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Retained earnings
Retained Earnings represent the cumulative balance of the
a. Net income or loss for the period
b. Dividend distributions
c. Prior period errors
d. Changes in accounting policy
e. Reclassifications of some components of other
comprehensive income
f. Other capital adjustments
The IFRS term for retained earnings is
“accumulated profits.”

 However, IAS 1 AND IAS 8 still maintain

the title “retained earnings”.
a. Unappropriated retained earnings
b. Appropriated retained earnings

Unappropriated retained earnings represent that

portion which is free and can be declared as dividends to
Appropriated retained earnings represent that portion
which has been restricted and therefore is not available
for any dividend declaration.
When the retained earnings account has a
debit balance is called a “deficit”.

A deficit is not an asset but a deduction

from shareholders’ equity.

The IFRS term for deficit is “accumulated


Dividends are distributions of earnings or

capital to the shareholders in proportion to
their shareholdings. Dividends are broadly
classified in to two namely:

a. Dividends out of earnings

b. Dividends out of capital
Dividends out of earnings
Legally, dividends can be declared only from retained
Dividend declaration is reposed on the board of
directors of the corporation.
When dividends are formally declared by the board of
directors, three dates are essential for accounting
purposes namely:
a. Date of declaration
b. Date of record
c. Date of payment

“The Board of Directors at their meeting on

December 31, 2019 declared a dividend of P5 per
share, payable March 31, 2020, to shareholders of
record on January 31, 2020.”

Date of declaration December 31, 2019

Date of record January 31, 2020
Date of payment March 31, 2020
Recognition of dividend

Under IFRIC 17 “Distribution of noncash assets

to owners”, paragraph 10, the liability to pay
dividend shall be recognized when no longer at
the discretion of the entity.

Simply stated, the liability for dividend must

be recognized on the date of declaration.
Dividends out of earnings

The dividends out of earnings are usually in the

form of the following:

a. Cash dividends
b. Property dividends
c. Liability dividends in the form of bond and
d. Share dividends or bonus issue

Cash dividends are the most common type of

dividend. Dividends may be expressed as

a.A certain amount of pesos per share –

For example, the dividend is P5 per share.
b.A certain percent of the par or stated
value – Thus, if a 7% dividend is declared, a
P200 par value share will receive P14 as
When cash dividends are declared, a
current liability is recognized on the date
of declaration by debiting retained
earnings or “dividends” and crediting
dividends payable.

When the dividends declared are paid, the

entry is debit dividends payable and credit
The Board of Directors at their meeting on November 30, 2019 declared
a dividend of P20 per share, payable April 30, 2020, to shareholders of
record on December 31, 2019. The entity had 20,000 shares issued and
outstanding with par value of P100.
Nov. 30 Retained earnings 400,000
Dividends payable 400,000
Dec. 31 No entry
April 30 Dividends payable 400,000
Cash 400,000
Property dividends or dividends in kind
are distribution of earnings of the entity to the
shareholders in the form of noncash assets.
There are two accounting issues with respect
to property dividends, namely:
a. Measurement of the property dividends of
b. Measurement of the noncash asset to be
distributed as property dividend.
A. Measurement of property
dividend payable

 IFRIC 17, paragraph 11, provides that an entity shall

measure a liability to distribute noncash asset as a
dividend to its owners at the fair value of the asset
to be distributed.
 Paragraph 13 further provides that at the end of each
reporting period and at the date of settlement, the
entity shall review and adjust the carrying amount of
the dividend payable with any change recognized
in equity as adjustment to the amount of the
Settlement of property dividend

 IFRIC 17, paragraph 14, provides that when

an entity settles the dividend payable, the
difference between the carrying amount of
the dividend payable and the carrying
amount of the asset distributed shall be
recognized in profit or loss.
B. Measurement of noncash asset
 As amended, PFRS 5, paragraph 5A, provides that the
classification, presentation and measurement
requirements in this PFRS shall also apply to “a noncurrent
asset to be distributed to owners” as property dividend.
 Paragraph 15A further provides that an entity shall
measure a noncurrent asset classified for distribution to
owners at the lower of carrying amount and fair
value less cost to distribute.
 Accordingly, if the fair value less cost to distribute is
lower than the carrying amount of the asset at the end of
the reporting period, the difference is accounted for as
impairment loss.
An entity owned 50,000 unquoted shares of another entity
accounted for under the cost method. The carrying amount
of the investment is P1,000,000.
On December 1, 2019, the entity declared these shares as
property dividend to be distributed on January 31, 2020.
The investment include had the following fair value less cost
to distribute:

December 1, 2019 1,500,000

December 31, 2019 1,800,000
January 31, 2020 1,900,000
Journal entries
1. To recognize the dividend payable on the date of
declaration on December 1, 2019:
Retained earnings 1,500,000
Dividends payable 1,500,000
2. To recognize the increase in dividend payable at the
end of the reporting period on December 31, 2019:
Retained earnings 300,000
Dividends payable 300,000

FV – Dec. 31, 2019 1,800,000

FV – Dec. 1, 2019 1,500,000
Increase in dividend payable 300,000
3. The carrying amount of the investment of P1,000,000
is not adjusted because this is lower than the fair value
of P1,800,000 on December 31, 2019.
4. To recognize the increase in dividend payable on the
date of settlement on January 31, 2020:
Retained earnings 100,000
Dividend payable 100,000

FV – Jan. 31, 2020 1,900,000

FV – Dec. 31, 2019 1,800,000
Increase in dividend payable 100,000
5. To record the settlement of the dividend payable on
January 31, 2020.
Dividend payable 1,900,000
Investment in equity securities
Gain on distribution of property dividend 900,000

Dividend payable – Jan 31, 2020 1,900,000

Carrying amount of investment 1,000,000
Gain on distribution of property dividend 900,000
Choice of either noncash or cash
 IFRIC 17, paragraph 12, provides that if an entity
gives its 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.

 At the end of the reporting period and at the

date of settlement, the entity shall adjust the
dividend payable based on the alternative
chosen through equity or retained earnings.

Cash alternative (70% x 2,000,000)

Noncash alternative (30% x 3,000,000)
Dividend payable 2,300,000

The declaration of the dividend on December 31, 2019 is

recognized as follows:
Retained earnings 2,300,000
Dividend payable 2,300,000
 If the shareholders have chosen the cash alternative
Dividend payable 2,300,000
Cash 2,000,000
Retained earnings 300,000

 If the shareholders chosen the noncash alternative and

the fair value of inventory remained at P3,000,000
Retained earnings 700,000
Dividend payable 700,000

Dividend payable 3,000,000

Inventory 2,500,000
Gain on distribution of property dividend 500,000
If the shareholders have chosen the noncash
alternative and the fair value of the inventory is

Retained earnings 1,000,000

Dividend payable 1,000,000

Dividend payable 3,300,000

Inventory 2,500,000
Gain on distribution of property dividend 800,000
Scrip dividends declared in the amount of P200,000
payable in six months at 12% interest. The journal entry on
the date of declaration is:
Retained earnings 200,000
Scrip dividends payable 200,000

When scrip dividends are redeemed, the journal entry is:

Scrip dividends payable 200,000
Interest expense (200,000 x 12% x ½) 12,000
Cash 212,000
Dividends are declared in the amount of P1,000,000 payable
in entity’s own bonds, 12%, P1,000,000 face value. The
bonds mature in five years.
a. To record the declaration of the dividends:
Retained earnings 1,000,000
Bond dividends payable
b. To record the issuance of the bonds in payment for the
Bond dividends payable 1,000,000
Bonds payable 1,000,000
c. To record the payment of periodic semiannual
interest on the bonds:
Interest expense 60,000
Cash 60,000
d. To record the redemption of the bonds on maturity
Bonds payable 1,000,000
Cash 1,000,000
 The IFRS term for share dividend is “bonus
 Share dividends are distribution of the earnings of
the entity in the form of the entity’s own shares.
 When share dividends are declared, the retained
earnings of the entity are in effect capitalized,
meaning transferred to share capital.
 Share dividends may be referred to as ordinary
share dividends or special share dividends.
Question on share dividend

How much of the retained earnings should be

 If the share dividend is less than 20% the amount
charged to retained earnings is equal to the fair
value on the date of declaration. (Small share
 If the share dividend is 20% or more, the par or
stated value is capitalized because this is
conceived to materially effect a reduction in the
share market value. (Large share dividend)

Share capital, P100 par, 20,000 shares authorized,

10,000 shares issued and outstanding 1,000,000
Share premium 500,000
Retained earnings 500,000

The entity declared a 20% share dividend or 2 shares for every

10 shares held, or a total of 2,000 shares as share dividend
(20% x 10,000 shares issued and outstanding).
Journal entry on date of declaration
Retained earnings (2,000 shares x 100) 200,000
Share dividends payable 200,000

When a statement of financial position is prepared prior to the

issuance of the share dividend, the share dividend payable
account is an addition to share capital.

When the share dividends are issued, the journal entry is:
Share dividends payable 200,000
Share capital 200,000
Fractional share dividends

The following steps may be taken by the entity with

respect to the fractional share dividends.

a.The entity may issue warrants for the fractional

shares and give the holders thereof enough time
to accumulate sufficient warrants for a full share.
b.The entity may pay cash in lieu of fractional share.
*This is possible only if the source of share dividends is retained
Share capital, P100 par, 10,000 shares issued
Share dividends declared 50%
Full shares issued 4,000
Fractional shares issued 1,000

a. When the share dividends are declared:

Retained earnings (5,000 shares x 100) 500,000
Share dividends payable 500,000
b. When the full share dividends and fractional stock dividends
are issued:
Share dividends payable 500,000
Share capital (4,000 shares x 100) 400,000
Fractional warrants outstanding
(1,000 shares x 100) 100,000
*The “fractional warrants outstanding” account is part of share

c. When only 600 full shares are issued through the surrender of
the required fractional warrants and the remaining warrants
Fractional warrants outstanding 100,000
Share capital (600 shares x 100) 60,000
Treasury shares as share dividend
Treasury shares may be declared as share dividend.
The declaration of treasury shares as dividend is termed as
property dividend under the Philippine Corporation
Code. However, the authors believe that such declaration
shall be accounted for as share dividend.

An entity distributed as share dividend 1,000 treasury shares
with cost of P100,000 and market value of P120,000.

*Note that the cost of the treasury shares is charged to retained earnings.
a. To record the declaration:
Retained earnings 100,000
Share dividend payable

b. To record the payment:

Share dividend payable 100,000
Treasury shares
Special cases on share dividend
1.When shareholders may elect to receive cash in lieu
of share dividend, the amount to be charged to
retained earnings should be equivalent to the
optional cash dividend.
2.In certain cases, share dividends are declared on the
basis of a proposed increase in authorized share
capital, the application for which has been filed but
not yet approved by SEC at the end of the reporting
3.In closely held entities, if share dividends are
declared, retained earnings shall be capitalized only
to the extent of par value or stated value of the
Dividends out of capital
 When capital is returned to shareholders, it is known
as dividend out of capital or liquidating dividend.
 As a rule, liquidating dividends are paid to the
shareholders when the entity is dissolved and
 However, wasting asset corporation may declare
dividends which are in part distribution of earnings
and in part distribution of capital.
 A wasting asset entity is an entity engaged solely or
substantially in the exploitation of natural resources.
The following accounts appear in the statement of financial
position of a wasting asset entity at year-end:
Resource property 10,000,000
Accumulated depletion 2,000,000
Retained earnings 3,000,000
The maximum dividends that may be declared would be
P5,000,000. If the maximum amount is declared, the journal
entry is:
Retained earnings 3,000,000
Capital liquidated 2,000,000
Dividends payable 5,000,000

*Note that any amount declared in excess of the retained earnings balance is
treated as liquidating dividends and charged to the capital liquidated account which
is a deduction from the total shareholders’ equity.
Dividends as expense

 Paragraph 36 provides that distributions to holders

of an equity instrument classified as financial
liability are recognized in the same way as
interest expense on a bond
 Paragraph 40 further provides that dividends
classified as an expense may be presented in the
income statement either with interest on other
liabilities or as a separate line item.

Example: Redeemable preference share


Retained earnings
Appropriation and quasi-
Appropriation of retained earnings
In order to limit or restrict the payment of dividends,
the entity may transfer a portion of the retained
earnings unappropriated to retained earnings

The appropriation of retained earnings may be

described as follows:
a.Legal appropriation
b.Contractual appropriation
c.Voluntary or discretionary appropriation
Legal appropriation
 The legal appropriation arises from the fact that
the legal capital cannot be returned to the
shareholders until the entity is dissolved and

 Accordingly, apportion of the retained earnings

must be appropriated for an amount equal to the
cost of the treasury shares.

 Such appropriation is called “retained earnings

appropriated for treasury shares”.
Contractual appropriation

 The contractual appropriation arises from the

fact that the terms of the bond issue and
preference share issue may impose restriction on
the payment of dividends.

 The appropriation may be described as “retained

earnings appropriated for sinking fund or bond
redemption” and “retained earnings
appropriated for redemption of preference
Voluntary appropriation
 The voluntary appropriation is a matter of
discretion on the part of management.
 This may arise from the fact that management
wishes to preserve the funds for expansion
purposes or for covering possible losses or
contingencies. The appropriation may be described
as follows:
a.Retained earnings appropriated for plant expansion
b.Retained earnings appropriated for increase in
working capital
c.Retained earnings appropriated for contingencies
Accounting for appropriation
The establishment of the appropriation balance is recorded as

Retained earnings xx
Retained earnings appropriated xx

When the appropriation is no longer necessary because the

conditions for which it is established no longer exist, the
appropriation is simply reversed as follows:

Retained earnings appropriated xx

Retained earnings xx
An entity purchased treasury shares at a cost of P500,000. Legally, if the
treasury shares are not yet reissued at year-end, this would require legally
an appropriation of retained earnings.
Retained earnings 500,000
Retained earnings appropriated for treasury shares
*The appropriation account does not imply that there is a cash fund
established for the same.
If the treasury shares are subsequently reissued, the appropriated balance
is cancelled.
Retained earnings appropriated for treasury shares 500,000
Retained earnings 500,000
Statement of retained earnings

 The statement of retained earnings shows the

changes affecting directly the retained earnings of
an entity and relates the income statement to the
statement of financial position.

 The statement of retained earnings is no longer a

required component of financial statements but it
is a part of the statement of changes in equity.
Items affecting directly retained

a. Net income or loss for the period

b. Prior period errors
c. Dividends to shareholders
d. Effect of change in accounting policy
e. Appropriation of retained earnings
f. Components of other comprehensive income
reclassified subsequently to retained earnings
Illustration (all amounts are assumed)
Exemplar Company
Statement of Retained Earnings
Year ended December 31, 2019
Retained earnings, January 1 1,000,000
Correction of error resulting
from prior year underdepreciation ( 100,000)
Change in accounting policy from weighted average
to FIFO inventory valuation resulting in increase 300,000
Corrected beginning balance 1,200,000
Net income for the period 1,550,000
Dividends declared during the year ( 400,000)
Appropriated for contingencies ( 200,000)
Retained earnings, December 31 2,150,000
Under international accounting standard, the use of
equity reserves is based on whether a reserve is part
of distributable equity or nondistributable

Distributable equity is that portion that can be

distributed to shareholders as dividends without
impairing the legal capital of the entity.
Nondistributable equity is that portion that cannot
be distributed to the shareholders in any form during
the lifetime of the entity
Nondistributable equity reserves usually include
the following:

a.Share premium reserve – is the excess over par

or stated value.
b.Appropriation reserve – is the earmarking of
retained earnings for a certain purpose which may
be legal, contractual or voluntary.
c.Asset revaluation reserve – arises from the
revaluation of property, plant and equipment.
d.Other comprehensive income reserve
Statement of changes in equity
The statement of changes in equity is a formal statement that shows
the movements in the elements or components of the shareholders’
An entity shall present a statement of changes in equity showing the
a. Total comprehensive income for the period.
b. Effects of changes in accounting policies and corrections of errors.
c. A reconciliation between the carrying amount at the beginning and
end of the period, separately disclosing changes from:
1. Profit or loss
2. Each item of other comprehensive income
3. Transactions with owners in their capacity as owners showing
separately contributions by and distributions to owners
Components of comprehensive
1. Net income or loss
2. Other comprehensive income which comprises items of
income and expense that are not recognized in profit or
loss as required or permitted by PFRS.
a. Unrealized gain or loss on equity investments
designated at fair value through other comprehensive
b. Unrealized gain or loss on debt investment
measured at fair value through other comprehensive
c. Gain or loss from translating the financial
statements of a foreign operation
d. Change in revaluation surplus
e. Unrealized gain or loss from derivative contracts
designated as cash flow hedge
f. Remeasurement of defined benefit plan
g. Change in fair value attributable to the “credit
risk” of a financial liability irrevocably designated at
fair value through profit or loss.
Comprehensive Illustration
Share Capital Reserves Retained Earnings
Balances – January 1 5,000,000 2,000,000 1,000,000
Correction of error – prior year
underdepreciation (100,000)
Change in accounting policy
from average to FIFO-credit 300,000
Issuance of 10,000 ordinary shares
of P100 par value at P150 per share 1,000,000 500,000
Issuance of 5,000 preference shares
of P50 par value at P100 per share 250,000 250,000
Comprehensive income:
Net income 1,550,000
Other comprehensive income 50,000
Dividends paid (400,000)
Current appropriation for
Contingencies 200,000 (200,000)
Balance – December 316,250,000 3,000,000 2,150,000
A quasi-reorganization is a permissive but not a
mandatory procedure under which a financially
troubled entity restates its accounts and established a
“fresh start” in accounting sense.

Quasi-reorganization is also called corporate

readjustments and may be accomplished thru:

b.Revaluation of property, plant and equipment
Circumstances that may justify quasi-
a.When a large deficit exists,
b.When approved by the shareholders and creditors.
c.When the cost basis of the accounting for property,
plant and equipment becomes unrealistic.
d.When a “fresh start” appears to be desirable or
advantageous to all parties concerned.

A quasi-reorganization must be approved by the

Illustration – thru recapitalization
An entity provided the following statement of financial
position at year-end prior to quasi-reorganization:

Current assets 1,000,000

Property, plant and equipment 7,500,000
Accumulated depreciation (1,000,000) 6,500,000
Liabilities 4,500,000
Share capital, P100 par, 50,000 shares 5,000,000
Retained earnings (deficit) (2,000,000)
The shareholders and creditors agreed to a quasi-
reorganization. Accordingly, the following
restatements should be made:

a.The property, plant and equipment shall be

recorded at the fair value of P6,000,000.
b.The inventory is overvalued to the extent of
P250,000 and shall be revalued accordingly.
c.The share capital is reduced to P2,000,000, 20,000
shares, P100 par value.
d.The resulting deficit is charged to the share
premium arising from the reorganization.
a. Accumulated depreciation 1,000,000
Retained earnings 500,000
Property, plant and equipment 1,500,000
b. Retained earnings 250,000
c. Share capital 3,000,000
Share premium 3,000,000
d. Share premium 2,750,000
Retained earnings
Statement of Financial Position
Current assets
Property, plant and equipment 6,000,000
Share capital, P100 par, 20,000 shares
Share premium 250,000
SEC requirements

a. If the quasi-reorganization is the result of revaluation of

property, plant and equipment, the appraisal must be made
by an independent expert or specialist.
b. The increase in value of the property, plant and
equipment is credited to “revaluation surplus”.
c. The adjustments concerning “other” assets, such as
inventory, investment and intangible asset are made through
retained earnings.
d. The resulting deficit from the reorganization is offset
against the revaluation surplus.
e. Retained earnings subsequent to the quasi-
reorganization shall be restricted to the extent of
the deficit wiped out during the reorganization and
therefore cannot be declared as dividend.
f. Losses subsequent to quasi-reorganization
cannot be charged to the remaining revaluation
g. The quasi-reorganization shall be disclosed for
at least 3 years – the date, mechanics, purpose
and effect of the quasi-reorganization on the
entity’s statements.