Retained Earnings

share dividend

*bonus issue* - distribution of the earnings of the entity in the form of the entities own shares assets of the entity remain the same before and after the issuance of the share dividend

dividends out of earnings

- can be declared only from retained earnings ✓ cash dividend ✓ property dividend ✓ share dividend

Retained Earnings

- cumulative balance of ✓ periodic net income or loss ✓ dividend distributions ✓ prior period errors ✓ effects of change in accounting policy ✓ other capital adjustments - accumulated profits

recapitalization

- deficit is eliminated against to share premium from recapitalization

Dividends

- distributions of earnings or capital to shareholders in proportion to their shareholdings * if entity has a deficit it is illegal to pay dividends

Property Dividends

- dividends in kind - distribution of earnings to the shareholders in the form of non cash assets initially recognized at fair value of the non cash asset on date of declaration ✓ increased or decreased as a result of the change in fair value of the asset at every year end and date of settlement *offsetting is through equity or directly retained earnings CA of DP - CA of NCAsset = P/L Noncurrent Assets ✓ lower of CA or FV-COD FV-COD < CA ✓ impairment loss

dividends out of capital

- liquidating dividends - distributions of capital to shareholders in proportion to their shareholdings

Voluntary Appropriation

- matter of discretion on the part of management ✓ appropriation account may be described as retained earnings appropriated for plant expansion or retained earnings appropriated for contingencies

Contractual Appropriation

- required by contract usually with bondholders and preference shareholders who may impose restriction and payment of dividend ✓ may be described as retained earnings appropriated for bond or preference share redemption

Legal Appropriation

- required by law as in the case of treasury shares ✓ retained earnings must be appropriated to the extent of the cost of treasury shares

quasi-reorganization

- restating assets liabilities and capital in conformity with fair value for the purpose of eliminating a deficit 1. recapitalization 2. revaluation

deficit

- retained earnings account has a debit balance - accumulated losses - not an asset but a deduction from shareholders equity

when are dividends recognized

IFRIC 17 - date of declaration ✓ declared by management or the board of directors if the local jurisdiction does not require for their approval ✓ declaration of dividend by management or the board of directors is approved by relevant authority for example the shareholders if the local jurisdiction requires such approval

amount of share dividends

PH GAAP 1. large share dividend 2. small share dividend

treasury shares reissued as dividends

cost of the shares shall be charged to retained earnings

Revaluation

deficit is eliminated against the revaluation surplus

closely-held entities share dividends

retained earnings capitalized only to the extent of par value or stated value of the shares

share dividends declared on basis of a proposed increase in authorized share capital

✓ application has been filed but not yet approved by SEC at the end of reporting period ✓ not reflected in the statement of financial position prior to SEC approval ✓ disclosed in the notes to FS

circumstances that may justify quasi reorganization

✓ entity in financial difficulty may be permitted by sec to undergo a quasi reorganization and in the process may be allowed to revalue ppe if current cost is substantially more than cost ✓ retained earnings subsequent to quasi-reorganization shall be restricted to the extent the deficit wiped out during the reorganization and cannot be declared as dividend ✓ losses subsequent to quasi-reorganization cannot be charged to the remaining revaluation surplus ✓ quasi reorganization shall be disclosed for atleast 3 years

circumstances that may justify quasi reorganization

✓ large deficit exists ✓ approved by shareholders ✓ cost basis of accounting for PPE becomes unrealistic ✓ when fresh start appears to be desirable or advantageous to all parties concerned

share dividend payable

✓ not a liability ✓ addition to the share capital in shareholders equity

Unappropriated Retained Earnings

✓ portion which is free ✓ can be declared as dividends to stockholders

Appropriated Retained Earnings

✓ portion which is restricted ✓ not available for any dividend declaration

if proposed increase in authorized share capital is approved by SEC after the reporting period

✓ share dividends are subsequently affected before issuance of statements ✓ new authorized share capital may be presented ✓ share dividend may be shown as part of issued share capital ✓ disclosure is necessary

Kinds Of Appropriation Of Retained Earnings

1. legal appropriation 2. contractual appropriation 3. voluntary appropriation ✓ intent or purpose of appropriation of retained earnings is to limit the declaration of dividends

Classification Of Retained Earnings

1. unappropriated retained earnings 2. appropriated retained earnings

small share dividend

< 20% ✓ fair value of the share on the date of declaration is capitalized FV < Par/stated ✓ par or stated value is capitalized FV > Par/stated ✓ difference credited to share premium from share dividend

large share dividend

>=20% ✓ par stated value is capitalized ✓ debited to retained earnings - materially effect reduction in the share market value

receive cash in lieu of share dividend

amount charged to retained earnings is equal to the optional cash dividend

accounting procedure for the appropriation of retained earnings

establishment RE-unappropriated xx RE-appropriated xx * retained earnings appropriated still part of total retained earnings and a shareholders' equity item when no longer needed or required the appropriation balance is cancelled by: RE-appropriated xx RE-unappropriated xx