CORPORATE REPORTING

Limited
Companies
The Statement of Financial
Position (SOFP)
Classes of shares : Preference shares
 Entitle holders to certain rights which ordinary
shareholders do not enjoy.
 Preference shareholders are entitled to receive
dividends at a fixed rate out of profits before the
ordinary shareholders become entitled to dividends.
 When the company is wound up (cease to exist),
preference shareholders are entitled to have their
capital repaid before any repayment is made to the
ordinary shareholders.
 If there are insufficient funds after the preference
shareholders have been repaid, the ordinary
shareholders will lose some if not all their money.
Non-cumulative preference shares
 Notentitled to have any arrears of dividend carried
forward to future years if the profit of any year is
insufficient to pay the dividend in full.
Cumulative preference shares
 Entitledto have arrears of dividend carried
forward to future years when sufficient profits may
become available to pay the arrears.
Example 1
X Berhad was formed with a share capital of
10,000 8% non-cumulative preference shares of
RM1each and 20,000 ordinary shares of RM1
each.
 The profits available for dividend were as follows:
2006-RM 1200, 2007 – RM 900, 2008 – RM 600,
2009 – RM 1000, 2010 – RM700, 2011 –
RM1300.
 Show the effects of non-cumulative preference
shares and cumulative preference shares on the
ordinary dividends payable
Solution: Non-cumulative preference shares
Year 2006 2007 2008 2009 2010 2011
RM RM RM RM RM RM

PROFIT (A) 1200 900 600 1000 700 1300

Preference 800 800 600 800 700 800
dividends paid
(8% x 10,000)
(B)
Profit left for 400 100 NIL 200 NIL 500
ordinary
shareholders (C )
= (A) – (B)
Maximum 2% 0.5% 0% 1% 0% 2.5%
ordinary
dividend payable
(C/20,000) x 100
 Solution: Cumulative preference shares
Year 2006 2007 2008 2009 2010 2011

RM RM RM RM RM RM

PROFIT (A) 1200 900 600 1000 700 1300

Preference 800 800 600 800 700 800

dividends paid
(8% x 10,000)
(B)

Profit left for 400 100 NIL NIL NIL 400

ordinary
shareholders
(C ) = (A) – (B)

Maximum 2% 0.5% 0% 0% 0% 2%
ordinary
dividend
payable
(C/20,000) x
100
Ordinary shares
 Is known as the equity of a company
 May receive more than their original investment
when the business is doing well
 May receive less that what they paid for their
original shares when the company underperforms
or during economic recession or downturn
 All the reserves including retained profit also
belong to the ordinary shareholders
Shares: Nominal or par value
 Shares of RM 1 have a nominal value of RM 1
 Shares of RM 0.50 have a nominal value of RM
0.50.
 The directors of a company may issue shares at a
price exceeding their nominal value if they believe
that the issue will attract a lot of subscribers OR
the shares are already being bought and sold on
Bursa Malaysia at a price higher than the nominal
value.
Shares: Issued at a premium
 When shares are issued at a price above their nominal
value, they are said to be issued at a premium.
 If shares with a nominal value of RM 1 are issued at
RM 1.25, the premium on each share is RM 0.25.
 The premium on each share must be credited to a
special account called the Share Premium account.
 Only the nominal value of RM1 may be credited to
the share capital account.
 The balance on the share capital account and the share
premium account are shown separately in the SOFP.
Example 2
 The directors of X Berhad issued RM1 60,000
ordinary shares at RM 1.30 per share. All shares
were subscribed and issued.
 Required: Prepare journal entries to record the
issue of shares.
 DR Bank RM 78,000
 CR Ordinary share capital RM 60,000
 CR Share premium account RM18,000
 Narrative: Issue of RM1 60,000 ordinary shares at
RM 1.30 per share
Revenue Reserves: Retained Earnings
 Revenue reserves are created by transferring an amount from the
profit attributable to the equity holders.
 The transfer is shown in the statement of changes in equity
 Revenue reserves may be created for specific purposed
(replacement of non-current assets, or planned expansion of the
business) or generally to strengthen the financial position of the
company.
 The creation of general reserves reduces the amount of profit
available to pay dividends.
 If the reserves are later considered by the directors to be excessive
and no longer required, they may be credited back to Retained
Earnings and become available for the payment of dividend. This
adjustment is made in the Statement of Changes in Equity
 Retained earnings shown in the Statement of Financial Position is
one of the revenue reserves
Capital Reserves
 Not usually created by transferring profit from the
Income Statement but may be at times
 They represent gains that arise from particular
circumstances and usually represent gains which
have not yet been realised.
 Capital reserves are part of the capital structure of
a company and they may never be credited back to
the SOCI and can never be used to pay cash
dividends to the shareholders.
Capital Reserves: Share Premium Account
 Share Premium account to be used only for
specific purposes as follows:
 To pay up unissued shares to existing ordinary
shareholders as fully paid-up bonus shares
 To write off preliminary expenses incurred in the
formation of a company
 To write off expenses incurred in the issue of
shares or debentures of the company
 To provide any commission payable on the
redemption of shares and debentures
 To provide for any premium payable on the
redemption of debentures
Capital Reserves: Capital Redemption Reserve
 This reserve is created by transferring profit from
the Income Statement
 The reserve must be created when a company
redeems any of its shares otherwise if not then
need to use the proceeds of the new issue of
shares.
 May be used to pay up unissued shares to existing
ordinary shareholders as fully paid-up bonus
shares.
Capital Reserves: Revaluation Reserve
 A company may revalue its non-current assets and any gain
on the revaluation must be credited to a Revaluation Reserve
 It is unrealized profit and may not be credited to the Income
Statement
 An unrealized gain is a profit that exists on paper, resulting
from an investment. It is a profitable position that has yet to
be sold in return for cash, such as a stock position that has
increased in capital gains but still remains open. A gain
becomes realized once the position is closed for a profit.
 Profit which has been made but not yet realized through a
transaction, such as a stock which has risen in value but is
still being held. Unrealized profits are usually not taxable.
also called unrealized gain or paper gain or book profit.
Calculation of the value of ordinary shares
RM000’
Total assets less current liabilities 1400
Non-current liabilities: 10% debentures 2020 (300)
1100
Equity
1,000,000 ordinary shares of RM 0.50 each 500
Share premium 180
Capital redemption reserve 100
General reserve 200
Retained earnings 120
1100
Solution: Ordinary shares
 Required: Calculate the value of one ordinary
share
 Answer: The total of the ordinary share capital and
reserves = RM 1,100,000
 The value of one ordinary share is (RM
1,100,000 / 1,000 ,000 units of shares)
 = RM 1.10
Liabilities and Provisions
 Liabilities – are amounts owing by a company to
trade or other creditors when the amounts can be
determined with substantial accuracy.
 Provisions – created to provide for liabilities that
are known to exist but which the amounts cannot
be determined with substantial accuracy.