FAR 410: CHAPTER 4

EQUITY
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 Definition of Equity
In finance, equity is ownership of assets that
may have debts or other liabilities attached to
them.
Equity is measured for accounting purposes by
subtracting liabilities from the value of an asset.
For example, if someone owns a car worth
RM9,000 and owes RM3,000 on the loan used to
buy the car, then the difference of RM6,000 is
equity.
 In Conceptual Framework equity is “The
residual interest in the assets of the entity
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after deducting all its liabilities”
Equity = Total Assets – Total Liabilities
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 Components of
Shareholders’ Equity

Share Capital
Non-Distributable Reserves
 Capital Redemption
 Ordinary Shares
Reserve
 Asset revaluation Reserve
 Preference Shares
 Fair Value Reserve

Distributable Reserves
 Retained Profits

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 Types of Shares
-Ownership rights of companies are often represented by their shares
-Shares are generally transferable between parties.
-The advantages of transferability allows a company to continue in existence and in
operation despite changes in ownership

2. PREFERENCE SHARES
1. ORDINARY SHARES -PS shareholders do not enjoy
-Ordinary shareholders have the rights the rights to vote
to vote in annual general meeting -PS have the right to received
-Large shareholdings may enable their fixed dividends earlier than
shareholders to exercise majority ordinary shares
power in the company resolutions

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 1. Cumulative
Preference Shares

2. Non-cumulative
Preference Shares

3. Participating
Preference shares

4.Non-participating
PS
TYPE OF
PREFERENCE SHARES
5. Convertible
Preference Shares

6. Non-convertible
PS

7. Redeemable PS

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8. Non-redeemable
PS
• Shares are generally classified as equity
instruments except for shares that have
the characteristics of liability instruments
• Redeemable Preference shares is an
example of liability instruments

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 The Accounting Procedures for
Issuance of Ordinary Shares
• NEW ISSUEShares are issued to public investors
• RIGHT ISSUE issue of shares to existing shareholders
• BONUS ISSUE
• Private placement of shares
• Tender offers
• Special offer of shares to specific investors
• May be issued for acquisition of assets or businesses
• May be issued for retirement of debt
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NEW ISSUE: Issue of Shares at Fair Value for
Cash Consideration

Making Making the Making the

invitation Allotment calls (if any)

Reissue of
Forfeiture of
forfeiture
Shares
shares

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Sample Prospectus

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 Issuance of Equity Share Capital
• Whenever there is a public issue of shares, it is obviously very
rare that the applications for shares equal exactly the number
of shares to be issued.
• If application received exceed number of shares to be issued,
the issue is said to be oversubscribed.
• If application received is less than number of shares to be
issued, the issue is said to be undersubscribed.
• Issuance of shares [initial public offering (IPO) and new
issue of shares] are handled by the underwriters.

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Preference Shares
• Not all preference shares can be treated as equity.
• Under MFRS 132, preference shares can only be treated as equity if
it meets the requirements of paragraph 16.
• This means that:
 Non-redeemable preference shares with fixed rate of dividend
are financial liabilities.
 Non-redeemable preference shares where dividends are not
fixed are equity.
 Preference shares that are redeemable at the option of the
issuer and has no fixed rate of dividend are equity.
 Preference shares that are redeemable at the option of the
issuer but has fixed rate of dividends are compound instruments.
 Preference shares that are contractually redeemable at a specific
date are financial liabilities.
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 Disclosure of Share Capital and
Other Equity Items
MFRS 101, Presentation of Financial Statements requires the following
components of equity to be disclosed separately either in the Statement
of financial positions or Notes to the financial statements:
a) For each class of share capital:
i. number of shares authorised;
ii. number of shares issued and fully paid;
iii. par value per share, or that the shares have no par value;
iv. a reconciliation of the number of shares outstanding at the
beginning and at the end of the year;
v. rights, preferences and restrictions attaching to share capital
including restrictions on the distributions of dividends and
repayment of capital;
vi. shares in the entity held by the entity or subsidiaries or
associates
vii. shares reserved for issuance under options and contracts for the
sale of shares
b) Description of the nature and purpose of each reserve within equity 19
 Terms of the Issue of Shares
Applicants for the issue of shares are required to:

a) Pay the full amount of the share price upon application

(current practice in Malaysia)
Or
b) Pay by means of installments

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Example 1:
On 1 January 2019, Belia Bhd made a public offering of
10,000,000 ordinary shares at a price of RM3.50 per share.
Application were received for 25,000,000 shares. Of these
applications on 15,000,000 shares were rejected and the
application monies repaid to the unsuccessful applicants.

Solution:

The issue of shares is OVERSUBSCRIBED

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Example 1: RM RM
Debit Credit

Dt Bank account (25 mil x RM3.50) 8,750,000

Cr Share Application account 8,750,000
(to record application monies received)

Dt Share Application account 3,500,000

(10 mil x RM3.50)
Cr Ordinary Share Capital Account 3,500,000
(to record issuance of shares )

Dt Share Application account 5,250,000

Cr Bank account (15 mil x RM3.50) 5,250,000 22
(to record monies returned to unsuccessful applicants)
 Underwriter
• The underwriter is the organization that is actually responsible for pricing, selling, and
organizing the issue, and it may or may not provide additional services.
• Selection of a good underwriter is of the utmost importance, but it's important to
understand that many underwriters are equally selective of their clients since an
underwriter's reputation depends on successful issues, few firms will be willing to stake
their reputation on questionable companies.
• When selecting an underwriter, it's important to seek out an established company with a
good reputation. The decision may also depend on the kind of agreement the underwriter
is willing to make regarding the sale of shares.
• For profitable and established private companies, it shouldn't be difficult to locate an
underwriter willing to make a firm commitment arrangement. Under such an agreement,
the underwriter agrees to buy all issues shares, regardless of ability to sell them at a
particular price.
• For riskier or less established companies, an underwriter may offer a best efforts
arrangement for the initial public offering. A best efforts contract requires the underwriter
to buy only enough shares to fill investor demand. Under this arrangement, the
underwriter accepts no responsibility for unsold shares.
• Aside from fees and sales arrangements, most underwriters are fairly similar in their roles.
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Example 1: (with underwriters RM RM
Debit Credit

Dt Bank account (10 mil x RM3.50) 3,500,000

Cr Ordinary Share Capital Account 3,500,000
(to record issuance of 10 m shares fully paid up)

Using underwriters may incur cost of issue. Share issue expense is a transaction cost
of shares of issuing equity instrument and should be adjusted directly in equity in
accordance with MFRS 132.
Assuming the cost of issue is RM25,000
RM RM
Debit Credit
Dt Retained profits 25,000
Cr Bank account 25,000
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(to recognize transaction cost in equity)
 Recording of Issue of Shares
(No Par Value Regime )
Dr. Bank acc
Cr Ordinary Share Capital acc
Dr. Shares issue expense acc
Cr Bank acc
OR:
Dr. Bank acc
Dr. Shares issue expense acc 25
Cr Ordinary Share Capital acc
 Example
Belia Bhd made a public offer of 10,000,000 ordinary shares .
The par value of shares is RM1.00 per share. The issue of shares
are fully subscribed. The cost of issue was RM1,500,000.
Required:
Show the journal entries to record the above transaction if the
shares were issued at:
a) RM1.00
b) RM3.50
c) RM0.80

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Recording of Issue of Shares (No Par Value Regime)

RM1.00
Dt. Bank acc 10 mil
Cr Ordinary Share Capital 10 mil
Dt Shares issue expense acc 1.5mil
Cr Bank acc 1.5 mil
OR:
Dt Bank 8.5 mil
Dt Share Issue expense 1.5 mil
Cr Ordinary Share Capital 10 mil

AND:
Dt Retained profit 1.5 mil
Cr Share Issue Expense acc 1.5 mil
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Recording of Issue of Shares (No Par Value Regime)

RM3.50
Dt. Bank acc
Cr Ordinary Share Capital
Dt Shares issue expense acc
Cr Bank acc
OR:
Dt Bank
Dt Share Issue expense
Cr Ordinary Share Capital

AND:
Dt Retained profit
Cr Share Issue Expense acc
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Recording of Issue of Shares (No Par Value Regime)

RM0.80
Dt. Bank acc
Cr Ordinary Share Capital
Dt Shares issue expense acc
Cr Bank acc
OR:
Dt Bank
Dt Share Issue expense
Cr Ordinary Share Capital

AND:
Dt Retained profit
Cr Share Issue Expense acc
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 Bonus issue
• Bonus issue is free of charge and made to existing shareholder of
the company.
• It does not involve any cash inflow.
• To facilitate/finance the bonus issue, company may utilize its
reserves balances.

• Reserves can be classified as follows:

Distributable reserves/Revenue reserve - general reserve, retained
profits
Non-distributable reserves/Capital reserve - capital redemption
reserve, asset revaluation reserve

Journal entries
Dt Distributable/Non-distributable Reserve
Cr Ordinary Share capital 30
 Bonus Issue - Example
Power Berhad is registered with an authorised capital of 45,000,000 ordinary
shares of RM1.00 each and 500,000 7% preference shares of RM1.00 each.
Below is the extract Statement of Financial Position of Power Bhd as at 30 June
2019:
RM
Issued and paid up capital
8,000,000 ordinary shares of RM1.00 each 8,000,000
80,000 7% preference shares of RM1.00 each 80,000
Share premium 200,000
Retained earnings 1,000,000
9,280,000
9,080,000

At the end of the year, the company decided to make a bonus issue of 1 for
every 50 shares held. To facilitate the issue, the retained earnings balances will
be used.
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 Bonus Issue - Answer
Bonus issue = (8,000,000 x 1/50)
= 160,000 x RM1.00
= RM160,000

Dr. Retained Earnings RM160,000

Cr. Ordinary Share Capital RM160,000

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 Bonus Issue - Answer
RM
ISSUED AND FULLY PAID SHARE CAPITAL

8,160,000 ORDINARY SHARES OF RM1 PER SHARE 8,160,000

80,000 7% PREFERENCE SHARES OF RM1 PER SHARE 80,000

RETAINED PROFITS (1,000,000 – 160,000) 840,000

1,000,000

SHARE PREMIUM (200,000 - 160,000) 40,000

9,080,000
9,280,000

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 Rights Issue
• Subsequent to the initial issue of shares, a company may wish to raise additional
capital to finance its expansion programme, to repay loans etc. This can be
achieved through rights issue.
• Right issue allows company to invite existing shareholders to purchase additional
shares in the company at a price lower than the market price.
• It involves cash inflow.
• However, the existing shareholders may consider the following 3 options before
accepting the offer from the company:
 Buy all shares
 Sell rights to third party
 Renounce the rights in favour of the company – company may sell the
shares in the open market.

Journal entries

Dt Bank a/c
Cr Ordinary Share Capital a/c

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 Rights Issue -Example
Power Berhad is registered with an authorised capital of 45,000,000 ordinary
shares of RM1.00 each and 500,000 7% preference shares of RM1.00 each.
Below is the extract Statement of Financial Position of Power Bhd as at 30 June
2019:

At the end of the year, the company decided to make a rights issue of 1 for
every 50 ordinary shares held at RM1.00.
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 Rights Issue - Answer
Rights issue = [ 8,000,000 x 1/ 50]
= 160,000 x RM1.00
= RM160,000

Journal entries:
Dr. Bank RM160,000
Cr. Ordinary Share Capital RM160,000

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Issuance of Golden/Special Shares
to Government
• Golden issue or special issue is an issuance of share made by a
company to government. The amount of golden share to be
issued is one unit.
• It is often held by a government organization, in a government
company undergoing the process of privatization and
transformation into a private company.
• The holder of golden share is able to outvote all other shares
in certain circumstances. E.g sale of major asset.
• Examples of companies that issue golden share are MAS and
Telekom Malaysia Berhad.
• The golden shares will be disclosed as an issued share capital
in the Statement of Financial Position. 37
 Share Buybacks
• A company may purchase its own ordinary shares although the
issued ordinary shares form a permanent capital. This is following
the provision in Section 127 of the Companies Act 2016 which
allows public listed companies to buy back its own ordinary
shares from the market.

Motivation for share buybacks

• to support share prices in times when the prices are depressed
• To distribute surplus cash to shareholders in lieu of cash
dividends
• To improve capital structure of a company
• To provide a means of utilizing surplus cash
• To buy out dissenting shareholders
• To thwart hostile takeover attempts by reducing the number of 38
shares in issue
 Share buybacks - Accounting Methods
Section 126(3) of Companies Act 2013 – Directors of company may resolve:
a. To cancel the shares so purchased
b. To retain the shares as treasury shares
c. To retain part in treasury shares and cancel the remainder

Cancel the shares (Share retirement)

• The shares are cancelled. The company does not want to reissue it back to the public
in the future.

Treasury shares
• The shares are held as treasury shares. The issued share capital is reduced. The
company may reissue it back to the public in the future.

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Cancel the shares so purchased
EXAMPLE: Company X Bhd purchases 10,000 of its own at a
price of RM3.00 per share. Transaction costs amount to RM500.
The company choose to cancel the shares repurchased.

JOURNAL ENTRIES:
Dt Ordinary shares capital RM30,500
Cr Bank RM30,500
(to cancel and reduce number of shares)
Dt Retained profits
Cr Ordinary share capital RM30,500
(to maintain contributed capital) 40
Retain the share as Treasury Shares
EXAMPLE: Company X Bhd purchases 10,000 of its own at a price of RM3.00
per share. Transaction costs amount to RM500. The company choose to retain
shares repurchased as treasury shares.

JOURNAL ENTRIES:
Dt Treasury shares at cost 30,500
Cr Bank RM30,500
(to record purchase of own shares and held in treasury)
If the treasury shares are subsequently cancelled, the journal entries:
Dt Retained profits 30,500
Cr Treasury shares at cost RM30,500
(to record the cancellation of treasury shares)
If the treasury shares are subsequently sold at a price of RM4 per share, the
journal entries:
Dt Cash 40,000
Cr Treasury Shares at cost 30,500
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Cr Ordinary shares capital 9,500
(To record sale of treasury shares)
 Shares issued in
exchange for an asset
• The shares and the acquired (exchanged) asset must be
recorded at the fair value of the shares or the asset,
whichever is the more clearly evident.
• Refer example 6, page 814.

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Shares issued to settle debts
• Companies having financial difficulties may issue shares to
settle their debts commitment. (pg. 815)

• Where the fair value of shares issued is equal to the value of

debts, the journal entries should be recorded as follows:
Debit Term loan
Credit Contributed Share Capital

• However, if the fair value of shares issued is not equal to the

value of debts, the journal entries would be as follows:
Debit Term loan
Credit Share Capital
Debit Loss arising on debt extinguished
Or
Credit Gain arising on debt extinguished 43
Share split and Share Consolidation
• Pg. 817
• A share split is a decision by the company's board of directors to increase
the number of issued shares of the company by reference to the nominal
value of the shares.
• For example, in a 2-for-1 share split, every shareholder with one share is
given an additional share. So, if a company had 10 million@RM1 of issued
shares before the split, it will have issued shares of 20 million@50 sen after
a 2-for-1 split.
• After a split, the share price will be reduced since the number of issued
shares has increased. Although the number of issued shares and the share
price change, the capital structure remains constant.

Issued Share Capital Before Split

10,000,000 Shares @ RM1.00 per share = RM10,000,000
Issued Share Capital After Split
20,000,000 shares @ RM0.50 per share = RM10,000,000 44
Under the No Par Value share regime, the concept of share split and share
consolidation would be irrelevant.