TOPIC 3

EQUITY
 Definition of Equity

The residual interest in the assets of

the entity after deducting all its
liabilities
Equity = Total Assets – Total Liabilities
 Components of
Shareholders’ Equity

Non-Distributable
Share Capital Reserves
▪Share Premium (under
par value regime)
▪ Ordinary Shares ▪Capital Redemption
Reserve
▪ Preference ▪Asset revaluation
Shares Reserve
▪Fair Value Reserve

Distributable Reserves
▪Retained Profits
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.
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 authorized;
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

 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.
 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.
• Aside from fees and sales arrangements, most underwriters
are fairly similar in their roles. 
• 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.
 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
 Issuance of Equity Share Capital
• Shares can be issued at par, premium (above par
value) and discount (below par value).
• Par value can be RM1.00 or any amount.
• The par value of shares is the denomination or
nominal value of shares stated in the Company’s
Memorandum of Association and Articles of
Association.
• Par value establishes the maximum liability of the
company’s shareholders.
• There are no restrictions to the issuance of shares at
par or premium.
• However, there are restrictions to the issuance of
shares at a discount.
 Recording of Issue of Shares
(Par Value Regime – Companies Act 1965)
Par
Premium
Dr. Bank a/c
Dr. Bank a/c Discount
Dr. Shares issue Dr. Bank a/c
Dr. Shares issue expense
expense a/c a/c Dr. Shares issue expense a/c
Cr. Share Capital a/c Cr. Share Capital a/c Dr. Discount on Shares a/c
Cr. Share Premium a/c Cr. Share Capital a/c
 Recording of Issue of Shares
(No Par Value Regime – Companies Act
2016)

Dr Bank (application received x price of shares)

Cr Application

Dr Application (application returned x price)

Cr Bank

Dr Application (shares offered x price)

Cr Share Capital
Rationale for changing to a No Par Value Share
Regime

• Refer Pg. 802 - 803

• Reasons why the authorized share capital and par value concepts
are no longer relevant:
⮚A company having an authorized share capital does not mean
that it will indeed issue all shares it is authorized to issue.
⮚If need be, a company can always increase its original authorized
capital under the Companies Act.
⮚The authorized share capital does not ensure that the company
has a minimum principal amount of capital adequacy
requirement.
⮚Regardless of whether shares are issued with or without par
value, there is no adverse effect on existing shareholders because
shareholders’ rights are stated in law and the constitution, and
not the price paid on the shares or their par value.
 Example
Belia Bhd made a public offer of 10,000,000 ordinary
shares . The price of shares is RM1.50 each. The public
offer was underwritten by HIDF Issuing House Sdn Bhd.
The offer was five times over-subscribed. Allotment of
shares was made on due date and monies received by the
underwriter were returned to unsuccessful applicants.
The cost of issue was RM1,500,000.
Required:
Show the journal entries to record the above transaction.
Answer:
Dr Bank RM75,000,000
Cr Application - Ordinary Shares RM75,000,000
(Money received upon application)

Dr Application - Ordinary Shares RM60,000,000

Cr Bank RM60,000,000
(Money refund to unsuccessful applicants)

Dr Application - Ordinary Shares RM15,000,000

Cr Ordinary Share Capital RM15,000,000
(Recognition of share capital)
 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 - share premium,
capital redemption reserve, asset revaluation reserve

Journal entries
Dr Distributable/Non-distributable Reserve
Cr Ordinary Share capital
 Bonus Issue - Example
Below is the extract Statement of Financial Position of Power Bhd as at 30 June
2020:

Issued and Paid up Capital RM

Ordinary Shares 8,000,000
7% Preference shares 80,000
Retained Earnings 1,000,000
General Reserves 200,000
At the end of the year, the company decided to make a bonus issue of 1 for every
RM50 shares held. To facilitate the issue, the general reserves balance will be used.
9,280,000

 
 Bonus Issue - Answer
Bonus issue = (8,000,000 x 1/RM50)
= RM160,000

Dr. General Reserves RM160,000

Cr. Ordinary Share Capital RM160,000
 Bonus Issue - Answer
Issued & Paid up Capital RM
Ordinary Shares 8,160,000
7% Preference Shares 80,000
Retained Earnings 1,000,000
General Reserves 40,000
9,280,000
 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 - Right Issue

 Dr Bank a/c

Cr Right Issue

Dr Right Issue
Cr Ordinary Share Capital
 
 Rights Issue -Example
The following information were extracted from the book of Power
Bhd as at 30 June 2020:

Issued Share Capital RM

Ordinary Shares 8,000,000
7% Preference Shares 80,000
General Reserves 200,000
Retained Earnings 1,000,000
9,280,000

At the end of the year, the company decided to make a right issue
of 1 for every RM50 ordinary shares held. The market price of the
shares is RM3.00
 Rights Issue - Answer
Rights issue = [ 8,000,000 x 1/ RM50]
= RM160,000
Journal entries:
Dr. Bank RM160,000
Cr. Right Issue RM160,000

Dr Right Issue RM160,000

Cr Ordinary Share CapitalRM160,000
 Rights Issue - Answer
Issued Share Capital RM
Ordinary Shares 8,160,000
7% Preference Shares 80,000
General Reserves 200,000
Retained Earnings 1,000,000
9,440,000
Asset
Bank 160,000
 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.
 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

– Pg. 822

Conditions for share buybacks

– Pg. 827
 Share buybacks - Accounting Methods
Section 127(4) of Companies Act 2016 – 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.
• Example - Refer pg. 828 (eg. 13)

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.Example - Refer pg. 830-831 (eg. 14)
 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.
 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
 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

Under the No Par Value share regime, the concept of share split and
share consolidation would be irrelevant.