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ACCOUNTING FOR COMPANY STATEMENT OF FINANCIAL POSITION (equity)

ACCOUNTING FOR COMPANY STATEMENT OF FINANCIAL POSITION (equity). Equity. Definition : Equity is the residual interest in the assets of the entity after deducting all its liabilities. [F 4.4(c)] . Pre- issuance process.

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ACCOUNTING FOR COMPANY STATEMENT OF FINANCIAL POSITION (equity)

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  1. ACCOUNTING FOR COMPANY STATEMENT OF FINANCIAL POSITION(equity)

  2. Equity Definition: Equity is the residual interest in the assets of the entity after deducting all its liabilities. [F 4.4(c)]

  3. Pre- issuance process Initial Public Offering (IPO) – the first time company issues shares to the public Shares are offered to the institutional investors and retail investors. Institutional offering – include Malaysian and foreign institutions, selected investors and bumiputera investors approved by MITI Retail offering – Malaysian public, eligible customers, dealers and distributors and employees at the issue price Final offering – lower of the retail offering and 95% of the institutional offering

  4. Issuance of shares: • Public company issue shares or debentures to either buy fixed assets, to buy another entity or just to raise cash through public offerings. • When a company made an offer to the public to subscribe for it shares the amount of shares applied may be oversubscribed (number of shares applied > the number of shares offered) or undersubscribed (number of shares applied < the number of shares offered). • A company seeking listing through IPO are not allowed to allot those shares unless the requirement for a minimum amount of capital (Main Board, RM60,000,000 and Second Board, RM40,000,000) is met. If the minimum condition is not met than all monies received must be returned to the applicants.

  5. Types of Equity Instrument Ordinary shares • Usually, ordinary shares comprise significant portion of the company’s equity • It carries the right to vote • The shareholders are entitled for dividend after the dividends have been paid to other classes of shares • Risk taker- because if the business fail, they can lose their capital

  6. Cont. Preference shares • It carries preferential rights as to the payment of dividends and repayment of capital in the event of liquidation • No voting rights • Nature – cumulative, non-cumulative, participating, non-participating, and redeemable or convertible

  7. Cumulative preference shares - fixed dividend, the dividend in arrears can be carried forward and become payable in the future Non – cumulative preferences shares - fixed rate of dividend (has sufficient profit), the dividend are forfeited and cannot be carried forward Participating - allowed to receive additional dividends to the extent express in Articles of Association Non-participating – not allowed to participate in the excess profit Convertible preference shares- can be converted to ordinary shares

  8. Capital Equity: 8 • Authorised/Nominal/Registered Capital • Unissued Capital • Called-up Capital • Uncalled Capital • Paid-Up Capital

  9. Cont. AUTHORISED CAPITAL • Maximum number of shares that a company is permitted to issue and the par value per share. • Must be stated in MOA. • The company is not required to issue the total amount immediately. • Authorised capital = no. of shares X par value per share • *Par value/ nominal value/ face value – an amount per share attached to each unit of share at the time of formation • Company can increase it’s authorised capital by altering its memorandum at a company general meeting

  10. Cont. ISSUED CAPITAL • The nominal capital that has been issued to the public for cash. • It can be either be partly or fully paid. • Issue price may be higher or lower than the par value

  11. Cont. UNISSUED CAPITAL • Represents that part of the company’s authorised capital which has not been issued to shareholders • Also know as unallotted shares • The difference between authorised capital and issued capital is the total amount of unissued capital

  12. Cont. UNCALLED CAPITAL • A company, when it decides to issue shares, may not require the shareholders to pay in the total par value of the shares all at one time. • The pay value may be called up by the company in installments. • Uncalled capital represents the amount of issued capital which has not yet been called up by the company

  13. Cont. PAID-UP CAPITAL • The amount of called up capital that has been paid up by the subscribers. CALL IN ARREARS/UNPAID CAPITAL • This is the amount of called up capital that the subscribers failed to pay.

  14. Cont. Under the Corporate Act 1965, paid up capital is determined using the following approach: RM Authorised capital XX Less: Unissued capital X Issued capital XX Less: Uncalled capital X Called up capital XX Less: Unpaid capital X Paid up capital XX

  15. Capital Structure Statement of Financial Position (Extract) Authorized Capital RM 200,000, 10% Preference shares of RM1/each 200,000 500,000, Ordinary shares of RM1/each500,000 700,000 Issued and Paid-Up Capital 100,000, 10%preference shares of RM1/each, fully paid up 100,000 200,000, Ordinary shares of RM1/each, called and paid up to 70sen each 140,000 240,000 Reserves Share Premium 40,000 Retained Profits150,000 Total Shareholders Equity430,000

  16. Reserves • Definition: reserves are amount retained in the business and not distributed to owners

  17. Disclosure in the SFP Authorised capital • This can be shown on the face of the SFP or as part of the notes. • Shown in detail distinguishing between classes of shares, par value, etc. Issued share capital • Particulars of the issued capital, showing movements in the issued capital, distinguishing between different classes of shares are to be disclosed

  18. Cont. Reserves • The description of the nature and purpose of each reserve shown either on the face of the SFP or in the notes • Must be classified under separate heading: • Share premium • Revaluation surplus • Profit and loss balance/Retained earnings • Other reserves • Movements to and from reserves during a financial period are to be disclosed in the SFP or in the notes to the SFP and in other Comprehensive Income (in SCI)

  19. Cont. • Any dividends that have been proposed but not approved for payment and not considered as liability- to be disclosed by way of notes.

  20. What can the directors do when shares are oversubscribed? • The company has two options either: • To allot shares on a pro-rata basis. • Assume a company offers to issue 1,000,000 unit of ordinary shares and receive application for 4,000,000 shares may decide to allot those shares on a pro-rata basis of one unit for every four shares applied, or • Allotted shares to those who are successful in the balloting process and rejected i.e. share applications will be returned to unsuccessful applicants. • An applicant who is successful in the share application is credited with the number of shares to their account number in the Central Depository System (CDS) – a scrip less trading system i.e. no physical share certificate.

  21. ……………………………..cont • Shares or debentures are issued for cash or for other considerations either: • At par, or • At a premium (above the par value), or • At a discount (below the par value)

  22. …………………continue • Issue of shares at premium: - is a price over a par value - it will shows as ordinary shares of RM1/- each at RM1.25 per share. - the 0.25 cents above the par value is a premium payable by prospective investors to purchase the company’s shares. - if the company issue 10,000 unit of shares, it will receive RM12,500 in which RM10,000 will be share capital whereas RM2,500 is the share premium. - the share premium will be accounted in the share premium account. Sec 60 (2) Co Act 1965

  23. The extract of balance sheet: Issued and paid up capital: RM 10,000 ordinary shares RM1/-each 10,000 Reserves: Share premium 2.500 Capital and reserves 12,500 What is the purpose of having the share premium account? Co Act 1965 Sec 60(3) • Paying the unissued shares • Paying in whole or in part of the balance of unpaid shares • Payment of dividend • Writing off: preliminary expenses; commission; brokerage fees • Providing premium payable on redemption of shares

  24. 2. Issue of shares at discount: - shares that is issued below par value - condition need to be fulfilled under the Co. Act 1965 Sec 59(1) - the condition are: (i) authorized by resolution at the general meeting and confirmed by court (ii) resolution specifies the maximum rate of discount at which shares to be issued. (iii) at the date of issued not less than one year has lapsed at the date of commencement of business (iv) shares issued within one month after the date on which the issue is confirmed by court

  25. Issue at discount is shown as ordinary shares of par value of RM1/- each being issued for 0.90 cents. • The differences of 0.10 cents is called share discount. • The 9th Schedule [paragraph (f) (v)] only specifies ‘as far as they are not written off’ it should be separately disclosed. The CA 1965 and AAA do not specify the accounting treatment for share discount nor requires the share discount to be written off. • What is clear is that under the balance sheet approach (current practices) a ‘share discount account’ is not an asset and as such should not be reported as an asset in the balance sheet. • If the company’s policy is to write-off or amortised than the discount may be written-off or amortised against the share premium account or other suitable reserves such as retained profit.

  26. Current practices do not allow writing off share discount as an expense in the income statement since it represents transactions between the company and its shareholders (i.e. it is an equity transactionnotan income transaction). • If the share discount is not written off it may be reported in the equity section as a ‘dangling debit’ Extracted of balance sheet: Issued and paid up capital RM 10,000 ordinary shares of RM1/-each 10,000 Discount of shares (1,000)

  27. Terms of the issue: Applicants for the issued shares are required to pay based on the below terms: • Pay full amount of the share price upon application • Pay by means of installments Payment in full • Upon application the applicants will pay in full, in which the unsuccessful application will be refunded to them. • The successful applicants are called shareholders.

  28. Azim Bhd. Incorporated on the 1st Jan 2002 with an authorized capital of 1,000,000 an ordinary shares of RM1 each. On the 10th January 2002, the company decide to issue 200,000 ordinary shares of RM1 per share payable in full upon application. Application for 250,000 shares were received. The oversubscribed shares were refunded. Journal entries: 10 Jan 2002 Debit Bank 250,000 Credit Application 250,000 (Being the amount received on application) Debit Application 200,000 Credit Ordinary share 200,000 (Being the issue of 200,000 ordinary shares)

  29. Debit Application 50,000 Credit Bank 50,000 (Being refund made to unsuccessful applicants) Extract of the Balance Sheet of Azim Bhd as at 10 January 2002 Authorized Capital 1,000,000 ordinary shares of RM1/- each 1,000,000 Issued Share Capital 200,000 ordinary shares of RM1/-each 200,000

  30. Payment by installments: The share price is collected in the following stages: On application - payment on part of the issue price on the application. - the applicants is not the shareholder yet - the minimum amount payable should not less than 5% of the nominal amount. On Allotment - the shares are allotted to successful applicants - only when the shares are allotted to the applicants are then considered shareholders. - the shareholders need to pay the balance at the allotment when it is required by the company

  31. On calls - When further funds is required the company will issue the letter of call. - Call in advance: payment made by shareholder before the call is made. - the money received is considered as loan to the company - call in advance not entitled for a dividend - Call in arrears: is when the shareholders fail to pay the sum due on calls. - shown as deduction on the balance sheet, and charge as an interest to the company. Extract Balance Sheet Issued and called up capital xx Less: Call in arrears (xx) Add: Call in advance xx

  32. Adi Bhd. With an authorized capital of 500,000 ordinary shares of RM1/- each offered for issue to the public 300,000 ordinary shares of RM1/-each on the following terms: On application 20 cents On allotment 20 cents On 1st Call 30 cents On 2nd Call 30 cents Application were received for 500,000 ordinary shares and the directors resolved that the shares is allotted on a pro – rata basis of 3 shares for every 5 shares were applied for. Any surplus application monies were transferred to allotment account to reduce the money due on allotment. All money due on calls were duly received.

  33. Journal entries: Debit Bank 100,000 Credit Ord. Share - application 100,000 (Being money received for 500,000 shares) Debit Or. Share - application 60,000 Credit Or. Share capital 60,000 (Being shares allotted) Debit Or. Share – allotment 60,000 Credit Or. Share capital 60,000 (Being amount called up on allotment)

  34. Debit Ord. Share – application 40,000 Credit Ord. Share – allotment 40,000 (Being excess of application money transferred to allotment) Debit Bank 20,000 Credit Ord share – allotment 20,000 (Being balance of the allotment money received) Debit 1st Call 90,000 Credit Ord share capital 90,000 (Being 1st call made) Debit Bank 90,000 Credit 1st Call 90,000 (Being a receipt of amount due on 1st Call)

  35. Debit 2nd Call 90,000 Credit Or. Share capital 90,000 (Being 2nd call made) Debit Bank 90,000 Credit 2nd Call 90,000 (Being money received on 2nd call)

  36. If all the monies were duly collected when due except for a shareholders with 10,000 shares who paid the 2nd and final call money at the same time as the 1st call and another 5,000 shares who failed to pay the 2nd and final call money. Journal entries: Debit 1st Call 90,000 Credit Ordinary share capital 90,000 (Being 1st call made)

  37. Debit Bank 93,000 Credit 1st call 90,000 Call in advance 3,000 (Being amount received on 1st call and RM3,000 received as call in advance) Debit 2nd and final call 90,000 Credit Ordinary share capital 90,000 (Being 2nd call made) Debit Call in advance 3,000 Call in arrears 1,500 Bank 85,500 Credit 2nd and final call 90,000 (Being amount received on 2nd call)

  38. Balance Sheet as at 31 Dec 2002 Authorised capital: 500,000 ordinary shares @ RM1- 500,000 Issued share capital: 300,000 ordinary share capital @RM1- 300,000 Less: Call in arrears (1,500) Add: Call in advance 3,000 298,500

  39. A company is issuing 1,000, 7% preference shares of RM1 each payable using the following terms: On application 0.10 On allotment 0.20 1st Call 0.40 2nd Call 0.30 Application are received for RM1,550 shares. A refund of the money is made in respect of 50 shares, while for the remaining 1,500 applied for an allotment is made on a basis of 2 shares for every 3 applied for, The excess application monies are set off against the allotment monies asked for. The remaining requested installments are all paid in full.

  40. Forfeiture of shares Forfeit share on which the shareholders fails to pay the call requested by the company. The shares will be cancelled and the installments paid by s/holders will be lost After forfeiture the company may reissue back the share at different prices. Eg. Using the above example, if Alia the holder of 100 shares fails to pay the first and second call, She had already paid the application and allotment monies as required dates. (a) Alia is forced to suffer the forfeiture of his shares (b) The directors reissue at a price of RM0.75 cents to Ali (c) Ali pays for the shares

  41. Forfeiture of shares: Journal Entries: Dr Ordinary share cap 100 Cr Forfeited shares 100 (100 x 1.00) Dr Forfeited share 70 Cr Call in arrears 70 (100 x 0.70)

  42. If the share are not reissued: Journal Entries Dr Forfeited share 30 Cr Share Premium 30

  43. If the share were reissued Journal Entries Dr Reissue 100 Cr Share Capital 100 (100 x 1.00) Dr Bank 75 Cr Reissue 75 (100 x 0.75)

  44. ….....cont Dr Forfeited shares 30 Cr Reissue 30 (amount forfeited transfer to reissue) Dr Reissue 5 Cr Share Premium 5

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