RULES IN FAR

SHAREHOLDERS’ EQUITY

† Shareholders’ Equity is the residual interest in the assets of a corporation after deducting all its liabilities
-Share Capital
-Preference Share -(Subscription Receivable)
-Share Premium –PS -(Discount on Share Capital)
-Subscribe Share Capital –PS -(Capital Liquidated)
-Ordinary Share -Share Premium –Treasury Share
-Share Premium –OS -Share Premium -Retirement
-Subscribe Share Capital –OS -Share Premium –Delinquent Subscription
-Share Dividend Distributable -Share Premium –Redemption and Callable Shares
-Share Premium –Donated Capital -Share Premium –Assessment
-Share Premium - Recapitalization
-Retained Earnings
-Appropriated/Restricted -Unappropriated/Unrestricted
-Other Components of Equity
-Revaluation Surplus
-Remeasurement of net defined benefit liability
-Gains and Losses on Investment –FVOCI
-Gains and Losses arising from translating the FS of a foreign corporation
-Effective Portion of gains and losses on hedging instruments in a cash flow hedge
-Changes in fair value of financial liability FVPL that are attributable to changes in credit risk
-Changes in the time value of option when the option’s intrinsic value and time value are
separated and only the changes in the intrinsic value is designated as the hedging instruments
-Changes in the value of the forward elements of forward contracts
-Treasury Shares
-Statutory Reserves (included for regulated entities like banks, insurance and cooperatives)
† Accounting for share capital:
-Memorandum Method (memo entry for the authorized capitalization)
-Journal Entry Method (dr Unissued Share Capital, cr Authorized Share Capital) –used to reflect the difference between the two accounts
which is the Issued share capital
† Basic Rights of Ordinary Shareholders
-Right to attend and vote in shareholder’s meeting
-Right to purchase additional shares (Pre-emptive right)
-Right to share in the corporate profits (Right to dividends)
-Right to share in the net assets of the corporation upon liquidation
† Super voting shares – shares of the same class but were given more voting rights than the others. This is
usually given to founders and executives for a greater control over the company
† Share Premium (additional paid-in capital) is recorded on the initial phase of transactions and arises from:
-excess of subscription price over par value or stated value
-excess of reissuance price over cost of treasury shares issued
-distribution of small stock dividends
† Share capital and Subscribed Share Capital are credited at par value regardless of the subscription price
† No par value share has a stated value (issued value) indicated in the Articles of Incorporation but not on the
share certificate issued
† No par value shares should not be issued for a consideration less than P5/share. However, preferred shares
can only be issued with par value.
† Legal capital is the portion of contributed capital that cannot be distributed to owners during the life of the
corporation as based on the concept of TRUST FUND DOCTRINE:
-WITH PAR value share –legal capital is the aggregate par value of shares issued and subscribed
-WITHOUT PAR value shares –legal capital is the total consideration received or receivable from shares issued or subscribed. Total
consideration refers to the subscription price inclusive of any amount in excess of stated value
† Share Issuance cost is deducted to share premium from the issuance, if the share premium is insufficient, the
excess is charge to RE
† Discount on Share Capital is a receivable from shareholder concerned but presented in the FS as a contra-
equity account. Issuing shares below par or stated value is prohibited only on ORIGINAL ISSUE. Thus, treasury
shares may be reissued below par or stated value
† Watered stocks refers to shares issued for noncash consideration received where the noncash item fair value
is below par or stated value. Account used is “Discount on Share Capital”
† Secret Reserve refers to shares issued for noncash consideration received where the noncash item fair value is
above par or stated value. It understates assets and equity. (It is the opposite of watered stocks)
† Treasury shares can only be acquired if there is sufficient unrestricted RE
-to increase fair value per share
-to increase earnings per share
-to increase return on equity
-tax-efficient method of providing cash to shareholders than by paying dividends
-results from redemption of redeemable shares
-used to acquire new assets, to issue share dividends, to issue share options, or as reserve for future issuance
-to buy-out one or more specific stockholders as protection against takeover threat
-to settle shares held by the dissenting shareholder
-to eliminate fractional shares arising from dividends
-to settle delinquent subscriptions when there is no highest bidder
† Reissuance of treasury shares could be AT COST, MORE THAN COST or BELOW COST. Share premium increases
if issued above cost and decreases if issued below cost which could further results to a decrease in RE if share
premium from treasury shares cannot cover the amount.
† Deduction in Share Premium is made possible only if the transaction BELONG TO THE SAME CLASS, otherwise
it will be charged to RE
† Note that the Ordinary/Preferred Shares including their Share Premium -OS/PS are not affected by treasury
transactions
† Note also that accounting for treasury shares and retirement of shares may DECREASED RE but NEVER
INCREASED RE
† Accounting for Treasury shares:
-Cost Method
-Par Value Method – records treasury shares at par and its corresponding share premium in original issuance is derecognized. A share-
premium – treasury share may be recognized if reacquired below PAR.
† An amount equal to the treasury shares obtained should be APPROPRIATED in RE.
† Reacquisition of treasury shares is a decrease in TOTAL STOCKHOLDERS’ EQUITY equal to the cost of the
reacquired shares.
† Reissuance of treasury shares is an increase in TOTAL STOCKHOLDERS’ EQUITY equal to the reissuance price of
the reissued shares.
† Retirement of share occur when such shares are reacquired and cancelled. They cannot be reissued anymore.
When shares are retired, the TOTAL PAR VALUE and the RELATED SHARE PREMIUM of the retired shares are
removed from the books of accounts. Any difference is between the total amount removed (share capital and
premium) and the retirement cost (treasury cost or purchase cost) is accounted as:
-if the share capital and share premium of the retired shares exceeds the retirement cost, the difference is credited to SHARE PREMIUM –
RETIREMENT
- if the share capital and share premium of the retired shares are less than the retirement cost, the difference is debited in the order of
priority (1) SHARE PREMIUM – TREASURY SHARES (2) RE
TREASURY SHARE Effect on Shares Issued Effect on Outstanding Shares
Purchase No effect Decrease
Reissuance No effect Increase
Retirement Decrease No effect
†
† TRANSACTION WITH OWNERS do not give rise to income or expenses. NO GAIN OR LOSS shall be recognized
in P/L on the sale, purchase, sale, issue or cancellation of an entity’s own equity instruments
† Delinquent Subscription – After 30 days but not exceeding 60 days from the date the shares are declared
delinquent by the BOD, the delinquent shares are sold at public auction to the highest bidder
† Highest Bidder – the bidder who pays the offer price or the highest amount for the smallest number of shares.
The remaining shares not covered by the highest bidder will be credited or given to the delinquent
shareholder.
† If there is no HIGHEST BIDDER, the CORPORATION MAY PURCHASE the delinquent shares as treasury shares,
the delinquent shareholder will not recover such delinquent shares but is relieved from liability thereof. The
amount paid by the delinquent shareholder on the subscription will be forfeited and will be treated as
premium    bye!
† The corporation will pay for the Expenses on delinquent shares and delinquent shares but not for the interest
income from such delinquency. The accrued interest is ignored because to recognize such unrealizable interest
would overstate both the cost of treasury and RE. RE appropriated for delinquent shares purchased by the
corporation must be equal to the AGGREGATE PAR VALUE (SUBSCRIBED SHARE CAPITAL) of the delinquent
shares
† Delinquent shares acquired at below par value should not be reissued below par value in order not to
indirectly create watered stocks
† If there is no highest bidder for delinquent shares and the corporation is precluded to purchase the shares due
to insufficient RE, the SUBSCRIPTION IS CANCELLED IN ITS ENTIRETY
† Sale of Different Classes of Shares:
-Proportional Method – lump-sum price is allocated to the classes of share based on their relative value
-Incremental Method – applies when only one class of share has a determinable fair value. Such class is assigned its fair value and the
excess of lump-sum price is assigned to the remaining class of share without determinable fair value
† Redeemable preference shares are preferred shares which the HOLDER has the right to redeem at a set date.
The entity is mandatorily obligated to pay for the redemption price. This is classified as FINANCIAL LIABILITY
† Callable preference shares are preferred shares which the ISSUER has the right to call at a set date. The right
to call is at the discretion of the entity and it has no obligation to pay unless they choose to call on the shares.
This is classified as EQUITY INSTRUMENT
† Callable shares that are subsequently called in for redemption results in the derecognition of share capital and
share premium arising from the original issuance. If redemption price exceeds the original issuance price, the
excess is debited to RE. If the redemption price is less than the original issuance price, the difference is
credited to share premium.
† Equity instruments other than shares of stocks:
-Stock rights -issued in relation to the pre-emptive rights of ordinary shareholders which enable them to purchase new shares at a price
lower than the SHARE’S MARKET VALUE. They are evidenced by a certificate called SHARE WARRANTS and expires after a definite period of
time. Share warrants are issued in conjunction of the following:
-issuance of stock rights in relation to shareholders’ right of preemption
-issuance of detachable warrants with other securities as “sweetener” or “equity kicker” to make the principal instrument more attractive
to investors
-issuance of share options to employees as additional compensation
Accounting for Stock Rights
-recorded through memo entry on the date of issuance
-An entry is made only when the rights are exercised or recalled. Recalling stock rights (usually at a certain price per share) will only
reduce the share premium of a class of share (dr Share premium
OS/PS, cr Cash)
-if it expires but not recalled, the entity will just make a memo entry indicating that the unexercised stock rights have been cancelled
-Convertible Bonds and Convertible Preference Shares – when convertible bonds are issued, in effect,
the entity has issued two types of instrument, a FINANCIAL LIABILITY for the BONDS and an EQUITY INSTRUMENT for the conversion
feature. These components are segregated and accounted separately. When preference shares are converted to ordinary shares, the entity
has issued one type of financial instrument only, EQUITY INSTRUMENT but of different classes. The equity conversion option is an
embedded derivative that requires no separate recognition
-issuance of convertible preference share follows the usual recording. Upon conversion, the Preference Share together with the related
Share Premium will be derecognized and another class of share is recognized and recording either an increase in premium or decrease in RE
-Bonds with Detachable Warrants – a compound instrument, a FINANCIAL AND EQUITY INSTRUMENT
-Preference Shares with Detachable Warrants –one type of financial instrument, an EQUITY INSTRUMENT
-Detachable warrants in this case IS NOT an embedded derivative but an standalone instrument that could be accounted for separately.
Detachable warrants are capable of being transferred or sold separately.
-PFRS states that a derivative that is attached to a financial instrument but is contractually transferable independently of that instrument,
or has a different counterparty from that instrument, is not an embedded derivative but a separate financial instrument.
-the issue price should be allocated to the preference share and the detachable warrants based on their relative fair values on issuance
date. When both of the preference shares and the warrants have no fair values, the allocation of issue price is based on INTRINSIC VALUE
 of the warrants computed as the difference between the fair values of the ordinary shares and the subscription price. The warrants are
assigned their intrinsic value and any excess of the issue price is allocated to the preference shares.

† Donated Capital
-Donations from stockholders – credited to SHARE PREMIUM –DONATED CAPITAL
-Donation from the Government – recognized as GOVERNMENT GRANTS
-Donation from other sources – recognized as INCOME when:
-conditions attached to the donation are fulfilled or are reasonably expected to be fulfilled
-the donations become receivable
-the criteria for asset recognition are met
† Donations from Shareholders may be in the form of:
-Cash –recorded at the amount of cash received or receivable
-Non-cash assets – recognized at fair value of the non-cash assets
-Entity’s own share –initially recorded through memo because no asset is generated from the donated shares until they are subsequently
reissued. (Upon reissuance: dr Cash, cr Share Premium – Donated Capital
† Assessment on Shareholders – shareholders of a financially troubled corporation may vote to provide
additional capital based on their respective shareholdings and it is credited to SHARE PREMIUM –
ASSESSMENT (dr Cash or Assessment Receivable, cr Share Premium – Assessment)
† The following are the transaction where a MEMO ENTRY is made:
-The recognition of authorized share capital under the memorandum method
-Issuance of Stock Rights to Shareholders
-Donated Capital of Entity’s Own Share at the date of receipt
-The recognition of share splits

† Retained Earnings represent the cumulative profits (net losses, distribution to owners, and other adjustments)
which are retained in the business and not yet distributed to the shareholders:
-unrestricted – portion of RE that is available for future distribution to the shareholders
-restricted or appropriated – portion of RE that is not available for distribution unless restriction is subsequently reversed
 Legal Requirement (e.i. appropriations for cost of treasury shares)
 Contractual requirement (e.i. for loan agreements, bond indentures for the protection of creditors)
 Voluntary (e.i. for probable contingencies, business expansion)
† RE appropriation DO NOT mean that a corresponding cash fund has been set aside. Appropriations only
indicate amounts that are NOT AVAILABLE for distribution to stockholders.
† RE with NEGATIVE balance or debit balance is described in FS as DEFICIT but when total shareholders’ equity
has a NEGATIVE balance or debit balance it is described in FS as CAPITAL DEFICIENCY
† Appropriations for STATUTORY RESERVES are presented separate from RE
† Dividends:
-Cash dividend (may be declared as an amount per share or certain percentage of the par values of the shares)
 Liability dividend – are dividends issued by a corporation that has a temporary cash shortage
 Scrip dividend – short term and may or may not bear interest
 Bond dividend – long term and bear interest
-Property dividend – dividend in the form of non-cash assets
-Share dividend – dividends in the form of the entity’s own share (treasury shares or newly issued shares)
-Liquidating dividend – dividends declared out of capital
† Share dividends may be declared out of share premium in excess of par value because technically share
premium in excess of par is not part of the legal capital
† Dividends may be declared:
-out of unrestricted RE (return on capital) in accordance with the TRUST FUND DOCTRINE
-out of capital (return of capital) in accordance with the WASTING ASSET DOCTRINE
† Ex-dividend date –purchaser of shares on this date are NOT QUALIFIED TO RECEIVED dividends, so in order to
receive dividend, a purchaser must buy share before this date
† Liability for dividends is recognized on:
-the date when the dividend declared by the management is approved by the relevant authority (if further approval is necessary
-the date when management declares dividend (if no further approval is necessary)
† Dividends declared by banks are subject to the approval of the Bangko Sentral ng Pilipinas
† Share dividend declared by BOD are subject to the approval of shareholders representing 2/3 of outstanding
share capital at a regular or special meeting duly called for the purpose
† No liability is recognized for share dividends (only for cash and property dividends). Stock Dividends Payable is
presented in equity as an ADJUNCT ACCOUNT or addition to share capital, not a liability account
† Cash due on delinquent shares are first applied to the unpaid balance on the subscription plus cost and
expenses while share dividends are withheld from the delinquent subscriber until his unpaid subscription is
fully paid
† Upon declaration of dividend, RE is automatically debited. Alternatively, the account “Dividends” may be
applied in lieu of RE. The “Dividends” account may be used if dividends are declared more than once within a
year (e.g. semi-annually or quarterly dividends) and this account is closed to RE at year end
† Accounting for Scrip Dividend:
-date of declaration: dr RE or Dividends, cr Scrip Dividend Payable
-date of distribution: dr Scrip Dividend Payable, dr Interest Expense, cr Cash
† Accounting for Non-Cash Assets declared as Property dividend:
-accounting depends on whether the non-cash assets were previously classified as non-current asset or
current asset. If it is a noncurrent asset, it shall be subject to PFRS 5 reclassified as Noncurrent Asset Held for
Distribution to Owners which is initially and subsequently measured at lower of carrying amount and fair value
less cost to sell
† Non-current Asset declared as property dividend:
-date of declaration: (dr RE, cr Property dividend payable) & (dr NCA held for Distribution to Owners, dr Impairment Loss, cr NCA)
-end of the period: (Increase in fair value: dr RE, cr Property Dividends Payable, Decrease in Fair Value: dr Property Dividends Payable, cr
RE) at the same time recognize gain on impairment recovery or impairment loss for NCAHFDO (Gain: dr NCAHFDO, cr Gain on Impairment
and is impaired: dr Loss on Impairment, cr NCAHFDO)
-date of distribution: (Still adjust RE and Property dividend payable with regards to fair value) and derecognized Property Dividends
Payable with regards to the latest fair value amount at this date. Derecognize the NCAHFDO with its fair value amount during the end of
the period. Any difference is charge either to a gain or loss on distribution of property dividends
† The net effect of the declaration and settlement of property dividends on the retained earnings is a NET DEBIT
equal to the non-cash asset’s carrying amount on the date of declaration
† Accounting for Property Dividend Payable:
-the property dividends payable is initially measured at the fair value of the non-cash assets at date of declaration
-at the end of each reporting period and also on the settlement date, the property dividend is adjusted for changes in fair value. The
changes are recognized directly in RE
-on settlement date, any difference between the carrying amount of the dividends payable and the asset distributed is recognized in P/L
† Current asset declared as property dividends:
- date of declaration: (dr RE, cr Property dividend payable) & (dr dr Impairment Loss, cr CA) for any loss or write-down
-end of the period: (Increase in fair value: dr RE, cr Property Dividends Payable, Decrease in Fair Value: dr Property Dividends Payable, cr
RE) at the same time recognize gain on impairment recovery or impairment loss for CA (Gain: dr CA, cr Gain on Impairment and is
impaired: dr Loss on Impairment, cr CA)
-date of distribution: (Still adjust RE and Property dividend payable with regards to fair value) and derecognized Property Dividends
Payable with regards to the latest fair value amount at this date. Derecognize the CA with its fair value amount during the end of the
period. Any difference is charge either to a gain or loss on distribution of property dividends
† Choice between property and cash dividend:
-Fair value is adjusted to probability rate of choice. Recognize both cash and property dividend payable and record change in fair value on
the asset
† Treasury shares as dividends:
-accounting procedures for “small” and “large” share dividends do not apply. COST METHOD is used where RE is debited for the cost of the
treasury shares declared and no share premium arises. Stock dividend payable is used, not Treasury
† Accounting for Share Dividend:
-Small if LESS THAN 20% (share dividend is accounted for at FAIR VALUE, recognizing a share premium)
-Large if 20% OR MORE (share dividend is accounted for at PAR VALUE, no share premium recognized)
† Listed entities account for SMALL share dividends at par value if par value exceeds the market price per share
† Close corporation account for all share dividends, whether SMALL or LARGE at par value
† Share dividends increases outstanding shares but do not affect the par value per share
† Fractional shares are adjusted by the corporation through:
-issuance of fractional share rights (evidenced by share warrants) and give the holders thereof an ample time to accumulate sufficient
warrants for full share. (Share Premium Warrant Outstanding account is used, if share warrant is exercised it is credited to capital account,
if warrants just expired and not exercised it is credited to Share Premium account)
 -Pay cash in lieu of fractional share rights but ONLY IF SHARE DIVIDENDS were declared out RE. If the share dividends were declared out of
share premium, cash payment in lieu of fractional share rights is ILLEGAL
† Entry for share dividends at distribution date (dr Share Dividend Distributable, cr Share Capital (for full shares),
cr Share Premium – Warrants Outstanding (for fractional shares) and upon such given time where the
warrants are exercised (dr Share premiuim-Warrant Outstanding, cr Share Capital). In case of other warrants
that expired, the entry is (Share Premium –Warrants Outstanding, cr Share Premium)
† Share Dividends of Different Class –accounted for at fair value
-Ordinary Shares will receive Preferred Shares as dividends
-Preferred Shares will receive Ordinary Shares as dividends
Entry at date of declaration: dr RE, cr Share Dividend Distributable, cr Share Premium
Entry at date of distribution: dr Share Dividends Distributable, cr Share Capital
† In cases where preference shares are not preferred as to assets, the remaining assets after deducting liabilities
will be share proportionately by the preference shareholders and ordinary shareholders
† Preference shares that are preferred as to asset are normally entitled to LIQUIDATION VALUE.
† Liquidation value pertains to the amount which preference shareholders are entitled to receive in case of
corporate liquidation. The liquidation value is usually more than the par value of the preference share
† Preference over dividends
-Cumulative –accumulated unpaid dividends are disclosed as dividends in arrears
-Noncumulative
-Participating – ordinary share uses the preferred shares rate, in case of many class of preferred shares, the LOWEST preference rate is
used
 Fully Participating –pro rata basis (based on aggregate par values of outstanding shares)
 Partially participating –based on a certain percentage only (up to 20%, meaning 20%-basic rate)
-Non-participating
† In the absence of evidence to the contrary, preference shares are presumed to be “PREFERRED AS TO
DIVIDEND” with dividend preference of “NONCUMULATIVE AND NONPARTICIPATING)
† Format:
Basic Allocation to Preference Share
Basic Allocation to Ordinary Share
Participation of Preferred Share
Participation of Ordinary Share
† Dividends recognized as expense
-Dividend on Equity instrument –charged to RE
-Dividend on Financial liabilities (Redeemable preference Share) –charged tp P/L as Interest expense and the entry is on the date of
declaration: dr Interest Expense, cr Interest Payable; on the date of distribution, dr Interest payable, cr Cash
† Liquidating Dividends –are dividends declared out of capital rather than from RE per Wasting Asset Doctrine
(i.e. those engaged in mining). Entry: dr Capital Liquidated, cr Cash Dividend Payable
† Dividends declared and the related amount per share are disclosed either in the Statement of Changes in
Equity or in the notes. Dividends declared after the reporting period but before the financial statement are
authorized for issue are not recognized as a liability at the end of the reporting period because no obligation
exist at that time
† Recapitalization –refers to the change in the capital structure of an entity brought about by the
CANCELLATION OF OLD SHARES AND ISSUANCE OF NEW SHARES AS REPLACEMENT. It is accomplished through
any of the following:
-change from par to no-par or vice versa
-reduction of par value or stated value
-share splits or reverse splits
† Recapitalization does not affect assets, liabilities, or total shareholders’ equity. Any difference from
derecognition of old shares including premiums and the new shares is credited to Share Premium-
Recapitalization or debited to RE
† Share Split –only affect the number of shares and par value per share but they do not affect asset, liability,
equity, or the aggregate par value of shares issued. Share Splits are recorded only through memo entry
-Split-up or share split
-Split down or reverse share split
† Quasi-Reorganization –is an accounting procedure whereby a financially troubled corporation, but with a
favorable future prospects, is permitted, but not required, to REVALUE ITS ASSETS AND LIABILITIES, AND
REALIGN ITS EQUITY, subject to the provision of relevant regulations, in order to establish a fresh start in
accounting sense. It is effected through:
-Revaluation of PPE and/or
-Recapitalization
† Basic Approach to Quasi-Reorganization is as follows:
-assets and liabilities are revalued upwards or downwards
-any resulting credit balance in revaluation surplus is used to wipe out any deficit (negative RE)
-If a recapitalization is made, any resulting share premium shall also be used to wipe out any deficit
-disclosures required by relevant regulations are provided in the FS for a minimum period of 3 years
† Revaluation Surplus account is used for upward valuation of asset, RE account is used for downward valuation
of asset and Share premium account for the recapitalization. These three accounts are used in wiping out the
deficit. RE could be ZERO or increased after the quasi-reorganization. The fourth account RE-Restricted
accounts for the RE Deficit + Valuation decreases that must be appropriated from RE (Entry: dr RE, cr RE-
Restricted)
† SEC guidelines for Quasi-Reorganization
-allowed only if the entity is in FINANCIAL DISTRESS
-a reputable LICENSED APPRAISER will evaluate PPE
-allowed assets for revaluation are real properties, permanently installed fixed assets, and other machineries
and equipment directly NEEDED AND ACTUALLY USED IN THE OPERATION
-Fixed assets undergoing repair or will undergo repair shall not be included in revaluation
-entity must present a project study on its future operations to support its quasi-reorganization
-after absorption of deficit, any remaining surplus shall not be used to absorbed losses without prior approval
of the Commission
-the RE shall be restricted to the extent of the deficit wiped out of revaluation surplus. Any subsequent
piecemeal transfer of revaluation surplus to RE shall not be used for dividend declaration
†