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Accounting 3% exam weight

Issue of Shares

Part of the ACCA/CA Pakistan study roadmap. Accounting topic accoun-008 of Accounting.

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Issue of Shares

🟢 Lite — Quick Review (1h–1d)

Rapid summary for last-minute revision before your exam.

Issue of shares is how a limited company raises equity capital by allotting new shares, recognising cash received against share capital (at par) and share premium (any excess over par). The three golden rules:

  • Issue price = Par value + Premium per share
  • Total proceeds = Number of shares × Issue price
  • Cash received = Called-up amount × Number of shares held

Exam pointers: (1) Premium cannot be credited to share capital — it goes to a non-distributable share premium account under IFRS / IAS 32 and Companies Act, 2017 (Pakistan). (2) A bonus issue capitalises reserves — no cash, no income, no change in total equity, only a restructuring. (3) Forfeited shares reverse the share-capital entry and move the unpaid amount into a Forfeited Shares account, available for reissue.

🟡 Standard — Regular Study (2d–2mo)

Standard content for students with a few days to months.

Core Capital Categories

A company must distinguish four levels of share capital:

CategoryDefinition
Authorised capitalMaximum nominal value the company is permitted to issue under its Memorandum.
Issued capitalNominal value of shares actually offered to shareholders.
Called-up capitalPortion of issued capital that the company has actually demanded.
Paid-up capitalPortion of called-up capital actually received in cash.

The unpaid balance (Called-up − Paid-up) sits as a current asset Calls in Arrears (gross of any provision for non-collection).

Issue at Par, Premium or Discount

Under the Companies Act, 2017 (Pakistan) shares are normally issued at par or at a premium. Issue at a discount is only lawful in very narrow circumstances. The accounting entry on allotment:

Dr Bank / Cash                  XXX
   Cr Share Capital (par)            XXX
   Cr Share Premium (excess)         XXX

Share premium is a non-distributable reserve — it can only be used for limited purposes such as writing off preliminary expenses, issuing bonus shares, or providing for premium payable on a redemption of redeemable preference shares (Companies Act, 2017, s.81).

Issue Costs

Where legally permitted, issue costs and underwriting commission are netted off against share premium (the net premium method); otherwise they are charged to profit or loss. Under IAS 32, incremental costs directly attributable to issuing equity instruments are deducted from equity, not expensed.

Bonus (Capitalisation) Issue

A bonus issue converts retained earnings or other distributable reserves into fully paid shares, distributed pro-rata to existing shareholders. The double entry is:

Dr Retained Earnings / Reserves   XXX
   Cr Share Capital                    XXX

Total reserves, total equity and the shareholders’ proportionate interest are unchanged — only the composition of equity shifts.

🔴 Extended — Deep Study (3mo+)

Comprehensive coverage for students on a longer study timeline.

Rights Issue and the TERP

A rights issue invites existing shareholders to subscribe to new shares in proportion to their existing holding, usually at a discount to market price. The Theoretical Ex-Rights Price (TERP) is the price a share is expected to trade at once the rights are detached:

TERP = (Cum-rights market value of all existing shares + Total cash raised from the rights issue) ÷ (Existing shares + New shares)

A shareholder who takes up the rights neither gains nor loses wealth; a shareholder who sells the rights captures the value of the discount crystallised in the TERP. ACCA Financial Accounting (FA) and ACCA Financial Reporting (FR) frequently test TERP computation in multi-step numericals.

Forfeiture and Reissue

When a shareholder fails to pay a call, the company forfeits the shares. The forfeited shares account is credited with amounts already paid, and share capital (and any related premium originally credited) is reversed for the unpaid portion. On reissue, the shares can be reissued at any price; any surplus over the amount already paid is transferred to share premium, while any loss is borne by the original shareholder.

Worked Example

A company has 100,000 shares of Rs 10 par, market price Rs 18. It makes a 1-for-4 rights issue at Rs 14 per share.

  • New shares = 100,000 ÷ 4 = 25,000 shares
  • Cum-rights value = (100,000 × 18) + (25,000 × 14) = Rs 2,150,000
  • Total shares after issue = 125,000
  • TERP = 2,150,000 ÷ 125,000 = Rs 17.20 per share
  • Value of one right = Rs 18 − Rs 17.20 = Rs 0.80

Common Mistakes

  • Crediting the whole issue price (including premium) to share capital instead of splitting it.
  • Treating bonus shares as income to shareholders — they are a return of capital, never taxable as dividend.
  • Misapplying the net premium method: underwriting commission is only netted off premium if statute permits.
  • Ignoring the calls in arrears adjustment on the balance-sheet date — a frequent 2-mark trap in CA Pakistan papers.

Practice Prompts

  1. A company issues 50,000 shares of Rs 10 each at Rs 14, paying underwriting commission of Rs 30,000 and legal/printing costs of Rs 20,000. Prepare journal entries under both the gross and net premium methods and state the closing balance of share premium in each case.
  2. A 1-for-3 rights issue at Rs 60 is announced when the cum-rights market price is Rs 90. Compute the TERP and the theoretical value of one right, and explain the tax treatment of any sale of rights by a shareholder.

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