FINANCIAL ACCOUNTING AND REPORTING PART 2
SHAREHOLDERS’ EQUITY
DEFINITION
Stock – is the amount fixed representing the interest or right of a stockholder in the issuing
corporation as evidenced by a stock certificate.
CLASSIFICATION
A. From the point of view of Stockholder (Investor) -
a. Investment in Subsidiary – means that there is a controlling interest when the investor
company owns enough of the voting stock of an investee company to determine
its operating and financial policies. Ownership over 50% of the investee’s
outstanding voting stock usually would assure control.
b. Investment in Associate – means that the investor has the ability to affect, to an important
degree, the operating and financial policies of the investee. In the absence of
evidence to the contrary, a 20% or more of the investee’s voting stock held by an
investor is presumed to exercise significant influence.
c. Other Equity Securities – those without controlling interests or significant influences are
considered small investments, as follows:
(1) Nonmarketable – are usually without readily determinable fair market value.
(2) Marketable – are with readily fair market values.
- Trading Securities – are held with the intention of selling them in the near future
or very soon. They are normally classified as current assets for the purpose of
generating a profit. Any unrealized gains or losses are included in the net income
for the current period.
- Available-for-Sale Securities – are held indefinitely and will be available to be
sold in response to liquidity needs, reduction of legal reserves or allowable
alternative investments. They may be classified as current or noncurrent assets
depending on whether they are intended to be held within one year or for more
than one year. Any unrealized gains or losses are either included in the equity.
However, if the decline is judged to be “other than temporary”, such is
impaired and an impairment loss is included in the net income of the current
period.
B. From the point of view of Issuer (Investee) -
a. Common stock – is called ordinary share because the stockholders have the same rights
and privileges, and enjoy no preferences over each other.
The following are four basic rights of a common stockholder:
(1) right to vote and attend annual stockholders’ meeting
(2) right to share in corporate profit (dividends right)
(3) right to share in the distribution of assets upon corporate liquidation
(4) right to purchase additional shares of stock in case the corporation offers to
sell part or all of the unissued shares (pre-emptive right)
FINANCIAL ACCOUNTING AND REPORTING PART 2
b. Preferred stock – confers preferences, or specific rights that distinguish it from common
stock. The most common is a priority claim on dividends, usually at a stated rate
or amount, and in exchange, the voting right is sacrificed. Another preference is
the distribution of assets in the event of liquidation.
c. Other features of Preferred stock –
(1) Convertible preferred stock – has the right to be converted into common stock
at a specified conversion ratio.
(2) Redeemable preferred stock – allows either mandatory redemption at a
specified date and price or redemption at the option of the shareholder, who has
the right to redeem the shares at a specified ate and price.
(3) Callable preferred stock – means that the issue can call it in for cancellation at
a specified price and date(s).
(4) Cumulative preferred stock – means that if the specified dividend is not paid
in a given year, the unpaid dividends (called dividends in arrears) accumulate
and must be made up in a later dividend year before any dividends are paid on
common shares.
(5) Participating preferred stock – allows the preferred stockholders to receive
dividends above the preferential rate on a pro-rata basis with the common
stockholders.
VALUATION
A. From the point of view of Stockholder (Investor) -
(1) Initial Measurement
- Cost (fair value plus transaction costs*)
* outright expense for trading securities
(2) Subsequent Measurement
- For Trading and Available-for-Sale – use Fair Value
- For Non-Marketable – use Cost
- For Investment in Subsidiary (common stock only) – adjust cost using Equity
Method with Consolidation
- For Investment in Associate (common stock only) – adjust cost using Equity Method
B. From the point of view of Issuer (Investee) -
At Par/ Stated Value, any difference is either charged to APIC or Discount on Capital Stock
Components of Stockholders’ Equity:
(1) Contributed capital – consists of capital stock (preferred and common) and additional paid in
capital.
(2) Retained earnings – consists of accumulated net profits (losses) which may be appropriated
and unappropriated.
(3) Unrealized capital – consists of:
- unrealized holding gain (loss) on available-for-sale securities
- revaluation surplus arising from property appraisal
- minimum pension liability adjustment
FINANCIAL ACCOUNTING AND REPORTING PART 2
- deferred gains (losses) on derivatives
(4) Treasury stock – issued and acquired but not canceled; thus, may be re-issued.
RECLASSIFICATIONS BETWEEN PORTFOLIOS OF SECURITIES
1. For a security transferred from or into trading securities, the unrealized gain or loss at the
date of transfer will be recognized as a component of income. However, under the revised
PAS 39, such transfer is not allowable.
2. For a transferred from held to maturity into available for sale, the unrealized gain or loss
at the date of transfer shall be excluded from income and reported as a separate component
of stockholders’ equity.
3. For a transferred from available for sale securities into held to maturity, the unrealized
gain or loss at the date of transfer shall continue to be reported as component of stockholders’
equity but shall be amortized through interest income over the remaining life of the debt
security in a manner consistent with amortization of premium or discount using the effective
interest method.
4. For a transferred from available for sale securities into nonmarketable equity securities,
the fair value carrying amount of the financial asset becomes the new cost basis and any
previous gain or loss that has been recognized directly in equity shall remain in stockholders’
equity until such securities are disposed.
OTHERS
A. Dividends, Stock Split, and Stock Rights
1. Classes of Dividends –
a. Cash Dividend – treated as dividend income except if the equity method is used, it should
be credited to investment.
b. Property Dividends – treated as dividend income at fair market value of the property
received.
c. Liquidating Dividends – represent return of capital and thus are not income.
d. Stock Dividends – do not represent any income. They do not affect the total cost of the
investment but reduce the cost of the investment per share.
In case shares are received in lieu of cash dividends, the dividend income is recorded at
fair market value.
In case cash are received in lieu of stock dividends, the stock dividends are assumed to
be received and subsequently sold at the cash received.
2. Stock Split –
a. Stock split up – is a transaction whereby the outstanding shares are called in and replaced
by a larger number, accompanied by a reduction in the par or stated value of each share.
FINANCIAL ACCOUNTING AND REPORTING PART 2
b. Stock split down – is a transaction whereby the outstanding shares are called in and
replaced by a smaller number, accompanied by an increase in the par or stated value of
each share.
3. Stock Right – is a pre-emptive right granted to stockholders to subscribe for new shares of stock
issued by a corporation at a specified price within a specific period of time.
Theoretical or parity value of stock right:
a. When the stock is selling right-on –
Market value of stock right-on minus
subscription price = Value of one right
No. of rights to purchase 1 share plus 1
b. When the stock is selling ex-right –
Market value of stock right-on minus
subscription price = Value of one right
No. of rights to purchase 1 share
