FAR - Share Capital and Reserves

What are some methods of issuing shares?

- Offer for subscription - shares are offered to the public - Share placing - shares are arranged (placed) to be purchased by financial institutions - Rights issue - Bonus issue or capitalisation issue - use of retained earnings reserve (distributable reserve) or the share premium (non-distributable reserve): DR Retained earnings and / or share premium CR Share capital

Can private companies reduce their share capital?

Yes - In 2008 a change in UK legislation permitted private companies to reduce their capital by a special resolution, subject to the directors signing a solvency statement to confirm that the company would be able to meet all its liabilities for at least a year.

What is the minimum share capital a PLC in the UK must have in 2016?

£50,000

What are distributable reserves?

- represented by 'retained earnings / earnings reserve' in the statement of financial position. profits available for distribution to ordinary shareholders (subject to retaining a statutory minimum level) - represented by 'retained earnings / earnings reserve' in the statement of financial position. profits available for distribution to ordinary shareholders (subject to retaining a statutory minimum level)

What are non-distributable reserves?

- share premium - capital redemption reserve - For a public company: it also includes the excess of accumulated unrealised profits over accumulated unrealised losses at the time of intended distribution

Why would a company want to buy back their own shares?

- to return surplus cash to shareholders - to optimise the capital structure: debt to equity - to increase EPS and future share price - more tax-efficient cash distribution than paying a cash dividend

What is a preference share?

A share that guarantees a fixed rate of dividend (expressed as a percentage of the nominal value of the shares). Specific rights attached to a preference share can vary widely

What did the CA 2006 state that distributable profits must be based on for a public company?

For public companies: distributable profits (as defined above) must also be reduced by any net unrealised losses

Where is the surplus or deficiet on revaluation shown in the financial statements?

In the SOCIE and the SOCI.

Can public companies reduce their share capital?

In the case of UK public companies, this requires court consent

What is the revaluation reserve?

It is a reserve account that records the surplus created when assets are revalued.

What is the minimum share capital a Private Company in the UK must have in 2016?

No minimum

What is an ordinary share (equity share)?

Ordinary shares carry the main risk and their bearers are entitled to the residual profit (dividends) after any fixed interest or fixed dividends have been paid. Theses shares carry one voting right per share and an invitation to the AGM.

What are reductions in share capital limited too and how are they done?

1) Writing off part of capital already lost and not represented by assets: DR Share capital (with part of accumulated losses) DR Non-distributable reserves (with balance of accumulated losses) CR Retained earnings reserve (accumulated losses) 2) Repayment of part of paid-up capital to shareholders (i) DR Share capital CR Cash 3) Cancellation of unpaid share capital DR Share capital CR Called-up share capital unpaid (debtor) This uses up surplus liquid resources. 4) Purchase / buyback of own shares

What did the CA 2006 state that distributable profits must be based on for a private company?

Companies Act 2006 (CA 2006) stipulates that the distributable profits of a company must be based on relevant accounts. Relevant accounts may be prepared under either UK GAAP or EU-adopted IFRS.

What is the concept of realised profit and losses based on?

Decision on realisation is based on generally accepted accounting principles.

What is the formula for permenant capital?

Share capital + non-distributable reserves = Permanent capital

What is the formula for shareholders equity?

Share capital + reserves = Shareholders' equity

Where are preference shares recordied on the SOFP?

Shown as part of share capital under UK rules, but as a long term liability under IAS

What is the difference between the nominal value of a share and its market value?

The nominal value (par or face value) of a share is the value per share as stated in the issuing company's charter. This is the minimum amount that investors must pay per share in order to finance the company. The market value of a share (share price) is determined by the buying and selling activity of all investors on the open market. Because stocks often have par values near zero, the market value is almost always higher than par but is highly changeable.

What is the capital maintance concept?

There is a statutory requirement for the company to retain within the company the net assets equal to the non-distributable resereves. The purpose is creditor protection. The companies act 2006 rules determine how much is distributable to shareholders.