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CH7 NOTE PAYABLE & DEBT RESTRUCTURE

PROMISSORY NOTE > unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand or at a fixed or determinable future time a sum certain of money to order or to bearer

Initial measurement

Not designated as FVTPL

FV trans. costs

Irrevocably designated as FVTPL

Trans. costs expensed immediately

*FV or N/P > PV of future cash payments to settle N/P >PV: discounted amt of future cash outflow in settling N/P using market rate of interest

Subsequent measurement

(1) Amortized cost method > amt @ w/c N/P is measured initially principal repayment +/- cumu. Amort. >diff. bet. face amt & PV = discount/premium

Note issued solely for cash

PV = cash proceeds

Interest bearing note issued for property

Prop/asset: recorded @ purchase price (PV of note & FV of prop./asset)

Noninterest bearing note issued for property (1) w/ cash price

Prop/Asset: cash price (PV of

Types of debt restructuring

 

N/P) *cash price face of note = imputed interest

(2) no cash price

Prop/Asset: PV of N/P

Noninterest bearing note payable lump sum

Prop/Asset: PV of N/P

(2)

remeasured at every year end @ FV w/ any changes in FV recognized in P&L >trans. costs expensed outright >no amortization of discount/premium >interest expense: recognized using nominal/stated rate

Fair value method > N/P measured initially @ FV &

DEBT RESTRUCTURING > situation where the creditor, for economic or legal reasons related to the debtor’s financial difficulties grants to the debtor concession that would not be granted in a normal business relationship >concession: between C & D or imposed by law/court >creditor: accounting loss debtor: accounting gain

   

Phil. GAAP

US GAAP

Asset swap >transfer by the debtor to the creditor of any asset in full payment of an obligation >treated as a derecognition of financial liability or extinguishment of obligation >e.g. Dacion en pago (mortgaged property is offered by debtor in full settlement of debt)

Gain/loss on extinguishment of debt

Assume 2 transactions: sale of asset &

 

=

extinguishment of liability Gain/loss on exchange = FV of asset CA of asset

CA of Liability = principal + unamortized cost + accrued interest payable + legal fees + bank service chargesd

CA of Asset

Gain on restructuring = CA of liability FV of asset *FV of asset can’t be greater than CA of liability

Equity swap >issuance of share capital by the debtor to the creditor in full or partial payment of an obligation

Equity instruments issued to extinguish liability:

-same-

(a)

FV of equity instruments issued

(b)

FV of liability extinguished

 

(c)

CA of liability extinguished > no gain/loss

Gain/loss on extinguishment of debt = CA of liability initial measurement of equity inst.

Modification of terms >may involve: interest, maturity value, or both

Substantial modification of terms >gain/loss on extinguishment is at least 10% of old liability

Gain on debt restructuring = CA of old liab. New/restructured liab. (absolute amount)

(a)

Interest concession > reduction of interest

rate, forgiveness of unpaid interest, moratorium on interest payment

Gain/loss on extinguishment of debt = CA of old liab. PV of new/restructured liab. (using old effective rate) *costs incurred from substantial modification recognized as part of gain/loss on extinguishment

(b)

Maturity value concession > extension of

maturity date, reduction of amt to be paid at maturity >substantial modification of terms extinguishment of the old fin. liab. & recognition of a new fin. liab.

No substantial modification of terms >gain or loss is not recognized

CH 15 SHAREHOLDERS’ EQUITY

CORPORATION > an artificial being created by operation of law, having the right of succession, and the powers, attributes, and properties expressly authorized by law or incident to its existence >Corporation Code + special laws >5 to 15 persons >Certificate of Incorporation: final determination of the corporation’s right to do business >Formal organization: adoption of by-laws & election of officers

Organization cost > costs incurred in forming or organizing a corporation (legal fees, incorporation fees, share issuance costs) >expensed immediately >share issuance costs: debited to share premium, excess charged to expense if balance insufficient

SHAREHOLDERS’ EQUITY > residual interest of owners in the net assets of a corporation measured by the excess of assets over liabilities

Paid in capital/Contributed capital

Legal capital > cannot be returned to the shareholders in any form during the lifetime of the corporation Determination:

Preference share capital (cumulative, participating, has liquidating value, convertible, callable) > preferenceto dividends/assets; fixed return

Par value share: aggregate par value of shares issued & subscribed : aggregate par value of shares issued & subscribed

on investment *Redeemable P/S > fin. liab

Ordinary share capital > gives

No- par value share : total consideration received from shareholders including excess over stated value -par value share: total consideration received from shareholders including excess over stated value

owner right to vote, share in income, share in assets upon liquidation

Subscribed share capital (P/S & O/S) subscription rec. (NC)

Share premium

SP - issuance

SP - conversion privilege

share warrants outstanding

SP - treasury stock transactions

donated capital

small stock dividend (declaration)

special assessments

recapitalization

quasi-reorganization

SP forfeited subscriptions

SP redemption

SP unexercised warrants

SP stock dividend

SP unexercised share options

Retained earnings/Accumulated profits

 

Unappropriated/free

Appropriated > voluntary, contractual (creditor), legal (treasury shares)

(-) Treasury stock (@ cost)

(-) Capital liquidated

Accumulated comprehensive income

Trust fund doctrine > the share capital of a corporation is considered as trust fund for the protection of creditors >illegal to return legal capital during lifetime of corporation >corp. can pay dividends to shareholders but it is illegal to pay dividends if entity has a deficit

Issuance of share capital *a share shall not be issued for a consideration less than the par or stated value thereof *shares w/o par value can’t be issued for less than P5

Share issued @ discount >shares are sold at a price below par or stated value >prohibited under the Corporation Code >issue is not void but agreement that share be paid for less than par/stated value is illegal and cannot be enforced >discount liability shareholder must pay for the discount >refers to original issue of share; TS may be reissued for less than par/stated value Cash Discount on share capital Share capital *”Discount on share capital” – deduction from total shareholdersequity

xx

xx

xx

Issuance of share capital for noncash consideration

>valuation shall be initially determined by the incorporators or the BOD subject to the approval of the SEC Valuation of noncash consideration:

(a)

FV of noncash consideration received

(b)

FV of shares issued

(c)

Par value of shares issued

Issuance of share capital for services Valuation of services rendered:

(a)

FV of services

(b)

FV of shares issued

(c)

Par value of shares issued

Share issuance costs > direct costs to sell share capital

Share premium

xx

Expense (is SP insufficient)

xx

Cash

xx

Watered share > share capital issued for inadequate or insufficient

consideration; asset & capital are overstated Secret reserve > asset is understated & liability is overstated >

understated capital: excessive provision for depn, dep, etc.;

excessive writedown; CapEx recorded as outright expenses;

fictitious liabs.

Delinquent subscription > shareholder doesn’t pay of the date

fixed; delinquent share will be sold through public auction and will

be sold to highest bidder

Highest bidder > person willing to pay the offer price of delinquent shares for the smallest number of shares Offer price: balance due, accrued interest, ad and sell expenses

*if there are no bidders, corporation may purchase shares = treasury

shares

Callable P/S > can be called in for redemption at a specified price at the option of the corporation; has no redemption date; issuer does not have present obligation to transfer a financial asset to shareholders *if call price > original issue price, excess is debited to RE *excess of call price over par value of PS: (a) SP from issuance; (b) RE *if call price < original issue price: difference credited to SP O/S

Redeemable P/S > has a mandatory redemption date or one w/c must be redeemed at the option of the holder

>classified as current/noncurrent liability depending on redemption

(2) Par/Stated value method/Retirement method

date

TS (@ par)

xx

>dividends paid: interest expense

Cash

xx

>gain/loss from redemption or refinancing: recognized in P&L

SP-TS *not preferred due to legal restriction

xx

Convertible P/S > gives the holder the right to exchange the holdings for other securities of the issuing corporation

Retirement of TS

Results in gain

O/S (@ par) TS SP-TS

xx

Stock rights >evidenced by share warrants >no entry because they are issued w/o consideration

 

xx

xx

Results in loss

Loss debited in following order

 

(a)

SP-original issuance

P/S issued w/ share warrants>sale of 2 securities: P/S & share warrants

 

(b)

SP-TS

(c)

RE

Both securities have known MV

Consideration received allocated on the basis of MV

Disclosure of TS: (a) no. of TS; (b) restriction on RE for distribution of dividends *TS deducted from total SHE

Only 1 has know MV

 

Allocate to security w/ known

 

MV

an amt equal to its MV &

balance allocated to other security

Donated shares > shares received by entity from shareholders by donation >essentially TS >secured w/o costs: A, L, & E unaffected but no. of shares outstanding decreases Receipt: memo entry Sale: Cash (@ cost) Donated capital Retirement: O/S (@ par) Donated capital

xx

xx

xx

xx

Both securities have no MV

Basis for allocation would be MV of O/S

Issue:

Cash

xx

 

P/S

xx

SP-P/S

xx

SWO

xx

Exercise: Cash

 

xx

 

SWO

xx

 

O/S

xx

SP-O/S

xx

TS subterfuge > excessive shares issued for a property w/ understanding that shareholders shall subsequently donate a portion of their shares >resale or reissue of treasury donated share not entirely credited to donated capital; sale price to be used to correct overvalued asset and share capital

Not exercised: SWO

 

xx

SP-O/S

xx

Bonds payable issued w/ share warrants >compound financial instruments >classify liability & equity component separately

Treasury shares: (1) entity’s own share; (2) shares issued originally; (3) reacquired but not cancelled *if canceled, retired shares Legal limitation: corporation can acquire TS only to the extent of RE balance >RE must be appropriated to the extent of the cost of TS

Donation of capital >recorded @ FV when received or receivable >subsidies; credited to income

Assessments on shareholders Cash/Share assessment receivable Disc. on sh. capital

xx

xx

Accounting for TS (1) Cost method

Recapitalization > when there is a change in the capital structure of the entity >old shares canceled, new share issued

Acquired for cash: cost = cash payment

 

Acquired for noncash asset: cost = CA of asset surrendered

Change from par to no par

 

TS

xx

(a)

orig. issue price > stated value

O/S

xx

Cash/noncash asset

xx

SP-O/S

xx

Reissuance:

 

O/S-new

 

xx

@ cost

Cash

xx

SP-recap.

xx

TS

 

xx

 

@ more than cost

Cash

xx

(b)

stated value > orig. issue price

O/S

xx

TS

 

xx

SP-O/S

xx

SP-TS

xx

 

RE

xx

*no

gain/loss recognized on

SP-recap.

 

xx

purch., sale, issue or cancelation of equity inst.

Change from no par to par

(a)

O/S

xx

O/S-new

xx

@ below cost

Cash

xx

SP-recap

xx

SP-TS

xx

 

RE

xx

(b)

O/S

xx

TS

 

xx

RE

xx

 

O/S-new

xx

Reduction of par value

O/S (# of sh. x (old-new par) xx

SP-recap

xx

Reduction of stated value

O/S (# of sh. x (old-new par) xx

SP-recap

xx

Split up/share split proper >orig. shares called in for cancelation & replaced by a larger # accompanied by a reduction in par/stated value >to increase # of outstanding shares to reduce unit mkt price >there must be no change in amt. of sh. capital

Memo entry

Split down/reverse share split >orig. shares canceled & replaced by smaller # accompanied by inc. in par/stated value

 

CH16 RETAINED EARNINGS

>Accumulated profits >cumulative balance of periodic net income or loss, dividend distributions, prior pd. errors, changes in acctg policy and other capital (1) Unappropriated > free and can be declared as dividends to shareholders (2) Appropriated > restricted & not available for any dividend declaration *If RE has debit balance: deificit/accumulated losses

Dividends > distribution of earnings or capital to shareholders in property to shareholdings (1) Dividends out of earnings > from RE *if deficit or exceeds RE balance, illegal to declare Date of declaration > liability for dividends recognized Forms

Cash dividends

Declaration:

 

Certain amt of pesos/share

RE

xx

Certain % of par/stated value

Div.

pay.

 

xx

Payment:

 

Div.

pay.

xx

Cash

 

xx

Property dividends/dividends in kind >dist. of earnings in the form of noncash assets

Measurement: FV of asset to be distributed; adjusted every year-end RE (FV)

xx

Div.

pay.

 

xx

See *

RE (Δ FV)

xx

Div.

pay.

 

xx

Settlement: Gain/loss = CA div.

pay.

CA asset

 

Div.

pay.

xx

(Loss)

xx

Noncash asset

xx

(Gain)

 

xx

Measurement of noncash asset = lower of CA & FV less cost to dist.

*if FV less cost to dist. is lower, there is an imp. loss

Imp. loss

xx

Noncash asset

xx

Liability dividends >deferred cash dividends >RE sufficient, cash insufficient

 

(1) Scrip dividends > ST & may or may not be interest- bearing

RE

xx

Scrip div. pay. Scrip div. pay. Int. exp. Cash

 

xx

xx

 

xx

 

xx

(2) Bond dividends > LT & normally interest-bearing

RE Bond div. pay. Bond div. pay. Bond pay. Int. exp. Cash Bond pay. Cash

xx

xx

xx

 

xx

xx

 

xx

xx

 

xx

Stock dividends

Small stock dividend (< 20%):

>bonus issue

FV or par value, whichever is higher, on declaration date

xx

>dist. of earnings in the form of entity’s own shares >RE decreases, share capital increases

RE (FV/par/stated) Stock div pay SP

 

xx

xx

Ordinary: O/S to O/S or P/S to P/S

Stock div pay Sh. capital

xx

xx

Special: O/S to P/S or P/S to O/S

Large stock dividend (> 20%):

par/stated value capitalized

See **

RE (par) Stock div pay Stock div pay Sh. capital

 

xx

 

xx

 

xx

 

xx

*Choice of cash/noncash > entity shall estimate the div. pay. by considering both the FV & associated probabilities

Cash (% x FV)

xx

Noncash (% x FV)

xx

Div. pay.

xx

RE

xx

Div. pay.

xx

Cash alt.: Div. pay.

xx

Cash

xx

RE

xx

Noncash alt.: Div. pay.

xx

(Loss)

xx

Noncash

xx

(Gain)

xx

** Fractional stock dividends RE

xx

Stock div pay

 

xx

Stock div pay

xx

Sh. capital

 

xx

Fractional warrants O/S

xx

Fractional warrants O/S

xx

Sh. capital

 

xx

SP (expired warrants)

xx

TS as stock dividends > declaration: property dividends; substance over form

RE (cost)

xx

Stock div pay

xx

Stock div pay

xx

TS

xx

Special cases: (1) cash in lieu of stock dividend; (2) proposed inc. in authorized share capital; (3) closely held entities: RE capitalized to extent of par/stated value of shares

(2) Dividends out of capital/Liquidating dividend >paid to shareholders when entity is dissolved and liquidated >wasting asset corp.: RE + acc. depletion RE Capital liquidated Div. pay. *capital liquidated deducted from SHE

xx

xx

xx

Appropriation of RE > limit dividend declaration (1) legal: TS; (2) contractual: sinking fund/bond redemption; (3) voluntary: mgt discretion RE RE-app No longer necessary: RE

xx

xx

xx

RE-app

xx

*appropriation acct doesn’t imply a cash fund is established

Statement of RE > shows changes affecting directly the RE of an entity & related I/S to B/S >part of SOCE

(a)

Net income/loss = (+/-)

(b)

Prior pd errors = (+/-) beg. bal.

(c)

Dividends = (-)

(d)

Effect of changes in acctg policy = (+/-) beg. bal.

(e)

Appropriation = (-)

Reserves > distributable or nondistributable equity Nondist: sh. prem., appropriation reserve, RS, OCI

Statement of changes in equity >shows movements in the elements or components of SHE (1) total comprehensive income; (2) effects of changes in acctg policies & error correction; (3) beginning and ending balances

Quasi-reorganization > permissive but not mandatory procedure under w/c a financially troubled entity restates its accts & established a “fresh start” in the acctg sense >restating A, L, & share capital balances in conformity w/ FV for the purpose of eliminating deficit May be done through: (1) recapitalization: resulting deficit charged to share premium; (2) revaluation of PPE: resulting deficit charged to RS Justifications: (1) large deficit; (2) approved by shareholders & creditors; (3) cost basis acctg becomes unrealistic; (3) fresh start desired or advantageous >must be approved by SEC

CH 17 + 18 SHARE-BASED COMPENSATION

>compensation arrangement est. by entity whereby employees shall receive shares of capital in exchange for services or entity incurs liabilities to employees in amts based on price of its shares >performance-based: motivation (1) equity settled: share options (2) cash settled: liability based on equity instrument; share appreciation rights

SHARE OPTIONS > granted to officers and key employees to enable them to acquire shares of the entity during a specified period upon fulfillment of certain conditions

Measurement:

Method

Compensation

FV method

FV of share options on date of grant

Intrinsic value method >can only be used if FV of share options can’t be reliably estimated

Intrinsic value of share options Intrinsic value = MV share option price

Recognition:

(1) Vests immediately > compensation (as expense) recognized in full (2) Does not vest immediately > compensation recognized as expense over service/vesting pd Compensation: Salaries-SO SOO (sh. prem.)

xx

xx

Exercise:

Cash

xx

SOO

xx

O/S

 

xx

SP

xx

Not exercised: SOO

xx

SP

 

xx

Acceleration of vesting: (1) compensation expense recognized immediately; (2) any payment made to employees accounted for as repurchase of equity interest *if share options not exercised: (1) any cash paid up to FV of options or cumulative compensation already recognized deducted from equity or charged to SOO; (2) any amt in excess of FV already recognized treated as expense

SOO

xx

Salaries

xx

Cash

xx

Share-based payment transaction in w/c employees of subsidiary are granted rights to equity interest of parent > equity settled >FV of share options @ grant date >increase in equity recognized as contribution of parent in F/S of subsidiary

SHARE APPRECIATION RIGHTS > cash payment = increase in the price of a given number of shares

Cash settled transaction > entity incurs a liability for services received and liability is based on entity’s equity instruments >measured @ FV of liability; remeasured accdg to changes in FV

Measurement: FV of liability; remeasured every year-end FV liability = excess of MV share over a predetermined price for a given # of shares over a definite vesting period >determined on exercise date not grant date

Recognition:

(1) Vests immediately > compensation recognized on grant date (2) Does not vest immediately > compensation recognized as expense over service/vesting pd

Reversal: Acc. salaries pay. Gain on reversal of SAR

xx

xx

Cash & Share alternative (1) Cash alternative: cash payment = MV of certain # of shares subject to certain conditions (2) Share alternative: equity shares given to employees *entity has choice of settlement > no accounting problem

*employee has right to choose settlement >compound financial instrument Liability: cash alt. Equity: share = FV whole inst. FV liab Salaries

xx

xx

Noncumulative > right to receive dividends forfeited when not declared; current year dividends Cumulative > undeclared dividends accumulate each year until paid; all dividends in arrears Nonparticipating > entitled to receive dividends equal to fixed rate

SOO

xx

Participating > entitled to receive dividends in excess of fixed rate;

Salaries

O/S must first receive an amt equal to basic preferred rate

ASP

xx

Cash alt.: ASP

xx

SOO

xx

Cash

xx

SP

xx

Equity alt.: ASP

xx

SOO

xx

Sh. capital

xx

SP

xx

*Supplier

Equity component = FV asset FV liab >if FV of asset can’t be determined, asset recorded @ FV of shares to be issued: Equity = FV shares FV liab

Purchase: Asset

xx

A/P

xx

SOO

xx

Cash alt.: A/P

xx

SOO

xx

Int. exp.

xx

Cash

xx

SP

xx

Equity alt.: A/P

xx

SOO

xx

Sh. capital

xx

SP

xx

CH 19 BOOK VALUE PER SHARE

>amt that would be paid on each share assuming the entity is liquidated & the
>amt that would be paid on each share assuming the entity is
liquidated & the amt available to shareholders is exactly he amt
reported as SHE

(1)

(2) balance of SHE in excess of par/stated value apportioned taking into account liquidation value & dividend rights of preferred shareholders Available for dividends: (a) RE; (b) sh. premium; (c) RS

amt equal to par/stated value allocated to P/S & O/S

Liquidating value of P/S > amt w/c preferred shareholders normally receive upon liquidation of corporation >may be greater than par >if absent: par value deficit: prorate w/ ordinary shareholders *call price (paid to preferred SH upon redemption during the lifetime of corporation) is ignored

Preference as to assets Cumulative: LV + dividends in arrears Noncumulative: LV + current year’s dividends

Preference as to dividends >if dividends are declared, preferred SH have right to receive dividends first

CH 20 + 21 EARNINGS PER SHARE

>amt attributable to every O/S during the pd >pertains only to O/S >required for entities whose O/S or potential O/S are publicly traded

Presentation:

continuing ops: face of I/S

discontinued ops: face of I/S or notes

entity presents both consolidated & separate F/S: disclosures based on consolidated info

entity chooses to present EPS on separate I/S: shall not present on consolidated F/S

Uses: (a) determinant of mkt price; (b) measure of performance of mgt; (c) basis of dividend policy

BASIC EPS

performance of mgt; (c) basis of dividend policy BASIC EPS Net income = amt after deducting

Net income = amt after deducting dividends *if P/S cumulative, dividend for current year only is deducted whether declared or not *if P/S noncumulative, current year dividend deducted if declared *stock dividends or share splits recognized retroactively

Basic loss per share *if P/S cumulative, preference dividend added to net loss to get total loss *if P/S noncumulative, preference dividend is ignored because presumably there is no declaration since there is a net loss

DILUTED EPS Simple: O/S + P/S nonconvertible Complex: O/S + potential diluters (options & warrants, conv. P/S, conv. Bonds) *BEPS > what actually happened DEPS > worst case scenario

Potential ordinary share > fin. instrument or other contract w/c may entitle its holder to O/S

Dilution > inclusion of potential O/S decreases BEPS or increases BLPS Antidilution > inclusion of O/S increases BEPS or decreases BLPS

*computation of DEPS assumes ordinary shares are issued as a result of conversion of convertible securities & exercise of share options

Potential diluter

DEPS

Convertible bond payable *assume conversion done @ start of year or issue date, whichever is later

>interest expense (net of tax) added back to net income >no. of O/S increased by no. of O/S w/c would have been issued upon conversion

Int. exp. for bonds w/

 

disc./prem. = CA x eff. rate x (1- tax rate)

Convertible preference share *assume conversion done @ start of year or issue date, whichever is later

>net income no longer reduced by preference dividend >no. of O/S increased by no. of O/S w/c would have been issued upon conversion

Options & warrants >have no cash yield but derive value from right to obtain O/S at a specified price w/c is usually lower than prevailing market price *dilutive is exercise/option price < prevailing market price

Proceeds fr. assumed exercise of options = sh. options x (exercise price + FV option)

Assumed TS = Proceeds/ Ave. mkt price

Actual exercise: Assumed TS = Proceeds/ Mkt price on exercise date

 

Incremental O/S = Sh. opt. assumed TS

Multiple potential O/S >considered from most dilutive to least dilutive