Share Premium Account

Definition

A share premium account is a reserve on a company’s balance sheet that represents the amount received from shareholders over and above the par value of its shares upon issuance. The premium on shares is credited to a share premium account which can only be used for certain purposes specified by laws and regulations.

Utilization of the Share Premium Account:

1. Issuance of Bonus Shares: Companies can utilize the share premium balance to issue bonus shares to existing shareholders.
2. Writing-off Preliminary Expenses: Companies can write off initial setup costs.
3. Writing-off Underwriting Commissions: This includes costs related to underwriting share issues.
4. Provision of Premium for Redemption of Debentures: Adjustments related to premiums paid on redemption.
5. Provision of Premium for Redemption or Purchase of Share Capital: Specific expenditures related to redeeming or repurchasing share capital, subject to legal restrictions.
6. Others: The share premium account cannot be used to write off goodwill on consolidation.

Examples

• Example 1: If a company issues shares with a par value of $5 each at an issue price of $8, the $3 difference is credited to the share premium account.
• Example 2: A company raising capital via a public offering, issue shares of $2 par value at $5 each. The excess $3 is reflected in the share premium account.
• Example 3: Using the funds in the share premium account, a company issues bonus shares to all existing shareholders instead of cash dividends.

Frequently Asked Questions

What is the purpose of a share premium account?

A share premium account is used to handle the amount received over the par value of the shares, which can only be utilized for specific purposes as specified under legal provisions.

Can a share premium account be used to pay dividends?

No, the use of the share premium account for paying dividends is generally restricted by law.

Is the share premium account part of the company’s equity?

Yes, the share premium account is part of the company’s equity and appears under shareholders’ equity on the balance sheet.

Can share premium be used to write off goodwill?

No, the share premium account cannot be used to write off goodwill arising on consolidation.

What is merger relief in relation to a share premium account?

Merger relief allows certain mergers to not create a share premium account, subject to meeting the criteria under specific regulations.

Related Terms

• Bonus Shares: Shares given to current shareholders without any additional cost, based on the number of shares that a shareholder owns.
• Debentures: A type of debt instrument that is not secured by physical assets or collateral.
• Goodwill: An intangible asset that represents the excess of the purchase cost over the fair market value of an acquired company’s net assets.
• Merger Relief: A relief provision providing exceptions for creating a share premium account in certain merger scenarios.
• Underwriting Commission: Fees an underwriter charges for underwriting a new securities issue.

Online Resources

• Investopedia: Share Premium
• Corporate Finance Institute: Share Premium
• Accountancy Cloud: What is Share Premium Account?

Suggested Books

1. “Financial Accounting and Reporting” by Barry Elliott and Jamie Elliott
2. “Corporate Finance: Principles & Practice” by Denzil Watson and Antony Head
3. “Understanding Financial Statements” by Lyn M. Fraser and Aileen Ormiston
4. “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
5. “Principles of Corporate Finance” by Richard A. Brealey, Stewart C. Myers, and Franklin Allen

Accounting Basics: “Share Premium Account” Fundamentals Quiz

Thank you for learning about the share premium account and for participating in our quiz! For detailed insights, consider exploring the suggested books and online resources.