Company’s capital consists of shares which can be utilised to earn more capital for the company. Public companies issue shares to the public so that they can subscribe to their share capital while private companies opt for initial public offering or IPO to offer shares to the public.
Companies can issue shares at face value of the share, while there is an option to issue shares at premium which means shares will be issued to the public for a value which is more than the face value of the shares.
Issue of shares at premium means that the issuing of shares above the face value (also called as nominal value or par value). The difference between the face value of shares and the price of shares issued at premium is the premium amount.
It is generally issued by companies which have an excellent financial record and are managed well having a great reputation in the market.
The profit earned from the issuance of shares at premium is called as capital profit and is credited to a separate account which is known as the Securities Premium Account.
The company has the option to call the premium amount anytime without any call. The general rule that is followed is to collect the premium along with the application or at the time of allotment, but rarely at the time of call money. The most preferred method is to collect the premium at the time of share allotment.
What is a Securities Premium Account?
Securities premium account is a special type of account where the amount that is earned from the premium gets credited, as the premium thus collected is not a part of the share capital. It’s a capital gain for the company and as per the Companies Act, 2013, the companies are required to show the amount earned from premium as a credit balance of Securities Premium Account which is located on the liabilities section of the Balance Sheet under the heading of Reserve and Surplus.
Provisions for Security Premium
There are certain restrictions on how the securities premium can be used and accordingly there are provisions which are mentioned in section 52 of the Companies Act, 2013. These provisions are:
- By issuing fully paid bonus shares to the company members (shareholders).
- By providing for the premium payable which is paid on redemption of any redeemable preference shares or debentures.
- By writing off the preliminary expenses of the company
- By writing off the expenses incurred on issue of shares and debentures, the expenses such as discount allowed or commission paid for issuing the shares.
- By using it to buy back own shares.
Accounting treatment for Shares issued at premium
There is a very subtle difference between the accounting treatment for shares issued at premium and shares issued at par. Let us look at the following cases.
1) Premium is received with application money
In case the premium amount is received along with the application money, it will not be directly credited to the securities premium account, as there is a chance that the application can get rejected. The following entries can be seen
2)Premium received with allotment money
When premium is collected with the allotment money, the following entries will be created.
Any amount which will be paid in advance during the process of application will be adjusted towards the share allotment account. However the general rule is to first adjust the advance against the shares nominal value and then the remaining amount (if any) will be adjusted against the securities premium account.