in any form during
par or stated value. the lifetime of the corporation.
PAR VALUE: aggregate par value issued and subscribed.

SUBSCRIBED SHARE CAPITAL

NO-PAR VALUE: total consideration received from Watered share
shareholder including excess over the stated value. ➢ Share capital issued for inadequate or insufficient
consideration resulting to overstatement of asset
TRUST FUND DOCTRINE
and capital.
➢ Holds that the share capital of a corporation is
considered as trust fund for the protection of 1. Callable Preferred Share
creditors. ➢ Is one which can be called in redemption at a
specified price at the option of the corporation.

ACCOUNTING FOR SHARE CAPITAL 2. Redeemable Preferred Share

• Memorandum method ➢ A preferred shares that provides mandatory
• Journal entry method redemption by the issuer for a fixed or
determinable amount at a future date.
Issuance of share capital ➢ Gives the holder the right to require the issuer to
redeem the instrument for a fixed or determinable
➢ 1,000 ordinary shares of 10 par value sold at 12 amount at a future date.
per share. ➢ Classified as financial liability
Cash 12,000
Ordinary share capital 10,000 3. Convertible Preferred Share
Share premium 2,000 ➢ One which gives the holder the right to exchange
the holdings for other securities of the issuing
➢ 1,000 ordinary shares of 10 stated value sold at 12 corporation.
per share.
TREASURY SHARES, RIGHTS ISSUE,
Cash 12,000
Ordinary share capital 10,000 SHARE SPLIT
Share premium 2,000

TREASURY
Issuance of share capital for Services ➢ Shares owned by entity that have been issued but
➢ Use the fair value of the services reacquired and not canceled.
➢ As these are not canceled shares, it can be
Share Issuance Costs reissued.
Direct costs to sell share capital ➢ Deduction to shareholder’s equity
• Legal fees
• Underwriting fees When Repurchase is Legal
• Commissions ➢ In the presence of unrestricted earnings otherwise
• Cost of printing certificates violation of Trust Fund Doctrine.
• Doc stamps
• Filing fees with SEC Recapitalization
• Promotion and advertising fees Change on the capital structure where the old shares are
Shall be deducted from Equity canceled, and new ones are issued.
• Share premium from previous share issuance a. Change from par to no par
• Retained earnings b. Change from no-par to par
c. Reduction of par value
*Cost of public offering of shares – not include as d. Reduction of state value
share issuance costs e. Split up
Expense outright f. Split down
Rights Issue/Stock Right TWO CLASSIFICATIONS OF DIVIDENDS
➢ Granted to existing shareholders to enable them
to acquire new shares at a specified price during A. DIVIDENDS OUT OF EARNINGS
a specified period.
➢ This right is called the right of preemption. 1. CASH DIVIDENDS -
➢ Purpose: Retain the proportionate control in the Involve returns to shareholders that were paid in cash. It
corporation and in the retained earnings, and also is usually stated at dividends per ordinary share or as
in the net assets in the event of dissolution. percentage of par value for preferences share.

Share warrants 2. PROPERTY DIVIDENDS -

➢ Certificate issued evidencing right issue. ➢ Noncash assets are paid to shareholders. Most
uncommon and least attractive type of dividends.
Decreases the amount of equity.
CHAPTER 22-23
3. LIABILITY DIVIDENDS -
➢ Are deferred cash dividends. It may be in the form
RETAINED EARNINGS -
of bond and scrip.
➢ Represent the cumulative amount of profit/losses,
which are retained and not yet distributed as
4. STOCK DIVIDENDS -
dividends to the shareholders.
➢ Aka bonus issue, distributions of earnings of the
entity in the form of the entity’s own shares.
Total retained earnings may be:
1. Unappropriated retained earnings
DIVIDENDS EXPENSE -
2. Appropriated retained earnings
➢ PAS 32, Paragraph 35. Provides that distributions
to holders of an equity instrument shall be debited
1. UNAPPROPRIATED RETAINED EARNINGS -
by the entity directly to equity. In other words,
➢ Represent that portion which is free and can be
dividends out of earnings are charged to retained
declared as dividends to stockholders.
earnings.
2. APPROPRIATED RETAINED EARNINGS -
TYPES OF APPROPRIATION
➢ Represent that portion which is restricted and
therefore not available for any dividend
1. LEGAL APPROPRIATION -
declaration unless the restriction is subsequently
➢ These are appropriations required by law as in the
reversed.
case of treasury shares. Retained earnings must
be appropriated to the extent of the cost of
DIVIDENDS
treasury shares.
➢ Are resources distributed to entity’s shareholders.
May be in form of cash, non-cash assets, short-
2. CONTRACTUAL APPROPRIATION -
term and long-term liabilities or shares of stocks.
➢ These are appropriations required by contract
➢ Only shares issued and outstanding are entitled to
such as appropriation for bond or preference
dividends. Issued and outstanding shares may be
share redemption.
determined as follows:
3. VOLUNTARY APPROPRIATION -
Number of share capital issued
➢ Is a matter of discretion on the part of the
Add: number of subscribed share capital
management such as appropriation for plant
Less: number of treasury shares
expansion or appropriations for contingencies.
Total outstanding shares
 process may be allowed to revalue its PPE if its
NEGATIVE BALANCES IN EQUITY current value is substantially more than
➢ When the retained earnings account has a debit its cost.
balance, it is called a “deficit.” This is presented • When a “fresh start” appears to be desirable or
as a deduction from total SHE. When total SHE advantageous to all parties
has a negative balance, this is described as concerned.
“capital deficiency.”

RESERVES -
➢ The use of equity reserves in based on whether a
reserve is part of distributable equity or non-
distributable equity.

DISTRIBUTABLE EQUITY -
➢ A portion that can be distributed to shareholders
as dividends without impairing the legal capital
of the entity. It squarely pertains to
unappropriated retained earnings.

NON-DISTRIBUTABLE EQUITY -
➢ Portion that cannot be distributed to the
shareholders in any form during the lifetime of
the entity. Includes share premium, retained
earnings appropriated, revaluation surplus and
components of other comprehensive income.

A. SHARE PREMIUM RESERVE -

➢ excess over par or stated value

APPROPRIATION RESERVE - earmarking of retained

earnings for a certain purpose which may be legal,
contractual or voluntary. This is technically known as
retained earnings appropriated.

C. ASSET REVALUATION RESERVE -

➢ Arises from the revaluation of PPE. It is the
excess of fair value or depreciated replacement
cost of the revalued property over its book value.
This is technically known as revaluation surplus.

D. OTHER COMPREHENSIVE INCOME

RESERVE

CIRCUMSTANCES THAT MAY JUSTIFY QUASI-

REORGANIZATION:
• When a large deficit exists.
• When approved by the shareholders and
creditors
• When the cost basis of accounting for PPE
becomes unrealistic. An entity in financial
difficulty may be permitted by the SEC to
undergo a quasi-reorganization and in the
 CHAPTER 24-25 2. OTHER THAN EMPLOYEES
➢ there shall be a rebuttable presumption that the
fair value of the goods or services received can be
SHARE-BASED COMPENSATION
estimated reliably. If cannot estimate reliably the
➢ a transaction in which the entity receives goods or
fair value, the entity shall measure the goods or
services as consideration for equity instruments
services received. by reference to the fair value of
of the entity (including shares or share options) or
the equity instruments granted at the date the
acquires goods or services by incurring liabilities
entity obtains the goods or the counterparty
to the supplier of those goods or services for
renders service.
amounts that are based on the price of the entity's
shares or other equity instruments of the entity.
MEASUREMENT OF SHARE OPTIONS
TYPES OF SHARE-BASED PAYMENT
1. FAIR VALUE METHOD
TRANSACTION
a method mandated by PFRS 2 wherein the compensation
is equal to the fair value of the
1. EQUITY SETTLED
share options on the date of grant.
➢ entity issues equity shares in consideration for
services received. e.g., share options.
2. INTRINSIC VALUE METHOD
PFRS 2 provides if the fair value of the share options
2. CASH SETTLED
cannot be measured reliably, the entity
➢ entity incurs a liability for services received and
shall measure the share options at their intrinsic value
the liability is based on the entity's equity shares.
initially and subsequently at each
e.g., share appreciation rights.
reporting and at the date of final settlement, with any
change in intrinsic value recognized in
3. SHARE-BASED PAYMENT WITH CASH
profit or loss.
ALTERNATIVES
Intrinsic value = Market Price - Option Price
SHARE OPTIONS
➢ aka Stock Option. is a contract that gives the
"An option pricing model is used to measure the fair value
holder the right. but not the obligation. to
of share option, as a method of
subscribe to the entity's shares at a fixed or
determining compensation expense for equity-settled
determinable price for a specified period of time.
share-based payment transactions."
➢ It is granted to officers and key employees, as an
additional compensation. to enable them to
RECOGNITION OF COMPENSATION
acquire shares of stock of the entity during a
specified period upon fulfillment of certain
1. VEST IMMEDIATELY
conditions at a specified price.
the employees are not required to complete a specified
period of service before
EQUITY-SETTLED SHARE-BASED PAYMENT
unconditionally entitled to option. On grant date. the
entity shall recognize the
1. WITH EMPLOYEES AND OTHERS PROVIDING
compensation expense in full w/ corresponding increase
SIMILAR SERVICES
in equity.
➢ the entity shall measure the fair value of the
2. DO NOT VEST IMMEDIATELY
services received by reference to the fair value
the compensation is recognized as an expense over the
nof the equity instruments granted the fair value
service period or vesting period.
of those equity instruments shall be measured at
meaning. from the date of grant to the date at which the
grant date.
options can first be exercised.
ACCELERATION OF VESTING THE ACCOUNTING FOR THIS TYPE OF SHARES
If an entity cancels or settles a grant of share options DEPENDS ON "WHICH PARTY HAS THE
during the vesting period. the entity CHOICE OF SETTLEMENT"
shall account for the cancellation or settlement as an • if the entity has the choice of settlement, there is no
acceleration of vesting. accounting problem. The entity shall
account for the instrument initially either as a liability or
THE ACCOUNTING PROCEDURES ARE: equity, or both.
a. The entity shall recognize immediately the • If the employee has the right to choose the settlement,
compensation expense that otherwise would the entity is deemed to have issued
have been recognized for services received over the a compound financial instrument. Thus, the compound
remainder of the vesting period. financial instrument is accounted for
b. Any payment made to the employee on the cancellation as partly liability which is the cash alternative and partly
or settlement of the grant shall equity which is the share alternative.
be accounted for as the repurchase of equity interest, The equity component is usually the fair value of the
meaning deduction from equity or whole compound financial instrument
share options outstanding. minus the fair value of the liability component. The equity
component is always the residual
SHARE APPRECIATION RIGHT amount.
entitles an employee to receive cash which is equal to the
excess of the market value of the CASH AND SHARE ALTERNATIVE FOR
entity's share over a predetermined price for a stated SUPPLIERS
number of shares. It is considered a • If the fair value of the asset received can be measured
cash-settled share-based compensation. directly and easily, the equity
Unlike the share option. the entity shall recognize a component is the fair value of the asset minus the fair
liability because a share appreciation value of the liability.
right is actually an obligation on the part of the entity to • However, if the fair value of the asset received cannot be
pay cash in the future on the measured directly, the asset is
exercise date. recorded at the fair value of the share issued.
Thus, the fair value of the equity component is the fair
MEASUREMENT OF COMPENSATION ARISING value of the shares issued minus the
FROM SHARE APPRECIATION RIGHT: fair value of the liability.
• The compensation is based on the fair value of the
liability at the end of the reporting
period and shall be remeasured at every year-end until it
is finally settled. Any changes
in fair value are included in profit or loss.
• During the vesting period from the date of grant to the
exercise date, if there are
increases or decreases in the market value of the shares.
the liability for the
compensation shall be adjusted.

CASH AND SHARE ALTERNATIVE

1. CASH ALTERNATIVE
cash payments equal to the market value of a certain
number of phantom shares subject to
certain conditions.

2. SHARE ALTERNATIVE
equity shares give to employees.