1 Ordinary Shares
Ordinary share represents the fraction of capital subscribed in the company.
Ordinary shares have par value or nominal value. It is the price of share written on the face of document either in the form of hard copy or soft copy.
Ordinary shares can be issued both above and below par value. In former case, share is considered to be issued at premium. In later case, share is considered to be issued at discount.
If a share is issued at premium that surplus above par value is credited (increase) to share premium account.
If a share is issued at discount that deficit above par value is debited (decrease) to share premium account.
Firstly, a share premium account is debited. Any excess remaining is then debited to share capital account.
Any issue cost incurred is first debited (decrease) to share premium account. Any excess remaining is then debited to share capital account.
Par value or nominal value is written on the face of document to comply with company law 2006 UK.
It is also used to determine the total no of shares in issue.
2 Preference Share Capital
Preference share capital is prior charged capital.
Preference shareholders to prior claim on profits and surplus assets in the event of winding up.
Preference shares can be either cumulative or non-cumulative.
All preference shares are cumulative unless specifically stated as non-cumulative.
Cumulative preference shares have claim on unpaid dividends from previous years.
Non-cumulative preference share do not have any claim on unpaid dividends from previous years.
Preference shareholders cannot legally compel company for the payment of dividends. However, any thing has to be paid to ordinary shareholder, preference shareholders must be paid first according to company law 2006 UK.
It necessary to check the type of preference shares for calculation of dividend payments to preference shareholders.
In addition, preference shares either redeemable or irredeemable.
Both redeemable and irredeemable preference shareholders are owners of the company according to company law 2006 UK. However, redeemable preference shareholders are creditors and recognized as long term liability for accounting purpose in the light of substance over form principle. Any preference dividend paid to redeemable preference shareholders are recognized as finance cost to the entity.
Preference shares redeemable in one accounting period should be recognized as short-term liability.
Usually accounting period for limited companies (both private and public) is 12 months or 1 year, as required by company law 2006 UK, except in exceptional cases.
Dividend payable on preference shares is written just before preference shares, such as 10% preference shares.
Preference dividend paid to preference shareholders does not attract any tax relief, as they are owners according to company law 2006 UK. According to tax law in UK, owners cannot claim tax relief on profits distributed as dividend.
3 Loan Notes or Debentures
Loan notes or debenture can only be issued by publicly listed companies.
Public listed companies’ securities are quoted/traded in stock market/exchange.
Loan notes holders are creditors and recognized as Long term liability in SFP. However, loan notes redeemable in one accounting period should be recognized as short term liability.
In UK, Loan notes have par value or nominal value of £100.
Interest payable on loan notes is written just before loan notes, such as 10% loan notes.
Loan notes are debt finance and therefore, it attracts tax relief at the rate income tax payable.
Tax relief does not reduce the amount of interest payable. Tax relief is the reduction in income tax expense in SOCI.
3.1 Type of Loan Notes
- Zero Coupon Loan Notes
- Deep Discount Loan Notes
- Convertible Loan Notes
- Irredeemable Loan Notes
- Redeemable Loan Notes