A share for share reorganisation has been affected which is illustrated in the following diagram. How is this to be accounted for in the company that issued the shares under Company law firstly assuming 1) the shares were issued at par with a share premium and 2) secondly where 100,000 shares of €1 were issued?
Ordinarily, Section 71(5) of CA 2014 requires all shares to be issued at market value. Section 71(5) of CA 2014 makes it clear where shares are issued at a premium (i.e. above par – option 1 in this case), the market value of the cash/non-cash asset given up by the subscriber above the par value of the shares issued, then this difference must be recognised in un-denominated capital in an account called the share premium.
There are three exceptions to the rule in Section 71(5), these are:
- where the conditions in Section 72 – merger relief applies.
- where the conditions in Section 73 applies.
- where the conditions in Section 75 – New Parent relief applies.
Section 72 of CA 2014 applies where the issuing company has secured at least a 90 per cent equity share capital holding in another company in pursuance of an arrangement providing for the allotment of equity share capital in the issuing company, on terms that the consideration for the shares allotted is to be provided (for every class of share) —
(a) by the issue or transfer to the issuing company of equity shares in the other company; or
(b) by the cancellation of any such shares not held by the issuing company.
Note Section 72 applies mandatorily unless Section 73 of CA 2014 applies (Section 73 applies where 100% of the shares are transferred between group companies)
Where the above conditions are met and the shares are allotted at par and the amount subscribed for is in excess of the par value, then the amount that is recognised within the company capital (i.e. share capital in this case) is the par value of the shares issued. The premium above par does not form part of the company capital. Note where the above conditions are met, company law requires the above guidance to be followed, there is not a choice here (unless the transaction is within a group in which case Section 73 of CA 2014 applies). Section 74 of CA 2014 goes on to state where Section 72 of CA 2014 applies, then there is a choice to ignore the premium on the shares issued when recognising these in the financial statements or else recognise the amount in excess of par within another reserve in equity (e.g. a merger reserve). Note this merger reserve only becomes distributable when the shares are sold/impaired. Note however, that readers should refer to the accounting framework when assessing whether Generally accepted accounting practice will allow shares to be issued at the par amount where the market value is higher. Section 22 of FRS 102 currently requires that all shares issued must be recognised at fair value. Note however when the triennial review amendments made by the FRC to FRS 102 apply (which are mandatorily effective for periods beginning on or after 1 January 2019 and can be early adopted assuming all the changes made by the amendments are applied), where Section 72 applies the choice in Section 74 of CA 2014 can be taken (i.e. to only state the investment on the balance sheet at the par value of the shares subscribed for).
Note even though, Section 72 of CA 2014 applies whereby it restricts the amount to be recognised as part of the company capital, for the purposes of future disposals, the cost of the shares will always be the market value subscribed for (i.e. the par amount plus the premium which is €100,000 in our example).
Note if the below share reorganisation applied, then Section 72 would not apply and instead Section 73 would apply as there is a 100% transfer between the group.
Option 1: The company capital will be €100.
The journals to account for this will be to (assuming the choice in Section 74 of CA 2014 is availed of (and generally accepted accounting practice permits this)):
- Dr Investments €100
- Cr Ordinary share capital €100
The journals to account for this will be to (assuming the choice in Section 74 of CA 2014 is not availed of)):
- Dr Investments €100
- Cr Ordinary share capital €100
- Cr Other reserve – merger reserve €99,900
Note the other reserve does not form part of the company capital so therefore it can become distributable when the investment is sold.
Option 2: The company capital will be €100,000 as the shares have not been allotted above par.
The journals to account for this will be to:
- Dr Investments €100,000
- Cr Ordinary share capital €100,000