INTERMEDIATE

ACCOUNTING 2
LIABILITY & SHAREHOLDER'S EQUITY

SHAREYLD ANNE DE GUIA, CPA, CB, MICB

FINANCIAL
LIABILITIES
ACCOUNTS PAYABLE
NOTES PAYABLE
BONDS PAYABLE
FINANCIAL recognize financial liabilities when the entity becomes a
party to the contractual provisions of an instrument
LIABILITIES
INITIAL SUBSEQUENT CHANGE IN FAIR VALUE INTEREST EXPENSE

@FVPL:
DESIGNATED @ DUE TO OWN CREDIT
FVPL FACE VALUE FACE VALUE RISKS--OCI NOMINAL RATE
IRREVOCABLE OTHERS--P/L

@ FVPL : HELD FOR

FACE VALUE FACE VALUE P/L NOMINAL RATE
TRADING

FV-TC
@FVAC AC NONE EFFECTIVE RATE

BEST ESTIMATE
NON-FINANCIAL IF MEASURED @ PV—
FOR FUTURE BEST ESTIMATE NONE
LIAB EFFECTIVE RATE
CASH FLOWS
CURRENT
LIABILITY
• expected to be settled within the normal operating cycle
• incurred for trading
• due to be settled within 12 months after reporting period
• does not have the right at the end of reporting period to defer settlement
of the liability for at least 12 mons after reporting period

EXAMPLES:

• trade accounts & notes payable & most accrued • income tax payable
expenses • cash dividend payable
• bond that was issued with INTENTION TO • interest payable
REPURCHASE in order to profit from changes in • PAS 37 items (Provisions, contingent liabs)
market prices
• deferred revenue that is realizable within 1 yr or
normal operating cycle, whichever is LONGER
• liabilities that are due within 1 yr after reporting
period
• current portion of an installment liability
CURRENTLY MATURING
OBLIGATIONS
WITH EXISTING RIGHT AS OF BS DATE TO NON-CURRENT
DEFER SETTLEMENT AT LEAST 12 MONS OF
BS DATE LIABILITY

NON-CURRENT
IS REFINANCING COMPLETED ON OR BEFORE
BS DATE? LIABILITY

CURRENT Refinancing is done through:

• Extension of maturity date or
LIABILITY • Entering into a borrowing transaction,
proceeds of which will be used to settle
the maturity obligation
BREACH OF COVENANTS

WITH GRACE PERIOD NOT TO COLLECT AT LEAST CURRENT LIABILITY

12 MONS FROM BS DATE

CURRENT LIABILITY
IS GRACE PERIOD PROVIDED ON OR BEFORE BS
DATE?

EXAMPLE:
ON 01/01/2021, ABC COMPANY LENDS 15,000 TO
MARIA. IT SPECIFIES THAT THE LOAN WOULD BE PAID
ON 12/31/21. COME DUE DATE, MARIA ASKS FOR A
GRACE PERIOD SINCE SHE HAS NO ENOUGH MONEY
TO PAY, WHICH THE COMPANY GLADLY GRANTED.

NON-CURRENT THE GRACE PERIOD IS UNTIL 12/31/2022.

IS IT CL OR NCL?
LIABILITY
NOTES PAYABLE
• unconditional written promise to pay a specific sum of money to the
creditor (on demand/ on a specific date
• supported by formal written promissory note

NON-INTEREST BEARING

Do not have a stated rate of interest.

INTEREST BEARING

Has a stated rate of interest that is payable in addition to the face value
of the note.
NOTES PAYABLE
INITIAL RECOGNITION: If NOT designated @ FVPL--> FAIR VALUE - TRANSACTION COSTS

TERM INITIAL SUBSEQUENT

SHORT-TERM FAIR VALUE=FACE VALUE FACE OR EXPECTED SETTLEMENT

AMOUNT
LONG-TERM
CASH PRICE
1. Non-interest
AMORTIZED COST USING EIR
bearing FAIR VALUE= PV OF PRESENT
CASH FLOW USING EFFECTIVE
RATE
2. Interest bearing

• Realistic (nominal FAIR VALUE= FACE VALUE FACE OR EXPECTED SETTLEMENT

rate= effective rate) AMOUNT
• Unrealistic
(nominal not equal CASH PRICE
to ER) AMORTIZED COST USING EIR
FAIR VALUE= PV OF PRESENT
CASH FLOW USING EFFECTIVE
RATE
NOTES PAYABLE
INTEREST-BEARING
• Realistic (nominal rate= effective
rate) UNREALISTICALLY
LOW
• Unrealistic (nominal not equal to
ER) UNREALISTICALLY
HIGH

HOW TO COMPUTE PRESENT VALUE OF CASH FLOWS?

PV= PV OF PRINCIPAL + PV OF INTEREST

INTEREST EXPENSE= PV X ER X N/12
INTEREST PAYABLE= FACE VALUE X NR X N/12
NOTES PAYABLE
NON-INTEREST BEARING
XYZ Inc borrows money from a lender by issuing non-interest-bearing notes. It issues 100 notes of face
value P1,000 each @ P914.24 each, with a term of 12 months. Thus, each bond is issued at a discount of
P85.76.

JOURNAL ENTRIES:
On maturity:
Month 1:
NOTES PAYABLE P100,000
CASH P91,424 CASH 100,000
DISCOUNT ON NOTES PAYABLE 8,576
NOTES PAYABLE 100,000 (Being repayment of notes of FV P100,000
recorded)

End of Month 1 and every subsequent month till

maturity:

INTEREST EXPENSE 714.67

DISCOUNT ON NOTES PAYABLE 714.67
• DISCOUNT MUST BE AMORTIZED
NOTES PAYABLE
INTEREST BEARING
ABC Inc raises P500,000 by issue of 5000 interest-bearing notes of face value P100
each. These notes are issued at an annual coupon rate of 9% and have a maturity of 10
years.

JOURNAL ENTRIES:
Year 1: End of Year 1 and every subsequent year
till maturity:
CASH P500,000
NOTES PAYABLE 500,000 INTEREST EXPENSE P45,000
CASH 45,000
(Being interest expense recorded)
On maturity:

NOTES PAYABLE P500,000

CASH 500,000
(Being repayment of notes of P500,000 recorded)
NOTES PAYABLE

9/1/2023
NP 1.5M
CASH 1.5M

1/1/2023- 8/31/2023= 6M x 12% x 8/12= 480k INT PAYABLE 240K

9/1/2023-12/31/2023= 4.5M x 12% x 4/12= 180k ACCRUED PAYABLE INT EXPENSE 480K
TOTAL INTEREST EXPENSE= 660K CASH 720K

12/31/2023
INT EXPENSE 180K
INT PAYABLE 180K

ACCRUED INTEREST PAYABLE 9/1/2022

CASH 6M
REMAINING BAL= 4.5M NOTES PAYABLE 6M

12/31/2022
4.5M X 12% X 4/12= INTEREST EXPENSE (6M X 12% X 4/12) 240K
180K INT PAYABLE 240K
NOTES PAYABLE
1ST 500K X 12% X 10/12= 50K
2ND 1.5M X 12% X 6/12= 90K
3RD 3M X 12% X 8/12= 240K
TOTAL SHOULD BE= 380K
ACCRUED INT PAYABLE
3/1/2022-2/28/2023= 5M X 12% X 12/12= 600K
5M + 600K= 5.6M
3/1/2023- 12/31/2023
5.6M X 12% X 10/12= 560K
TOTAL= 1160K
CLIENT
1ST 500K X 12% X12/12= 60K
DIFFERENCE OR
2ND 1.5M X 12% X 6/12= 90K
UNDERSTATED= 230K
RECORDED= 150K
ACCRUED INT PAYABLE
3/1/2022-12/31/2022= 5M X 12% X 10/12= 500K
5M + 500K= 5.5M
1/1/2023-12/31/2023
5.5M X 12% X 12/12= 660K
TOTAL= 1160K
NOTES PAYABLE

12/31/2022
Machine 2856000
500K X 5.712= 2856000 Discount 1644000 (4M-2356k)
(500K)
2356000 Notes Payable(500k x 8) 4M
Cash 500k

12/31/2023
2356000 X 11%= 259,160 Interest expense 259160
Discount on NP 259160

Notes Payable 500000

Cash 500000

NOTE: WE DO NOT CREDIT INTEREST PAYABLE

BECAUSE THERE’S NO AGREEEMENT TO PAY
AN INTEREST
NOTES PAYABLE

ACCOUNTS PAYABLE 1M
12% NP (RIGHT TO REFINANCE HAPPENS AFTER BS DATE) 2M
10% DP (principal) 500k
TOTAL CL 3.5M

CL
750K
NOTES PAYABLE

NOTES PAYABLE MAX 5M

AGREEMENT (80% OF 4.5M) (3.6M)
CURRENT LIAB 1.4M

INTEREST EXPENSE
5M X 10% X 6/12= 250K

GAIN/LOSS?
5M- 4.75M= 250K

IS THERE A DISCOUNT/ PREMIUM?--- NONE

WHY? Fair Value Option is used
BONDS PAYABLE
• formal unconditional promise, made under seal, to pay a specified
sum of money at a determinable future date, to make periodic
interest payment at a stated rate until the principal sum is paid.

• considered as financial liabilities since they represent contractual

obligation to pay cash or other financial assets.

FAIR VALUE THROUGH PROFIT/ LOSS (INCURRED FOR

TRADING OR DESIGNATED AT FVPL)

INITIAL: FAIR VALUE ONLY

SUBSEQUENT: FAIR VALUE
NOTES:
• any bond issue cost is EXPENSED
• interest expense is based on NOMINAL rate
• no amortization
• @ fair value every reporting period, with changes
recognized in
> incurred for trading-- P/L
> designated @ FVPL (Fair value Option)
* change attributable to credit risk---OCI
* others--P/L
BONDS PAYABLE
FAIR VALUE THROUGH AMORTIZED COST
INITIAL: FAIR VALUE LESS BOND ISSUE COST

BONDS WERE ISSUED @

• DISCOUNT EFFECTIVE RATE > NOMINAL RATE

INTEREST INCOME > INTEREST RECEIVABLE
• PREMIUM EFFECTIVE RATE < NOMINAL RATE
INTEREST INCOME < INTEREST RECEIVABLE

INTEREST EXPENSE= CARRYING AMOUNT,BEG X EFFECTIVE RATE XX

INTEREST PAID= FACE VALUE X NOMINAL RATE (XX)
DISCOUNT (PREMIUM) AMORTIZATION XXX

SUBSEQUENT:
NOTES:
NO FVOCI; RECLASSIFICATION RULES
=FACE AMOUNT + UNAMORTIZED PREMIUM - UNAMORTIZED DISCOUNT DO NOT APPLY TO FINANCIAL
OR LIABILITY

ON BONDS PAYABLE
=INITIAL MEASUREMENT + DISCOUNT AMORTIZATION - PREMIUM
• INCLUDE ACCRUED INTEREST IF
AMORTIZATION REQUIREMENT IS TOTAL CASH
PAID
• EXCLUDE ACCRUED INTEREST IF
REQUIREMENT IS GAIN/LOSS ON
RETIREMENT
FINANCIAL
LIABILITIES
COMPOUND FINANCIAL
INSTRUMENT
• CONTAINS BOTH LIABILITY COMPONENT & EQUITY COMPONENT
• ORDER OF PRIORITY TO MEASURE THE TOTAL ISSUE PRICE:
1) LIABILITY COMPONENT @ FAIR VALUE
2) EQUITY COMPONENT IS @ RESIDUAL AMOUNT

BONDS WITH DETACHABLE / NONDETACHABLE SHARE WARRANTS

PROCEEDS FROM ISSUE ( FACE AMOUNT X FAIR VALUE EACH) XX

FAIR VALUE OF LIAB WITHOUT WARRANTS (XX)
SHARE WARRANTS OUTSTANDING XXX

CONVERTIBLE BONDS --→ NO G/L ON CONVERSION

CARRYING AMOUNT CONVERTED (CA X EXERCISED/ TOTAL FACE AMOUNT) XX

SHARE PREMIUM FROM CONVERSION PRIVILEGE XX
SHARE CAPITAL ( EXERCISED BOND X # OF SHARES X PAR) (XX)
BOND ISSUE COST (XX)
SHARE PREMIUM BY REASON OF BOND CONVERSION XXX
DEBT RESTRUCTURING
-When creditor grants concession to the debtor that it would not otherwise
grant under normal conditions

OBJECTIVE: objective of creditor is to maximize recovery of investment

EFFECTS:
• Derecognition of financial liability
• Recognition of GAIN in the books of DEBTOR
• Recognition of LOSS in the books of CREDITOR

TYPES:
ASSET SWAP- non-cash asset is given up
EQUITY SWAP- issuance of own equity securities
MODIFICATION OF TERMS- any combination of :
reduction in principal
condonation of interest
extension of maturity date
change in interest rate
DEBT RESTRUCTURING
ASSET SWAP- TRANSFER BY DEBTOR TO CREDITOR OF NON-CASH ASSET IN FULL PAYMENT
OF OBLIGATION

IFRS: G/L ON EXTINGUISHMENT= CARRYING VALUE OF LIABILITY- CARRYING

VALUE OF NON-CASH ASSET

US GAIN ON RESTRUCTURING= CARRYING VALUE OF LIABILITY- FAIR VALUE OF

NON-CASH ASSET
GAAP:

US GAIN OR LOSS ON FAIR VALUE OF NON-CASH ASSET- CARRYING

GAAP: EXCHANGE OR DISPOSAL= VALUE OF NON-CASH ASSET
 DEBT RESTRUCTURING
EQUITY SWAP- ISSUANCE OF EQUITY INSTRUMENT BY DEBTOR TO CREDITOR IN FULL OR
PARTIAL PAYMENT OF OBLIGATION

EQUITY ISSUED
1. FV OF EQUITY
CARRYING VALUE 2. FV OF LIAB PAR VALUE OF
3. CV OF LIAB
OF LIABILITY EQUITY ISSUED

DEBTOR’S POV DEBTOR’S POV

Generally GAIN in P/L SHARE PREMIUM

GAIN ON
TO EQUITY
EXTINGUISHMENT
DEBT RESTRUCTURING
MODIFICATION OF DEBT TERMS
1ST STEP- DETERMINE IF TRANSACTION WILL RESULT TO SUBSTANTIAL MODIFICATION OR
NON-SUBSTANTIAL MODIFICATION OF TERMS

SUBSTANTIAL- THERE WILL EXTINGUISHMENT OF LIAB

NON-SUBSTANTIAL- NONE→ CONTINUE THE OLD LIAB

CARRYING VALUE OF PRESENT VALUE OF

LIABILITY MODIFIED CASH FLOWS

DETERMINE WHETHER THE DIFFERENCE IS AT

LEAST 10% OF CARRYING VALUE OF LIABILITY

DIFFERENCE ≥ 10% CV OF LIAB: WITH SUBSTANTIAL

DIFFERENCE < 10% CV OF LIAB: NO SUBSTANTIAL
 DEBT RESTRUCTURING
WITH SUBSTANTIAL MODIFICATION

• Extinguishment of old liability

• Restructured liability (NEW) @ FAIR VALUE OR PRESENT VALUE OF NEW LIABILITY
USING PREVAILING MARKET RATE OF INTEREST
• GAIN/LOSS ON EXTINGUISHMENT= CARRYING VALUE OF OLD LIAB- FAIR VALUE OF
RESTRUCTURED LIAB
• ARRANGEMENT FEE IS PART OF G/L ON EXTINGUISHMENT

• GAIN OR LOSS ON EXTINGUISHMENT • DISCOUNT/PREMIUM OF NEW LIABILITY

= OLD LIABILITY = NEW FACE AMOUNT
(PV OF NEW LIAB @MARKET RATE) (PV OF NEW LIAB @ MARKET RATE)
(ARRANGEMENT FEE) XXX
XXX
DEBT RESTRUCTURING
WITHOUT SUBSTANTIAL MODIFICATION

• OLD LIABILITY IS NOT EXTINGUISHED BUT CONTINUED WITH MODIFIED CASH FLOWS
• PV OF MODIFIED CASH FLOWS @ ORIGINAL RATE IS ALSO THE LIABILITY
• ARRANGEMENT FEE IS DEDUCTED FROM THE PRESENT VALUE OF MODIFIED CASH
FLOWS

• GAIN OR LOSS ON MODIFICATION • DISCOUNT/PREMIUM OF LIABILITY

= CARRYING VALUE OF LIABILITY = NEW FACE AMOUNT

(PV OF MCF @ ORIGINAL RATE) (PV OF MCF )

XXX (ARRANGEMENT FEE)

XXX
• TO GET INTEREST EXPENSE, ADJUST FIRST THE
PV OF MCF
=PV OF MCF
(ARRANGEMENT FEE)
XXX
NON-FINANCIAL
LIABILITIES
 PROVISIONS Existing liability of an uncertain timing or amount

• To recognize a provision as liability

➢ PRESENT OBLIGATION as a result of past event

➢ PROBABLE that an outflow of economic benefits shall be required to settle an obligation
➢ Amount of obligation can be measured reliably

❑ PRESENT OBLIGATION
>> LEGAL OBLIGATION- contract, legislation or operation of law
>>CONSTRUCTIVE OBLIGATION- entity will accept certain responsibilities & created a valid
expectation on the part of other parties that entity will discharge those responsibilities

❑ OBLIGATING EVENT
>> event that created the legal or constructive obligation
>> no alternative but to settle

❑ PROBABLE
>> more than likely than not to occur
>> more than 50% likely
>> Measurement is the BEST ESTIMATE to settle the obligation
>SINGLE OBLIGATION- MOST LIKELY
> RANGE OF POSSIBLE OUTCOMES- MIDPOINT OF THE RANGE
> LARGE POPULATION OF ITEMS- EXPECTED VALUE (use probabilities)
CONTINGENT LIABILITY
• POSSIBLE OBLIGATION that arises from a past event & whose existence will be

confirmed by one or more uncertain future events

• PRESENT OBLIGATION- that arises from a past event, but not recognized

> NOT PROBABLE that there will be outflow of benefits to settle the liability, OR

> Amount of the liability CANNOT BE MEASURED RELIABLY

• UNCERTAINTY IN FUTURE EVENTS

> PROBABLE- more than 50%

DISCLOSURE IN NOTES
> POSSIBLE- 50% or less

> REMOTE- 10% or less --------------------→ NO DISCLOSURE

CONTINGENT ASSET
• POSSIBLE ASSET from a past event & whose existence will be confirmed by one or more

future events

• Disclose only if likelihood is PROBABLE

• NO DISCLOSURE if POSSIBLE or REMOTE

• Recognize as INCOME if the realization of the asset is VIRTUALLY CERTAIN

ESTIMATED LIABILITIES
• PREMIUM LIABILITY- items given to customers as a result of previous sales or sales

promotion activities in exchange for product labels, box tops, wrappers, & coupons to

encourage the sale of their items.

> As a result, when the product is sold, an accounting liability for future premium

distribution occurs, which should be recognized.

❖ WHEN THE PREMIUMS ARE PURCHASED ❖ IF PREMIUMS ARE STILL OUTSTANDING AT THE
Premiums END OF THE YEAR
Cash Premium Expense
Estimated Premiums Liability
❖ WHEN THE PREMIUMS ARE GIVEN TO CUSTOMERS
Premium Expense
Cash
WARRANTY LIABILITY
Warranty- pertains to after-sale services provided by the company to command sales.

• ACCOUNTING FOR WARRANTY

➢ ACCRUAL APPROACH- best theoretical rationale

ESTIMATED WARRANTY COST IS RECORDED AS FOLLOWS:
Warranty Expense
Estimated Warranty Liability
ACTUAL WARRANTY COST IS SUBSEQUENTLY INCURRED & PAID:
Estimated Warranty Liability
Cash
WARRANTY LIABILITY
➢ EXPENSE AS INCURRED APPROACH- expensing warranty cost only when incurred.

SALE OF WARRANTY- the amount received from the sale of extended warranty is

initially recorded as DEFERRED REVENUE & then amortized over the term of the

warranty contract using straight-line method.

OTHER LIABILITIES
➢ UNEARNED REVENUE/DEFERRED REVENUE- income is received but not yet earned

➢ ACCRUED LIABILITIES-already incurred but not yet paid, or an entity consumed, used, or

benefited but are yet to be paid or settled. Ex: accrued interest payable, accrued salaries payable,

bonuses, etc.

➢ CUSTOMER LOYALTY PROGRAM- generally intended to reward customers for previous

purchases & to provide incentives for future purchases.

➢ GIFT CERTIFICATES- in exchange for future delivery of goods.

➢ REFUNDABLE DEPOSITS- customer deposit required for returnable containers such as

bottles, drums, tanks, etc.

➢ INTEREST PAYABLE

➢ DIVIDENDS PAYABLE- if an entity declares dividends (other than stock dividends), these are

initially declared ON THE DATE OF DECLARATION

SHAREHOLDER’S
EQUITY
INTRO TO SHE
EQUITY-residual interest of the owner in the net assets

CORPORATION- refers to a legal entity with the right of succession & the powers,

attributes, & properties expressly granted by law, or as a result of its existence.

SHAREHOLDER’S EQUITY- another term for equity used in corporation.

COMPONENTS OF SHE:
• SHARE CAPITAL- portion of paid-in capital that represents total par or stated

value of shares issued. It contains common & preferred stocks

• ADDITIONAL PAID-IN CAPITAL(APIC) / SHARE PREMIUM- portion of paid-in

capital that represents excess over the par or stated value.

✓ Excess of issuance price over its par/ stated value

✓ Resale of treasury shares at more than its cost

✓ Issuance of share warrants

✓ Donated capital

✓ Quasi-reorganization & recapitalization

✓ Distribution of dividends
• RETAINED EARNINGS- accumulated balance of periodic earnings, dividend
distributions, prior period errors, & other capital adjustments.
COMPONENTS OF SHE:
• ACCORDING TO SOURCE OF CAPITAL
> CONTRIBUTED CAPITAL= PAID-IN CAPITAL + ADDT’L PAID-IN CAPITAL
> ACCUMULATED COMPREHENSIVE INCOME=ACCUMULATED
PROFIT/RETAINED EARNINGS + ACCUMULATED OCI/LOSS

❑ CONTRIBUTED CAPITAL:
PAID-IN CAPITAL-- @ PAR OR STATED VALUE
> ORDINARY SHARES
>PREFERENCE SHARES
>ORDINARY SHARES-SUBSCRIBED
>PREFERENCE SHARES-SUBSCRIBED
> ORDINARY SHARES DIVIDEND PAYABLE- DECLARATION OF STOCK
DIVIDENDS
ADDT’L PAID-IN CAPITAL
> SHARE PREMIUM-ORDINARY SHARES
> SHARE PREMIUM-PREFERENCE SHARES
>SHARE PREMIUM-TREASURY SHARES
> APIC-BOND CONVERSION
> OS OPTIONS OUTSTANDING
> OS WARRANTS OUTSTANDING
> LESS: SUBSCRIPTION RECEIVABLE-NON-CURRENT
TOTAL CONTRIBUTED CAPITAL
COMPONENTS OF SHE:
TO GET TOTAL SHE
TOTAL CONTRIBUTED CAPITAL
+ ACCUMULATED PROFITS
> Accumulated Profit appreciation for TS
> Accumulated Profit appreciation for Plant Expansion
> Accumulated Profit appreciation for Debt Repayment
> Accumulated Profits Unappropriated

+ ACCUMULATED OTHER COMPREHENSIVE INCOME/LOSS

> Accumulated unrealized gain/loss on FA-FVOCI
>Accumulated revaluation surplus/reserves
> Accumulated remeasurement gain/loss on ABO & plant assets
> Accumulated forex translation reserves
> Accumulated Hedging Reserves
> LESS: Transaction Cost
TOTAL SHE
COMPONENTS OF SHE:
LEGAL CAPITAL

IF WITH PAR= ISSUED & SUBSCRIBED

IGNORE SUBSCRIPTION RECEIVABLE & SHARE PREMIUM

IF W/O PAR= STATED VALUE + ISSUED & SUBSCRIBED + SHARE PREMIUM

ACCOUNTING FOR SHARE CAPITAL

✓ MEMORANDUM METHOD- to record authorized share capital, no entry.

✓ JOURNAL ENTRY METHOD- debit unissued share capital & crediting authorized
share capital, authorization to issue share capital is recorded.
ACCOUNTING FOR
SHARE CAPITAL
MEMO METHOD JOURNAL ENTRY METHOD
a. An entity received authorized
Memo entry Unissued share capital 5M
shares amounting to P5,000,000
divided into 500,000 shares with par Authorized Share capital 5M
value of P10.
Subscription receivable 1M Subscription receivable 1M
b. Received subscription to 100,000 Subscribed share capital 1M Subscribed share capital 1M
shares at par.
Cash 250k Cash 250k
c. Collected 25% of the subscription
Subscription receivable 250k Subscription receivable 250k
receivable

d. Received full payment for 60k Cash 450k Cash 450k

shares originally subscribed. Subscription receivable 450k Subscription receivable 450k
Subscription price (60k x P10) 600k
Less: partial payment (25% x 600k) (150k)
BALANCE 450K

e. Issued the share certificates for Subscribed share capital 600k Subscribed share capital 600k
60kshares which are fully settled. Share capital 600k Unissued share capital 600k

f. Received a cash subscription for 40k Cash 400k Cash 400k

shares at par Share capital 400k Unissued Share capital 400k
MODES OF SHARE
ISSUANCES
1. FOR CASH
TRANSACTION COSTS→ GR: DEDUCTION TO APIC/SHARE PREMIUM
XPN: EXPENSE IF ORGANIZATION COSTS

2 OR MORE SECURITIES ISSUED @ LUMP-SUM

> PRO-RATA
> RESIDUAL APPROACH----- 1) DEBT --→ 2) EQUITY

2. FOR NON-CASH CONSIDERATION→ @ FAIR MARKET VALUE

GR: FMV of consideration received= FMV of equity issued + Cash paid – Cash received
XPN: If consideration is SERVICES → FMV OF EQUITY ISSUED

3. ON SUBSCRIPTION BASIS
UPON SUBSCRIPTION UPON COLLECTION IF FULL COLLECTED (SHARES ARE EVENUTALLY ISSUED)
Subscription receivable Cash Subscribed OS
Subscribed OS Subscription receivable OS
Share Premium
MODES OF SHARE
ISSUANCES
4. IN PAYMENT OF EXISTING LIABILITY
✓ Under normal credit terms– no gain/loss
✓ Under debt restructuring(EQUITY SWAP) – gain/loss recognize
TREASURY SHARES-
Cost Model
REACQUISITION→ NOT REISSUED BUT RETIRED (EKIS
TS KA NA, NO LONGER LISTED AS TS)
CASH
ISSUE PRICE > COST= GAIN ON RETIREMENT
REISSUE (SOLD) CREDIT SHARE PREMIUM
Cash
TS
1. Reissue price=Cost
Cash ISSUE PRICE < COST= LOSS ON RETIREMENT
2. Reissue price > Cost TS
SP-TS DEBIT 1) SP from orig issuance
2) SP from TS
Cash
SP-TS 3) RE
3. Reissue price < Cost RE
TS

NOTES
RETIREMENT OF TS-affects
elements of SHE but not the
TOTAL SHE
SHARES SPLIT
TWO FORMS

1. SPLIT UP- transaction in which the original shares are cancelled & replaced with a
larger # of shares with lower par value or stated value. The company can sell more shares at
lower price. This is done usually to accumulate funds.

Ex: With par value of P100, an entity has 50,000 shares issued & outstanding. If the shares
are split up 5-for-1, the new capitalization would be 250,000 shares with par value of P20.

TIP: If the 1st number I the share split arrangement is greater than second, in this case, 5 is > 1,
the operation is to multiply the number of shares issued & outstanding by the higher
number. Here: 50,000 shares x 5= 250,000

NOTE: TOTAL AMOUNT OF SHARES remain unchanged. It will still be 5M. But the par value
has decreased to P20 (P100/5) as the # of shares increased.

NOTES
SHARES SPLIT DOES NOT
AFFECT SHE
SHARES SPLIT
TWO FORMS

2. SPLIT DOWN- transaction in which the original shares are cancelled & replaced
with a lower # of shares but with par value or stated value being increased.

Ex: With par value of P100, an entity has 50,000 shares issued & outstanding. If the shares
are split down 1-for-4, the new capitalization would be 12,500 shares with par value of P400.

TIP: If the 1st number I the share split arrangement is less than second, in this case, 1 < 4, the
operation is to DIVIDE the number of shares issued & outstanding by the higher number.
Here: 50,000 shares / 4= 12,500

NOTE: TOTAL AMOUNT OF SHARES remain unchanged. It will still be 5M. But the par value
has increased to P400 (P100 x 4) as the # of shares decreased.

NOTES
SHARES SPLIT DOES NOT
AFFECT SHE
PREFERENCE SHARES
In the event of liquidation, the preferences usually refer to the preference
shareholders’ claims on dividends & net assets

CALL OR RETIRE PREFERENCE CONVERSION OF PS TO OS

SHARES
ORDINARY SHARE CAPITAL= # of PS x
MORE THAN ISSUE PRICE- excess over original conversion policy x par value
issue price is charged against Retained
Earnings
AS A RESULT OF CONVERSION,
PS PS
SP-PS SP-PS
RE OS
CASH SP-OS

LESS THAN ISSUE PRICE

PS
SP-PS
CASH
SP-OS
QUASI-
REORGANIZATION
➢ Process of restating assets, liabilities, and share capital balances in accordance with

fair value in order to eliminate a deficit.

➢ Also known as corporate readjustment and may be accomplished through:

> Recapitalization

> Revaluation of PPE

SHARE-BASED
COMPENSATION
➢ Share-based compensation plan is a pay structure in which an entity’s employees

receive equity shares in exchange of their services, or the entity incurs liabilities to

the employees based on the price of its equity shares.

TYPES:
✓ EQUITY-SETTLED- entity issues shares in exchange of services of employees

EX: share options

✓ CASH-SETTLED- entity incurs a liability to its employees for services received and

liability is based on the value of entity’s shares

EX: share appreciation rights

SHARE OPTIONS
➢ Share options are granted to officers and key employees which allows them to

purchase shares of the company during a specified period at a specified price

provided certain conditions are met.

➢ Considered as additional compensation on the part of officers and key employees

➢ When the shareholder exercises the option, entity will require to issue additional

shares of stocks

➢ TREATMENT→ EQUITY
SHARE OPTIONS
HOW TO MEASURE? (EXPENSE)

1. FAIR VALUE OF SHARE OPTIONS @ GRANT DATE

2. INTRINSIC VALUE OF SHARE OPTIONS

MARKET VALUE OF SHARE XX

LESS: OPTION OR EXERCISE PRICE (XX)

INTRINSIC VALUE XXX

• every end of reporting period until exercised, the intrinsic value changes, therefore, REMEASURE

• changes in intrinsic value is recognized in P/L

• this method is used only if the fair value of share option CANNOT BE MEASURED RELIABLY
SHARE OPTIONS
WHEN TO RECOGNIZE THE EXPENSE?

1. VESTED IMMEDIATELY- expense fully at grant date with corresponding increase in

equity at grant date

2. VESTED OVER SERVICE PERIOD- Compensation expense is determined using the

cumulative approach

VESTING PERIOD- from grant date to the date which the share options can be exercised.

In the absence of vesting period, it is presumed to be vested immediately.

SHARE APPRECIATION RIGHTS
➢ Share appreciation rights offer the right to the cash equivalent of a stock's price

gains over a predetermined time interval.

➢ Considered as additional compensation on the part of officers and key employees

➢ When SARs vest, it simply means that they become available to exercise.

➢ Payment that the entity us required to make at the time of settlement is based on

MARKET PRICE over PRE-DETERMINED PRICE

➢ TREATMENT→ LIABILITY
SHARE APPRECIATION RIGHTS
HOW TO MEASURE THE LIABILITY & EXPENSE?

FV OF LIABILITY @ EVERY REPORTING PERIOD-- UNTIL EXERCISED, REMEASURE

HOW TO RECOGNIZE COMPENSATION EXPENSE RELATED TO SAR?

VESTED IMMEDIATELY- FULLY

CONDITIONAL (THERE IS VESTING PERIOD)- OVER THE SERVICE OR VESTING PERIOD

VESTING PERIOD- from grant date to the date which the share appreciation rights can be

exercised.

In the absence of vesting period, it is presumed to be vested immediately.

BOOK VALUE &
PREFERENCE SHARES
ONE CLASS OF SHARE

BOOK VALUE PER SHARE= TOTAL SHAREHOLDER’S EQUITY

SHARES ISSUED+ SUBSCRIBED- TS

TWO CLASSES OF SHARE

1) PREFERENCE
SHARES (PRIORITY)

TOTAL SHE
2) ORDINARY
SHARES (RESIDUAL)
BOOK VALUE &
PREFERENCE SHARES
TWO CLASSES OF SHARE
1) PREFERENCE
SHARES (PRIORITY)
TOTAL SHE

2) ORDINARY
SHARES (RESIDUAL)
PREFERENCE SHARES

1. PAR VALUE

2. LIQUIDATION PREMIUM- amount on top of PAR that they will receive on liquidation

3. CUMULATIVE OR NON-CUMULATIVE

CUMULATIVE- before liquidation, entitled to dividends in arrears

NON-CUMULATIVE- entitled to current year dividends only regardless of dividends in arrears

4. PARTICIPATING OR NON-PARTICIPATING

PARTICIPATING- after they get fixed share of dividend, they also share with the ordinary shareholders the

residual amount of book value of entity.

NON-PARTICIPATING- everything of residual will go to ordinary shareholders

BOOK VALUE &
PREFERENCE SHARES
PREFERENCE SHAREHOLDER ORDINARY SHAREHOLDER

TOTAL SHE

PS-PAR XX

LIQUIDATION PREMIUM XX

CUMULATIVE XX

NON-CUMULATIVE XX

OS-PAR XX

OS-PARTICIPATION XX

PARTICIPATION- RESIDUAL XX XX

NOTES
• SUBSCRIPTION RECEIVABLE- for purposes of BVPS→ IGNORE
• TREASURY SHARES- assumed retired(-)
• LIQUIDATION VALUE= PAR + Liquidation Premium
RETAINED EARNINGS
• Represents the cumulative amount of profits & losses, dividends, and other capital

adjustment.

• May be appropriated or unappropriated

• Items that will commonly cause a movement to the RE account include the

following:

• Income or loss for the period

• Dividends

• Appropriations
ACCOUNTING FOR DIVIDENDS
TYPES AMOUNT TO BE CHARGED TO RETAINED
EARNINGS
CASH Face amount

PROPERTY FAIR VALUE AT THE FOLLOWING DATES:

a. Date of Declaration
b. At the end of reporting period
c. Date of Settlement
SHARE Small (<20% of dividend rights)- fair value of
shares
Large (>=20% of dividend rights)- par value of
shares
LIABILITY Scrip (short-term)- face amount
Bond (long-term)- fair value
APPROPRIATION OF RETAINED
EARNINGS
• This refers to the restriction of retained earnings for certain purpose. Appropriation
may be:
✓ An appropriation of retained earnings as MANDATED FOR BY LAW
LEGAL
because the legal capital cannot be returned to the shareholders
APPROPRIATION
until the corporation is dissolved & liquidated.
✓ EX: appropriation for an amount equal to the cost of treasury shares

CONTRACTUAL ✓ An appropriation of retained earnings as REQUIRED BY CONTRACT as

APPROPRIATION to ensure payment
✓ Such issuances may impose restriction on the payment of dividends
✓ EX: appropriation for sinking fund or bond redemption, appropriation
for redemption of preference shares
DISCRETIONARY
APPROPRIATION
✓ Appropriation made at the discretion of the entity’s management
✓ EX: appropriation for plant expansion, increase in working capital,
and contingencies