TREAsURY SHARES -

'freasury shares are an entity's own shares that hove been

issued and then reacquired but not canceled.
Three requisites to qualify as treas~y shares:
---
a. 'fhe shares musf be the e~titi's
--
own shares.
- --
The acqm-·s-it-io-n- of-. s-hares of another entity-is- not treasury
~u~ an_~vestment. ·
b. The shares ntust have _ _ been issued originally.
This requisite -distinguishes treasury shares from
unissued shares. · . ) ,

Trea~ury shares can be legally reissued at a discount

without any discount liability while unissued shares
must be issued at least at par or stated value. ·
In other respects, treasury shares and unissued shares
are the same. Both a1·e equity items ! ather than assets .
.

c. The shares are reacquired but not canceled.

Legal limitation on treasury· shares
The Revised Corporation Code provides that. no corporation
shall redeem, repurchase, or reacquire its own shares; of
whatever class, unless it has adequate amount of unrestricted
1·etained earnings to support the cost of said shares.
Thus, the corporation can acquire treasury shares .only to
the extent of retained earnings balance. _·
·- ----- --- ·---- -------
If the- _corporation w_ere allow~d to acquire· treasury shares
when 1t .has no retained earnings balance or when it has a
deficit, it would be tantamount to indirectly returning capital
to shareholders.
Under the trust fund doctrine it is illeg·a l to return legal
capital to the shareholders.
Wh<:1t its. prohibited to be done directly cannot be done by
indirection.
The~fore, in order to prese?-""e the legal capital, the retained
=-~rtr~~~~~h~~~p~~t~d, ~t an, ~~~~~tc1ce 1~ ~ ~~~ - . _
The. amount appropriated must not be declared a 8 di 'd d
until the treasury shares are subsequently reissue
. d . Vl en

727
Accounting for treasury shares

The cost niethod is used in accounting for treasury shares

because of the legal liniitation on the acquisition of treasury
sha1·es. .·

Treasu1·y shares shall be reco,·ded at cost, regardless of

whether the shares are acquired below or above the par value
or stated value. ·

If the treasury shares are acquired for cash, the cost is

equal to the cash payment.

If treasury shares are acquired for noncash consideration,

PAS 32 does not provide explicit guidance.

However, PAS 32, paragraph 33, provides that no gain or

loss sha~l be recognized on the purchase, sale, issue or
cancelation of an entity's equity instrument.

Accordingly, if the treasury shares are acquired for non.cash .

consideration, the cost is usually measured by the carrying
~mount of the noncash JlSS.et· surrendered.

Illustration .
An entity acquired 2,000 shares with par value of PlOO at
Pl50 per share.
Treasury shares
Cash .
300,000
300,000 j
The treasury shares are initially recorded at cost of
acquisition. .

Subsequently, the treasury shares may be reissued or sold

at cost, more than cost or below cost.

I
I

728
Reissuance at cost
The treasury shares are subsequ~ntly reissued at Pl50 per
share.
Cash
Treasury shares 300,000
Reissuance at more than cost
The treasury sh~res are subsequently reissued at P200 per
share.
The excess of
the reissue price over the cost is t1·eated as
share premium. ·
Cash 400,000
· Treasury shares 300,000
Share premium - t1·easury sha1·es 100,000
As stated earlier, no gain or-loss shall be recognized on the
_p urchase, sale, issue ,or cancelation of an entity's equity
instrument.
Thus, _g~fr.om_sa!e _of treasuey. shares. ah.§!!_no-t be ci:~di~d
to inc.ome but rec<Jg_njzed djr(}_c! ly 1:n equity as share premium.
- -- ;,.__ --- ---- - - .. --- --- --
Reissuance at below cost.-
1'he treasury shares are subsequently reissued at Pl00 per
·share.
The excess of the cost over the reissue price is charged to ,
the following in the order of priority: .
a. Share premium from treasury shares oif: the same class
b. Retained earnings
In other words, the "loss" on the sale of treasury shares is
debited to share p_remium from: treasury shares of the same
class, if any, and when this balance is exhausted, it is chatged
to retained earnings. , ·
If there are no previous transactions involving treasury- ·
shar·es, the l~ss on sale of treasury shares is charged to
retained earnings.
Cash 200,000
Retained earnings 100,000
Treasury shares 300,000

729
Another illustration
Ordinary share capital, 10,000 shares, PI00 pa1· 1,000,000
Share ·premium - original issuance 200,000
Share premium - treasury shares 20,000
Retained earnings 500,000
Treasury shares, 2.000 shares at cost 300,000

Subsequently; the treasury shares are reissued at PI 00 per

share.

Cash (2,000 x 100) 200,000

Sha re premiwn - treasury shares 20,000
Retained earnings . 80,000
Treasury shares 300,000

Observe that the share premium from or,:ginal issuance is

not touched.

Par value or stated value method

1."he par value or stated value ,nethod is the other method of
accounting for treasury shares. The par value or stated value
m~thod is also known as retirenient niethod.
A~s the title suggests, the treasury shares account is debited
at par value or stated value.

For example, if 2,000 shares with par value of Pl00 are

acquired for a total consideration of Pl50,000, the journal
entry ts:
Treaswry shares, at par 200,000
Cash · 150,000
Share premium - treasury sha1·es 50,000

The cost method is the acceptable method in accounting

for treasury shares.
Thus, the par value '1nethod is not discussed exhaustively.
The par value or stated value method is not an acceptable
approach because of the legal requirement that retained
ea.1·nings m.ust be appropriated at a.n arnou.nt equal to the cost
_o f treasury sha.res. ' · --
730 I'I
Retirement of treasury sh ares
If trear,ury shares are subsequently retired, the share capi~
account is debited a.t pa.r value or stated value and t e
treasury shares acco lnt is credited at cost,
If the par value or stated value exceeds the cost of treasury
shares retired, the difference is gain on retiren1ent.
H owever, such r.ain on r~tirement is not included in profit
~rloss.hut..credit.ed to slia~ ~1n1uro from treasury snares.
-----
For example, if 1,000 ordinary shares with par value otP1UO
are held as treasury at a cost of PS0,000 and subsequently
retired, the journal entry is:
Ordinary share capital · 100,000
Treasury shares 80,000
Share premiu1n - treasury shares 20,000

If the. c0st of t reasury shares rf-t:red exceeds the par value

or stated value, the dfferepce is loss on retirenient.
However, such loss on r etirement is not included in profit
or loss but debited to the following in the order of priority:
a. Share pre1nium fro1n origina.l issuance
b. Share premium fro1n treasury shares
c. R.etained earnings
Illustration
Ordinary share capital, 50,000 shares, Pl00 par 5,000,000
Share premium - 01·iginal issuance · 500,000
Share pren1itun - treasury shares 100,000
Retained earnings 1,000,000
Treasury shares. 5,000 shares·at cost 750,000 ~

The retire1nent ofthe treasury shares is recorded in the

follo\\'ing n1anner:
Ordinary share capital (5,000 x 100) 500,000
Share p1·emium -issuance 50,000
Share pre1niuin - treasury shares 100,00Q
Retained earnings 100,000
Treasury shares 750,000
The -s hare premium from original issuance is canceled on a
prorata basis· in the absence of specific amount identified
with .the
. treasury shares .
Share pre1nium -issuance (5,000 / 50,000 x 500,000)

731
Disclosure of treasury shares
The disclostu·e relating to treasury shares shall include the
following:
a. The number of shares held in the treasury.
b. The restriction on the availability of retained earnings
for distribution of dividends equal to the cost of treasury
shares.
PAS 32, paragraph 33, provides that if an entity reacquires
its own equity instruments, the treasury shares shall be
deducted from equity.
.Simply stated, the cost of treasury shares shall be deducted
from total shareholders' equity.
' .
Under Application Guidance 36 of PAS 32, an entity's own
equity instruments are not recognized as financial asset
regardless of the reason for which the equity shares are
reacquired.
Presentation of treasury shares
Ordinary share capital, 50,000 shares, PlOO par s. 000,000
Share premium 500,000
Retained earnings, of which P600,000 is
appropriated for the cost of treasury shares 2,000,000
T1·easury shares, 5,000 shares at cost ( 600,000)
Total shareholde~s• equity 6,900,000

Donated shares
Donated shares are shares receive<!, by the entity from the
shareholders by wa.y of donation.
Donated shares are actually treasury shares and- may
therefote be reissued at any price without any discount
liability. .
Donate~ shares are secured without co~t and conse.quently,
the entity's assets, liabilities and shareholders' equity are
not affected _b ut the number of outstanding shares is reduced.
However, the reissue or resale of donated shares increases.
assets and donated capital or share premium.

782
 Illustration·
Sh~reholders donated to the entity an aggregate of lO,OOO
0rdinary shares of their sharel:ioldings with par of PlOO.
The receipt of the donated shares by the entity is sintply
recorded by means of a niem,oranduni entry. ·
"Received from shareholders as donation 10,000 ordinary
shares ·with Pl00 .par value." .
·
The 10,000 donated shares are subsequently sold for P150
·per share.
Cash 1,500,000
Donated capital 1,500,000

If the donated shares are retired or canceled prior to

reissuance, the journal entry is: ·
Ordinary shar.e capital (10,000 x 100 pa1·) 1,000,000
D9nated capital 1,000,000
'\

The ~na.ted cap_itq.l _is part <,if share pre1niu.m.

Treasury share subterfuge

Treasury share subterfu.ge occurs when excessive shares are
issued for a property with the -unde1·standing that the
shareholders shall subsequently donate a portion of their
shares.
The donated shares may then be reissued at a. discount without
any liability on the part of the shareholder. "
or.
In this case, the .resale . reissu.e or'the treasury .donated
shares is not credited entirely to donated capital.

The sale price shall be used in c o r r ~ e overvalued

assetand s n a r e ~- - - -. -----·-

For example, an entit~ issu~d 10,000 ordinary-shares of Pl0O

par va~ue for land with a legally determined fair value of
PS00,000 only. .
Land . 1,000,0()0
Ordinary share capital 1,000,000

l 733
 Actually, the transaction creat;es a "water" in ·the ordinary
share capital because the land is overvalued t.o the extent of
P200J000 with a consequent ove1·state~ent of shareholders'
equity.

If subsequently 3,000 shares are donated to th~ corporation

by the shareholders and the same shares are reissued at P90
per share, thtr journal entry should be:

Cash 270,000
Land 200,000
Donated capital 70,000 \

The pi-oceeds from the reissue of the donated treasury shares

are not entirely _credited to donated capital but a portion is
used to correct the overvaluation of the land.

Donation of capital

Contributions; including shares of an entity, received from

sha.reholders ~hall b.e recorded at fair v~lue with the credit
going to donated capital.

Entities sometimes receive from ~onsha,:eholders gifts or

grants of funds or othe.r assetsJthat are re~tricted for property
and equipment additions.

Capital gifts or grants shall be.recorded at fair value when

received
/ .
or receivable. ·

Such capital gifts or grants from nonshareholders are

generally subsidjes and credited to income.

· In the rare case where ~uch items are not subsidies, the
offsetting credit shall be a 'liability account un~il the (

restrictions are met. · . · C

€
f
At that time when the restrictions are ·met, the capital gifts
or grants are transferred to income. .1,
1
Ill
I
~I)

i 734 ,,
It
I 111111
 Assessments on -shareholders
As_s~ssment may be levied on shareholders when s~are~ a~e
originally issued at discount or when th~ corporation is in
dire need of financial assistance.

~en shares are originally issued at a discount, the discount

1s actually a receivable from t he sMreholder.

For example, if there is a discount on share capita l of

P100,·ooo and the same is charged to the shareholder by
virtue of an assessment made -by the board of directors, the
journal entry is:
Cash or share assessment receivable 100,000
_Discount on share capital 100,000

When the cor poration is in dire need of financial assistance,

the shareholders ca n vote to assess themselves a certain
~ amount per_share owned.

~ For example, if. the corporation had 100,000 shares issued

and outstandin_g and the shareholders are assessed P50 per ·
share, the journal entry is:
Cash or share assessment receivable 5,000,000
Share,premium - assessments 5,000,000

REC1'PITi\LIZATION
Recapitalization occurs when there is a change in the capital
structure of the entity. The old shares are canceled and new
shares are issued.

Typical recapitalizations
a. Change from par to no-par
b. Change from no-par to par
c. Reduction of par value
d. Reduction of stated value
e. Split up
f. Split down

736
Change from par to no-pa1·
Ordinary share capital, PlOO par, 50,000 sha1·es 5,00Q,000
Share premium 500,000
Retained earnings 2,500,000

Case 1

All the 50,000 shares are called in for cancelation. Instead,

50,000 n~•par share·s with stated value of P50 are issued.
• Ordinary share capital 5,000,000
Share premium . 500,000
Ordinary share capital (50,000 x 50) 2,500,000
, Share premium - recapitalization 3,000,000

Case 2

All _the 50,000 shares are called in for cancelation. Instead,

50,000 no-par shares with stated value of P150 per share are
issued.. · "

Ordinary share capital 5,000,000

Share premium 500,000
Retained earnings . 2,000,000
01·dinary share capital (50,000 x 150) 7,500,000

Note that if the aggregate stated value of the new shares is

more than the original issue price of 'the par value shares,
the difference is charged to retained earnings. In effect, there
is capitalization of the retained earnings.

As a ruie, changes in the par value of share capital shall be

charged or· credited to share premium.

However, if the increase in share capital exceeds share

premium, the excess is charged to retained earnings.

736
 Change from no par to par value share
Ordinary share capital, no-par PlOO stated value,
50,000 shares 5,000,000
Ret.ained earnings 2,500,000

Case 1

All the 50,000 shares are called in for cancelation. Instead,

50,000 shares of P50 pa1· value ai·e issued. ·

Ordinary share capital 5,000,000

Ordinary share capital (50,000 x 50) 2,500,000
Share premium - recapitalization 2,500,000

Case 2

All the 50,000· shares are called in for cancelation.

•
Instead,
50,000 shares of P 150 par value are issued.

Ordinary share capital · 5,000,000

Retained earnings 2,500,000
Ordi~ary share capital (50,000 x 150)
. 7,500,000

Reduction of par value

f • Ordinary share capital, 50,000 shares, Pl00 par 5,000,000
·share·premium 500,000
Retained earnings 2,000,000

A recapitalization is effected whereby the par value of PlOO

is reduced to P80 per share.

Journal entry
Ordinary share capital (50,000 x 20) 1,000,000
Share premium-recapitalization 1,000,000

737
 .
Reduction of stated value
Ordinary share capital, 50,000 shares, Pl00 stated value 6,000,000
Retained earnings 2,0001000

A recapitalization is effected whereby the stated value of

PlOO is reduced to P80.

Ordinary share capital (50,000 x 20) 1,000,000

Shru·e premium - recapitalization 1,000,000

Share split

Share split may be in the form of:

a. Split up or share split proper

b. Split down or reverse share split

Split up

Split 11,p is a transaction whereby the origin~l shares are

called in for cancelation and replaced by a larger number
accompanied by a reduction in the par value or stated value.
'

This action is prompted mainly by a desire to increase the

number of outstanding shares for the purpose of effecting a
.reduction in unit market price.

For example, an entity has 10,000 shares issued and

outstanding, with PlOO par value.

If the shares are split up 5 to 1, the new capitalization would

be 50,000 shares with P20 par value.

·Note that before and after the share split, the share capital
remains the same. ·
) .
In order to be properly·called a share split, there niust not be
any change in the amount of shore capital.
'
There is only a change in. the nu,nber of shares and the par
val~ or stated val~~j . · •
,••
.Me~orandum entry
No formal entry is necessary to record share split.

Only a memorandum is made for the number of new shares

issued· in exchange for the old shares plus an indication of
the new par value or stated value ..

"Issued 50,000 new shares with par value of P20, as a

result of 5-for-1 split of 10,000 old shares with par value of
PlOO."

Split down

Split down is the reverse of split up.

Split down is a transaction whereby the original shares are·

canceled and replaced by a smaller number accompanied by
an increase in the par value or stated value.

For example, an entity has 10,000 shares issued and

outstanding with PlOO par value.

If the ~hares are split ci~wn ~ to 1, the new capitalization

would be 2,-000 shares with P500 par value.

Share capital before split (10,000 sha1·es x Pl00) 1,000,000

Share capital after split· ( 2,000 shares x P500) · 1,000,000

The share capital niust be the sanie before and after split.

Original shares 10,000

()rjginal par value 100

New shares (10,000 / 5) 2,000

·New~parvalue ( lOOx 5) 500

739,
RIGHTS ISSUE
E
Rights issue is granted to existing shareholders to enable
them to acquire new shares at a specified price during a ~ If
specified period. · · fo
The Philippine term for rights issue is share right. t~

Sha.1~ warrants represent the certificate or instrument Tl

.
evidencing ownership over the rights issue. 1S

Whenever the share capital of a· corporation is increased and Fe

new shares are issued, the new issue must be offered fii·st to vi
the existing shareholde.rs in proportion to their c~
shareholdings before subscriptions are received from the
general public.
' .
Such legal ·right of the sha1~eholders is called the rigfit of If
· pr~n. · P:
--
In the accounting parlance, the right of preemption is_called
Ci

number
----
share right or right issue.

. of shares
.
·
The share warrants evidencing the rights· issue state the .
the holder may purchase as well as the
p
v.,
exercise price. a
tl
Normally, the ~xercise price is less than the current market a
value of such sha~ -
V
~ s
Issuance of share rights ,.
i f.
No entry is required whe~ share rights are issued to existing ~ ~
shareholders becaus~ the share rights are issued usually t
without consideration. (

The entity only needs to make a memorandum entry to

indicate the number of share rights issued to shareholders
and the number of shares that can·be purchased through the
exercise of the share rights.
Expiration of share rights
Only a ~emorandum entry is -required fo~ the expiration of J \

share rights. · "' t J, , l vJ. . t l.., l

~ 4,) / r- i\) of \~C\,{ 1/l,{ i
. 740 I
Exercise of share rights
If the share rights are exe1·cised, a memorandum is made
for the decrease in the number of shares claimable through
the exercise of the share rights.

!he issue. of share~ through the exercise of the share rights·

18then recorded normally.

For example, ·if cash receiv~d, Pl,0O0,000, is equal to the par

value o.f the share capital, the journal entry is:
Cash 1,000,000
Share capital tooo,ooo
If cash rece.ived,_ Pl,200,000, is more than the par value of
Pl,000,000, the Journal entry is: ·"
Cash 1,200,000
Share capital 1,000,000
Share premi~m 200,000

Preference shares issued with share warrants

·When issuing different types of securities,. such ·as bonds
and preference shares, share warrants may be included in
the issuance as a "sweetener" to make the securities more
attractive to the pro~pective investors. .
When share warrants are issued together with preference
shares, there is actually a sale of two securities - the
preference shares aqd the sh<(l-re warrants.
Thus, the consideration received shall be· allocated bet\veen
the preference shares and the share war1·ants on the basis
of their market value.
Illustration
An entity issued 20,000 preference shares of PlOO par value
for P3,250,000 wit~ 20,000 share warrants to acquire 10,000, ·
P50 par value ordinary shares at P60 per share. 011 tli& date
of the issuance, the market values are:
Preference share ex-wa.>.Tant
Share warrant

741
Allocation_of issue ·price
Market Allocated
value Fraction issue price
Preference shai·es (20,000 x 120) 2,400,000 24/26 3,000,000
Share warrants (20,000 x 10) 200,000 2/26 250,000

2,600,000 3,250,000

The fractions are developed from the market value and

multiplied by P3,250,000 to arrive at the allocated price.

Accordingly, the journal entry to record the issuance of the

prefe1·ence shares and share warrants is:

Ca8h 3,250,000
Prefe1·ence share capita1'(20,000 x 100) 2,000,000
Share premium - p1·eference shares 1,000,000
Sha1·e warrants outstanding 250,000

The ~Tan,J.s..®.tst.audiag ,a.ccJW,nt is reJ?.orted as part

.of !3h~!,.~..w;eJ.llium. · .

If subsequently, all 20,000 share warrartts are exercised

requiring .the issuance of 10,000 ordinary shares at P60 per
share,
,,
the journal entry is:

Cash (10,000 x 60) 600,000

Share warrants outstanding 250,000
Ordinary share capital (10,000 x 50) 500,000
Share premium 350,000 ·

Jf for ,.eason, the sha1·c u,arra.nts are not exe,.cised, th.e

<l1lJ'
sh.are wqrrants ou.tstandin.g account is siniply ·closed and
credi-tcd to share preniiuni . .

Share wai·1·antt1 outstanding 25,0,000 .

Share premium - unexercised share war1·ants 250,000

741
 uery
If in the given illustration, only the preference share has a
known market value of P120 and the warrant has no known
market value, how is the issue price of P3,250,000 allocated?
The procedure is simply to allocate to the security with a
known market value an amount equal to its market value, ' ·
and the balance is allocated to the other security.
Preference shares (20,000 x .120) 2,400,000
Share warrants (3,250,000 - 2,~00,000) 8~,000
3,250,000

Cash 3,250,000
P1·eference share capital 2,000,000
Share premium -preference shares 400,000
Share warrants outstanding 850,000

Another illustration
Pl'eference shares, 20,000, with-par value of Pl00, are issued
for P3,250,000, together with 20,000 share warrants to acquire
20,000, P50 par value ordinary shares at P60 per share.
The prefe1~ence share ex-warrant and the warrant have no
,nark.et value but the ordinary share has a niarket value of Pl00.
In this case, the basis for allocation would be the market
value of the ordinary share. An a1nount is allocated to the
share \.Varrants equal to intrinsic value and the balance is
allocated to the preference shares.
Market value of 01·di11a1-y .share 100
Option price or exe1·cise price ( 60)
Intrinsic value of share warrant -10
~1ultiply by number of ordina1·y shares under the wa1·rRnt.s 20!000 '
Total intrinsic value of share wan·ants ~0,000
Issue price 3,250,000
Intrinsic value of share warrants ( 800,000)
Amount assigned to preference shares 2,450,000
Cash 3,250,000
Preference share capital 2,000,000
Share premium - preferfence sha1·es 450,000
Share warrants outstanding 800,000

743