07 Shareholders Equity

UNIT 6: SHAREHOLDERS EQUITY - ACTG 205

Concept of a Corporation

  • A corporation is an artificial being created by law, designed to have rights of succession and powers as authorized by law.

  • It is a legal person, distinct from its individual members or shareholders, treated as an entity by the law for functional purposes.

Organization of a Corporation

  • Formation by law: Corporations require approval from the state and cannot be formed merely by agreement.

  • Governed by Republic Act 11232 (Revised Corporation Code) in the Philippines.

  • Section 10 details that up to 15 individuals may organize a corporation for lawful purposes.

Additional Legal Considerations

  • Professionals or partnerships in specific professions cannot form a corporation unless special laws allow it.

  • One Person Corporation: A corporation with a single shareholder.

  • Corporations can be classified as stock (capital divided into shares) or nonstock (without shares).

Contents of Articles of Incorporation

  • Must file Articles with SEC containing:

    • Name of corporation

    • Purpose of formation

    • Location of principal office

    • Term of existence

    • Personal details of incorporators

    • Number of directors/trustees.

Additional Requirements for Stock Corporations

  • For stock corporations, specifics include:

    • Amount of authorized capital stock

    • Number of shares and par value

    • Details of original subscribers including amounts subscribed and paid, if applicable.

Certificate of Incorporation

  • Corporation gains legal status from the SEC Certificate of Incorporation.

  • Marks the corporation's right to do business, but requires organizational formalities like adopting bylaws.

Bylaws

  • Rules adopted for internal governance of the corporation and management of officers, shareholders, and members.

  • Typical bylaws may include meeting procedures and duties of directors and officers.

Minimum Capital Stock

  • Section 12 of the Revised Corporation Code states there is no minimum capital requirement for stock corporations, unless specified by special law.

Components of Corporation

  • Corporators: Individuals or entities in the corporation.

  • Incorporators: Initial corporators in the articles of incorporation.

  • Shareholders: Owners of shares in stock corporations.

  • Members: Those in nonstock corporations.

Books and Records of a Corporation

  • Minutes Book: Records of meetings.

  • Stock and Transfer Book: Shares and payments information.

  • Books of Accounts: Financial transactions, including journals and ledgers.

  • Additional Books:

    • Subscription book

    • Shareholders' ledger

    • Subscribers' ledger

    • Share certificate book.

Organization Cost

  • Costs incurred in forming a corporation include legal fees, incorporation fees, and share issuance costs.

  • PAS 38 states startup costs must be expensed immediately, except share issuance costs.

Shareholders Equity

  • Represents the residual interest of owners in the net assets of a corporation (assets minus liabilities).

  • Key components include share capital, share premium, retained earnings, treasury shares, and revaluation surplus.

Definitions of Terms

  • Share Capital: Total par or stated value of issued shares.

  • Subscribed Share Capital: Part of authorized capital that is subscribed but not paid.

  • Share Premium: Excess over par value.

  • Retained Earnings: Cumulative retained gains and losses over periods.

Capital Stock

  • Defined in articles; represents paid-in capital by shareholders.

  • Rights of shareholders include:

    • Earning sharing

    • Voting rights

    • Preemptive rights to new shares

    • Claims to net assets upon liquidation.

Share Certificates

  • Document evidencing ownership, issued when subscriptions are fully paid.

  • Shares can be par value or no-par value (minimum issue price for no-par is P5).

Ordinary vs. Preference Share Capital

  • Ordinary Shares: Equal rights and privileges without preference.

  • Preference Shares: Preferences in dividends and liquidation; types include callable and redeemable shares.

Legal Capital

  • Portion of paid-in capital that cannot be returned to stockholders during the corporation's existence, encompassing both par and no-par shares.

Trust Fund Doctrine

  • Share capital treated as a trust fund for creditor protection; dividends can only be paid from retained earnings.

Accounting for Share Capital

  • Memorandum Method: No entry for authorized capital; credit to share capital when shares are issued.

  • Journal Entry Method: Different accounting for subscription receivable and unissued share capital.

Share Issuance Costs

  • Includes direct costs associated with issuing shares, deducted from equity.

  • Costs related to stock market listings are expensed immediately.

Watered Share & Secret Reserve

  • Watered Share: Issued share capital is high compared to the consideration, leading to overstatement of assets and capital.

  • Secret Reserve: Understated assets/liabilities leading to undercapitalization.

Delinquent Subscriptions

  • Board can declare unpaid subscriptions due; delinquent shares may be auctioned.

  • Lack of bidders allows the corporation to redeem shares.

Callable and Redeemable Preference Shares

  • Callable Shares: Redeemable at corporate option without a set date.

  • Redeemable Shares: Mandatory redemption on specified dates becomes a liability based on the redemption term.

Convertible Preference Shares

  • Can be exchanged for ordinary shares or bonds, usually benefiting from operational success.