SHAREHOLDERS’ EQUITY

(Share Capital Transactions, Dividends, Retained Earnings)

Shareholders’ Equity
 Residual interest in the assets of a corporation after deducting all its liabilities
 Equivalent to the “Owner’s Equity” in a sole proprietorship, and the aggregate of partners’ capital in a
partnership

Components:
 Contributed Capital
o Share Capital – Examples:
 Preference share capital
 Ordinary share capital
 Subscribed share capital
o Additional Paid-In Capital (APIC) – Examples:
 Share premium
 Stock options outstanding
 Donated capital
 Retained Earnings/Accumulated Profits or Losses
o Unappropriated – available for dividend distribution
o Appropriated – set aside for a specific purpose; classifications:
 Legal appropriations – appropriations made to comply with the provisions of a law, rule, or
regulation, such as appropriations for treasury shares
 Contractual appropriations – appropriations made to comply with the provisions of a contract,
such as appropriations for bond sinking fund
 Voluntary appropriations – appropriations made by the entity voluntarily, such as appropriations
for plant expansion
 Other Components of Equity – Examples:
o Revaluation surplus
o Cumulative unrealized holding gains/losses on FVOCI securities
o Translation differences on foreign operations
 Treasury Shares

Accounting for Share Capital

Methods of Accounting for Share Capital
1. Memorandum method – only a memorandum is made for the authorized capitalization; subsequent issuances of
shares are credited to the share capital account
2. Journal entry method – the authorized capitalization is recorded by crediting authorized share capital and
debiting unissued share capital; subsequent issuances of shares are credited to unissued share capital; the
difference between the two accounts represents the issued share capital

Note: Memorandum method is more commonly used.

Classes of Share Capital

1. Ordinary share capital (Common stock)
2. Preference share capital (Preferred stock)

Par Value and No-Par Value Shares

 Par value shares – one with a fixed peso value in the articles of incorporation
 No-par value shares – one without a fixed peso value in the articles of incorporation, but has a stated value
which is indicated in the articles of incorporation, not on the share certificate issued; no-par value shares cannot
be issued for a consideration less than five pesos (P5) per share
Shares cannot be issued for a consideration below par or stated value. Any discounted issuances result to a receivable
from the shareholder, otherwise, the issuance is illegal.

Legal Capital
Portion of contributed capital that cannot be distributed to owners during the lifetime of the corporation, unless the
corporation is dissolved and all of its liabilities are settled first. Legal capital is computed as follows:
 For par value shares – aggregate par value of shares issued and subscribed
 For no-par value shares – total consideration received or receivable from shares issued or subscribed; inclusive
of any amount in excess of the stated value

Share Issuance Costs

 Costs incurred in the issuance of shares, such as legal fees, accounting fees, regulatory fees, and so on.
 Treatment: deducted from any resulting share premium from the issuance; if share premium is insufficient,
charged to retained earnings

Treasure Shares (Treasury Stocks)

 Entity’s own shares that were previously issued but are subsequently reacquired but not retired
 Corporations may reacquire only if it has sufficient unrestricted retained earnings
 Accounted for using the cost method
 Presented as a deduction in the shareholders’ equity (i.e. contra equity account)

Acquisition of Treasury Shares

xx
Treasury Shares x
xx
Cash x

Reissuance at Cost
xx
Cash x
xx
Treasury Shares x

Reissuance at Above Cost

xx
Cash x
xx
Treasury Shares x
xx
Share Premium - Treasury Shares x

Reissuance at Below Cost

xx
Cash x
xx
Share Premium - Treasury Shares x
xx
Retained Earnings* x
xx
Treasury Shares x

*Debited if the “share premium – treasury shares” cannot cover the difference between reissuance price and cost.
Retirement of Shares, Cost Equal to Original Issuance Price
xx
Share Capital x
xx
Share Premium* x
xx
Treasury Shares x

*Share premium is included as part of the original issuance price and is removed if the related shares have been retired.

Retirement of Shares, Cost Greater Than Original Issuance Price

xx
Share Capital x
xx
Share Premium x
xx
Treasury Shares x
xx
Share Premium - Retirement x

Retirement of Shares, Cost Less Than Original Issuance Price

xx
Share Capital x
xx
Share Premium x
xx
Share Premium - Treasury Shares x
xx
Retained Earnings* x
xx
Treasury Shares x

*Debited if “share premium – treasury shares” cannot cover for the difference.

Retained Earnings/Accumulated Profits or Losses

Retained earnings represent the cumulative profits or losses and other adjustments which are retained in the business
and not yet distributed to the shareholders.

Dividends
Dividends are distributions to shareholders. Dividends may be in the form of:
 Cash dividends – dividends in the form of cash
o Liability dividends – issued by a corporation that has a temporary cash shortage.
 Scrip dividends – short-term and may or may not bear interest
 Bond dividends – long-term and bear interest
 Property dividends – distributions in the form of non-cash assets
 Share dividends – distributions in the form of the entity’s own shares

Dividends may be declared out of:

 Unrestricted retained earnings (return on capital); or
 Capital (return of capital)
Return of capital is not allowed because of the trust fund doctrine, and is only applicable for wasting asset corporations;
the dividends declared are called liquidating dividends.

Relevant Dates for Dividends

 Date of declaration – date when BOD formally announces distribution of dividends
 Date of record – date when the stock and transfer book of the corporation is closed for registration; only those
listed will be entitled to receive dividends
 Date of distribution – date when dividends declared are distributed

Recognition of Liability for Dividends

 If further approval by a relevant authority is required – date the declaration is approved
 If no further approval is required – date of declaration

Cash Dividends
(Date of Declaration)
xx
Retained Earnings (or Dividends) x
xx
Cash Dividends Payable x

(Date of Record)
No Entry

(Date of Distribution)
xx
Cash Dividends Payable x
xx
Cash x

Liability Dividends
(Date of Declaration)
xx
Retained Earnings (or Dividends) x
xx
Scrip Dividends Payable/Bonds Payable x

(Date of Record)
No Entry

(Date of Distribution)
xx
Scrip Dividends Payable/Bonds Payable x
xx
Interest Expense* x
xx
Cash x

*Not debited for scrip dividends payable if the liability is non-interest bearing.

Property Dividends
The measurement rules are as follows:
1. The property dividends payable is initially measured at fair value of the non-cash asset at the date of declaration.
 2. At the end of each reporting period and also on the settlement date, the property dividends payable is adjusted
for changes in fair value. The changes are recognized directly to retained earnings.
3. At settlement date, the difference between the carrying value of the dividends payable and the asset distributed
is recognized in profit or loss.

Share Dividends
The charge to retained earnings (or the debit to dividends) is determined as follows:
1. If the share dividends declared are less than 20% of the outstanding shares (called “small” stock dividend), the
retained earnings is debited at fair value of the shares.
2. If the share dividends declared are 20% or more of the outstanding shares (called “large” stock dividend), the
retained earnings is debited at par value of the shares.