CORPORATION

SHAREHOLDERS EQUITY
DEFINITION

A corporation is an artificial being created by operation of

law, having the rights of succession, and the powers,
attributes, and properties expressly authorized by law or
incident to its existence.
COMMENCEMENT

• After filing of the articles of incorporation, the corporation commences to have

judicial personality and legal existence only from the moment the SEC issues to
the incorporators a certificate of incorporation

• The corporation must formally organize and commence operation within two
years from the date of its incorporation. Otherwise, its corporate powers shall
cease.

• By-laws shall be adopted and filed with the SEC within one month from the date
of incorporation, Failure to do so, corporation is liable for the revocation of its
registration.
PREINCORPORATION
SUBSCRIPTION REQUIREMENT
The Corporation Code provides that the SEC shall not register
any stock corporation unless 25% of its authorized number of
shares has been subscribed, and at least 25% of the
subscription has been paid. However, in no case shall the paid
in capital be less than P5,000.
COMPONENTS OF CORPORATION

• Corporators
• Incorporators
• Shareholders or stockholders
• Members
BOOKS AND RECORDS OF A
CORPORATION
• Minutes book
• Stock and transfer book
• Book of accounts
• Subscription book
• Shareholders’ ledger
• Subscribers’ ledger
• Share certificate book
ORGANIZATION COST

Organization cost represents costs incurred in forming or organizing a corporation. These

costs include:
a. Legal fees in connection with the incorporation – drafting of articles of incorporation
and by-laws and corporation registration.
b. Incorporation fees
c. Share issuance costs – printing of stock certificates, cost of stock and transfer book,
seal of corporation, underwriting and promotional fees, accounting and legal fees
related to share issuance.
Note: Organization costs shall be recognized as expense when incurred except for share
issuance cost which is charged to share premium on the issuance of new shares. If share
premium from issuance of the new shares is not enough to absorb the share issuance costs,
such amount shall be recognized as expense.
ELEMENTS OF SHAREHOLDERS’
EQUITY
PHILIPPINE TERM IAS TERM

Capital stock Share capital

Subscribed capital stock Subscribed share capital

Common stock Ordinary share capital

Preferred stock Preference share capital

Additional paid in capital Share premium

Retained earnings (deficit) Accumulated profits(loss)

Retained earnings appropriated Appropriation reserve

Revaluation surplus Revaluation reserve

Treasury stock Treasury share

SHARE CAPITAL

• Share capital is the amount fixed in the articles of incorporation to be

subscribed and paid in or secured to be paid in by the shareholders.
• The amount fixed in the articles of incorporation is called the
authorized share capital.
• Share capital is divided into shares evidenced by a share certificate
• Share certificate is the instrument or document that evidences the
ownership of a share. As a general rule, share certificate is issued
only when subscription is fully paid.
SHARE CAPITAL

• Share capital may be par value share or no par value share.

• Par value share is one with specific value fixed in the articles of
incorporation and appearing on the share certificate.
• No par value share is one without any value appearing on the face of
the share certificate.
• No par share has always issued value or stated value based on the
consideration for which it is issued.
• The minimum consideration or issue price for no par share as
provided for in the Corporation Code is P5.
SHARE CAPITAL
(TYPES)

• Ordinary Share Capital

• Preference Share Capital

LEGAL CAPITAL

• Legal capital is that portion of the paid in capital arising from

issuance of share capital which cannot be returned to the
shareholders in any form during the lifetime of the corporation.
• In par value share, legal capital is the aggregate par value of
the shares issued and subscribed.
• In no par value share, legal capital is the total consideration
received from shareholders including the excess over the stated
value.
TRUST FUND DOCTRINE

• Trust fund doctrine holds that the share capital of a

corporation is considered as trust fund for the protection of
creditors.
• It is illegal to return legal capital to shareholders during
lifetime of the corporation.
• Corporation can pay dividends to shareholders but limited
only to the retained earnings balance
• It is illegal to pay dividends if the entity has a deficit.
ACCOUNTING FOR SHARE
CAPITAL
•Memorandum method – no entry is made for authorization of
share capital. Only when share capital is issued that it is
credited to Share Capital account

•Journal entry method – authorization for share capital is

recorded by debiting Unissued Share Capital and crediting
Authorized Share Capital. Once issued, Authorized Share
Capital is credited to Unissued Share Capital account.
ISSUANCE OF SHARE CAPITAL

Illustration1: 10,000 ordinary shares of P100 par value are sold at P150 per share.
Cash 1,500,000
Ordinary share capital 1,000,000
Share Premium 500,000
Illustration 2: 20,000 ordinary shares of P50 stated value are issued at P80 per
share.
Cash 1,600,000
Ordinary share capital 1,000,000
Share Premium 600,000
SHARE ISSUED AT DISCOUNT

• Corporation Code prohibits the issue of share at a discount, thus, when a

share is sold at a discount, the discount is not considered a loss to the
issuing corporation but the shareholder is held liable therefor.

Illustration: 10,000 shares of P100 par value are sold for P800,000 cash
Cash 800,000
Discount on share capital 200,000
Share Capital 1,000,000
ISSUANCE OF SHARE CAPITAL
FOR NON-CASH CONSIDERATION
If share capital is issued for non-cash, the share capital is
recorded at an amount equal to the following order of
priority:
a. Fair value of the noncash consideration received
b. Fair value of the share issued
c. Par value of the share issued
ISSUANCE OF SHARE CAPITAL
FOR NON-CASH CONSIDERATION
(ILLUSTRATION)
An entity issued 10,000 ordinary shares of P100 par value in
exchange for land with a fair value of P1,500,000. The fair
value of the shares issued is P180 per share or a total of
P1,800,000
• If the FV of land is used,
Land 1,500,000
Ordinary share capital 1,000,000
Share Premium 500,000
ISSUANCE OF SHARE CAPITAL
FOR NON-CASH CONSIDERATION
(ILLUSTRATION)
An entity issued 10,000 ordinary shares of P100 par value in
exchange for land with a fair value of P1,500,000. The fair
value of the shares issued is P180 per share or a total of
P1,800,000
• If the FV of share is used,
Land 1,800,000
Ordinary share capital 1,000,000
Share Premium 800,000
ISSUANCE OF SHARE CAPITAL
FOR NON-CASH CONSIDERATION
(ILLUSTRATION)
An entity issued 10,000 ordinary shares of P100 par value in
exchange for land with a fair value of P1,500,000. The fair
value of the shares issued is P180 per share or a total of
P1,800,000
• If the par value of shares is used,
Land 1,000,000
Ordinary share capital 1,000,000
ISSUANCE OF SHARE CAPITAL
FOR SERVICES
If shares are issued for services, the shares shall be recorded at
the fair value of such services or fair value of the share issued,
whichever is reliably determinable.
SHARE ISSUANCE COSTS

• Share issuance costs are direct costs to sell share capital.

• Share issuance costs shall be debited in the order of
priority:
a. Share premium arising from the share issuance
b. Share premium from previous share issuance
c. Retained earnings
COSTS OF PUBLIC OFFERING
SHARES
• Costs that relate to stock market listing and recorded as
expense in the income statement.
• Costs of listing shares includes road show presentation and
public relations consultant’s fees.
JOINT COSTS

• Joint costs are transaction costs that relate jointly to the

concurrent listing and issuance of new shares and listing of old
existing shares.
• Joint costs shall be allocated prorate on the basis of outstanding
shares between the newly issued and listed shares, and the newly
listed old existing shares
• Joint costs includes; audit and other professional advice relating
to prospectus, opinion of counsel, tax opinion, fairness opinion
and valuation report, and prospectus design and printing
SIC, CPO,JC
ILLUSTRATIONS
An entity undertakes an initial public offering or IPO for the listing and
issuance of 700,000 new shares and listing of 300,000 old existing shares.
The entity incurred the following costs:
Documentary stamp tax 25,000
Fairness opinion and valuation report 125,000
Tax opinion 100,000
Newspaper publication 200,000
Listing fee 300,000
Other joint costs 275,000
WATERED SHARE

• Water share is share capital issued for inadequate or

insufficient consideration
• The consideration received is less than par or stated value,
but the share capital is issued as fully paid.
• If the share capital is watered, asset is overstated and capital
is correspondingly overstated.
WATERED SHARE
ILLUSTRATION
Land with fair value of P800,000 is received for 10,000 shares of P100 par
value.
• To create water in the share capital, the issuance of 10,000 shares is
recorded as fully paid
Land 1,000,000
Share capital 1,000,000
• To correct the account
Discount on share capital 200,000
Land 200,000
SECRET RESERVE

• Secret reserve is the reverse of watered share.

• Secret reserve arises when asset is understated or liability is overstated
with a consequent understatement of capital.
• Secret reserve usually arises from the following
a. Excessive provision for depreciation, depletion, amortization and
doubtful accounts
b. Excessive writedown of receivables, inventories and investments.
c. Capital expenditures are recorded as outright expenses
d. Fictitious liabilities are recorded
DELINQUENT SUBSCRIPTION

• Delinquent subscription happens when shareholder does not

pay on the date fixed.
• BOD may at any time declare due and payable unpaid
subscriptions. This official declaration is called a call
usually expressed in the form of board resolution stating the
date fixed for payment of unpaid subscriptions.
• Delinquent shares will be sold at public auctions
DELINQUENT SUBSCRIPTION
ILLUSTRATION
 CALLABLE PREFERENCE SHARE

• A callable preference share is one which can be called in for redemption at a specified price at the option of the corporation.

• Callable preference share has no definite redemption date as this is dependent on the “call” of the issuer.

• A callable preference share is an equity instrument rather than a financial liability

• When preference shares are called in at more than the original issue price of the preference shares, the excess is debited to
retained earnings.

• Accordingly, the excess of the call price over the par value of the preference shares is charged to the following:

a. Share premium from original issuance of the preference share

b. Retained earnings

• When preference shares are called in at less than original issue price, simply credit to share premium related to ordinary
shares
 CALLABLE PREFERENCE SHARE
ILLUSTRATION
An entity issued 10,000 callable
preference shares with par value of Cash(10,000*120) 1,200,000
Preference share capital 1,000,000
P100 at P120 per share. Share Premium-PS 200,000

Subsequently, the preference shares

are called in at P150 per share. Preference share capital 1,000,000
Share Premium-PS 200,000
Retained earnings 300,000
Cash(10,000*150) 1,500,000
 REDEEMABLE PREFERENCE
SHARE
• A preference share that provides for mandatory redemption by the
issuer for a fixed or determinable amount at a future date. (PAS 32,
paragraph 18)
• A preference share that gives the holder the right to require the issuer
to redeem the instrument for a fixed or determinable amount at a
future date. (PAS 32, paragraph 18)
• A redeemable preference share shall be classified as current or
noncurrent financial liability depending on the redemption date.
 REDEEMABLE PREFERENCE
SHARE
ILLUSTRATION Cash(10,000*100) 1,000,000
An entity issued 10,000 preference shares at the par
value of P100 per share. The preference shares have a Redeemable preference shares 1,000,000
mandatory redemption by the issuer for P1,200,000

If a dividend of P100,000 is paid to the redeemable

preference shareholders.
Interest expense 100,000
Cash 100,000
Subsequently, if the preference shares are redeemed
by the issuer for P1,200,000
Redeemable preference shares 1,000,000
Loss on redemption 200,000
Cash 1,200,000
 REDEEMABLE PREFERENCE
SHARE
ILLUSTRATION 2020:
On January 1, 2020, an entity issued preference
Jan 1 Cash 6,000,000
shares for cash equal to the par value of P6,000,000.
Redeemable preference shares 6,000,000
The preference shares are redeemable at the option of Dec. 31 Interest expense 300,000
the preference shareholders. Accrued interest payable 300,000

(5%*6,000,000)
No dividends are to be paid on these shares but the
2021:
preference shareholders have the right to require the
Dec 31 Interest expense 315,000
issuer to redeem the shares on January 1, 2022 for
Accrued interest payable 315,000
P6,615,000.
(5%*6,300,000)
The interest rate implicit in this agreement is 5%, 2022:
which is compounded annually. Jan 1 Redeemable preference shares 6,000,000

Accrued interest payable 615,000

Cash 6,615,000
CONVERTIBLE PREFERENCE
SHARE
• A convertible preference share is one which gives the holder the right
to exchange the holdings for other securities of the issuing
corporation.
• A preference shareholder may convert the preference share into
ordinary share because operations are successful and earnings on the
ordinary share are unlimited
• A preference shareholder may convert the preference share into bonds
which is actually a change of equity from that of an owner to that of a
creditor. Normally, preference share is convertible into ordinary share
 CONVERTIBLE PREFERENCE
SHARE
ILLUSTRATION Case 1: The preference share is converted into ordinary share
PSC,10,000 shares,P100 par 1,000,000
in the ratio of one preference share for three ordinary shares
OSC,200,000 shares authorized, Preference share capital 1,000,000

100,000 share issued, P30 par Share premium-PS 200,000

3,000,000 Ordinary share capital(30,000*30) 900,000

Share premium-ordinary 300,000

Share Premium-PS 200,000
Case 2:The preference share is converted into ordinary share
Share Premium-OS 1,000,000 in the ratio of one preference share for five ordinary shares

Preference share capital 1,000,000

Retained earnings
2,000,000 Share premium-PS 200,000

Retained earnings 300,000

Ordinary share capital 1,500,000