Share premium relief in UK help!!!!!

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Gill Gittings
Gill Gittings Registered Posts: 121 Dedicated contributor 🦉
I have a problem and need some advice please.
My boss has asked me to look into a problem and I'm not really sure were to start. A company has issued shares over and above par value and I think a share premium account should be set up. My boss says there might be a way around this as a premium account cannot be withdrawn.

Had anyone come across this before?

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  • Gill Gittings
    Gill Gittings Registered Posts: 121 Dedicated contributor 🦉
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    Sorry posted in wrong forum. Was meant to be in MIP forum.
  • Steve Collings
    Steve Collings Registered Posts: 997 Epic contributor 🐘
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    You're getting into the deep and meaningful technicalities here!! :)

    Your boss is right that there "may" be a way around creating a share premium account - but (and it's a big "but") the circumstances are quite limited.

    What are the circumstances surrounding this share issue? Ordinarily if a company issues shares above their par value you would have to create (or increase) a share premium account to deal with the difference. There is such a thing as "merger relief" or "reconstruction relief" in the UK but do not confuse this with "merger accounting" (FRS 6). This relief is only available where the acquiring company acquires 90% of the equity of the company being sold but the consideration for the shares must be either the issue or transfer of the shares in the company being sold to the acquiring company or the cancellation of the shares in the company being sold which are not held by the acquiring company.

    If you can demonstrate this company in your situation qualifies for such relief then you won't have to transfer any premium issued on the shares to a share premium account. So for example if you issue 100,000 £1 shares for £250,000 normally you would set up a share premium account to take the £150,000 difference. If merger relief is available you don't have to create the share premium account and the investment can be stated at a cost of £100,000. However you could choose to state the investment at full effective cost of £250,000 and then transfer the £150k excess to a separate (distributable) reserve.

    Be very careful though with this!

    Kind regards
    Steve
  • Gill Gittings
    Gill Gittings Registered Posts: 121 Dedicated contributor 🦉
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    Aww thanks Steve. It's just a general share issue to raise money but my boss doesn't want to put it to a share premium account. Can we out it somewhere else so it can be distributed if needs be?
  • Steve Collings
    Steve Collings Registered Posts: 997 Epic contributor 🐘
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    It's just a general share issue to raise money but my boss doesn't want to put it to a share premium account. Can we out it somewhere else so it can be distributed if needs be?

    Well, no - the excess of par value over issue price is a premium which will go to a share premium account (it cannot be "dressed up" to make the premium distributable). The Companies Act 2006 makes this very clear. Once a share premium account is created the Companies Act treats it as share capital which means it is undistributable.

    Kind regards
    Steve
  • Gill Gittings
    Gill Gittings Registered Posts: 121 Dedicated contributor 🦉
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    Thanks Steve. Could the proceeds perhaps be treated as a loan? Just thinking of various different treatments at the minute :/
  • Steve Collings
    Steve Collings Registered Posts: 997 Epic contributor 🐘
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    Hi Gill,

    It depends!

    If the share issue is on ordinary equity shares that don't have any type of redemption feature attached to them (which, generally speaking, ordinary issued shares do not) then you cannot classify them as a liability because, by definition, they are equity shares and thus you would recognise the par element of the issue in ordinary share capital, with the premium being recognised in share premium - both are undistributable reserves.

    If, however, the share issue does have a form of redemption attached to it (i.e. if the shares issued are preference shares which give the holder(s) of those shares a right to receive cash (either interest or future redemption)) then you can classify them as debt (liability). You should consult the provisions in FRS 25 / IAS 32 to establish the correct treatment.

    Where issues of (say) preference dividends give the holder a right to receive cash you might have to do a calculation to establish the 'debt' component and the 'equity' component of the issue.

    Regards
    Steve
  • beverly hudson
    beverly hudson Registered Posts: 95 Regular contributor ⭐
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    You need to debit bank, credit share capital and credit share premium.
  • Julia
    Julia Registered Posts: 78 Regular contributor ⭐
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    Beverley I don't think the OP wanted to know the book entries. I think she just wanted clarification that's all.

    Julia
  • Steve Collings
    Steve Collings Registered Posts: 997 Epic contributor 🐘
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    Julia wrote: »
    Beverley I don't think the OP wanted to know the book entries. I think she just wanted clarification that's all.

    Julia

    Though Beverly has put the correct entries up for the OP.... just in case.

    Regards
    Steve
  • beverly hudson
    beverly hudson Registered Posts: 95 Regular contributor ⭐
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    Julia I put the entries for completeness as Steve had not done so. It is much better to be complete were questions like this are concerned.
  • Rachey
    Rachey Registered Posts: 589 Epic contributor 🐘
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    Steve,

    The next time you post a response in such detail with great knowledge, would you care to be more complete please? How we are supposed to pass exams with such incompleteness is beyond me.

    Kind Regards

    Rachel
  • Bluewednesday
    Bluewednesday Registered Posts: 1,624 Beyond epic contributor 🧙‍♂️
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    tax treatment as well? For completeness?

    This could go on!
  • Rachey
    Rachey Registered Posts: 589 Epic contributor 🐘
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    tax treatment as well? For completeness?

    This could go on!

    I am completely shocked, I have tried to phone the helpline but they wont answer my call. It's so unfair.
  • CJC
    CJC Registered Posts: 1,657 Beyond epic contributor 🧙‍♂️
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    You'd think they'd have someone there on a Sunday evening, wouldn't you. Or maybe they knew it was you so didn't answer.
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