ACYFARP: Retained Earnings

Accumulated Profits

It is the IFRS term for retained earnings.

Retained Earnings

Represent the cumulative balance of the following:

a. Net income or loss for the period.

b. Distributions of dividends

c. Prior period errors.

d. Changes in accounting policy

e. Reclassifications of some components of other comprehensive income.

f. Other capital adjustments.

Unappropriated Retained Earnings

Represent that component which is available and can be declared as dividends to shareholders.

Appropriated Retained Earnings

Are those that have been restricted and hence are not available for dividend declaration.

Deficit

Occurs when the retained earnings account has a debit balance. It is not an asset, per se, but rather a reduction in shareholder equity.

Accumulated Losses

Is the IFRS term for deficit.

Dividends

Are payments made to shareholders in proportion to their shareholdings of earnings or capital.

True

(True or False) Dividends can be declared legally only from retained earnings. If the entity has a deficit, it is prohibited to pay dividends. If the entity distributes dividends in excess of the retained earnings balance, the excess is considered a return of capital and so violates the trust fund doctrine.

True

(True or False) The Board of Directors are in charge of declaring dividends.

Date of Declaration

The date on which the board of directors authorize the distribution of dividends to shareholders.

Date of Record

The date on which the stock and transfer book of the company will be closed for registration. Only stockholders who were registered on that day are eligible to receive dividends. No entry is required on this date but a list of the shareholders entitled to receive dividends is prepared.

Date of Settlement

The date on which dividend liability will be settled or paid.

Distribution of Non-Cash Assets to Owners

The liability to pay such distribution is when the dividend is properly authorized and no longer at the discretion of the company. which is the date:

a. When the dividend declaration by management or the board of directors, if the local jurisdiction does not require further approval.

b. Based on the Philippine Jurisdiction, the declaration by the board of directors do not require further approval.

c. When the dividends declaration by management or the board of directors is approved by the appropriate authority, such as the shareholders, if the local jurisdiction needs such approval.

Date of Declaration

The date when dividend liability must be recognized.

Cash Dividend

The most prevalent sort of payout. When used alone, the term usually refers to the distribution of cash. It can be expressed in the following ways:

a. A fixed sum of pesos per share (Ex: P8 per Share for Dividends)

b. A percentage of the par or stated value (Ex: If a 10% dividend is issued, a P300 par value share will received P30 as dividend).

Cash Dividends

When declared, a current liability is established by debiting retained earnings or "dividends" and crediting dividends payable on the date of declaration.

True

(True or False) When dividends are declared during the year, they are recorded in the "dividends" account. At the end of the year, such an account is closed to retained earnings. However, if the dividend declared during the year is directly charged to retained earnings, no objections can be raised.

Cash Dividends

When such distributions are paid, the entry to be debited is dividends payable; and the entry to be credited is cash.

Property Dividends

Also known as dividends in kind, are distributions of an entity's earnings to shareholders in the form of noncash assets.

Property Dividends

Is measured at the non-cash asset's fair value. The entity shall review and amend the carrying amount of the dividend due at the end of each reporting period and on the day of settlement, with any change recorded in equity as an adjustment to the amount of consideration. This implies that the dividend payable is initially recognized at the fair value of the noncash asset on the date of declaration and is increased or decreased as a result of changes in the asset's fair value at the end of the fiscal year and the date of settlement.

Settlement of Property Dividend Payable

An entity settles the dividend payment. The difference between the carrying amount of the dividend payable and the carrying amount of the asset is distributed is recorded in profit or loss.

Measurement of Non-Cash Asset to be Distributed as Property Dividend

An entity shall measure a noncurrent asset classified for distribution to owners at the lower of the carrying amount and the fair value less the cost to distribute. If the asset's fair value less cost to distribute is less than its carrying amount at the end of the reporting period, the difference is accounted for as an impairment loss.

True

(True or False) If an entity gives its owners a choice of 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 probabilities of owners selecting each alternative. At the end of each reporting period and at the date of settlement, the entity shall adjust the dividend payable based on the alternative chosen through equity or retained earnings.

Scrip Dividends

Are like notes in that they are official evidence of indebtedness to pay a sum of money at some future time.

Bond Dividends

Like scrip dividends, do not pay dividends immediately; instead, the company promises to pay dividends at a later date and issue bonds to owners in lieu of cash. The only difference between this type of dividend and scrip dividend is the date of payment. Both result in a decrease in surplus and an increase in the company's obligation. The sole distinction is the longer maturity date.

True

(True or False) In the case of bond dividends, stockholders have a stronger claim against the company than in the case of scrip payouts.

Bonus Issue

Is the IFRS term for a share dividend.

Share Dividends

Are distributions of an entity's earnings in the form of its own shares. When such dividends are declared, the entity's retained earnings are effectively capitalized, or transferred to share capital. Upon issuance, the entity's assets are the same before and after. Such dividends only affect the components of shareholders' equity, resulting in a decrease in retained earnings but an increase in share capital.

Special Share Dividends

Are dividends in terms of ordinary shares paid to preference shareholders or preference shares granted to regular shareholders.

Share Dividends is Less than 20%

The amount charged to retained earnings is equal to the fair value on the date of declaration. The fair value, however, cannot be less than par or stated value. Otherwise, the amount debited from retained earnings is equal to the stated value or par.

Share Dividends is Less than 20%

It is considered as a small share dividend since, empirically, it does not result in a lower market price for the outstanding shares.

Share Dividends is 20% or More

The par or stated value is capitalized because it is expected to have a material effect on the share market value. This is considered as a large share dividend.

True

(True or False) The amount to be capitalized in the issuance of share dividends is the par value of the shares.

Share Dividend Payable Account

Is an addition to share capital when a statement of financial position is prepared prior to the issuing of the share dividend.

True

(True or False) Share dividend payable is classified as an increase in share capital, and never a liability because share dividends never reduce the assets of an entity.

Share Dividends is Less than 20%

Upon recognition of declaration, a share premium is credited.

Share Dividends is 20% or More

Upon recognition of declaration, no share premium is credited.

Fractional Share Dividends

Upon the issuance of such, the entity may issue warrants for fractional shares and provide holders enough time to accumulate enough warrants for a full share. Or, in lieu of a fractional share, the entity may pay cash. (This is only possible if share dividends are paid from retained earnings. Cash payment of share dividends is illegal if the source of the income is share premium).

Shareholders Received Cash Instead of a Share Dividend

The amount charged to retained earnings should be equal to the optional cash dividend.

Share Dividends are Declared Based on a Proposed Increase in Authorized Share Capital for Which an Application has Been Filed but Has not Yet Been Accepted by the SEC at the Conclusion of the Reporting Period

Prior to the SEC clearance, the proposed increase and dividend declaration shall not be recorded in the statement of financial position. These matters, however, should be stated in the notes to financial statements.

True

(True or False) In the event that the proposed increase in authorized share capital is approved by SEC after the end of the reporting period and the share dividends are subsequently effected before release of statements, the new authorized share capital may be presented. The share dividend may be included in the issued share capital. In this scenario, disclosure is still required.

Dividends Out of Capital

Also known as Liquidating Dividends. It refers to when capital is returned to shareholders.

True

(True or False) Returning funds to shareholders in accordance with the trust fund theory is illegal during the entity's lifetime.

Wasting Asset Theory

States that a wasting asset entity can declare dividends not only up to the amount of retained earnings, but also up to the amount of cumulative depletion.

True

(True or False) Any amount declared in excess of the retained earnings balance is recognized as liquidating dividends and applied to the capital liquidated account, which represents a reduction in total shareholders' equity.

True

(True or False) Distributions to holders of equity instruments shall be debited directly to equity by the entity. However, distributions to holders of an equity instrument designated as a financial liability are treated the same as interest expense.

Dividends Classified as an Expense

May be included in the income statement with either interest on other obligations or as a separate line item.

True

(True or False) Legally, retained earnings must be appropriated to the extent of the remaining cost of the treasury shares.

True

(True or False) Treasury shares may be reissued as dividends, in which case, the cost of the shares should be charged to retained earnings.

Loss on Treasury Shares

Cost of Treasury Shares - Par Value of Treasury Shares