ACCOUNTING FOR
EQUITY PART 2
This presentation will cover key impacts a company's financial structure and shareholder
value, including bonus issues, rights issues, Share Repurchases, reserves, and dividends.
by JALILA BINTI JOHARI / SPE
Bonus Issue: Definition and Accounting Treatment
Definition of Bonus Issue
Accounting Treatment
Advantages of Bonus Issue
A bonus issue, also known as a
When a company issues a bonus issue, it
Bonus issues can increase the
scrip issue, is the process where
transfers an equal amount from its
liquidity of a company's shares,
a company issues new shares to
reserves (usually the share premium
make the stock more affordable for
its existing shareholders without
account or general reserves) to the share
smaller investors, and signal the
any additional cost. This is a way
capital account. This increases the
company's financial strength and
to capitalize on the company's
number of outstanding shares without
growth potential to the market.
reserves and distribute the
affecting the company's net worth or the
shares proportionately.
shareholders' proportionate ownership.
Rights Issue: Definition and Accounting
Treatment
Definition
Accounting Treatment
A rights issue is an invitation to existing
When a rights issue is announced, the
shareholders to purchase additional
company must record the new shares in
shares in the company at a discounted
its capital accounts. The difference
price and in proportion to their existing
between the issue price and the par value
shareholdings.
is recorded in the share premium
account.
Shareholder Impact
Shareholders have the option to either subscribe to the rights issue or sell their rights in the
market. Subscribing helps maintain their proportionate ownership in the company.
ISSUED TO
BONUS
ISSUE AND
RIGHT ISSUE
PURPOSE
MEDIUM
VALUE
BONUS ISSUE
EXISTING SHAREHOLDER
TO PAY DIVIDEND
NOT INVOLVING ANY
MONEY (F.O.C)
USE THE EXISTING
NOMINAL VALUE
USED RETAINED PROFIT
RIGHT ISSUE
EXISTING
SHAREHOLDER
TO RAISE FUND
MONEY/FUND
USE EXISTING
NOMINAL VALUE
USAGE
DO NOT USED
RETAINED PROFIT
BOTH OF THE SHARE IS ISSUED IN PRO-RATE BASIS: THE
PROPORTION OF SHARE HELD BY THE SHAREHOLDER
E.G. Issued at 1 for every 5-right issue
Bonus issue – no par
shares
Blue Bhd has issued 6 million units of ordinary
shares which were issued at RM3 per share. It
plans to issue no-par bonus shares at RM 2.00
per share at one for every 6 shares held. The
company will utilize its general reserves and
retained earnings equally. Both accounts have
balances before the bonus issue of RM2,500,000
and RM3,300,000 respectively. The shares are
issued on 31 December 2021. Prepare journal
entries.
DR (RM)
15 December
2021
General Reserves
1,000,000
Retained earnings
1,000,000
Bonus Issue
CR (RM)
2,000,000
(Being a bonus share derived from the general
reserve and retained earnings)
31 December
2021
Bonus Share
2,000,000
Share capital
(Issue of bonus shares at RM2 each)
2,000,000
Bonus issue at par value
Blue Bhd has issued 5 million units of ordinary
shares which were issued at RM2 per share. It
plans to issue a bonus issue at RM 3.00 per share
at one for every 5 shares held. The company will
utilize its general reserves and share premium
equally. Both accounts have balances before the
bonus issue of RM2,500,000 and RM5,000,000
respectively. The retained profit accounts
balance of RM1,500,000. The shares are issued on
31 December 2021. Prepare journal entries.
DR (RM)
15 December
2021
General Reserves
1,500,000
Share premium
1,500,000
Bonus Issue
CR (RM)
3,000,000
(Being a bonus share dividend derived from the
general reserve)
31 December
2021
Bonus Share
3,000,000
Share capital
(Issue of bonus shares at RM3 each)
3,000,000
RIGHT ISSUE – with no
par shares
Red Bhd. plans to raise RM4,000,000 capital
through a right issue one for every five. The
company has issued 5 million units of ordinary
shares at RM2.00. Its plan to issue no par value
shares at RM4.00 per share which currently
selling at RM 4.80 per share. The right issue is
fully underwritten, and the application is to be
received by 15 December 2021. Assuming
800,000 shares were received from the existing
shareholder. Subsequently, the shares are issued
on 31 December 2021
Date
DR
15 December 2021 Cash
3,200,000
Application
Receivable Underwriter
3,200,000
800,000
Application
Cash
800,000
800,000
Receivables Underwriter
31 December 2021 Application
Share Capital
CR
800,000
4,000,000
4,000,000
RIGHT ISSUE - par value
D A TE
15 December 2021
DR
Cash
3,200,000
Application
Red Bhd. plans to raise RM4,000,000 capital
through a right issue one for every five. The
company has issued 5 million units of ordinary
shares at RM1.00 shares issued at RM2.00. It
plans to issue shares at RM4.00 per share which
currently selling at RM 4.80 per share. The right
issue is fully underwritten, and the application is
to be received by 15 December 2021. Assuming
800,000 shares were received from the existing
shareholder. Subsequently, the shares are issued
on 31 December 2021
Receivable - Underwriter
3,200,000
800,000
Application
Cash
800,000
800,000
Receivables - Underwriter
31 December 2021
Application
Contributed Share Capital
CR
800,000
4,000,000
4,000,000
Share Repurchase: Definition and Accounting Treatment
Definition
A Share Repurchase is a
corporate action where a
company repurchases its own
outstanding shares, reducing
the number of shares available
on the open market.
Purpose
Viewed as a way to “distribute”
company profits without paying
dividends. Decreasing the supply
of shares in the marketplace
supports the price of remaining
shares. Acquisition of a company’s
own shares does not create an
asset. Companies buy back shares
to offset the increase in shares
issued
to
employees
in
compensation plans
Accounting Treatment
Impact on Financials
The repurchased shares are
A Share Repurchase can
recorded as a reduction in
increase earnings per share,
shareholders' equity on the
improve return on equity, and
balance sheet. The cash used to
signal management's
buy back the shares is debited, and
confidence in the company's
the share capital and share
future prospects.
premium accounts are credited.
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Approach of Share Repurchase
▪ Companies are allowed to buyback their shares (ordinary shares) in the open market ,
through the share broker.
▪ The cost of buying the shares will include the market share price and plus the brokerage
fees and commissions.
▪ According to the Sec 67A Co’s Act 1965, allow parties to implement Share Repurchase
scheme:
➢Cancel the shares
➢Retain the share as treasury shares
➢Keep part as treasury shares and cancel the remainder
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Purpose and condition for share buy back:
❑ Purpose:
– To support share prices in time when the share prices are depressed
– To distribute surplus cash to shareholder in lieu of dividend
– To improve the capital structure of a company
– To provide means to utilizing the surplus cash
❑ Condition:
– The company is solvent at the date to purchase
– The purchase is made through the stock exchange
– The purchase is made through the good faith and the interest of the company
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Current Legislation
• Before Sept 1997, company registered in Malaysia are not allowed to purchase their
own shares
• After the 1997, the companies in Malaysia are allowed to buy back their shares, this
will lead to a reduction in numbers of shares in the market.
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Statutory Requirement:
Under Sec 67A:
➢ Authorised by AoA
➢ Purchase price should not be more than 15% above the weighted average price of
shares quoted
➢ The nominal value of the share cancelled must be transferred to CRR
➢ Cancellation shares must not be deemed to be a reduction of capital
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Statutory Requirement:
➢ Share Repurchase must not cause public shareholding to fall below 25%
➢ May not result from the issued and paid-up capital falling below the minimum capital
required.
➢ Sec 126 (3) of the new Co’s Act 2013 (same as Co’s Act 1965) specifies that the
treatments for own shares repurchase:
➢To cancel the share repurchase
➢To retain shares as treasury shares
➢To retain part in treasury shares and cancel the remainder
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Capital Maintenance:
• Original Co’s Act 1965 (Sec 67A) allow the use of share premium (SP) or retained earnings
(RE) to provide the cost of share repurchased
• The nominal value of the share cancelled should be replaced by a transfer of SP or RE to
capital redemption reserve.
• Co’s Act 2013, Sec 126 (11) When own shares are purchased and cancelled, the costs of the
shares shall be applied in the reduction of the profits otherwise available for distribution as
dividend i.e. retained profits.
• The option of using the share premium account is NO LONGER APPLIACABLE under the NPV
SHARE regime
ILLUSTRATION 1
Co X Bhd purchases 10,000 of its own shares at a price of RM3.00 per share. Transaction costs
amount to RM500. The company chooses to cancel the shares repurchase. It has a sufficient share
premium balance to provide for the costs of the share repurchased.
PV Regime:
NPV Regime
Dr Share Cap 10,000
Dr Cont. Share Cap 30,500
Share Pre
Cr
Cr Cash
30,500
Cash
30,500
CRR
10,500
30,500
Dr Retained Profits 30,500
Cr Cont. Share Cap 30,500
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Accounting for Treasury Stock (TS):
i.
Conceptual Recognition issue:
a.
Is TS can be considered as an asset?
❑
Such as investment
❑
Do not satisfy the recognition of asset criteria
❑
When the share repurchase means there is no share outstanding
❑
Derecognition of share amounts of outstanding share in issue
b.
Under the statues the share repurchased are not required to be cancelled.
❑
MFRS 132 – Fin Instruments: Presentation – share repurchases is deduction from equity not financial asset
Total Cap
(-) Treasury Shares
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Accounting for Treasury Stock (TS):
• Treatment for TS: Sec 126 (6) Co’s Act 2013
• Distribute the TS as dividend
• Resell the TS
• Transfer of shares for the purpose of employee share scheme
• Sell . Transfer or otherwise use the treasury share as required by Minister
• The different of reissued price and the carrying value of TS should be adjusted to
or against equity.
• The TS may be reissued in the open market when the market conditions improved
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Accounting for Treasury Stock:
•
•
•
•
•
Purchase of treasury stock is viewed as a temporary reduction of shareholders’ equity
Cost of acquiring the shares is “temporarily” debited to the treasury stock account
Shares are considered to be issued, but not outstanding
Purchase of treasury stock and its subsequent resale is considered to be a “single transaction”
This approach to accounting for treasury stock is referred to as the “cost method”
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Co X Bhd purchases 10,000 of
its own shares at a price of
RM3.00 per share. Transaction
costs amount to RM500. The
company chooses to retain the
shares as treasury shares. It
has a sufficient PROFIT balance
to provide for the costs of the
share repurchased.
ILLUSTRATION 2
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Journal Entries:
Dr
Treasury Shares, at cost
30,500
Cr
Cash
30,500
(Being purchase of own shares and held in treasury)
If the treasury shares are subsequently cancelled:
Dr
Retained Earnings 30,500
Cr
Treasury Shares
30,500
If the treasury shares are subsequently sold at a price of RM4.00 per share:
Dr
Cash
40,000
Cr
Treasury Shares, at cost
30,500
Contributed share capital
9,500
Comparison of Share Retirement and Treasury Stock
Accounting—Share Repurchase
Comparison of Share
Retirement and
Treasury Stock
Accounting—Share
Repurchase case 1
Comparison of
Share Retirement
and Treasury Stock
Accounting—Share
Repurchase case 2
Reporting Share Buyback in
the Balance Sheet
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Resale of Shares:
• Subsequent sale of shares after shares are retired is recorded exactly like
any sale of shares
• Resale of treasury shares is viewed as the consummation of the “single
transaction” begun when the treasury shares were purchased
– Allocating the cost of treasury shares occurs when the shares are resold
Comparison of Share
Retirement and
Treasury Stock
Accounting—
Subsequent Sale of
Shares
Comparison of Share
Retirement and Treasury
Stock Accounting—
Subsequent Sale of Shares
Dividend: Definition, Types, and Accounting Treatment
Definition
Types
Accounting Treatment
Implications
Dividends are cash
Common types of dividends
When a company declares a
Dividends affect investor
payments made by a
include regular cash
dividend, it records a liability
returns and a company's access
company to its
dividends, special dividends,
on its balance sheet. The cash
to capital. Careful dividend
shareholders. They
stock dividends, and stock
payment then reduces the
policy decisions balance
represent a portion of
splits. The choice of
company's assets and
shareholder interests with a
the company's profits
dividend type depends on
shareholders' equity. Dividends
company's growth and
distributed to investors
the company's financial
can impact financial ratios and
reinvestment needs.
who own the company's
situation and objectives.
a company's reported
stock.
earnings.
• Distributions of assets the company has earned on behalf of its
shareholders
Dividend
Dividends paid
>
Assets earned by the company
Management is returning to shareholders a portion of their investments
• Designates a portion of the balance as being unavailable for
dividends
• Indicated by a disclosure note to the financial statements
• Rarely, a formal journal entry may be used to reclassify a
portion of retained earnings to an “appropriated” retained
earnings account
• A restriction of retained earnings communicates
management’s intention to withhold assets represented by a
specified portion of the retained earnings balance
Cash Dividend
• No legal obligation exists for paying dividends to shareholders
• Liability is not recorded until a company’s board of directors votes to declare a
dividend
Directors declared
a cash dividend
Retained earnings are reduced
Liability is recorded
Before the payment can be made, a listing must be assembled of shareholders entitled to
receive the dividend
Cash Dividend
Date of record
• Stated specific date as to when the determination will be made of the recipients of the dividends
• Registered owners of shares of stock on this date are entitled to receive the dividend
To be a registered
owner
An investor must purchase the shares
before the ex-dividend date
Usually is one business day
before the date of record
Illustration:
Cash Dividend
• On June 1, the board of
directors of Craft Industries
declares a cash dividend of $2
per share on its 100 million
shares, payable to shareholders
of record June 15, to be paid July
1:
Illustration:
Preference
Dividend
The shareholders’ equity section of
Corbin Enterprises includes the
items shown below. The board of
directors declared dividends of
$360,000, $500,000, and $700,000
in its first three years of
operation—2023, 2024, and 2025
respectively.
Note: The preferred shareholders
are entitled to dividends of $480,000
(8% × $6,000,000).
Determine the amount of dividends to be paid to preferred and common shareholders in
each of the three years, assuming that the preferred stock is cumulative and
nonparticipating.
Reserves: Types and Accounting Treatment
Retained Earnings
Capital Reserves
Legal Reserves
The accumulated profits of a
Reserves created from
Reserves mandated by law,
company that have been
capital surpluses, such as
often a percentage of net
reinvested rather than
from share premiums or
profits, to provide a buffer
distributed as dividends.
asset revaluations.
against losses.
Reserves play a crucial role in a company's financial health and growth. They provide a cushion against
unexpected losses, fund future investments, and signal financial stability to stakeholders. Proper
accounting and management of different reserve types is essential for a company's long-term
sustainability.
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