Revised Corporation Code of the Philippines

• Republic Act No. 11232, known as the Revised Corporation Code of the Philippines, defines a corporation.
• A corporation is an artificial entity, created by law.
• It possesses the right of succession and powers authorized by law or incidental to its existence.

Characteristics of Corporations

• A corporation possesses these characteristics: separate legal entity, number of owners, lack of personal liability, lack of mutual agency, indefinite life, taxation, and capital accumulation.
• A corporation is organized independently of its owners and possesses certain legal rights like any individual.
• It can sue and be sued, borrow money, and own property.
• Changes like owner withdrawal, death, or insanity do not affect its existence.
• The right of succession allows a new owner/member to assume the departing owner/member's rights and responsibilities.
• Corporations have one or more owners, known as stockholders or shareholders.
• Shares of a public corporation can be purchased on an organized stock exchange, like the New York Stock Exchange (NYSE), Nasdaq Stock Market, or the Philippine Stock Exchange (PSE).
• Shares of privately held corporations cannot be purchased on a stock exchange and often have only a few stockholders.
• Stockholders are not personally liable for the corporation's debts.
• Stockholders are not the business's mutual agents, meaning they cannot bind the business to a contract, which is unlike sole proprietorships and partnerships.
• Corporations are created by law, having indefinite life; their existence, rights, and liabilities are dictated by the Revised Corporation Code.
• A corporation can exist even with the withdrawal or death of an original owner through the right of succession.
• Corporations are separate taxable entities, paying income tax on business earnings and payroll taxes on employee salaries and wages.
• Corporations experience double taxation when making cash payments (dividends) to stockholders because the payments are taxed as earnings of the corporation and dividend income of the stockholder.
• Corporations raise more money than sole proprietorships and partnerships through an Initial Public Offering (IPO).

Classes of Corporations

• The Code specifies two classes of corporations: stock and nonstock
• Stock corporations have capital stock divided into shares and can distribute dividends or allotments of surplus profits based on shares held.
• Nonstock corporations are non-profit entities formed for a single or shorter purpose and owned by members who do not own stocks
• The Securities and Exchange Commission (SEC) will not register any stock corporation unless 25% of its authorized shares have been subscribed and at least 25% of the subscription has been paid.

Components of Corporations

• Corporators are the stockholders or members who compose the corporation.
• Incorporators are the stockholders or members who originally formed the corporation, and their names and signatures are in the articles of incorporation.
• Stockholders are the owners of a stock corporation.
• Members are the owners of a nonstock corporation.

Shareholders' Equity

• Shareholders' equity generally consists of many shares with the same value.
• Share ownership determines the holder's interest in the corporation.
• If a company has 10,000 ordinary shares, a person holding 3,000 shares possesses 30% ownership.
• Holders can examine the articles of incorporation, share certificates, and applicable laws to understand their rights.

Articles of Incorporation

• The articles of incorporation are filed with the SEC to formally establish a corporation and include:
• The corporation's name
• The specific purpose(s) for which the corporation is being formed.
• For corporations with multiple purposes, the primary and secondary purposes must be indicated.
• Nonstock corporations may not include a purpose that contradicts their nature.
• The location of the principal office, which must be within the Philippines
• The term for which the corporation is to exist, if not perpetual
• The names, nationalities, and residence addresses of the incorporators
• The number of directors or trustees, which shall not be more than fifteen (15)
• The names, nationalities, and residence addresses of those who shall act as directors or trustees until the first regular election.
• For stock corporations, the amount of authorized capital stock, the number of shares, the par value of each, names/info for original subscribers, the amount subscribed and paid, and whether shares are without par value.
• For nonstock corporations, the amount of its capital, the names/info of the contributors, and the amount contributed by each.
• Other law-consistent matters as deemed necessary/convenient by the incorporators

Share Certificate

• A written document serving as the legal basis of ownership for a certain number of shares in a corporation, also known as a stock certificate.

Components of Shareholders' Equity

• Contributed capital, also termed paid-in capital, represents the amounts contributed by the owners and includes share capital and share premium.
• Legal capital includes the corporation's share capital and subscribed share capital.
• For corporations that issue no par value share capital, its legal capital is the total peso amount of consideration received or receivable on shares issued and subscribed.
• Share capital, subscribed share capital, and share premium represent the total legal capital.
• Accumulated profits, conventionally called the retained earnings of the corporation
• Accumulated other comprehensive income (OCI) includes accumulated revaluation surplus, unrealized gains/losses on financial assets at fair value through other comprehensive income, foreign currency translation adjustment gains and losses, and actuarial gains and losses on the defined benefit plan.
• Contra-shareholders' equity accounts include share capital subscriptions receivable and treasury shares.

Accounting for Share Capital

• When issuing shares, companies must follow these procedures:
• The applicable governmental agency must authorize the shares, generally in articles of incorporation.
• The corporation offers shares for sale, entering into contracts to sell these shares.
• After receiving payment, the corporation issues the shares.
• The corporation generally makes no entry in the general ledger accounts when it receives its share authorization from the jurisdiction of incorporation.
• Par value share value stated in the share certificate.
• The par value associated with most ordinary share issuances is very low compared to the par value of preference shares.
• Accounts are maintained for each class of shares to show the required information for issuance of par value shares.

Preference Share

• The holder gets a portion of the company's profit or dividends before ordinary shareholders.
• Preference shareholders have priority in the distribution of business profits with other creditors, like bondholders, assuming the company fails and decides to close.

Ordinary Share

• Ordinary shares represent the basic voting shares of a corporation
• Holders are typically entitled to one vote per share and receive dividends at the discretion of the company's management if funds are available after preference share dividends are paid
• Ordinary shareholders bear greater financial risk than creditors and preference shareholders but can reap greater rewards if the company makes large profits
• The residual interest in a corporation belongs to the ordinary shareholders

Share Premium

• This account indicates any excess of par value paid in by shareholders in return for the shares issued to them.
• A premium on the issue of shares is not income for the corporation because the company is dealing with its shares; it is another type of paid-in capital account, known as Paid-in Capital over Par, reported on the statement of financial position.

Issuing shares at par value (example)

• Lloyd Corporation, with authorized 20,000 ordinary shares, issues 10,000 ordinary shares at P1 par value.
• Debit Cash 10,000
• Credit Ordinary Share Capital 10,000

Issuing shares at premium (example)

• Lloyd Corporation issues its P1 par value shares for P6 per share.
• Debit Cash 60,000
• Credit Ordinary Share Capital 10,000
• Credit Ordinary Share Premium 50,000

Accounting for No-Par Value Shares

• Corporations sell no-par shares for whatever price they want without a premium or discount, unlike par value shares.
• The exact amount represents the credit to ordinary or preferred shares.

Issuance of no-par value shares (example)

• Dorina Corp issues 1,000 shares for cash at P8 per share
• Debit Cash 8,000
• Credit Ordinary Share Capital 8,000
• If Dorina Corp. issues another 1,000 shares for P10
• Debit Cash 10,000
• Credit Ordinary Share Capital 10,000
• True no-par shares should be carried in the accounts at issue price, without any share premium reported
• Some countries require no-par shares to have a stated value, representing a minimum value.
• The Philippines' minimum value or issue price for no-par shares is P5.
• Companies cannot issue no-par shares for an issue price less than P5.

Accounting for Lump-Sum Sales

• Corporations sell classes of shares separately to track proceeds, but sometimes they issue two or more classes of shares for a single payment (lump sum).
• Allocating proceeds among the different classes of securities is an accounting issue; two allocation methods are available.

Proportional Method

• It is used if the fair value or other sound basis for determining relative value is available for each share class.

Proportional Method (example)

• Rhezza Company issues 1,000 shares of P10 stated value ordinary shares with a fair value of P20 and 1,000 shares of P10 par value preference shares with a fair value of P12 for a lump sum of P30,000. -The fair value of ordinary shares (1,000 x P20) is 20,000 -The fair value of preference shares (1,000 x P12) is 12,000
• The aggregate fair value totals 32,000
• Allocation of value shares
• Allocate ordinary shares 18,750
• Allocate preference shares 11,250
• The total allocation is 30,000

Incremental Method

• It is used when the company cannot determine the fair value of all classes of securities; fair value of securities is used as a basis for those it knows, and the remainder of the lump sum is allocated to the class for which it does not know the fair value.

Incremental Method (example)

• Rhezza Company issues 1,000 shares of P10 stated value ordinary shares with a fair value of P20 and 1,000 shares of P10 par value preference shares with no established fair value for a lump sum of P30,000.
• Allocation of Value:
• Lump-sum receipt: 30,000
• Allocate to ordinary shares (1,000 x P20) 20,000
• Allocate to preference shares 10,000
• If the company cannot determine the fair value of any class of shares involved in a lump sum exchange, it may need to use other approaches, like an expert's appraisal.
• If one or more of the classes of securities issued will have a determinable future value, a best-estimate basis can be used to adjust later upon establishing it.

Accounting for Shares Issued in Non-Cash Transactions

• Record shares at the fair value of the goods or services received unless it cannot be reliably measured; otherwise, use the fair value of the shares issued.
• A company may issue unissued or treasury shares for property or services.
• If treasury shares are used and the property or services' fair value cannot be reliably estimated, the cost of treasury shares is not decisive; instead, use the fair value of the treasury shares to value property or services.

Shares Issued in Non-Cash Transactions (example)

• ABC issues 10,000 ordinary shares of P50 par value in exchange for land with a fair value of P750,000; the fair value of the shares issued is P85.
• If the fair value of the land is used:
• Debit Land 750,000
• Credit Ordinary Share Capital 500,000
• Credit Share Premium 250,000
• If the fair value of the shares is used:
• Debit Land 850,000
• Credit Ordinary Share Capital 500,000
• Credit Share Premium 350,000
• If the fair value of the land is used:
• Debit land 500,000
• Credit Ordinary Share Capital 500,000

Accounting for Costs of Issuing Shares

• Share issuance costs are direct costs to sell share capital, including legal fees, accountant fees, underwriting fees, commissions, certificate printing, documentary stamps, SEC filing fees, advertising, and newspaper publication fees.
• PAS 32 states that transaction costs directly attributable to the issuance of new shares shall be deducted from equity, net of any related income tax benefit.
• Share issuance costs should be debited to the share premiums from the share issuance.
• If the share premium is insufficient, the excess shall be debited to "share issuance costs" and reported as a contra equity account from the following in the order of priority:
• Share premium from previous share issuance
• Retained earnings

Cost of Public Offering of Shares

• Costs related to stock market listing or otherwise not incremental costs directly attributable to the issuance of new shares shall be recorded as expenses in the income statement.
• Costs of listing shares are not considered costs of an equity transaction since no equity instrument has been issued and are recognized as an expense when incurred.
• Road show presentation
• Public relations consultant's fees are examples of listing costs.

Joint Costs

• Paragraph 38 of PAS 32 requires that transaction costs that relate jointly to the concurrent listing and issuance of new shares and listing of old existing shares shall be allocated between the newly issued and listed shares and the newly listed old existing shares.
• The PIC says joint costs shall be allocated prorated based on outstanding newly issued and listed shares and outstanding newly listed old existing shares.
• Audit and other professional advice relating to prospectus
• Opinion of counsel
• Tax opinion
• Fairness opinion and valuation report
• Prospectus design and printing
• These costs are examples of joint costs.

Joint Costs (example)

• Lala Corporation undertakes an IPO for listing and issuing 700,000 new shares and listing 300,000 old shares, incurring the following costs:
• Documentary stamp tax P 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
• Listing fee
• The entry is recorded as a public offering expenses.

Share Issuance Cost (example)

• Documentary stamp tax P 25,000
• Newspaper publication 200,000
• If the new shares are issued at more than par:
• Share Premium 225,000
• Cash 225,000
• If the new shares are issued at par:
• Share Issuance Costs 225,000
• Cash 225,000

Joint Costs (example)

• Fairness opinion and valuation report ₱ 125,000
• Tax opinion 100,000
• Other joint costs 275,000
• Total joint costs ₱ 500,000 Allocation of joint costs:
• Newly issued and listed shares: 700,000 total shares outstanding
• Newly listed old existing shares: 300,000 total shares outstanding
• Share Premium 350,000
• Stock Listing Fee 150,000
• Cash 500,000

Preference Shares

• A special class of shares with certain preferences or features not possessed by ordinary shares.

Common Classes of Preference Shares

• Cumulative preference share: its annual fixed-rate dividend, if unpaid, accrues until it is paid before ordinary shares.
• Accrued dividends of a cumulative preference share are termed dividends in arrears.
• Participating in preference shares: gives the holder the right to receive additional dividends other than the fixed dividend promised in the Articles of Incorporation.
• Convertible preference share: allows the shareholder to exchange preference shares for ordinary shares at a predetermined ratio.
• Callable preference shares: permit the company to redeem the outstanding shares at specified future dates and stipulated prices.
• Redeemable preference share: has a mandatory redemption feature that the issuer cannot control.

Accounting for Preference Shares

• Similar to that for ordinary shares; a company allocates proceeds between the par value of the preference shares and the share premium.

Preference Shares (example)

• Dano Corp. issues 10,000 P10 par value preference shares for P13 cash per share, records issuance.
• Debit Cash 130,000
• Credit Preference Share Capital 100,000
• Credit Preference Share Premium 30,000

Delinquent Subscription

• The board of directors may declare unpaid subscriptions due and payable anytime. Usually shown in a board resolution stating the date fixed for payment of the unpaid subscriptions.
• If a shareholder does not pay, the shareholder is declared delinquent, and the shares will be sold at public auction.
• At the public auction, so many delinquent shares as needed to cover the unpaid subscription, interest, advertisement, and other sale costs will be sold to the highest bidder.
• The highest bidder is the person willing to pay the "offer price” of delinquent shares for the smallest number of shares; the offer price includes the balance due on subscription, interest accrued, and costs of sale.

Delinquent Subscription (example)

• X subscribed to 10,000 shares of DEF Corporation at P100 par with P600,000 initial payment. The balance due was called but was unpaid, and the subscription was declared delinquent. Including balance due, the offer price is P450,000. A offers to pay the price for 4,500 shares, B for 5,000 shares, and C for 6,000 shares.
• A is the highest bidder, thus A gets 4,500 shares, and X gets 5,500 shares the share is fully paid.
• If there are no bidders, the corporation may purchase the delinquent shares; the delinquent subscriber is released from liability concerning the subscription and is deemed fully paid.

Delinquent Subscriptions - Journal Entries

• X subscribes for 10,000 shares at P100 par.
• Debit Subscription Receivable 1,000,000
• Credit Subscribed Share Capital 1,000,000
• X pays P600,000.
• Debit Cash 600,000
• Credit Subscription Receivable 600,000
• The subscription balance is called, and X defaults
• The corporation pays P30,000 expenses for the auction
• Debit Advances in Delinquency Sale 30,000
• Credit Cash 30,000
• A is the highest bidder for 4,500 shares and pays the P400,000 balance plus P20,000 interest and P30,000 delinquency expenses.
• Debit Cash 450,000
• Credit Subscription Receivable 400,000
• Credit Interest Income 20,000
• Credit Advances in Delinquency Sale 30,000
• The corporation issues A 4,500 shares, and X 5,500
• Debit Subscribed Share Capital 1,000,000
• Credit Share Capital 1,000,000

Rights Issue

• A rights issue lets existing shareholders acquire new shares at a specified price during a specified period (stock rights).
• When a corporation increases its share capital, the new issue must be offered first to the existing shareholders in proportion to their shareholding before the general public can purchase through subscriptions (right of preemption).

Issuance of Rights

• No formal entry is required when share warrants are issued to existing shareholders because they are usually issued without consideration.
• An entity only needs to make a memorandum entry to indicate the number of rights issued and the number of shares that can be purchased through the exercise of rights.

Exercise of Rights

• A memorandum entry is made to decrease receivable shares if the rights are exercised, The share sales by exercising rights are then recorded Example
• Jem Company plans to issue an additional 100,000 shares for P150/share for an expansion project. The company issued stock rights equal to the outstanding shares with a feature that gives the holder the right to purchase 1 ordinary share at P120 for every six shares held (600,000/100,000). Before the issuance, the company has 600,000 outstanding shares with a P100 par value. 450,000 rights were exercised out of it. Issuance of Rights

Memorandum Entries

• Issued 600,000 stock rights to shareholders with a feature to purchase 1 ordinary share of P100 par shares at P120 for every six shares held
• Exercise of Rights
• Debit Cash 9,000,000
• Credit Ordinary Share Capital 7,500,000
• Credit Ordinary Share Premium 1,500,000

Computation

450,000 rights/6=75,000 shares 75,000 shares x P120= P9,000,000 75,000 shares x P100= P7,500,000 P9,000,000 - P7,500,000- P 1,500,000 Expired rights: 150,000 of the 600,000 stock rights have expired

Share Warrants

• Certificates entitling holders to acquire shares at a specific price within a stated period, similar to convertible securities that become ordinary shares if exercised.
• Companies issue share warrants to make the security more attractive, to show evidence of the preemptive right of the shareholders and compensate company executives and employees.

Share Warrants Attached to Other Securities

• Corporations issue bonds or preference shares with detachable or non-detachable share warrants, proceeds should be allocated based on fair values, and computed share warrant value is credited to ordinary share warrants outstanding or share premium – ordinary share warrants.

Share Warrants Attached to Other Securities (example)

• DM Corporation issues 5,000 preference shares with P80 par value for P100 each share has one detachable share warrant with the right to purchase one ordinary share with P40 par value at P55 per share -Preference Share without warrants - P95 -Warrants- P5 -Ordinary share capital - P55 issuance

Issuance of Preference Share with Share Warrants (example)

• Debit Cash 500,000
• Credit Preference Share Capital 400,000
• Credit Preference Share Premium 75,000
• Credit Share Premium- Ordinary Share Warrants Outstanding 25,000 Allocated to preference share capital P475,000 Allocated to share warrants P25,000

Exercise of Warrants

• Debit Share Premium Debit Cash 275,000
• Ordinary Share Warrants Outstanding 25,000
• Credit Ordinary Share Capital 200,000
• Credit Ordinary Share Premium 100,000

Computation

Proceeds=5,000 shares 55= P 275,000 Ordinary Share Warrants Outstanding =5,000 share warrants x P5 =P25,000

Accounting for Treasury Shares

• Some public corporations eliminate their public ownership by purchasing all their outstanding shares"go private” or leverage buyout (LBO).
• Companies either retire reacquired shares or keep them as treasury shares, which reduce both the assets and equity and do not give the company the right to vote, preemption, dividends, or assets in case of liquidation.

Recording Treasury Shares

• Treasury shares are recorded at cost, and when reissued, treasury shares are also credited at cost.
• Share premium account is adjusted for any difference between the reissuance price and the cost of treasury shares.
• Any remainder is charged to the retained earnings account.

Accounting for Treasury Shares (example)

• Robin Corporation reacquired 5,000 shares of P95 par value ordinary shares for P110, sold these shares for P115. Reacquisition Date
• Debit Treasury Shares 550,000
• Credit Cash 550,000
• Exercise of Rights
• Debit Cash 575,000
• Credit Treasury Shares 550,000
• Credit Treasury Share - Premium 25,000

Recapitalization

• Recapitalization is a change in an entity's capital structure, where old shares are canceled, and new shares are issued. Typical recapitalizations include:
  • Change from par to no-par.
  • Change from no-par to par.
  • Reduction of par value.
  • Reduction of stated value.
  • Split up and split down.

Recapitalization (example)

• ABC Corporation has the following capital structure Ordinary Share capital , P2,500,000 Share premium 250,000 Retained earnings 1,250,000 ABC Cancels all of its shares, 25,000 no-par shares with value of P50 issued
• Debit Ordinary share capital 2,500,000
• Credit Share premium 250,000
• Debit Ordinary share capital 1,250,000
• Credit Share premium - recapitalization 1,500,000

Share Splits

• A Forward share split the number of outstanding shares increases with inverse effect share value.

Reverse share split

• Direct opposite of forward share split

Forward Share Split (example)

• Marielle Corporation has 18,000 shares and value P50. The company splits.
• the company's capitalization would be
• Number of shares equals 90,000 shares
• per value the capital would be P10 Reverse Share Split reverse split
• The total share capital still averages to P 900,000 Tony Corporation has 18,000 shares and a P50 The company shares split for 1-for-5 capital
• total amount equals to 3,600 shares
• value is 250 the company equal P 900,00