PRACTICAL ACCOUNTING 1

SHAREHOLDERS’ EQUITY – Lecture

1. Measure of capital when issued

a. With Par – at par any excess to Share Premium account
b. Without Par – but with stated value
b.1 At stated value any excess to Share Premium
b.2 At total amount or proceeds on the issue of the share

2. Measure of consideration received on the issue of share capital

a. For cash or receivable – at face
b. For non-cash – at the FMV of the con-cash or FMV of the shares issued whichever is clearly determinable
c. For service rendered – at the FMV of the services rendered or market value of the stock issued whichever is
clearly determinable.

 When the stock issued is actively traded in the market, the market value of the stock will be the fair
measure of the consideration received.

3. Issuance of Ordinary and Preference Shares for a Basket Price

Both Securities are treaded as equity
a. If the market values of both equity shares are known, the basket price is allocated using their market value
ratio.

b. When only one security has a known market value, the basket price or proceeds is allocated to the
securities by deducting the market alue of the security with a known market value (the market value of
that security will be its assigned value) the excess will be assigned value of the security without a known
market value.

Preference Shares are treated as Debt:

The residual method is used to allocate the proceeds between the Ordinary Share Capital (Equity) and the
Preference Share (Debt). The fair value of the Preference Share (Debt) is deducted from the total proceeds in
arriving at the fair value of the Ordinary Share Capital (Equity)

4. Issuance of Preference Share with a Share Warrant

Preference Share is treated as Equity:
a. If the market value of the preference share and the market value of the warrants are known – the
proceeds is allocated to the securities using their market value ratio.

b. When only one security has a known market value, the proceeds is allocated to the securities by deducting
the market value of the security with a known market value (the market value of that security will be its
assigned value) the excess will the assigned value of the security withour a knwon market value.

Preference Share is treated as Debt:

The residual method is used to allocate the proceeds between the Share Warrants (Equity) and the Preference
Share (Debt). The fair value of the Preference Share (Debt) is deducted feom the total proceeds in arriving at
the fair value of the Share Warrants (Equity).

5. Measure of Treasury Share – at cost which is equal to the face value of cash or fair market value of non-cash asset
surrendered in reacquiring shares of the company

Disposal of treasury share thru re-issuance – the re-issue price less the cost of treasury share. Any positive excess
is credited to Share Premium – from Treasury. Any negative excess is debited to Share Premium – Treasury to the
extent of an existing credit balance prior to re-issuance, any remaining negative excess is charged to Retained
Earnings or Accumulated Profits or Losses account.

Disposal of treasury share thru retirement – compare the carrying value of the share to which to the treasury share
belongs against the cost of the treasury. Any positive excess is credited to Share Premium – From Retirement. Any
negative excess is charged to the existing Share Premium – Treasury, if any and the remaining amount to Retained
Earnings/Accumulated Profits and Losses.

 The carrying value of the share includes the Par and the Share Premium at the time the shares were
originally issued.

6. Retirement of Share Capital – compare the carrying value of the share capital retired (par and share premium)
against the retirement price any positive excess is credited directly to an equity account (share premium) –
retirement), however, if the result is negative excess is debited directly to retained earnings.
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7. Conversion of a Class of Own Equity to another Class of Own Equity – compare the carrying value of the
share capital converted against the par or stated capital shares issued the difference is credited to share
premium account. Any transaction cost incurred is a charged to the share premium account

8. Share Rights – is an issue of new shares with the terms of issue giving shareholders the right to an
additional number of shares in proportion to their current shareholdings. Right issue may be
renounceable or non-renounceable. If renounceable, existing shareholders may sell their rights to the
new shares to another party during the offer period. If the rights issue is non-renounceable, a
shareholder is not allowed to sell his or her rights to the new shares and must either accept or reject the
offer to acquire new shares in the company.

Accounting for Share Rights:

a. Upon issuance – no formal entry is necessary, only a memorandum entry is required
b. Upon exercise – formal entry to record the issue of new shares
c. Upon redemption – formal entry is required the “as if” payment of cash dividends
d. Upon expiration – no formal entry is necessary

9. Bonus issue – is an issue of shares to existing shareholders in proportion to their current shareholdings at
no cost to the shareholders. The company uses its reserves balances or retained earnings to make the
issue. The bonus issue is a transfer from one equity account to another, so it does not increase or
decrease the shareholders’ equity of the enterprise. Bonus issue is a transaction that will only affect the
components of the equity or a transaction inside the shareholders’ equity. The result of the bonus issue
increases the share capital and decreases another equity account of the entity.

10. Equity-Settled Share-Based Payment: (Share Options):

The entity shall measure the services received, and the corresponding increase in equity, directly, at the
fair value of the services received, unless the fair value cannot be estimated reliably. If the entity cannot
estimate value of the services received, the entity shall measure their fair value and the corresponding
increase in equity, indirectly, by reference to the fair value of the equity instruments granted. Because of
the difficulty of directly measuring the cost of the service, the entity shall measure the fair value of the
employee services received by reference to the fair value of the equity instruments granted. However,
in rare cases, the entity may be unable to estimate reliably the fair value of the equity instruments
granted at the measurement date, the entity shall instead measure the equity instruments at their
intrinsic value.

Accounting for share options:

1.) Measurement – is done on the date of grant and if necessary it is re-measured at each accounting
reporting date during vesting period. Re-measurement is necessary when subsequent information
differs from previous estimates.

The following are the factors in measuring the cost of services:

a. Number of shares to be issued:
Fixed – no performance condition but determine number of employees with vested benefits
Variable – consider any performance condition and determine number of employees with vested
Benefits

b. Value of the option – its determinable Fair Market Value (for value model) or its Intrinsic Value
(Intrinsic Model). The Intrinsic Value is the difference of the Fair Market Value of shares on the
date of grant over the Option Price. The intrinsic model is used only when the fair value of the
option is not clearly determinable.

c. Vesting period
Fixed – no performance condition
Variable – consider performance condition

2.) Recognition
a. Already vested – recognize immediately
b. Has yet to vest – the fair value of the service is amortize over the vesting period and recognize as
an expense in each year-end during the vesting period.

11. Cash-Settled Share-Based Payments:

The entity shall measure the goods or services acquired and the liability incurred at the fair value of the
liability. Until the liability is settled, the entity shall re-measure the fair value of the liability at each
reporting date and at the date of settlement, with any changes in fair value recognized in profit or loss for
the period.
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Accounting for cash-settled share-based payment

1. Measurement
a.) For future services to be rendered – at each year-end during the vesting period and amortize
over the total or remaining required service period. If the compensation has yet to be exercised
after the vesting period but before the expiration of the required exercised period further re-
measurement is required.

Factors in measuring the cost of services:

b.) Number of shares to be issued:
Fixed – no performance condition but determine number of employees with vested benefits
Variable – consider any performance condition and determine number of employees with vested
benefits

c.) Value of the option – its determinable Fair Market Value (Fair Value Model) or its Intrinsic Value
(Intrinsic Model). The Intrinsic Value is the difference of the Fair Market Value of shares in each
accounting reporting date over the pre-determined market price. The intrinsic model is used
only when the fair value of the option is not clearly determinable.

d.) Vesting period

Fixed – no performance condition
Variable – consider performance condition

2. Recognition
a. Already vested – recognize immediately
b. Has yet to vest – the fair value of the service is amortize over the vesting period and
recognize as an expense in each year-end during the vesting period.

12. Share-Based Payment with Cash Alternatives:

For share-based payment transactions in which the terms of the arrangement provide either the entity or
the counter party with the choice of whether the entity settles the transaction in cash (or other asset) or
by issuing equity instruments, the entity shall account for that transaction, or the components of that
transactions, as a cash-settled shared-based payment transactions if, and to the extent that, the entity
has incurred a liability to settle in cash or other assets, or as equity-settled share-based payment
transaction if, and to the extent that, no such liability has been incurred.

13. Share-Based Payment – The Counter Party with a Choice of Settlement:

If an entity granted the counterparty the right to choose whether a share-based payment transaction is
settled in cash or by issuing equity instruments, the entity has granted a compound financial instrument,
which includes a debt component and equity component. For transaction with parties other than
employees, in which the fair value of the goods or services received is measured directly, the entity shall
measure the equity component of the compound financial instrument as the difference between the fair
value of the goods or services received and the fair value of the debt component, at the date when the
goods or services are received.

For transactions, including transactions with employees, the entity shall measure the fair value of the
compound financial instrument at the measurement date, taking into account the terms and conditions
on which the rights to cash or equity instruments were granted. The entity shall first measure the fair
value of the debt component and then measure the fair value of the equity component, taking into
account that the counterparty must forfeit the right to receive cash in order to receive the equity
instruments.

14. Share Based Payment – The Entity with a Choice of Settlement:

If the terms of the arrangement provide an entity with choice of whether to settle in cash or by issuing
equity instruments, the entity shall determine whether it has a present obligation to settle in cash and
account for the share-based payment transaction accordingly. The entity has a present obligation to
settle in cash if the choice of settlement is equity instrument has no commercial substance (e.g. because
the entity is legally prohibited from issuing shares), or the entity has a past practice or a stated policy of
settling in cash, or generally settles in cash whenever the counterparty asks for cash settlement. If the
entity has a present obligation to settle cash, it shall account for the transaction in accordance with the
requirements applying cash-settled share-based payment transactions. If no such obligation, the entity
shall account for transaction in accordance with the requirements applying equity-settled share-based
payment transactions.

15. Reserves – is the generic term for all equity accounts other than contributed equity. A major component
is the Accumulated Profits/Losses (Retained Earnings) account. Other items included in the reserves
account are the following: Revaluation of property, plant and equipment: foreign exchange reserves:
unrealized gain/loss on available for sale securities: