Sharedolders Reviewer PART 1 PDF

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Summary

EQUITY SHARE CAPITAL COMPOSITION: Share Capital Issued ( Fully paid Shares) ( If at par or stated value par or stated value, no par, no stated value Consideration received) Add: Share Dividend Distributable XX XX Subscribed Share Capital ( Not Fully Paid Shares) XX XX ( If at par or stated value par...

Description

SHAREDOLDERS’ EQUITY – SHARE CAPITAL COMPOSITION:

Share Capital Issued ( Fully paid Shares) ( If at par or stated value = par or stated value, no par, no stated value = Consideration received) Add: Share Dividend Distributable

XX XX

Subscribed Share Capital ( Not Fully Paid Shares)

XX

XX

( If at par or stated value = par or stated value) Less: Subscription Receivable(If collectible beyond one year)

(XX)

XX

Share Premium: Share Premium in Excess of Par

or Stated Value

XX

Share Premium – Treasury Shares Transactions

XX

Share Premium on Conversion Option on Liabilities

XX

Quasi Reorganization

XX

Recapitalization

XX

Donated Capital

XX

Small Share or Stock Dividend Warrants Outstanding

XX XX

Option Outstanding

XX

XX

Retained Earnings:

      

Unappropriated

XX

Appropriated

XX

Net Income or Loss Prior Period Adjustments Dividends ( Cash Property, Liability and Shares) Quasi- Reorganization Appropriation or Restriction of Retained Earnings Reversal of Appropriation or Restriction Loss on Share Capital Transactions ( Treasury, Retirement)

XX

Deposit on Subscription (Proposed Increase in share capital) Other Comprehensive Income Revaluation Surplus Unrealized Gain or (Loss) on FVTOCI Remeasurement Gain or (loss) under Employee Benefits Translation Gain or (loss) Effective Portion of cash Flow Hedge Change in FV due to credit risk of designated FL@TPL Discount on Share Capital

XX

XX XX XX XX XX

XX XX (XX)

Treasury Shares ( Company’s own reacquired issued shares at cost)

(XX)

Minority Interest ( In Consolidated Statement)

XX

STOCKHOLDERS’ EQUITY

XX

Preincorporation Subscription Requirements a. 25% of the Authorized shares has been subscribed b. 25% of the Subscribed shares has been paid, no lower than P 5,000.

The Corporate Form of Organization\ 1. The corporate form of business organization generally begins with the submitting of articles of incorporation to the appropriate governmental agency in the country in which incorporation is desired. While a company can operate in many different countries, it is incorporated in only one country. Since laws and restrictions vary from country to country, it’s to a company’s advantage to incorporate where laws favor the corporate form of business. Assuming the requirements are properly fulfilled, the corporation charter is issued and the corporation is recognized as a legal entity subject to the laws of the country of incorporation. Many countries have their own business incorporation acts, and the accounting for equity transactions follows these acts.

2. Within a given class of shares, each share is exactly equal to every other share. A person’s percent of ownership in a corporation is determined by the number of shares he or she possesses in relation to the total number of shares owned by all shareholders. In the absence of restrictive provisions, each share carries the right to participate proportionately in: (a) profits, (b) management, (c) corporate assets upon liquidation, and (d) any new issues of shares of the same class (preemptive right).

3. The transfer of ownership between individuals in the corporate form of organization is accomplished by one individual selling or transferring his or her shares to another individual. The only requirement in terms of the corporation involved is that it be made aware of the name of the individual owning the shares. A subsidiary ledger of shareholders is maintained by the corporation for the purpose of dividend payments, issuance of share rights, and voting proxies. Many corporations employ independent registrars and transfer agents who specialize in providing services for recording and transferring shares.

4. The basic ownership interest in a corporation is represented by ordinary shares. Ordinary shares are guaranteed neither dividends nor assets upon dissolution of the corporation. Thus, ordinary shareholders are considered to hold a residual interest in the corporation. However, ordinary shareholders generally control the management of the corporation and tend to profit most if the company is successful. In the event that a corporation has only one authorized issue of capital shares, that issue is by definition ordinary shares, whether or not it is so designated in the charter.

Equity: Contributed Capital and Earned Capital     

Contributed capital is the amount paid in by shareholders and includes par value and any premiums (less any discounts). Earned capital or Retained Earnings results from the company’s profitable operations (reduced by any dividends distributed). Equity is the difference between the assets and the liabilities of the company—also known as the residual interest. Equity is not a claim to specific assets but a claim against a portion of the total assets. Equity is not specified or fixed, it increases when the company is profitable and decreases when the company loses money.

The Shareholders’ Equity Equity in a corporation is the residual interest in the assets of the company after deducting all liabilities. Equity is often sub-classified, and the following categories are commonly used. a. Issued Share capital ( Capital Stock)  Ordinary Share Capital ( Common Stock) and Preference Share Capital ( Preference Share)  Measurement when Issued or Subscribed 1. With Par – At Par Value , any excess to Share Premium 2. Without Par but with stated value – At Stated Value , any excess to Share Premium 3. Without Par nor Stated Value – At total amount of proceeds on the issue of shares, none to Share Premium 



Measurement of the Consideration Received in Exchange of the Shares 1. For Cash or Receivable – At Face Value 2. For Non Cash – at FMV of Non-Cash or FMV of shares issued whichever is clearly determinable 3. For Services – at FMV of Services or FMV of shares issued whichever is clearly determinable Basket Issuance ( Ordinary and Preference Shares Issued at Lump-sum Price ) 1. If market values of both shares are known, prorate the total price based on their market values 2. If only one of the shares has a market value, use the same as the allocated price of that share and any excess from the total proceeds will be allocated to shares with no market price. 3. If preferred shares are treated as debt ( Redeemable Preferred Shares) - The residual method is used to allocate the proceeds ( The market value of the Preference will be its initial measurement, and the balance after deducting the same from the total proceeds will be for the Ordinary)



Issuance of Shares with Warrants 1. If both have market values, allocate the total proceeds to both securities based on its market values. 2. If only one has market value, assigned the same to that security and the balance after deducting from the total proceeds will be the value for those without market value. 3. If Preferred shares are treated as debt and is issued with warrants, the residual method will be used to allocate the proceeds to the securities – the value for preferred (debt) first and the balance for the warrants ( equity)



Direct costs incurred to sell shares such as underwriting costs, accounting and legal fees, and printing costs should be recorded as reductions of amounts paid in (debited to Share Premium)



Management salaries and other indirect costs related to the share issuances should be expensed as incurred

b. Treasury shares.  Treasury shares are a corporation’s own shares that (a) were outstanding, (b) have been reacquired by the corporation, and (c) are not retired.  Treasury shares are not an asset and should be shown in the statement of financial position as a reduction of equity.  Treasury shares are essentially the same as unissued shares.  The reasons corporations purchase their outstanding shares include: (a) to provide tax efficient distributions of excess cash to shareholders; (b) to increase earnings per share and return on equity; (c) to provide shares for employee share compensation; (d) to contract operations or thwart takeover attempts; and (e) to make a market in the shares. 

Two methods are used in accounting for treasury shares, the cost method and the par value method.



The par or stated value method records all transactions in treasury shares at their par value and reports the treasury shares as a deduction from share capital only.



Under the cost method (the method most frequently used), treasury shares are recorded in the accounts at acquisition cost. When the treasury shares are reissued the Treasury Shares account is credited for the acquisition cost. If treasury shares are reissued for more than their acquisition cost, the excess amount is credited to Share Premium— Treasury. If treasury shares are reissued for less than their acquisition cost, the difference should be debited to any Share Premium—Treasury from previous treasury share transactions. If the balance in this account is insufficient, the remaining difference is charged to retained earnings.



The cost of treasury shares is shown in the statement of financial position as a deduction from equity, generally as the last item in the

g. Non-controlling interest (minority interest).

Accounting for the Issuance of Shares 1. The process for issuing shares begins with authorization by the appropriate governmental agency (SEC)to issue shares (often the corporate charter) 2. The corporation offers the shares for sale, after receiving the sales price the shares are issued and recorded in the company’s accounting records 3. The par value of a share has no relationship to its fair value. At present, the par value associated with most ordinary share issues is very low. Low par values help companies avoid the contingent liability associated with shares sold below par. Preference Shares Preference shares is the term used to describe a class of shares that possesses certain preferences or features not possessed by the ordinary shares. The following features are those most often associated with preference share issues: a. Preference as to dividends. b. Preference as to assets in the event of liquidation. c. Convertible into ordinary shares. d. Callable at the option of the corporation. e. Nonvoting. Some features used to distinguish preference shares from ordinary shares tend to be restrictive. For example, preference shares may be nonvoting, noncumulative, and nonparticipating. A corporation may attach whatever preferences or restrictions in whatever combination it desires to a preference share issue so long as it does not specifically violate its country’s incorporation law. The dividend preference of preference shares is normally stated as a percentage of the preference share’s par value. For example, 9% preference shares with a par value of P100 entitle its holder to an annual dividend of P9 per share. However, a preference as to dividends does not assure the payment of dividends; it merely assures that corporations must pay the applicable amount to the preference shares prior to paying any dividends on the ordinary shares.

Certain terms are used to describe various features of preference shares. These terms are the following: a. Cumulative. Dividends not paid in any year must be made up in a later year before paying any dividends to ordinary shareholders. Unpaid annual dividends on cumulative preference shares are referred to as dividends in arrears and are disclosed in a note to the financial statements. b. Participating. Holders of participating preference shares share with the ordinary shareholders in any profit distribution beyond a prescribed rate. This participation involves a pro rata distribution based on the total par value of the outstanding preference and ordinary shares. c. Convertible. Preference shareholders may, at their option, exchange their preference shares for ordinary shares on the basis of a predetermined ratio. d. Callable. At the option of the issuing corporation, preference shares can be redeemed at specified future dates and at stipulated prices.

e. Redeemable. The shares have a mandatory redemption period or a redemption feature that the issuer cannot control.

Reporting of Preference Shares 

Preference shares generally have no maturity date and therefore no legal obligation exists to pay preference shares. As a result, preference shares are classified as part of equity. Redeemable preference shares, however, are required by IFRS to be reported as liabilities and accounted for similar to liabilities

Dividends 

Very few companies pay dividends in amounts equal to their legally available retained earnings. The major reasons are: (a) agreements with creditors, (b) corporation laws may require corporations to restrict contributed capital from distribution as dividends to protect creditors, (c) to finance growth or expansion, (d) to provide for continuous dividends whether in good or bad years, and (e) to build a cushion.

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Before a dividend is declared, management must consider availability of funds to pay the dividend. Directors must also consider economic conditions, most importantly, liquidity.



Dividends may be paid in cash (most common means), shares, or some other asset. Dividends other than a share dividend reduce the equity in a corporation through an immediate or promised distribution of assets. When a share dividend is declared, the corporation does not pay out assets or incur a liability. It issues additional shares to each shareholder and nothing more. Liquidating dividends, which are dividends not based on retained earnings, should be disclosed to shareholders so they do not misunderstand the source of the dividend.

Cash Dividends  The accounting for a cash dividend requires information concerning three dates: (a) date of declaration, (b) date of record, and (c) date of payment. A liability is established by a charge to retained earnings on the declaration date for the amount of the dividend declared. No accounting entry is required on the date of record. The shareholders who have earned the right to the dividend are determined by who owns the shares on the date of record. The liability is liquidated on the payment date through a distribution of cash. The following journal entries would be made by a corporation that declared a P50,000 cash dividend on March 10, payable on April 6 to shareholders of record on March 25. Declaration Date (March 10) Retained Earnings (or Cash Dividends Declared)............. Dividends Payable....................................................... Record Date (March 25) No entry Payment Date (April 6)

50,000 50,000

Dividends Payable............................................................

50,000

Cash............................................................................

50,000

Property Dividends  . Property dividends, or dividends in kind, represent distributions of corporate assets other than cash. Such transfers should be recorded at the fair value of the assets transferred. When the property dividend is declared, fair value should be recognized in the accounts with the appropriate gain or loss recorded. The fair value then serves as the basis used in accounting for the property dividend. For example, if a corporation held shares of another company that it intended to distribute to its own shareholders as a property dividend, it would first be required to make sure the carrying amount reflected current fair value. If on the date the dividend was declared, the difference between the cost and fair value of the shares to be distributed was P75,000, the following additional entry would be made. Equity Investments............................................................ 75,000 Unrealized Holding Gain or Loss—Income..................

75,000

Liquidating Dividends Liquidating dividends represent a return of the shareholders’ investment rather than a distribution of profits. In a more general sense, any dividend not based on profits must be a reduction of corporate capital, and to that extent, it is a liquidating dividend. Share Dividends  When a company issues a share dividend, no assets are distributed and each shareholder has exactly the same proportionate interest in the company before and after the dividend. The book value per share will decrease since there are more shares outstanding, but overall equity does not change. It can be defined as a capitalization of retained earnings that results in a reduction in retained earnings and a corresponding increase in certain contributed capital accounts.  When a share dividend is declared, Retained Earnings is debited for the number of shares issued times their par value and Ordinary Share Dividend Distributable is credited for the same amount. A share dividend is recorded at par value and does not affect any asset or liability accounts. If a statement of financial position is prepared between the dates of declaration and distribution, it should show the ordinary share dividend distributable in the equity section as an addition to share capital—ordinary. For example, consider the following set of facts. Vonesh Corporation, which has 50,000 ordinary P10 par value shares outstanding, declares a 10% share dividend on December 3. The following entry would be made when the share dividend is declared: Retained Earnings (5,000 X P10)...................................... 50,000 Ordinary Share Dividend Distributable........................

50,000

When the shares are issued, the entry is: Ordinary Share Dividend Distributable.............................. Share Capital—Ordinary............................................. Share Split

50,000 50,000



A share split results in an increase or decrease in the number of shares outstanding with a corresponding decrease or increase in the par or stated value per share. In general, no accounting entry is required for a share split as the total dollar amount of all equity accounts remains unchanged. A share split is usually intended to improve the marketability of the shares by reducing the market price of the shares being split. In general, the difference between a share split and a share dividend is a share split increases the number of shares outstanding and decreases par value per share whereas a share dividend increases the number of shares outstanding and increases the total par value outstanding (since the par value per share is transferred from retained earnings to share capital).

Restrictions on Retained Earnings In many corporations restrictions on retained earnings or dividends exist, but no formal journal entries are made. Such restrictions are best disclosed by note. Presentation and Analysis of Equity 

An example of a comprehensive equity section taken from a statement of financial position is given in the textbook. A company should disclose the pertinent rights and privileges of the various securities outstanding. Examples of information that should be disclosed are dividend and liquidation preferences, participation rights, call prices, and dates.

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IFRS requires companies to present a statement of changes in equity which includes the following:

a. Total comprehensive income for the period, showing separately the amounts attributable to owners of the parent and the non-controlling interests. b. Effect...