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Asignatura: Contabilidad general, Profesor: , Carrera: ADE + Derecho, Universidad: URJC
Tipo: Apuntes
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Summary:
_1. Introduction
In this chapter we discuss the topics of owners' equity, capital maintenance and distributable profits and in the following chapters we discuss capital increases and reductions. The approach taken by the standard setters has been to define assets and liabilities and to leave total owners' equity as a residual figure being the difference between the assets and liabilities. However, rules over these areas are necessary to protect the rights of the various stakeholders and this comes from legislation enacted in individual countries. The rules may not be totally consistent between countries but there are some common themes running through much of the legislation. These topics are: Share capital can be broadly of two types, ordinary or preference, with preference shares tending to give a more certain (usually fixed) return but less participation in activities of the enterprise. The distributable reserves of enterprises are those that have arisen due to realized gains and losses (retained profits), as opposed to unrealized gains (such as revaluation reserves). There must be protection for creditors to prevent an enterprise distributing assets to shareholders to the extent that the creditors are not paid in full. An enterprise must retain net assets at least equal to its share capital and non-distributable reserves (a capital maintenance concept). The capital maintenance concept also applies with regard to reducing share capital, with most countries requiring a replacement of share capital with a non- distributable reserve (capital redemption reserve) if it is redeemed.
2.3. Types of Reserves Non-Distributable Reserves There are two types of statutory non-distributable reserve: share premium and capital redemption reserve. These are considered in greater detail in a future chapter. In addition to the statutory non-distributable reserves, a company might have restrictions on distribution within its memorandum and articles, stipulating that capital profits are non-distributable as dividends. Distributable Reserves Distributable reserves are normally represented by the balance on the profit and loss account that appears in the balance sheet and belong to the ordinary shareholders. However, as we shall see, there may be circumstances where credits that have been made to the profit and loss account are not actually distributable, usually because they do not satisfy the realization concept. Although the balance sheet profit and loss account figure contains the cumulative residual distributable profits, it is the earnings per share (EPS), based on the post- tax earnings for the year as disclosed in the profit and loss account, that influences market valuation of the shares, applying the price/ earnings ratio When deciding whether to issue or buy back shares, the directors will therefore probably consider the impact on the EPS figure. If the EPS increases, the share price can normally be expected also to increase.
3.1. Shares issued at nominal value The amount of capital "paid-in" by investors during common or preferred stock issuances, including the par value of the shares themselves. Paid-in capital represents the funds raised by the business from equity, and not from ongoing operations. Contributions to corporate enterprises may comprise only goods or rights liable to economic appraisal, thus paid-in capital can be cash contributions or non cash contributions. It’s not allowed to accept work as a contribution to capital stock.
Despite the mentioned above, by-laws may state the execution of ancillary services as contribution different from paid-in capital. Cash Contributions Cash contributions shall be denominated in Euros or the official country currency. If the contribution is made in any other currency, its equivalent value in the official currency shall be calculated as stipulated by law. Non Cash Contributions Non cash contributions will consist of good or rights capable of being reliably measured. Non-cash contributions must be described in the deed of incorporation or instrument on capital increase, including registry data as appropriate, the value thereof in Euros and the numbers of the shares or stakes attributed thereto. In the event the contribution should consist of real or movable property or of rights attached thereto, the contributor shall be bound to surrender and disencumber the
a) When the contribution consists of listed securities on an official secondary market or another regulated market or money market instruments. Such assets shall be valued at the average weighted trading price on one or various regulated markets during the quarter immediately preceding the date of actual contribution, in accordance with the certification issued by the governing body of the official secondary or regulated market in question. If such price has been impacted by exceptional circumstances that may have significantly modified the value of the assets on the actual date of contribution, the company directors shall lodge a request for the appointment of an independent expert to prepare a report. b) When the contribution consists of assets other than mentioned in the preceding paragraph, whose fair value was determined within six months prior to the date of the actual contribution by an independent professional with the necessary expertise not appointed by the parties concerned, in accordance with generally accepted rules and principles for the valuation of such assets. If there were new circumstances that could significantly change the fair value of the property at the time of the contribution, the directors of the company should request the appointment of an independent expert to issue a new report. If new circumstances ensue that might significantly alter the fair value of the assets on the date of contribution, the company directors must lodge a request for the appointment of an independent expert to prepare a report. If the directors fail to appoint an expert where bound to do so, any shareholder or shareholders representing at least five per cent of the share capital may ask the Mercantile Registry serving the place where the registered office is located to appoint an expert, at the company’s expense, to value the assets involved. That request may be lodged up to the date of the actual contribution, provided the shareholders concerned continue to represent at least five per cent of the company’s share capital at the time the request is made. The law states when no Mercantile Registry’s expert is appointed, the company directors shall draft a report containing the following information: a) Description of the contribution. b) Value of the contribution, the source of the valuation and, as appropriate, the valuation method used. If the contribution comprises money market instruments or movable assets listed on an official secondary or a regulated market, the certification issued by the respective governing body shall be attached thereto.
c) A statement specifying whether the appraised value is at least equal to the par value of and, as appropriate, any issue premium for, the total number of shares issued in exchange d) A statement indicating that no new circumstances have arisen that might affect the initial valuation. Finally the law includes the obligation of publicity of the expert’s report on the Mercantile Registry and attached to the incorporation’s deed of the company. Example A corporation issues 1,000 shares, at par face value 6€. The corporation will receive machinery as a non-cash contribution and the expert’s value is: Stage Non-contribution value Result Stage A 5.000 The transaction cannot be done Stage B 5 .500 The transaction cannot be done Stage C 6 .500 The operation can be done because the real value of the machinery is bigger than the value in the Deeds, so the stock is supported by real assets and the principle of reality of the stock is accomplished Recording non-cash contributions
Later, the corporation calls for the outstanding contribution: 3.2. Shares issued at a premium The market price of the shares of a company, which is based on the prospects of that company, is invariably different from the par (nominal) value of those shares. On receipt of consideration for the shares, the company again debits the cash account with the amount received and credits the ordinary share capital or preference share capital, as appropriate, with the nominal value of the shares. Assuming that the market price exceeds the nominal value, a premium element will be credited to a share premium account. The share premium is classified as a non- distributable reserve to indicate that it is not repayable to the shareholders who have subscribed for their shares: it remains a part of the company's permanent capital. The other non-distributable reserve is the capital redemption reserve, which
may be created when a company redeems some of its shares without replacing them with new ones. Example A Plc issues 200,000 shares at premium (150%), face value €1 to increase the stock. Shareholders contribute at subscription with a contribution in kind for 200.000, being pending the rest of the contribution. The contributions in kind are a land for 200,000€, vehicles for 50,000€ and 50,000€ cash. When the shares are underwritten: Land and natural resources Uncalled capital contributions pending registration Uncalled in-kind contributions pending registration Shares or equity holding issued
Upon registration in the Mercantile Registry (both successive and simultaneous) Share capital pending registration Share capital Share premium
Uncalled capital contributions Uncalled in-kind contributions Uncalled capital contributions pending registration Uncalled in-kind contributions pending registration
business creditors. Sometimes owners attempt to influence creditors unfairly, by maintaining a lifestyle in excess of what they can afford, or try to frustrate the legal rights of creditors by putting their private assets beyond their reach, e.g. by transferring their property to relatives or trusts. These subterfuges become apparent only when the creditors seek to enforce their claim against the private assets. Banks are able to protect themselves by seeking adequate security, e.g. a charge on the owners' property. Incorporated limited liability company Because of limited liability, the rights of creditors against the private assets of the owners, i.e. the shareholders of the company, are restricted to any amount unpaid on their shares. Once the shareholders have paid the company for their shares, they are not personally liable for the company's debts. Creditors are restricted to making claims against the assets of the company. Hence the legislature considered it necessary to ensure that the shareholders did not make such distributions to themselves so that the assets needed to meet creditors' claims were put beyond creditors' reach. This was achieved by setting out statutory rules.
