BLP Guide 2 - Notes for the second portion of the BLP module (Equity/Debt Finance, Business PDF

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Download BLP Guide 2 - Notes for the second portion of the BLP module (Equity/Debt Finance, Business PDF

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2021/22

BLP Guide 2 Exam Notes – – – –

Equity Finance Debt Finance Business Accounts Taxation

TABLE OF CONTENTS EQUITY FINANCE ............................................................................................................................ 5 STRUCTURE OF SHARE CAPITAL ......................................................................................................... 5 CLASSES OF SHARE ............................................................................................................................ 5 ISSUING SHARES ................................................................................................................................. 6 PROCESS AND PROCEDURE FOR ALLOTMENT OF SHARES ..................................................................... 9 STEP 1: IS THERE A CAP? ............................................................................................................................ 9 STEP 2: DO THE DIRECTORS HAVE AUTHORITY TO ALLOT THE SHARES TO BE ISSUED? .................................... 9 STEP 3: PRE-EMPTION RIGHTS – DO THEY NEED DISAPPLYING, IF SO, HOW? ................................................ 10 STEP 4: IF APPLICABLE UPDATE ARTICLES TO REFLECT NEW CLASS OF SHARE ........................................ 11 STEP 5: AS APPLICABLE POST MEETING MATTERS AND FORMS ............................................................... 11 EQUITY SECURITIES ........................................................................................................................... 12 TAKING CARE NOT TO INADVERTENTLY OFFER TO PUBLIC IF A PRIVATE COMPANY ............................... 12 ALLOTING SHARES WHERE DIRECTORS ARE NOT AUHTORISED ............................................................ 13 REVOKING DIRECTOR AUTHORITY TO ALLOT SHARES .......................................................................... 13 CALCULATIONS - ISSUING SHARES ..................................................................................................... 13 HOW MANY SHARES NEED ISSUING TO GIVE X AMOUNT OF VOTING RIGHTS?................................................. 13 WHAT SUBSCRIPTION PRICE IS BEING PAID FOR THE SHARES? ..................................................................... 14 PERCENTAGE FOR PREFERENCE SHARES TO ENSURE A CERTAIN AMOUNT OF DIVIDEND EACH YEAR .............. 14 DEBT FINANCE .............................................................................................................................. 15 TYPES OF DEBT FINANCE .................................................................................................................. 15 LENDER’S AIMS, CONCERNS AND PROTECTIONS ................................................................................. 16 SECURITY ....................................................................................................................................... 16 TYPES OF SECURITY: ................................................................................................................................ 17 WHAT THE BORROWER SHOULD CONSIDER : ................................................................................................ 17 FIXED VS FLOATING CHARGES ................................................................................................................... 17 Examples of what should be fixed and floating charges .....................................................................................................18

PROCEDURE FOR ARRANGING A TERM LOAN ..................................................................................... 18 STEP 1 INITIAL CHECKS ........................................................................................................................... 18 STEP 2 NEGOTIATION .............................................................................................................................. 18 STEP 3 AGREEMENT AND RECEIPT OF FUNDS ........................................................................................... 19 STEP 4 POST-AGREEMENT ...................................................................................................................... 19 KEY CLAUSES IN LOAN AND SECURITY DOCUMENTATION................................................................... 20 LOAN DOCUMENTS ................................................................................................................................... 20 SECURITY DOCUMENTS ............................................................................................................................. 20 EVENT OF DEFAULT ........................................................................................................................... 20 EQUITY V DEBT FINANCING ........................................................................................................ 21 BUSINESS ACCOUNTS ................................................................................................................. 23 KEY POINTS ...................................................................................................................................... 24 PROFIT AND LOSS ............................................................................................................................. 24 GOODS BUSINESSES: ................................................................................................................................ 24 SERVICES BUSINESSES: ............................................................................................................................ 25 END OF YEAR ADJUSTMENTS ............................................................................................................ 25 ACCRUALS ............................................................................................................................................... 25 PRE-PAYMENTS ........................................................................................................................................ 25 DEPRECIATION – STRAIGHT LINE METHOD .................................................................................................. 26 DEPRECIATION – REDUCING BALANCE METHOD .......................................................................................... 26

Key: Act; Case

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BAD + DOUBTFUL DEBTS .......................................................................................................................... 27 MONEY RECEIVED IN ADVANCE ................................................................................................................. 28 BALANCE SHEET............................................................................................................................... 29 EFFECT OF TRANSACTIONS ON BALANCE SHEET ............................................................................... 30 ISSUING NEW SHARES (ORDINARY/PREFERENCE ETC) FOR CASH ................................................................ 30 BONUS ISSUE OF SHARES ......................................................................................................................... 32 TAKING OUT/PAYING OFF A LOAN .............................................................................................................. 33 REVALUATION OF PROPERTY ..................................................................................................................... 33 DECLARATION OF DIVIDENDS ..................................................................................................................... 34 Declared Dividend ...............................................................................................................................................................34 Interim Dividend ..................................................................................................................................................................34 DIVIDENDS In the accounts ...............................................................................................................................................34

INTERPRETING ACCOUNTS ................................................................................................................35 PREPARATION OF ACCOUNTS .................................................................................................................... 36 TAXATION ...................................................................................................................................... 37 TERMINOLOGY .................................................................................................................................. 37 ASSESSMENT OF TAX ........................................................................................................................ 37 CALCULATING INCOME TAX ............................................................................................................... 37 INCOME EXEMPT FROM INCOME TAX: .......................................................................................................... 37 1. ADD UP ALL INCOME = TOTAL INCOME ................................................................................................. 37 Examples of income and savings .......................................................................................................................................37

2. SUBTRACT AVAILABLE TAX RELIEFS = NET INCOME ............................................................................... 38 3. DEDUCT PERSONAL ALLOWANCE = TAXABLE INCOME ........................................................................... 38 4. CALCULATE NSI: SPLIT NON-SAVINGS, SAVINGS, DIVIDEND .................................................................. 38 5. CALCULATE PERSONAL SAVINGS ALLOWANCE (PSA) – FOR SI ............................................................. 38 6. APPLY RELEVANT RATES .................................................................................................................... 38 REDUCING INCOME TAX LIABILITY .............................................................................................................. 39 CAPITAL GAINS TAX OVERVIEW ......................................................................................................... 40 OVERVIEW ................................................................................................................................................ 40 CALCULATING CAPITAL GAINS TAX .................................................................................................... 41 EXCLUDED ASSETS ................................................................................................................................... 41 1. CONSIDERATION RECEIVED/DEEMED CONSIDERATION ........................................................................ 41 2. NET SALE PROCEEDS ........................................................................................................................ 41 3. TOTAL CHARGEABLE GAIN ................................................................................................................. 41 4. TAXABLE CHARGEABLE GAIN .............................................................................................................. 41 5. APPLY APPLICABLE RATE ................................................................................................................... 42 6. BADR AND IR.................................................................................................................................... 42 Business Asset Disposal Relief (BADR) on the Sale of Shares .........................................................................................42 Investors Relief (IR) on the Sale of Shares.........................................................................................................................42 VAT & STAMP TAXES ....................................................................................................................... 42

VAT ......................................................................................................................................................... 42 STAMP TAXES ........................................................................................................................................... 43 CORPORATION TAX ........................................................................................................................... 44 SUMMARY ................................................................................................................................................ 44 CALCULATING INCOME PROFITS ........................................................................................................ 44 1. INCOME RECEIPTS ............................................................................................................................. 44 2. MINUS DEDUCTIBLE EXPENDITURE – 3 REQUIREMENTS ....................................................................... 45 Test – which of these meets the TAX-DEDUCTIBLE criteria? ...........................................................................................45

3.

MINUS CAPITAL ALLOWANCES (DEDUCTED FROM INCOME PROFITS – EXCEPTION TO GENERAL SEPARATE

RULE) ....................................................................................................................................................... 45

Plant and Machinery ...........................................................................................................................................................45

4.

MINUS TRADING LOSSES .................................................................................................................... 46

Key: Act; Case

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= INCOME PROFITS ................................................................................................................................... 46 CALCULATING CHARGEABLE GAINS .................................................................................................. 46 1. CONSIDERATION RECEIVED ................................................................................................................ 46 2. MINUS ALLOWABLE EXPENDITURE (NET SALE PROCEEDS) .................................................................. 46 3. MINUS INDEXATION ............................................................................................................................ 46 4. MINUS CAPITAL/TRADING LOSSES ...................................................................................................... 46 = CHARGEABLE GAINS .............................................................................................................................. 46 RELIEF.............................................................................................................................................. 47 ROLLOVER RELIEF .................................................................................................................................... 47 Holdover Relief ...................................................................................................................................................................47

PAYING CORPORATON TAX ................................................................................................................ 47

Key: Act; Case

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Equity Finance EQUITY FINANCE STRUCTURE OF SHARE CAPITAL • •

•

• •

Shares are a bundle of rights which allow an investor to be a part owner of a company Incentives of purchasing shares: o Income (dividends) o Capital gains (by growth in value of company) o Some rights to profits/assets on winding up Shares must have both a fixed nominal value, without which it would be void (s.542(2), which represents the base level value of the shares. They tend to have a subscription price which is above this nominal value. The subscription price minus the nominal value gives the share premium. o The amount paid by the shareholder is the paid-up share capital o If payment is still owing, the company can all the payment up When shares are allotted (s.558) an individual has a right/is unconditionally entitled to be included in the company’s register of members When shares are issued, this means a shareholder is actually registered in the Register of Members and title is complete

CLASSES OF SHARE •

There are different rights that can be attached to shares (class rights), the main types being:

Ordinary Shares Preference Shares

•

All rank equally

•

Redeemable Shares

•

Gives the holder preferential treatment to receive divided and/or recover capital on winding up o % based on nominal or subscription price o May or may not give right to vote – but always has the right on any proposal to change their preference rights (s.630) o May be cumulative, meaning if a preference dividend is not paid in one year the right carries forward to the next o May be participating, meaning they also participate in the ordinary dividend distribution Shares which the company can, at some time in the future, redeem to return the shareholder their investment

Note – still need to check company’s articles as these share types are not written in statute and can be varied – these are just what is typically meant by these types of shares.

Key: Act; Case

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Equity Finance ISSUING SHARES

Key: Act; Case

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Equity Finance Initial checks?

PRIVATE COMPANY WITH SINGLE CLASS OF SHARES A company that has one class of shares prior to the allotment and is proposing to issue a new class in the allotment is deemed to be a company with more than one class of shares, and thus examined in the row below

Is the company governed by CA 1985 or CA 2006?? Are there any caps on the number of shares which can be issued? (check Articles for CA 2006 company or Memorandum for 1985 company) Need to check for any resolutions requiring a cap or eliminating a cap and also check the number of shares which have already been issued. Note the difference between 1985 and 2006 companies. 1985 companies had to have a provision for authorised share capital and s.28 CA 2006 means this is adopted as part of their articles. Unless this has been removed, there will be a cap. 2006 companies do not have this cap. Need to check for any resolutions requiring a cap or eliminating a cap and also check the number of shares which have already been issued.

Key: Act; Case

Power of directors to issue shares derives from? And/or what are these powers subject to? s.550 – directors have power to allot more shares of those in the same class as the existing shares in issue. This provision automatically applies to companies incorporated after Oct 2009 when CA 2006 came in. Any incorporated before Oct 2009 can opt into this s.550 provision by an ordinary resolution.

Do shareholders have a right of preemption? (list criteria/exemptions) s.561 – statutory right of pre-emption for existing shareholders where the company is issuing new equity securities. s.565 pre-emption rights do not apply where equity securities are being offered wholly or in part for non-cash consideration.

Method of disapplying pre-emption rights s.569 allows for the disapplication of preemption rights for private companies with one class of share – the disapplication can be provided for in the articles or by way of a special resolution. .

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Equity Finance OTHER COMPANY

As above

s.551 applies for companies with more than one class of share. It provides that directors may allot shares if they are authorised to do so in the articles or by an ordinary resolution of the company. The authorisation can either be for a particular exercise of ...