Treasury Stock Transactions

Occasionally, a corporation buys

back its own stock for the purpose
of later reissuing it. This stock is
referred to as treasury stock.
Treasury Stock Transactions
Treasury stock is stock that:
1. has been issued as fully paid.
2. has been reacquired by the
corporation.
3. has not been canceled or reissued.
Accounting for Treasury Shares
Accounting method Cost method - it is the legal limitation on
acquisition of treasury shares
- Shall be recorded always at cost

Par value method – also know as

retirement method

Acquired for cash Cost is equal to the cash payment

Noncash considerations Cost is usually measured by the carrying

amount of the noncash asset surrendered

No gain or loss Shall be recognized on the purchase, sale,

issue or cancellation of an entity’s equity
instruments
 Entry
An entity acquired 2,000 shares with par of P100 Treasury shares 300,000
at P150 per share (Reacquired) Cash 300,000
The treasury shares are subsequently reissued at Cash 300,000
P150 per share (Re-issued at cost) Treasury shares 300,000
The treasury shares are subsequently reissued at Cash 400,000
P200 per share (Re-issued above cost) Treasury shares 300,000
Share premium – treasury shares 100,000
The treasury shares are subsequently reissued at Assume no previous transactions involving the
P100 per share (Re-issued below cost) treasury shares

The excess of the cost over the reissue price is Cash 200,000
charged to the following in the order of priority; Retained Earnings 100,000
1. Share premium from treasury shares of the Treasury shares 300,000
same class
2. Retained earnings
Illustration 2
Ordinary Share capital, 10,000 shares, P100 par 1,000,000
Share premium – original issuance 200,000
Share premium – treasury shares 20,000
Retained earnings 500,000
Treasury shares, 2,000 at cost 300,000

Subsequently, the treasury shares are reissued at P100 per share

Entry:
Cash 200,000
Share premium 20,000
Retained earnings 80,000
Treasury shares 300,000
Retirement of treasury shares
Retirement - Share capital is debited at par
- Treasury shares is credited at cost

Gain on retirement = Par Value > Cost of Treasury Shares

Loss on retirement
= Cost of Treasury Shares > Par Value
Loss should be debited in order of priority;
1. Share premium from original issuance
2. Share premium from treasury shares
3. Retained earnings
 Illustration
Gain on Retirement Loss on retirement
Example: if 1,000 ordinary shares with par of Ordinary share capital, 50,000 shares
P100 are held as treasury at a cost of P80,000, 100 par 5,000,000
and subsequently retired, 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

Entry: Entry:

Ordinary Shares 100,000 Ordinary shares capital 500,000

Treasury Shares 80,000 Share premium – original issuance 50,000
Share premium – treasury shares 20,000 Share premium – treasury shares 100,000
Retained earnings 100,000
Treasury shares 750,000
Disclosure of treasury shares
Includes the following: Presentations:
1. Number of shares held in the treasury The cost of treasury shares shall be deducted
2. Restriction on the availability of retained from the total shareholder’s equity
earnings for distribution of dividends
equal to the cost of treasury shares
Problem 1
Granny Corporation purchased 10,000 shares of its P10 par
value ordinary share as treasury share for P120,000 on March
2, 2014.
Under the cost method of accounting for treasury shares, the
issuance would result in credit to a:

How much is the gain or loss in the reissuance of treasury

shares?
 Problem 2
The following capital accounts are shown in the balance sheet of Laughing
Corporation:
Ordinary share, 10,000 shares, par value P100 1,000,000
Share premium – ordinary share 20,000
Share premium – treasury shares 30,000
Retained earnings 750,000
Treasury shares, 2,000 shares at cost 250,000

The entire 2,000 treasury shares were sold for P200,000

What would be the balance of the retained earnings account after the sale?
 Problem 3
The analysis of shareholder’s equity of P Company at January 1, 2014 showed the following:
Ordinary share, par value P20, authorized 200,000
Shares, issued and outstanding, 120,000 shares 2,400,000
Share premium 480,000
Retained earnings 1,540,000
The company uses the cost method of accounting for treasury share and the following transaction
took place:

Acquired 2,000 shares of its shares for P70,000.

Sold 1,200 treasury shares at P40 per share.
Retired the remaining treasury shares.

What is the amount of the share premium at the end of the accounting period?

How much the shareholders equity at the end of the accounting period?
Donated Shares
- Refers to the shares received by the entity from the
shareholders by way of donation

- Are actually treasury shares and may therefore be reissued

and any price without any discount

- Assets , liabilities and shareholder’s equity are not affected

but the number of outstanding shares is reduced

- Reissue or resale of donate shares increases assets and

donated capital or share premium
Illustration
Shareholders donated to the entity an aggregate of 10,000
ordinary share of their shareholdings with a par of P100.

The 10,000 shares are subsequently sold for P150 per share
Entry
Receipt of donated shares Memorandum entry

Sales of donated shares Cash 1,500,000

Donated Capital 1,500,000

Retirement or cancelled prior to reissuance Ordinary Share Capital 1,000,000

Donated Capital 1,500,000

Donated Capital is part of share premium

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

- Donated shares may then be reissued at a discount without

any liability on the part of the shareholder

- The resale or reissue of the treasury donated shares is not

credited entirely to the donated capital.
Illustration
An entity issued 10,000 ordinary shares of P100 par value for land
with a legally determined fair value of P800,000 only.
Entry:
Land 1,000,000
Ordinary Share Capital 1,000,000
If subsequently 3,000 shares are donated to the corporation by the
shareholders and the same shares are reissued at P90 per share.
Entry:
Cash 270,000
Land 200,000
Donated Capital 70,000
Donation of Capital
Shareholders Non-shareholders
Valuations: Fair Market Value
Valuation: Fair Market Value
Without Restrictions: Credited to Income

With Restrictions:
Initially: Credited to Liability
Credit: Donated Capital
Meet the conditions:
Debit: Liability
Credit: Income
Recapitalization
- Occurs when there is a change in the capital structure of the
entity.

- The old shares is cancelled and new shares are issued.

 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

All the 50,000 shares are called in for cancellation. Instead, 50,000 no
par-par shares with stated value of P50 are issued.
Entry:
Ordinary share capital 5,000,000
Share premium 500,000
Ordinary share capital 2,500,000
Share premium 3,000,000
Case 2
Ordinary share capital, P100 par, 50,000 shares 5,000,000
Share premium 500,000
Retained earnings 2,500,000
All the 50,000 shares are called in for cancellation. Instead 50,000
no-par shares with stated value of P150 per share are issued.

Entry:
Ordinary share capital 5,000,000
Share premium 500,000
Retained Earnings 2,000,000
Ordinary share capital 7,500,000
Change from no-par to par value share
Ordinary share capital, no-par P100 value
50,000 shares 5,000,000
Retained Earnings 2,500,000

All the 50,000 shares are called in for cancellation. Instead, 50,000
shares of P50 par value are issued.

Entry:

Ordinary share capital 5,000,000

Ordinary share capital 2,500,000
Share premium – recapitalization 2,500,000
Case 2
Ordinary share capital, no-par P100 value
50,000 shares 5,000,000
Retained Earnings 2,500,000
All the 50,000 shares are called in for cancellation. Instead,
50,000 shares of P150 par value are issued.

Entry:
Ordinary share capital 5,000,000
Retained earnings 2,500,000
Ordinary share capital 7,500,000
Reduction of par value
Ordinary share capital, 50,000 shares, P100 par 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.

Entry:
Ordinary share capital 1,000,000
Share premium- recapitalization 1,000,000
Reduction of stated value
Ordinary share capital, 50,000 shares, P100
stated value 5,000,000
Retained earnings 2,000,000

A recapitalization is effected whereby the stated value of P100 is

reduced to P80.

Entry:

Ordinary share capital 1,000,000

Share premium – recapitalization 1,000,000
Share split
a. Split up or share split over

b. Split down or reverse share split

 Split up
- is a transaction whereby the original shares are called in for cancellation and
replaced by a larger number accompanied by a reduction in the par value or stated
value.
- Desire to increase the number of outstanding shares for the purpose of effecting a
reduction in unit market price
- The share capital remains the same

Example:
An entity has 10,000 shares issued and outstanding, with P100 par value. If
the shares are split up 5 to 1.

10,000 x 5 = 50,000 shares

P 100 / 5 = P20 par value
P1,000,000 total

Entry: Only memorandum entry is needed

Split down
- Is the reverse of split up. It is the transaction whereby the original
shares are canceled and replaced by a smaller number
accompanied by an increase in the par value or stated value.

- Example:

An entity has 10,000 shares issued and outstanding, with

P100 par value. If the shares are split down 5 to 1.
10,000 shares / 5 = 2,000
P100 x 5 = P500 per share
P 1,000,000 total
Rights Issue / Stock Right
- Is granted to existing shareholders to enable them to acquire
new shares at a specified price during a specified period.

- Share warrants – represent the certificate or instrument

evidencing ownership over the rights issue.

- Pre-emptive right / right of preemption – legal right

of shareholders

- Exercise price – is less than the current market value

Issuance of Rights Expiration of Rights Exercise of Rights
- No entry is required - Memorandum entry is made
(without considerations)
- Sale of shares through
- Memorandum (includes the Memorandum entry only exercise of the rights
number of rights issued and
number of shares to be - Cash is equal to par
purchased)

- Cash is greater than par

Preference share issued with warrants
- Serve as a sweetener to make the securities more attractive to the
prospective investors.

- Consideration received shall be allocated between the preference

share and the warrants on he basis of their market value.
Illustration
An entity issued 20,000 preference shares of P100 par value for
P 3,250,000 with 20,000 warrants to acquire 10,000, P50 par
value ordinary shares at P60 per share. On the date of the
issuance, the market values are:

Preference share ex-warrant 120

Warrant 10
 Computations
Market Value Fraction Allocation
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
Total 2,600,000 3,250,000
 Entry
Issuance of preference shares with Cash 3,250,000
warrants Preference shares capital 2,000,000
Share premium – P/S 1,000,000
Share warrants outstanding 250,000

Exercised of 20,000 warrants Cash (10,000 x 60) 600,000

Share warrants outstanding 250,000
Ordinary share capital 500,000
Share premium 350,000

Warrants expired - Share warrants outstanding is simply closed to

share premiums

Share warrants outstanding 250,000

Share premiums 250,000
Illustration 2 - continuation
Only the preference share has a know market value of P120 and the warrants has
no known market value

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

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

Cash 3,250,000
Preference share capital 2,000,000
Share premium – P/S 400,000
Share warrants outstanding 850,000
Illustration 3
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.
Computations:
Market value of ordinary share 100
Less: Option price or exercise price 60
Intrinsic value of warrant 40
Multiply by number of share warrants 20,000
Total value of warrants outstanding P800,000
Entry:
Cash 3,250,000
Preference share capital 2,000,000
Share premium – P/S 400,000
Share warrants outstanding 850,000
Classifications of Retained Earnings
a. Unappropriated retained earnings – represent that
portion which is free and can be declared as dividends to
shareholders
b. Appropriated retained earnings – represent that
portion which has been restricted and therefore is not
available for any dividend declaration
c. Deficit –when the balance has a debit balance
- known as accumulated losses
- deduction from shareholders
 Cash dividends – two classes of shares
Classifications of preference shares:
1. Cumulative and Non-Participating
2. Non-cumulative and Non-participating
3. Cumulative and fully participating
4. Non-cumulative and fully participating

Illustration:
The following data were taken from the record of Banahaw Corp.
10% Preference Share, P100 par, 1,000 shares were
issued and outstanding P100,000
Ordinary Shares, P50 par, 3,000 shares were issued
and outstanding 150,000
Accumulated Profits (losses):
Appropriated fro Plant Expansion P 80,000
Unappropriated or Free 120,000 200,000
Of the unappropriated or free Accumulated Profit (losses) of P120,000, P90,000 was declared as cash
dividends in 2015. No cash dividends were declared and paid in the past two (2) years.
 Preference Shares are cumulative & non-participating

Preference Shares Ordinary Shares Total

Preference Dividends:
Arrears- P100,000 x 10% x 2 years P20,000 P20,000
Current – P100,000 x 10% x 1 yr 10,000 10,000
Total P30,000 P30,000
Balance (90,000 – 30,000) P 60,000

Ordinary Dividends:
Balance P60,000 P60,000
As distributed P30,000 P60,000 P90,000

Divided by issued shares 1,000 3,000

Dividends per share P30.00 / share P20.00 / share

 Preference are non-cumulative & non-participating.
Preference Shares Ordinary Shares Total
Preference Dividends:
Current – P100,000 x 10% x 1 yr P 10,000 P10,000
Total P 10,000 P10,000
Balance (90,000 – 10,000) P 80,000

Ordinary Dividends:
Balance P80,000 P80,000
As distributed P10,000 P80,000 P90,000

Divided by issued shares 1,000 3,000

Dividend per shares P10 / share P 26.67 / share

 Preference shares are cumulative & fully participating
Preference Shares Ordinary Shares Total
Preference Dividends:
Arrears- P100,000 x 10% x 2 years P20,000 P20,000
Current – P100,000 x 10% x 1 yr 10,000 10,000
Total P30,000 P30,000

Ordinary Dividends: (150,000 x 10% ) P15,000 P15,000

As distributed P30,000 P15,000 P45,000

Balance :90,000 – 45,000 = P45,000

Preference shares P100,000/250,000
x P45,000 18,000 18,000
Ordinary Shares P150,000/250,000
x P45,000 27,000 27,000
Grand Total P48,000 P42,000 P90,000

Divided by issued shares 1,000 3,000

 Non-cumulative & fully participating
Preference Shares Ordinary Shares Total
Preference Dividends:
Current – P100,000 x 10% x 1 yr P10,000 P10,000

Ordinary Dividends: (150,000 x 10%) P15,000 15,000

As distributed P10,000 P15,000 P25,000

Balance: P90,000 – 25,000 = P65,000

Preference shares = 100,000/250,000

x P65,000 26,000 26,000
Ordinary shares = 150,000/250,000
x P65,000 39,000 39,000
Grand Total P36,000 P54,000 P90,000

Divided by issued shares 1,000 3,000

Dividends per share P36.00 / share P18.00 / share

 Share dividends
Requirements:
a. Sufficiency of accumulated profits (losses)
b. sufficiency of the original and unissued shares
c. approval of shareholders representing not less than two thirds (2/3) of
the outstanding share capital at a regular meeting.

Declaration: Entry
Accumulated Profits (losses) xxx
Share dividends distributable xxx
Distribution: Entry
Share dividends distributable xxx
Share capital xxx

Effects in Shareholder’s Equity: Total = Zero (0)

Share Capital = Total (0) / number of shares Increased / Par (decreased)
 Small Share Dividends
Declaration of share dividends of less than or equal to 20%
Valuation of dividends: Fair market value at the time of declaration

Illustration:
Magara Corporation, a corporation with listed shares, declares a 10% share dividend. It
has 10,000 shares issued and outstanding with a par value of P100. On the date of declaration, the
market value per share is P105.

Entry: Declaration:
Accu. Profit (Losses) 105,000
Share Dividends Distributable 100,000
Share Premium from Share Dividends 5,000
Distribution:
Share Dividends Distributable 100,000
Ordinary Share Capital 100,000
 Large Share Dividends
Declaration of share dividends of more than 20%
Valuation of dividends: Par value at the time of declaration

Illustration:
Magara Corporation, a corporation with listed shares, declares a 25% share dividend. It has
10,000 shares issued and outstanding with a par value of P100. On the date of declaration, the market
value per share is P105.

Entry: Declaration:
Accu. Profit (Losses) 250,000
Share Dividends Distributable 250,000

Distribution:
Share Dividends Distributable 250,000
Ordinary Share Capital 250,000
The following data were taken from the record of Debento Inc.

5% Preference Share, P50 par, 20,000 shares were

issued and outstanding P1,000,000
Ordinary Shares, P75 par, 10,000 shares were issued
and outstanding 750,000
Treasury Shares , 2,000 shares 150,000

Accumulated Profits (losses):

Appropriated for - TS P 150,000
Unappropriated or Free 750,000

In addition, the income of Debento for the year ended December 31, 2018
amounted to P800,000. In the same date the company declared dividend of 80%
of Accumulated Profit (Losses). The Ordinary shares will receive P10 / share.
There are 3 years unpaid dividends.

Required: Compute the dividends for both Preference and Ordinary Shares

1. Non-cumulative and fully participating

2. Non-cumulative and Non-participating
3. Cumulative and Non-Participating
4. Cumulative and fully participating
 Liquidating Dividends
- Are those dividends declared and paid out of capital. In other
words, liquidating dividends are return of capital to investing
shareholders.
Dividends
- Are distribution of earnings or capital to the shareholders in
proportion to their shareholdings.
Classifications:
1. Dividends out of earnings
2. Dividends out of capital
Dividends out of earnings
- it can be declared only from retained earnings

- (deficit) – it is illegal to declared dividends or excess of

retained earnings (return of capital)

- Stock dividend – may be declared from premium on par

value share.

- Declaration- is reposed on the board of directors of the

corporation.
Essential dates
1. Date of declaration – is the date on which directors
authorize the payment of dividends to shareholders
2. Date of record – is the date on which the stock and
transfer book of the corporation will be closed for registration
- only registered as of such date are entitled to receive
dividends
- no entry
3. Date of payment – is the date on which the dividend
liability is to be paid.
Cash dividends
- Is the most common type of dividends
- May be expressed as follows;

- Certain amount of peso per share (example) P 5 per share

- Certain percent of the par or stated value (example) 7%

dividend is declared, a P200 par value share will receive P14 as
dividend.
Property dividends
- Also known as dividends in kind are distribution of earnings
of the entity to the shareholders in the form of non-cash
assets.
- Accounting issues with respect to property dividends;
- Measurement of the property dividend payable

- Measurement of the noncash asset to be distributed as property

dividend.
 Measurement of property dividend payable
Declaration – fair value of the asset distributed

Year end and payment date – adjust the carrying amount of the
dividend payable with any change recognized in equity as
adjustment to the amount of distribution.
- any adjustment is charged either debit or credit to retained
earnings.
Date of settlement –
Profit or Loss = Dividend Payable – Carrying Amount of
Asset
Measurement of noncash asset distributed
- shall measure a noncurrent asset classified for distribution to
owners at the lower of carrying amount and fair value less cost
to distribute.

Impairment loss = Fair value less cost to sell < Carrying

amount of the asset
Illustration – Investment in Equity
An entity owned 50,000 unquoted shares of another entity
accounted for under the cost method. The carrying amount of
the investment is P1,000,000.
On December 1, 2017, the entity declared these shares as
property dividend to be distributed on January 31, 2018.
The investment had the following fair value less cost to
distribute:
December 1, 2017 P 1,500,000
December 31, 2017 1,800,000
January 31, 2018 1,900,000
 Entry
December 1 – date of declaration Retained Earnings 1,500,000
Dividend payable 1,500,000
December 31, 2017 - Liability
FMV 12/31 1,800,000 Retained Earnings 300,000
FMV – 12/1 1,500,000 Dividend Payable 300,000
Increase 300,000
Carrying amount of investment Whichever is lower between FMV less to cost and
- ASSET carrying amount
P1,000,0000
January 31, 2018 - Final Assessment
FMV 1/31 1,900,000 Retained Earnings 100,000
FMV – 12/31 1,800,000 Dividend Payable 100,000
Increase 100,000
January 31, 2018 – Payment
Dividend payable 1,900,000
Dividends payable 1,900,000 Investment in equity securities 1,000,000
Carrying Amount 1,000,000 Gain on distribution of dividends 900,000
Gain on distribution 900,000
Illustration 2 – Depreciable Asset
On November 1, 2017, an entity declared a property dividend
of equipment payable on March 1, 2018.

The carrying amount of the equipment is P3,000,000 and the

fair value is P2,500,000 on the same date.

However, the fair value less cost to distribute the equipment is

P2,000,000 on December 31, 2017 and P2,000,000 on March
1, 2018.
 Entry
November 1, 2017 – Date of declaration Retained earnings 2,500,000
Dividends payable 2,500,000
December 31, 2017 – Liability
FMV 12/31 2,200,000 Dividends payable 300,000
FMV – 11/1 2,500,000 Retained earnings 300,000
Increase (300,000)
December 31, 2017 – Asset
FMV 2,200,000 Impairment loss 800,000
CV 3,000,000 Equipment 800,000
I/L (800,000)
March 1 – Final Assessment
FMV 3/1 2,000,000 Dividends payable 200,000
FMV – 12/21 2,200,000 Retained earnings 200,000
Increase (200,000)

March 1 – payment
D/P 2,000,000 Dividends payable 2,000,000
C/A 2,200,000 Loss on distribution of P/D 200,000
Loss on distribution (200,000) Equipment 2,000,000
Choice of either non-cash or cash
- Estimate the dividend payable by considering both the fair
value of each alternative and the associated probabilities of
owners selecting the alternatives.

- Settlement – adjust the dividend payable based on the

alternative chosen through equity or retained earnings.
 Illustration
On December 31, 2017, an entity declared dividends on ordinary shares payable on
March 31, 2018.

The entity decided to give the shareholders a choice between a total cash dividend of
P2,000,000 or a property dividend in the form of noncash asset from the inventory with
carrying amount of P2,500,000 and fair value less cost to distribute of P3,000,000.

The entity estimated that 70% of the shareholders will take the option of the cash
dividend and 30% will elect the noncash asset.
 Entry
December 31, 2017 – Declaration
Cash alternative (70% x 2,000,000) 1,400,000 Retained earnings 2,300,000
Noncash (30% x 3,000,000) 900,000 Dividends payable 2,300,000
Dividends payable 2,300,000

March 31 – Cash alternative (Payment) Dividends payable 2,300,000

Cash 2,000,000
Retained earnings 300,000
March 31 – Noncash alternative Final Assessment
FMV 3/31 3,000,000 Retained earnings 700,000
D/P – 12/31 2,300,000 Dividends payable 700,000
Increase 700,000

March 31- Payment Dividends payable 3,000,000

Dividends payable 3,000,000 Inventory 2,500,000
Carrying Value 2,500,000 Gain on distribution P/D 500,000
Gain on distribution 500,000
March 31- Noncash – FMV 3,300,000 (2)
FMV 3/31 3,300,000 Retained earnings 1, 000,000
D/P – 12/31 2,300,000 Dividends payable 1,000,000
Increase 1,000,000

March 31- Payment - (2) Dividends payable 3,300,000

D/P 3,300,000 – C/A 2,500,000 = 800,000 gain Inventory 2,500,000
Gain on distribution P/D 800,000
 Scrip dividend
- Is a like a note which is a formal evidence of indebtedness to pay a sum of money at
some future time.

- Example:
- Scrip dividends are declared in the amount of P200,000 payable in six (6) months at
12% interest.
Declaration:
Retained Earnings 200,000
Scrip dividends payable 200,000
Redemption:
Scrip dividends payable 200,000
Interest expense 12,000
Cash 212,000
 Bonds Payable
Dividends declared in the amount of P1,000,000 payable in entity’s own
bonds, 12%, P1,000,000 face value. The bonds mature in five years.

Declaration
Retained earnings 1,000,000
Bonds dividends payable 1,000,000

Issuance of bonds in
payment of dividends Bonds dividends payable 1,000,000
Bonds payable 1,000,000

Payment of semi-annual
interest Interest expense 60,000
Cash 60,000

Redemption of bonds
Bonds payable 1,000,000
Cash 1,000,000
 Share dividends/Stock dividends
IFRS term - Bonus issue
-Are distributions of the earnings of the entity in the form of the
entity’s own shares

Declaration - Retained earning are capitalize, transferred to share capital

Effects in asset - Remain the same before and after the declaration

Effects in shareholders - DEBIT: Retained Earnings

equity - Credit: Share Capital

Classifications of share - Ordinary share dividends

dividends - Special share dividends

Ordinary share dividends - Are dividends in terms of ordinary share given to ordinary
shareholders or preference shares to preference shares
Special share dividends - Are dividends in terms of ordinary share given to preference
shareholders or preference share given to ordinary shareholders
How much of the retained earnings should be
capitalized?
Small Share Dividends Large Share Dividends
- Less than 20% - 20% or more

- Valuation: Fair Market Value on the date of - Valuation: PAR value or Stated value
declaration (debit: R/E)

- Fair value must not lower than par value or

stated value

- Fair Market Value Lower Par Value the PAR

Value will be used.
Illustration
Share capital, P100 par, 20,000 shares authorized,
10,000 shares issued 1,000,000
Share premium 500,000
Retained earnings 750,000

Case 1: If a 10% share dividends is declared and the market value of the share is P150.
Entry:
Declaration
Retained earnings 150,000
Share dividends payable 100,000
Share premiums 50,000

Issuance of shares of stock

Share dividends payable 100,000
Share dividends payable 100,000
Case 2
If a 50% share dividend is declared and the market value of the share is P150.
Entry:
Declaration
Retained earnings 500,000
Share dividends payable 500,000

Issuance of shares of stock

Share dividends payable 500,000
Share dividends payable 500,000
 Fractional share dividends
- refers to unit of stock that is less than one full share. Fractional shares generally
come about from stock splits, bonus shares and similar corporate actions.
- Normally, fractional shares cannot be acquired from the market, and while they have
value to the investor, they can be difficult to sell.

Example:
- Fractional shares can be created in a situation where a company has a 3-for-2 stock
split. Suppose you have three shares of XYZ Corp. and XYZ has a 3-for-2 stock split.
In this case, you should get an extra 1 1/2 shares, which would be 4 1/2 shares total.
Normally, you can't buy half a share in the stock market, but in this case, you could
end up with a fractional share. Most companies tend to round up to the nearest
whole number of shares when fractional shares occur. In the above example, XYZ
Corp. could opt to round up the 1/2 share to leave you with five shares.
Fractional shares options:
 The entity may issue warrants for the optional shares and
give the holders thereof enough time to accumulate sufficient
warrants for a full share.

 The entity may pay cash in lieu of fractional shares. Possible

only if the source of share dividends is retained earnings.
 Illustration
Share capital, P100 par, 10,000 shares issued 1,000,000
Share dividends declared 50%
Full shares issued 4,000 shares
Fractional shares issued 1,000 shares

Declaration Retained earnings 500,000

Share dividends payable 500,000

Issuance of share dividends and Share dividends payable 500,000

fractional shares Share capital 400,000
Fractional warrants outstanding 100,000

6oo full shares are issued and Fractional warrants outstanding 100,000
remaining expired Share capital 60,000
Share premium 40,000
Treasury shares as share dividends
- may reissued as dividends in which case cost of the shares
shall be charged to retained earnings.

- termed as Property Dividends under Philippine Corporation

Code

- Other authors “accounted as share dividends” because the

entity’s obligation is not to convey cash but to re issue its own
share capital, and therefore no accounting liability.
 Illustration
An entity distributed as share dividend 1,000 treasury shares with cost of
P100,000 and market value of P120,000.

Declaration Retained earnings 100,000

Share dividends payable 100,000

Payment Share dividends payable 100,000

Treasury shares 100,000
Dividends out of Capital
- Also know as dividend out capital or liquidating dividend.
- Are paid to the shareholders when the entity is dissolved and
liquidated.
- Exceptions: Wasting assets
- in conformity of “wasting asset doctrines” which holds
that a wasting asset entity can declare dividends not only to
the extent of the retained earnings balance but also to the
extent of accumulated depletion balance.
 Dividends as expense
-PAS 36 distributions to holders of an equity instruments classified
as financial liability are recognized in the same way as interest
expense on a bond.

- Dividends classified as an expense maybe presented in the

income statement either with interest on other liabilities or as a
separate line item.

- Example: “redeemable preference share”

Appropriation of Retained Earnings
-appropriation of retained earnings may be described as
follows;
1. Legal appropriation
2. Contractual appropriation
3. Voluntary or discretionary appropriation
Legal appropriation
- Arises from the fact that the legal capital cannot be returned
to the shareholders until the entity is dissolved and
liquidated.

- Acquires it owns shares, it must have sufficient retained

earnings balance, otherwise, the acquisition is illegal.

- Appropriation must be equal to the cost of treasury share

appropriated.

- Retained earnings appropriated for treasury shares

Contractual appropriation
- Arises from the fact that the terms of the bond issue and
preference shares issue may impose restriction on payment of
dividends.

- To insure the eventual payment of the bonds and redemption

of the preference share.

- Retained earnings appropriated for sinking or bond

redemption.
Voluntary appropriation
- is a matter of discretion on the part of the management.

Example:
1. Appropriated for plant expansion
2. Appropriation for increase in working capital
3. Appropriation for contingencies
 Statement of Retained Earnings
- Shows the changes affecting the retained earnings of an entity
and relates the income statement to the statement of financial
position.

- Is no longer a required component of financial statements, but it

is a part of the statement of changes in equity.
 Items affecting retained earnings
 Net income or loss for the period

 Prior period errors

 Dividends to shareholders

 Effect of changes in accounting policy

 Appropriation of retained earnings

 Components of other comprehensive income reclassified

subsequently to retained earnings
 Statement of Retained Earnings
Retained earnings, January 1 1,000,000
Correction of error resulting from prior years under-depreciation (100,000)
Change in accounting policy from weighted average to FIFO
inventory valuation resulting in increase 300,000
Corrected beginning balance 1,200,000
Net income for the period 1,550,000
Dividends declared during the year (400,000)
Appropriated for contingencies (200,000)
Retained earnings, December 31 2,150,000
 Reserves
 Distributable equity

 Non-distributable equity reserve

 share premium reserve
 appropriation reserve
 asset revaluation reserve
 other comprehensive income reserve
 Statement of changes in equity
- Is a formal statement that shows the movements in the elements
or components of the shareholder’s equity.
- It includes the following;
- Total comprehensive income for the period
- Effects of changes in accounting policies and corrections of errors
- Reconciliation between the carrying amount at the beginning and
end of the period, separately disclosing changes from:
- Profit or loss
- Each item of other comprehensive income
- Transactions with owners in their capacity as owners showing separately
contributions by and distributions to owners
 Statement of changes in Equity
Share Capital Share Premium Retained Earnings
Balance – January 1 5,000,000 2,000,000 1,000,000
Issuance of share capital of
10,000 shares with P100
Par value at P150 per share 1,000,000 500,000
Net income 1,550,000
Dividend paid (200,000)
Balance – December 31 6,000,000 2,500,000 2,350,000
Components of comprehensive income
1. Net income or loss
2. Other comprehensive income comprises items of income and expense that are not
recognized in profit or loss as required or permitted by PFRS
1. Unrealized gain or loss on equity investment designated at fair value through other comprehensive
income
2. Unrealized gain or loss on equity investment at fair value through other comprehensive income
3. Gain or loss from translating the financial statements of foreign operation
4. Change in revaluation surplus
5. Unrealized gain or loss from derivative contracts designated as cash flow hedge
6. Re-measurements of defined benefit plan, such as actuarial gain or loss recognized in the current
year
7. Change in fair value attributable to the “credit risk” of financial liability irrevocably designated as fair
value through profit or loss.
 Comprehensive income illustration
Share Capital Reserves Retained Earnings
Balances – January 1 5,000,000 2,000,000 1,000,000
Correction of error- prior periods under-
depreciation (100,000)

Change in accounting policy from FIFO – credit 300,000

Issuance of q0,000 ordinary shares of P100 par at 1,000,000 500,000

P150 per share
250,000 250,000
Issuance of 5,000 preference shares of P50 par
value at P100 per share 1,550,000
50,000
Comprehensive income: (400,000)
Net income 200,000 (200,000)
Other comprehensive income

Dividends paid

Appropriation for contingencies

Balance – December 31 6,250,000 3,000,000 2,150,000

Investment in Equity Security
- Representing ownership interest in an equity (e.g ordinary
share or preference share) or the right to acquire ownership
interest (e. g share options, share warrants ).
- In layman’s term it’s represent an ownership interest in an
entity.
- Does not includes;
- Callable or redeemable shares
- Treasury shares
- Convertible bonds
Financial Assets

 - is an asset whose value comes from contractual claims.

 There assets are frequently traded.

( Cash, Investment in Equity)
Classifications of Financial Assets
 Financial assets at fair value through profits and loss (Trading
Securities)
Includes both equity securities and debt

 Financial assets at fair value through other comprehensive

income (Available for sale securities)
Includes both equity securities and debt

 Financial assets at amortized costs

Includes only debt securities
Initial Measurement of Financial Assets
 Financial assets at fair value through profits and loss
- At fair market value
- Transaction Cost – charge as outright expense

 Financial assets at fair value not through profits and loss

- At fair market value
- Transaction costs – capitalized
Expenses includes:
Fees and commissions paid to agents, advisers, brokers
Transfer taxes and duties
Financial assets at fair value through profits
and loss
 Financial Assets held for trading - known as trading
securities – “by requirement”
 All other investment in quoted equity instruments – “by
consequence”
 Irrevocably designated initially as at fair value through profit
or loss – “by option”
 All debt investments that do not qualify for measurement at
amortized costs – “by default”
Debt investment at amortized cost
Requirements:
- To hold the financial assets in order to collect contractual
cash flows on specified date
- Contractual cash flows are solely payments of principal and
interest on the principal amount outstanding
Debt Instruments at Fair Value through OCI
Requirements –
- By collecting contractual cash flows and by selling the
financial assets
- Contractual cash flows are solely for payments of principal
and interest on the principal outstanding
 Summary of measurement rules
Equity Instruments Debt Investments
Held for trading Fair value to profits or loss Fair value through profits or loss

Not Held for Trading – as a Fair value to profits or loss Held for collection of contractual
rule cash flows – at amortized costs

Not Held for Trading – Fair value to profits or loss Collection of contractual cash
irrevocable through OCI flows (irrevocable designation) –
fair value through profit and loss

Quoted Equity Instruments Fair value to profits or loss Collection of contractual cash
flows and for sale of the financial
assets – fair value through OCI

Un-Quoted Equity At costs Collection of contractual cash

Instruments flows and for sale of the financial
assets – (irrevocable at fair value)

Investment of 20% to 50% Equity Method

Investment of more than 50% Consolidation Method
Gain or Loss – Financial Asset at Fair Value
General Rule – “Gain or Loss” presented in income statement

Unrealized Gain = Fair Market Value > Carrying Amount

Unrealized Loss = Carrying Amount > Fair Market Value

Sale of Financial Asset = Realized Gain / Loss

Expenses – transaction are not deducted on disposal of the

financial assets.
Financial Assets – Amortized Costs
- Unrealized Gain / Loss is recognized at OCI

- Gain or loss – is recognized when financial assets –

- Derecognized
- Sold
- Impaired
- Reclassified
- Through amortization process
Illustration 1
On January 1, 2019, an entity purchased marketable equity
securities for P5,000,000. The equity securities qualify as
financial assets held for trading. The entity also paid P50,000 as
commission to the broker.
On December 31,2019, the trading securities have a fair value
of P6,000,000.
On December 31, 2020, the trading securities have a fair value
of P4,500,000.
On December 31, 2021, the trading securities are sold for
P5,200,000.
Entry
DATE Particulars
January 1, 2019 Trading Securities 5,000,000
Commission Expense 50,000
Cash 5,050,000

December 31, 2019 Trading Securities 1,000,000

Unrealized Gain – TS 1,000,000

December 31, 2020 Unrealized Loss – TS 1,500,000

Trading Securities 1,500,000

December 31, 2021 Cash 5,200,000

Trading Securities 4,500,000
Gain on Sale – TS 700,000
 Illustration 2
On January 1, 2019, an entity acquired trading securities with the following market value on
December 31, 2019.
Cost Market Gain/Loss
ABC Preference Share 200,000 150,000 (50,000)
XYZ Ordinary Share 800,000 950,000 150,000
RST Ordinary Share 1,000,000 1,100,000 100,000
MNO Bonds 3,000,000 2,500,000 (500,000)
Total 5,000,000 4,700,000 (300,000)

On January 5, 2020, The ABC Prefence share is sold for P80,000.

On December 31, 2020, the remaining trading securities have the following carrying amount and
market value.
Cost Market Gain/Loss
XYZ Ordinary Share 950,000 1,000,000 50,000
RST Ordinary Share 1,100,000 1,500,000 400,000
MNO Bonds 2,500,000 2,400,000 (100,000)
Total 4,550,000 4,900,000 350,000
 Entry
Date Particulars
January 1, 2019 Trading Securities 5,000,000
Cash 5,000,000

December 31, 2019 Unrealized Loss – TS 300,000

Trading Securities 300,000

January 15, 2020 Cash 80,000

Loss on Sale – TS 70,000
Trading Securities 150,000

December 31, 2019 Trading Securities 350,000

Unrealized Gain – TS 350,000
 Illustration 3 – Equity Investment at Fair Value through OCI
On January 1, 2019, an entity purchased marketable securities for
P1,000,000, the entity paid commission and taxes for P100,000. The entity
do not qualify as financial asset held as trading.

On December 31, 2019, the securities have a market value of P1,300,000.

On December 31, 2020, the securities have market value of P1,600,000.

On July 1, 2021, the securities are sold for P2,000,000.

 Entry
Date Particular
January 1, 2019 Financial Asset – FVOCI 1,100,000
Cash 1,100,000

December 31, 2019 Financial Asset – FVOCI 200,000

Unrealized Gain – OCI 200,000

December 31, 2020 Financial Asset – FVOCI 300,000

Unrealized Gain – FVOCI 300,000

July 21, 2020 – Realized Cash 2,000,000

Gain / Loss Financial Asset – OCI 1,600,000
Retained Earnings 400,000

July 21, 2020 – Unrealized Gain – OCI 500,000

Cumulative Unrealized Retained Earnings 500,000
Gain/Loss
The amount recognized in other comprehensive income is not
classified to profit or loss under any circumstances.
 Illustration 4
On January 1, 2019 – an entity purchased marketable equity
securities for P2,000,000. The securities do not qualify as
financial asset held for trading.

On December 31, 2019- the securities have a market value of P,

1800,000.

On December 31, 2020 – the securities have a market value of

P1,300,000.

On July 20, 2021 – the securities are sold for P1,200,000.

 Entry
Date Particular
January 1, 2019 Financial Asset – FVOCI 2,000,000
Cash 2,000,000

December 31, 2019 Unrealized Loss – OCI 200,000

Financial Asset - FVOCI 200,000

December 31, 2020 Unrealized Loss – OCI 500,000

Financial Asset - FVOCI 500,000

July 21, 2020 – Realized Cash 1,200,000

Gain / Loss Retained Earnings 100,000
Financial Asset – OCI 1,300,000

July 21, 2020 – Retained Earnings 700,000

Cumulative Unrealized Unrealized Loss 700,000
Gain/Loss
 Illustration 5
On January 1, 2019 – an entity purchased marketable equity securities not qualify as
financial asset held for trading with the following fair market value at December 31, 2019.
Cost Market Value Gain/Loss
Security A 1,000,000 1,100,000 100,000
Security B 2,000,000 2,700,000 700,000
Security C 3,000,000 2,800,000 (200,0000
Total 6,000,000 6,600,000 600,000

On July 1, 2020 – Security A was sold for P 1,400,000

On December 31, 2020 – the remaining securities have the carrying amount anf market
value.
Cost Market Value Gain/Loss
Security B 2,700,000 3,500,000 800,000
Security C 2,800,000 2,750,000 (50,0000
Total 5,500,000 6,250,000 750,000
 Entry
Date Particulars

January 1, 2019 Financial Asset – FVOCI 6,000,000

Cash 6,000,000

December 31, 2019 Financial Asset – FVOCI 600,000

Unrealized Gain – OCI 600,000

July 1, 2020 Cash 1,400,000

Financial Asset – FVOCI 1,100,000
Retained Earnings 300,000

Unrealized Gain 100,000

Retained Earnings 100,000

December 31, 2020 Financial Asset – FVOCI 750,000

Unrealized Gain – OCI 750,000

Total Unrealized Gain = 600,000 – 100,000 + 750,000

- OCI = 1,250,000
 Acquisition of Equity Instruments
Type of Investments Initial Measurement Transaction Cost
Investment in Equity trough Fair Market Value Expensed Immediately
Profit or Loss (Trading
Securities
Investment in Equity Fair Market Value Capitalized
Securities
Acquisition by Exchange
 Fair value of asset given

 Fair value of the asset received

 Carrying amount of asset given

Lump Sum - Acquisition
 General Rule – Fair Market Value

 Only one security has known Fair Market Value – allocated

first to those securities with known fair market value and
exceeds is to the securities with no known fair market value.
Investment Categories
 Trading Securities or Financial Asset at Fair Value through
Profits or Loss
 Financial Assets at Fair Value through Other Comprehensive
Income
 Investment in Associate
 Investment in Subsidiary
 Investment in Un-quoted Equity Securities
Gen. Rule – At fair Market Value
Exemptions – Cost if the Fair Market Value cannot be
determined.
Sale of Equity Security
FIFO or Average Cost Approach - is used to assign the cost of
equity security sold purchased on the same class acquired at
different dates with different costs.
 Cash Dividends
Investment at Fair Value Investment at Fair Value Investment at Amortized
through Profit or Loss through OCI Cost
- Treated as income - Treated as income -Treated as income
- Investment account are not - Investment account are not - Investment account are not
affected affected affected

Accrual of Dividend Income Collection of Dividend Income

Dividend Receivable xxx Cash xxx
Dividend Income xxx Dividend Receivable xxx

Dividends - ON Ex- Dividend

- Shares are sold between date of - Shares are sold between date of record
declaration and date of records. and date of payment.
- New shareholders will be entitled to - Existing shareholders will be entitled to
received the dividend receive the dividends
 Illustration
A shareholder own 1,000 shares costing P100,000.
Subsequently, the shareholder receives notice of dividend
declaration of P5 per share or P5,000 and sold for P150,000.

Dividends - ON Ex- Dividends

Cash 150,000 Cash 150,000

Investment in equity 100,000 Investment in equity 100,000
Dividend Income 5,000 Gain on Sale of Investments 50,000
Gain on Sale of Investments 45,000
Property Dividend (Kind/Non-Cash
Assets)
Shareholder’s Side Company Side
Valuation / Measurement Fair Market Value Fair Market Value
AccountingTreatment -dividend income -dividend payable

Shareholder’s Company

Date of Declaration Dividend Receivable xxx Retained Earnings xxx

Dividend Income xxx Dividends Payable xxx
Date of Record - Update - Updates

Date of Payment Cash/Property xxx Dividends Payable xxx

Dividend Receivable xxx Cash/Property xxx
Illustrations
1- X – Company distributes its holdings of 10,000 shares in
Company as property dividends. The shares of Y Company have
a market value of P 100 per share. A shareholder receive 500
shares of company as property dividends.

2- An entity declared P100 worth of merchandise for every

share as property dividends. A shareholder owns 500 shares.
 Entry
Shareholders Company
Illustration 1 Investment in Equity Security 50,000 Retained Earnings 50,000
Dividend Income 50,000 Investment in Equity Security 50,000

Illustration 2 Merchandise Inventory 50,000 Retained Earnings 50,000

Dividend Income 50,000 Merchandise Inventory 50,000
Liquidating Dividends
Non-Wasting Assets Wasting Assets
Recognition of Dividends
Cash /Appropriated Account xxx
Cash /Appropriated Account xxx Investment in Shares xxx
Investment in Shares xxx

A shareholder received a P100,000 dividend Partly Dividends / Return of Investments

designated as income, P60,000 and
liquidating P40,000 Cash 100,000
Dividend Income 60,000
Investment in Shares 40,000

Liquidating dividends exceeds the costs of - excess credited to gain on investments

investments - Profit & loss

Liquidation is fully completed and carrying - Balance is written off as a loss

amount is not fully recovered - Profit or loss
 Shares Dividends
- Equivalent to shares “Bonus”
- Not treated as income
- Assets (remain the same), SHE (remain the same)
- Increase the number of shares / decrease the par value.
- Ordinary Share Dividends – same class
- Special Share Dividends – different class
- Illustration:
- A shareholders own 10,000 ordinary shares costing P800,000.
subsequently, the shareholder receives 10% share dividends n the
form of preference shares. Market value of Ordinary is P150 and
preference share is P100.
 Computation
Market Value Fraction Allocation
Ordinary Share
(10,000 x P150) 1,500,000 15/16 750,000

Preference Share
(1,000 x P100) 100,000 1/16 50,000
Total 1,600,000 800,000
Entry:
Investment in Preference Shares 50,000
Investment in Ordinary Shares 50,000
Shares received in Lieu of Cash
Dividends
- Treated as income
- Valuation – Fair market value of the shares received (treated
as if property dividends)
- Fair market value is unknown – equal to cash dividends that
would been received.
- Illustration:
- A shareholder owns 10,000 shares costing P 1,000,000.
Subsequently the shareholder receives 1,000 shares in lieu of
cash dividends of P10 per share. The market value of share is
P150.
Entry
Fair Market Value is Known Fair Market Value is Un-known

Investment in shares 150,000 Investment in shares 100,000

Dividend Income 150,000 Dividend Income 100,000
Cash Received in lieu of Share Dividends
- Shares is declared and received – not an income
- 2 methods used
- ‘As if approach method” – meaning that the share dividends
are assume to be received and subsequently sold at the cash is
received. Gain or loss will be recognized.
- “BIR approach” – all cash received, whether originally
designated as cash dividend or share dividend, is recognized
as income.
- Illustration:
- A shareholder owns 10,000 shares costing P1,100,000.
Subsequently, the shareholder receives P150,000 cash in lieu
of 1,000 shares originally declared as 10% share dividend.
Entry
As if Approach BIR Approach
1,000 shares representing share dividends
are assumed to be sold for the cash received.

Cash 150,000 Cash 150,000

Investment in Share 100,000 Dividend Income 150,000
Gain on Investment 50,000

P1,100,000 / 11,000 shares = P100 per

share
Recapitalization
- Share splits
- Split Up
- Split down

- Assets – remained the same

- Shareholders equity – remained the same
- Number of shares – increased/decreased
- Par Value – increased / decreased
Special Assessments
- Additional capital contribution of the shareholders.
- Recorded as additional cost of the investments
Illustration:
A shareholder owns 10,000 shares costing P500,000.
Subsequently, the directors pass a resolution to the effect that
the shareholders shall contribute P5 for each share held to the
corporation.
Shareholders Corporation
Investment in Shares 50,000 Cash 50,000
Cash 50,000 Share Capital 50,000
Redemption of Shares
- Callable and redeemable preference shares
- Recorded as the same manner as sale of shares.
- Redemption price – treated as the sale price.

Illustration:
If the shareholder acquires 10,000 preference shares for P100
per share. And subsequently, the preference are called in by the
issuing entity at P110 per share.
 Entry
Transactions Shareholders Corporation

Acquisition Investment in P/S 1,000,000 Cash 1,000,000

Cash 1,000,000 Preference Share – Callable 1,000,000

Redeem/Call- Cash 1,100,000 Preference Share – Callable 1,000,000

In Investment in P/S 1,000,000 Loss on Redemption 100,000
Gain on Investment 100,000 Cash 1,100,000
Share Right / Stock Right
- Also known as share right or pre-emptive right
- IAS term – “right to issue”
- One right = One share
- Purpose:
- To retain the percentage of ownership interest
- Price – lower than in market price
- Shares warrants – evidence of ownership of rights
Accounting of Stock Rights
- PFRS 9 – no clear accounting treatment but treated as
financial asset.

- Acceptable Methods
- Share rights are accounted for separately
- Share rights are not-accounted for separately
 Accounted for Separately
Accounting Treatment Investment in Equity

Initial Measurement/Valuation Fair Market Value

Acquisition Date -portion of the carrying amount of original investments

in equity shares is allocated to the share rights at an
amount equal to the fair value of the share rights.

Exercise/Issuance of Shares -two share is being issued the original shares and the
related rights

Presentation -current Assets

 Not -Accounted for Separately
Accounting Treatment -embedded derivative but not a “stand-alone
derivative”
Embedded derivative - Is a component of a hybrid or combined contract (host
contract) with the effect that some of the cash flows of
the combined contract vary in a way similar to a stand –
alone derivatives
PFRS 9, paragraph 4.3.3 -An embedded derivative shall be separated from host
contract and accounted for separately under certain
conditions
-Simply means that the host contract is a financial assets,
the embedded derivative is not separated.

Valuation / Measurement -Host contract is measured at fair value through profit or

loss , the embedded derivative is not separated

Share right as embedded derivatives -Is not accounted separately therefore treated as one
 Different dates for share rights
Dates Explanations
Declaration - The issuance of share was approved by the BOD.

Record - The stock and transfer book of the entity will be closed for
registration and only those shareholders registered as of the
record date are entitled to receive share rights.

Expiration - The share rights are exercised

Right - On - Between the date of declaration and date of record
- Share and the right are inseparable and treated as one
- The cannot be sold without also selling the right or vice-versa
Subsequent sale prior to Gain or loss on sale = Selling Price – Carrying Amount
record date
Illustration – Right - On
A shareholders owns 5,000 share costing P500,000.
Subsequently, the shareholder receives notice of shares rights to
subscribe for 1,000 shares at the par value of P100 per share.
Prior to the issuance of the share warrants, the shareholders
sells the investments for P750,000.
Entry:
Cash 750,000
Investment in Shares 500,000
Gain on sales of Investments 200,000
Ex- Right ( Between date of record
and Expiration date)
- Date of record – the warrants evidencing the share rights are
issued to the shareholders
- Meaning that the share can now be sold separate from the
right or vice versa.

- Methods
- Accounted Separately
- Not-Accounted Separately
Illustration – Accounted Separately
A shareholder acquired 10,000 shares costing P 1,800,000.
Subsequently, the shareholders received 10,000 shares rights to
subscribe for new shares at P100 per share for every five rights
held.
The market value of the share is P150 and the market value of
the right is P10.
 Entry
Date Particulars
Acquisition Investment in Shares 1,800,000
Cash 1,800,000

Receipts of rights – initially

valued at Fair Market
Increased/decreased in FMV =
Unrealized Gain/Loss Shares Rights 100,000
No FMV = Theoretical or Parity Investment in Shares 100,000
Value
Exercise of Rights Investment in Shares 300,000
10,000 / 5 = 2,000 x P100 Cash 200,000
Share Rights 100,000

Sale of Rights – sold at FMV Cash 150,000

Share Rights 100,000
Gain on Sale of Share Rights 50,000

Expiration of Rights – did Loss on Share Rights 100,000

not exercise Share Rights 100,000
Illustration – Not Accounted
Separately
A shareholder acquired 10,000 shares costing P 1,500,000.
Subsequently, the shareholders received 10,000 shares rights to
subscribe for new shares at P100 per share for every five rights
held.
The market value of the share is P140 and the market value of
the right is P10.
 Entry
Date Particulars
Acquisition Investment in Shares 1,500,000
Cash 1,500,000

Receipts of rights
Memo Entry – Received 10,000 shares to subscribe for new
shares at P100 per share for every five rights held, or a total of
2,000 new shares.

Exercise of Rights
10,000 / 5 = 2,000 x P100 Investment in Shares 300,000
Cash 200,000

Sale of Rights – sold at FMV Cash 150,000

Investment in Shares 150,000

Expiration of Rights – did Memorandum entry

not exercise
Quasi-Reorganization
- Is a permissive but not a mandatory procedure under which a
financial troubled entity restates its accounts and establish a “fresh
start” in accounting sense.
- Is the procedures of restating assets, liabilities and share capital
balances in conformity with fair value for the purpose of
eliminating deficit.
- - also called corporate readjustment
- Recapitalization
- Revaluation of property plant and equipment

- It must be approved by SEC

 Circumstances:
Large deficit exists

Approved by the shareholders and creditors

Cost basis of the accounting for property, plant and

equipment becomes unrealistic

“Fresh start” appears to be desirable or advantageous to all

parties concerned.
 Illustration
An entity provided the following statement of financial position on December 31, 2017 prior to
quasi-reorganization:
Current assets 1,000,000
Property, plant and equipment 7,500,000
Accumulated depreciation (1,000,000) 6,500,000
7,500,000
Liabilities 4,500,000
Share capital, P100 par, 50,000 shares 5,000,000
Retained earnings (2,000,000)
7,500,000
On December 31, 2017, the shareholders and creditors agreed to a quasi-reorganization.
Accordingly, the following restatements should be made:
1. PPE shall be recorded at the fair value of P6,000,000
2. Inventory is overvalued to the extent of P250,000 and shall be revalued accordingly
3. Share capital is reduced to P2,000,000, 20,000 shares, P100 par value
4. Resulting deficit is charged to the share premium arising from the reorganization.
Entry
PPE at Fair Value Accumulated Depreciation 1,000,000
Retained earnings 500,000
Property, plant and equipment 1,500,000

Overvaluation of inventory Retained earnings 250,000

Inventory 250,000

Reduce of share capital Share capital 3,000,000

Share premium 3,000,000

Deficit Share premium 2,750,000

Retained earnings 2,750,000
 Illustration 2
An entity sustained heavy losses over the period of time and conditions warrant that the entity should undergo a quasi-
reorganization on December 31, 2017.
The statement of financial position on December 31, 2017 prior to the reorganization is:
Current assets 1,000,000
Property, plant and equipment 5,000,000
Accumulated depreciation (1,500,000) 3,500,000
Goodwill 100,000
Total assets 4,600,000

Current Liabilities 1,100,000

Share Capital, P100 par 5,000,000
Share premium 500,000
Retained earnings (2,000,000)
Total liabilities and shareholder’s equity 4,600,000

The SEC approved the quasi-reorganization on the basis of the unrealistic valuation of PPE.

Accordingly, the SEC recommended that PPE be revalued by an independent expert.

1. The property, plant and equipment are determined to have replacement cost of P9,000,000
2. The inventory is to be written down by P400,000
3. The goodwill is to be written off.
4. Unrecorded accounts payable amounted to P200,000
5. Any resulting deficit is charged against the revaluation surplus.
 Entry
Revaluation of PPE Property plant and equipment 4,000,000
Accumulated depreciation 1,200,000
Revaluation surplus 2,800,000

Written down of inventory Retained earning 400,000

Inventory 400,000

Write off of Goodwill Retained earning 100,000

Goodwill 100,000

Unrecorded payable Retained earning 200,000

Accounts payable 200,000

Deficit Revaluation surplus 2, 700,000

Retained earnings 2,700,000
Share-based compensation
 is a compensation arrangement established by the entity
whereby the entity’s employees shall receive shares of capital
in exchange for their services or the entity incurs liabilities to
the employees in amounts based on the price of its shares.

 are common feature of employee remuneration for directors,

senior executives and other key employees.

 usually tied to performance

 Measurement
Equity settled – the entity issues Cash settled – the entity
equity instruments in incurs a liability for services
consideration for services received and the liability is
received. based on the entity’s equity
instruments.
Example:
Example:
Share options
Share appreciation rights
Share options
- Are granted to officers and key employees to enable them to
acquire shares of the entity during a specified period upon
fulfillment of certain conditions at a specified price.
- Considered as part of their remuneration package, in
addition to a cash salary and other employment benefits.
- Therefore, are conceived as additional compensation
- Problems:
- How is the compensation measured?
- When is the compensation recognized?
 Measurement of Compensation
Fair value method - Equal to the fair values of the share options on the date of
grant
- Mandated by PFRS 2

Intrinsic value method - Equal to intrinsic value of the shares options.

- Intrinsic = excess of the market value of the share over
the option price
- Can be used only if the fair value of the share option
cannot be estimated reliably.
 Recognition of compensation
Vested immediately - Employee is not required to complete a specified period of
service before unconditionally entitled to the share option

- On grant date – entity shall recognize the compensation as

expense in full with corresponding increase in equity

Do not vest - Employee should need to complete a specified service period

immediately
- Compensation is recognized as expense over the service
period or vesting period

- Meaning , from the date of grant to the date on which the

options can first exercised.
 Illustration- no vesting period
On January 1, 2017, share options are granted to employees to purchase 100,000
ordinary shares of P50 par value at P60 per share. On this date, the fair value of the
each share option is P20.

The options are exercisable immediately. The employees exercised all their share
options on December 31, 2017.
 Entry
Jan. 1 – Grant date Salaries – share options 2,000,000
(exercisable immediately) Share options outstanding 2,000,000

December 31, 201 7 – Cash 6,000,000

Exercise date Share options outstanding 2,000,000
Ordinary share capital 5,000,000
Share premium 3,000,000
Illustration 2 – with vesting period
On January 1, 2017, share options are granted to officers to
purchase 100,000 ordinary shares of P50 par value at P60 per
share.
The fair value of each share option is P15. The officers are
entitled to the share options only after completing two years of
service.
The options can be exercised starting January 1, 2019 and
expire one year after.
All shares are exercised on December 31, 2019.
 Entry
Total compensation or fair value of share options (100,000 x
15 ) P1,500,000
Annual compensation = P 1,500,000 / 2 = 750,000

December 31,2017 Salaries – share options 750,000

Share options outstanding 750,000

December 31, 2018 Salaries – share options 750,000

Share options outstanding 750,000

December 31, 2019 – Exercise Cash 6,000,000

date Share options outstanding 1,500,000
Ordinary share capital 5,000,000
Share premium 2,500,000

Note: Share premium outstanding is part of share premium

 Illustration 3 – Some employees left
On January 1, 2017, an entity granted 100 share options each to 500 employees, conditional
upon the employee’s remaining in the entity’s employ during the vesting period.

The share options vest at the end of a three-year period. On grant date, each share option has a
fair value of P30.

By December 31, 2017, 30 employees have left and it is expected that on the basis of a weighted
average probability, a further 30 employees will leave during the vesting period.

By December 31, 2018, 28 employees left and the entity expects that a further 25 employees
will leave during 2019.

By December 31, 2019, 22 employees left and therefore, 420 employees shall receive share
options at the end of 2019.
 Computations
2017 2018 2019
Number of employees 500 500 500
Employees who left 2017 (30) (30) (30)
Employee expected to leave 2018 (30) (28) (28)
Employees expected to leave 2019 (25) (22)
Employees entitled to share options 440 417 420
Multiply by share options per employee 100 100 100
Total share options 44,00 41,700 42,000
Multiply by fair value P30 P30 P30
Total compensation 1,320,000 1,251,000 1,260,000

Compensation expense (1st year) 440,000

Cumulative compensation 834,000 1,260,000

Less: Compensation realized 440,000 834,000
Compensation expense(2nd and 3rd year) 394,000 426,000
Entry
December 2017 Salaries – share options 440,000
Share options outstanding 440,000

December 2018 Salaries – share options 394,000

Share options outstanding 394,000

December 2019 Salaries – share options 426,000

Share options outstanding 426,000

December 2019 Cash (42,000 x P60) 2,520,000

Exercise Date Share options outstanding 1,260,000
Ordinary share capital 2,100,000
Share premium outstanding 1,680,000
Illustrations 4- with condition and share options vary
On January 1, 2017, an entity granted share options to each of the 300 employees working in the
sales department.
The share options vest at the end of a three-year period provided that the employees remain in the
entity’s employ and provided the volume of sales will increase by an average of 10% per year.
The fair value of each share option on grant date is P20.
If the sales increase by average of 10%, each employee will receive 200 share options.
If the sales increase by an average of 15% per year, each employee will receive 300 share options.
During 2017, the sales increased by 10% and the entity expects this rate of increase to continue in
the next two years.
During 2018, the sale increased by 20% resulting in an average of 15% for two years to date
(10% plus 20% divided by 2 equals 15%)
During 2019, the sales increased by an average of 16% over three years.
By the end of 2019, 20 employees left the entity.
 Computations

2017 2018 2019

Number of employees 300 300 300
Employees who left 2017
Employee expected to leave 2018
Employees expected to leave 2019 20
Employees entitled to share options 300 300 280
Multiply by share options per employee 200 300 300
Total share options 60,000 90,000 84,000
Multiply by fair value P20 P20 P20
Total compensation 1,200,000 1,800,000 1,680,000

Compensation expense (1st year) 400,000

Cumulative compensation 1,200,000 1,680,000

Less: Compensation realized 400,000 1,200,000
Compensation expense(2nd and 3rd year) 800,000 480,000
Entry

December 2017 Salaries – share options 400,000

Share options outstanding 400,000

December 2018 Salaries – share options 800,000

Share options outstanding 800,000

December 2019 Salaries – share options 480,000

Share options outstanding 480,000

December 2019 Cash (84,000 x P60) 5,040,000

Exercise Date Share options outstanding 1,680,000
Ordinary share capital 4,200,000
Share premium outstanding 2,520,000
Illustration 5 – with condition and exercise price varies
On January 1, 2017, an entity granted to a senior executive 20,000 share options, conditional upon
the executive’s remaining in the entity’s employ until December 31, 2019.
The par value per share is P50
The exercise price is P100
However, the exercise price drops to P80 if the entity’s earnings increase by at-least an average of
10% per year over the three year period.
On grant date, the entity estimates that the fair value of the share option is P30 if the exercise price
is P80.
If the exercise prices is P100, the fair value of the share option is P25.
During 2017, and 2018, the earnings increase by 12% and 11% respectively.
However, during 2019, the earnings increased only by 4%.
 Computations

2017 2018 2019

Share options 20,000 20,000 20,000
Multiply by fair value 30 30 25
Total compensation 600,000 600,000 500,000

Compensation 1st year 200,000

Cumulative compensation 400,000 500,000

Less: Compensation recognized (200,000) 400,000
Compensation 2nd year and 3rd year 200,000 100,000
 Problem 1 - Computations

2017 2018 2019

Share options 10,000 10,000 10,000
Multiply by fair value 45 45 40
Total compensation 450,000 450,000 400,000

Compensation 1st year 150,000

Cumulative compensation 300,000 400,000

Less: Compensation recognized (150,000) 300,000
Compensation 2nd year and 3rd year 150,000 100,000
Entry
December 2017 Salaries – share options 150,000
Share options outstanding 150,000
December 2018 Salaries – share options 150,000
Share options outstanding 150,000
December 2019 Salaries – share options 100,000
Share options outstanding 100,000
December 2019 Cash (10,000 x P120) 1,200,000
Exercise Date Share options outstanding 500,000
Ordinary share capital 1,000,000
Share premium 700,000
 Problem 2
Marcus Company issues fully paid shares to 200 employees on
December 31, 2014. Normally shares issued to employees vest
over a two-year period, but these shares have been given as a bonus
to the employees because of their exceptional performance during
the year. The shares have a market value of P400,000 on December
31, 2014 and an average fair market value of P450,000. What
amount would charged against income in year 2014 related to the
share-based payment transaction?
 Problem 3
Chester Company grants 2,000 share options to each of
its five directors on July 1, 2013. The options vest on
June 30, 2017. The fair value of each option on July 1,
2013 is P5 and it is anticipated that all of the share
option will vest on June 30, 2017. What will be the
accounting entry in the financial statements for the year
ended December 31, 2014.
Solutions
Total share options (2,000 x 5) 10,000
Fair value options P5
Total compensation P50,000
Divide: Vesting periods /4
Compensation expense per year P12,500

Entry:
Salaries expense – share options 12,500
Share option outstanding 12,500
 Problem 4
Derby Company, a public limited company, has granted share options to its employees
with a fair market value of P12,000,000. The options vest in three years time. The
company uses the Monte-Carlo model to estimate the fair value of the options, the
number of employees that will vest and the revision of estimates such as the following:
 Grant date – January 1, 2013, estimate of employees leaving the company
during the vesting period – 5%
 Revision of estimate – January 1, 2014 – estimate of employees leaving the
company during the vesting period – 6%
 Actual number of employees leaving the company – December 31, 2015 –
5%
What would be the amount of expense charged in the profit or loss for the year ended
December 31, 2015?
Monte – Carlo Model
Monte Carlo simulation, or probability simulation, is a
technique used to understand the impact of risk and
uncertainty in financial, project management, cost, and other
forecasting models.
 Solutions
2013 2014 2015
Total Salaries P12,000,000 P12,000,000 P12,000,000
x with vested rights 95% 94% 95%
Vested benefits P 11,400,000 P11,280,000 P11,400,000
x ratio 1/3 2/3 3/3
Value of compensation P3,800,000 P7,520,000 P11,400,000
Less: prior years - 3,800,000 7,520,000
Salaries Expense P 3,800,000 P 3,720,000 P 3,880,000
 Problem 5
On Jan. 2, 2014, X Company grants 50 shares each to 400 employees, conditional upon the
employees remaining in the company’s employ during the vesting period. The shares will vest at
the end of 2014 if the company’s earnings increased by more than 15%; or at the end of 2015 if
the earnings increased by an average of 12% over the two-year period; or at the end of 2016 if the
earnings increased by an average of 10% over the three-year period. The shares have a fair value of
P25 on January 2, 2014, which is equal to the share price on the grant date.

At the end of 2014, earnings had increased by 13% and the company expects the earnings will
continue to increase at a similar rate in 2015 and expects to vest in 2015. At the end of 2015,
earnings increased by only 9% and therefore shares do not vest at the end of 2015. The company
expects that earnings will continue to increase at similar rate. At the end of 2016, earnings
increased by 9%. What amount of remuneration expense should the company recognize in its
December 31, 2016 profit and loss?
 Solutions
Year 2014 400 x 50 shares x P25 x ½ = P250,000
Year 2015 400 x 50 shares x P25 x 2/3 = P333,333
Year 2016 400 x 50 shares x P25 x 3/3 = P500,000

2014 2015 2016

Required balance P250,000 P333,000 P500,000
Less: Realized - 250,000 333,333
Salaries expense P 250,000 P 83,333 P 166,667
 Problem 6
On Jan. 2, 2014, X Company grants 50 shares each to 400 employees, conditional upon the
employees remaining in the company’s employ during the vesting period. The shares will vest at
the end of 2014 if the company’s earnings increased by more than 15%; or at the end of 2015 if
the earnings increased by an average of 12% over the two-year period; or at the end of 2016 if the
earnings increased by an average of 10% over the three-year period. The shares have a fair value of
P25 on January 2, 2014, which is equal to the share price on the grant date.
At the end of 2014, earnings had increased by 13% and 20 employees have left and the company
expects that earnings will continue to increase at a similar rate in 2015 and expects to vest in
2015. The company also expects, on the basis of weighted average of probability, that a further 20
employees will leave during 2015.
At the end of 2015, earnings increased by only 9% and therefore shares do not vest at the end of
2015. Also, 15 employees have left the company in 2015 but expects that 10 employees will leave
the company in 2016. The company expects that earnings will continue to increase at similar rate.
At the end, earnings increased by 9% and 5 employees have left the company in 2016. What
amount of remuneration expense should the company recognize in its December 31, 2016 profit
and loss?
 Solutions
2014 2015 2016
Total employees 400 400 400
Actual number leaving (20) (35) (40)
Expected number (20) (10) -
With vested benefit 360 355 360

Year 2014 360 x 50 shares x P25 x ½ = P225,000

Year 2015 355 x 50 shares x P25 x 2/3 = P295,833
Year 2016 360 x 50 shares x P25 x 3/3 = P450,000

2014 2015 2016

Required balance P225,000 P295,833 P450,000
Less: Realized - 225,000 295,833
Salaries expense P225,000 P 70,833 P 154,167
Illustration 6 – Intrinsic value method
On January 1, 2017, an entity granted 10,000 share options to employees. The share
options vest on December 31, 2018, provided the employees remain in service until
then.
The fair value of the share option cannot be estimated reliably. The par value per
ordinary share is P100.
The option price is P125 and the market value of the ordinary share is also P125 at the
date of grant.
All shares options vested on December 31, 2018 and no employees left the entity.
The share options can be exercised starting January 1, 2019 and expire two years after.
All share options are exercised on December 31, 2019.
The share market prices are P150 on December 31, 2017, P180 on December 31, 2018
and P200 on December 31, 2019.
 Computations

2017 2018 2019

Market Value 150 180 200
Less: Option price 125 125 180
Intrinsic value of each option 25 55 20
Multiply by share options 10,000 10,000 10,000
Total compensation 250,000 550,000 200,000

Compensation expense 1st year 125,000

Cumulative compensation 550,000

Less: Compensation recognized 125,000
Compensation expense 2nd year and 3rd year 425,00
Entry
Note: the increase in intrinsic value after the vesting period is recognized
as additional compensation immediately.

Dec. 31, 2017 Salaries – share options 125,000

Share options outstanding 125,000

Dec. 31, 2018 Salaries – share options 425,000

Share options outstanding 425,000

Dec. 31, 2019 Salaries – share options 200,000

Share options outstanding 200,000

Dec. 31, 2019 Cash (10,000 x 125) 1,250,000

Exercise Share options outstanding 750,000
Ordinary share capital 1,000,000
Share premium 1,000,000
 Illustration 2
Pure Company adopted a share option plan that granted options to key executives to
purchase 30,000 ordinary shares with P10 par value.

The options were granted on January 1, 2017 and were exercisable two years after date of
grant if the grantee was still an employee of the entity.

The options expired three years from date of grant. The option price was set at P30 and
the market price at the date of grant was also P30 per share.

The fair value of the share options cannot be estimated reliably.

The share market prices are P45 on December 31, 2017, P50 on December 31, 2018 and
P55 on December 31, 2019. All of the options were exercised on December 31, 2019.
 Computations
2017 2018 2019
Market Value 45 50 55
Less: Option price 30 30 50
Intrinsic value of each option 15 20 5
Multiply by share options 30,000 30,000 30,000
Total compensation 450,000 600,000 150,000

Compensation expense 1st year 225,000

Cumulative compensation 600,000

Less: Compensation recognized 225,000
Compensation expense 2nd year and 3rd year 375,00
 Entry

Dec. 31, 2017 Salaries – share options 225,000

Share options outstanding 225,000

Dec. 31, 2018 Salaries – share options 375,000

Share options outstanding 375,000

Dec. 31, 2019 Salaries – share options 150,000

Share options outstanding 150,000

Dec. 31, 2019 Cash (30,000 x 30) 900,000

Exercise Share options outstanding 750,000
Ordinary share capital 300,000
Share premium 1,350,000
 Acceleration of vesting
 Rules
Recognize immediately the compensation expense that otherwise
would have been recognized for services received over the
remainder of the vesting period.

Any payment made to employee on the cancellation or settlement

of the grant shall be accounted for as the repurchase of equity
interest, meaning, deduction from equity.

Payments exceeds the fair value of the share option, the excess shall
be recognized as an expense.
Illustration
On January 1, 2017, an entity granted 50,000 share options to the employees. The
option price is P60 and the par value of each share is P50. The vesting period is 4 years.
The fair value of the share options or total compensation expense to the vesting date on
December 31, 2020 has been calculated at P4,000,000. The entity has decided to settle
the award early on December 31, 2019.
The compensation expense charged in the income statement since the date of grant is
as follows;
2017 1,000,000
2018 1,050,000
If the share options are cancelled or settled during the vesting period, it is as if the
vesting date had been brought forward and the balance of the fair value not yet
expensed is recognized immediately.
 Entry
To record compensation for 2019
Salaries expense 1,950,000
Total compensation 4,000,000 Share options outstanding 1,950,000
Less: Recognized 2,050,000
Compensation expense 1,950,000

December 31, 2019 – If shares

options is exercised Cash (50,000 x P60) 3,000,000
Share options outstanding 4,000,000
Share capital 2,500,000
Share premium 4,500,000

December 31, 2019 - Not

exercised but the employer paid Share options outstanding 2,050,000
P2,500,000 to employees Salaries expense 450,000
Cash 2,500,000
IFRIC 11
Employee of subsidiary are granted rights by - Shall also be accounted for as equity-
the parent company settled

Subsidiary - Measure the services received from its

employees on the basis of the fair value of
the share options at grant date.

Financial Statement of Subsidiary - Increase in equity is recognized

 Illustration
On January 1, 2017, a parent entity granted 500 shares options to each of 100
employees of a subsidiary, conditional upon the completion of two years of service with
the subsidiary.
The fair value of a share option is P50 on January 1, 2017.
At grant date, the subsidiary estimated that 80% of the employees will complete the
two year-year service period.
At the end of vesting period, 90% of the employees completed the required two years
of service.
The parent entity did not require the subsidiary to pay for the shares needed to settle
the grant of share options.
The share options were exercised in January 2019.
The exercise price is P120 and the par value is P100 per share.
 Computations
2017 2018
Number of employees 100 100
Number of employees leaving (20) (10)
Number of employees availed 80 90
Multiply by number of share options 500 500
Total share options 40,000 45,000
Multiply by Fair Value P50 P50
Total Compensation 2,000,000 2,250,000

Compensation 1st year 1,000,000

Cumulative compensation 2,250,000

Less: Recognized in prior years 1,000,000
Compensation expense 2nd year and 3rd year 1,250,000
 Entry
December 31, 2017 Salaries expense 1,000,000
Equity contribution from parent 1,000,000

December 31, 2018 Salaries expense 1,250,000

Equity contribution from parent 1,250,000

December 31, 2019 – Exercise by Cash 5,400,000

employees Share capital 4,500,000
Share premium 900,000
 Illustrations 2
On January 1, 2017, Karla Company, a parent entity, granted 200 shares options to each of
100 employees of Erika Company, a subsidiary, conditional upon the completion of two
years of service with the subsidiary. The fair value of share options on grant date is P30
each.
At grant date, the subsidiary estimated that 80% of the employees will complete the two-
year service period.
On December31, 2018, 81 employees completed the required two-years of service.
The parent does not require the subsidiary to pay for the shares needed to settle the grant
of share options.
The share options are exercised in January 2019.
The exercise price is P60 and the par value is P50 per share.
 Computation
2017 2018
Number of employees 100 100
Number of employees leaving (20) (19)
Number of employees availed 80 81
Multiply by number of share options 200 200
Total share options 16,000 16,200
Multiply by Fair Value P30 P30
Total Compensation 480,000 486,000

Compensation 1st year 240,000

Cumulative compensation 486,000

Less: Recognized in prior years 240,000
Compensation expense 2nd year and 3rd year 246,000
 Entry
December 31, 2017 Salaries expense 240,000
Equity contribution from parent 240,000

December 31, 2018 Salaries expense 246,000

Equity contribution from parent 246,000

January 1, 2019 – Exercise by Cash (16,200 x P60) 972,000

employees Share capital 810,000
Share premium 162,000
 Modification of conditions
PFRS 2 Application - Continue to account for equity instruments granted based on the
Guidance, paragraph B43 original condition and vesting period at the date of grant
- Beneficial to employees (modifications) – exercise price of the
share option is reduced
- Increases the fair value of the equity instruments granted – the
entity shall include the increase in fair value as additional
compensation
- Increase in fair value = Modified fair value – Fair value original
- Therefore:
- Compensation based on original condition
- Compensation based on modification

PFRS 2 Application -continue to recognize compensation based on the original condition

Guidance, paragraph B44 as if modification had never occurred under the following
circumstances:
1. Modification reduces the fair value of the entity instruments
2. The modification is apparently not beneficial to the employees,
example, by increasing the exercise price of the option.
 Illustration
On January 1, 2017, an entity granted 100 shares options to each of the 500 employees.
The options are exercisable after a three-year vesting period. The fair value of the each
share option is P15 on grant date.
On December 31, 2017, 40 employees left the entity and based on weighted average
probability, 70 employees are expected to leave by the end of the vesting period.
On January 1, 2018, the entity repriced the share options by lowering the exercise price.
The options still vest after three years.
The entity estimated that on the date of repricing the increase in the fair value of the
share option is P65.
During 2018, 35 employees left the entity and further 30 employees are expected to
leave in 2019.
During 2019, 45 employees actually left the entity.
 Computations
2017 2018 2019
Number of employees 500 500 500
Employees who left 2017 (40) (40) (40)
Employee who left 2018 (70) (35) (35)
Employees wo left 2019 (30) (45)
Employees entitled to share options 390 395 380
Multiply by share options per employee 100 100 100
Total share options 39,000 39,500 38,000
Multiply by fair value P15 P15 P15
Total compensation 585,000 592,500 570,000

Compensation expense 1st year 195,000

Cumulative compensation 395,000 570,000

Compensation based on modifications 118,500 228,000
Total cumulative compensation 513,500 798,000
Less: Recognized in previous years 195,000 318,500
Compensation in 2nd year and 3rd year 318,500 284,500
 Entry

December 31, 2017 Salaries – share options 195,000

Share options outstanding 195,000

December 31, 2018 Salaries – share options 318,500

Share options outstanding 318,500

December 31, 2019 Salaries – share options 284,500

Share options outstanding 284,500
 Illustration
On January 1, 2017, an entity granted 500 shares options to each member of the sale
team composed of 20 employees.
The vesting period is three-years and that the sales team must sell at least 50,000 units
during the three-year vesting period.
The fair value of the share option is P30 on grant date.
On December 31, 2018, the entity increased the sales target to 100,000 units and by
December 31, 2019, the sales team only sold 55,000 units and the share options did not
vest based on the modified condition.
 Computations
Number of employees 20
Share options per employee 500
Total shares options 10,000
Multiply by fair value P30
Total compensation P300,000

Compensation for year 2017 P100,000

Cash settled transactions
- Is a share-based transaction whereby an entity incurs a liability for services received
and the liability is based on the entity’s equity instruments.

- Measure the services acquired and the liability incurred at the fair value of the
liability

- 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

- Example: Share appreciation right

Share appreciation rights
- Entitles an employee to receive cash which is equal to the excess of the market value
of the entity’s share over a predetermined price for a stated number of shares.

- Meaning, entitles the employee to a cash payment equal to the increase in the price
of a given number of shares over a given period.

- Similar with share option it is viewed as compensation for services rendered

- Difference, entity recognize a liability because a share appreciation right is usually an

obligation on the part of the entity to pay cash in the future on exercise date.

- Meaning, creates liability.

 Measurement / Recognition
Measurements Recognition
Compensation – based on fair value of the Vests immediately – compensation is
liability at the reporting date recognized immediately on the date of grant
- subject for re-measurement
every end of reporting date until it is finally
settled. Does not vest immediately – until the
- compensation in a share employee completes a definite vesting period
appreciation right is the cash paid by the entity
Compensation expense – is recognized over
Cash payment – known only on the exercise the service or vesting period.
date.

Fair market value = Market Value – Pre

determined price

No liability should be recognized if Market Value

equal to Pre-Determined Rate

The intrinsic value of the share appreciation

right on the date of exercise is the amount paid
out to the employees.
 Illustration
An entity granted a share appreciation right to the general manager on January 1, 2017.
After a four-year service period, the employee is entitled to receive cash equal to the
appreciation in share price over the market value on January 1, 2017.
Thus, the market value on January 1, 2017 is the predetermined price for purposes of
determining the compensation.
The share appreciation right had the following terms:
a. Service period – January 1, 2017 to December 31, 2020
b. Number of shares -20,000 shares
c. Exercise date – January 1, 2021
The quoted prices of the entity’s share are:
January 1, 2017 200 December 31, 2017 210
December 31, 2018 220 December 31, 2019 240
December 31, 2020 250
2017 - December 31, 2017
Fair Market Value 21/31 210
Less: Pre-determined Price 200 Salaries Expense 50,000
Excess 10
Multiply by number of shares 20,000
Accrued Salaries Expense 50,000
Total compensation 200,000
Compensation expense (200,000/4) 50,000
2018 - December 31, 2018
Fair Market Value 21/31 220
Less: Pre-determined Price 200 Salaries Expense 150,000
Excess 20
Multiply by number of shares 20,000
Accrued Salaries Expense 150,000
Total compensation 400,000
Compensation expense (400,000/4 x 2) = 200,000 – 50,000 = 150,000
2019 - December 31, 2019
Fair Market Value 21/31 240 Salaries Expense 400,000
Less: Pre-determined Price 200 Accrued Salaries Expense 400,000
Excess 40
Multiply by number of shares 20,000
Total compensation 800,000
Compensation expense (800,000 / 4 x 3) = 600,000 – 200,000= 400,000
2020 - December 31, 2020
Fair Market Value 21/31 250
Less: Pre-determined Price 200 Salaries Expense 400,000
Excess 50
Multiply by number of shares 20,000
Accrued Salaries Expense 400,000
Total compensation 1,000,000
Compensation expense = 1,000,000 – 600,000 = 400,000
2021 Payment Accrued Salaries Payable 1,000,000
Cash 1,000,000
 Continuation
Suppose in the preceding illustration, the market value of the
share unfortunately drops to P200 on December 31, 2020.
Since the predetermined price is also P200, the entity has no
obligation because there is no appreciation or increase in market
value on exercise date.
In this case, the accrued compensation on December 31, 2019 of
P600,000 shall be reversed on December 31, 2020.
Entry:
Accrued salaries payable 600,000
Gain on reversal of share appreciation rights 600,000
 Phantom shares
is simply a promise to pay a bonus in the form of the equivalent of
either the value of company shares or the increase in that value over
a period of time.
For instance, a company could promise Mary, its new employee,
that it would pay her a bonus every five years equal to the increase
in the equity value of the firm times some percentage of total
payroll at that point. Or it could promise to pay her an amount
equal to the value of a fixed number of shares set at the time the
promise is made. Other equity or allocation formulas could be used
as well.
 Illustration 2
On January 1, 2017, Module Company granted 100 share appreciation rights to each of the
500 employees on condition that the employees remain in the employ of the entity for the
next three years.
No employees left the entity during the three-year vesting period.
The employees exercised their share appreciation rights as follows:
December 31, 2019 100 employees
December 31, 2020 250 employees
December 31, 2021 150 employees
The fair value and intrinsic value of the share appreciation right are:
Fair Value Intrinsic Value
December 31, 2017 15
December 31, 2018 18
December 31, 2019 20 15
December 31,2020 21 20
December 31, 2021 25
 Computations

2017
Share appreciation rights (500 x 100) 50,000 Salaries expense 250,000
Multiply by fair value 15
Total fair value 750,000
Accrued Salaries expense 250,000

Compensation expense (750,000 / 3) 250,000

20178
Share appreciation rights (500 x 100) 50,000
Multiply by fair value 18
Total fair value 900,000
Salaries expense 350,000
Accrued Salaries expense 350,000
Compensation expense (900,000 / 3 x 2) 600,000
Less: Recognized in previous years 250,000
Compensation expenses 2017 350,000
 Continuations
2019
Share appreciation rights not yet exercised (500 – 100 x 100) 40,000
Multiply by fair value 20
Total fair value 800,000

Compensation expense 800,000 Salaries Expense 200,000

Less: Recognized in previous years 600,000 Accrued Salaries Expense 200,000
Compensation expenses 2017 200,000

Share compensation rights exercised (100 x 100) 10,000

Multiply by intrinsic value 15 Salaries Expense 150,000
Total payment 150,000 Cash 150,000

Compensation related to rights not exercised 200,000

Compensation paid to rights already exercised 150,000
Total compensation expense 350,000
 Continuation
2020
Share appreciation rights not yet exercised (400 – 250 x 100) 150,000
Multiply by fair value 21
Total fair value 315,000

Compensation expense 315,000 Accrued Salaries Expense 485,000

Less: Recognized in previous years 800,000 Salaries expense 485,000
Compensation expenses 2017 (485,000)

Share compensation rights exercised (250 x 100) 25,000

Multiply by intrinsic value 20 Salaries Expense 500,000
Total payment 150,000 Cash 500,000

Reversal of accrued liability related to rights not exercised (485,000)

Compensation paid to rights already exercised 500,000
Total compensation expense 15,000
2021
Share appreciation rights exercised (150 x 100) 15,000 Salaries expense 60,000
Multiply by intrinsic value 25 Accrued salaries expense 315,000
Total payment in 2021 375,000 Cash 375,000
Less: Recognized in previous years 315,000
Net compensation expense 60,000
 Cash and share alternatives
Entity has the choice of settlement Employee has the choice of settlement
Accounted as either; - The entity is deemed to have issued a
1. Cash alternative compound financial instrument.
2. Share alternative
- Accounted for as partly
The instruments is no a compound financial
instruments - liability
- equity

- PFRS 2 – requires that this compound

financial instrument shall be accounted for
separately as liability and equity.

- Equity component = Fair value of the whole

compound financial instruments minus the
fair value of the liability component.

- Liability = is always the residual value

 Illustration
On January 1, 2017, an entity granted to an employee the right to choose either:
a. Share alternative – equal to 12,000 shares
b. Cash alternative – cash payment equal to market value of 10,000 phantom
shares
The grant is conditional upon the completion of three years of service.
If the employee chooses the share alternative, the shares must be held for three years
vesting date.
The par value of the shares is P25 and at grant date on January 1, 2017, the share price is
P51.
The share prices for the three-year vesting period are P54 on December 31, 2017, P60
on December 31, 2018 and P65 on December31, 2019.
After taking into account the effects of post-vesting restrictions, the entity has estimated
that the fair value of the share alternative is P48 per share.
Computations:
Fair value of share alternative (12,000 share x P48) 567,000
Fair value of liability on grant date (10,000 shares x P51) 510,000
Equity component 66,000
 Entries
2017
Shares option (66,000/3) 22,000 Salaries 22,000
Share options outstanding 22,000
Share appreciation
Share basis 10,000
Multiply by fair value 54 Salaries 180,000
Compensation 540,000 Accrued rent expense 180,000

Accrued liability (540,000/3) 180,000

2018
Shares option (66,000/3) 22,000
Salaries 22,000
Share appreciation Share options outstanding 22,000
Share basis 10,000
Multiply by fair value 60
Compensation 600,000

Accrued liability (600,000/3x2) 400,000 Salaries 220,000

Less: Recognized prior years 180,000 Accrued rent expense 220,000
Compensation this year 220,000
 Continuation
2019
Shares option (66,000/3) 22,000
Salaries 22,000
Share appreciation Share options outstanding 22,000
Share basis 10,000
Multiply by fair value 65
Compensation 650,000

Accrued liability 650,000 Salaries 250,000

Less: Recognized prior years 400,000 Accrued rent expense 250,000
Compensation this year 250,000

Final settlement
Cash Alternative Equity Alternative

Accrued salaries expense 650,000 Accrued salaries payable 650,000

Shares option outstanding 66,000 Shares option outstanding 66,000
Cash 650,000 Share capital 300,000
Share premium 66,000 Share premium 416,000
 Illustration 2
On January 1, 2017, an entity purchased an equipment for the cash price of P5,000,000.
The supplier can choose how the purchase is to be settled.
The choices are 50,000 shares with a par value of P50 in one year’s time, or cash
payment equal to the market value of 40,000 phantom shares on December 31, 2017.
At grant date on January 1, 2017, the market price of each share is P110.
Since the supplier has the choice of settlement, the instrument issued for the purchase of
the equipment is a compound financial instrument.

If the fair value of the asset received can be measured directly and easily, as in this case,
the equity component is the fair value of the asset minus the fair value of the liability.
Fair value of equipment 5,000,000
Fair value of liability (40,000 x P110) 4,400,000
Equity component 600,000
 Entry
January 1, 2017 - o record purchase of equipment Equipment 5,000,000
Accounts payable 4,400,000
Shares option outstanding 600,000
December 31, 2017 – Cash alternative and the market
price of share is P130.
Accounts payable 4,400,000
Cash payment (40,000 x 130) 5,200,000 Interest expense 800,000
Fair value of liability 4,400,000 Cash 5,200,000
Implied interest 800,000
To cancel share outstanding
Shares option outstanding 600,000
Share premium 600,000

Share alternative
Accounts payable 4,400,000
Shares option outstanding 600,000
Share capital 2,500,000
Share premium 2,500,000