Download ACT 3216 ADVANCED FINANCIAL ACCOUNTING 1

Financing A Company - Equity
Learning Outcomes:
 Able to identify classes of shares
 Know to account for the issuance of shares
 Know to account for the forfeiture and reissue of
forfeited shares
 Know to report the shares in the financial statements
1
Classes of Shares



Ordinary share capital
Preference share capital
Deferred shares
2
Cont.
Ordinary shares capital




Carries the right to vote.
Entitled to share dividends only after dividend, if
any have been paid to the other classes of
shares.
The rate of dividend is not fixed dependent upon
the company’s level of profits and dividend policy.
The shareholders have the first opportunity to
purchase additional shares (pre-emptive right)
3
Cont.
Preference shares capital



Has no voting rights.
Has a priority over ordinary shares regarding
dividend distribution.
Dividends are guaranteed, providing that
earnings exist.
4
Cont.
Types of Preference shares capital
i. Cumulative Preference Shares
Receive a fixed dividend per annum. The prior year
dividend can be carried forward and become payable in
the future.
5
Cont.
ii. Non - Cumulative Preference Shares
Receive a fixed rate dividend only when the company has
profit, however if dividend not declare for that year, it will
be forfeited and cannot be carried forward.
iii. Convertible Preference Shares
Gives the right for such preference shareholders to
convert their preference shares into ordinary shares
6
Cont.
iv. Redeemable Preference Shares
Type of shares that is liable to be bought back by the
issuing firm on a specified date or after a specified period
of notice
Need to report as a liability
7
Cont.
Deferred shares capital



Also known as founder’s shares.
Normally issued to founders/ promoter
The rights to dividend and return of capital come
after right of ordinary shareholder
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Accounting for Share Issues
Issuance of Shares:

A company can issue shares directly to investors or
indirectly through an investment banking firm.

Investors can be individual or institutions

Reasons for issuance of share are fund/cash raising, buying
assets, paying debts.
9
Cont.
Methods for Issuing Shares:

Offer for subscription – offered direct to public

Placings – shares are arranged (placed) to be bought by
financial institutions

Right issues – the new shares are offered to the existing
shareholders at a price below the market price of those
shares
10
Cont.
Directors have a number of options when issuing shares:
Choose to issue ordinary shares, preference shares or
both
Issue shares at their par value, at a premium or at a
discount
Shares may be issued
1.
2.
3.
I.
II.
III.
Payable in full on application
Paying a deposit on application and the remainder on
allotment
Part payment on application, part on allotment and the
remainder in one or more installments (or calls)
11
Cont.
Revision:
Authorised Capital
The share capital as provided for in the MA. The shares to be
issued by the corporation should not exceed the authorised
capital
Issued capital
The number of shares issued out of the authorised capital for
subscription to the general public. The balance remaining in the
authorised capital are called unissued capital
12
Cont.
Revision:
Issued and Fully Paid Capital
Shares that have been issued and all fully paid.
Paid up Capital
For shares that are payable on installments, issued
shares may consist of a portion that is paid up and a
portion that is not yet paid. The portion that is paid up is
called paid up capital
13
Cont.
Application:

Money received is debited bank & credited to share
application account.

Application money must not be less than 5% of the par.
Allotment

Successful applicant is allotted the amount of share.

Debited share application account & credited allotment
account.

Uncalled money credited as call in advance
14
Cont.
Call(s):

Issue letter of call when require money from shareholders.

Debited bank & Credited Call (1st, 2nd or etc) account

Future call money – call in advance (Ct) as paid-up capital

Failure to pay the call – call in arrears (Dt) as deduction to
paid-up capital.
Forfeiture of Shares:

Forfeit shares due to failure in collecting money from call
in arrears.

Must be provided in AA.

Reissued or not to be reissued
15
Cont.
Issuing shares at par (nominal value)
Assume on July 1, A Berhad issues 500,000 ordinary shares of
out of its authorized capital of 1,000,000 ordinary shares, par
value RM1, payable in full on application.
Journal entry:
July 1 Bank
RM
500,000
RM
Ordinary share capital
500,000
(To record proceed of cash from issuance of shares)
16
Cont.
Issuing shares at premium (above par value)
Assume on July 1, A Berhad issues 500,000 ordinary shares of
RM1 each at RM1.25 per share, payable in full on application.
Journal entry:
July 1 Bank
RM
625,000
RM
Ordinary share capital
500,000
Share premium
125,000
(To record proceed of cash from issuance of shares at a
premium)
17
Cont.
Share Premium Account:

Share premium account is a Capital reserve and also a
Statutory reserve (created due to law requirement)

Part of shareholder’s equity (Owner’s equity)

Balance in the share premium account can only be
utilized or applied for the following purposes:
1.
2.
To pay up un issued shares as a fully paid bonus shares
To pay up in whole or in part for unpaid shares previously
issued to shareholders
18
Cont.
3.
4.
5.
As dividend payment to shareholders in form of shares
As transfer to statutory fund (require for insurance
companies)
In writing off:
(a) Preliminary /formation / pre operating expenses of the co
(b) Commission expenses/brokerage fees/discount allowed
related to shares issued
6.
Provide premium payable on redemption of redeemable
preference shares (RPS)
19
Cont.
Issuing shares at a discount (below par value)
Assume on July 1, A Berhad issues 500,000 ordinary shares of
RM1 each at RM0.90 per share, payable in full on application.
Journal entry:
RM
450,000
50,000
RM
July 1 Bank
Discount on shares
Ordinary share capital
500,000
(To record proceed of cash from issuance of shares at a
discount)
20
Cont.
Oversubscribed and Undersubscribed Shares
Oversubscription
The number of shares applied for by subscribers exceed the
number of shares that are issued. The shares may be either :
Reject some of the applications for the shares
2.
Allotted on a pro-rata basis: in proportion to the applicant
applied for.
Example:
500,000 shares are offered and application were received for
1,000,000 shares. A person who applies for 150 shares will be
offered:
150 x 500,000 = 75 shares
1,000,000
See Example 1 & 4 from JL&TLL, CG&AR, 6th Edition, p.16 & 26
1.
21
Cont.
Bonus Shares:






Issued by the company to existing shareholders free of charge
(FOC)
Issued when company has huge profits (retained earning) or
huge capital reserves (share premium, assets revaluation)
and cannot make cash dividend payment
No effect on corporate assets and shareholders equity
Will diluting the net asset per share and listed price per share
as the number of shares has increased
Capitalized reserves above into paid-up ordinary shares
e.g. 1 to 5 bonus share indicates the shareholder of 5 ordinary
shares will receive 1 bonus share FOC
See Example 5 & 6 JL&TLL, 6th Edition, p41 & 42
22
Cont.
Right Issue:








Invitation to the existing shareholders to subscribe additional
shares
To raise capital without having to pay a high cost of issuance
May dilute the listed price of the company share
Increase shareholders’ equity and total assets
Issued at a fixed rate e.g. 1 share offered for 4 shares
Same recording as ordinary shares
Price usually less than market price
Full or installment payment
23
Cont.
Share split:





To increase the number of shares in the company without
increasing the fund
To make the share price cheaper to be subscribed by the
shareholders
Reduce the par value of the shares (from RM1 to RM0.50)
Units of shares will increase but the total par value of the
shares remained the same
No effect on shareholders’ equity
Example:
The company announces that 1 share with a par value RM1
now becomes 2 shares with a par value of RM0.50
24
Cont.
Redeemable Preference Shares (RPS):



RPS is classified as financial liability in the balance sheet
Dividend payable to RPS will be treated as expense
In Malaysia RPS can be redeemed provided:
(1)
(2)
(3)
(4)
(5)
Sufficient liquid fund available
Redemption cannot reduce the amount of authorised
capital
Premium payable on redemption must be provided for
out of profits / out of share premium BEFORE shares
redeemed
Shares fully paid up
Within 14 days must give notice to companies
commission (inform the amount of shares redeemed)
25
Cont.
Redemption of RPS:
Depending on the financial position of the company, it may:

Make fresh issue of shares

Transfer profits earned to Capital Redemption Reserve (CRR)
account

Partly make fresh issue, partly hold past profits
26
Cont.
Redemption of RPS: Fresh issue of shares
See Illustration in JL&TLL, 6th Edition, p59
ZYZ Berhad issued ordinary share capital of RM40,000,000
and RM10,000,000, 5% RPS of RM1 each, decided to redeem
the preference shares at par and issue new shares to facilitate
the redemption.
RM10,000,000 nominal amount of new shares, ordinary or
preference has to be issued in order to maintain the issued
capital at RM50,000,000
27
Balance Sheet (extract) of RPS Berhad BEFORE redemption
RM(000')
Liability
10000000 5% RPS of RM1 each
Shareholders' Equity
Issued and fully paid up capital
40000000 ordinary shares of RM1 each
10000
40000
50000
Balance sheet (extract) of RPS Berhad AFTER redemption
RM(000')
Shareholders' Equity
Issued and fully paid up capital
50000000 ordinary shares of RM1 each
50000
Cont.
Redemption of RPS: Transfer profits earned to CRR account



No new shares issued
Amount equal to nominal amount of shares redeemed
transferred from Profit and Loss a/c (or any revenue reserve)
to a capital redemption reserve (CRR)- capital reserve
CRR cannot be transferred back to profit and loss a/c –NON
DISTRIBUTABLE
See Illustration in JL&TLL, 6th Edition, p59
29
Balance Sheet (extract) of RPS Berhad BEFORE redemption
RM(000')
Liability
10000000 10% RPS of RM1 each
Shareholders' Equity
Issued and fully paid up capital
60000000 ordinary shares of RM1 each
Reserves
Retained Profit
10000
60000
12000
82000
Balance sheet (extract) of RPS Berhad AFTER redemption
RM(000')
Issued and fully paid up capital
60,000,000 ordinary shares of RM1 each
Capital reserve
Capital Redemption reserve (CRR)
Revenue Reserves
Profit and Loss account
60000
10000
2000
72000
Cont.
Redemption of RPS: Partly fresh issue, partly profits
See Illustration in JL&TLL, 6th Edition, p60
XYZ Bhd decided to redeem all PS 5,000,000 OS issued at
par, and RM5,000,000 will be transferred out of profits to CRR
Liability
10000000 10% RPS of RM1 each
Shareholders' Equity
Issued and fully paid up capital
60000000 ordinary shares of RM1 each
Reserves
Retained Profit account
(RM'000)
10000
60000
12000
82000
32
Balance sheet (extract) of RPS Berhad AFTER redemption
RM(000')
Issued and fully paid up capital
65000000 ordinary shares of RM1 each
Capital reserve
Capital Redemption reserve (CRR)
Revenue Reserves
Retained Profit account
65000
5000
7000
77000
Cont.
Share Buyback:


1.
2.
3.

Purchase own shares in the market – intention to cancel
Reasons:
Strategic measure – Due to a lack of viable investment
projects, so returning excess cash to shareholders to
allow them to search out better investments.
Proactive measure – Reducing the number of shares in
issue which increases the earning per share
Reactive measure - To stabilise a falling share price
Risk - if the company has to borrow funds in order to
make the buyback
34
Cont.
Accounting Treatment:
2 methods:
(1)Treasury share method

More appropriate when the company wishes to reissue the
purchased shares in the future

The repurchase shares are NOT cancelled but held as
treasury shares

Treasury shares-no right to vote, to dividends and in any
other distribution

Shown as a deduction against the issued share capital
(i.e. treated as unissued capital)
See Example 4 JL&TLL, 6th Edition, p75
35
Cont.
(2 )Share retirement method

Used if the company intends to cancel the shares
repurchased

Entry: Debiting the Ordinary Share Capital account &
crediting the CRR.
Done by utilising either share premium/retained profits

Any acquisition costs & premium or discount arising from
shares repurchased –adjusted and transferred to share
premium or distributable reserve (retained earnings)
See Example 4 JL&TLL, 6th Edition, p77
36
Cont.
Next Week: Accounting for Research & Development (R&D)
(FRS 138)
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