Shareholders’ Equity

(Treasury Shares, Rights Issue, Share Split)

Accounting for Corporation

Learning Objectives
1. Apply the recognition and measurement of
treasury shares
2. Explain the legal limitation in the acquisition
of treasury shares
3. Explain the accounting procedure for the
retirement of treasury shares
4. Identify the typical recapitalization
5. Journalize recapitalization and stock rights
transactions
Treasury Shares
• Entity’s own shares that have been
issued and then reacquired but not
cancelled
• Requisites
− Shares must be the entity’s own shares
− Shares must have been issued originally
− Shares are reacquired but not cancelled
Legal Limitation of
Treasury Shares
“Provided that the corporation has
unrestricted retained earnings in its books
to cover the shares to be purchased or
acquired, a stock corporation shall have
the power to purchase or acquire its own
shares for a legitimate corporate purpose
or purposes…”
(Section 40, RA 11232 Revised Corporation Code of the Philippines)
Accounting for Treasury
Shares
• COST method
• Treasury shares shall be recorded at
cost, regardless of whether the shares
are acquired below or above the par
value or stated value
• Noncash consideration, the cost is
usually measured by the carrying
amount of the noncash asset
surrendered.
Illustration
An entity acquired 2,000 shares with par of P100 at
P150 per share.
Treasury shares 300,000
Cash (2,000 shares x P150) 300,000
Reissuance at cost
The treasury shares are subsequently reissued at P150
per share.

Cash 300,000
Treasury shares 300,000
Illustration (cont’d)
Reissuance at more than cost
The treasury shares are subsequently reissued at P200
per share.
Cash 400,000
Treasury shares 300,000
Share premium - treasury shares 100,000

The excess of reissue price over the cost is treated as

share premium.
Illustration (cont’d)
Reissuance at less than cost
The treasury shares are subsequently reissued at P100
per share.

The excess of cost over the reissue price is treated is

charged to the following in order of priority:
a. Share premium from treasury shares of the same
class
b. Retained earnings
Illustration (cont’d)
Reissuance at less than cost
If there are no previous transactions involving treasury
shares, the journal entry is

Cash 200,000
Retained earnings 100,000
Treasury shares 300,000
Another Method: Par value
or Stated Value Method
The Company’s 2,000 shares with par value of P100 are
acquired for a total consideration of P150,000, the
journal entry is

Treasury shares 200,000

Cash 150,000
Share premium - treasury shares 50,000

Note: Another term - RETIREMENT METHOD, treasury

is debited at par. The COST METHOD is the only
acceptable method in accounting for treasury
shares.
Retirement of Treasury
Shares
• If treasury shares are subsequently retired,
the share capital account is debited at par
value or stated value and the treasury shares
account is credited at cost.
• Example: If the 1,000 ordinary shares with par
value of P100 are held as treasury at a cost of
P80,000, and subsequently retired, the journal
entry is
Ordinary share capital 100,000
Treasury shares 80,000
Share premium - treasury shares 20,000
Retirement of Treasury
Shares (cont’d)
If the retirement results in a loss, meaning the
cost of the treasury shares exceeds the par
value, such loss is debited to the following order
of priority:
a. Share premium from the original issuance
b. Share premium from treasury shares
c. Retained earnings
Illustration
Ordinary share capital, 50,000 shares, P100 par 5,000,000
Share premium - original issuance 500,000
Share premium - treasury shares 100,000
Retained earnings 1,000,000
Treasury shares, 5,000 shares at cost 750,000

The subsequent retirement of the treasury shares is recorded as

Ordinary share capital 500,000

Share premium - original issuance 50,000
Share premium - treasury shares 100,000
Retained earnings 100,000
Treasury shares 750,000
Disclosure of treasury
shares
a. The number of shares held in the treasury.
b. The restriction on the availability of retained
earnings for distribution of dividends equal to
the cost of treasury shares
Presentation of Treasury
Shares
Ordinary share capital, 50,000 shares, P100 par 5,000,000
Share premium 500,000
Retained earnings (of which P600,000 is appropriated
for the cost of treasury shares) 2,000,000
Treasury shares, 5,000 shares at cost (600,000)
Total shareholders' equity 6,900,000
Donated Shares
• Refer to shares received by the entity from the
shareholders by way of donation
• Donated shares are actually treasury shares and
may therefore be reissued at any price without any
discount liability.
• Secured without cost, and consequently the entity’s
assets, liabilities and shareholders’ equity are not
affected but the number of outstanding shares is
reduced
• The reissue or resale of donated shares – increases
assets and donated capital or share premium
Donated Shares (cont’d)
• Shareholder donated to the entity an
aggregate of 10,000 ordinary shares of their
shareholdings with par of P100.
• The receipt of the donated shares by the entity
is simply recorded by means of a
memorandum entry.

“Received from shareholders as

donation 10,000 ordinary shares with
P100 par value.”
Donated Shares (cont’d)
• The 10,000 donated shares are subsequently sold
for P150 per share.
Cash 1,500,000
Donated capital 1,500,000

• If the donated shares are retired or cancelled prior

to reissuance, the journal entry is
Ordinary share capital 1,000,000
Donated capital 1,000,000
Treasury Share
Subterfuge
• Occurs when excessive shares are issued for
a property with the understanding that the
shareholders shall subsequently donate a
portion of their shares.
• An entity issued 10,000 ordinary shares of
P100 par value for land with a legally
determined fair value of P800,000 only.

Land 1,000,000
Ordinary share capital 1,000,000
Treasury Share
Subterfuge (cont’d)
• If subsequently, 3,000 shares are donated to
the corporation by the shareholders and the
same shares are reissued at P90 per share,
the journal entry should be

Cash 270,000
Land 200,000
Donated capital 70,000
Donation of Capital
• Contributions, including shares of an entity,
received from shareholders shall be recorded at
fair value with the credit going to donated capital.
• Entities receive from nonshareholders gifts or
grants of funds or other assets that are restricted
for property and equipment additions.
• Capital gifts or grants shall be recorded at fair
value when received or receivable.
• Such capital gifts or grants from nonshareholders
are generally subsidies and credited to income.
Assessment on
Shareholders
• Assessment may be levied on shareholders when
shares are originally issued at discount or when the
corporation is in dire need of financial assistance.
• When shares are originally issued at discount, the
discount is actually a receivable from the shareholder.
• EXAMPLE: If there is a discount on share capital of
P100,000 and the same is charged to the shareholder
by virtue of assessment made by the board of
directors

Cash or Share assessment receivable 100,000

Discount on share capital 100,000
Assessment on
Shareholders (cont’d)
• When the corporation is in dire need of
financial assistance, the shareholders can
vote to assess themselves a certain amount
per share owned.
• EXAMPLE: The corporation has 100,000
shares issued and outstanding and the
shareholders are assessed P50 per share

Cash or Share assessment receivable 5,000,000

Share premium - assessments 5,000,000
Recapitalization
• Occurs when there is a change in the capital structure
of the entity
• The old shares are cancelled and new shares are
issued
• Typical recapitalization
1. Change from par to no-par
2. Change from no-par to par
3. Reduction of par value
4. Reduction of stated value
5. Split up
6. Split down
Change from Par to No-
Par
Ordinary share capital, P100 par, 50,000 shares 5,000,000
Share premium 500,000
Retained earnings 2,500,000

Case 1: All the 50,000 shares are called for cancellation.

Instead a new shares with stated value of P50 are issued.

Ordinary share capital 5,000,000

Share premium 500,000
Ordinary share capital (50,000 x 50) 2,500,000
Share premium - recapitalization 3,000,000
Change from Par to No-
Par (cont’d)
Ordinary share capital, P100 par, 50,000 shares 5,000,000
Share premium 500,000
Retained earnings 2,500,000

Case 2: All the 50,000 shares are called for cancellation.

Instead a new shares with stated value of P150 per share
are issued.
Ordinary share capital 5,000,000
Share premium 500,000
Retained earnings 2,000,000
Ordinary share capital (50,000 x 150) 7,500,000
• If increase in share capital exceed share premium, the
excess is charged to retained earnings.
Change from No-Par to
Par
Ordinary share capital, P100 stated value
50,000 shares 5,000,000
Retained earnings 2,500,000

Case 1: All the 50,000 shares are called for cancellation.

Instead 50,000 shares of P50 par value are issued.

Ordinary share capital 5,000,000

Ordinary share capital (50,000 x 50) 2,500,000
Share premium - recapitalization 2,500,000
Change from No-Par to
Par (cont’d)
Ordinary share capital, P100 stated value
50,000 shares 5,000,000
Retained earnings 2,500,000

Case 2: All the 50,000 shares are called for cancellation.

Instead, 50,000 shares of P150 par value are issued.

Ordinary share capital 5,000,000

Retained earnings 2,500,000
Ordinary share capital (50,000 x 150) 7,500,000
Reduction of Par Value
Ordinary share capital, P100 par, 50,000 shares 5,000,000
Share premium 500,000
Retained earnings 2,000,000

A recapitalization is effected whereby the par value of

P100 is reduced to P80 per share.

Ordinary share capital (50,000 x 20) 1,000,000

Share premium - recapitalization 1,000,000
 Reduction of Stated Value
Ordinary share capital, P100 stated value
50,000 shares 5,000,000
Retained earnings 2,000,000
A recapitalization is effected whereby the stated value of
P100 is reduced to P80 per share.

Ordinary share capital (50,000 x 20) 1,000,000

Share premium - recapitalization 1,000,000
Share Split
Share Split may be in a form of
a. Split up or share split proper
b. Split down o reverse share split
Split Up
• Transaction whereby the original shares are
called in for cancellation and replaced by a
larger number accompanied by reduction in
the par value or stated value
• Prompted mainly by a desire to increase the
number of outstanding shares for the purpose
of effecting a reduction in unit market place
Split Up (cont’d)
• EXAMPLE: An entity has 10,000 shares issued
and outstanding, with P100 par value. If the
shares are split up 5 to 1, the new capitalization
would be 50,000 shares with P20 par value.
• Note that before and after the share split, the
share capital remains the same/
• THERE MUST NOT BE ANY CHANGE IN THE
AMOUNT OF SHARE CAPITAL OF THE ENTITY
• CHANGE IN NUMBER OF SHARES AND THE
PAR VALUE OR STATED VALUE
Memorandum Entry
• No formal entry is necessary to record the
share split
• It is sufficient that a memorandum is made for
the number of new shares issued in exchange
for the old shares plus an indication of the
new par value
Split Down
• Reverse of split up
• The original shares are cancelled and
replaced by a smaller number accompanied
by an increase in par value
• EXAMPLE: An entity has 10,000 shares
issued and outstanding, with P100 par value.
If the shares are split down 5 to 1, the new
capitalization would be 2,000 shares with
P500 par value.
Right Issue
• Granted to existing shareholders to enable them
to acquire new shares at a specified price during
a specified period.
• Philippine term – “STOCK RIGHTS”
• Share warrants – represent the certificate or
instrument evidencing ownership over the rights
issue
• Share capital of the corporation is increased, new
shares are issued – offer first to existing
shareholders (right or preemption; accounting –
stock rights/right issue)
Issuance, Expiration,
Exercise of Rights
• Issuance – no entry is required, without
consideration, memorandum entry only
• Expiration – only memorandum entry
• Exercise – if the rights are exercised, a
memorandum is made for the decrease in the
number of shares claimable through the exercise
of rights
• The sale of shares through the exercise of the
rights is then recorded normally
Preference Share Issued
with Share Warrants
• When share warrants are issued together with
preference share, there is actually a sale of two
securities – the preference share and the share
warrants
• Thus, the consideration received shall be
allocated between the preference share and the
warrants based on their market value
Illustration
An entity issued 20,000 preference shares of P100
par for P3,250,000 with 20,000 share warrants to
acquire 10,000, P50 par value ordinary shares at
P60 per share. On the date of issuance, the market
values are: Preference share ex-warrant – P120,
Warrant – P10
Allocated
Market Value Fraction Issue Price
Preference share (20,000 x 120) 2,400,000 24/26 3,000,000
Warrants (20,000 x 10) 200,000 2/26 250,000
2,600,000 3,250,000
Illustration (cont’d)
• Accordingly, the journal entry to record the issuance
of preference shares and warrants is:

Cash 3,250,000
Preference share capital (20,000 x 100) 2,000,000
Share premium - PS 1,000,000
Share warrants outstanding 250,000

• The share warrants outstanding account is reported

as part of share premium.
Illustration (cont’d)
• If subsequently, all 20,000 warrants are exercised
requiring the issuance of 10,000 ordinary shares at
P60 per share, the journal entry is:
Cash (10,000 x 60) 600,000
Share warrants outstanding 250,000
Ordinary share capital (10,000 x 50) 500,000
Share premium 350,000

• If for any reason, the warrants are not exercised, the

share warrants outstanding account is simply closed
and credited to share premium.
Illustration - Query
• Only the preference share has known market value of
P120, and the warrant has no known market value,
how is the sales price of P3,250,000 allocated?

Preference share (20,000 x 120) 2,400,000

Warrants (3,250,000 – 2,400,000) 850,000
3,250,000

Cash 3,250,000
Preference share capital (20,000 x 100) 2,000,000
Share premium - PS 400,000
Share warrants outstanding 850,000
Another Illustration
• Preference shares, 20,000, with par value of
P100, are issued for P3,250,000, together
with 20,000 warrants to acquire 20,000, P50
par value ordinary shares at P60 per share.
• The preference share ex-warrant and the
warrant have no market value but the ordinary
share has a market value of P100.
Another Illustration (cont’d)
Market value of ordinary share 100
Less: Option price or exercise price 60
Intrinsic value of warrant 40
Multiply by number of ordinary shares under the warrants 20,000
Total value of share warrants 800,000

Sales price 3,250,000

Less: Value of the share warrants 800,000
Value assigned to preference share 2,450,000

Cash 3,250,000
Preference share capital (20,000 x 100) 2,000,000
Share premium - PS 450,000
Share warrants outstanding 800,000
Summary
• Accounting for treasury shares
• Recapitalization: typically (1) change from
par to no-par, (2) change from no-par to par,
(3) reduction of par value, (4) reduction of
stated value, (5) split up and (6) split down
• Rights Issue: issuance, expiration and
exercise
• Preference share issued with share warrants
End of Presentation
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