CHAPTER 23
Appropriation and Quasi-reorganization
Appropriation means that the portion of retained
earnings cannot be used as a payment for dividends
Legal capital- amount of capital of the entity that
cannot be legally returned to shareholders until there is
a creditor, in accordance with the trust fund doctrine
1. Legal appropriation
-arises when the capital cannot be returned
back to its shareholders until dissolution and
liquidation.
2. Contractual appropriation
-retained earnings settled for bond
redemptions or preference share redemption
-For example, a loan contract may state that
part of a corporation's $100,000 of retained
earnings is not available for cash dividends until
the loan is paid.
3. Voluntary appropriation
-retained earnings that is appropriated for
expansion projects, working capital increment
or contingencies.
3.
4.
5.
6.
7.
8.
9.
Dividends to shareholders
Effect of change in accounting policy
RE appropriation
Retirement of treasury shares
Recognition of share issuance cost
Call of preference shares
Conversion of preference shares into ordinary
shares
Reserves
-part of the Shareholder's Equity that is earmarked for
specific purposes like fixed assets acquisition
Non-distributable equity reserves
1.
2.
3.
4.
Share premium
Appropriated
Asset revaluation
Other components of OCI
QUASI-REORGANIZATION
-not mandatory
-restructuring the components of assets, liabilities and
equity for the purpose of eliminating a deficit
1. Recapitalization
-change in the capital structure of the entity,
issuance of new shares and cancellation of the
old ones
-share capital, share premium and retained
earnings
Typical examples
1. Change from par to no par
2. From no par to par
3. Reduction of par value or stated value
Items affecting retained earnings
1. Profit or loss for the period
2. Prior errors
2. Revaluation of PPE
1. Cost model- carried at cost less
accumulated depreciation or impairment
2. Revaluation model-fair value at the date of
revaluation less subsequent accumulated
depreciation
Basis for revaluation
-Fair value
-Depreciated replacement cost
SEC requirements
form of an incentive program given to key employees
enabling them to receive a certain number of shares of
the company’s stock upon the completion of a period of
service or achievement of an established milestone. It is
a form of an incentive program that is proven to be a
motivating factor for the employees.
No vesting period
The company doesn’t require the employees to render
some certain condition, hence compensation expense is
fully recognized upon granting
With vesting period
-the employees are required first to accomplished a
certain condition before compensation is given, and it is
recognized from the date of grant until the end of
service-cumulative basis
Cancellation or settlement of the share option right
before the end of vesting period
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