CABRIA CPA REVIEW CENTER

SHAREHOLDER’S EQUITY Tel. Nos. (043) 980-6659

ERNIE M. LAT II

LECTURE
Corporation – an artificial being created by operation of Nature of Equity Instruments
law, having the right of succession, and the powers, Equity instruments fall under the broad category of financial
attributes, and properties expressly authorized by law or instrument.
incident to its existence.
Authorized Shares, Issued Shares and Outstanding
Presentation in the Statement of Financial Position
Shares
 Contributed (Paid-in) Capital
Issued Shares – number of shares that the corporation
 Accumulated profits (retained earnings)
has issued to its shareholders as of a specific date.
 Accumulated other comprehensive income
Outstanding Shares – shares issued and are still in the
o Accumulated revaluation surplus
hands of the shareholders as of specific date.
o Accumulated unrealized gains/losses on
Treasury Shares – shares issued to shareholders and have
financial assets at FVTOCI
been reacquired.
o Accumulated foreign currency translation
adjustments gains and losses
Issuance of Share Capital
o Accumulated actuarial gains and losses on
 For cash – the proceeds should be credited to the
defined benefit plan
share capital equal to par or stated value with
 Other items
excess being reflected as share premium
o Share capital subscriptions receivable
 Other than cash – order of priority a) fair value
o Treasury shares
of the property or services received b) fair value of
Contributed Capital the share capital issued
Paid in capital, represents the amount invested or  Share capital sold on subscription – At the time
contributed by owners. of subscription, subscription receivable account is
Composed of share capital and share premium debited for the full stated value of the subscribed
shares with any excess reflected as share premium.
Legal Capital
 Shares issued with other securities – the lump
Represents the par value of all share capital issued and
sum price is allocated among the classes of
subscribed.
securities based on their relative fair value
a. Share capital
b. Subscribed share capital
Share Issue Cost and Stock Assessments
If without par,  The transaction costs are accounted for as a
a. Share capital deduction from equity (net of any related income
b. Subscribed share capital tax benefit), by a charge to APIC (share premium)
c. Share premium pertaining to that issue.
Ordinary Shares and Preference Shares  In rare situations that a corporation assesses its
Basic Rights of Ordinary Shareholders shareholders an additional amount above their
1. The right to share proportionately in profits and original contribution, the amount received is
losses; credited to a share premium account appropriately
2. The right to share proportionately in management described as arising from assessments.
(voting right);
3. The right to share proportionately in corporate Reacquisition of Share Capital
assets upon liquidation; and  Shares Reacquired for Immediate
4. The right to share proportionately in any new issues Retirement
of share capital of the same class The share capital account is debited equal to the
par value of the shares retired; share premium is
Most Common Features Attached to Preference Shares debited equivalent to the amount of the credit at
1. Cumulative
the date the shares were originally issued; and cash
2. Participating is credited equal to the total retirement price.
3. Convertible
4. Callable
5. Redeemable

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If the retirement price exceeds the original issue
price, such difference is debited to the following
accounts:
a. Share premium from previous retirement or
treasury share transactions of the same class of
stock; and
b. Retained earnings
 Treasury Shares Acquired by Purchase
Upon acquisition, TS is recorded at cost,
irrespective of whether these are acquired above or
below the par value. Upon resales of the TS, the TS
account is credited at its cost.
a. Limitation on Treasury Shares
A corporation can reacquire or repurchase
treasury shares provided that the corporation
has unrestricted retained earnings in its books
to cover the shares to be purchased or
acquired.
b. Donated Treasury Shares
The receipt of the donated shares is recorded
by means of a memorandum entry.
Share Split
Issuance by an enterprise of its own ordinary shares to its
ordinary shareholders without consideration and under
conditions indicating that such action is prompted mainly by
a desire to increase the number of outstanding shares.
Shares Rights, Warrants and Options
 Share Rights – are rights issued to existing
shareholders entitling them to maintain a
proportionate interest in the ownership of the
corporation when new shares are to be issued.
 Share option – gives an investor the right, but
not the obligation, to buy or sell a stock at an
agreed upon price and date.
IFRS 2
IFRS 2 Share-based Payment requires an entity to recognize
share-based payment transactions (such as granted shares,
share options, or share appreciation rights) in its financial
statements, including transactions with employees or other
parties to be settled in cash, other assets, or equity
instruments of the entity. Specific requirements are included
for equity-settled and cash-settled share-based payment
transactions, as well as those where the entity or supplier
has a choice of cash or equity instruments.
Definition of share-based payment
A share-based payment is a transaction in which the entity
receives goods or services either as consideration for its
equity instruments or by incurring liabilities for amounts
based on the price of the entity's shares or other equity
instruments of the entity. The accounting requirements for
the share-based payment depend on how the transaction
will be settled, that is, by the issuance of (a) equity, (b)
cash, or (c) equity or cash.
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Scope
The concept of share-based payments is broader than
employee share options. IFRS 2 encompasses the issuance
of shares, or rights to shares, in return for services and
goods. Examples of items included in the scope of IFRS 2
are share appreciation rights, employee share purchase
plans, employee share ownership plans, share option plans
and plans where the issuance of shares (or rights to shares)
may depend on market or non-market related conditions.
IFRS 2 applies to all entities. There is no exemption for
private or smaller entities. Furthermore, subsidiaries using
their parent's or fellow subsidiary's equity as consideration
for goods or services are within the scope of the Standard.
There are two exemptions to the general scope principle:
 First, the issuance of shares in a business
combination should be accounted for under IFRS 3
Business Combinations. However, care should be
taken to distinguish share-based payments related
to the acquisition from those related to continuing
employee services
 Second, IFRS 2 does not address share-based
payments within the scope of paragraphs 8-10 of
IAS 32 Financial Instruments: Presentation, or
paragraphs 5-7 of IAS 39 Financial Instruments:
Recognition and Measurement. Therefore, IAS 32
and IAS 39 should be applied for commodity-based
derivative contracts that may be settled in shares or
rights to shares.
IFRS 2 does not apply to share-based payment transactions
other than for the acquisition of goods and services. Share
dividends, the purchase of treasury shares, and the issuance
of additional shares are therefore outside its scope.
Recognition and measurement
The issuance of shares or rights to shares requires an
increase in a component of equity. IFRS 2 requires the
offsetting debit entry to be expensed when the payment for
goods or services does not represent an asset. The expense
should be recognized as the goods or services are
consumed. For example, the issuance of shares or rights to
shares to purchase inventory would be presented as an
increase in inventory and would be expensed only once the
inventory is sold or impaired.
The issuance of fully vested shares, or rights to shares, is
presumed to relate to past service, requiring the full amount
of the grant-date fair value to be expensed immediately.
The issuance of shares to employees with, say, a three-year
vesting period is considered to relate to services over the
vesting period. Therefore, the fair value of the share-based
payment, determined at the grant date, should be expensed
over the vesting period.
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As a general principle, the total expense related to equity-
settled share-based payments will equal the multiple of the
total instruments that vest and the grant-date fair value of
those instruments. In short, there is truing up to reflect
what happens during the vesting period. However, if the
equity-settled share-based payment has a market related
performance condition, the expense would still be
recognized if all other vesting conditions are met. The
following example provides an illustration of a typical equity-
settled share-based payment.
Illustration – Recognition of employee share option
grant
Company grants a total of 100 share options to 10 members
of its executive management team (10 options each) on 1
January 20X5. These options vest at the end of a three-year
period. The company has determined that each option has
a fair value at the date of grant equal to 15. The company
expects that all 100 options will vest and therefore records
the following entry at 30 June 20X5 - the end of its first six-
month interim reporting period.
Dr. Share option expense 250
Cr. Equity 250
[(100 × 15) ÷ 6 periods] = 250 per period
If all 100 shares vest, the above entry would be made at
the end of each 6-month reporting period. However, if one
member of the executive management team leaves during
the second half of 20X6, therefore forfeiting the entire
amount of 10 options, the following entry at 31 December
20X6 would be made:
Dr. Share option expense 150
Cr. Equity 150
[(90 × 15) ÷ 6 periods = 225 per period. [225 × 4] –
[250+250+250] = 150
Measurement guidance
Depending on the type of share-based payment, fair value
may be determined by the value of the shares or rights to
shares given up, or by the value of the goods or services
received:
General fair value measurement principle. In
principle, transactions in which goods or services are
received as consideration for equity instruments of the
entity should be measured at the fair value of the goods or
services received. Only if the fair value of the goods or
services cannot be measured reliably would the fair value of
the equity instruments granted be used.
Measuring employee share options. For transactions
with employees and others providing similar services, the
entity is required to measure the fair value of the equity
instruments granted, because it is typically not possible to
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estimate reliably the fair value of employee services
received.
When to measure fair value - options. For transactions
measured at the fair value of the equity instruments granted
(such as transactions with employees), fair value should be
estimated at grant date.
When to measure fair value - goods and services. For
transactions measured at the fair value of the goods or
services received, fair value should be estimated at the date
of receipt of those goods or services.
Measurement guidance. For goods or services measured
by reference to the fair value of the equity instruments
granted, IFRS 2 specifies that, in general, vesting conditions
are not taken into account when estimating the fair value of
the shares or options at the relevant measurement date (as
specified above). Instead, vesting conditions are taken into
account by adjusting the number of equity instruments
included in the measurement of the transaction amount so
that, ultimately, the amount recognized for goods or
services received as consideration for the equity
instruments granted is based on the number of equity
instruments that eventually vest.
More measurement guidance. IFRS 2 requires the fair
value of equity instruments granted to be based on market
prices, if available, and to take into account the terms and
conditions upon which those equity instruments were
granted. In the absence of market prices, fair value is
estimated using a valuation technique to estimate what the
price of those equity instruments would have been on the
measurement date in an arm's length transaction between
knowledgeable, willing parties. The standard does not
specify which particular model should be used.
If fair value cannot be reliably measured. IFRS 2
requires the share-based payment transaction to be
measured at fair value for both listed and unlisted entities.
IFRS 2 permits the use of intrinsic value (that is, fair value
of the shares less exercise price) in those "rare cases" in
which the fair value of the equity instruments cannot be
reliably measured. However this is not simply measured at
the date of grant. An entity would have to remeasure
intrinsic value at each reporting date until final settlement.
Performance conditions. IFRS 2 makes a distinction
between the handling of market based performance
conditions from non-market performance conditions. Market
conditions are those related to the market price of an
entity's equity, such as achieving a specified share price or
a specified target based on a comparison of the entity's
share price with an index of share prices of other entities.
Market based performance conditions are included in the
grant-date fair value measurement (similarly, non-vesting
conditions are taken into account in the measurement).
However, the fair value of the equity instruments is not
adjusted to take into consideration non-market based
performance features - these are instead taken into account
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by adjusting the number of equity instruments included in and are adjusted each period until such time as the equity
the measurement of the share-based payment transaction, instruments vest.

REVIEW QUESTIONS
1. Which of the following is a characteristic of a 7. A holder of preference share can
corporation? a. Purchase treasury shares at any time at the
a. Unlimited liability of the owner stockholder’s option
b. Right of succession b. Purchase additional shares offered in order to
c. Limited life maintain the same fractional interest in the
d. Exempt from taxation corporation
c. Turn in the preference shares for a specified
2. What does the par value of share capital represent? cash price at a specified date or during a
a. Liquidation value of the share capital specified period
b. Book value of the share capital d. Convert the preference shares for ordinary
c. Legal nominal value assigned to the share share
capital
d. Amount received by the corporation when the 8. How would a share split affect each of the
share was originally issued following?
Assets Total SHE Addition
3. Ownership of shares in the ordinary share capital of al paid
a corporation entitled the holders of the following in
rights: capital
I. To elect the board of directors of the a. Increase Increase No effect
corporation b. No effect No effect No effect
II. To share in the profits of the corporation c. No effect No effect Increase
III. To purchase new shares when they are d. Decrease Decrease Decrease
offered for sale
9. Treasury shares is appropriately presented on the
IV. To participate in the daily operations of the
SFP as a?
corporation
a. Financial asset at fair value
a. I, II, III and IV b. Deduction at cost from total SHE
b. II, III and IV c. Deduction at cost from total contingent
c. I, III and IV liabilities
d. I, II, and III d. Deduction at part from total SHE
4. The entry to record the issuance of ordinary shares 10. Gains or losses on the purchase and resale of
for fully paid subscription is treasury share are reflected in
a. A memorandum entry a. Contributed capital
b. Dr: Ordinary share subscribed b. Contributed capital accounts and RE
Cr: Ordinary share capital c. P/L, contributed capital and RE
Cr: Share premium - ordinary share d. P/L and OCI
c. Dr: Ordinary share subscribed 11. At the date of the financial statements, ordinary
Cr: Subscription receivable shares issued would exceed ordinary shares
d. Dr: Ordinary share subscribed outstanding as a result of the
Cr: Ordinary share capital a. Declaration of a share split
b. Declaration of a bonus issue
5. Which feature of preference share makes it more of c. Purchase of T/S
a liability than an equity account? d. Payment in full of subscribed shares
a. Callable
b. Convertible 12. On Feb 1, authorized ordinary share capital was
c. Participating sold on subscription basis at a price in excess of par
d. Redeemable value, and 20% of the subscription price was
collected. On May 1, the remaining 80% of the
6. Which of the following transaction costs relating to subscription price was collected. Additional paid in
issue of the share capital shall be charged to P/L? capital would increase on
a. SEC registration fees for issue of new shares Feb 1 May 1
b. Underwriting costs a. No Yes
c. Stock exchange listing fees b. No No
d. Documentary stamp tax in public offering of c. Yes No
share d. Yes Yes

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the fair value of the share warrants was P10 per
13. A company declared a cash dividend on its ordinary warrant.
shares in December 2016, payable in January 2017.
RE woud What is the amount credited to Share premium –
a. Increase on the date of declaration preference by N on the issuance of the securities?
b. Not be affected on the date of declaration a. P0
c. Not be affected on the date of payment b. P40,000
d. Decrease on the date of payment c. P50,000
d. P80,000
14. Preference share that has a claim on any prior year
dividends that may have passed is 19. The following accounts are shown on the SFP of P
a. Cumulative Co:
b. Participating
Share capital P100,000
c. Non-cumulative
d. Non-participating Share premium 2,000
Share premium – TS 3,000
15. How will retained earnings be affected by purchase Retained earnings 75,000
of treasury shares and subsequent sale of treasury TS, 200 shares at cost 25,000
share at more than the acquisition cost?
Acquisition of TS Sale of TS All the 200 TS were sold for P20,000. How would
a. No effect Increase the resale of the TS be recorded?
b. Increase No effect
a. Cash 20,000
c. No effect No effect
Treasury shares 20,000
d. Increase Decrease
b. Cash 20,000
Share premium 2,000
16. Dividends in arrears are shown on the financial
statements as Share premium – TS 3,000
a. Current liabilities Treasury shares 25,000
b. Contra-equity accounts c. Cash 20,000
c. Contra-asset accounts Retained earnings 5,000
d. Note disclosure only Treasury shares 25,000
d. Cash 20,000
17. The shareholders’ equity of May Company revealed Share premium – TS 3,000
the following
Retained earnings 2,000
Preference shares, P100 par value P230,000
Treasury shares 25,000
Share premium, preference 80,500
Ordinary share, P15 par value 525,000
Share premium – ordinary 275,000 20. Q Corporation was incorporated on January 2,
Subscribed ordinary shares 5,000 2016. The following information pertained to Q’s
Retained earnings 190,000 ordinary share transactions during the year.
Notes payable 400,000 Jan 1 Number of shares authorized
Subscription receivable – ordinary 40,000 Feb 1 Number of shares issued
Jul 1 Number of shares reacquired but not can
Dec 1 Two-for-one share split
How much is the legal capital of the company?
a. P755,000
What is the number of Q’s ordinary share
b. P760,000
outstanding at December 31, 2016?
c. P1,115,000
a. 150,000
d. P1,305,500
b. 120,000
c. 115,000
18. On March 2, 2016, N Corp. issue a 4,000 shares of
d. 110,000
9% cumulative P100 par value preference share for
P480,000. Each preference share carried one
21. Of the 125,000 ordinary shares issued by L Co.,
detachable share warrant which entitles the holder
25,000 were held as treasury shares on December
to acquire at P35, one share of N Corp.’s P10 par
31, 2016. During 2017, transactions involving L’s
ordinary share capital.
ordinary shares were as follows:
On March 2, 2016, the fair value of the preference
share without the warrants was P110, per share and

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January 1 through October 31 – 13,000 ordinary 23. Same info from 23. How much should be the
shares were distributed to officers as part of share amount of ordinary share capital to be shown on
compensation plan. the December 31, 2016 SFP?
a. P9,450,000
November 1 – A 3-for-1 share split took effect. b. P9,310,000
c. P9,130,000
December 1 – L purchased 5,000 of its own shares d. P4,725,000
to discourage an unfriendly takeover. These shares
were not retired. 24. Same info from 23. The retirement of the 2,000
preference shares would decrease share premium
At December 31, 2017, how many shares of L’s preference by
ordinary share capital were issued? a. P0
a. 125,000 b. P16,000
b. 324,000 c. P20,000
c. 334,000 d. P60,000
d. 375,000
25. Same info from 23. After the split, the par value
22. The P Corp. has two classes of share capital per share of the ordinary share capital
outstanding, 9%, P20 par preference and P70 par a. Remained at P70
ordinary share. During the fiscal year ending b. Was increased by P70
December 31, 2016, the company had the following c. Was reduced by P35
equity transactions in chronological order: d. Was reduced by 14
No. of Price per
shares share 26. Same info from 23. What is the total cost of the
Issue of preference shares 10,000 P28 remaining treasury shares?
Issue of ordinary shares 35,000 70 a. P0
Reacquisition and retirement of 2,000 30 b. P200,000
preference shares c. P260,000
Purchase of treasury ordinary 5,000 80 d. P400,000
shares
Share split 2-for-1 27. S Co. has outstanding 20,000 shares of P100 par
Reissue of treasury ordinary 5,000 52 value 8% cumulative preference share capital and
shares 30,000 shares of P50 par value ordinary share on
December 31, 2015. At December 31, 2015,
Balances of the accounts in the SHE section of SFP dividends in arrears on the preference shares were
at December 31, 2015 were: P80,000. Cash dividends declared in 2016 totaled
Preference share capital,50,000 P1,000,000 P300,000. The amounts paid to preference
shares shareholders and ordinary shareholders are
Ordinary share capital, 100,000 7,000,000 a. P80,000 and P120,000
shares b. P160,000 and P140,000
Share premium – preference 400,000 c. P220,000 and P80,000
Share premium – ordinary 1,200,000 d. P240,000 and P60,000
Retained earnings 550,000
28. On July 1, 2016, Tools Company granted share
options to the employees for the purchase of
Dividends were paid at the end of the fiscal year on
20,000 of the company’s ordinary share capital at
the ordinary share at P1.20 per share and on the
P25 per share. Based on an option-pricing model
preference at the preference rate. Profit for the
used by the company, the fair value of the share
year was P850,000. option on this date was P9.
How much should be the amount of preference
The options are intended to compensate employees
share capital to be shown on the December 31, for the next two years. The options are exercisable
2016 SFP? within a four-year period beginning July 1, 2018 by
a. P1,220,000
grantees still in the employ of the company. The
b. P1,160,000 market price of Tool’s ordinary share was P33 per
c. P1,140,000
share at the date of grant. No share options were
d. P1,116,000
terminated during the year.

How much should Tools charge to compensation

expense for the year ended December 31, 2016?

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a. P45,000
b. P80,000 Share prices are as follows:
c. P90,000
d. P160,000
What liability will be recorded on December 31,
29. On January 1, 2016, Dan Corporation granted an 2016 as a result of the share appreciation right?
employee an option to purchase 3,000 shares of January 1, 2016 P20
Dan’s P5 par value ordinary share at P20 each. The December 31, 2016 24
option become exercisable on December 31, 2018.
The option was exercised on January 10, 2019. December 31, 2017 27
December 31, 2018 30
The market prices of Dan’s share capital were as a. P108,000
follows: January 1, 2016 – P30; December 31, 2016 b. P120,000
– P50; January 10, 2019 – P45. c. P189,000
d. P270,000
The company cannot reliably determine the fair
value of the share option, so it decided to use the 33. Use same info from 33. How much compensation
intrinsic value method. expense should be recorded for the year ended
December 31, 2017?
For the year 2016, how much should Dan recognize a. P96,000
as compensation expense? b. P108,000
a. P10,000 c. P120,000
b. P15,000 d. P258,000
c. P25,000
d. P30,000 34. R Co. has 50,000 shares of P50 par value ordinary
share outstanding and 5,000 shares of P100 par
30. M Corp granted share options to its employees with preference share outstanding. The current market
a fair value of P4,500,000 on January 1, 2016. The value of the ordinary share is P120 and total
options vest in three years and the options are shareholders’ equity amount to P3,600,000. The
exercisable starting January 1, 2019 until December preference share has a liquidation value of P140 per
31, 2019. share and no dividends are in arrears. What is the
book value per ordinary share?
On December 31, 2016, it was estimated that 5% a. P50
of employees will leave the entity during the vesting b. P58
period. This estimate was revised to 6% during the c. P72
year 2017. On December 31, 2018, employees d. P120
record indicates that 90% of the employees became
entitled to the options. 35. The Mike Corporations SFP shows total SHE of
P3,150,000 as of December 31, 2016.
What would be the expense charged during the
year ending December 31, 2016? What is the book value per share, assuming that the
a. P1,350,000 company has only one class of share capital
b. P1,410,000 outstanding consisting of 50,00 P10 par ordinary
c. P1,425,000 shares?
d. P1,500,000 a. P10
b. P63
31. Use same info from 31. What would be the expense c. P70.20
charged during the year ended December 31, 2017? d. P73
a. P1,350,000
b. P1,395,000 36. Use same info from 36. What is the book value per
c. P1,410,000 ordinary share assuming that the company has two
d. P1,500,000 classes of share capital outstanding consisting of
the following: 5,000, P100 par value preference
32. J Co. has granted 200 share appreciation rights to shares with a liquidation value of P120 per share
each of its 300 employees in January 1, 2016. The and 50,000, P10 par value ordinary shares?
rights are due to vest on December 31, 2017, with a. P10
payment being made on December 31, 2018. b. P51
During the year 2016, the company estimated that c. P53
all options would vest, although only 90% of the d. P63
options actually vested.

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37. The M Co. began operations in January 2013 and
reported the following results for each of its three
years of operations.

2014 – P520,000 loss; 2015 – P80,000 loss; 2016 –

P1,600,000 profit

At December 31, 2016, M Co.’s capital accounts

were as follows:
8% Cumulative preference share
capital, P100 par; 50,000 shares P5,000,000
authorized, issued and
outstanding
Ordinary share capital, P10 par,
1,000,000 shares authorized; 7,500,000
750,000 shares issued and
outstanding

M Co. has never paid a cash or bonus issue and

there has been no change in its capital accounts
since its began operations in 2014. The corporation
law permits dividends only from retained earnings.

What is the book value of the ordinary share at

December 31, 2016?
a. P9.73
b. P10.00
c. P10.80
d. P11.33

38. ABC Corporation’s performance during the last

three years had not been favorable resulting to a
deficit of P950,000 at December 31, 2016. The
company, with the approval of the shareholders,
decided to eliminate the deficit through quasi-
reorganization which would be effected as follows:
The company’s 200,000, P20 par ordinary share
capital originally issued at an average price of P22
would be reissued with par value of P15.

Immediately after quasi-reorganization, what would

be the balance of share premium?
a. P1,400,000
b. P1,000,000
c. P600,000
d. P450,000

End

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