Other Components

of ShareholderS’
Equity continuation
Reporter: Guardalupe, Jhea Mae
BSBA-FM2
Declaration of Dividends
The accumulated profits are
usually reduced upon the
declaration of dividends to the
shareholders.
Illustration
 Assume that X corp. has an unrestricted
accumulated profits amounting to P1,500,000. the
board of directors decided to declare P500,000 as
dividends to shareholders during the year.
GENERAL JOURNAL
Page no. 010
Date Descriptions Debit Credit
3) Accumulated profits 500,000
Dividends payable 500,000
To record declaration of dividends

4) Dividends payable 500,000

Cash 500,000
To record payment of dividends
Reserves
The caption “Reserves” generally
includes shareholders’ equity items
other than the total par or stated value
of the share capital and the
unrestricted accumulated profits.
 To give the enterprise & its creditors an added measure of
protection from the effects of losses, law, or management
option sometimes requires creation of reserves. Specially,
reserves include the following shareholder’s equity items:
 Other reserves:
 additional paid-in capital
Appropriation reserve
Asset revaluation surplus
Fair value differences

Translation reserve:
Foreign currency translation differences
Additional Paid-in Capital (APIC)
Share premium in excess of the par
value or stated value
Excess of the sale proceeds of
treasury stock over cost
Donated capital
Equity share options issued
Other premiums in relation share
capital issuances & retirements
 Transfer to & From Reserves
 When a proportion of accumulated profits is transferred to
the reserve portion of the shareholders’ equity, such portion
is called Appropriation Reserve.

 The “appropriation reserve” is the portion of accumulated

profits that is not available for any dividend declaration
because it is restricted for a specific purpose which the BDO
deems necessary, the law requires so, or because of
contractual obligations.

 The restricted accumulated profits can be reverted from

reserves to the unrestricted accumulated profits after the
purpose of which it was segregated has been accomplished.
Illustration
For instance, assume that the board of
directors of D Corp. decided in its meeting
that P 100,000 of the accumulated profits will
be earmarked for the acquisition of
equipment.
GENERAL LEDGER
Page no. 010
Date Descriptions Dr. Cr.
A) Accumulated profits 100,000
Appropriation reserve for equipment 100,000
To record appropriation of
accumulated earnings
If D Corp. has already acquired the
equipment, the journal entry to reverse the
appropriated accumulated profits would be:
GENERAL JOURNAL

Page no. 010

Date Descriptions Dr. Cr.

B) Appropriation reserve for equipment 100,000

Accumulated profits 100,000

To record reversal of appropriation

reserve for equipment

Note: The appropriation of accumulated profits decreases the amount of

accumulated profits available for dividends declaration. The reversal of
appropriated accumulated profits; however, increase the available
accumulated profits for dividend declaration.
Revaluation Reserve
This account is also called “Revaluation
Surplus” or “Asset Revaluation Increment”
increases the recorded value of plant asses as
a result of appraisal in relation to their current
replacement cost. This accounting practice
shifts the value of plant assets from cost model
to fair value model.
Basis of Revaluation
Fair value of the property. The fair value is
usually the market value determined by
independent professionally qualified appraisers.

Depreciated replacement cost (Sound value).

When there is no evidence of market value (e.g.,
for property and equipment).
Treatment of Revaluation
Increase
 When an asset’s carrying amount is decreased as
a result of a revaluation, the increase should be
credited directly to an equity account under the
heading of revaluation surplus.

 However, a revaluation increase should be

recognized as income to the extent that it reverses
a revaluation decrease of the same asset
previously recognized as an expense.
Treatment of Revaluation Decrease

 A revaluation decrease should be charged directly

against any related revaluation surplus to the
extent that the decrease does not exceed the
amount held in the revaluation surplus in respect to
the same asset,

 However, when an asset’s carrying amount is

decreased as a result of a revaluation, the
decrease should be recognize as expense.
Terms Defined
Revaluation – the process of appraising the value
plant assets. Am independent professional asset
appraisers prepares a detailed schedule of the
inspected plant asset items including their
respective replacement cost, accumulated
depreciation and the computed depreciated
replacement cost.
Appraised value – the new value plant asset
based on the independent appraiser’s opinions. It
is also called replacement cost which is the current
purchase price of property, plant and equipment.
Appreciation – the excess of appraise value over
historical cost.
Sound Value (SV) - the excess of replacement cost over its
accumulated depreciation (replacement cost).

Book Value – the excess of historical cost over its accumulated

depreciation.

Revaluation Surplus – the excess of sound value over book value.

Condition Percent - the percentage of the remaining life over the

new estimated life computed as follows:

If no scrap value, condition percent is the percentage of sound

value divided by the appraised value.

If with scrap value, condition percent is the percentage of sound

value minus scrap value dividend by the appraised value minus
scrap value.
Illustration:
 Assume the following data:
Historical cost Appraised
value
 Machine P100,000 P150,000
 Accum. Depn 20,000 30,000
 Book value/sound value P 80,000 P120,000

 The revaluation surplus would be P40,000, computed as follows:

 Sound value P120,000
 Less: Book value 80,000
 Revaluation surplus P 40,000
 The journal entry would be:
Machinery 50,000
Revaluation surplus 40,000
Accumulated depreciation – machine 10,000

The increase in revaluation surplus is to be added as part of

the reserve portion of the shareholders’ equity section of the
statement of financial position.
Fair Value Differences
A fair value is determined as the
amount for which an asset could be
exchanged or a liability settled between
knowledgeable, willing parties in an
arm’s-length transaction.
The fair value of a financial
statement may refer to the following:
Quoted market price. For securities listed or
traded in the stock market, the “closing price” is
usually used for valuation as fair value.

Present value. IAS 39 provides that fair value

may be ascribed to the computed present value of
all future cash payments or receipts. The present
value is generally used as the selling price
(purchase price) of a debt instrument.
The financial instrument that are
basically affected by this temporary
fluctuation are the “trading securities”
(TS) and the “available-for-sale
securities” (AFS).
Foreign Currency Translation
It refers to the net charges in
translating foreign currency
denominated operation or financial
statements from one foreign currency
to another. This reserve may be the
“gain or losses on foreign currency
translation”
Translating Financial Statements
from Foreign Currency
IAS 21.39 provides the following steps in translating
financial statements that are stated at foreign currency
into Philippine Peso:

oAssets & liabilities are translated using the closing rate at

the date of financial statements.
oRevenue, expenses, gains and losses, and other
comprehensive income are translated at
• Exchange rate at the date of translation if applicable.
• Average rate during the year, if exchange rate at
transaction date is not applicable.
oThe exchange rate differences are charged or credited to
other comprehensive income.
 Illustration:
 X corp. (a domestic corp.) purchased substantial inventory amounting to
$100,000 on Dec. 15, 2013 for its US operations when the exchange
rate was $1.00 to P45.

On Dec.31,2013, when X Corporation prepares its financial statements

$1.00 is pegged at P40.

X corporation is required to translate its foreign operation’s transactions or

financial statements into Philippine currency in its consolidated financial
statements.

Focusing only on the foreign currency translation related to the

substantial purchase of inventory as of Dec. 31, 2013, the journal entry
should be:
Loss on foreign currency translation 500,000
Merchandise inventory(P5x$100,000) 500,000