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Semester 3: Corporate Accounting I
Issue of Shares: Premium, Discount, Forfeiture, Reissue, Pro-rata Allotment, Rights, Bonus Shares
Issue of Shares
Premium on Shares
Premium refers to the amount received by a company over and above the face value of its shares. It indicates investors' confidence in the company's prospects. Premium can be calculated as the difference between the issue price and the face value.
Discount on Shares
Discount occurs when shares are issued at a price lower than their face value. This situation may arise in certain circumstances, such as when a company is in financial distress and needs to attract investors quickly.
Forfeiture of Shares
Forfeiture refers to the process where a company cancels an unpaid share due to non-payment of calls by the shareholders. The shares become the property of the company again, and the shareholder loses their rights to the shares.
Reissue of Forfeited Shares
After forfeiture, a company may reissue the shares to new or existing shareholders. Reissued shares may be offered at a premium or discount depending on the circumstances.
Pro-rata Allotment
Pro-rata allotment means distributing shares to existing shareholders based on their current shareholding percentage. This approach ensures equity among shareholders during new share issues.
Rights Issue
A rights issue allows existing shareholders the first opportunity to purchase additional shares, usually at a discounted price. This mechanism helps companies raise capital while giving current shareholders a chance to maintain their ownership percentage.
Bonus Shares
Bonus shares are additional shares given to existing shareholders without any extra cost, based on the number of shares they already hold. This method is used to reward shareholders and indicate company growth without redistributing cash.
Issue/Redemption of Preference Shares and Debentures: Provisions, Methods, Sinking Fund, Purchase in Open Market
Issue/Redemption of Preference Shares and Debentures
Introduction to Preference Shares
Preference shares are equity instruments that have preferential rights over ordinary shares regarding dividend payments and asset distribution upon liquidation. They usually have fixed dividends.
Types of Preference Shares
Various types include cumulative, non-cumulative, participating, non-participating, convertible, and redeemable preference shares.
Introduction to Debentures
Debentures are debt securities issued by a company to borrow money, with a fixed interest rate and repayment terms. They do not provide ownership rights.
Types of Debentures
Debentures can be secured or unsecured, convertible or non-convertible, and can carry fixed or variable interest rates.
Provisions for Issue and Redemption
Companies must comply with legal provisions under the Companies Act regarding the issuance and redemption of preference shares and debentures, including consent from shareholders.
Methods of Redemption
Common methods include payment in cash, conversion into equity shares, and redemption at a premium or par value.
Sinking Fund Method
A sinking fund method involves setting aside money regularly to redeem debentures on maturity, ensuring funds are available for repayment.
Purchase in Open Market
Companies may buy back their debentures or preference shares from the open market, which can help manage capital structure and often at market rates.
Final Accounts as per Companies Act, 2013: Balance Sheet, Statement of Profit and Loss, Managerial Remuneration
Final Accounts as per Companies Act, 2013
Balance Sheet
The Balance Sheet is a financial statement that reflects the financial position of a company at a specific point in time. It is divided into two main sections: Assets and Liabilities. Assets are classified as Non-Current Assets and Current Assets. Liabilities are further subdivided into Shareholders' Funds (Share Capital, Reserves & Surplus) and Non-Current Liabilities and Current Liabilities. The format of the Balance Sheet is prescribed by the Schedule III of the Companies Act, 2013.
Statement of Profit and Loss
The Statement of Profit and Loss is prepared to show the company's financial performance over a period of time. It includes revenue earned and expenses incurred. The statement starts with the revenue from operations, followed by other income, total income, and then the expenses incurred, which include cost of goods sold, operating expenses, and taxes. The result is the net profit or loss for the period. The format for this statement is also prescribed in Schedule III.
Managerial Remuneration
Managerial remuneration refers to the compensation paid to the key management personnel of a company. Under the Companies Act, 2013, the remuneration of directors and other managerial personnel is regulated to ensure it is reasonable and adequate, based on the company's profitability. The Act specifies a maximum limit for remuneration, which requires approval by shareholders and may need the approval of the Central Government in certain cases. Transparency in disclosure is mandated in the financial statements.
Valuation of Goodwill: Average Profit, Super Profit, Capitalisation
Valuation of Goodwill
Introduction to Goodwill
Goodwill represents the intangible value of a business beyond its physical assets. It includes elements such as brand reputation, customer relationships, and employee expertise. Goodwill arises when a business is purchased for more than the fair value of its identifiable assets and liabilities.
Average Profit Method
The Average Profit Method calculates goodwill by averaging the profits of a business over a certain period, typically 2-5 years. The average profit is then multiplied by a predetermined number of years' purchase to determine the value of goodwill. This method is straightforward but may not reflect future earning potential.
Super Profit Method
The Super Profit Method focuses on the excess profit generated by a business over and above the normal or expected returns on investment. Super profit is calculated by deducting an expected return on capital employed from actual profit. Goodwill is then determined by multiplying super profit by a number of years' purchase.
Capitalization Method
The Capitalization Method involves determining the value of goodwill based on a business's earning capacity. It typically uses an average profit figure and capitalizes it at a reasonable rate of return. The formula generally used is: Goodwill = (Average Profit / Expected Rate of Return) - Net Assets. This method provides a comprehensive view of the business's ability to generate profits.
Conclusion
Valuing goodwill is essential for accurate accounting during mergers and acquisitions. The choice of method can affect financial statements and stakeholders' perspectives on the company's value. Understanding the implications of each method aids in making informed financial decisions.
Valuation of Shares: Methods and Need
Valuation of Shares: Methods and Need
Introduction to Share Valuation
Share valuation refers to the process of determining the worth of a company's shares. It is essential for investors, analysts, and financial professionals to understand the value of share capital for various reasons, including investment decisions, mergers and acquisitions, and financial reporting.
Methods of Valuation
There are several methods for valuing shares, including: 1. Market Capitalization: This method calculates the total market value of a company's outstanding shares based on the current market price. 2. Earnings Valuation: This approach focuses on a company's earnings, utilizing metrics like Price-to-Earnings (P/E) ratio to assess share value. 3. Dividend Discount Model: This method estimates a share's intrinsic value based on the present value of expected future dividends. 4. Asset-based Valuation: This method assesses a company's assets and liabilities to determine the net asset value per share.
Need for Share Valuation
Valuation of shares is needed for several reasons, such as: 1. Investment Decisions: Investors require accurate valuations to make informed decisions about buying or selling shares. 2. Corporate Governance: Proper valuation ensures fair treatment of shareholders, particularly during events like stock splits or mergers. 3. Financial Reporting: Companies must report accurate valuations for transparency and compliance with accounting standards. 4. Legal Requirements: Share valuation may be necessary for legal cases involving shareholder disputes or company restructuring.
Conclusion
Understanding the valuation of shares and its methods is crucial for various stakeholders in the financial markets. Accurate valuation aids in achieving fair market practices and contributes to overall market efficiency.
