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

2  Ordinary share capital  Preference share capital  Deferred shares Classes of Shares

3 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) Cont.

4 Preference shares capital  Has no voting rights.  Has a priority over ordinary shares regarding dividend distribution.  Dividends are guaranteed, providing that earnings exist. Cont.

5 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. Cont.

6 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 Cont.

7 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 Cont.

8 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 Cont.

9 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. Accounting for Share Issues

10 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 Cont.

11 Directors have a number of options when issuing shares: 1. Choose to issue ordinary shares, preference shares or both 2. Issue shares at their par value, at a premium or at a discount 3. Shares may be issued I. Payable in full on application II. Paying a deposit on application and the remainder on allotment III. Part payment on application, part on allotment and the remainder in one or more installments (or calls) Cont.

12 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 Cont.

13 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 Cont.

14 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 Cont.

15 Call(s):  Issue letter of call when require money from shareholders.  Debited bank & Credited Call (1 st, 2 nd 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 Cont.

16 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: RM RM July 1 Bank500,000 Ordinary share capital500,000 (To record proceed of cash from issuance of shares) Cont.

17 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: RM RM July 1 Bank625,000 Ordinary share capital500,000 Share premium125,000 (To record proceed of cash from issuance of shares at a premium) Cont.

18 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. To pay up un issued shares as a fully paid bonus shares 2. To pay up in whole or in part for unpaid shares previously issued to shareholders Cont.

19 3. As dividend payment to shareholders in form of shares 4. As transfer to statutory fund (require for insurance companies) 5. 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) Cont.

20 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 RM July 1 Bank450,000 Discount on shares50,000 Ordinary share capital500,000 (To record proceed of cash from issuance of shares at a discount) Cont.

21 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 : 1. 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, 6 th Edition, p.16 & 26 Cont.

22 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, 6 th Edition, p41 & 42 Cont.

23 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 Cont.

24 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 Cont.

25 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)Sufficient liquid fund available (2) Redemption cannot reduce the amount of authorised capital (3)Premium payable on redemption must be provided for out of profits / out of share premium BEFORE shares redeemed (4)Shares fully paid up (5)Within 14 days must give notice to companies commission (inform the amount of shares redeemed) Cont.

26 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 Cont.

27 Redemption of RPS: Fresh issue of shares See Illustration in JL&TLL, 6 th 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 Cont.

29 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, 6 th Edition, p59 Cont.

32 Redemption of RPS: Partly fresh issue, partly profits See Illustration in JL&TLL, 6 th 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 Cont.

34 Share Buyback:  Purchase own shares in the market – intention to cancel  Reasons: 1. Strategic measure – Due to a lack of viable investment projects, so returning excess cash to shareholders to allow them to search out better investments. 2. Proactive measure – Reducing the number of shares in issue which increases the earning per share 3. Reactive measure - To stabilise a falling share price  Risk - if the company has to borrow funds in order to make the buyback Cont.

35 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, 6 th Edition, p75 Cont.

36 (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, 6 th Edition, p77 Cont.

37 Next Week: Accounting for Research & Development (R&D) (FRS 138) Cont.