How is share premium amount treated by a company?
A company issues its shares at a premium when the price at which it sells the shares is higher than their par value. … The amount of the premium is the difference between the par value and the selling price. If shares do not have a par value, then there is no premium.
Shares are considered to be issued at a premium if the amount received for issued shares is greater than the face value of shares. The premium is calculated by finding the difference between the share issue price and the par value of shares offered for sale.
A share premium is the amount paid for an equity in excess of its nominal value, that is; its market value less its book cost. … The purchaser would be deemed to have paid a premium on the purchase which would be recorded in the share premium account in the company’s books.
Key Difference – Share Capital vs Share Premium
The key difference between share capital and share premium is that while share capital is the equity generated through the issue of shares at face value, share premium is the value received for shares that exceed the face value.
The share premium account is usually utilized to pay off equity expenses, which include underwriter fees. The account can also be used in the issuance of bonus shares and for costs or expenses related to this issuance.
All types of companies can issue their shares at premium. As per the provisions of Section 52 of the Companies Act, 2013 a company can issue shares at a premium, whether for cash or otherwise.
When shares are issued at a price higher than the face value, they are said to be issued at a premium. Thus, the excess of issue price over the face value is the amount of premium. … the premium on issue of shares must not be treated as revenue profits.
As the NAV has been rising, the share premium on that particular sub fund has become negative due to large redemptions. The overall result is that the share premium is now showing a debit balance, in spite of credit balances on other sub funds, because of the very significant debit balance on the one sub fund.
As per common sense Share premium is not ‘profit’ or ‘gain’:
Share premium is capital receipt and contributed as such by the shareholders. The amount of premium is neither ‘profit’ nor ‘gain’ of the company, it is capital receipt to be accounted for as share premium.
There are a few steps to go through, in summary these are:
- Ensure the company’s articles allow a capital reduction.
- All directors must sign a solvency statement.
- Shareholders must approve the capital reduction via a special resolution (needing 75% of the votes) within 15 days of the solvency statement date.
In accordance with article 3 of the Companies (Reduction of Share Capital) Order (SI 2008/1915), the reserve created on such reduction can be treated as a realised profit and, therefore, it may be distributed to shareholders or used to buy back shares.
The proceeds are left in the company to reinvest or draw on as they wish, as basic rate dividends and a personal allowance level salary to withdraw funds tax free.