Chapter 1- company account PDF

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FAR 250 ~ FINANC IAL AC C O UNTING 4At the end the chapter, students should be able to: 1. explain the characteristics of a company 2. differentiate between public and private companies 3. explain how a company is registered 4. explain the differences between Memorandum of Association and Articles o...

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FA R 250 ~ FINA NC IA L A CC O UNTING 4

At the end the chapter, students should be able to: 1. explain the characteristics of a company 2. differentiate between public and private companies 3. explain how a company is registered 4. explain the differences between Memorandum of Association and Articles of Association 5. identify the various classes of shares 6. explain the meaning of debentures and its characteristics

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1.1

INTRODUCTION

1.1.1

Definition of a Company A body of persons (minimum of 2) joined together for purposes of business as a separate legal entity. It is created under the provision of the Companies Act 1965

1.1.2

Advantages of a Company Most large businesses are in the form of companies. This form of business is preferred because of the following:

a) Limited liability Shareholders liability of a limited company is limited to the unpaid amount of capital invested in the company. If a company cannot pay its liabilities, the shareholders have no personal obligation for the company’s liabilities.

b) Separate legal entity From the legal point of view, a company has a separate entity from its owners or shareholders. The implications of having separate legal entity are: i.

a company can buy, own and sell a property under its own name

ii. a company can enter into contracts iii. a company can sue and be sued

c) Perpetual existence A company has perpetual existence i.e. it is unaffected by changes of ownership when shares are transferred or when shareholders die (especially for public company)

d) Easy to raise capital Public company has opportunity to trade shares on the stock exchange. Thus it has opportunity to raise large amounts of capital through the issue of shares and debentures to the public

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1.2

CLASSIFICATION OF COMPANIES 2 BASIC TYPES

Statutory Companies

Registered Companies

Incorporated under Parliament Acts

Incorporated under Companies Act 1965

Public companies

Private companies

Exempt private companies

Foreign companies

Min. no. of members is 2 and no limit on the max. no.

Min. no. of members is 2 and limited to 50 members

Private ltd companies with not more than 20 members

Incorporated outside Malaysia but carry business in Malaysia

Can offer shares and debentures to the public

Prohibited from issuing shares and debentures to the public

May not required to file accounts with CCM

Have the word Bhd at the end of their names

Have the word Sdn Bhd at the end of their name

No restriction of transfer of shares

Transfer of shares is restricted

Investment Companies Public companies engaged primarily in investment in marketable securities for the purpose of revenue and not for the purpose of exercising control

Must submit financial reports to Companies Commission of Malaysia (CCM) May be listed on Bursa Malaysia

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Companies

Limited Liability

Unlimited Liability

Limited by shares

Limited by guarantee

Liabilities are limited to the unpaid amount

Liabilities are limited as specified in the

on the share capital

Memorandum of Association

The personal assets of a shareholder will

Members have guaranteed to contribute to

not be affected

the assets of the company on winding up

Private Company

Non-exempt Private Company

1.3

Public Company

Exempt Private Company

Listed Company

Non-listed Company

COMPANY FORMATION

1.3.1

Procedures to form a company To form a company, normally the following procedures will be carried out: 1. Draw up the constitution of a company which comprises of : a) the Memorandum of Association (MOA) o

regulates the external affairs of the company

o

contains the following •

the name of the company

•

location of the company’s registered office

•

the activities in which the company may legally operate

•

statement that the liability of the members is limited (for a ltd liability company) and for an unlimited liability company, it must state that the liability is unlimited

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•

the amount the authorized capital for each class of shares and the par value of each share.

b) the Articles of Association (AOA) o

set out the rules covering the internal affairs of the company

o

contain the following: •

the rights of different classes of shareholders

•

the transfer of shares

•

the duties, powers and proceedings of directors

•

notice and proceedings of meetings

•

the borrowing power of the company

2. Both MOA and AOA must be signed by at least two persons who are to be the first directors of the proposed company.

3. The documents must be lodged with CCM together with the appropriate fees and other relevant documents.

4. After all legal requirements have been met, CCM will issue a Certificate of Incorporation. After receiving the certificate, a private company may commence business. 5. For a public company, it must receive Certificate to Commence Business before business is commenced. 1.3.2

Prospectus Before a public company can issue its shares or debentures to the public, it has to issue prospectus inviting the public to subscribe for shares. It is designed setting out the background of the company and report by the accountant on the company’s performance and also expected future financial positions of the company. The prospectus will be circulated to the public through a newspaper advertisement. The minimum amount of capital to be raised must be specified.

1.3.3

Preliminary / Formation Expenses These expenses are all organizational costs involved when a company is established. Such expenses include: a) registration fees paid to the CCM b) fees paid to solicitors for drawing up the MOA and AOA

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c) printing costs of the various documents such as prospectus d) payments made to the promoters of the company

1.4

CAPITAL STRUCTURE a) Authorized/Nominal/ Registered Capital This is the maximum capital that a company can issue which is specified in the Memorandum of Association. It is normally shown in the notes to the financial statements of the company. Eg: XYZ Bhd had an authorised capital of RM1,000,000 consisting of 2,000,000 ordinary shares of RM0.50 each. This means that the company cannot issue more than 2,000,000 ordinary shares. However, the authorized capital can be increased by applying to the CCM. b) Par or Nominal Value This is the face value attached to each unit of shares. For example, if a company has ordinary shares of RM0.50 each, it means the par or nominal value of the ordinary shares is RM0.50

c) Issued Capital This is part of the authorised capital that has been issued to the public. Issued capital will increase gradually as and when a company needs funds, it will issue shares to the public. The issued capital cannot exceed the authorised capital.

For example, XYZ Bhd had issued capital of RM500,000 which consists of 1,000,000 ordinary shares of RM0.50.

d) Unissued Capital This is the difference between authorised capital and issued capital. It represents the amount of capital that can still be issued to the public. For example, XYZ Bhd has unissued capital of RM500,000.

e) Called Up Capital This is the amount of money that a company has called up on the issued capital which the subscribers are required to pay within a specified time. For example, XYZ had issued capital of RM500,000 which consists of 1,000,000 ordinary

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shares of RM0.50. To date, the company had called for only RM0.40 per share. Thus, the called up capital of the company is RM400,000 (1,000,000 x RM0.40)

f) Uncalled Capital This represents money on the issued capital which the subscribers are not required to pay within a specified time. Using example in (e), the uncalled capital is RM100,000 (1,000,000 x RM0.10)

g) Paid Up Capital This indicates the amount of called up capital that has been paid by the subscribers

h) Unpaid Capital This is also known as call in arrears. It refers to the amount of the called up capital that the subscribers failed to pay when the money was called.

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1.5

TYPES OF EQUITY INSTRUM INSTRUMENT ENT SHARES CAN BE CLASSIFIED AS

Ordinary Shares

Preference Shares

Deferred Shares

Have the rights to

Have preferential rights as to the

Known as founder/s shares

vote

payment of dividend and repayment of capital in the event of liquidation

The owner of the

Dividend rate is fixed

company

Issued to founder or promoters of the company

Risk takers

Do not have voting rights

Dividends and return on capital come after rights of the ordinary shareholders have been satisfied

Dividend rate

May be classified as equity,

depends on profit

debts or hybrid

level and dividend policy of the company

1.5.1 Types of Preference Share Capital a) Cumulative preference shares The shareholders are entitled to receive a fixed dividend per annum. If dividends are not paid in any year, the arrears can be carried forward and become payable in the future

b) Non-cumulative preference shares Provided that the company has sufficient profits to declare dividends, the shareholders will receive a fixed dividend rate. If the dividends are not paid in a particular year, the dividends for that year are forfeited and cannot be carried forward

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c) Participating preference shares The shareholders will receive fixed dividend and additional dividends may be received to the extent stated in the Articles of Association, after all the other classes of shareholders have received their dividends

d) Non-participating preference shares These shareholders are not entitled to get additional dividends after all the other classes of shareholders have received their dividends

e) Redeemable preference shares These shares will be redeemed or purchased by the company in future as determined at the time of the issue.

f) Convertible preference shares These shares will be converted into ordinary shares in the future as stated in the Articles of Association.

1.6

T Y PE S O OF F D DE EBT IIN NSTRUMENT

a) Redeemable preference shares These shares will be redeemed or purchased by the company in future as determined at the time of the issue.

b) Debentures Debentures are loan capital with a fixed interest rate. Debentures may be redeemable and may be convertible into ordinary shares at or by a specified date. Debentures may be listed on the stock exchange. Thus, the rights attached to debentures are transferable and a debenture holder needs not hold on to the debentures if he does not want to.

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1.6.1

Difference between an equity and a debt instrument Debentures

Shares

Company pays a fixed interest based on

Payment on dividend on OS is not

the Nominal Value of the debentures at a

compulsory. The amount of dividend

specified time regardless of whether the

depends on the profit level and the co’s

co. makes a profit or not

dividend policy. Dividend on PS is fixed but payment is not compulsory

Debenture holders are creditors of the

Ordinary shareholders are the owner of

co. and do not have any voting rights.

the company and have voting rights

Trustees are appointed to act on behalf of the debenture holders. The rights and responsibilities of the trustees will be determined in the trust deed

Debenture interest is an expense, which

Dividends are distribution of profits and

is

shown in the statement of changes in

charged

to

the

Statement

Of

Comprehensive Income (SOCI)

equity

Debenture holders have a priority claim over the shareholders of the company to the assets of the co in the event of the co winding up as they are creditors of the company

1.6.2

Charges over Debentures Debentures are often secured to certain assets of the company. If the company cannot pay interest or loan capital on the due date, the trustees can take possession of the charged assets and sell the assets to repay the debenture holders. However, the company can still use the assets in the normal course of its business.

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Two types of charges

Floating Charge

Fixed Charge

Debentures are secured to a group of

A specific asset is charged to the

assets. The co can replace an asset

debentures. The co can use the asset in

from the group of assets charged with

the normal course of business but will be

another asset.

unable to sell the asset

COMPREHENS COMPREHENSIVE IVE EXERCISE QUESTION 5 (APRIL 2007) a)

Explain the differences between share capital and loan capital. (6 marks)

b)

Give two (2) situations where a company may increase its number of shares without increasing new funds. Explain why a company would embark on such a program. (4 marks)

c)

What are the 2 statutory documents that need to be submitted to the Companies Commission Malaysia for registration of a company, and state their purposes.

(4 marks) (Total: 14 marks)

SOLUTION a)

Share Capital •

It is the capital of a company invested by the owners who are termed as shareholders.

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•

Share capital can be divided into different classes. Example of the different classes of capital are Ordinary Shares, Preference Shares and Deferred Shares.

•

The whole amount of the capital is not raised in one lump sum but normally over a period of time as and when there is a need to increase the company’s fund.

Loan Capital (Debentures/Bonds) •

It is the capital of a company, which is raised by borrowing money from the public, who are termed as the creditors or debenture holders.

•

In Malaysia, examples of loan capital are debenture stocks, bonds, notes and any other evidence of indebtedness of a company for borrowed fund.

•

The document that is issued by the company to state the terms of borrowing is called a debenture.

b)

Bonus shares • when the company have accumulation of reserves Split shares •

c)

to increase the marketability of the shares

2 statutory documents submitted to CCM: 1) Article of Association •

sets out the rules covering the internal affairs of the company such as the rights of the shareholders and the powers and duties of the management of the company.

2) Memorandum of Association •

regulates the company’s relations with outside persons i.e. the external affairs of the business.

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