The Philippine Corporation Code defines a corporation as “an artificial being created by operation of law,

having the
right of succession and the powers, attributes and properties expressly authorized by law or incident to its
existence.”
A corporation is formed by at least 5 but not exceeding 15 natural persons, all of legal age and a majority
of whom
are residents of the Philippines.The entity’s articles of incorporation must be authorized by the Securities
and
Exchange Commission (SEC)
• The articles of incorporation states, among other things, the entity’s authorized capital stock, which is
the maximum
number of shares that the entity can issue. Any excess share issued is deemed illegal. In order to issue
shares in
excess of the authorized capital stock, the entity must amend its articles of incorporation.
• To amend the articles of incorporation, a majority vote of the board plus a vote by shareholders
representing at least
two-thirds (2/3) of the outstanding share capital is needed. After ratification, the amended articles of
incorporation
are filed with the SEC and shall become effective only upon approval by the SEC.
• At least 25% of the entity’s authorized capitalization should be subscribed and at least 25% of the total
subscription
must be paid upon subscription. In no case shall the paid-up capital be less than five thousand pesos
(₱5,000).
Components of Shareholders’ Equity
• The following transactions affect the accounting for a corporation’s equity:
• Authorization, subscription, and issuance of shares
• Acquisition and reissuance of treasury shares
• Retirement of shares
• Donated capital
• Distributions to owners (Dividends)
Accounting for share Capital
• Memorandum method - Only a memorandum is made for the authorized capitalization. Subsequent
issuances of
shares are credited to the share capital account.
• 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.”
Share capital is basically classified into two, namely:
• Ordinary share capital (common stock); and
• Preference share capital (preferred stock).
4 basic rights of a ordinary shareholder• Right to attend and vote in shareholders’ meetings
• Right to purchase additional shares (also known as preemptive right or stock right)
• Right to share in the corporate profits (also known as right to dividends)
• Right to share in the net assets of the corporation upon liquidation
Share Premium
Share premium (additional paid-in capital) arises from various sources which include the following:
• Excess of subscription price over par value or stated value.
• Excess of reissuance price over cost of treasury shares issued.
• Issuance or origination of other equity instruments, such as share options, detachable share warrants,
and equity
components of compound financial instruments.
• Distribution of “small” stock dividends.
• Quasi-reorganization and recapitalization.
•
Legal Capital
• Legal capital is the portion of contributed capital that cannot be distributed to the 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:
1. For par value shares, legal capital is the aggregate par value of shares issued and subscribed.
2. For no-par value shares, legal capital is the total consideration received or receivable from shares
issued or subscribed
. Total consideration refers to the subscription price inclusive of any amount in excess of stated value.
Share issuance cost
• “The transaction costs of an equity transaction are accounted for as a deduction from equity to the extent
they are
incremental costs directly attributable to the equity transaction that otherwise would have been avoided.”
(PAS 32.7)
Accounting for treasury shares
• The cost method is used in accounting for treasury share transactions. Under this method, the
reacquisition and
subsequent reissuance of treasury shares are recognized and derecognized, respectively, at cost.
Donated Capital
1. Donation from shareholders – recognized directly in equity (i.e., credited to share premium).
2. Donation from the government – recognized as government grant.
3. Donation from other sources – recognized in profit or loss (i.e., income) when (a) the conditions
attached to the
donation are fulfilled or reasonably expected to be fulfilled, (b) the donation becomes receivable, and (c)
the criteria for
asset recognition is met.
Continuation of donated capital ;
• Cash – recognized at the amount of cash received or receivable.
• Noncash assets – recognized at the fair value of the noncash assets
• Entity’s own shares – initially recorded through memo entry.
• Donated capital is recognized only when the donated shares are subsequently reissued. This is because
no asset is
generated from the donated shares until they are subsequently reissued. If the donated shares are not to be
resold,
the entity should effect a formal reduction of its authorized capital by retiring the shares received.
Accounting for Dividends
Retained Earnings
• Retained earnings represent the cumulative profits (net of losses, distribution to owners, and other
adjustments)
which are not yet distributed as dividends but rather retained to be reinvested in the business or to settle
debt.
• Total retained earnings may consist of:
• Unrestricted – available for future distribution as dividends
• Appropriated (Restricted) – not available for distribution unless the restriction is subsequently reversed.
Distibution to Owners
Cash dividends – distributions in the form of cash.
2. Property dividends – distributions in the form of noncash assets.
3. Share dividends (bonus issue or stock dividends) – distributions in the form of the entity’s own shares.
Dates relevant to accounting for dividends
• Date of declaration – the date when the board of directors formally announces the distribution of
dividends. • Date of record – the date on which the stock and transfer book of the corporation is
closed for registration.
Only those who are listed as of this date are entitled to receive dividends.
• Date of distribution – the date when the dividends declared are distributed to the shareholders.
Accounting for cash dividends
• Only the outstanding shares are entitled to dividends.
• Outstanding shares are shares issued plus subscribed shares minus treasury shares.
Share dividends
• If the share dividends declared are considered “small” share dividends (i.e., less than 20% of the
outstanding
shares), the share dividends are accounted for at fair value.
• If share dividends declared are considered “large” share dividends (i.e., 20% or more of the
outstanding
shares), the shares are accounted for at par value.
Preference shares
1. Preference in the distribution of assets in case of corporate liquidation (preferred as to assets)
2. Preference in the distribution of dividends when declared (preferred as to dividends)
Liquidating dividends
• Dividends declared out of capital, rather than from retained earnings, are called liquidating
dividends.
Liquidating dividends are normally declared only upon corporate liquidation. However, the
wasting asset
doctrine permits wasting asset corporations to declare dividends out of capital during their
existence.
Share split
1. Split up occurs when old shares are cancelled and replaced by a larger number of new shares but
with a reduced
par value (stated value) per share.
2. Split down is the opposite of split up whereby old shares are cancelled and replaced by a smaller
number of new
shares but with an increased par value (stated value) per share.