Share Premium

Share Premium Share Premium Account Nominal Value Scrip Issue Corporate Finance Equity Financing
Share premium is the amount payable for shares in a company that is issued by the company itself, in excess of their nominal value. The premium received must be credited to a share premium account, which is restricted in use and cannot be utilized for paying dividends to shareholders.
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Definition

Share Premium occurs when shares are issued by a company at a price higher than their nominal or par value. The excess amount received over and above the nominal value of the shares is termed as the share premium.

Examples

  1. Company A Issues Shares:

    • Nominal value: $1 per share
    • Issue price: $5 per share
    • Share premium: $4 per share (i.e., $5 - $1)
    • If Company A issues 10,000 shares, the share premium account will reflect $40,000 ($4 * 10,000).

  2. Company B Raises Capital:

    • Nominal value: $2 per share
    • Issue price: $10 per share
    • Share premium: $8 per share (i.e., $10 - $2)
    • If Company B issues 20,000 shares, the share premium account will have $160,000 ($8 * 20,000).

Frequently Asked Questions (FAQs)

1. What is the purpose of a Share Premium Account?

Answer: The share premium account is used to record the premium received from issuing shares above their nominal value. This account cannot be used for distributing dividends but can be utilised for specific corporate purposes like issuing bonus shares.

2. Can the share premium be used to cover operational expenses?

Answer: No, the share premium cannot be used to cover operational expenses. It is restricted in its usage and primarily for purposes that are capital in nature.

3. How does the share premium affect a company’s balance sheet?

Answer: The share premium appears as a part of the equity in the company’s balance sheet, increasing the overall shareholders’ equity but with restricted use.

4. Are there any regulatory restrictions on the usage of share premium?

Answer: Yes, regulatory frameworks often restrict the use of share premium for purposes such as paying dividends, and mandate its usage for specific purposes like issuing bonus shares, writing off preliminary expenses, or any other purposes as defined by corporate regulations.

5. What happens to the share premium in case of a company liquidation?

Answer: In the event of liquidation, the share premium account is treated as part of the shareholders’ equity and distributed according to the liquidation order, subject to regulatory compliance and stipulations.

  1. Nominal Value: The face value of a security stated by the issuer.

  2. Scrip Issue: A method allowing a company to issue additional shares to shareholders without changing the total share capital.

  3. Equity Financing: Raising capital through the sale of shares.

  4. Bonus Shares: Additional shares given to existing shareholders without additional cost based upon the number of shares that a shareholder owns.

  5. Corporate Finance: Area of finance dealing with the sources of funding and capital structure of corporations.

Online Resources

  1. Investopedia Article on Share Premium
  2. Corporate Finance Institute’s Guide on Share Premiums
  3. AccountingTools: Share Premium

Suggested Books for Further Study

  1. “Financial Accounting” by Jerry J. Weygandt, Paul D. Kimmel, and Donald E. Kieso

    • A comprehensive textbook covering the fundamentals of financial accounting, including sections on share premium and corporate equity structure.

  2. “Corporate Finance” by Jonathan Berk and Peter DeMarzo

    • This book delves into the various aspects of corporate finance, including raising capital through equity and the implications of share premium accounts.

  3. “Principles of Corporate Finance” by Richard A. Brealey, Stewart C. Myers, and Franklin Allen

    • An authoritative text providing insights into the principles of corporate finance with discussions on equity financing and regulatory aspects of share capital.

Accounting Basics: “Share Premium” Fundamentals Quiz

### How is share premium calculated? - [ ] Nominal value plus issue price - [x] Issue price minus nominal value - [ ] Par value divided by issue price - [ ] Nominal value times number of shares > **Explanation:** Share premium is calculated as the issue price of the shares minus their nominal value. ### What kind of account is used to record share premiums? - [ ] Dividend account - [x] Share premium account - [ ] Common stock account - [ ] Retained earnings account > **Explanation:** Share premiums are recorded in a share premium account, which cannot be used for paying dividends. ### Can the share premium account be used to distribute dividends? - [ ] Yes, it is primarily used for dividends. - [x] No, it is restricted for specific uses other than dividends. - [ ] It can be used partially for dividends. - [ ] Only if approved by shareholders > **Explanation:** The share premium account cannot be used for paying dividends to shareholders; it is restricted for specific uses like issuing bonus shares. ### Which entry is correct for recording share premium when issuing shares at a premium? - [ ] Debit Share Premium, Credit Cash - [ ] Debit Cash, Credit Expense - [x] Debit Cash, Credit Share Premium - [ ] Debit Share Capital, Credit Cash > **Explanation:** The correct entry for recording share premium is Debit Cash and Credit Share Premium. ### What is another name often used interchangeably with nominal value? - [ ] Market value - [ ] Book value - [x] Par value - [ ] Actual value > **Explanation:** Nominal value is also commonly referred to as Par Value. ### In which section of the balance sheet is the share premium account reported? - [x] Under shareholders' equity - [ ] Under current liabilities - [ ] Under current assets - [ ] Under non-current liabilities > **Explanation:** The share premium account is reported under shareholders' equity in the balance sheet. ### What limits the usage of the share premium account? - [ ] Company bylaws only - [ ] Market conditions only - [ ] Shareholder agreements only - [x] Regulatory restrictions > **Explanation:** The usage of the share premium account is limited by regulatory restrictions, which prevent it from being used for paying dividends. ### Can share premium be used to write off preliminary expenses? - [x] Yes, it can be used for certain capital purposes. - [ ] No, it cannot be used for preliminary expenses. - [ ] Yes, but only with shareholder approval. - [ ] Only if stated in the articles of association. > **Explanation:** Share premium can be used for certain capital purposes, including writing off preliminary expenses, subject to regulatory guidelines. ### What is a scrip issue in relation to share premium? - [ ] Issuing bonds instead of shares - [ ] Decreasing share capital - [x] Issuing additional shares to shareholders without additional cost - [ ] Repaying shareholders in cash > **Explanation:** A scrip issue involves issuing additional shares to shareholders without additional cost, often using the share premium account. ### What does the share premium account reflect about a company's shares? - [ ] Their market value - [ ] Their liquidation value - [x] Their issuance above nominal value - [ ] Their depreciation > **Explanation:** The share premium account reflects the amount by which the shares were issued above their nominal value.

Thank you for exploring the detailed landscape of share premiums and tackling our interactive quiz to test your understanding. Keep delving deeper into the world of accounting and corporate finance for continuous learning and professional growth!

Tuesday, August 6, 2024
Share Premium Account
Share Option
Bonus Issue (Scrip Issue) January 1, 1
Capital Paid in Excess of Par Value January 1, 1
Capitalization Issue January 1, 1
Equity Share Capital January 1, 1
Issued and Outstanding Shares January 1, 1
Merger Relief January 1, 1
Minimum Premium Value January 1, 1
Preliminary Expenses January 1, 1
Share Premium Account January 1, 1
Weighted Average Cost of Capital (WACC) January 1, 1

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