CH7 NOTE PAYABLE & DEBT RESTRUCTURE

PROMISSORY NOTE > unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand or at a fixed or determinable future time a sum certain of money to order or to bearer Initial measurement Not designated as FVTPL FV trans. costs Irrevocably designated as Trans. costs expensed FVTPL immediately *FV or N/P > PV of future cash payments to settle N/P >PV: discounted amt of future cash outflow in settling N/P using market rate of interest Subsequent measurement (1) Amortized cost method > amt @ w/c N/P is measured initially principal repayment +/- cumu. Amort. >diff. bet. face amt & PV = discount/premium Note issued solely for cash PV = cash proceeds Interest bearing note issued for Prop/asset: recorded @ property purchase price (PV of note & FV of prop./asset) Noninterest bearing note issued for property (1) w/ cash price Prop/Asset: cash price (PV of

N/P) *cash price face of note = imputed interest (2) no cash price Noninterest bearing note payable lump sum Prop/Asset: PV of N/P Prop/Asset: PV of N/P

(2) Fair value method > N/P measured initially @ FV & remeasured at every year end @ FV w/ any changes in FV recognized in P&L >trans. costs expensed outright >no amortization of discount/premium >interest expense: recognized using nominal/stated rate DEBT RESTRUCTURING > situation where the creditor, for economic or legal reasons related to the debtors financial difficulties grants to the debtor concession that would not be granted in a normal business relationship >concession: between C & D or imposed by law/court >creditor: accounting loss debtor: accounting gain

Types of debt restructuring Asset swap >transfer by the debtor to the creditor of any asset in full payment of an obligation >treated as a derecognition of financial liability or extinguishment of obligation >e.g. Dacion en pago (mortgaged property is offered by debtor in full settlement of debt) Phil. GAAP Gain/loss on extinguishment of debt US GAAP Assume 2 transactions: sale of asset & extinguishment of liability Gain/loss on exchange = FV of asset CA of asset Gain on restructuring = CA of liability FV of asset *FV of asset cant be greater than CA of liability -same-

=
CA of Liability = principal + unamortized cost + accrued interest payable + legal fees + bank service chargesd

CA of Asset Equity instruments issued to extinguish liability: (a) FV of equity instruments issued (b) FV of liability extinguished (c) CA of liability extinguished > no gain/loss Gain/loss on extinguishment of debt = CA of liability initial measurement of equity inst. Substantial modification of terms >gain/loss on extinguishment is at least 10% of old liability Gain/loss on extinguishment of debt = CA of old liab. PV of new/restructured liab. (using old effective rate) *costs incurred from substantial modification recognized as part of gain/loss on extinguishment No substantial modification of terms >gain or loss is not recognized

Equity swap >issuance of share capital by the debtor to the creditor in full or partial payment of an obligation

Modification of terms >may involve: interest, maturity value, or both (a) Interest concession > reduction of interest rate, forgiveness of unpaid interest, moratorium on interest payment (b) Maturity value concession > extension of maturity date, reduction of amt to be paid at maturity >substantial modification of terms extinguishment of the old fin. liab. & recognition of a new fin. liab.

Gain on debt restructuring = CA of old liab. New/restructured liab. (absolute amount)

CH 15 SHAREHOLDERS EQUITY
CORPORATION > an artificial being created by operation of law, having the right of succession, and the powers, attributes, and properties expressly authorized by law or incident to its existence >Corporation Code + special laws >5 to 15 persons >Certificate of Incorporation: final determination of the corporations right to do business >Formal organization: adoption of by-laws & election of officers Organization cost > costs incurred in forming or organizing a corporation (legal fees, incorporation fees, share issuance costs) >expensed immediately >share issuance costs: debited to share premium, excess charged to expense if balance insufficient SHAREHOLDERS EQUITY > residual interest of owners in the net assets of a corporation measured by the excess of assets over liabilities Paid in capital/Contributed capital Legal capital > cannot be Preference share capital returned to the shareholders in (cumulative, participating, has any form during the lifetime of liquidating value, convertible, the corporation callable) > preferenceto Determination: dividends/assets; fixed return on investment Par value share: aggregate *Redeemable P/S > fin. liab par value of shares issued & Ordinary share capital > gives subscribed owner right to vote, share in No-par value share: total income, share in assets upon consideration received from liquidation shareholders including Subscribed share capital (P/S & excess over stated value O/S) subscription rec. (NC) Share premium SP - issuance SP - conversion privilege share warrants outstanding SP - treasury stock transactions donated capital small stock dividend (declaration) special assessments recapitalization quasi-reorganization SP forfeited subscriptions SP redemption SP unexercised warrants SP stock dividend SP unexercised share options Retained earnings/Accumulated profits Unappropriated/free Appropriated > voluntary, contractual (creditor), legal (treasury shares) (-) Treasury stock (@ cost) (-) Capital liquidated Accumulated comprehensive income Trust fund doctrine > the share capital of a corporation is considered as trust fund for the protection of creditors >illegal to return legal capital during lifetime of corporation >corp. can pay dividends to shareholders but it is illegal to pay dividends if entity has a deficit

Issuance of share capital *a share shall not be issued for a consideration less than the par or stated value thereof *shares w/o par value cant be issued for less than P5 Share issued @ discount >shares are sold at a price below par or stated value >prohibited under the Corporation Code >issue is not void but agreement that share be paid for less than par/stated value is illegal and cannot be enforced >discount liability shareholder must pay for the discount >refers to original issue of share; TS may be reissued for less than par/stated value Cash xx Discount on share capital xx Share capital xx *Discount on share capital deduction from total shareholders equity Issuance of share capital for noncash consideration >valuation shall be initially determined by the incorporators or the BOD subject to the approval of the SEC Valuation of noncash consideration: (a) FV of noncash consideration received (b) FV of shares issued (c) Par value of shares issued Issuance of share capital for services Valuation of services rendered: (a) FV of services (b) FV of shares issued (c) Par value of shares issued Share issuance costs > direct costs to sell share capital Share premium xx Expense (is SP insufficient) xx Cash xx Watered share > share capital issued for inadequate or insufficient consideration; asset & capital are overstated Secret reserve > asset is understated & liability is overstated > understated capital: excessive provision for depn, dep, etc.; excessive writedown; CapEx recorded as outright expenses; fictitious liabs. Delinquent subscription > shareholder doesnt pay of the date fixed; delinquent share will be sold through public auction and will be sold to highest bidder Highest bidder > person willing to pay the offer price of delinquent shares for the smallest number of shares Offer price: balance due, accrued interest, ad and sell expenses *if there are no bidders, corporation may purchase shares = treasury shares Callable P/S > can be called in for redemption at a specified price at the option of the corporation; has no redemption date; issuer does not have present obligation to transfer a financial asset to shareholders *if call price > original issue price, excess is debited to RE *excess of call price over par value of PS: (a) SP from issuance; (b) RE *if call price < original issue price: difference credited to SP O/S Redeemable P/S > has a mandatory redemption date or one w/c must be redeemed at the option of the holder

>classified as current/noncurrent liability depending on redemption date >dividends paid: interest expense >gain/loss from redemption or refinancing: recognized in P&L Convertible P/S > gives the holder the right to exchange the holdings for other securities of the issuing corporation Stock rights >evidenced by share warrants >no entry because they are issued w/o consideration P/S issued w/ share warrants >sale of 2 securities: P/S & share warrants Both securities have known MV Consideration received allocated on the basis of MV Only 1 has know MV Allocate to security w/ known MV an amt equal to its MV & balance allocated to other security Both securities have no MV Basis for allocation would be MV of O/S Issue: Cash P/S SP-P/S SWO Exercise: Cash SWO xx xx xx xx xx xx xx xx xx

(2) Par/Stated value method/Retirement method TS (@ par) xx Cash xx SP-TS xx *not preferred due to legal restriction Retirement of TS Results in gain

Results in loss

O/S (@ par) xx TS xx SP-TS xx Loss debited in following order (a) SP-original issuance (b) SP-TS (c) RE

Disclosure of TS: (a) no. of TS; (b) restriction on RE for distribution of dividends *TS deducted from total SHE Donated shares > shares received by entity from shareholders by donation >essentially TS >secured w/o costs: A, L, & E unaffected but no. of shares outstanding decreases Receipt: memo entry Sale: Cash (@ cost) xx Donated capital xx Retirement: O/S (@ par) xx Donated capital xx TS subterfuge > excessive shares issued for a property w/ understanding that shareholders shall subsequently donate a portion of their shares >resale or reissue of treasury donated share not entirely credited to donated capital; sale price to be used to correct overvalued asset and share capital Donation of capital >recorded @ FV when received or receivable >subsidies; credited to income Assessments on shareholders Cash/Share assessment receivable Disc. on sh. capital

O/S SP-O/S Not exercised: SWO xx SP-O/S

Bonds payable issued w/ share warrants >compound financial instruments >classify liability & equity component separately Treasury shares: (1) entitys own share; (2) shares issued originally; (3) reacquired but not cancelled *if canceled, retired shares Legal limitation: corporation can acquire TS only to the extent of RE balance >RE must be appropriated to the extent of the cost of TS Accounting for TS (1) Cost method Acquired for cash: cost = cash payment Acquired for noncash asset: cost = CA of asset surrendered TS xx Cash/noncash asset xx Reissuance: @ cost Cash xx TS xx @ more than cost Cash xx TS xx SP-TS xx *no gain/loss recognized on purch., sale, issue or cancelation of equity inst. @ below cost Cash xx SP-TS xx RE xx TS xx

xx xx

Recapitalization > when there is a change in the capital structure of the entity >old shares canceled, new share issued Change from par to no par (a) orig. issue price > stated O/S xx value SP-O/S xx O/S-new xx SP-recap. xx (b) stated value > orig. issue price O/S SP-O/S RE SP-recap. (a) O/S O/S-new SP-recap (b) O/S RE O/S-new xx xx xx xx xx xx xx xx xx xx

Change from no par to par

Reduction of par value Reduction of stated value Split up/share split proper >orig. shares called in for cancelation & replaced by a larger # accompanied by a reduction in par/stated value >to increase # of outstanding shares to reduce unit mkt price >there must be no change in amt. of sh. capital Split down/reverse share split >orig. shares canceled & replaced by smaller # accompanied by inc. in par/stated value

O/S (# of sh. x (old-new par) SP-recap O/S (# of sh. x (old-new par) SP-recap Memo entry

xx xx xx xx

Liability dividends >deferred cash dividends >RE sufficient, cash insufficient (1) Scrip dividends > ST & may or may not be interestbearing RE Scrip div. pay. Scrip div. pay. Int. exp. Cash xx xx xx xx xx

(2) Bond dividends > LT & normally interest-bearing

CH16 RETAINED EARNINGS

>Accumulated profits >cumulative balance of periodic net income or loss, dividend distributions, prior pd. errors, changes in acctg policy and other capital (1) Unappropriated > free and can be declared as dividends to shareholders (2) Appropriated > restricted & not available for any dividend declaration *If RE has debit balance: deificit/accumulated losses Dividends > distribution of earnings or capital to shareholders in property to shareholdings (1) Dividends out of earnings > from RE *if deficit or exceeds RE balance, illegal to declare Date of declaration > liability for dividends recognized Forms Cash dividends Declaration: Certain amt of pesos/share RE xx Certain % of par/stated Div. pay. xx value Payment: Div. pay. xx Cash xx Property dividends/dividends Measurement: FV of asset to be in kind distributed; adjusted every >dist. of earnings in the form of year-end noncash assets RE (FV) xx Div. pay. xx See * RE ( FV) xx Div. pay. xx Settlement: Gain/loss = CA div. pay. CA asset Div. pay. xx (Loss) xx Noncash asset xx (Gain) xx Measurement of noncash asset = lower of CA & FV less cost to dist. *if FV less cost to dist. is lower, there is an imp. loss Imp. loss xx Noncash asset xx

Stock dividends >bonus issue >dist. of earnings in the form of entitys own shares >RE decreases, share capital increases Ordinary: O/S to O/S or P/S to P/S Special: O/S to P/S or P/S to O/S

RE xx Bond div. pay. xx Bond div. pay. xx Bond pay. xx Int. exp. xx Cash xx Bond pay. xx Cash xx Small stock dividend (< 20%): FV or par value, whichever is higher, on declaration date RE (FV/par/stated) xx Stock div pay xx SP xx Stock div pay xx Sh. capital xx

Large stock dividend (> 20%): par/stated value capitalized See ** RE (par) xx Stock div pay xx Stock div pay xx Sh. capital xx *Choice of cash/noncash > entity shall estimate the div. pay. by considering both the FV & associated probabilities Cash (% x FV) xx Noncash (% x FV) xx Div. pay. xx xx Div. pay. Cash alt.: Div. pay. xx Cash RE Noncash alt.: Div. pay. xx (Loss) xx Noncash (Gain) ** Fractional stock dividends RE Stock div pay Stock div pay Sh. capital Fractional warrants O/S Fractional warrants O/S Sh. capital SP (expired warrants) RE

xx xx xx

xx xx

xx xx xx xx xx xx xx xx

TS as stock dividends > declaration: property dividends; substance over form RE (cost) xx Stock div pay xx Stock div pay xx TS xx

Special cases: (1) cash in lieu of stock dividend; (2) proposed inc. in authorized share capital; (3) closely held entities: RE capitalized to extent of par/stated value of shares (2) Dividends out of capital/Liquidating dividend >paid to shareholders when entity is dissolved and liquidated >wasting asset corp.: RE + acc. depletion RE xx Capital liquidated xx Div. pay. xx *capital liquidated deducted from SHE Appropriation of RE > limit dividend declaration (1) legal: TS; (2) contractual: sinking fund/bond redemption; (3) voluntary: mgt discretion RE xx RE-app xx No longer necessary: RE xx RE-app xx *appropriation acct doesnt imply a cash fund is established Statement of RE > shows changes affecting directly the RE of an entity & related I/S to B/S >part of SOCE (a) Net income/loss = (+/-) (b) Prior pd errors = (+/-) beg. bal. (c) Dividends = (-) (d) Effect of changes in acctg policy = (+/-) beg. bal. (e) Appropriation = (-) Reserves > distributable or nondistributable equity Nondist: sh. prem., appropriation reserve, RS, OCI Statement of changes in equity >shows movements in the elements or components of SHE (1) total comprehensive income; (2) effects of changes in acctg policies & error correction; (3) beginning and ending balances Quasi-reorganization > permissive but not mandatory procedure under w/c a financially troubled entity restates its accts & established a fresh start in the acctg sense >restating A, L, & share capital balances in conformity w/ FV for the purpose of eliminating deficit May be done through: (1) recapitalization: resulting deficit charged to share premium; (2) revaluation of PPE: resulting deficit charged to RS Justifications: (1) large deficit; (2) approved by shareholders & creditors; (3) cost basis acctg becomes unrealistic; (3) fresh start desired or advantageous >must be approved by SEC

Measurement: Method FV method Intrinsic value method >can only be used if FV of share options cant be reliably estimated

Compensation FV of share options on date of grant Intrinsic value of share options Intrinsic value = MV share option price

Recognition: (1) Vests immediately > compensation (as expense) recognized in full (2) Does not vest immediately > compensation recognized as expense over service/vesting pd Compensation: Salaries-SO xx SOO (sh. prem.) xx Exercise: Cash xx SOO xx O/S xx SP xx Not exercised: SOO xx SP xx Acceleration of vesting: (1) compensation expense recognized immediately; (2) any payment made to employees accounted for as repurchase of equity interest *if share options not exercised: (1) any cash paid up to FV of options or cumulative compensation already recognized deducted from equity or charged to SOO; (2) any amt in excess of FV already recognized treated as expense SOO xx Salaries xx Cash xx Share-based payment transaction in w/c employees of subsidiary are granted rights to equity interest of parent > equity settled >FV of share options @ grant date >increase in equity recognized as contribution of parent in F/S of subsidiary SHARE APPRECIATION RIGHTS > cash payment = increase in the price of a given number of shares Cash settled transaction > entity incurs a liability for services received and liability is based on entitys equity instruments >measured @ FV of liability; remeasured accdg to changes in FV Measurement: FV of liability; remeasured every year-end FV liability = excess of MV share over a predetermined price for a given # of shares over a definite vesting period >determined on exercise date not grant date Recognition: (1) Vests immediately > compensation recognized on grant date (2) Does not vest immediately > compensation recognized as expense over service/vesting pd Reversal: Acc. salaries pay. xx Gain on reversal of SAR

CH 17 + 18 SHARE-BASED COMPENSATION
>compensation arrangement est. by entity whereby employees shall receive shares of capital in exchange for services or entity incurs liabilities to employees in amts based on price of its shares >performance-based: motivation (1) equity settled: share options (2) cash settled: liability based on equity instrument; share appreciation rights SHARE OPTIONS > granted to officers and key employees to enable them to acquire shares of the entity during a specified period upon fulfillment of certain conditions

xx

Cash & Share alternative (1) Cash alternative: cash payment = MV of certain # of shares subject to certain conditions (2) Share alternative: equity shares given to employees *entity has choice of settlement > no accounting problem

*employee has right to choose settlement >compound financial instrument Liability: cash alt. Equity: share = FV whole inst. FV liab Salaries xx SOO Salaries xx ASP Cash alt.: ASP SOO Cash SP Equity alt.: ASP SOO Sh. capital SP xx xx xx xx xx xx xx xx

xx xx

Noncumulative > right to receive dividends forfeited when not declared; current year dividends Cumulative > undeclared dividends accumulate each year until paid; all dividends in arrears Nonparticipating > entitled to receive dividends equal to fixed rate Participating > entitled to receive dividends in excess of fixed rate; O/S must first receive an amt equal to basic preferred rate

CH 20 + 21 EARNINGS PER SHARE

>amt attributable to every O/S during the pd >pertains only to O/S >required for entities whose O/S or potential O/S are publicly traded Presentation: continuing ops: face of I/S discontinued ops: face of I/S or notes entity presents both consolidated & separate F/S: disclosures based on consolidated info entity chooses to present EPS on separate I/S: shall not present on consolidated F/S Uses: (a) determinant of mkt price; (b) measure of performance of mgt; (c) basis of dividend policy BASIC EPS

*Supplier Equity component = FV asset FV liab >if FV of asset cant be determined, asset recorded @ FV of shares to be issued: Equity = FV shares FV liab Purchase: Asset xx A/P xx SOO xx Cash alt.: A/P xx SOO xx Int. exp. xx Cash xx SP xx Equity alt.: A/P xx SOO xx Sh. capital xx SP xx

Net income = amt after deducting dividends *if P/S cumulative, dividend for current year only is deducted whether declared or not *if P/S noncumulative, current year dividend deducted if declared *stock dividends or share splits recognized retroactively Basic loss per share *if P/S cumulative, preference dividend added to net loss to get total loss *if P/S noncumulative, preference dividend is ignored because presumably there is no declaration since there is a net loss DILUTED EPS Simple: O/S + P/S nonconvertible Complex: O/S + potential diluters (options & warrants, conv. P/S, conv. Bonds) *BEPS > what actually happened DEPS > worst case scenario Potential ordinary share > fin. instrument or other contract w/c may entitle its holder to O/S Dilution > inclusion of potential O/S decreases BEPS or increases BLPS Antidilution > inclusion of O/S increases BEPS or decreases BLPS *computation of DEPS assumes ordinary shares are issued as a result of conversion of convertible securities & exercise of share options Potential diluter Convertible bond payable *assume conversion done @ start of year or issue date, whichever is later DEPS >interest expense (net of tax) added back to net income >no. of O/S increased by no. of O/S w/c would have been issued upon conversion Int. exp. for bonds w/

CH 19 BOOK VALUE PER SHARE

>amt that would be paid on each share assuming the entity is liquidated & the amt available to shareholders is exactly he amt reported as SHE

(1) amt equal to par/stated value allocated to P/S & O/S (2) balance of SHE in excess of par/stated value apportioned taking into account liquidation value & dividend rights of preferred shareholders Available for dividends: (a) RE; (b) sh. premium; (c) RS Liquidating value of P/S > amt w/c preferred shareholders normally receive upon liquidation of corporation >may be greater than par >if absent: par value deficit: prorate w/ ordinary shareholders *call price (paid to preferred SH upon redemption during the lifetime of corporation) is ignored Preference as to assets Cumulative: LV + dividends in arrears Noncumulative: LV + current years dividends Preference as to dividends >if dividends are declared, preferred SH have right to receive dividends first

Convertible preference share *assume conversion done @ start of year or issue date, whichever is later Options & warrants >have no cash yield but derive value from right to obtain O/S at a specified price w/c is usually lower than prevailing market price *dilutive is exercise/option price < prevailing market price

disc./prem. = CA x eff. rate x (1tax rate) >net income no longer reduced by preference dividend >no. of O/S increased by no. of O/S w/c would have been issued upon conversion Proceeds fr. assumed exercise of options = sh. options x (exercise price + FV option) Assumed TS = Proceeds/ Ave. mkt price Actual exercise: Assumed TS = Proceeds/ Mkt price on exercise date Incremental O/S = Sh. opt. assumed TS

Multiple potential O/S >considered from most dilutive to least dilutive