EQUITY

Learning Objectives
1. Definition
2. Components of equity
3. Changes in Co. Act 2016
• Background
• Abolition of Authorised capital & par value
• Rationale of Changing to NPV share regime
• Impact of NPV regime
• Utilization of Share Premium
• Rights & Types of shares
• Issuance of shares (incl. Right & Bonus issue)
• Share buy back
• Redemption of Preference Shares
4. Reserves
5. Distribution of profits under Co Act 2016.
6. SOCE
 DEFINITION
■ MASB Framework:
– Equity is the residual interest in the assets of
the entity after deducting all its liabilities.
– It includes non-controlling interests in partly-
owned subsidiaries, option reserves
attributable to option holders, equity component
of a convertible bond & preference shares.
– It represents what the business owes to its
owners.
– It is also a reflection of the capital left in the
business after assets of the entity are used to
pay off any outstanding liabilities.
 DEFINITION
■ Equity therefore includes share capital
contributed by the shareholders along with any
profits or surpluses retained in the entity. This is
what the owners take home in the event of
liquidation of the entity.
■ Assets - Liabilities = Equity
■ MFRS 132:
– Equity: Contract that evidences a residual
interest in the assets of an entity after
deducting all of its liabilities.
 DEFINITION: MFRS 132
■ In summary, when an issuer determines whether a financial instrument
is a financial liability or an equity instrument, the instrument is an equity
instrument if, and only if, both conditions (a) and (b) are met.
a. The instruments includes no contractual obligation:
i. To deliver cash or another financial assets to another entity or
ii. To exchange financial assets or financial liabilities with another entity
under conditions those are potentially unfavourable event to the issues.
b. If the instrument will or may be settled in the issuer’s own equity,
it is
i. A non-derivative that include no contractual obligation for the issuer to
deliver a variable no. of its own equity instruments; or
ii. A derivative that will be settled only by the issuer exchanging a fixed
amount of cash or another fin. Assets for a fixed no. of its own equity
instruments.
■ Para 17: the critical difference between fin. Liability & equity
instruments is a(i), Rather it has increased the ownership interest
in issuer’s net assets (residual interest)
 MEASUREMENT
■ Para 43 of MFRS 139: Recognition and
Measurement:
– All financial instruments are measured
initially at FAIR VALUE.
– AG64: Fair value of financial
instruments is usually the transaction
price (the amount of consideration
received)
 COMPONENTS
Co Act 2016, components of its S/H’s equity
depend on complexity of its capital structure:
1. Share capital (may consists of different classes)
2. Reserves - Retained earnings/profits, Capital
redemption reserves, Revaluation reserves, Fair
value reserves, Hedge reserves, Merger reserves,
Foreign exchange reserves
 Measurement & recognition – governed by laws &
statutes (share capital & share premium),
accounting principles related to asset revaluation
or consolidation.
Background of Companies Act 2016

■ Approved in parliament in April 2016 to replace the previous

companies act 1965
■ Gazetted on 31st august 2016 & come in force in stages
■ Every company incorporated under the Companies Act 2016
must comply with the act’s provision concerning accounting &
reporting
■ Announcement by CCM on the enforcement date
“The Companies Commission of Malaysia (SSM) hereby notifies
that the Companies Act 2016 (CA 2016) will be implemented on
staggered basis with the first phase to be effective from 31 January
2017. With the enforcement of the first phase of the CA 2016, the
Companies Act 1965 is repealed” (CEO of CCM, 2016)

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Number of Directors & Shareholders

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 MOA & AOA replaced by CONSTITUTION
■ Having a constitution is optional. (Except for companies limited by
guarantee)
■ Companies may adopt a constitution if it wishes to tailor provisions for
itself and its members.
■ Rights, powers, duties and obligations of directors and members are as
set out in the companies act 2016 unless modified by a constitution.
■ For a company which was incorporated before the CA 2016, the existing
MOA & AOA will continue to be applicable to such companies until the
companies resolve otherwise.
■ The constitution of a company may contain provision relating to:
a) The object of the company;
b) The capacity, rights, powers or privileges of the company if the
provision restricts such capacity, rights, powers or privileges;
c) Matters contemplated by the act to be included in the constitutions;
and
d) Any other matters as the company wishes to include in its constitution.

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 Abolition of the authorized
capital & par value (NPV regime)
■ Under s. 74 of the CA 2016, all shares issued shall
have no par or nominal value.
■ Companies will no longer be required to state its
authorised share capital.
■ The NPV regime will bring about simplification of
accounts where share premium accounts and capital
redemption reserves will no longer be applicable.
■ Countries that have moved to NPV regime-Canada,
Australia, New Zealand, United Kingdom, Singapore &
Hong Kong.

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 Co Act 2016 - Rationale for changing
to a No Par Value (NPV) Share Regime.
■ Co Act 1965 : emphasizes capital maintenance rule (capital accounts cannot
be reduced unless permitted or authorised by law)
■ Applied on 2 concepts within the jurisdiction of common law:
1. Authorised share capital concept – sets limit in which co may issue its
shares.
2. Par value concept.
Protection of S/H’s interest Protection of creditor’s interest
• authorised capital – restrict further issue • Both principles purportedly (claim) – co
of shares which may dilute existing implicitly warrants it has available to pay
S/H’s rights & value of existing creditors.
shareholding. • Authorised cap: potential max co can
• Par value restrict the co’s ability to issue and to the paid-up capital ,
issue shares at discount to ensure no amount cannot be returned or
dilution in the value of existing distributed among shareholders i.e.
shareholding. cushion against insolvency.
• ensure co receives adequate
consideration & has a min capital.
Co Act 2016 - Rationale for changing
to a No Par Value (NPV) Share Regime.
■ Both principles no longer relevant concepts on present day buss
envi.
■ What does it mean that par values regime is misleading or irrelevant?
1. Nominal or par value only applicable at the point of issuance of
shares. The actual value will vary in accordance with current
situation faced by the co.
2. The issued price of shares will be determined by the current value
of the co, factors affecting the buss. of the co and the capital that
the co is seeking to raise.
3. Nominal value will not accord protection to the S/H, instead the
rights of S/H are attached to the shares. This includes the right to
attend, speak, vote at meeting of shareholders and right to
dividends.
4. Right of S/H depends on number of shares held & not on the
value of shares when it was purchased.
Co Act 2016 - Rationale for changing
to a No Par Value (NPV) Share Regime.
■ June 2005: CLRC proposed to abandon the 2 concepts and
introduced NPV to:
1. Simplifying co operations with objective of reducing compliance
costs and
2. Promoting corporate governance.
■ To ensure it facilitates business to be competitive & suitable to the
needs of modern business environment.
■ Share premium and capital redemption reserves concept no longer
required.
• Correct or clarify misleading perception of both principles that co
will have reserves & be able to pay its debt to creditors.
• Hence, enable co to undertake capital raising exercise with
greater flexibility.
 IMPACT OF NPV REGIME & CAPITAL
MAINTENANCE RULE
1. Shares to be issued without par value. Hence, it will be issued at a price.
2. Share premium, capital redemption reserves & concept of authorized capital is no
longer applicable.
3. Transitional period of 24 months will be given to co to utilize the amounts standing
in credit in share premium account.
4. Shares certificates will only be issued upon application.
5. Register of members – prima facie evidence as to title of the shares.
6. Any variation of class rights must be made in accordance with the constitutions, or
if not provided, by at least 75% of members in that class.
7. Introduction of solvency statements for reduction of share capital, redemption of
preference shares, provision of financial assistance, share buyback.
8. Introduction of an alternative method for reduction of share capital without having
to go through Court provided solvency statements are made by all directors.
9. Redemption of preference shares is by way of special resolution & supported by
solvency statements from all the directors.
10. Financial assistance by a co in the purchase of its own shares shall not exceed
10% of S/H’s fund and must be supported by solvency statements by directors.
 UTILIZATION OF SHARE PREMIUM
ACCOUNT
During the transitional period, companies having credit in its
share premium account could utilise them for specific
purposes to pay/provide for:
• The premium payable on redemption of debentures or
Redeemable premium shares issued;
• Writing off the preliminary expenses incurred or any
expenses, commissions, brokerage or allowances
incurred by the company or to write off any duty, tax
payable in connection with any issuance of shares of the
company;
• Unissued shares as a fully paid up bonus shares;
• In whole or in part the balance of any unpaid shares
issued to its members; or
• dividends to its shareholders
 RIGHTS OF SHARES
s. 71 (1):
A share in a company, other than preference shares,
confers on the holder –
■The right to attend, participate & speak at a meeting;
■The right to vote on a show of hands on any resolution of
the company;
■The right to one vote for each share on a poll;
■The right to an equal share in the distribution of surplus
assets of the company; or the right to an equal share in
dividends
■However, right to dividends may be negated, altered or
added in the constitution

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 TYPES OF SHARES
■ S.69 of Companies Act 2016: “Subject to the constitution
of the company, shares in a company may:
– be issued in different classes;
– Redeemable Preference shares;
– confer preferential rights to distributions of capital or
income;
– confer special, limited or conditional voting rights; or
not confer voting rights.”
■ Ordinary shares and preference shares

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TYPES OF SHARES
SHARES

ORDINARY
PREFERENCE

NON
REEDEMA REEDEMA
BLE EQUITY
BLE

MANDATOR NON
Y MANDATO
RY
LIABILITY

LIABILITY EQUITY

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 DIFFERENCES BETWEEN ORD &
PREF SHARES
Ordinary Shares
Carries right to vote
Entitled for dividends after
other classed received their
dividends
Rate of dividends paid is not
fixed; depend upon co’s level
of profits and dividend policy
Preference shares
Do not have voting rights
unless in the event of non-
payment of dividend may be
allowed to vote.
Carry preferential rights as to
the payment of dividends and
repayment of capital in the
event liquidation.
Receive fixed rate of dividend
(expressed as percentage of
nominal value)
 ISSUANCE OF SHARES
 Accounting procedures depend on:
• Term of the issue that set out timing for application,
and
• Allotment, the call (if any) and forfeiture & reissue
terms.
 A public offer of shares requires company to issue
prospectus together with application form.
 invitation to offer – inviting the public investors to
make an offer to the co., intimating their willingness to
invest and become shareholders of the co.
 Share issue at a price deemed to be at fair value – price
transacted between willing parties in the marketplace.
 ISSUANCE OF SHARES
■ Based on provisions available in CA 2016, steps in
issuance of shares (pg 806, TLT):
1. Making INVITATIONS together with necessary forms
and terms of applications
2. Making the ALLOTMENT (IPO comply with
requirement CMSA 2007)
3. Making the CALLS, if any
4. FORFEITURE of shares; and
5. REISSUE of forfeited shares
■ UNDER & OVERSUBSCRIBED
• Underscribed – underwriters bear the risk
• Oversubscribed – application monies of unsuccessful
applicants are returned.
 ISSUANCE OF SHARES
■ All subscription money received by a company for
each share will be credited to ordinary share capital
account (contributed share capital
■ E.g: pg 803,TLT

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 SHARE PREMIUM & CAPITAL
REDEMPTION RESERVES
■ Upon commencement of S 74 (no par value
shares), any amount standing to the credit of a
company’s share premium and redemption
reserve shall become PART of the company’s
contributed capital.
■ Dr: Share premium
Cr: Ord share capital

■ Dr: CRR
Cr: Ordinary share capital
 RIGHT ISSUE
■ Invitation to existing shareholders to purchase additional shares in
proportion of their shares held. (raise additional capital)
■ Existing shareholders entitled to take up specified no. of shares at
specific price usually lower than market price of the shares.
■ To attract shareholders to subscribe for the rights, shareholders may
not be required to pay the full amount of rights taken up immediately.
■ Must inform Bursa Malaysia of relevant dates: date of acceptance,
renunciation, excess application, payment and dispatch of the
abridged prospectus & rights subscription form not less than 3 market
days despatch of the abridged prospectus & rights subscription form.
■ Alternatives to shareholders: 1) take up the shares 2) sell “rights” to
3rd party 3) renounce “rights” in favour of co (company may sell in
open market)
■ Journal entries:
– Dr: Bank
Cr: Ordinary shares
 BONUS ISSUE
■ Made to shareholders in proportion of their
shareholdings.
■ Does not involve any outflow of funds, but there is
dilution in the net assets value of shares after the bonus,
due to increase in no. of shares issued.
■ Given free of charge to existing shareholders &
recommended when co has large accumulated profits or
capital reserves (does not want or unable to distribute
them in the form of cash dividends.
■ In a NPV regime bonus issue can be made out of
• revaluation reserve or retained profit or
• by increasing no. of shares in contributed capital
(without changing the carrying amount of contributed
capital)
 BONUS ISSUE
1. Made out of contributed capital, No. of shares increased
but there is no adjustment to the contributed capital (split
shares)
2. Made out of revaluation reserves or retained, there is a
need to SET the ISSUE PRICE (estimated FV) to
determine the amount of reserve to be capitalised as
shares no longer at par value.
 The price can be at any amount that the directors think
fit, recorded at fair value

Bonus shares issued: Increase in shares issued

Dr: Reserves Dr: Bonus shares
Cr: Bonus shares Cr: Ordinary shares capital
 BONUS ISSUE
■ Company A has 10,000,000 fully paid-up shares with a
market value of RM40,000,000. In a one for four bonus
issue, it issued 2.5 million fully paid up shares out of
retained profits to its existing shareholders.
Unit issued = 10,000,000 x 4 = 2,500,000 units
Estimated Fair Value = RM40,000,000/12,500,000 units =
RM3.20/ share
Bonus issue = RM3.20 x 2,500,000 = RM8,000,000

■ Dr: Retained profits RM8,000,000

Cr: Ordinary share capital RM8,000,000

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SHARE BUY BACK-Treasury Method
EXAMPLE 1:

Journal entries:
Dr: Treasury shares(4m x RM3) 12,000,000
Cr: Cash 12,000,000
To record share repurchased & held as treasury shares
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SHARE BUY BACK-Treasury Method
■ EXAMPLE 2: Resale at higher price
■ Facts as stated in Example 1, except that
Buyback Bhd offered for sales in the open
market the repurchased shares at RM5 each.
Show the journal entries.

Journal entries RM RM
Dr: Cash (4m x RM5) 20,000,000
Cr: Treasury shares 12,000,000
Ord. share capital 8,000,000
(Being reissue of treasury shares)

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SHARE BUY BACK-Treasury Method
■ EXAMPLE 3: Resale at lower price
■ Facts as stated in Example 1, except that Buyback
Bhd offered for sales in the open market the
repurchased shares at RM2 each. Show the journal
entries.

Journal entries RM RM
Dr: Cash (4m x RM2) 8,000,000
Retained earnings (4m x RM1) 4,000,000
Cr: Treasury shares 12,000,000
(Being reissue of treasury shares)

* No gain or loss on resale should be recognised. Instead, the difference

is SET OFF as DEBIT or CREDIT against EQUITY.

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 SHARE BUY BACK-Cancellation Method
EXAMPLE 4:

Directors of Buyback Bhd have decided to cancel the 4,000,000 ordinary

shares repurchased.
Journal entries RM RM
Dr: Ord. shares capital (4m x (40m/RM40m) 4,000,000
Cr: Purchase own of own shares0= 4,000,000
(Being the shares repurchase)
Dr: Purchase of own shares 12,000,000
Cr: Bank (4m x RM3) 12,000,000
(Being payment of shares purchased)
Dr: Retained earnings 8,000,000
Cr: Purchase of own shares 8,000,000
(Being the cost of shares purchased applied
to retained earnings
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 REDEEMABLE PREFERENCE
SHARES
 S72(1) Co Act 2016, specifies that subject to company
constitution, a company having a share capital may issue
preference shares - non-redeemable and redeemable.
 S72(4): Pref. shares are redeem only if they are fully paid
and the redemption shall be out of:
a. Profit
• Company has sufficient capital thus did not want to
increase capital
• Provided directors make a solvency statement by
satisfying the solvency test & lodge a copy to
registrar
b. Fresh issue of shares
c. Capital
REDEMPTION OF REDEEMABLE
PREFERENCE SHARES
Statement of Financial Position (extract) as at 31 December 2017
RM
40,000,000 ordinary shares 48,000,000
Retained earnings 50,000,000

Non-current liability:
20,000,000 6% Redeemable preference shares 22,000,000
Current liabilities 15,000,000
135,000,000

Minki Bhd issued 20 million 6% redeemable preference shares which

were redeemable at a premium of 10% on 31 December 2017. The
company amortised the premium payable over the issue period. All the
redeemable preference shares were to be redeemed out of profits.
 REDEMPTION OF REDEEMABLE
PREFERENCE SHARES
■ Journal entries (redeem out of profits)
RM RM
Dr: 6% Redeemable Pref. shares 22,000,000
Cr: Pref. shares redemption account 22,000,000
(Being redemption of the pref. shares)
Dr: Pref. shares redemption account 22,000,000
Cr: Bank 22,000,000
(Being amount paid to the RPS shareholders)
Dr: Retained earnings 22,000,000
Cr: Ord. share capital 22,000,000
(Being transfer of profits to contributed cap)

• 40,000,000 ordinary shares = RM70,000,000

• Retained earnings (50m – 22m) = RM28,000,000
REDEMPTION OF REDEEMABLE
PREFERENCE SHARES
Statement of Financial Position (extract) as at 31 December 2017
RM
40,000,000 ordinary shares 44,000,000
Retained earnings 50,000,000

Non-current liability:
20,000,000 6% Redeemable preference shares 24,000,000
Current liabilities 17,000,000
135,000,000

KTH Bhd issued 20 million 6% redeemable preference shares which

were redeemable at a premium of 20% on 31 December 2017. The
company amortised the premium payable over the issue period. KTH
Bhd has also issued 20m ordinary shares at RM1.20 per share.
REDEMPTION OF REDEEMABLE
PREFERENCE SHARES
REDEMPTION BY ISSUANCE OF NEW SHARES
■ A total of 20m new ord. shares were issued raising RM24m to
replace the RM24m 6% redeemable pref. share (redeem)
RM RM
Dr: 6% Redeemable Pref. shares 24,000,000
Cr: Pref. shares redemption account 24,000,000
(Being redemption of the pref. shares)
Dr: Pref. shares redemption account 24,000,000
Cr: Bank 24,000,000
(Being amount paid to the RPS shareholders)
Dr: Bank 24,000,000
Cr: Ord. share capital 24,000,000
(Being 24m ord. shares issued for cash)
REDEMPTION OF REDEEMABLE
PREFERENCE SHARES
Statement of Financial Position (extract) as at 31 December 2017
RM
40,000,000 ordinary shares 48,000,000
Retained earnings 50,000,000

Non-current liability:
20,000,000 6% Redeemable preference shares 22,000,000
Current liabilities 15,000,000
135,000,000

The redeemable pref. shares were redeemed and 8,800,000 ord.

shares were issued at RM1.25 each to finance partly the redemption of
the pref. shares.
 REDEMPTION OF REDEEMABLE
PREFERENCE SHARES
REDEMPTION BY ISSUANCE OF NEW SHARES & OUT OF PROFITS
■ The proceeds from the new issuance of ord. shares are insufficient to
maintain existing cap. Structure. Remaining RM11,000,000 must be provided
out of profits to restore capital to its original amount.
RM RM
Dr: 6% Redeemable Pref. shares 22,000,000
Cr: Pref. shares redemption account 22,000,000
(Being redemption of the pref. shares)
Dr: Pref. shares redemption account 22,000,000
Cr: Bank 22,000,000
(Being amount paid to the RPS shareholders)
Dr: Bank (8.8m x RM1.25) 11,000,000
Cr: Ord. share capital 11,000,000
(Being ord. shares issued)
Dr: Retained earnings (22m -11m) 11,000,000
Cr: Ord. share capital 11,000,000
(Being transfer of profits to contributed capital)
 RESERVES
■ Profits retained by the company.
■ Can be classified as
1. Distributable (revenue reserves)
2. Non-distributable (capital reserves)

Distributable reserves
• Profits arising from operations (realised profits)
• Example: retained profits, general reserves, asset
replacement reserves, sinking fund reserves and any
other reserves appropriated out of realised profits.
• Distributable as dividend.
Non-distributable reserves
■ Increases to the shareholders’ equity by non-trading activities.
■ Reflect amounts which the entity’s assets have increased.
■ May arise due to:
1. Equity transactions between the entity and its shareholders.
2. From adjustments arising in accounting for business
combination.
3. From differences arising on translation of foreign operations.
4. From surpluses arising on asset revaluation (unrealised profit as
long as asset remain in the business, on disposal, gain is
realised & surplus transferred to retained earnings)
5. Any unrealised gain which has not been included in income.
■ Non-distributable as dividend except for bonus share.
■ Example: capital reserves arising on acquisition, capital reserves
arising on mergers, merger reserves, statutory reserves, ARR, fair
value reserves, hedge reserves, exchange translation reserves.
■ Prohibited by the legislation or by the entity’s articles/constitution.
 DISTRIBUTABLE vs NON-
DISTRIBUTABLE
■ Defining distributable and non-distributable based on
convention rather than accounting concept (Companies
Act 1965, 9th Schedule).
■ Used interchangeably with terms revenue reserves and
capital reserves.
■ Classifying in the context of can & cannot respectively be
paid out as cash dividends. Both reserves are not
accounting concepts & practices tend to be diverse.
■ Co Act 2016 and MFRSs – classification into distributable
and non-distributable reserves is no longer necessary.
 DISTRIBUTION OF PROFITS
UNDER CA 2016
■ s 365(1) specified that no dividend shall be payable to the S/H except out of
profits or pursuant to s 60.
• Dividend could only be paid out of realised profits (term realized profits is
not defined and pass losses need not be made good before dividend is
made).
• S 131(1) .. A co may make a distribution to the S/H out of profits if co. is
solvent.
• S 132(2) requires solvency test – co must remain solvent immediately
after co is able to pay its debts as and when the debts becomes due
within 12 months immediately after the distribution is made.
 Ability to pay debts - availability of retained profits, cash available and
future cash flows,
• If after authorization of dividend has been made, but the directors are of
the view that the solvency test will not be met, they shall take necessary
steps to prevent the distribution being made.
• A new provision for recovery of distribution to the extent that the dividend
paid has exceeded the value of any distribution that would properly have
been made (H/ever not apply if S/H received in good faith and has no
knowledge that solvency test was not met.)
 STATEMENT OF CHANGES IN
EQUITY (SOCE) : PURPOSE
1. A statement that distinguishes owner changes in equity from non-
owner changes in equity.
2. It shows users factors that cause a change in the owner’s equity
over one accounting period.
3. Shows movement in various items of equity such as share capital,
retained profit and other reserves
4. Changes resulting from transactions with owners in their own
capacity as owners and transaction costs directly related to
transactions like equity contributions, reacquisition of the
company’s own equity instruments and dividends (not shown in
other statements) are shown in SOCE.
5. Complement Statement of Profit or Loss and Other Comprehensive
Income (SOPLOCI) and Statement of Financial Position (SOFP).
DISCLOSURE IN STATEMENT OF
CHANGES IN EQUITY (SOCE)
■ The following items are presented on the face of SOCE:
a. Total comprehensive income for the period showing separately:
i. Profit or loss
ii. Each item of other comprehensive income and
iii. The total amount attributable to the owners of the parent & non-controlling
interest.
b. Effect of changes in accounting policies & correction of errors on
retrospective adjustments & retrospective restatement in accordance with
MFRS 108.
c. For each component of equity, the opening amount, increases or
decreases during the period and the closing amount, and
d. Contributions & distribution from & to equity owners & changes in
ownership interest in subsidiaries that do not result in loss of control.

1. Prior year credit & charges 2. Transfer to and from reserves

3. Dividends paid 4. Dividend proposed