Share capital

Share capital is the nominal value of the shares issued within equity of an entity. Only nominal values are debited (repayment of shares) or credited (issuance of shares), the difference with amounts subscribed is credited/debited to a separate account within equity. Share capital

Share premium is the amount subscribed for share capital in excess of nominal value.

Shares are financial instruments. A share is a certificate evidencing the rights of the shareholder, to whom it is granted, in a company. Shares may take bearer or registered form. One share of stock represents a fraction of the share capital of a corporation.

Shares issued at a Premium

A short example:

  • 100 shares of nominal CU 100 are subscribed at 125%,
  • cash receipt is CU12,500 (=100 shares x CU100 x 125%),
  • shares issued are CU10,000 (100 shares x CU1,000), and
  • the share premium is CU 2,500.

Share capital is credited for CU 10,000 at the actual issuance of the 100 shares and the receipt of the cash. The journal entry is:

CU CU
DT Cash 12,500
CR Share capital 10,000
Cr Share premium 2,500

Shares issued at a Discount

A short example:

  • 100 shares of nominal CU 100 are subscribed at 75%,
  • cash receipt is CU7,500 (=100 shares x CU100 x 75%),
  • shares issued are CU10,000 (100 shares x CU1,000), and
  • the discount on shares account is negative or DT CU 2,500 (and recorded within equity).

Share capital is credited for CU 10,000 at the actual issuance of the 100 shares and the receipt of the cash.

Note: Shares issued at a discount does happen in a limited number of cases, think of a reorganisation in a family owned business or a listed company attracting new investors in a financial difficult situation.

The journal entry is as follows:

CU CU
Cash 7,500
Discount on shares issued 2,500
Share capital   10,000

Bonus shares issued

Bonus shares are shares issued to shareholders of a company free of any cost. Bonus issue is also known as scrip issue and scrip dividends.

As an alternative to cash dividends, companies at times give away free shares to their shareholders when they are short of cash and don’t want to upset shareholders that expect a regular income. Shareholders can then sell the bonus shares to meet their liquidity requirements. Bonus shares are also issued to restructure company reserves.

Issuing bonus shares does not involve cash-flow. It increases the share capital of the company but not its net assets.

Bonus shares are issued to each shareholder according to their stake in the company. For example, a 3 for 2 bonus issue would entitle each shareholder 3 shares for every 2 shares already held by them before the issue. e.g. A shareholder having 1000 shares would therefore receive 1500 bonus shares (1000 x 3 ÷ 2).

Accounting
From an accounting perspective, a bonus issue is a simple reclassification of reserves which causes an increase in the share capital of the company on the one hand and an equal decrease in other reserves. The total equity of the company therefore remains the same although its composition is changed.

Following journal entries are required to account for a bonus issue:

Debit Undistributed Profit Reserves / Share Premium Reserve / or Other reserves Number of bonus shares × nominal value of 1 share
Credit Share capital Number of bonus shares × nominal value of 1 share

Example

ABC PLC declared a 3 for 2 bonus issue. Extract of ABC PLC’s balance sheet prior to issuance of bonus shares is as follows:

Ordinary Share Capital CU 0.5 each CU 2,000,000
Share Premium CU 1,000,000
Revaluation Reserve CU 1,500,000
Retained Profits CU 5,000,000
Total equity CU 9,500,000

Because of the nature of a revaluation reserve (arisen from a specific asset/asset group which is subject to impairment risks) revaluation reserve should not be used for the purpose of accounting for bonus issue, whereas retained profits should only be used if other reserves are exhausted.

As a result the following journal entries are required to account for the above transactions.

CU CU
Share premium 1,000,000
Retained Profits 2,000,000
Share capital   3,000,000

Calculations:

Total number of shares before bonus issue = CU 2,000,000 ÷ CU 0.5 = 4,000,000
Bonus shares to be issued = 4,000,000 x 3 ÷ 2 = 6,000,000
Increase in share capital = 6,000,000 x CU 0.5 =  CU 3,000,000
Amount to be offset from Share Premium Account =  CU 1,000,000
Remaining amount to be offset from retained profits =  CU 2,000,000 (CU 3m – CU 1m)

Ordinary Share Capital CU 0.5 each CU 5,000,000
Share Premium – –
Revaluation Reserve CU 1,500,000
Retained Profits CU 3,000,000
Total equity CU 9,500,000

General model of measurement of insurance contracts

Share capital

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