ACCT 203 - 2 Shareholders Equity 2.pdf
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Shareholders’ Equity ACCT203 1 Shareholders’ Equity Shareholders’ Equity – residual interest in the assets of a corporation after deducting all its liabilities. 2 Transactions affecting...
Shareholders’ Equity ACCT203 1 Shareholders’ Equity Shareholders’ Equity – residual interest in the assets of a corporation after deducting all its liabilities. 2 Transactions affecting corporation’s equity a. Authorization, subscription, issuance, acquisition, reissuance, and retirement of shares b. Origination of other equity instruments, c. Distribution to owners (dividends) d. Transactions giving rise to “other components of equity” e. Recapitalization and Quasi-reorganization 3 Accounting for Share Capital 1. Memorandum Method - authorized capitalization. Subsequent issuances are credited to the share capital account. 2. Journal Entry Method – authorized capitalization is recorded by crediting “authorized share capital” and debiting “unissued share capital”. Subsequent issuances of shares are credited to “unissued share capital”. 4 Subscription – contract between purchaser of shares and issuer in which the former promises to buy shares from the latter. 5 6 Classes of Shares a. Ordinary Share Capital (Common Stock) -Residual corporate interest that bears ultimate risk of loss and receives benefit of success Four basic rights of ordinary shareholders: 1. Right to attend and vote in shareholders’ meetings 2. Right to purchase additional shares 3. Right to share in the corporates profits 4. Right to share in the net assets upon liquidation b. Preference Share Capital (Preferred Stock) -Give holders certain preferences over other shareholders. -Include priority claims over (a) Dividends and/or (b) net assets in the event of liquidation 7 Share Premium (additional paid-in-capital) a. Excess of subscription price over par value/ stated value b. Excess of reissuance price over cost of treasury shares issued c. Distribution of “small” stock dividends 8 Par value and No-par value shares Par value -share with a peso value fixed in the articles of incorporation. -Cannot be issued below its par value No-par value -Share without a peso value fixed in the articles of incorporation -It has stated value (indicated in the articles of incorporation but not on the share cert issued). -Should not be issued for a consideration less than five (P5) pesos per share. 9 Legal Capital -Cannot be distributed to the owners during the lifetime of the corporation unless it is dissolved and all liabilities are settled first. -Computation: a. Par value shares Aggregate par value of shares issued and subscribed. b. No-par value shares Total consideration (inclusive of any amount excess of stated value) received or receivable from shares issued or subscribed. 10 Share Issuance Cost Shares issued at discount Share Issuance Cost -Deducted from any resulting share premium from the issuance. If share premium is insufficient, the excess is charged to retained earnings. Shares issued at discount -Shares issued below par or stated value -Shareholder concerned is held liable to the corporation for the Discount -Discount on share capital is a receivable from the shareholder concerned but presented in the fs as contra-equity account -Prohibited only on original issuance. Thus, treasury shares may be reissued below par or stated value. 11 Watered Stocks Shares issued for non-cash consideration with fair value that is below par or stated value. Land xx Discount on share capital xx Share Capital xx 12 Secret Reserve Treasury Shares Secret Reserve -Arises when shares are issued for non-cash consideration with fair value that is above par or stated value. Treasury Shares -Entity’s own shares that were previously issued but are subsequently reacquired but not retired. 13 Accounting for Treasury Shares -Cost method -Presented as deduction in the shareholders’ equity 14 Retirement of Shares Retired if they have been reacquired and cancelled in accordance with SEC regulations Total par value and the related share premium of the retired shares are removed from the books of accounts. 15 Delinquent Subscription -Subscription remains unpaid at a due date set by the entity’s board of directors Offer Price: a. Unpaid balance on the subscription b. Interest accrued on the subscription c. Expenses in public auction 16 No Bidders at the Public Auction – Corporation bids 17 No Bidders and the corporation has insufficient Retained Earnings -Subscription is cancelled in its entirety 18 Sale of different classes of share capital 1. Proportional Method – fair value of all classes of share capital issued are determinable 2. Incremental Method – only one class of shares has a determinable fair value 19 20 Origination of other equity instruments 1. Stock Rights 2. Conversion options included in convertible bonds and convertible preference shares 3. Detachable warrants issued with bonds and preference shares 4. Stock Options 21 Stock Rights -Recorded through memo entry only because stock rights are issued to existing shareholders without consideration. -Entry is made only when the rights are exercised or recalled. If the stock rights are subsequently recalled, any consideration paid is debited to share premium. No entry is made if the stock rights expire but not recalled 22 Convertible Bonds Components are segregated and accounted separately (1) Financial Liability for the bonds (2) Equity instrument for the conversion feature Preference Shares convertible to ordinary shares -no separate accounting is required upon issuance 23 Bonds with detachable warrants Preference Shares with detachable warrants Bonds with detachable warrants- segregated and accounted for separately (1) Financial liability for bonds (2) Equity instrument for the detachable warrants Preference Shares with detachable warrants -Issue price should be allocated to the preference shares and the detachable warrants based on their relative fair values on issuance date. -When both preference shares and the warrants do not have available fair values, the allocation of the issue price is based on the intrinsic value of the warrants computed as the difference between the fair value of the ordinary shares and the subscription price 24 Donated Capital (1) Donations from shareholders – credited to share premium (2) Donations from the government –government grants. (3) Donations from other sources – income when (a) conditions attached to the donation are fulfilled or are reasonably expected to be fulfilled, (b) donation becomes receivable, and (c) criteria for asset recognition are met. Cash – amount of cash Noncash Assets – fair value Entity’s own shares – initially recorded through memo entry. Donated capital is recognized only when the donated shares are subsequently reissued 25 Assessment on shareholders -for financially troubled corporations -The assessment or additional capital provided is credited to share premium. Cash or Assessment Rec. xx Share Premium – Assessment x 26 Retained Earnings (a)Unrestricted (b)Appropriated (Restricted) Appropriation may be a result of: RAB1 1. Legal Requirement 2. Contractual Requirement 3. Voluntary 27 Slide 27 RAB1 RACHELLE ANN BAOD, 31/08/2022 Dividends (a) Date of declaration (b) Date of record – No entry is made (c) Date of distribution Recognition of liability for dividends a. Date when the dividend declared by management is approved by a relevant authority, if further approval is required, or b. Date when management declared dividends, further approval is not required Disclosure of dividends - Disclose either in the statement of changes in equity or in the notes. Events after the reporting period - Not recognized as a 28 29 30 31 Preference over dividends 1. Noncumulative – dividend entitlement for a year is forfeited when dividends are not declared in that year. 2. Cumulative – dividend entitlement accumulates each year until paid. Accumulated unpaid dividends are disclosed as dividends in arrears but not accrued as liability unless the dividends are declared. 3. Nonparticipating – entitled only to fixed amount of dividends. 4. Participating – entitled to an amount in excess of the fixed amount of dividends a. Fully Participating – pro rata basis b. Partially Participating – certain amount or percentage 32 Dividends recognized as expense Dividends declared on financial liabilities such as redeemable preference shares, are charged to profit or loss as interest expense 33 Liquidating Dividends Dividends declared out of capital. The wasting asset doctrine permits wasting asset corporations to declare dividends out of capital during their existence 34 Recapitalization Change in the capital structure of an entity brought about by the cancellation of old shares and issuance of new shares as replacement. Accomplished through any of the ff: a. Change from par to no-par, or vice versa b. Reduction of par value or stated value c. Share splits or reverse splits Note: Recapitalization does not affect assets, liabilities, or total SHE 35 Share Split (recorded only through memo entry) 1. Split up or share split 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 or reverse share split Old shares are cancelled and replaced by a smaller number of new shares but with an increased par value (stated value) per share 36 Quasi-reorganization Accounting procedure whereby a financially troubled organization, but with favorable future prospects, is permitted, but not required, to revalue its assets and liabilities, and realign its equity, subject to the provisions of relevant regulations, in order to establish a “fresh start” in accounting sense. (1) Revaluation of PPE; and/or (2) Recapitalization 37 38 39 40 41 42 43 44 45 Donated Treasury Shares 46 Conversion – Preference to Ordinary 47 Share Split 48 49 Share rights 50 51 Share warrants attached to other securities 52 53 Share options 54 55 56 57 58 59 60 61 62 63 s 64 65 66 Market Condition 67 Share Appreciation Rights 68 69 70 71 72 73 74 75 76 77 Share-based Transactions with Cash Alternatives 78 79 80 81 82 Cash Dividend 83 Property Dividend 84 85 Share Dividend (Bonus Issue) 86 87 Fractional share warrants 88 Scrip Dividend 89 Liquidating Dividends 90 Quasi-reorganization 91 92 93 94 95 96 97 BV per share 98 More than 1 class of share capital 99 100 101
