Topic 3: Retained Earnings

Declaration and Payment of dividends important dates

• Date of Declaration • Date or Record • Date of Payment

Retained Earnings

• Retained earnings represent the cumulative balance of the following, among others: a. Net Income or loss for the period b. Dividend distributions c. Prior period errors d. Change in accounting policy e. Reclassifications of some components of other comprehensive income f. Retirement of preference shares in the excess of original issue price. g. Loss on sale of treasury shares in excess of share premium from treasury shares h. Loss on retirement of treasury shares in excess of share premium from treasury shares.

the book value per share is computed by dividing the total shareholders' equity by the number of shares outstanding

When only one single class of share is outstanding,

the retained earnings of the entity are in effect capitalized or transferred to share capital.

When share dividend is declared

Dividends in arrears

When the board does not declare dividends, the dividends for cumulative preference share accumulate, this is called.

Effect of A Prior Period Error

• The correction of a prior period error is excluded from profit or loss for the period in which the error is discovered.

Effect of Share Splits on Shares

• The par or stated value per share will decrease with a corresponding increase in the number of authorized, issued and outstanding shares.

Non-Participating Preference Shares.

• These shares entitle the holders only to the extent of the stipulated preference dividend • yung remainder, kay common shares lahat.

Classification of Retained Earnings

• Unappropriated • Appropriated

Declaration of Cash Dividends

• When the board of directors declares cash dividends, preference shares are entitled to dividends before ordinary shareholders received any distribution. • The dividend is stated as a percentage of the par value of shares.

Book Value Per Share

• amount that would be paid on each share if the corporation is liquidated • The amount available to shareholders is exactly the amount reported as shareholder's equity

BVPS

Shareholders Equity / Shares Outstanding

Share dividend payable

not a liability but an addition to the share capital in the shareholder's entity.

Body of Appropriated Retained Earnings

presents the: • beginning balance of the retained earnings appropriated account • any additions or deductions during the period • the ending balance

Body of Unapropriated Retained Earnings

presents the: • beginning balance of the retained earnings unappropriated account • correction of prior priod errors • profit or loss for the period • dividends • transfers to and from the appropriated and unappropriated accounts • the ending balance

the par or stated value is capitalized.

However, if the fair value is lower than the par or stated value,

Restricted Retained Earnings - Entry

Appropriated Retained Earnings ---Retained Earnings

Cash Dividends - Entry upon payment

Cash Dividends Payable ---Cash

Prior Period Error - Correcting Entry

Correct Account ---Retained Earnings

retained earnings would have to be decreased

If an error overstated profit in prior periods,

correcting entry would be needed to increase retained earnings

If an error resulted in an understatement of profit in previous periods

it is illegal to pay dividends

If the entity has a deficit,

the difference is credited to share premium from share dividend.

If the fair value is higher than par or stated value,

No

Is a corporation obliged to declare dividends annually?

1. Non-cumulative and non-participating 2. Non-cumulative and participating 3. Cumulative and non-participating 4. Cumulative and participating

Preference shares may contain one of the following combination of features:

Property Dividends - Date of Payment

Property Dividends Payable ---Investment ---Gain on Distribution Property Dividends Payable (natira)

Property Dividends - Date of Declaration

Retained Earning ---Property Dividends Payable

Share Dividend - Date of Declaration

Retained Earnings ---Share Distributable ---Share Premium

Cash Dividends - Entry upon declaration

Retained Earnings ---Cash Dividends Payable

Share Dividend - Date of Payment

Share Distributable ---Ordinary Shares

Ordinary Shareholder's Equity

Total SHE - Preference Equity

Dividends out of earnings

can be declared only from retained earnings.

Offsetting debit or credit

directly through equity or directly retained earnings

Preference Shareholder's Equity

liquidation value + current dividends + dividends in arrears

Effect of Share Splits on Equity

there is no change in the balances of the shareholders' equity accounts

BVPS of Ordinary Share

total SHE - preference equity / totaloutstanding shares

Deficit

when the retained earnings account has a debit balance

Statement of Retained Earnings

• Appropriated • Unappropriated

Common Forms of Dividends out of Earnings

• Cash Dividend • Property Dividend • Share Dividend

What to Do in a Prior Errors

• The amount of the correction of a prior period error that related to prior periods should be reported by adjusting the opening balances of retained earnings and affected assets and liabilities.

Effects of Share Dividends

• The assets of the entity remain the same before and after the issuance of the share dividend.

Reverse splits

• can be accomplished by increasing the par or stated value of its share and reducing the shares accomplished by increasing the par or stated value of its share and reducing the shares outstanding • There will be not journal entry required; • a memo entry is sufficient.

Liquidation value

• cash price of other consideration that can be received in a forced sale of assets such as that occurring when a firm is in the process of going out of business • less than what could be received from selling assets in the ordinary course of the business.

the share dividend is 20% or more

• considered a large share dividend • the par or stated value is capitalized or debited to retained earnings • the par or stated value is capitalized because this is conceived to materially effect a reduction in the share market value

the share dividend is less than 20%

• considered a small share dividend because the small share dividend does not result in a reduced market price of the outstanding shares. • the fair value of the share on the date of declaration is capitalized • however, if the fair value is lower than the par or stated value, the par or stated value is capitalized. • if the fair value is higher than par or stated value, the difference is credited to share premium from share dividend

Date of Payment

• corporation settles its liability on this date. • entry is made on this date

Share Dividend

• distribution of the earnings of the entity in the form of the entity's own shares

Dividends

• distributions of earnings or capital to shareholders in proportion to their shareholdings • obligations of the firm.

Property Dividends

• dividends in kind • distribution of earnings to the shareholders in the form of noncash assets.

Non-Cumulative Preference Shares.

• entitles the holders only to the payment of current dividends • if and when dividends are declared to the extent of preference rate, before the ordinary dividends are paid • If there is no dividend declaration for a certain year, then the dividend for that year is forfeited.

Choosing between a non-cash asset or cash alternative

• entity shall estimate the dividend payable by considering both the fair value of each alternative and the associated probabilities of owners selecting each alternative.

Preference Shareholders

• have the right to receive assets equal to the part value or a larger stated liquidation value per share

BVPS of Preference Share

• liquidation value + current dividends + dividends in arrears / total preference outstanding shares

Date of Record

• list of shareholders entitled to the declared dividends is prepared • if an investor buys a share of stock after this date, he will not receive the dividend • The shares is said to be traded ex-dividend • No entry is required on this date.

Prior Period Errors

• maling entries from period periods at nakita mo nung nakasara na yung books • omissions from and other misstatement of the entity's financial statements for one or more prior periods that are discovered in the current period. • Material prior periods must be restated to report financial position and results of operations as they would have been presented had the error never taken place.

Cash Dividends

• most common type of dividend • may be expressed as a certain amount of pesos per share or a certain percent of par or stated value of shares. • declared solely by the board of directors

Effect of restriction or appropriation of retained earnings

• no effect on assets, total retained earnings or total shareholders' equity • simply communicates that the restricted portion is not available for dividend declarations

Restricticted or Appropriated Retained Earnings

• portion of retained earnings for future expenses, contingencies or other purposes. • corporation may be required by law or contractual arrangements to set aside portion of the retained earnings for specified purposes

Statement of Changes in Shareholders' Equity

• prepared in columnar format • each column represents a major shareholders equity classification.

IFRIC 17, Paragraph 11

• provides that an entity shall measure a liability to distribute noncash asset as a dividend to owners at the fair value of the asset to be distributed.

IFRIC 17, paragraph 12

• provides that if an entity gives it owners a choice of either a noncash 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.

Paragraph 13

• provides that the dividend payable is initially recognized at fair value of the noncash asset on the date of declaration and is increased or decreased as a result of the change in the fair value of the asset at every year-end and date of settlement.

Paragraph 14

• provides that when an entity settles the dividends payable, the difference between the carrying amount of the dividend payable and the carrying amount of the noncash asset distributed shall be recognized as gain or loss on distribution of property dividend

Share Splits

• reduce the par or stated value of its share capital and issues additional shares to its shareholders through the practice

Appropriated

• restricted retained earnings. • portion which is restricted and therefore not available for dividend declaration.

Participating Preference Shares

• shares entitle the holders to participate with the holders of ordinary shares pro-rate in the remainder after the ordinary shares have received their initial share based on the preference rate

Date of Declaration

• the board of directors will adopt a resolution declaring that a dividend is to be paid. • The resolution will specify the amount, type and date of payment of this dividend • Dividends to be paid in cash or property become a liability on this date. • Shares distributable is also recognized.

Gain or Loss on Distribution of Property Dividend.

• the difference between the carrying amount of the dividend payable and the carrying amount of the noncash asset distributed when an entity settles the dividends payable

Large Share Dividend

• the share is 20% or more of the previously outstanding shares such that the effect is to reduce materially the market value per share • then only the par or stated value is credited to ordinary shares with a corresponding debit to retained earning

Unappropriated

• unrestricted retained earnings • portion which is free and can be declared as dividends to shareholders.