Rights issues and Bonus issues of shares – ACCA (FA) lectures
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I have a small doubt in the part of the advantages of bonus issues in the Kaplan study text. It’s explained as:
i) Issued share capital is divided by a larger number of shares making the value of each less, so the shares will be more marketable
ii) Issued share capital will be brought closer to the asset equity by a reduction in share premium and an increase in share capital.
These explanations are very complicated, can you please put it into simple terms. I would really appreciate it. Thank you
In future please ask this sort of question in the Ask the Tutor Forum and not as a comment on a lecture.
For (i), with a bonus issue, there are more shares in issue but the total worth of the company will be no different. Therefore the value of each share will be lower. People tend to prefer ‘cheaper’ shares and so it will make them easier to sell.
For (ii), when shares are issued at a premium the total cash raised increases the assets of the company, but share capital only increases by the nominal value (the extra goes to share premium). This means that the assets are worth a lot more than the amount of share capital. With a bonus issue, some or all of the share premium is added to the share capital.
To be honest, neither of these points is particular relevant for Paper MA. They are much more relevant to Paper FM 馃檪
Ok noted. Thank you very much. These points were written in the FA study text, I was not aware that they are not as relevant for this time. Thank you for the quick response
1 jan 2016, a company’s capital structure was as follows:
ordinary sc
2000000 shares of 50c each 1000000
share premium account 1400000
In January 2016, a company issued 1000000 shares at $1.40 each.
in September 2016 the company made a bonus issue of one share for every three held using the share premium account.
what are the balances…
I cannot solve and the answer is really confusing, please help 馃檪
I forgot to mention that it is for example 4.
Hi John,
Good Afternoon.
I’m new to Financial Accounting and will be sitting for it in 3weeks time.
I must say your lectures have been very helpful, thank you.
On this topic on Rights Issue would like to know how 0.75 was gotten.
I tried multiplying the Nominal Value 0.25×2+25=75. Is this correct?
Please, I would like to get your feedback on this.
Thank you in advance.
The question says that the shares are issued at $1 per share.
The nominal value of the shares is $0.25, and therefore the share premium is $1 – $0.25 = $0.75 per share.
Oh, I see.
It is clear now.
Thank you so much for your prompt response. I really appreciate it.
You are welcome 馃檪
Dear sir,
What is the logic of not allowing share premium to be distributed away as a profit, or for some other use, and rather keeping it as a capital reserve. Unlike, revaluation reserve, this money has been realized, and its not just in theory you are increasing something鈥檚 worth. Cash has flown in. Profit has been made.
The same reason as they are not allowed to distribute the share capital. If they could do that then if the company was doing badly shareholders could take out all the money in the company and there would be a risk of there being nothing left to pay the creditors.
But isn鈥檛 Share premium treated as excess profit, and that is why it is not put inside share capital, and rather given a separate account ? So wouldn鈥檛 it be better for Share premium to be treated like retained earnings, rather than share capital (that only gets officially distributed after liquidation). Then all these issues wont prop up – as to what to do with Share premium that keeps increasing. It is realized. Excess money has come in. Unlike revaluation surplus – the bonus shares could play around with this instead.
It is not excess profit – it is not any sort of profit!!
It is a capital reserve and is not distributable.
Hello. From where did you get 750000 in example 4?
I added together the 500,000 share that were there at the start of the year and the rights issue of 1/2 x 500,000 = 250,000 shares.
I always had problem with the retained earning, capital reserve, revenue reserve etc. since school , you really teach like god.
Thank you for your comment 馃檪
Hi john, I am really confused on how we came about 0.75 which was later multiplied by 250,000 to get the share premium 187,500
The difference between the issue price and the nominal value (both of which are given in the question).
A company may choose to use the retained earnings reserve if it wants
Even though it may also have a share premium account balance, it may still choose to use the retained earnings reserve
Practically, it doesn’t make commercial sense! There are very restrictedd uses of the share premium account and financing the issue of fully paid bonus shares to existing members is the one most likely to be used
If the company chooses to use retained earnings (a distributable reserve) to finance the issue of fully paid bonus shares instead of using the share premium account (a non-distributable reserve) the effect is, as John has pointed out, to reduce distributable profits ie the amount that the company is legally able to pay to shareholders by way of a dividend
But, as both John and I have said, if the company wishes to do that … fine
Better?
Within the Statement of Changes in Equity there are separate columns for each of the component elements of equity – one for share capital, one for share premium, another for revaluation reserve and so on
When a company chooses to make a bonus issue, clearly the share capital column amount will increase by the nominal value of those bonus shares
But, at the same time and by the same amount, one of the other columns will decrease. Ideally, the reserve that is used to finance the bonus issue will be the share premium reserve but, if the company doesn’t have a share premium account (and therefore no share premium reserve) it is able to finance the issue out of retained earnings
OK?
Yup i understand, but this is when the company don鈥檛 have share premium account right?, but this company do have share premium account and when i said the company use the retained earning to bonus issue what i meant is, only some portion of retained earning the rest is share premium. Pls explain it?
As Mike replied before, if there is a bonus issue then one of the reserves must be reduced. If there is a share premium account then it makes sense to reduce the share premium account (because, as I explain in the lecture) reducing retained earnings means there is less available for dividends.
It is up to the company which reserve they reduce, but in the exam you will always use the share premium account if there is one.
Hi, i’m confused here. Do the company can use retained earning to issue, bonus issue to shareholder. If can’t why when i read statement change in equity in some companies, the company use retained earning when issue bonus to shareholder. Hope you give explanation, thank you.
Hi John,
Curious, how would ordinary share value be determined with no issue price and no ordinary share capital given? Only no. of shares issued is provided. 1000 shares. Please help!
Thank you