STOCKHOLDERS EQUITY

Composition: 1. Contributed Capital/Paid-in Capital a. Share Capital Aggregate Par or Stated Value of i. Shares Issued ii. Subscribed b. Additional Paid-in Capital (Share Premium) contributions from stockholders other than the aggregate par or stated value of shares. This category includes: i. APIC or Share Premium from excess over par or stated ii. Treasury stock transactions (reissuance and retirement) iii. Ordinary share warrants and Ordinary share option outstanding iv. Others 2. Unearned Capital/Other Comprehensive Income/Losses a. Revaluation Surplus/Revaluation increment in properties b. Translation Reserves c. Unrealized holding gain or loss from Available-for-sale securities d. Unrealized gain or loss on derivatives (Swaps) e. Actuarial gain or loss on Accumulated Benefit Obligation or Plan Asset under the direct recognition approach 3. Accumulated Profits or Retained Earnings a. Un-appropriated (free of dividends distribution) b. Appropriated i. Voluntary (e.g. Plant expansion) ii. Contractual (e.g. Sinking fund) iii. Legal (e.g. Treasury stock) Share Issue Issuance of Share Capital for Cash Preference or ordinary shares are created equal to par and the excess to paid-in capital. 1. Share Issuance Costs include registration fees, underwriter commissions, legal fees, accounting fees, share certificate cost, promotional costs and postage. Generally, for subsequent issuances charged to APIC relative to that particular issue. For initial issuance charged to Organizational Expense. 2. Issuance of Preference and Ordinary Shares for a Lump-sum Price This is accounted as follows: a. If preference are effectively equity securities, use pro-rata approach in reference to the aggregate market value of preference and ordinary shares. b. If preference are effective debt securities (e.g. redeemable), use residual definition approach assigning the fair value of preference and ordinary shares. 3. Issuance of Share Capital on a Subscription Basis the agreed purchase price is debited to APIC. Upon its full payment, the Share Capital Subscribed is closed to Share Capital. The Subscriptions Receivable is presented as a current asset if collection is expected within one year of the balance sheet date. If there is no definite due date set for subscription receivable, it is shown as a contra to stockholders equity, an offset against the Ordinary Shares Subscribed account. Default on Subscriptions a. Shares are offered in an auction. b. The entire amount collected is returned to the defaulting subscriber. c. The entire amount collected is returned to the defaulting subscriber less any cost incurred by the corporation in reissuing the shares. d. A corresponding number of shares is issued to the defaulting subscriber based upon the total amount collected; or, e. The entire amount collected is forfeited. 4. Issuance of Share Capital for Non-cash Consideration (PFRS 2) Non-cash consideration (Asset or Services) received shall be valued at their fair market value, unless the fair values of shares are more clearly determinable.

Treasury Shares 1. Acquisition of Treasury Shares, use cost model Treasury Stock at Cost Cash 2.

xx xx

Sale of Treasury Shares When treasury shares are reissued, the journal entry is: a. Sold at a price higher than the cost, resulting in a capital gain Cash xx Treasury shares (at cost) APIC from TS Transactions/Reacquired Shares (gain) b. At a price less than the cost resulting in a capital loss Cash xx (1) APIC from Treasury Shares xx Transactions (until balance is exhausted) (2) Retained Earnings xx Treasury shares at cost

xx xx

xx

*Note: When treasury shares are acquired at different costs, specific shares may be identified. Otherwise a FIFO or Average Cost Per Share is used to determine the cost of treasury shares sold. 3. Retirement of Treasury Shares Retire Treasury Shares at their carrying value, which is the original issue price: a. If OIP > COST (Original issue price/Carrying Value>Cost of Treasury Share: Capital Gain) Ordinary Share (at par) Paid in Capital in Excess of Par (pro-rata) Treasury Shares (at cost) APIC from Treasury Shares Transactions/Retirement b. If OIP < COST (Capital Loss) Ordinary Share (at par) Paid in Capital in Excess of Par (pro-rata) (1)Paid-in Capital from Treasury Shares Transactions (until exhausted) (2)APIC from Treasury Shares Transactions/Retirement Treasury Shares (at cost)

xx xx xx xx xx xx xx xx xx

4.

Restrictions of Retained Earnings for Treasury Shares has to appropriate Retained Earnings equal the balance of its Treasury Shares (Appropriation=cost of TS)

RIGHTS, WARRANTS, AND OPTIONS Similarity is that these securities entitle holders to acquire shares at an exercise rate ordinarily lower than the prevailing market rate. The difference however lies on how to account for the issuance, exercise and expiration of such, to wit: Distinction Rights Are issued to entitle the general stockholders in relation to their preemptive rights, to protect their proportional interest whenever corporations issue fresh new shares. Normally issued attached to a principal security (Bond or Preference Shares) as an inducement to buyers of the principal securities. Issuance No entry (memo entry only) 1 right for every 1 stock issued Exercise Normal entry for issuance of shares: Cash xx OS xx Share Prem xx Expiration No entry (memo entry only)

Warrants

PS with warrants: Cash xx PS xx Share Prem xx OSWO xx *Use pro-rata or residual approach Bonds with warrants: Cash xx Discount xx Prem xx Bonds Payable xx OSWO xx

Cash (Ex P) xx OSWO** xx OS xx Share Prem xx **debit OSWO at the carrying value of the warrants exercised.

OSWO** xx Share Prem xx From expired warrants

*Use residual approach Options Normally issued to key executives and officers as additional compensation for either past or future services provided to the company. Comp exp xx OSOO xx At FMV of options or the intrinsic value, whichever is appropriate (see note below) Cash (Ex P) xx OSOO** xx OS xx Share Prem xx **debit OSOO at the carrying value of the warrants exercised. OSOO** xx Share Prem xx From expired warrants

Notes on Accounting for Option Issuance (Equity-settled share based payment): 1. Determine if options vest immediately or do not vest immediately a. If options vest immediately (dr. comp expense for the entire valuation of the options) 2. If options do not vest immediately, determine if option plan is fixed or variable. a. If options are under FIXED OPTION PLAN (the only vesting condition is the vesting period), charge compensation expense to the vesting period by allocating the valuation of the options to the said vesting period (Options/VP) b. In estimating the compensation expense for each period, always consider in the analysis the estimated number of employees who shall remain within the companys employs until the end of the vesting period. Any changes in the number of employees remaining with the company until the options vest shall be accounted for as a mere change in estimate. 3. If options are under VARIABLE OPTION PLAN (if apart from the besting period, there is an additional vesting condition), determine what is the nature of the additional vesting condition (MARKET-BASED OR NON-MARKET-BASED) a. If additional vesting condition is MARKET-BASED (e.g. share price), account for the option as if it is fixed. That is, options shall vest regardless whether the additional market condition is achieved or not. This is because the determination of the fair valuation of the options considers the probability that market-based condition will be achieved or not achieved. In addition, market-based condition cannot be directly influenced by key employees. 4. If additional vesting condition is NON-MARKET-BASED (e.g. target sales, earnings, increase in sales etc), consider whether the additional nonmarket based condition is achieved or not in vesting the options. This means that the options shall only become exerciseable if the additional vesting condition (apart from the cesting period) is achieved. In addition, ascertain which among the following items are variable/varies in response to the non-market-based condition: a. Number of options b. Vesting period c. Fair value of options If non-market-based vesting condition is not achieved,the option shall revert to the company. Retained Earnings Retained Earnings RE, Beginning Prior period adjustments: (a) PP errors (b) Change in policies (c) Capital lossed from TST (d) Capital loss from recapitulation (e) Dividends declared from earnings (f) Appropriations (legal, contractual Voluntary) (h) Net loss 1. (a) PP errors (b) Change in policies RE, beg as adjusted

(g) Reversal on appropriations (i) Net income RE, end

2. 3.

Cash Dividend Computation of Cash dividends payable: Number of shares outstanding and subscribed * (% of cash dividend * Par per share) Property Dividends measured at fair market value of the asset declared as dividends. Stock Dividends or Capitalization or Bonus Issue an ordinary stock dividend is a stock dividend of the same class; i.e. ordinary shares to ordinary shareholders. A special stock dividend is a stock dividend of a different class; i.e. preference shares to ordinary shareholders. a. Less than 20% of the shares previously outstanding and subscribed, the stock dividend is termed small, in which case the amount to be charged to Retained Earnings is equal to its current market value.

b. 4.

5.

At least 20% of the shares previously outstanding and subscribed, the stock dividend is termed large in which case the amount charged against Retained Earnings is equal to par value. Scrip Dividends A corporation may declare a scrip dividend by issuing promissory notes called scrip. This arises when the corporation may have adequate Retained Earnings to meet the legal dividend requirements but has insufficient funds to disburse. If the promissory note bears interest this is charged to Interest Expense. Balance Sheet Classification Dividends Payable, Property Dividends Payable and Scrip Dividends Payable re classifies as liabilities whereas Stock Dividends Distributable is an addition in the Stockholders Equity.