CHAPTER 4

EQUITY
Topic Outcomes

At the end of this topic, students should

be able to:
1. Aware on the requirements of statutes
and accounting standards.
2. Understand the issuance of equity
shares.
 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
Share Capital Non-Distributable Reserves
 Share Premium (under par
value regime)
 Ordinary Shares
 Capital Redemption
Reserve
 Preference Shares
 Asset revaluation Reserve
 Fair Value Reserve

Distributable Reserves
 Retained Profits
 Ordinary Shares
(1) Limited Liability
Ordinary shareholders have limited
liability, in other words, their liability
is limited to those shares.
(2) Liquidation Rights
If a company goes bankrupt and
liquidates all its assets, the ordinary
shareholders have the right to receive
their share of sale proceeds.
(3) Preemptive Rights
If a company plans to issue new
shares, existing shareholders have the
rights to subscribe to new shares, often
at lower prices, before they are issued
to the public.
(4) Voting Rights
Ordinary shareholders have the rights
to vote in general meeting of the
company. Each share carries the right
to one vote.
(5) Dividend Payments
Ordinary shareholders are entitled to a
share of the profits in the form of
dividend.
 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.
 Companies Act 1965 – Original
Provision
 Emphasis on the capital maintenance rules – required the capital
accounts of a company cannot be reduced (unless
permitted or authorised by law.)
 This restrictions were mainly for the protection of shareholders
and creditors.
 The law on capital maintenance applied 2 related concepts:
 (a) the authorised share capital concept – sets the limit in which a
company may issue its shares
 (b) the par value concept – requires the shares of a company to have
a par or nominal value, such as RM1 each or shares of RM0.50 each.
Companies Act 2013 - Nature of Shares

Section 68(1) – a share or other interest of a member in a company is personal

property and transferable in accordance with Section 103.
Section 68(2) – a share in a company confers on the holder:
a. The rights to vote on a poll(election, survey, census) on any resolution of
the company;
b. The right to an equal share of dividends authorised by the Board;
c. The right to an equal share in the distribution of the surplus assets of the
company.
Section 69(1) – Shares in a company may:
d. Be issued in different classes;
e. Be redeemable in accordance with Section 70;
f. Confer preferential rights to distributions of capital or income;
g. Confer special, limited, or conditional voting rights;
h. Not confer voting rights.
Section 72(1) – shares of a company shall have no par value
 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
 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.
 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

 Companies Act 1965 –
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 Discount

Dr. Bank a/c Dr. Bank a/c Dr. Bank a/c
Dr. Shares issue Dr. Shares issue Dr. Shares issue expense
expense a/c expense a/c a/c
Cr. Share Capital a/c Cr. Share Capital a/c Dr. Discount on Shares
Cr. Share Premium a/c
a/c Cr. Share Capital a/c
 Recording of Issue of Shares
(No Par Value Regime – Companies Act 2013)

Dr. Bank a/c

Dr. Shares issue expense a/c
Cr. Contributed Share Capital a/c
 Rationale for changing to a
No Par Value Share Regime

 Refer Pg. 1085 - 1087

 Reasons why the authorised share capital and par value concepts are no
longer relevant:
 A company having an authorised share capital does not mean that it
will indeed issue all shares it is authorised to issue.
 If need be, a company can always increase its original authorised
capital under the Companies Act.
 The authorised 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 par
value of shares is RM1.00 per share. 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 if the shares
were issued at:
a) RM1.00
b) RM3.50
c) RM0.80
 At Par

Journal Entries:

Dr. Bank a/c RM8,500,000

Dr. Shares issue expense a/c RM1,500,000
Cr. Share Capital a/c RM10,000,000
 At Premium
Journal Entries:

Dr. Bank a/c RM33,500,000

Dr. Shares issue expense a/c RM1,500,000
Cr. Share Capital a/c RM10,000,000
Cr. Share Premium a/c RM25,000,000

Note:
The share issue expense can be write-off against share premium a/c.
Dr. Share Premium a/c RM1,500,000
Cr. Share issue expense a/c RM1,500,000
 At Discount
Journal Entries:

Dr. Bank a/c RM6,500,000

Dr. Shares issue expense a/c RM1,500,000
Dr. Discount on Shares a/c RM2,000,000
Cr. Share Capital a/c RM10,000,000

Note:
If the entity wishes to eliminate the discount on shares – make adjustment to
retained profits in the Statement of Changes in Equity.
 Recording of Issue of Shares (No
Par Value Regime)
RM1.00
Dr. Bank a/c 8.5m
Dr. Shares issue expense a/c 1.5m
Cr. Contributed Share Capital a/c 10m

RM3.50
Dr. Bank a/c 33.5m
Dr. Shares issue expense a/c 1.5m
Cr. Contributed Share Capital a/c 35m

RM0.80
Dr. Bank a/c 6.5m
Dr. Shares issue expense a/c 1.5m
Cr. Contributed Share Capital a/c 8m
 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
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 2013:

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

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 share premium balances will be used.
 Bonus Issue - Answer

Bonus issue = (8,000,000 x 1/50)

= 160,000 x RM1.00
= RM160,000

Dr. Share Premium RM160,000

Cr. Ordinary Share Capital RM160,000
 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

SHARE PREMIUM (200,000 - 160,000) 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

At par

Dr Bank a/c

Cr Ordinary Share Capital a/c

At premium

Dr Bank a/c

Cr Ordinary Share Capital a/c

Cr Share premium a/c

 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 2012:

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. The market price is RM3.00.
 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
 Rights Issue - Answer

ASSETS RM
Bank a/c 160,000

ISSUED AND FULLY PAID UP CAPITAL

(8,000,000 + 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
SHARE PREMIUM 200,000
9,440,000
 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 67A of the Companies
Act 1965 which allows public listed companies to buy back
its own ordinary shares from the market.

Motivation for share buybacks

– Pg. 1114

Conditions for share buybacks

– Pg. 1121
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.
 Example - Refer pg. 1122 (eg. 15)

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. 1125 (eg. 16)
 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 9, page 1104.
 Shares issued to settle debts
 Companies having financial difficulties may issue shares to settle their debts
commitment. (pg. 1104)

 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
 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.