Share Forfeiture, Re-issue and its Accounting treatment

Share forfeiture, Re-issue and its Accounting treatment:

Today we are going to learn another important concept of company accounting Share Forfeiture. So far we have learned—“The process of issue of share and their accounting treatment” we have also learned that if any share holder fails to pay allotment money we write it as “calls in Arrear” and this “calls in arrear” gets adjusted when that shareholder pays his outstanding amount at the time of 1^st call or final call but what if any share holders completely failed to pay his or her allotment or call money? Here comes our today’s  term “Share Forfeiture” which says that in that case their shares would be forfeited-that is, cancelled. Thus, Share Forfeiture is said to happen when company imposed penalty on the shareholder for the non- payment of their allotment or call money and because of this, those shareholders cease to become the member of that company.

But what do you think; company can overnight forfeit their shares without saying anything to them? Answer is definitely No! The company must send prior intimation notice to the defaulting shareholders and informed him that if they failed to pay their due amount with interest within some specific time limit their share will be forfeited. And I think you know that there must be a clause of share forfeiture in the company’s article of association otherwise they first have to alter it and then go for the SF.

Now what exactly happens in the process of share forfeiture is that the company takes the money given by the defaulting shareholders and terminates their membership. INTERESTING!  Means, if suppose you as a shareholders has paid ‘application money’ ‘allotment money’ ‘1^st call money’ but failed to pay final call money, your total money of application, allotment and first call will be taken by the company , you won’t receive any money from that and moreover, you will be ceased to become the shareholder of that company . Complete loss man, your complete loss! But why the Company Ac is so harsh about the defaulting shareholders? Answer is because if millions of share holders will do the same, it would be hard for the companies to decide who their original shareholder is and the normal activity of the companies would be next to impossible, thus the company act is so harsh for this type of defaulting shareholders. Ok forget about the shareholder; let’s think from the company’s point of view— as we are learning Company Accounting , let’s think about whether company is getting profited by it or not? Answer is Yes probably, because they reissue or resell those forfeited shares and transfer this forfeited money (gain) to Capital Reserves but when forfeited share are re-issued at discount –that is, less than the face value then the company adjust the discounted (loss) amount with that forfeited amount and then balance will be transferred to Capital Reserve.

Curious readers can think that what if the forfeited shares are re-issued at premium? Answer is, nothing you just relax, premium amount will be credited as usually to security premium account -as simple as that!

Now very interesting part is about to come please reader I beg you to order some tea or coffee till then we need to recall what we have learned so far-

ü  Meaning of share Forfeiture.

ü  Consequence of share Forfeiture.

ü  Accounting treatment when forfeited shares are reissued at discount and premium.

You’re ready? Let’s move further:       

With the help of Double Entry concept, it would be interesting to imagine the Balance sheet affect of the whole scenario..

1)      When share holder ‘X’ gives application money say Rs 5000—In the Asset side of Balance sheet, Bank balance increases with Rs 5000 and in the liability side share capital increases with the similar amount Rs 5000.

2)      When that shareholder gives allotment money say Rs 6000 (including premium Rs1000).—In the Asset side of Balance sheet, Bank balance increases with Rs 6000 and in the liability side share capital increases with Rs 5000 and Security premium account increases with Rs 1000.

3)      Now the shareholder ‘X’ hasn’t paid first and final call money say Rs 7000—In the asset side of balance sheet, calls in arrear created with Rs 7000 and in the liability side share capital increase with Rs 7000. Here till now it has not been cleared whether ‘X’ will paid his part of liability or not. He can pay within time limit or maybe not.  

4)      Now after the specific time limit, after giving notice, company has decided to forfeit his share—means time for cancellation has come---firstly, total Share Capital a/c  which has so far been credited with Rs 17000 should be debited with same amount to cancel it. Secondly, calls in arrear of Rs 7000 in asset side should be credited to cancel the entry. Till now financial position is, liability is decreased for Rs 17000 and asset is decreased for Rs7000. Now third and final is create share forfeiture account for Rs 10000 in liability side under capital reserve. To make it very clear I’m showing you journal entry for step 4—

                                       Share capital a/c     debit 17000

                                                  To share forfeiture a/c      10000

                                                   To calls in arrear a/c           7000

 It is to be noted that Security premium of 1000 given by ‘X’ should not be touched and remain as it is in Balance sheet.

 Now suppose ‘X’ had failed to pay allotment money also then calls in arrear would be Rs13000, share forfeiture would be Rs5000, share capital would be Rs 17000 and very important point security premium account would be debited with Rs1000. Journal entry on that case would be:

                                        Share capital a/c            debit 17000

                                        Security premium a/c    debit 1000

                                                    To share forfeiture a/c                          5000

                                                    To calls in arrear a/c                               13000

Suppose share were issued at discount for say Rs 2000 and shareholder ‘X’ failed to pay  the same first and final call Rs 7000. Allotment money paid was Rs 3000, and application money paid was Rs 5000

 Here when share were issued entry were:

   Bank a/c                                        debit   8000

  Calls in arrear a/c                          debit   7000

   Discount on issue of share a/c   debit   2000

                         To   share capital a/c                                    17000

Now after forfeiture, entry for cancellation would be:

               Share capital a/c                debit   17000

                     To share forfeiture a/c                               8000

                      To calls in arrear a/c                                    7000

                      To discount on issue of share a/c              2000

                        

It is very interesting to know that when shares are issued at a discount, it will be credited to cancel entry but if shares are issued at a premium and shareholder failed to pay premium money; it will not be touched to cancel entry at the time of forfeiture.

Well done! You have paid enough attention just my final point is coming, you are about to have the mastery in this concept. I need to say one more thing listen carefully!

When the part of forfeited shares is re-issued, the proportionate amount will be transferred to Capital reserve after adjusting discount if any. Suppose 100 shares are forfeited for say Rs 5000 and of this, 80 shares are re-issued at a discount of say Rs 200. Here calculation would be: 5000/100*80= Rs4000 (minus) 200= 3800 will go directly in the capital reserve and the remaining 1000 will go for share forfeiture Account.

This is how I explained about share forfeiture; Re-issue and their accounting treatment if you have any question regarding this concept feel free to ask in the comment box below.

Journal Entries For Isuue of Share In Company Account

1)    When a company allows public to give the full value of share at a time of application.

First, the company will receive full value with application money:

Bank a/c         debit

     To share application and allotment a/c   credit

(Being application and allotment money received)

If there is an over subscription, then company would refund the excess money immediately:

Share application and allotment a/c      debit

      To Bank a/c    credit

(Being excess application money refunded)

Now transfer of application and allotment money to share capital:

Share application and allotment a/c       debit

            To share capital a/c    credit

(Being transfer of application and allotment money to share capital)

2)    When company allows public to give value of share in installment:

    

When application money received:    

Bank a/c      debit

  To share application a/c

(Being application money received)

Share application a/c   Debit

     To Bank a/c

(Being excess application money refunded)

Share application a/c     Debit

      To share capital a/c

(Being the application money transferred to share capital)

For allotment, the company will pass the due entry first and then money received entry:

                                                                                      

Share allotment a/c     Debit                                                                                                   

   To share capital a/c                                                                                       

(Being allotment money due to be received)                                                                          

                                                                                                                 

Bank a/c                Debit                                                                                

    To share allotment a/c                                                                              

(Being amount received from allotment)                                                          

For first call, company again will pass due entry first:

Share 1^st call a/c            Debit

       To share capital a/c

(Being money due for share 1^st call)

Bank a/c       Debit

  To share 1^st call a/c

(Being amount received for 1^st call)

Similar transaction will be there for final call.

Now suppose, If shares are issued at premium:

In the due entry we will add one more item “security premium a/c”

Share allotment a/c                 debit

      To share capital a/c

       To security premium a/c

(Being the amount due to be received with premium)

If shares are issued at discount:

 Share allotment a/c              debit

  Share discount a/c              debit

       To share capital a/c

(Being the amount due to be received and discount allowed)

If any shareholder fails to pay allotment money:

Bank a/c                debit

Calls in arrear a/c   debit

      To share allotment a/c

(Being the amount received on allotment except shareholder holding

___shares failed to pay allotment money)

Similar treatment will be there for shareholders fail to pay call money)

When calls received in advance at the time of allotment:

Bank a/c          debit

     To share allotment a/c

       To calls in advance a/c

(Being allotment money received with some shareholder

Paying calls money in advance)

When calls are made:

Calls in advance a/c    debit

 To (relevant) calls a/c

(Being the amount adjusted with calls money received)

And for the money on calls in advance the company have to pay 6 % interest and the entry will be:

Interest on calls in advance a/c   debit

  To bank a/c

(Being money paid for interest on calls in advance)

If interest on calls in advance not paid in cash:

Interest on calls in advance a/c   debit

  To sundry shareholders a/c

(Being the amount due to be paid)

At the end interest on calls in advance transferred to p/l account:

Profit and loss a/c   debit

 To interest on calls in advance a/c

(Being interest on calls in advance transferred to p/l)

Sometimes, company issues shares to the vendor for the purchase of assets. Company doesn’t give cash but instead it gives its shares to that vendor. The journal entry for these types of transaction is:

Asset a/c     debit

    To share capital a/c

(Being share issued for purchase of asset)

When company issues share to promoter for the service rendered by them by the way of engineering service, drawing and designing etc without payment, the entry will be:

Goodwill a/c   debit

  To share capital a/c

(Being share issued to promoter)

This was how I explained about part of  issue of shares. I f you have any question regarding this concept feel free to write in the comment box below.

Process of Issue of shares and its related Concepts

Initial Public Offering (IPO):

The whole Company Accounting starts with this IPO.  What happens is, when a private company decides to convert itself into a public limited company to get listed in the stock market so that it can raise its capital for the expansion of its business, the company engages in the task of IPO. Here the company first time gets confronted with the general public by the way of prospectus. What is prospectus?    Listen, the company is going to take money from public and nobody will give their money to anyone unless they have the surety of profitable return of their investment. This prospectus is the document that tells everything about the company’s past performance, its business, its sales, its average profits, its reserves and many more things. After reading this prospectus thoroughly, if public get some surety or security about their return they move further, otherwise as we all know they won’t applied for it because they don’t have legal obligation to apply for that company, mind it! It’s just an offer from the company’s side to the general public.

Share Capital of Company:

But the task of IPO is not so easy. First the members of that company have to talk with registrar to make their Authorized Capital—It is the maximum limit of a company to issue its share in the market. It means the company is authorized to have maximum that much of share capital in its Balance sheet. After having authorized capital clause in its memorandum of association, company decides how much to issue or offer shares in that IPO from that authorized capital, it’s called Issued Capital. From that issued capital, general public applied for certain amount of shares it is called Subscribed Capital. From that subscribed capital, company makes calls to demand money for shares people (shareholders) have applied for, it’s known as Called Up Capital. From that called up capital, people paid certain amount of money it’s known as Paid up Capital. This was the whole concept of share capital of the Company.

Now after being impressed by the prospectus of the company, general public applies for the shares within a specific time limit. This share is a legal document which says that the person has made some contribution in the share capital of the company and he has proportionate share in that share capital. It forms the basis of ownership in that company. The fixed value of a share is printed on the share certificate; it is called the Face value or Nominal Value of Shares.

Suppose, general people have applied more than the shares intended by the company to be issued in this IPO then company would refund the excess money to the public. At last company would allot the required number of shares (called issue share) to the general public (called shareholders).

EXAMPLES:

 

As I have told you earlier also, we never understand theoretical part unless we look at some practical examples for it—so here it is:

Suppose, a company XYZ ltd has authorized capital of Rs 10000000; each share of the company has face value of Rs 10 each. Here the number of authorize shares are 10000000/10=1000000.

Now company has decided to issue 500000 shares in IPO. So the issued capital would be 500000*10=Rs 5000000.

After looking a prospectus, general public applies for 600000 shares and thus they paid Rs 6000000 as the face value of each share was Rs 10 and company issues share at par and allow the public to pay full money with application. So the subscribed capital would be Rs 6000000 but company has already decided to issue not more than 500000 shares so they would refund the excess money of 100000 shares multiply by Rs 10 so total Rs 1000000 and the subscribed capital would be equal to issued capital Rs 5000000

Here suppose, instead of 600000 shares, public subscribe 450000 shares ---then the subscribed capital of the company would be 450000*10=Rs 4500000.  

Now suppose, the company has decided to not take whole amount of money at the time of application but to allow public to give money in installment and the terms of installment is as follows:

·         At the time of application Rs 2 on each share applied for.

·         In the beginning of second quarter, Rs 4 on allotment money.

·         In the beginning of third quarter, Rs 2 on 1^st call money.

·          In the beginning of fourth quarter, Rs 2 on Final call.

Now in the beginning of third quarter the company will say our called up capital is Rs8 *450000=Rs 3600000 and paid capital is also Rs 3600000 if shareholders have paid in full otherwise after deducting that amount would be the paid up capital.

 

Points to be remembered that:

·         When a company issues share at face value it will be “Issue at par”

·         When a company issues share at price more than face value it will be “Issue at premium”

·         When a company issues share at price less than face value, it will be “Issue at discount”

 

This was all about the process of issue of shares and related concepts. I've tried my best to make you understand this concepts; If you have any question regarding this lecture, feel free to ask me in the comment box below.

 

 

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FCMITDA, Foreign Operation and Forward exchange Contract AS 11 (PART2)

Foreign Currency Monetary Item Translation Difference Account:

For long term monetary items which were used to purchase fixed assets, the exchange difference on that will be added or deducted from that asset and depreciation will be applied on them.

For long term monetary items used for other purpose, the exchange difference will be transfer to FCMITDA and from there we should written off the amount each year according to the life of asset or liability.

According to the recent notification, FCMITDA should come on the component of shareholder’s fund of an enterprise.

Foreign Operation:

Foreign operation means doing business in the country other than the country of reporting enterprise. It can be its subsidiary, joint venture, associate or branch.  The foreign operation is of two types:

Integral Foreign Operation:

It means the foreign operation which is the main part of the reporting enterprise. It is the extension of reporting enterprise. Goods are supplied from reporting enterprise’s country to other country where foreign operation is going on and they sell those goods there in foreign country. In short, transaction is huge between them and all the activities are carried on and guided by the reporting enterprise.

Suppose, Tata steel ltd, after doing business for 5 years decided to open its subsidiary named, Tata Xian ho co., in Japan. Here Tata steel ltd is a reporting enterprise and Tata Xian ho co. is its integral foreign operation.

Translation:

·         The cost and deprecation of fixed assets is translated using the exchange rate at the date of purchase of the assets.

·         The cost of inventories is translated at the rate existing at the time of incurring of cost- that is, opening stock at opening rate and closing stock at closing rate.

·         All the income and expenses should be recorded at rate prevailing at the time of transaction or sometimes average rate is used where there is no significant changes in exchange rate.

·         The monetary items are translated using closing rate.

Exchange difference arises on the monetary items of an integral operation should be recognized as in come or an expenses in the statement of profit and loss account in the period in which they arise.

Non-Integral Foreign Operation:

This is not the main part of the reporting enterprise; all the works in foreign operation are done by themselves, major decision are taken by themselves and they have the autonomy of doing business; and no major transaction takes place between reporting enterprise and foreign operating enterprise.

Translation:

·         All the assets and liabilities- both monetary and non monetary are recorded at closing rate.

·         All the income and expenses should be recorded at rate prevailing at the time of transaction or sometimes average rate is used where there is no significant changes in exchange rate.

·         Exchange difference arises will be accumulate in the Foreign Currency Translation Reserve until the disposal of the “net investment” in non integral foreign operation.

·         Any goodwill or capital reserve arises on the acquisition of non integral operation are recorded at closing rate.

Points to be remembered:

·         Whether it’s integral or non integral foreign operation, assets and liabilities must be recorded in the books of reporting enterprise but the difference is –In integral operation non monetary items are recorded at historical cost and In non integral operation,  non monetary items are recorded at closing rate and exchange difference for this have to create Foreign Currency Translation Reserve.

·         The exchange difference of integral operation are recognized in the income statement of the reporting enterprise and exchange difference of non integral should be accumulate in the Foreign Currency Translation Reserve.

        Change in the classification:

If integral becomes non integral, then on the date of reclassification, exchange difference of non monetary items would be recorded in the Foreign Currency Translation Reserve and non monetary items would be recorded at closing rates.

If non integral becomes integral, then on the date of reclassification, the non monetary items would be recognized in the balance sheet at historical cost and the foreign currency translation reserve which have been deferred would not be recognized in the statement of p/l account until the disposal of operation.

Forward Exchange Contract:

It is an agreement to exchange different currencies at a fixed rate in specific future date.

Suppose, current exchange rate is Rs45/$ and a company entered into a contract of purchasing some asset at 50/$ after 6 months. This is the forward exchange contract because they have agreed to purchase and sell asset at a specific future date and at a specific exchange rate. Now if the exchange rate be 35/$ or 65/$ the purchasing company would have to pay 50/$. This is the total concept of Forward Exchange Contract.

It is created for two purposes first, for speculation and second, to know the exact money which will be required at the time of settlement so that they can arrange it up to that date.

When the contract is not for speculation:

The premium or discount in the beginning will be amortized as expense or income over the contract life. Forward rate (minus) spot rate is used to determine amount of income or expense.

When it is for speculation:

The contract price (minus) sale price is to be done to determine profits or loss and ignored premium or discount in the beginning.

Disclosures:

An enterprise should disclose-:

(i)                  Amount of exchange difference included in the net profit or loss for the period.

(ii)                Net exchange difference accumulated in the foreign currency translation reserve as separate component of shareholder’s fund.

(iii)               When there is a change in classification of foreign operation enterprise should disclose:

a)      Nature of change in classification, b) impact of change in classification on shareholder’s fund

This was the complete concept of Foreign Exchange; If you reader have any questions  or suggestion regarding this Accounting Standard, please write in the comment box below.