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Share
Capital
YO U S U F S I YA M

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Share
 A company raises capital by the issue of shares.
 The total capital of the company is divided into smaller denominations -
each part is known as a “share”.

 These shares are issued for subscription.

 The persons who contribute to the shares are called the “Shareholders”

 A share is evidenced by a share certificate which is issued by the company under its
common seal.

 Each share has a distinct number.

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Nature and Classes of Shares

 Equity shares

◦ Shares which do not enjoy any preferential right in the payment of

dividend or repayment of capital, are termed as equity/ordinary shares.

◦ The dividend on equity shares is not fixed and it may vary from year to
year depending upon the amount of profits available for distribution.

◦ The equity share capital may be (i) with voting rights; or (ii) with
differential rights as to voting, dividend or otherwise in accordance with
such rules and subject to such conditions as may be prescribed.

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Nature and Classes of Shares

 Preference Shares

• Preference share is one, which fulfils the following conditions :

 That it carries a preferential right to dividend to be paid either

as a fixed amount payable to preference shareholders or an
amount calculated by a fixed rate of the nominal value of each
share before any dividend is paid to the equity shareholders.

 That with respect to capital it carries or will carry, on the

winding up of the company, the preferential right to the
repayment of capital before anything is paid to equity
shareholders.

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Share Capital Types

 Authorized or Registered Share Capital

• Maximum amount of capital, which a company is allowed to

raise during its lifetime

 Issued Capital

• The portion of authorized capital, which has been issued to all

the investors including public

• The amount of issued capital is taken in the balance sheet only if

the total amount of issued capital is subscribed, called up by the
company and paid by the share holders. Otherwise, its presentation
is similar to authorized capital

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Share Capital Types

 Subscribed Capital

• The portion of the issued capital, which has been subscribed by all the investors including the
public

 Called up Capital
• The portion of the subscribed capital that has been called up by the company
for payments is the called up capital

 Paid-up Capital

• That part of called up capital, which has been paid up by the subscribers of share capital
 Calls in Arrear

• The amount, which is due but yet to be received, is known as calls in arrears / Asset
 Calls in Advance
• The amount which is received in in advance / Liability
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Public Issuance of Shares

Initial public offering (IPO)

- The first sale/offer of shares that a company made to public investors.

- Main purpose: to raise capital.

- Companies listed on the stock exchange can issue shares to public,

provided in compliance with Securities Commission’s (SC)
requirements.

- Subsequent increase in capital – Right Issue – to the existing

shareholders generally at below market price

- Fixed Price vs Tender Offer

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Public Issues

 Process: approval from SC (a watchdog for the issuing houses);

announcement/invitation to public (eg. via ‘prospectus’).

 A minimum subscription required

- at least 5% of nominal value of shares plus premium.
- may need assistance from underwriters (e.g; financial institutions).
• Issue Cost: the issuer incur issue or transaction costs such as registration fee, regulatory
fee, accounting and other professional advisors…

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Scenarios of Public Issuance

Fully Over Subscription Under

Subscription Subscription
Application = Offer Application < Offer
Application > Offer
3 Options for excess applications:
1. Transfer the excess
application money
2. Allot the shares on pro rata
basis
3. Reject some applications

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Issue of Shares
 Issue of Prospectus: The company first issues the prospectus to the public. Prospectus is an
invitation to the public that a new company has come into existence and it needs funds for
doing business. It contains complete information about the company and the manner in
which the money is to be collected from the prospective investors.

 Receipt of Applications: When prospectus is issued to the public, prospective investors

intending to subscribe the share capital of the 8 Accountancy : Company Accounts and
Analysis of Financial Statements company would make an application along with the
application money and deposit the same with a scheduled bank as specified in the
prospectus. The company has to get minimum subscription within 120 days from the date of
the issue of the prospectus. If the company fails to receive the same within the said period,
the company cannot proceed for the allotment of shares and application money should be
returned within 130 days of the date of issue of prospectus.

 Allotment of Shares: If minimum subscription has been received, the company may
proceed for the allotment of shares after fulfilling certain other legal formalities. Letters of
allotment are sent to those whom the shares have been alloted, and letters of regret to those
to whom no allotment has been made. When allotment is made, it results in a valid contract
between the company and the applicants who now became the shareholders of the company.
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Issue of shares at par value

E.g. A company issues 10,000 ordinary shares of RM1 each at par value for cash. All
the shares were subscribed.
Dr Bank (10,000 x RM1) RM10,000
Cr OSC (10,000 x RM1) RM10,000

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Issue of shares at a premium

•Shares issued above par value

•Companies with good track record of profitability and stability

•E.g. A company issues 10,000 ordinary shares of RM1 each at RM1.10 per share for
cash. All the shares were subscribed.

• Dr Bank (10,000 x RM1.10) RM11,000

• Cr OSC (10,000 x RM1) RM10,000
• Cr Share Premium (10,000 x RM0.10) RM 1,000

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Share Premium Account

• Capital reserves – part of shareholders’ fund

• Can only be used for

• Paying unissued shares to be issued to members as bonus shares
• Paying up balance unpaid on shares issued to members
• Payment of dividends in the form of shares
• Writing off:
• Preliminary expenses
• Expenses related to issuance of shares
• Providing premium payable on redemption of redeemable PS

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Issue of shares at a discount

•Issue of shares below par value

•Rights issue to existing SH (not to public unless AA allows)

•Conditions to be fulfilled before issue:

• Authorized by resolution at GM and confirmed by court
• Resolution specifies maximum rate of discount
• Date of issue not less than one year since business commencement
• Issue within one month of date confirmed by court

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Issue of shares at a discount…cont’d

•A company issues 10,000 ordinary shares of RM1 each at 90 sen per share for cash.
All the shares were subscribed.

•
• Dr Bank (10,000 x 90 sen) RM9,000
• Dr Discount on shares (10,000x10 sen) RM1,000
• Cr OSC (10,000 x RM1) RM10,000

• Discount on shares can be written off against:

• Share premium
• Retained profits

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Terms of issuance

1. Full payment on application of shares.

2. Payment by instalment.

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1. Full payment on application

• Stages:
(c) refund (if any)
(a) application
DR Bank
DR Application
CR Application CR Bank
(being money received on shares
applications)
(being the refund of
application money for
(b) allotment
DR Application
unsuccessful applications).
CR Share Capital
(closing off application account on
allotment of shares issued)

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1. Payable in full on application

Directors of a company with an authorised capital of 1 million ordinary shares of RM1 each offer
for subscription an initial offering of 600,000 ordinary shares of RM1 each comprising:
300,000 to institutional investors at RM2 per share, and
300,000 to retail investors payable in full on application at 95% of the price to institutional
investors
Applications were received from 300,000 institutional investors and 400,000 retail investors.
The money received on the oversubscribed shares from retail investors was refunded.
Journal entries to record the above transactions:
At close of application date:
Dr Bank (300 x RM2 + 400 x [0.95 x RM2]) RM1,360,000
Cr Application RM1,360,000
Being money received on application

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1. Payable in full on application…cont’d

On allotment,
Dr Application RM1,170,000

Cr OSC (600’xRM1) RM600,000

Cr SP (300’x RM1 + 300’x90sen) RM570,000
Being allotment of 600,000 ordinary shares

Refund
Dr Application RM190,000

Cr Bank (100’x RM1.90) RM190,000

Being refund made to unsuccessful applicants

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2. Payment by installment

Stages: • Excess application money can be dealt with:

(1) application a) immediate refund and/or;
(2) allotment
b) transfer to allotment/calls
(3) call or calls • Account to be offset against the subsequent
amount due.

Take note:
Call in advance (loan /liability) and/or;
Call in arrears (receivable/asset)

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Payment by instalment

 Stages:  Stages continue:

(a) application (b) refund

DR Bank DR Application
CR Application CR Bank
(being money received on shares (being the refund for excess applications)
applications)
(c) Transfer to subsequent called up

DR Application DR Application
CR Share Capital CR Allotment/Calls
(closing off application account on (being the excess application money retained to
allotment of shares issued) be off-set against the next called up amount due)

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Payment by instalment

 Stages continue:  Stages continue:

(d) allotment money called up (f) First/Final call made

DR Allotment DR First / Final call

CR OSC (any SP, if any) CR OSC (any SP, if any)
(being the subsequent amount due (being the first amount called up for
following the allotment of shares) payment)
(e) Allotment money received (g) First call /final call received

DR Bank DR Bank
CR Allotment CR First/final call
(being the payment received for the (being the payment received for the
allotment money called-up) first/final called up)

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Payment by instalment

Note:
• Call in advance

DR Bank
CR Call in Advance
(being the payment received in advance)

• Call in arrears
DR Call in arrears
CR Allotment/First/final call
(being the outstanding amount due)

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Class Illustration - Installment basis

Application 20 sen

Allotment 40 sen (including premium)

First call 30 sen

Second call 30 sen

Registered 50,000,000 ordinary shares at 1RM each

Invited application for issue od 30,000,000 shares of 1RM at 1.20 RM

Application for 40,000,000 shares were received

The director rejected 5,000,000 shares and allotted the shares on pro-rata basis.

Any surplus money on application was used to paid up on allotment.

a) Prepare journal entries

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Changes to capital structure

Rights issue
Bonus issue
Share options and warrants
Share split and consolidation

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Right Issue (RI)

• Main purpose: to raise additional capital.

• An invitation to existing shareholders to subscribe more

shares

• Price is lower than the market price.

• Shareholders might decide to:

a) accept the offer to take up the shares;
b) sell the ‘rights’ to a third party;
c) renounce the ‘rights’ in favour of the company,
whereby the company may offer the shares in the open
market.

• Accounting entry(s):
DR Cash
CR Share Capital
CR Share Premium (if any)
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Rights issue…example
A company with issued ordinary shares of 100,000 or RM1 each made a rights issue to
existing shareholders of one for every five shares held at a price of RM1.80 per share. All
shares offered under rights issue were taken up.

No of rights issue = 100,000/5 = 20,000

Dr Bank (20,000 x RM1.80) RM36,000

Cr OSC (20,000 x RM1) RM20,000
Cr SP (20,000 x 80 sen) RM16,000

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Script / Bonus Issue (BI)

• Shares issued to existing shareholders free of charge.

• In proportion to shareholdings – eg. 2 for 5 BI.

• Implication: no inflow/outflow of funds – only dilution in the net asset value.

• Bonus issue also known as capitalisation of reserves.

• Recommended when company has large accumulated profits but does not
want/unable to distribute them as cash dividends (e.g. due to company’s
policy).

• All reserves can be utilised for BI purposes (e.g. share premium, retained profit
etc.).
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Bonus shares
• Issue to existing shareholders
• Unlike rights issue, bonus issue does not involve outflow of
funds
• Usually issued when company has large profits or capital
reserves but unable to pay cash dividends
• Issue in proportion to shares held
• Dilution in net asset value per share after the issue
• bonus issue also known as capitalisation of reserves

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Bonus shares…example
A company with an issued share capital of 150,000 ordinary shares of RM1 each made a bonus
issue of one for every three held. The share premium is to be utilized for the issue. The net assets
of the company before the issue was RM300,000.
Before the bonus issue, Net asset per share
No of bonus shares = 150,000/3 = 50,000 RM300,000/150,000 = RM2
Dr SP RM50,000
Cr Bonus shares RM50,000
After the bonus issue, Net asset per share
(Shares issued as bonus)
Dr Bonus shares RM50,000 RM300,000/(150,000 + 50,000) = RM1.50
Cr OSC RM50,000
(OSC increased by the bonus issue)

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Share options

Share options
◦ Generally issued to directors and employees
◦ Holders can buy company shares at a predetermined price within
a stipulated time period (within 10 years of issue)
◦ If market price is higher than exercise price: holders should
exercise the option

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Changes to nominal value of shares

Share split
◦ Shares are cheaper, increase marketability
◦ Reachable to more small-time investors
◦ Number of shares increased but total nominal value unchanged
◦ E.g. 100 million shares @ RM1 each split into 200 million shares @ 50 sen each

Share consolidation
◦ Two or more shares joined to make a bigger share
◦ Number of shares reduced but total nominal value unchanged
◦ E.g. 100 million shares @ 10 sen per share consolidate into 20 million shares @ 50 sen per share

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Journal Entries
3. On allotment of shares:
1.When application moneyis received:
I. The application money on allotted sharesis transferred from share
Dr. Bank A/cxxx application account to share capitalA/c with the following entry.

Cr. shareApplicationA/c xxx Dr. Share Application A/c xxx

(Being application moneyreceived)
2. For the allotment money due on the
shares:
Cr. Share Capital A/c xxx
(Being application money transferred to share capital A/c)
II. If any applications are totally rejected the application money should
be refunded to the applicants.The following entry is passed for the
refund.

Dr. Share allotmentA/c xxx Dr. Share Application A/c xxx

Cr. To Bank A/c xxx
Cr. ShareCapitalA/c xxx
(Being Applicationmoney refunded)

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Journal Entries – Cont’d

4. When allotment money is received: 6. When first call money is received:

Dr. Bank A/cxxx
Cr. Share Allotment A/c xxx Dr. Bank A/cxxx
(Being the allotment money received)

• It should be noted that the above entry should be passed Cr. Share first call A/c xxx
with the actual amount received towards allotment
money. (Being first call received)

5.When the company makes the first call:
Dr. Share First Call A/c xxx
Cr. Share Capital A/c xxx
(Being the first call money due)This entry should be passed
with the amount called up on first call.
• This entry is passed with the actual
amount received on first call.
• Similar entries are made for every call.
The last call is called the final call.

• If there is only one call, it is known as

first and final call.
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Illustration 1

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Illustration 2

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Illustration 3

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Part 2:
SHARE
BUY-BACK
YO U S U F S I YA M

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What Is Share By-back?

•Purchasing/buying back own shares.

•The shares are usually bought back in the open

market.

•Authorisation from BOD at the AGM must be

obtained.

•It does not lead to a reduction in capital (statutory

requirement).
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Background

•Public listed companies can buy back their own

shares from the open market (Shares Buy-back
Scheme) either for cancellation or holding them as
treasury shares.

•Treasury shares can be distributed as share

dividends to shareholders or resold.

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Rationale / Motivation

•To support the price of shares in times when the share prices are depressed.

•To make the shares more attractive to potential investors.

•To distribute surplus cash to shareholders in replacement of dividends.

•To provide means of utilising surplus cash.

•To prevent takeover attempt by reducing the number of shares in issue…etc

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Potential Risks
•Reduction in financial resources ---- may be at the expense
of future good investment opportunities.

•Reduction in the amount of reserves otherwise available

for dividend distributions.

•Reduction in the amount funds available to meet creditors’

claims.
• Thus, to protect creditors’ interests, certain statutory
• Requirements: Companies Regulations

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Financing of Shares Buy-back

•No restrictions on the types of funds used to buy-back

shares. As long as the buy-back is backed up by an
equivalent amount of distributed retained profits and/or
share premium.
•Allows companies to use share premium as considerations
to buy-back shares.
•Current practice: companies use internally generated funds
(retained profits) and/or bank borrowings as sources of
funds for shares buy-back.

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Statutory Requirements

In the following circumstances a company can buyback shares:

The company is solvent, and won’t become insolvent at the time of repurchase by
incurring the debts to pay for repurchased shares
a. Purchase is made through stock exchange.
b. The purchases is in good faith and for the interest of the company

Allows parties implement share buyback scheme to either:

a. Cancel the shares: deemed cancelled immediately and automatically delisted.
Objective is to return surplus fund to shareholders. The amount of reduced
capital issued is transferred to “share redemption reserve” from profits if not the
amount is available for distribution as dividend.
b. Retain the shares as treasury shares: the treasury shares either can be
shared as share dividends or resell the treasury shares

c. Keep part of purchased shares as treasury shares and cancel the

remaining

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Accounting Treatments

╠ Two permissible methods of accounting for shares buy- back:

╠ 1. Treasury Stock Method

╠ 2. Share Retirement Method

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1. Treasury Stock Method

•Appropriate if company intends to •Treasury shares are viewed as equivalent

reissue the purchased shares in
future.
•Share buy-back is for short term
such as to support share price
when the market is depressed.
•No gain/loss on resale should be
•Treasury shares have no rights to
vote, to dividends or to other
distributions of assets.
•Treasury shares may be measured
at cost or nominal value.
to unissued share capital and are shown
as a deduction against the issued share
capital in the SOFP. They may be
cancelled or reissued.
recognized on the sale of treasury shares.
Instead, the difference between the resale
price and carrying value of treasury
shares should be seen as movement in
shareholders’ funds (i.e. set it off against
the debit or credit of share premium).

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1. Treasury Stock Method

Journal entry(s):
DR Treasury Shares
CR Bank
(being the shares repurchased and held as treasury shares)

DR Bank
CR Share Premium
CR Treasury Shares @ cost
(being the resale of treasury shares at a premium)

DR Bank
DR Share Premium
CR Treasury Shares @ cost
(being the resale of treasury shares at a discount)

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2. Share Retirement Method

• The method is suitable when companies intend to cancel

the shares repurchased.

Journal entry(s):
DR Share capital
CR Purchase of Own Shares
(being the nominal amount of shares
retired/cancelled)

DR Purchase of Own Shares

CR Bank
(being the payment for the purchase of own shares)

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2. Share Retirement Method

• Upon cancellation of shares, an •The purchase considerations including any premium or
amount equivalent to the nominal discount arising from the shares repurchased is
value of shares repurchased must adjusted to share premium or other suitable reserves.
then be transferred to a capital DR Ordinary share capital
redemption reserve (CRR) account Share premium
by utilizing share CR Purchase of Own Shares
premium/retained profits. (being the shares repurchased at a premium)

DR Retained or, DR Ordinary Shares capital

profits/Share Premium CR Purchase of own shares
Share Premium
CR CRR
(being the shares repurchased at a discount)

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