INTERMEDIATE ACCTG 2 (by:

MILLAN)
Retained earnings

• Retained earnings represent the cumulative profits (net of losses,

distribution to owners, and other adjustments) which are not yet
distributed as dividends but rather retained to be reinvested in the
business or to settle debt.

• Total retained earnings may consist of:

1. Unrestricted – available for future distribution as dividends
2. Appropriated (Restricted) – not available for distribution unless
the restriction is subsequently reversed. (V-L-C)

INTERMEDIATE ACCTG 2 (by:

MILLAN)
Distributions to owners
1. Cash dividends – distributions in the form of cash.

• Liability dividends – are dividends issued by a corporation that has

a temporary cash shortage. Liability dividends may be either:
o Scrip dividends – short-term and may or may not bear interest
o Bond dividends – long-term and bear interest

2. Property dividends – distributions in the form of noncash assets.

3. Share dividends (bonus issue or stock dividends) – distributions

in the form of the entity’s own shares.
INTERMEDIATE ACCTG 2 (by:
MILLAN)
Dates relevant to the accounting for dividends

1. Date of declaration

2. Date of record
o Ex-dividend date – to provide shareholders ample time to
register, they are normally allowed to register about three to five
days prior to the date of record.

3. Date of distribution – the date when the dividends

declared are distributed to the shareholders who are
entitled to the dividends.

INTERMEDIATE ACCTG 2 (by:

MILLAN)
Recognition of liability for dividends

• Under IFRIC 17, the liability to pay a dividend shall be

recognized when the dividend is appropriately authorized and
is no longer at the discretion of the entity, which is:
1. The date when the dividend declared by management is
approved by a relevant authority, if further approval
is required, or
2. The date when management declares dividends, if
further approval is not required.

INTERMEDIATE ACCTG 2 (by:

MILLAN)
• Outstanding shares pertain to shares issued and held by
shareholders and those that are subscribed. Outstanding
shares exclude unissued shares and treasury shares.

INTERMEDIATE ACCTG 2 (by:

MILLAN)
Accounting for property dividends

• The accounting for property dividends is affected by the

following:
1. Accounting for the resulting property dividends payable,
and
2. Accounting for the non-cash assets declared as property
dividends

INTERMEDIATE ACCTG 2 (by:

MILLAN)
Accounting for property dividends payable
• The liability recognized on the declaration of property dividends is
accounted for as follows:
1. The property dividends payable is initially measured at the fair
value of the non-cash assets at date of declaration.
2. At the end of each reporting period and also on the settlement
date, the property dividends payable is adjusted for changes in
fair value. The changes are recognized as gain or loss, directly
in retained earnings.
3. On settlement (distribution) date, any difference between the
carrying amounts of the dividends payable and the asset
distributed is recognized in profit or loss.
INTERMEDIATE ACCTG 2 (by:
MILLAN)
Accounting for non-cash assets declared as
property dividends
• If the property dividend is a noncurrent asset, it shall be, subject to
the requirements of PFRS 5, reclassified as “Non-current asset held
for distribution to owners” and subsequently accounted for under
PFRS 5. A “Non-current asset held for distribution to owners” is
initially and subsequently measured at the lower of its carrying
amount and fair value less costs to distribute.
• If the property dividend is a current asset, it shall be accounted for
under its previous accounting. No reclassification is needed.

INTERMEDIATE ACCTG 2 (by:

MILLAN)
Share dividends

• If the share dividends declared are considered “small” share

dividends (i.e., less than 20% of the outstanding shares), the share
dividends are accounted for at fair value.
• If share dividends declared are considered “large” share dividends
(i.e., 20% or more of the outstanding shares), the shares are
accounted for at par value.

INTERMEDIATE ACCTG 2 (by:

MILLAN)
Preference shares

1. Preference in the distribution of assets in case of

corporate liquidation (preferred as to assets)
2. Preference in the distribution of dividends when
declared (preferred as to dividends)

INTERMEDIATE ACCTG 2 (by:

MILLAN)
Dividends recognized as expense

• Dividends declared on equity instruments are charged to

retained earnings. However, dividends declared on financial
liabilities, such as redeemable preference shares, are
charged to profit or loss as interest expense.

INTERMEDIATE ACCTG 2 (by:

MILLAN)
Dividends out of capital

• Dividends declared out of capital, rather than from retained

earnings, are called liquidating dividends. Liquidating
dividends are normally declared only upon corporate
liquidation. However, the wasting asset doctrine permits
wasting asset corporations to declare dividends out of capital
during their existence.

INTERMEDIATE ACCTG 2 (by:

MILLAN)
Disclosure of dividends

• Dividends declared and the related amount per share are

presented either in the statement of changes in equity or
in the notes.

• Dividends declared after the reporting period but before the

financial statements are authorized for issue are not
recognized as a liability at the end of the reporting period
because no obligation exists at that time. The dividends
are disclosed only in the notes.

INTERMEDIATE ACCTG 2 (by:

MILLAN)
Other Components of Equity

1. Revaluation surplus
2. Cumulative unrealized gains/losses on fair value changes in
investments in FVOCI equity securities
3. Exchange differences on translating foreign operations
4. Effective portion of cash flow hedges

INTERMEDIATE ACCTG 2 (by:

MILLAN)
Recapitalization
• Recapitalization refers to the change in the capital structure
of an entity brought about by the cancellation of old shares
and issuance of new shares as replacement. Recapitalization is
accomplished through any of the following:
1. Change from par to no-par, or vice-versa
2. Reduction of par value or stated value
3. Share splits or reverse splits

• Recapitalization does not affect assets, liabilities, or total

shareholders’ equity.

INTERMEDIATE ACCTG 2 (by:

MILLAN)
Share split

1. Split up occurs when old shares are cancelled and replaced

by a larger number of new shares but with a reduced par
value (stated value) per share.
2. Split down is the opposite of split up whereby old shares
are cancelled and replaced by a smaller number of new
shares but with an increased par value (stated value) per
share.

INTERMEDIATE ACCTG 2 (by:

MILLAN)
Quasi-reorganization

• Quasi-reorganization is an accounting procedure whereby a

financially troubled corporation, but with favorable future
prospects, is permitted, but not required, to revalue its assets
and liabilities, and realign its equity, subject to the provisions
of relevant regulations, in order to establish a “fresh start” in
accounting sense.
• Quasi-reorganization may be effected through:
1. Revaluation of property, plant, and equipment; and/or
2. Recapitalization

INTERMEDIATE ACCTG 2 (by:

MILLAN)
Quasi-reorganization (continuation)

• The basic approach to quasi-reorganization is as follows:

1. Assets (and liabilities) are revalued upwards or downwards.
2. Any resulting credit balance in revaluation surplus is used to wipe
out any deficit (i.e., negative balance in retained earnings).
3. If a recapitalization is made, any resulting share premium shall also
be used to wipe out any deficit.
4. Disclosures required by relevant regulations are provided in the
financial statements for a minimum period of three (3) years.

INTERMEDIATE ACCTG 2 (by:

MILLAN)
INTERMEDIATE ACCTG 2 (by:
MILLAN)