CA > Foundation > Paper 1 – Skim Notes

Unit 2: Issue, Forfeiture and Re-Issue of Shares

Overview

  • Understanding the concept of shares and their accounting treatment is essential for managing company finances effectively.
  • This unit focuses on various types of shares, share capital, and the accounting processes involved in share issuance and management.
  • The Companies Act, 2013 provides regulations that govern the issuance and management of shares, including penalties for violations.
  • The treatment of subscription types—full, under, and over subscription—has a significant impact on the financial statements.
  • The handling of calls-in-arrears and calls-in-advance is pivotal in maintaining accurate financial records and understanding shareholder equity.
  • This unit addresses the forfeiture of shares and their subsequent re-issue, which is critical for companies facing payment defaults by shareholders.
  • Sophisticated financial practices regarding shares issued for non-cash considerations are also covered.

Key Topics

Types of Shares and Share Capital

  • Various types of shares include equity shares and preference shares, each with different rights and obligations.
  • Shares can be issued at face value, premium, or discount, but Companies Act prohibits issuing shares at a discount except for sweat equity.
  • Share capital is divided into several categories including authorized capital, issued capital, subscribed capital, called-up capital, and paid-up capital.
  • Each category has specific definitions and implications for the company’s financial health and reporting.

Deep Dive

  • Preference shares can be cumulative or non-cumulative, affecting dividend payments.
  • Equity shares typically have voting rights, while preference shares do not, which influences investment decisions.
  • The concept of authorized share capital limits the total amount of capital the company can raise, guiding financial planning and investment strategies.

Accounting Treatment for Share Issuance

  • Companies issue shares under various circumstances, with specific journal entries recorded for each transaction.
  • Application money received is recorded as a credit to the share application account, indicating funds raised from potential investors.
  • A minimum subscription must be achieved before shares are allotted, ensuring financial viability for the issue.
  • In the case of oversubscription, excess applications may lead to partial allotments on a pro-rata basis, returning undue amounts to investors.

Deep Dive

  • The book-building process assists companies in determining share prices based on market demand and investor bids.
  • Accounting treatment differs for public and private companies depending on the type of share issuance method.
  • Regulatory compliance ensures investor protection and corporate governance through adherence to Companies Act guidelines.

Calls-in-Arrears and Calls-in-Advance

  • Calls-in-arrears occur when shareholders do not pay the amount due on shares, affecting liquidity and share capital reporting.
  • Calls-in-advance refers to payments made to the company for future calls, which can enhance cash flow in the present.
  • Journal entries for both calls-in-arrears and calls-in-advance require careful recording to maintain accurate financial statements.
  • Interest on calls-in-arrears and calls-in-advance is a crucial aspect for companies to manage shareholder relationships.

Deep Dive

  • Interest rates on calls-in-arrears can vary based on company policy, impacting shareholder dividends and investment attractiveness.
  • Companies often have provisions in their articles to speak on interest rates for both calls-in-arrears and calls-in-advance.
  • Strategic handling of calls can influence shareholder confidence and investment patterns significantly.

Forfeiture of Shares

  • Forfeiture of shares is a process undertaken by companies when shareholders fail to meet payment obligations, effectively cancelling their shares.
  • Proper notice must be issued to defaulting shareholders, allowing directors the power to forfeit shares as prescribed in the articles.
  • Account entries for forfeited shares involve debiting the share capital account and crediting the forfeited shares account.
  • The implications of forfeiture include loss of future rights for shareholders and impacts on share capital reporting.

Deep Dive

  • Share forfeiture serves as a deterrent against default and promotes timely payment among shareholders.
  • Companies may re-issue forfeited shares, leading to complex accounting scenarios involving profit or loss on re-issue.
  • Understanding the regulations surrounding forfeiture can prevent legal penalties and promote corporate governance.

Re-Issue of Forfeited Shares

  • Forfeited shares can be re-issued, impacting capital reserves and the accounting structure of the company.
  • Losses incurred from the re-issue may not exceed the amounts forfeited; any surplus should be transferred to a capital reserve account.
  • Accounting entries during the re-issue process involve careful consideration of the previous value attributed to forfeited shares and current market dynamics.
  • Companies must maintain a transparent process for reissuing shares to uphold stakeholder confidence.

Deep Dive

  • Re-issue procedures provide opportunities for companies to strengthen capital while addressing past defaults.
  • Regulatory hurdles during re-issue may affect market perception and investment strategies.
  • Forecasting and managing future re-issues can become a vital part of financial planning for growing companies.

Shares Issued for Consideration Other than Cash

  • Companies can issue shares in exchange for assets or services, altering their shareholder equity and asset base.
  • The value attributed to shares issued for non-cash considerations should reflect fair market value accurately.
  • Documentation of the transaction is essential for regulatory compliance and proper accounting treatment.
  • Creating a transparent valuation process can bolster investor confidence and encourage equity investment.

Deep Dive

  • Assets exchanged must be fairly evaluated to prevent accounting discrepancies and ensure accurate reporting.
  • The implications of issuing shares for non-cash considerations can affect overall company valuation and investor relations.
  • Companies’ retention of rights and liabilities during this process must be legally vetted to safeguard organizational integrity.

Summary

This study note covers essential concepts in company accounts regarding the issuance, forfeiture, and re-issue of shares. Key areas include the types and classifications of shares, their accounting treatments during issuance and subscription, and the management of calls. The forfeiture process is explained, emphasizing its regulatory requirements and implications for shareholders, alongside the subsequent re-issue procedures and their influence on company capital. Additionally, the notes highlight the handling of shares issued for consideration other than cash, emphasizing proper valuation and reporting. Understanding these principles is crucial for managing company share capital effectively and complying with legal mandates.