De Guzman, Christian Dayne M.

ACTCY32S1 – 3rd Year Accountancy

ACCTG 025 – Discussion # 4
Auditing & Assurance: Concepts & Applications

1. Enumerate and describe each component of SHE.

The components of a shareholder's equity are as follows:
 Share Capital
This refers to the paid-in capital representing the money it raises from selling common or
preferred stock. It represents the portion of authorized capital stock that has been fully paid.
Classes of shares are either:

 Ordinary Share - an equity instrument that is subordinate to all other classes of equity
instruments or the capital that is received or given by the owners of a business in
exchange for shares. 
 Preference Share - an equity instrument that gives the holder certain preferences over
its ordinary shareholders and carry a preferential right to a fixed dividend and usually
rank higher than other share classes in the event of a winding up.
 Share Premium
The difference between the issue price and the par value of the stock and is also known as
securities premium. The shares are said to be issued at a premium when the issue price of the
share is greater than its face value or par value. Usually used for paying equity related expenses
such as underwriter's fees, it can also be used to issue bonus shares to the shareholders.
 Unappropriated Retained earnings
These are the portion of retained earnings not assigned to a specific business purpose.
These are retained profits of a business that have not been set aside for a specific purpose.
These funds may be directed wherever they are needed, such as for funding the purchase of fixed
assets, funding increases in working capital or making dividend distributions to shareholders.
 Appropriated Retained earnings
Represent that portion of retained earnings which has been restricted and therefore is not
available for any dividend; these are retained earnings that are earmarked for a certain project or
purpose. The account is used to help third parties stay informed about the company's agenda.
 Treasury share
This is formerly outstanding stock that has been repurchased and is being held by the
issuing company. Treasury shares may be accounted as follows:

 Cost Method - treasury shares are debited or recognized at its acquisition cost. Also,
any subsequent re-issuance and/or retirement of the treasury shares is credited at cost.
 Par Value Method - the amount debited to treasury shares is equal to the total par value
of the treasury shares. In addition, share premium from the original issuance is also
debited. Any subsequent re-issuance and retirement of the treasury shares is also
credited at par.
2. What are items included in contributed and legal capital
 Contributed Capital
Also known as paid-in capital is the cash and other assets that shareholders have given a
company in exchange for stock. This represents the amount invested or contributed by owners.
This is composed of share capital and share premium.
 Legal Capital
The portion of paid in capital which cannot be returned to stockholders in any form during
the lifetime of the corporation, The legal capital of a capital stock with a par value is the aggregate
amount at par value of the shares issued and subscribed. The premium or excess over par is not
to be considered as part of the legal capital. The legal capital of a capital stock without par value
is the entire amount of consideration received. Accordingly both the stated value and the
additional paid in capital in excess of stated value shall not be distributed as dividends to the
stockholders during the lifetime of the corporation.

3. How do we account for share capital transaction in terms of a) issuance; b) re-acquisition in the form of
treasury and c) retirement 
a) Issuance
1. Cash consideration: we may account Share capital: Cash consideration by debiting cash
and or discount on share capital and by crediting Share premium at par or stated value
and or premium on share capital.
2. Noncash consideration: Based on the provision of the corporation code and in conformity
with the PFRS 2, the following rules shall be observed when share capital is issued for
noncash consideration:
 Non-cash asset or service received- Share capital shall be recorded at an
amount equal to the following (in order of priority)
1. FV of noncash consideration received.
2. FV of share capital issued
3. Par value of share capital issued
 Liability extinguished received- Items classified as debt for equity swap under
IFRIC 19 (in order of priority)
1. FV of share capital
2. FV of liability extinguished
3. Carrying amount of liability extinguished
b) Re-acquisition
As a general rule, treasury stocks is accounted for under cost method.

c) Retirement
By debiting the share capital and share premium account, and crediting any cash payment.
In case of loss, is it debited through retained earnings, while in case of gain, it is credited in
share premium.

4. Identify and how do we account for the different kinds and types of dividends.
 Cash dividends
It is the distribution of funds or money paid to stockholders generally as part of the
corporation's current earnings or accumulated profits. We may account by debiting retained
earnings and crediting dividends payable at the date of declaration and by debiting dividends
payable and crediting cash at the date of payment.
  Property dividends
A dividend paid in the form of non-cash asset of the entity. This type of dividend may be from:
 Non Current Asset covered by PFRS 5
 Asset other than those covered by PFRS 5
Accounting for Property Dividend:
1. At the date of declaration, measure the dividend payable at fair value of the
assets to be distributed;
2. At the end of each reporting and at the date of settlement, review and adjust
the carrying amount of the dividends payable to equity as adjustment to the
amount of distribution;
3. At the date of settlement, get the difference between the carrying amount of
dividends payable and the carrying amount of the non-cash assets to be
distributed;
4. Consider also the following:

Non Current Asset of PFRS 5 Asset Other than by PFRS 5

Date of Re classify the non cash asset to be distributed as No need to reclassify the property
Declaration "Non Current Asset Held for Distribution and dividends to other criteria.
measure the non current asset at the lower of the
carrying amount and fair value less cost to
distribute. An entity shall not depreciate a non
current asset while it is classified as held for sale or
while it is part of a disposal group classified as held
for sale
Date of Measure the non current asset held for distribution Measure the property dividends in
Reporting at the lower of the original carrying amount and fair accordance with applicable PFRS
value less cost to distribute on the date of reporting
or settlement. Gain may be recognize but not in
excess of the amount of cumulative loss that was
previously recognize
Date of Carrying amount of the non cash asset for purposes Carrying amount of the no cash
Settlement of computing the gain or loss on distribution shall be asset for purposes of computing
the carrying amount as adjusted in accordance with the gain or loss on distribution
PFRS 5 on the date of reporting shall be the carrying amount as
adjusted on the date of reporting
in accordance with applicable
PFRS.

Treasury Share as Dividend

This is when the corporation declared its treasury shares as dividends, the cost of the
shares should be charged to retained earnings
Non Cash or Cash Alternative
 If an entity gives its owners a choice of receiving either a non-cash asset or a cash
alternative, the entity shall estimate the dividend payable by considering both the fair value
of each alternative and the associated probability of owners selecting each alternative.

Share Dividend
It is a dividend paid in the form of the entity's own share. Share dividend may either be
small or large share dividend, to wit:
Fractional share dividend
Issuance of share dividends might give rise to fractional share dividends for it might not be
possible to issue full shares to all shareholders.

5. What are transactions affecting the retained earnings and differentiate a free portion from restricted
retained earnings.

Retained earnings are affected by any increases or decreases in net income and dividends
paid to shareholders. As a result, any items that drive net income higher or push it lower will
ultimately affect retained earnings. Free portion retained earnings are the portion of retained earnings
not assigned to a specific business purpose. These are retained profits of a business that have not
been set aside for a specific purpose. While Restricted retained earnings on the other hand, are
retained earnings that are earmarked for a certain project or purpose. The account is used to help
third parties stay informed about the company's agenda.

6. Enumerate and describe the three types of share based payment transactions.

Share based payment is a transaction where the entity receives goods or services as a
consideration for equity instruments of the entity or the acquisition of goods or services by incurring
an obligation to the supplier of those goods or services for amounts that are based on the price of the
entity's share or other equity instruments of the entity. They may be in the form of:

 Equity settled - where the entity issues equity instruments in consideration for
services rendered;
 Cash settled - where the entity incurs a liability for services rendered and liability
is based on the entity's equity instruments
 Share Based Payment with Cash Alternatives - this may be in the form of:
 Originally equity settled and cash settled was subsequently added or
 Granted simultaneously

7. Enumerate the types of vesting condition in a share based payments

This refers to the condition that determines whether the entity who receives the services that
include the counter party to receive cash, other assets or equity instruments of the entity, under a
share based payment arrangement. This type of condition is either:
 Service condition - this is a vesting condition that requires the counter party to
complete a specified period of service during which services are provide to the
entity. If the counter party, regardless of the reason, ceases to provide service
 during the vesting period, it has failed to satisfy the condition. A service condition
does not require a performance target to be met
 Performance condition, which is either a

 Market condition - this is upon which the exercise price, vesting or

exercisability of an equity instrument depends that is related to the market
price of the entity equity instruments such as:
o Attaining a specified share price or a specified amount of
intrinsic value of a share option
o Achieving a specified target that is based on the market price of
the entity's equity instruments relative to an index of market
prices of equity instruments of other entities
 Non market condition -  this is a type of performance condition upon which
the exercise price, vesting or exercisability of an equity instrument
depends that is not related to a market price of the entity equity
instruments   

8. Describe and compute book value per share. 

This is the portion of the total shareholder's equity assigned to each outstanding share. It is the
expected amount that the shareholders will receive assuming the assets of the corporation will be
realized at their book value. The determination of book value per share will depend if:

o There is only one share:

-BPS = (Total Shareholders Equity excluding subscription receivable) / Number of
Outstanding Shares
o There is more than one class of share:
- BPS of Ordinary Share = (Ordinary Shareholders Equity) / No. of Ordinary Shares
Outstanding      
- BPS of Preference Share = (Preference Shareholders Equity) / No. of Preference Share
Outstanding

9. Describe and discuss

Basic earnings per share

Basic earnings per share is a rough measurement of the amount of a company's profit that
can be allocated to one share of its common stock. Earnings per share (EPS), is a company's
net profit divided by the number of common shares it has outstanding. EPS indicates how much
money a company makes for each share of its stock, and is a widely used metric to estimate
corporate value. A higher EPS indicates greater value because investors will pay more for a
company's shares if they think the company has higher profits relative to its share price. EPS can
be arrived at in several forms, such as excluding extraordinary items or discontinued operations,
or on a diluted basis.
The determination of basic earnings per share is: BEPS = (Net income - preferred dividends)
÷ weighted average of common shares outstanding during the period.
Diluted Earnings per share

Diluted earnings per share (diluted EPS) calculates a company’s earnings per share if all
convertible securities were converted. 

This is the amount attributable to every share of ordinary share outstanding during the
period while giving effect to all dilutive potential ordinary shares outstanding during the period.
The reduction of earnings per share or an increase in a loss per share as a result of an
assumption that convertible instruments are converted, that warrants or options are exercised or
that ordinary shares are issued upon a condition this is what we called as dilution.