CHAPTER 18: SHAREHOLDERS EQUITY

FORMS OF BUSINESS
EQUITY NET INVESTMENT & NET INCOME/LOSS
ORGANIZATION
Single proprietorship Capital or Owners equity Recorded in the capital accounts

Partnership Partners capital or Partners equity Recorded in the capital accounts

Distinction is made between invested capital &
Corporation Shareholders equity or Stockholders equity
earnings or losses accumulated in the business

CORPORATION an artificial being created by operation of law, having the right of succession, and the powers, attributes, &
properties expressly authorized by law or incident to its existence

Corporation is separate & apart from the individual members & shareholders who, as natural persons, are merged in one
corporate body
Members corporation
Corporation requires the authority & grant from the state (operation of law)
The general law which governs the creation of private corporations is the Corporation Code
Private corporations owned/controlled by the government or any subdivision or instrumentality thereof are created by
special laws

LEGAL REQUIREMENT (CORPORATION CODE)

5 to 15 persons, majority of whom are residents of the Philippines (incorporating directors)
Articles of Incorporation filed with the SEC, duly executed & acknowledged before a notary public

CERTIFICATE OF INCORPORATION (issued by the SEC)

- the issuance of which commences the corporation to have a judicial personality & legal existence
- final determination of the corporations right to do business
- calls the corporation to being but it is not yet ready to do business until it is organized

FORMAL ORGANIZATION
- requires the adoption of by-laws & the election of officers by the board of directors pursuant to the by-laws
- must be done within 2 years from the date of incorporation, otherwise, its corporate powers shall cease

BY-LAWS
- rules of action adopted by the corporation for its internal govt & for the govt of its officers, shareholders, or members
- adopted & filed with the SEC within 1 month from the date of incorporation, otherwise, the corporation shall be
rendered liable for the revocation of its registration

PREINCORPORATION SUBSCRIPTION REQUIREMENT

SEC shall not register any stock corporation unless 25% of its authorized no. of shares has been subscribed
At least 25% of the subscription is paid

COMPONENTS OF CORPORATION
Those who compose the corporation whether shareholders or
CORPORATORS
members or both

Those corporators mentioned in the articles of incorporation

INCORPORATORS as originally forming & composing the corporation
Only natural persons

Owners of shares in a stock corporation

SHAREHOLDERS OR STOCKHOLDERS
May be natural or artificial persons
MEMBERS Corporators of a nonstock corporation

BOOKS & RECORDS OF A CORPORATION (p. 736)

ORGANIZATION COST
- Represents costs incurred in forming or organizing a corporation
Legal fees in connection with the incorporation (expensed immediately)
Ex: Drafting of articles of incorporation & by-laws & corporation registration
Incorporation fees (expensed immediately)
Share issuance costs
Ex: Printing of stock certificates, cost of stock & transfer book, seal of corporation, underwriting & promotional fees,
accounting & legal fees related to share issuance

SHAREHOLDERS EQUITY OR STOCKHOLDERS EQUITY

- is the residual interest of owners in the net assets of a corporation measured by the excess of assets over liabilities

COMMON SOURCES OF ADDITIONAL PAID-IN CAPITAL OR SHARE PREMIUM

a. Excess over par value or stated value
b. Resale of treasury shares at more than cost
c. Donated capital
d. Issuance of share warrants
e. Distribution of stock dividends
f. Quasi-reorganization & recapitalization

PHILIPPINE TERM IAS TERM MEANING

Additional paid in
Share premium Portion of the paid in capital representing excess over the par or stated value
capital
Portion of the paid in capital representing the total par or stated value of the
Capital stock Share capital
shares issued
Common stock Ordinary share capital Shareholders have the same rights & privileges
Deposits to a proposed increase in share capital; may be reported as part of
Deposits on subscriptions
shareholders equity as a separate item in the equity section
Preferred stock Preference share capital Preferences are granted to shareholders
Retained earnings Accumulated profits Represent the cumulative balance of retained earnings, dividend distributions,
(deficit) (losses) prior period errors, & other capital adjustments
Retained earnings
Appropriation reserve
appropriated
Revaluation surplus Revaluation reserve Excess of revalued amount over the carrying amount of the revalued asset
Subscribed capital Portion of the authorized share capital that has been subscribed but not yet
Subscribed share capital
stock fully paid & therefore are still unissued
The corporations own shares that have been issued & then reacquired but not
Treasury stock Treasury share
canceled

CAPITAL STOCK
CAPITAL STOCK OR SHARE CAPITAL
- is the amount fixed in the articles to be subscribed & paid in or secured to be paid in by the shareholders of the
corporation, either in money/property/services, at the organization of the corporation, or afterwards & upon which the
corporation is to conduct its operations
- divided into shares

AUTHORIZED SHARE CAPITAL

- the amount fixed in the articles of incorporation
SHARE
- represents the interest or right of a shareholder in the corporation
- evidenced by a share certificate
RIGHTS OF A SHAREHOLDER
1. To share in the earnings of the corporation
2. To vote in the election of directors & in the determination of certain corporate policies
3. To subscribe for additional share issues (right of pre-emption or stock right)
4. To share in the net assets of the corporation upon liquidation

SHARE CERTIFICATE
- is the instrument or document that evidences the ownership of a share
- issued only when subscription is fully paid
1) PAR VALUE SHARE
- one with specific value fixed in the articles of incorporation & appearing on the share certificate
- purpose of the par value is to fix the minimum issue price of the share
2) NO PAR SHARE
- one without any value appearing on the face of the share certificate
- has always an issued value or stated value based on the consideration for which it is used
- cannot be issued for less than P5 (minimum consideration or issue price)

ORDINARY VS PREFERENCE SHARE CAPITAL

ORDINARY SHARE CAPITAL
Shareholders have the same rights & privileges
Gives the owner the right to vote, to share in the income, & in
the event of liquidation, to share in all assets after satisfying
creditors & preference shareholders claims
Shareholders have no fixed or specific return on investment
PREFERENCE SHARE CAPITAL
Shareholders have preferences granted
Shareholders have preferences pertaining to claims on
dividends and net assets in the event of liquidation
Shareholders have only limited or fixed return on investment

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 (trust fund doctrine)
The amount of paid in capital is determined as follows:
a. Par value share aggregate/total par value of the shares issued & subscribed
b. No-par value total consideration received from shareholders (including the excess over the stated value)
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 pay dividends if the entity has a deficit
It is illegal to return such legal capital to shareholders during the lifetime of the corporation
The corporation can pay dividends to shareholders but limited only to the retained earnings balance

ACCOUNTING FOR SHARE CAPITAL

MEMORANDUM ENTRY JOURNAL ENTRY METHOD
Memo entry:
Authorization to issue Unissued share capital xxx
The entity was authorized to issue share capital of
share capital Authorized share capital xxx
Pxxx, divided into xxx shares with par calue of Pxxx.
Received subscription Subscription Receivable xxx
(Same)
Subscribed Share Capital xxx
Collection of 25% of Cash xxx
(Same)
subscription Subscription Receivable xxx
Cash xxx
Subscription Receivable xxx
Full payment of
Computation: (Same)
subscription
Subscription price xxx
(no. of sh. subs. X par)
 Less: Partial payment (xxx)
Balance xxx
Issuance of share
Subscribed share capital xxx Subscribed share capital xxx
certificates for shares
Share capital xxx Unissued share capital xxx
fully paid
Cash xxx Cash xxx
Share capital xxx Unissued share capital xxx
Received cash OR OR
subscription Cash xxx Cash xxx
Share capital xxx Unissued share capital xxx
Share prem. (excess)xxx Share prem. (excess) xxx
Example:
Example:
Authorized share capital, Pxxx par, xxx shares
Statement xxx
Share capital, Pxxx par, xxx shares l
presentation (SFP Unissued sh. cap., xxx shares (xxx)
authorized, xxx shares issued xxx
Shareholders equity Issued share capital xxx
Subscribed sh. cap., xxx shares xxx
section) Subscribed sh. cap., xxx shares
Subscription receivable (xxx)
Subscription receivable (xxx)
Shareholders equity xxx
Shareholders equity xxx

ISSUANCE OF SHARE CAPITAL

- A share capital shall not be issued for a consideration less than the par or stated value thereof. (Corporation Code)
- When shares are sold, the proceeds shall be credited to the share capital account to the extent of the par value or, if no
par value, the stated value, with any excess credited to share premium
SHARE ISSUED AT A DISCOUNT (prohibited by the Corporation code)
When shares are sold at a price below par or stated value, they are said to be issued at a discount.
The discount is not considered a loss to the issuing corporation but the shareholder is held liable therefor (discount
liability of the shareholder)
ENTRY:
Cash xxx
Discount on share capital xxx
Share capital xxx
- Discount on share capital deduction from the total shareholders equity
ISSUANCE OF SHARE CAPITAL FOR NONCASH CONSIDERATION
Where the consideration for issuance of share capital is other than actual cash or consists of property (such as patent or
copyright), the valuation thereof shall be initially determined by the incorporators or the board of directors subject to
the approval of the SEC (Corporation Code)
The share capital is recorded at an amount equal to the following: (in order of priority)
a) Fair value of the noncash consideration received
Property (ex. Land) xxx
Ordinary share capital xxx
Share premium xxx
b) Fair value of the shares issued
Property xxx
Share capital xxx
Share premium xxx
c) Par value of the shares issued
Property xxx
Share capital xxx
ISSUANCE OF SHARE CAPITAL FOR SERVICES
Shares may be issued for services as long as the services are already rendered
The share capital is recorded at the fair value of the services or fair value of the shares issued (whichever is reliably
determinable)
ENTRY:
 Service expense (ex. Legal expenses) xxx
Ordinary share capital xxx
Share premium xxx
SHARE ISSUANCE COSTS
- are direct costs to sell share capital
- Debited to share premium arising from the share issuance

- If share premium is insufficient to absorb such expenses, the Philippine Interpretations Committee (PIC) concluded
that the excess shall be debited to share issuance costs to be reported as a contra equity account as a deduction
from the following: (in order of priority)
a) Share premium from previous share issuance
b) Retained earnings
Examples of share issuance costs are:
a. Legal fees
b. CPA fees
c. Underwriting fees
d. Commissions
e. Cost of printing certificates
f. Documentary stamps
g. Filing fees with SEC
h. Cost of advertising & promotion
i. Newspaper publication fee

COSTS OF PUBLIC OFFERING OF SHARES/COSTS OF LISTING SHARES

- Not considered as costs of an equity transaction since no equity instrument has been issued
- Recognized immediately as expense when they are incurred
The Philippine Interpretations Committee (PIC) concluded that costs that relate to stock market listing, or otherwise
are not incremental costs directly attributable to the issuance of new shares, shall be recorded as expense in the income
statement
Cost of listing shares include the following:
a) Road show presentation
b) Public relations consultants fees
c) Listing fee

JOINT COSTS
- are transaction costs that relate jointly to the concurrent listing & issuance of new shares, and listing of old shares
- shall be allocated between the newly issued & listed shares, and the newly listed old existing shares
The PIC concluded that the joint costs shall be allocated prorate on the basis of outstanding newly issued & listed
shares and outstanding newly listed old existing shares
Examples of joint costs are:
a) Audit & other professional advice relating to prospectus
b) Opinion counsel
c) Tax opinion
d) Fairness opinion & valuation report
e) Prospectus design & printing

ENTRIES:
Share issuance costs
Share premium xxx OR Share issuance costs xxx
Cash xxx Cash xxx
Costs of public offering
 Expense (ex. Stock listing fee) xxx
Cash xxx
Joint costs
Share premium xxx
Stock listing fee xxx
Cash xxx
Allocation of joint costs
Example:
OUTSTANDING FRACTION ALLOCATED
Newly issued & listed shares 700,000 7/10 350,000
Newly listed & old existing shares 300,000 3/10 150,000
1,000,000 500,000

WATERED SHARE
- is share capital issued for inadequate or insufficient consideration
- Consideration received < par or stated value (but share capital is issued fully paid)
- The asset is overstated & capital is correspondingly overstated
The entry to correct the accounts is:
Discount on share capital xxx
Asset (ex. Land) xxx
SECRET RESERVE
- is the reverse of watered share
- arises when asset is understated or liability is overstated & capital is understated
Secret reserve usually arises from:
a) Excessive provision for depreciation, depletion, amortization, & doubtful accounts
b) Excessive writedown of receivables, inventories and investments
c) Capital expenditures are recorded as outright expense
d) Fictitious liabilities are recorded
DELINQUENT SUBSCRIPTION
- is subscription not paid by the shareholder on the date fixed and will be sold at public auction to the highest bidder
Call official declaration stating the date fixed for payment of the unpaid subscriptions
Highest bidder is the person willing to pay the offer price of delinquent shares for the smallest number of shares
The offer price normally includes the following:
a) Balance due on the subscription
b) Interest accrued on the subscription due
c) Expenses of advertising & other costs of sale
ENTRIES:
The corporation paid for expenses incurred in connection with the auction
Advances on delinquency sale xxx
Cash xxx

The highest bidder pays the subscription balance plus interest plus the delinquency expenses
Cash xxx
Subscription receivable xxx
Interest Income xxx
Advances delinquency sale xxx
The corporation issues shares to the delinquent shareholder & the highest bidder
Subscribed share capital xxx
Share capital xxx
If there are no bidders, the corporation may bid or purchase for itself the delinquent shares
Treasury shares arise when the corporation purchases the delinquent shares
Treasury shares xxx
 Subscription receivable
Interest income
Advances on delinquency
PREFERENCE SHARES
CALLABLE
Can be called for redemption at a
specified price at the option of the
corporation (issuer)
No definite redemption date
Dependent on the call of the issuer
Is an equity instrument
CALLABLE PREFERENCE SHARES
xxx
xxx
xxx
REDEEMABLE
Give the holder the right to require the
issuer to redeem the instrument for a
fixed determinable amount at the option
of the holder
Mandatory redemption date
Dependent on the holder
Is a financial liability
CONVERTIBLE
Gives the holder the right to exchange
the holdings for other securities of the
issuing corporation
No definite redemption date
Dependent on the holder
May be converted into ordinary shares
or into bonds