|
Types of share capital
Company law and an entity's legal organisation documents
(charter, bye laws, and articles of association)
will govern matters relating to share capital and
equity instruments. These will include the ability
to pay dividends, use of reserves, the purchase
and re-issue of shares, the types of shares and
the rights attaching to various types of shares.
The common types of shares and rights associated
with them are discussed below, but each entity's
equity instruments should be assessed and classified
in accordance with the rights they confer on the
holders.
a) Ordinary shares
Ordinary shares are the main form of share capital
and confer a residual interest in an entity's net
assets to the ordinary shareholders. An entity's
charter prescribes the number of ordinary shares
that an entity is authorised to issue (authorised
capital). There may be more than one type or class
of ordinary shares. Ordinary shares may have a par
or nominal value, but are often issued at a premium.
b) Preference shares
Preference shares are those that have some form
of preferential rights over other classes of shareholders,
usually ordinary shareholders. Preferential rights
might include a fixed dividend, first call on the
assets in a liquidation, redemption rights or other
rights that give them priority over ordinary shareholders.
Many preference shares are in substance liabilities,
and are classified and accounted for as such .
c) Treasury shares
An entity may repurchase and hold its own equity
shares. These shares are treasury shares [IAS32R.33].
An entity's own shares may be held by subsidiaries
as they form part of the consolidated
group .
Initial recognition
Initial recognition of share capital and own equity
instruments involves consideration of whether they
are financial liabilities or equity instruments
or share-based payment transactions .
A financial liability is any liability that is
[IAS32R.11]:
| a) |
a contractual obligation |
|
| |
|
to deliver cash or another
financial asset to another entity; or |
| |
|
to exchange financial instruments with
another entity under conditions that are potentially
unfavourable; or |
|
| b) |
a contract that will or may
be settled in the entity's own equity instruments
and is: |
|
| |
 |
a non-derivative for which the entity
is or may be obliged to deliver a variable number
of the entity's own equity instruments ; or |
| |
|
a derivative that will or may be settled
other than by the exchange of a fixed amount
of cash or another financial asset for a fixed
number of the entity's own equity instruments
(excluding instruments that are themselves contracts
for the future receipt or delivery of the entity's
own equity instruments). |
An equity instrument is any contract that evidences
a residual interest in the assets of an entity after
deducting all of its liabilities [IAS32R.11].
Compound financial instruments have, in substance,
elements of both a financial liability and equity
instrument. The components are classified separately
as financial liabilities, financial assets or equity
instruments [IAS32R.28]. A convertible debt instrument
is an example of a compound instrument .
Ordinary shares are usually classified as equity
instruments. Preference shares may be classified
as equity but are more likely to meet the definition
of financial liabilities. Their classification as
financial liabilities or equity instruments requires
an analysis of the terms of the issue and the substance
of the arrangements
[IAS32R.18] [IAS32R.AG25].
The timing of initial
recognition of issued shares should follow legal
and regulatory requirements. Shares should be recognised
as issued when the rights of share ownership pass
to the holder, usually when the consideration is
paid. The terms of a share issue should be scrutinised
with respect to dividend, voting, trading and other
rights. Legal opinion may be required to determine
shareholders' rights.
When shares are issued as purchase consideration
in a business combination, recognition occurs at
the date of exchange
[IFRS3.25].
Initial measurement
Share capital
Initial measurement of share capital reflects the
net proceeds from issue, defined as the fair value
of the consideration received, net of transaction
costs directly attributable to the equity transaction
[IAS32R.35] .
Shares issued for cash are recognised at the amount
of the net cash proceeds. Determining fair value
is more problematic when the consideration is non-monetary.
Non-monetary consideration will arise in business
combinations effected through an exchange of shares
or where an entity acquires assets or purchases
services with shares .
Other own equity instruments
Initial measurement of other own equity instruments
is at the fair value of the consideration paid or
received. Initial measurement of option contracts
on an entity's own equity instruments will reflect
the amount of the option premium paid or received.
Own equity instruments embedded in compound
instruments
Compound instruments such as convertible debt instruments
and convertible preference shares give the holder
the right to convert the debt or preference shares
into ordinary shares. These instruments are made
up of a host debt instrument with an embedded derivative,
which represents a written call option on the entity's
shares. The embedded derivative may need to be accounted
for separately from the host contract .
When the initial carrying amount of the compound
financial instrument is allocated to its equity
and liability components, the fair value of the
liability element is determined first using the
market rate of interest for a similar financial
liability that does not include an equity component.
The equity component is then assigned the residual
amount after deducting from the fair value of the
instrument as a whole the amount separately determined
for the liability component [IAS32R.31].
The amount allocated to the debt component of a
compound instrument must be accreted using the effective
interest rate over the life of the instrument to
equal the amount that may eventually be repaid . Once recognised,
the equity element is not adjusted until conversion,
when it forms part of the consideration for the
shares issued. If the conversion feature lapses
without exercise then the equity element is reclassified
to a share capital reserve such as paid-in capital.
Treasury shares
Where an entity purchases its own shares in the
market, the shares should be presented as a deduction
from equity, at the amount paid including transaction
costs [IAS32R.33] [IAS32R.35]. IAS 32 does not give
guidance on accounting for the acquisition and the
subsequent sale of treasury shares. The following
methods are acceptable:
| a) |
cost method: the
gross cost of the treasury shares is shown as
a one-line deduction from equity, that is, treasury
shares are shown as a separate class of shareholders'
equity with a debit balance; |
|
| b) |
par value method: the par (or
stated) value of the treasury shares is presented
as a deduction from share capital with adjustment
of premiums or discounts against share premium.
On subsequent sale of treasury shares, excess
of the sale price over the par value of the
treasury shares reissued is credited to share
premium; and |
|
| c) |
constructive retirement method:
this method is similar to the par value method
except that the aggregate par value of treasury
shares is debited to the share capital account
(instead of the treasury stock account). |
No gain or loss is recognised in profit or loss
on transactions in an entity's own shares. All consideration
paid or received is recognised in equity [IAS32R.33].
Subsequent re-measurement
The Framework defines equity as a residual that
is derived from movements in the other elements
of financial reporting
[F.49.(c)]. Equity itself is not therefore re-measured.
Changes in the value of equity arise, however, from
the re-measurement of assets and liabilities. These
changes generally impact reserves, for example the
asset revaluation reserve.
Equity is restated in certain circumstances; these
are where the entity:
| a) |
Has a functional
currency which is the currency of a hyperinflationary
economy ; and |
|
| b) |
Presents its financial statements
in a currency other than its functional currency
. |
Presentation and disclosure
IFRS prescribes a number of disclosure requirements
for each class of share capital [IAS1R.76]. These
are:
| a) |
the number of shares
authorised; |
|
| b) |
the number of shares issued
and fully paid and issued but not fully paid; |
|
| c) |
par value per share, or the
fact that they have no par value; |
|
| d) |
a reconciliation of shares
outstanding at the beginning, and at the end
of the year; |
|
| e) |
the rights, preferences and
restrictions attaching to each type of share;
|
|
| f) |
shares in the entity held by
the entity or by its subsidiaries or associates;
and |
|
| g) |
shares reserved for issue under
options and contracts for the sale of shares,
including the terms and amounts. |
|
