SHAREHOLDERS’ EQUITY

1. Define a corporation.
Corporation is defined as a company or group of people authorized to act as a
single entity (legally a person) and recognized as such in law. It is an artificial being
created by operation of law, having the right of succession and the powers, attributes
and properties expressly authorized by law or incident to its existence.
In a corporation, the owners’ claim against the asset is called shareholders’
equity or stockholders’ equity. A corporation is a legal or juridical person with a
personality separate and distinct from the individual members or shareholders.

2. Explain the organization of a corporation.

A corporation is created by operation of law. This means that a corporation
cannot come into existence by mere agreement of parties as in the case of a business
partnership. In the Philippines, the general law that governs the creation of private
corporations is Republic Act 11232 otherwise known as Revised Corporation Code.
In Section 10 of the Revised Corporation Code, it was stated that any person,
partnership, association or corporation, singly or jointly with others but not more than
fifteen (15) in number, may organize a corporation for any lawful purpose or purposes.
Provided, that natural persons who are licensed to practice a profession, and
partnerships or associations organized for the purpose of practicing a profession, shall
not be allowed to organize as a corporation unless otherwise provided under special
laws. Incorporators who are natural persons must be of legal age. Each incorporator of a
stock corporation must own or be a subscriber to at least one (1) share of the capital
stock.
Section 3 provides that corporations formed or organized may be stock or
nonstock corporations. Stock corporations are those which have capital stock divided
into shares and are authorized to distribute to the holders of such shares, dividends, or
allotments of the surplus profits on the basis of the shares held. All other corporations
are nonstock corporations.

3. What are the contents of Articles of Incorporation?

All corporations shall file with the Securities and Exchange Commission the
Articles of Incorporation containing substantially the following matters:
a. The name of the corporation.
b. The specific purpose or purposes for which the corporation is being formed.
c. The place where the principal office of the corporation is to be located, which
must be within the Philippines.
d. The term for which the corporation is to exist, if the corporation has not elected
perpetual existence.
e. The names, nationalities, and residence address of the incorporators.
 f. The number of directors, which shall not be more than fifteen (15) or the
number of trustees which may be more than fifteen (15).
g. The names, nationalities, and residence address of persons who shall act as
directors or trustees until the first regular directors or trustees are duly elected
and qualified in accordance with the Revised Corporation Code.
h. If it be a stock corporation, the amount of its authorized capital stock, number of
shares into which it is divided, the par value of each, names, nationalities, and
residence addresses of the original subscribers, amount subscribed and paid by
each on the subscription, and a statement that some or all of the shares are
without par value, if applicable.
i. If it be a nonstock corporation, the amount of its capital, the names,
nationalities, and residence address of the contributors, and amount contributed
by each.
j. Such other matters consistent with law and which the incorporators may deem
necessary and convenient.

4. What are bylaws?

It may be defined as the rules of action adopt1ed by the corporation for its
internal government and for the government of its officers, shareholders, or members.
Among others, a private corporation may provide the following in its bylaws:
a) The time, place and manner of calling and conducting regular or special
meeting of directors, trustees, shareholders or members
b) The number, qualification, duties, responsibilities, length of office and
compensation of directors or trustees
c) The appointment, duties, responsibilities, length of office and compensation
of corporate officers, other than directors or trustees
d) The manner of issuing stock certificates

5. Distinguish between:

a. Corporators and incorporators

CORPORATORS INCORPORATORS
Corporators are those who compose Incorporators are those stockholders
a corporation, whether as or members mentioned in the
stockholders or shareholders in a articles of incorporation as originally
stock corporation or as members in forming and composing the
a nonstock corporation. corporation and who are signatories
thereof.
 b. Shareholders and members

SHAREHOLDERS MEMBERS
Corporators in a stock corporation Corporators in a non-stock
are called stockholders or corporation are called members.
shareholders.

6. Explain the following:

a. Minutes book- contains the minutes of the meetings of the directors and
shareholders.
b. Stock and transfer book- is a record of the names of shareholders, installments paid
and unpaid by shareholders and dates of payment, any transfer of share and dates
thereof, by whom and to whom made.
c. Books of accounts- represent the record of all business transactions. The books of
account include normally the journal and the ledger.
d. Subscription book- is a book of printed blank subscription.
e. Shareholders’ ledger- is a subsidiary for the share capital issued reporting the
number of shares issued to each shareholder.
f. Subscribers’ ledger- is a subsidiary for the subscriptions receivable account
reporting the individual subscription of the subscribers.
g. Share certificate book- is a book of printed blank share certificates.

7. What is the accounting treatment of organization cost?

Organization cost represents costs incurred in forming or organizing a
corporation. It includes legal fees in connection with the incorporation, incorporation
fees, share issuance costs. Organization cost is expensed immediately with the
exception of the share issuance costs.

8. What are the elements that constitute the shareholders’ equity and their equivalent
IFRS term?

PHILIPPINE TERM IAS TERM

Capital stock Share capital
Subscribed capital stock Subscribed share capital
Common stock Ordinary share capital
Preferred stock Preference share capital
Additional paid in capital Share premium
Retained earnings (deficit) Accumulated profits (losses)
Retained earnings appropriated Appropriation reserve
 Revaluation surplus Revaluation reserve
Treasury stock Treasury share
9. What is the meaning of capital stock or share capital?
Capital stock or share capital is a portion of the paid in capital representing the
total par or the stated value of the shares issued.

10. What are the basic rights of a shareholder?

1. To share in the earnings of the corporation
2. To vote in the election of directors and in the determination of certain
corporate policies
3. To subscribe for additional shares issued-called the right of preemption or
share right
4. To share in the net assets of the corporation upon liquidation.

11. Distinguish between:

a. Share capital and authorized share capital

SHARE CAPITAL AUTHORIZED SHARE CAPITAL

The portion of the paid in capital The amount fixed in the articles of
representing the total par or the stated incorporation
value of the shares issued.

b. Share certificate and a share

SHARE CERTIFICATE SHARE

Instrument or document that evidences Represents the interest or right of a
the ownership of a share shareholder in the corporation

c. Par value share and no-par value share

PAR VALUE SHARE NO-PAR VALUE SHARE

Par value share is one with specific A no par share is one without any value
value fixed in the articles of appearing on the face of the share
incorporation and appearing on the certificate but it always has an issued
share certificate. value or stated value.

12. Explain the two classes of share capital.

The two classes of share capital are Ordinary share capital and Preference share
capital. A share where ordinary shareholders have the same rights and privileges is
called ordinary share. On the other hand, preference share is so called as such because
of the preferences granted to the shareholders.
13. How much is legal capital?
Legal capital is the 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.
The amount of legal capital is determined as:
 In the case of par value share, legal capital is the aggregate par value of the
shares issued and subscribed.
 In the case of no-par value share, legal capital is the total consideration received
from shareholders including the excess over the stated value.

14. What is the trust fund doctrine?

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 return such legal capital to
shareholders during the lifetime of the corporation.

15. Explain the accounting for the issuance of:

a. Par value share- when sold, the proceeds shall be credited to the share capital
account to the extent of the par value, with any excess being reflected as share
premium. Excess over the par value is credited to share premium.
b. No-par value share- cannot be issued for less than P5. No-par share must have a
stated value of at least P5. When no-par shares are sold, the proceeds shall be
credited to the share capital to the extent of state value and any excess is credited
to share premium.

16. Explain the accounting for share capital issued for noncash consideration.
Where the issuance of share capital is for a non cash consideration, the share
capital is recorded at an amount equal to the following in the 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

17. Explain the treatment of share issuance costs?

Share issuance cost are direct costs to sell share capital which normally include
legal fees, CPA fees, underwriting fees, commissions, etc. It is debited to share premium
arising from the share issuance.

18. Explain the treatment of costs of public offering of shares.

Cost of public offering of shares are not considered as costs of an equity
transaction since no equity instrument has been issued. Therefore, such costs are
 recognized immediately as an expense when incurred. It includes the Road show
presentation and public relations consultant’s fees.

19. What is the meaning of watered share?

Watered share is a share capital issued for inadequate or insufficient
consideration. The consideration received is less than par or stated value, but the share
capital is issued as fully paid. If the share capital is watered, asset is overstated and
capital is correspondingly overstated.

20. What is secret reserve?

Secret reserve is the reverse of watered share. It arises when asset is
understated or liability is overstated with a consequent understatement of capital.
Secret reserve usually arises from:
a. Excessive portion for depreciation, depletion, amortization and doubtful
accounts
b. Excessive write-down of receivables, inventories and investments
c. Capital expenditures are recorded as outright expense
d. Fictitious liabilities are recorded

21. What is the treatment of a delinquent subscription?

The Revised Corporation Code provides that the board of directors may at any
time declare due and payable unpaid subscriptions. The official declaration is called a
call. If the shareholder does not pay on the date fixed, the shareholder is declared
delinquent and the delinquent share will be sold at a public auction.

22. Who is the highest bidder?

Highest bidder is the person who is willing to pay the offer price of the
delinquent shares for the smallest number of shares. The offer price normally includes
the following:
 Balance due on the subscription
 Interest accrued on the subscription due
 Expenses of advertising and other costs of sale

23. What is a callable preference share?

It is one which can be called in for redemption at a specified price at the option
of the corporation. Callable preference share has no definite redemption date. It is an
equity instrument rather than a financial liability because the option of the issuer to
redeem the share for cash does not satisfy the “textbook” definition of financial liability.
24. Explain a redeemable preference share.
PAS 32, paragraph 18, defines redeemable preference share as:
a. A preference share that provides for mandatory redemption by the issuer for a
fixed or determinable amount at a future date.
b. A preference share that gives the holder the right to require the issuer to
redeem the instrument for a fixed or determinable amount at a future date.
c. A redeemable preference share shall be classified as current or noncurrent
financial liability depending on the redemption date.

25. Explain a convertible preference share.

A convertible preference share is one which gives the holder the right to
exchange the holdings for other securities of the issuing corporation.
A preference shareholder may convert the preference share into ordinary share
because operations are successful and earnings on the ordinary share are
unlimited.
A preference shareholder may convert the preference share into bonds which is
actually a change of equity from that of an owner to that of a creditor. Normally,
preference share is convertible into ordinary share.

RETAINED EARNINGS
1. What is the meaning of retained earnings?
Retained earnings represent the cumulative balance of periodic earnings,
dividend distributions, prior period errors, and other capital adjustments. The IFRS term
for retained earnings is accumulated profits. The retained earnings of a corporation are
the accumulated net income of the corporation that is retained by the corporation at a
particular point of time, such as at the end of the reporting period. The two kinds of
retained earnings are appropriated and unappropriated retained earnings.

2. Distinguish between appropriated and unappropriated retained earnings.

UNAPPROPRIATED RETAINED
APPROPRIATED RETAINED EARNINGS
EARNINGS
Represent the portion which has been Represent the portion which is free
restricted and therefore is not and can be declared as dividends to
available for any dividend declaration shareholders
3. What is a deficit?
A deficit takes place when retained earnings has debit balance. Deficit is not an
asset but a deduction from shareholders’ equity and it has an IFRS term accumulated
losses.

4. What is the meaning of dividends?

Dividends are distribution of earnings or capital to the shareholders in
proportion to their shareholdings. Dividends are broadly classified into two namely
dividends out of earnings and dividends out of capital.

5. Distinguish between dividends out of earnings and dividends out of capital.

DIVIDENDS OUT OF EARNINGS DIVIDENDS OUT OF CAPITAL

Dividends are paid from Dividend that is drawn from a
earnings or declared out of company's capital base
profits earned by the company

6. What are property dividends?

Property dividends or dividends in kind are distributions of earnings of the entity
to the shareholders in the form of noncash assets. The accounting for property dividend
is now covered by IFRIC 17 as promulgated by the International Financial Reporting
Interpretations Committee.
It is also considered as “distribution of noncash assets to owners”.
There are two accounting issues with respect to property dividends, namely:
1. Measurement of the property dividend payable
2. Measurement of the noncash asset to be distributed as property dividend

7. Explain the measurement of property dividend payable.

IFRIC 17, par 11, provides that an entity shall measure a liability to distribute
noncash as dividend to its owners at the fair value of the asset to be distributed.
Dividend payable is initially recognized at the fair value of the noncash asset date of
declaration and is increased or decreased as a result of the change in fair value of the
asset at year-end and date of settlement. The offsetting debit or credit is through equity
or directly retained earnings.
The difference between the carrying amount of the dividend payable and the
carrying amount of the asset distributed shall be recognized in profit or loss.

8. Explain the measurement of noncash asset distributed as property dividend.

 PFRS 5, par 5A, provides that the classification, presentation and measurement
requirements in this PFRS shall also apply to a noncurrent asset to be distributed to
owners as property dividend. If the fair value less cost to distribute is lower than the
carrying amount of the asset at the end of the reporting period, the difference is
accounted for as impairment loss.

9. Explain the declaration of dividend with a choice of noncash asset or cash.

IFRIC 17, provides that if an entity gives its owners a choice either a noncash
asset or a cash alternative, the entity shall estimate the dividend payable by considering
both the fair value of each alternative and the associated probabilities the owners
selecting each alternative. At the end of each reporting period and at the date of
settlement, the entity shall adjust the dividend payable based on the alternative chosen
through equity or retained earnings.

10. Explain share dividends.

Share dividends are distributions of the earnings of the entity in the form of the
entity’s own shares. The IFRS term for share dividend is bonus issue. When share
dividends are declared, the retained earnings of the entity are in effect capitalized,
meaning transferred to share capital.
It creates only a change in the components of the shareholders’ equity- decrease
in retained earnings but increase in share capital.
Share dividends may be referred to as ordinary share dividends or special share
dividends.

11. How much retained earnings should be capitalized when share dividends are
declared?
If the share dividend is less than 20%, the amount charged to retained earnings
is equal to the fair value on the date of declaration and is conceived as a small
share dividend.
If the share dividend is more than 20%, the par or state value is capitalized
because this is conceived to materially effect a reduction in the share market
value. Share dividend of 20% or more is considered as large share dividend.

12. Explain fractional share dividends.

When share dividends are issued, it is usually impossible to issue full shares to all
of the stockholders. For example, if 10% share dividend is declared, it means that a
shareholder shall receive one share every ten shares held. Thus, a shareholder owning
45 shares shall be entitled to receive four full shares and a fractional one-half share.
 The following steps may be taken by the entity with respect to the fractional
share dividends:
1. The entity may issue warrants for the fractional shares and give the holders
thereof enough time to accumulate sufficient warrants for a full share
2. The entity may pay cash in lieu of fractional shares

13. May treasury shares be declared as share dividends?

Yes, treasury shares may be declared as share dividend. Treasury shares may be
reissued as dividends in which case the cost of the shares shall be charged to retained
earnings. The declaration is termed as property dividend under Philippine Corporation
Code.

14. Explain the treatment of the following:

a. When shareholders elect to receive cash instead of share dividends.
When shareholders elect to receive cash instead of share dividends, the amount to
be charged to retained earnings should be equivalent to the optional cash dividend.

b. When share dividends are declared on proposed increase in authorized share

capital.
When share dividends are declared on proposed increase in authorized share
capital, the application for which has been filled but not yet approved by SEC at the
end of the reporting period. The proposed increase and such dividend declaration
generally shall not be reflected in the statement of financial position prior to SEC
approval.
c. When share dividends are declared by closely held entities.
In closely held entities, if share dividends are declared, retained earnings shall be
capitalized only to the extent of par value or stated value of the shares.

15. May dividend be accounted for as expense?

Yes, dividend may be accounted for as expense. According to paragraph 40 of
PAS 32, dividend classified as an expense may be presented in the income statement
either with interest on other liabilities or as a separate line item.
 REFERENCES
Valix, C. T., Peralta, J. F., & Valix, C. A. (2020). Intermediate Accounting Volume 2. GIC Enterprises & Co.,
Inc.