Learning Objectives

Learning Objectives • At the end of the lecture students should be able to: • Identify, defined and differentiate (including characteristics and importance) between different types of companies. • Describe the statutory framework governing limited liability companies. • Identify, defined and differentiate between different types of capital for companies Financial Accounting

Learning Objectives... • Explain the differences between the memorandum of association and articles of association • Explain and demonstrate the key steps in the issuance, purchase, redemption, conversion and forfeiture of shares and debentures including the accounting entries. • Explain why and how annual reports (internal financial statements) for limited companies are prepared. Financial Accounting

Learning Objectives... • Prepare published accounts (external use) for limited liability companies. • Explain when and how a limited company may increase/decrease its share capital. Financial Accounting

Introduction • When business grows, it needs more capital to finance its operations. This normally leads to investors outside the business are invited to invest in the ownership or equity of the business. This is how a company (corporation) is formed. • A company is a "corporation" - an artificial person created by law. A company is a "legal" person. A company thus has legal rights and obligations in the same way that a natural person does. • Companies are registered legal entities formed by several persons that can own property, draw contracts and employ people. Financial Accounting

Type of companies in Malaysia • The most common type of company in Malaysia is a company limited by shares. This may be further categorized into: • Public Limited Company and • Private Limited Company Financial Accounting

Types of Limited Companies in Malaysia • Private limited companies cannot sell shares to the public, and are distinguished by the appellation "Sendirian Berhad", shortened to "Sdn Bhd" or "S/B". • Public limited companies source their capital by selling shares to the public, and are distinguished by the appellation "Berhad", shortened to "Bhd". Financial Accounting

Other Types of Companies in Malaysia • Exempt private company: a private limited company with not more than 20 members. Its shares cannot be held directly or indirectly by any other company. Such companies need not file their annual report with registrar of companies provided that the company files a certificate , signed by a director, the secretary and the auditor of the company stating that the company is able to meet its liabilities as and when they fall due. Financial Accounting

Other Types of Companies in Malaysia • Foreign Company: A company incorporated outside Malaysia but which carries on business in Malaysia or establishes a place of business in Malaysia. • Certain documentation and fees are required of this companies before they can commence business. This type company can hold movable properties in Malaysia. Financial Accounting

Other Types of Companies in Malaysia • Investment Company: a public company engaged primarily in investments in marketable securities for the purpose of revenue and profit and not for the purpose of exercising control. • Such companies are declared as investment companies by the ‘King’ or Y.P. Agong, and the status can be revoked if the purpose of its formation changes. Financial Accounting

Regulation of Registered Companies in Malaysia • Companies in Malaysia are governed by the Companies Act 1965, which protects the rights and interests of shareholders and investors, and provides regulations for the incorporation of companies, the formulation of company constitutions, management and closures. Financial Accounting

Regulation of Registered Companies in Malaysia • The provisions of The Companies Act 1965 allow the establishment of 3 types of companies: • a company limited by shares, which can be private or public. • a company limited by guarantee, where the members guarantee to meet the liability of up to a nominated amount if the company is wound up. • an unlimited company, where there is no limit to the members' liability. Financial Accounting

Regulation of Registered Companies in Malaysia • A company must have a minimum of two members, but a private limited company is limited to 50 members (public limited companies have no member limit). • A minimum paid-up capital of only RM2 is needed to start a private limited company. Financial Accounting

Regulation of Registered Companies in Malaysia • Public limited companies need a paid-up capital of not less than RM60 million (if it seeks to be listed on the Kuala Lumpur Stock Exchange Main Board) or not less than RM40mil (if it seeks to be listed on the KLSE Second Board). Financial Accounting

Some Benefits & Limitations of Private & Public Companies Financial Accounting

Capital Structure of a Company • Authorized/Nominal/Registered share capital: Maximum number of shares that a company can issue to the public as specified in the firm's articles of incorporation. This amount of shares is registered by the company and thus stated in the memorandum of association. Financial Accounting

Capital Structure of a Company • Par or nominal value: A minimum price of below which a company’s share cannot be issued as designated in the articles of incorporation. It is the face value attached to each unit of share. • Issued share capital: The total value of the shares issued by the company and made available to the public for purchase i.e. number of issued shares multiplied by nominal value of shares. Financial Accounting

Capital Structure of a Company • Unissued capital: the difference between authorized capital and issued capital. • Called Up capital: the amount of capital that the company has called up on the issued capital which must be paid within a specified time by all subscribers. • Uncalled Up capital: the portion of the issued capital not yet called up by the company. Thus the subscribers are not required to pay yet. Financial Accounting

Capital Structure of a Company • Paid Up capital: this is the amount of called up capital that has been paid by the subscribers. • Unpaid capital: the amount of the called up capital that the subscribers failed to pay when the money was called. The unpaid amount is also referred to as call in arrears. Financial Accounting

Capital Structure of a Company • Reserves: Profit and loss reserves are profits due to the owners that have not been paid out as dividend. This amount may not necessarily be held in cash but might have been invested in additional stock or fixed assets. • Shareholder fund: This is the combination of share capital (issued) and reserves. Financial Accounting

Memorandum of Association • The memorandum of association of a company is the document that governs the relationship between the company and the outside world. It is one of the documents required to incorporate a company in Malaysia, and the United Kingdom. It is also used in many of the common law jurisdictions of the Commonwealth. • A company may alter particular parts of its memorandum at any time by a special resolution of its shareholders, provided that the amendment complies with company law. Financial Accounting

Memorandum of Association A memorandum of association is required to state following: • the name of the company, • the type of company (such as public limited company or private company limited by shares), Financial Accounting

Memorandum of Association • the objectives of the company • its authorized share capital, and the subscribers (the original shareholders of the company). Financial Accounting

Articles of Association • These are the regulations governing the relationships between the shareholders and directors of the company, and are a requirement for the establishment of a company in most common wealth countries (including Malaysia and United Kingdom) and many other countries. Financial Accounting

Articles of Association • Together with the memorandum of association, they form the constitution of a company. The equivalent in the United States is Articles of incorporation. Financial Accounting

Articles of Association… • Articles of association typically cover the following issues: • issuing of shares (also called stock), • the different voting and dividend rights attached to different classes of share, • restrictions on the transfer of shares, • the rules of board meetings and shareholder meetings, and other similar issues. Financial Accounting

Articles of Association… • In most common wealth countries such as the UK and Malaysia , a table containing standard articles of association is usually establish under the company’s Act, however, a company is free to incorporate under different articles of association, or to amend its articles of association at any time by a special resolution of its shareholders, provided that they meet the requirements and restrictions of the Companies Acts. Financial Accounting

Issue of Shares • A company may have more than one type of shares. They differ in their voting rights, in priority to receive dividends and in the return of capital in the event liquidation of the company. • Below are some details for the two main types of shares most companies usually issue. Financial Accounting

Types of Shares Ordinary shares: generally, all companies must have ordinary shares. This share usually comprises the bulk of the company’s capital. This class of shares has the following features: • carries the right to vote • dividends are paid to shareholders after dividend payments to preference shareholders • where a business is performing well, dividend payments can be high • carries the highest risk for all types of shares Financial Accounting

Types of Shares…….. Preference shares offer their owners preferences over ordinary shareholders. There are two major differences between ordinary and preference shares: • Preference shareholders are often entitled to a fixed dividend even when ordinary shareholders are not. • Preference shareholders cannot normally vote at general meetings. Financial Accounting

Types of shares • The preference dividend is fixed in the sense that preference shares are often issued with the rate of dividend fixed at the time of issue. • For example, if 1000 units of 5% preference shares are issued at RM1 per share, where dividend is payable the amount of dividend will be computed as: 5% * RM1000 = RM50/yr Financial Accounting

Types of Preference shares Cumulative preference shares: Holders of this shares are entitled to receive a fixed dividend per annum. If dividends are not paid in a particular year, the amount of dividend accrued will be carried forward and become payable in the future. Non-cumulative preference shares: Holders of this shares are entitled to receive a fixed dividend only if the company has sufficient profits to declare a dividend. Where dividend is not paid for a particular year due to insufficient funds, the dividend for that year is forfeited and cannot be carried forward. BACCT1201 Financial Accounting 32

Types of Preference shares Participating preference shares: This type of preferred stock allows the possibility of additional dividend above the stated amount under certain conditions. Non-participating preference shares: these shareholders are not allowed to participate in any excess profits after all other classes of shareholders have been paid dividends BACCT1201 Financial Accounting 33

Types of Preference shares Redeemable preference shares: This type of shares can be repurchased from the shareholders (by the company) at a future date as pre-determine at the time of issue of the shares. This type of shares allows the issuing company to obtain capital of a semi-permanent nature at a fixed rate of dividend. Convertible preference shares: shares that can be converted to ordinary shares as expressed in the AOA. Date and conversion rate is also specified. BACCT1201 Financial Accounting 34

Issue of Shares Why the need to issue shares Regulatory requirements for issuance of shares Issuing House (e.g. Malaysian issuing house) Stages in the issuance of shares : application; allotment and call for payment. Over and under subscription Allotment on a pro-rata basis BACCT1201 Financial Accounting 35

Issue of Shares Issue of shares at a premium. Share premium account Issue of shares at a discount Terms of the issue: • Payment of the full amount of share price upon application • Payment by installments (generally not common in Malaysia) BACCT1201 Financial Accounting 36

Issue of Shares On call(s): issuance of letter of call on shares that are not fully called up. Calls in advance: payment for shares before calls are made. This payment do not rank for dividend Calls in arrears: failure to pay the sum due on shares when call. Reduces issued capital. BACCT1201 Financial Accounting 37

Accounting entries for issue of shares BACCT1201 Financial Accounting 38

Forfeiture of shares A company may forfeit shares on which the calls are unpaid usually after all the formalities regarding forfeiture has been observed. The share capital account will be reduced by the amount of capital called up on the nominal value of the forfeited shares. This shares may be reissued later. Note differences with capital reduction and where forfeited shares are cancelled. BACCT1201 Financial Accounting 43

Accounting entries: forfeiture & reissue of forfeited shares BACCT1201 Financial Accounting 44

Reissue of forfeited of shares This shares may be reissued either as fully paid or partly paid up shares provided the total amount received on this shares from: • The original shareholder (defaulter) and • The subsequent purchaser … Equals to at least the nominal value of the forfeited shares. BACCT1201 Financial Accounting 45

Reissue of forfeited shares BACCT1201 Financial Accounting 46

Reissue of forfeited shares BACCT1201 Financial Accounting 47

Bonus shares & Right issue What is bonus shares Why bonus shares Accounting entry for bonus shares What is a right issue Why a right issue Possible scenario on a right offer Accounting entry for a right issue BACCT1201 Financial Accounting 48

Share split What is a share split Why and how a share split is done Who benefits from a share split Accounting entry for a share split BACCT1201 Financial Accounting 49

Share split What is a share split: A corporate action in which a company's existing shares are divided into multiple shares. Although the number of shares outstanding increases by a specific multiple, the total dollar value of the shares remains the same compared to pre-split amounts, because no real value has been added as a result of the split.A stock split is also referred to as a "scrip issue, "capitalization issue" or "free issue". BACCT1201 Financial Accounting 50

Learning Objectives