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Sharedholders' Equity Summary, Summaries of Financial Management

Central Mindanao University (CMU)Financial Management

Summary notes for Shareholder's Equity and Retained Earnings from the book of Valix and Valix.

Typology: Summaries

2019/2020

Uploaded on 05/09/2020

kimberly-gales
kimberly-gales 🇵🇭

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SUMMARY NOTES- SHAREHOLDER’S EQUITY AND RETAINED EARNINGS
Lofranco, Kimberly G.
SHAREHOLDER’S EQUITY
Corporation:
-artificial being created by operation of
law
-have right of succession
-powers, attributes, properties expressly
authorized by law/ incident to its
existence
-legal/ juridical person separate from
members
Organization of a corporation:
-PH general law: Corporation Code
Legal requirement:
-5 or more person, not exceeding 15
-Articles of incorporation (SEC)
-By-laws (rules of action)
Preincorporation and subscription
requirement:
-25% stocks subscribed, at least 25% of
the subscription paid
-No capital less than P5,000
Components of corporation:
a. Corporators
b. Incorporators
c. Shareholders/ stockholders
d. Members
Books and records of a corporation:
a. Minutes book
b. Stock and transfer book
c. Books of accounts
d. Subscription book
e. Shareholders’ ledger
f. Subscribers’ ledger
g. Share certificate book
Organization cost
a. Legal fees
b. Incorporation fees
c. Share issuance costs
Shareholder’s equity:
-residual interest of owners in the net assets
of a corporation
Definition of terms:
Share capital- portion of paid in capital
representing total par
Subscribed share capital- potion of
unauthorized share capital that has
been subscribed but not fully paid (still
unissued)
Share premium- portion of paid in
capital representing excess over par
Retained earnings- cumulative balance
of periodic earnings, dividend
distributions, prior period errors etc.
Revaluation surplus- excess of revalued
amount over CA
Treasury shares- shares issued,
reacquired but not canceled
Deposits on subscriptions
Capital Stock:
-Amount fixed in AOI
-Authorized share capital divided into
shares evidenced by a share certificate
-Share represents rights of shareholder:
a. to share in the earning of the
corp
b. to vote in the election of directors
and determination of corporate
policies
c. to subscribe for additional share
issues (right of preemption/
share right)
d. to share in the net assets of corp
upon liquidation
-shares can be par/ no par value
-no par value share cannot be issued for
less than P5
pf3
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pf5
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Lofranco, Kimberly G. SHAREHOLDER’S EQUITY Corporation:

  • artificial being created by operation of law
  • have right of succession
  • powers, attributes, properties expressly authorized by law/ incident to its existence
  • legal/ juridical person separate from members Organization of a corporation:
  • PH general law: Corporation Code Legal requirement:
  • 5 or more person, not exceeding 15
  • Articles of incorporation (SEC)
  • By-laws (rules of action) Preincorporation and subscription requirement:
  • 25% stocks subscribed, at least 25% of the subscription paid
  • No capital less than P5, Components of corporation: a. Corporators b. Incorporators c. Shareholders/ stockholders d. Members Books and records of a corporation: a. Minutes book b. Stock and transfer book c. Books of accounts d. Subscription book e. Shareholders’ ledger f. Subscribers’ ledger g. Share certificate book Organization cost a. Legal fees b. Incorporation fees c. Share issuance costs Shareholder’s equity: -residual interest of owners in the net assets of a corporation Definition of terms:  Share capital- portion of paid in capital representing total par  Subscribed share capital- potion of unauthorized share capital that has been subscribed but not fully paid (still unissued)  Share premium- portion of paid in capital representing excess over par  Retained earnings- cumulative balance of periodic earnings, dividend distributions, prior period errors etc.  Revaluation surplus- excess of revalued amount over CA  Treasury shares- shares issued, reacquired but not canceled  Deposits on subscriptions Capital Stock:
    • Amount fixed in AOI
    • Authorized share capital divided into shares evidenced by a share certificate
    • Share represents rights of shareholder: a. to share in the earning of the corp b. to vote in the election of directors and determination of corporate policies c. to subscribe for additional share issues (right of preemption/ share right) d. to share in the net assets of corp upon liquidation
    • shares can be par/ no par value
    • no par value share cannot be issued for less than P

Lofranco, Kimberly G. Ordinary Share Capital

  • ordinary shareholders have the same rights and privileges
  • financial reward is based on the operation of the entity Preference share capital:
  • preference shareholders have only limited or fixed return of investment Legal capital:
  • portion of paid in capital arising from issuance of share capital
  • illegal to return to shareholders during the corporation’s lifetime
  • amount determination: a. if par, aggregate value of shares issued and subscribed b. if no par, total consideration received including excess over stated value Trust fund doctrine:
  • holds that the share capital of a corporation is considered as trust fund for creditor’s protection
  • dividend limited to retained earnings balance
  • illegal to pay dividends if the entity has a deficit Accounting for share capital a. memorandum method- no entry to record authorized share capital b. journal entry method- unissued share capital is debited, authorized share capital credited Issuance of share capital:
  • Corporation Code: a share shall not be issued for a consideration less than the par Shares issued at discount: - Sold at a price below par - Not considered loss but shareholder is held liable therefor (discount liability) Issuance of share capital for noncash consideration: - Valuation shall be determined by the incorporators/ board of directors subject to the approval of SEC - Fair value of property received - Recorded in order of priority: a. Fair value of the noncash consideration received b. Fair value of the shares issued c. Par value of the shares issued Issuance of share capital for services: - Fair value of such services/ fair value of shares issued Share issuance costs: - Direct cost to sell share capital - Include: 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. Advertising and promotion i. Newspaper publication fee - Debited to share premium arising from the share issuance Costs of public offering of shares: - Recorded as expense in the income statement - Stock market listing costs: a. Road show presentation b. Public relations consultant’s fee

Lofranco, Kimberly G.

  • Can be acquired to the extent of retained earnings balance *what is prohibited to be done directly cannot be done by indirection Accounting for treasury: Cost method:
  • If cash, cash payment
  • If noncash, CA of asset surrendered Reissuance: a. At cost b. More than cost- share premium c. Below cost- share premium, retained earnings Par value or stated value method:
  • Retirement method
  • Not acceptable approach Retirement of treasury shares:
  • Share capital account is debited at par value
  • Treasury shares accounts is credited at cost a. Par > Cost GAIN b. Par < Cost LOSS o Share premium from original issuance o Share premium from treasury shares o Retained earnings Disclosure of treasury shares: a. Number of shares held in the treasury b. Restriction on the availability of retained earnings for distribution of dividends equal to the cost of treasury shares
  • Cost of TS shall be deducted from total shareholder’s equity Donated shares: - Shares received from shareholders by way of donation - Are actually TS - Secured without cost Treasury share subterfuge - When excessive shares are issued for a property with the understanding that shareholders will subsequently donate a portion of their shares Donation of capital: - Recorded at fair value with credit going to donated capital - Gifts/ grants from nonshareholders: subsidies credited to income Assessment on shareholders: - Levied on shareholder when shares are originally issued at discount or when corp is in dire need of financial assistance RECAPITALIZATION - Change in the capital structure of entity - Old shares are canceled and new ones are issued Types of recapitalization: a. Change from par to no par b. Change from no par to par c. Reduction of par value d. Reduction of stated value e. Split up f. Split down Share split: a. Split up/ share split proper - Original shares are called in for cancellation and replaced by a larger number

Lofranco, Kimberly G. accompanied by a reduction in the par

  • No change in the amount of share capital
  • Only change in the number of shares and par value
  • Memorandum entry b. Split down/ reverse share split
  • Original shares are cancelled and replaced by a smaller number accompanied by increase in par Rights issue:
  • Granted to existing shareholders
  • Enable them to acquire new shares at specified price during specific period
  • PH term: stock right
  • Evidenced by share warrants Issuance of rights:
  • Warrants are issued without consideration
  • Memorandum entry Expiration of rights:
  • Memorandum entry Exercise of rights:
  • Memorandum is made for decrease in number of shares claimable
  • Sale of shares through exercise recorded normally Preference share issued with share warrants:
  • Sale of two securities—preference share and share warrants

Lofranco, Kimberly G.

  • Entity gives owners a choice of either noncash asset or a cash alternative
  • Div. pay. is estimated by considering fair value of both alternatives and associated probabilities Scrip dividend:
  • A note which is a formal evidence of indebtedness to pay a sum of money at future date Share dividend/ stock dividend
  • Bonus issue
  • Distribution of earnings in the form of entity’s own shares How much of the retained earnings should be capitalized?
  • If share dividend is less than 20%, amount charged to RE is fair value on date of declaration
  • If more than 20%, par/ stated value is capitalized Fractional share dividends:
  • It is usually impossible to issue full shares to all stockholders
  • Steps: a. Issue warrants for the fractional shares and give the holders thereof enough time to accumulate sufficient warrants for a full share b. May pay cash in lieu of fractional share Treasury shares as share dividend
  • Property dividend under PH corporation code
  • Accounted for as share dividend because obligation is to reissue own share capital not convey noncash asset Special cases on share dividend:
    1. When shareholder elect to receive cash in lieu of share dividend, the amount to be charged to retained earnings should be equivalent to the optional cash dividend.
    2. Share dividends declared on the basis of proposed increase in authorized share capital, disclosure necessary
    3. In closely held entities, if share div are declared, RE shall be capitalized only to the extent of par value. Dividends out of capital:
  • When capital is returned to shareholders
  • Liquidating dividend
  • May be exercised by wasting asset entity (engaged in the exploitation of natural resources) Dividends as expense:
  • Debited directly to equity
  • Dividends out of earnings are charged to RE Appropriation of Retained Earnings:
  • May be described as: a. Legal appropriation b. Contractual appropriation c. Voluntary or discretionary appropriation Legal appropriation
  • Arises from the fact that legal capital cannot be returned to shareholders until entity is dissolved/ liquidated
  • RE appropriated for TS Contractual appropriation
  • Arises from the fact that the terms of the bond issue and preference share issue may impose restriction on the payment of dividends

Lofranco, Kimberly G.

  • RE appropriated for sinking fund or bond redemption
  • RE appropriated for redemption of preference share Voluntary appropriation
  • Matter of discretion on the part of management
  • RE appropriated for plant extension/ increase in working capital/ contingencies Accounting for appropriation Dr Retained earnings xx Cr Retained earnings appropriated xx *reverse when no longer necessary Statement of retained earnings:
  • Shows changes affecting directly RE and relates the IS to the statement of financial position Items affecting directly retained earnings: a. Net income or loss for the period b. Prior period errors c. Dividends to shareholders d. Effect of change in accounting policy e. Appropriation of RE f. Components of OCI reclassified to RE Reserves:
  • Use of equity reserves is based on whether a reserve is part of distributable equity or nondistributable equity Nondistributable equity reserves: a. Share premium reserve b. Appropriation reserve c. Asset revaluation reserve d. OCI reserve Statement of changes in equity
  • Shows the movements in the elements or components of SHE
  • Shows the ff: a. Total comprehensive income for the period b. Effects of changes in accounting policies and corrections of errors c. Reconciliation between the CA at beg and end of period: i. Profit or loss ii. OCI iii. Transaction with owners in their capacity as owners Components of comprehensive income
  1. Net income/ loss
  2. OCI: a. Unrealized gain/ loss on equity investment designated at fair value through OCI b. Unrealized gain/ loss on debt investment measured at fair value through OCI c. Gain/ loss from translating the financial statement of a foreign operation d. Change in revaluation surplus e. Unrealized gain/ loss from derivative contracts designated as cash flow hedge f. Remeasurement of defined benefit plan g. Change in the fair value attributable to credit risk of a financial liability irrevocably designated at fair through P/ L