ACCA F4 - Corp and Business Law (ENG)

Part E Capital and the financing of companies  15: Share capital 239

5.3 Allotment of shares at a premium

If shares are issued at a premium, the excess must be credited to a share premium account.

Share premium is the excess received, either in cash or other consideration, over the nominal value of the

shares issued.

An established company may be able to obtain consideration for new shares in excess of their nominal

value. The excess, called 'share premium', must be credited to a share premium account.

Exam questions may test your knowledge of the meaning and effect of issuing shares at a premium and at

a discount.

If a company obtains non-cash consideration for its shares which exceeds the nominal value of the shares

the excess should also be credited to the share premium account.

5.3.1 Example: Using a share premium account

If a company allots its £1 (nominal) shares for £1.50 in cash, £1 per share is credited to the share capital

account, and 50p to the share premium account.

Illustration^

(^)
We will use the above example to illustrate the effects of the transaction on the balance sheet. The
company has issued 100 shares.
Before share issue After share issue
£ £
Cash 100 250
Share capital 100 200
Share premium – 50
100 250
The general rule is that reduction of the share premium account is subject to the same restrictions as
reduction of share capital. You should learn the fact that a company cannot distribute any part of its
share premium account as dividend.
5.4 Uses of the share premium account
Use of the share premium account is limited. It is most often used for bonus issues.
Under the Companies Act, the permitted uses of share premium are to pay:
 Fully paid shares under a bonus issue since this operation merely converts one form of fixed
capital (share premium) into another (share capital)
 Issue expenses and commission in respect of a new share issue
Additionally, the share premium account may be used to finance any premium due when redeemable
shares are redeemed.
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