Fundamental Of Accounting For CAP-CPT: Forfeiture And Reissue Of Shares

Accounting for forfeiture and reissue of shares

Discuss about the Fundamental of Accounting for CAP-CPT.

There are certain advantages of issuing shares in the form of instalments. One of them is that it is possible for the investors to purchase many shares by not paying the lump sum amount at once like certain number of instalments made for purchasing assets. However, the organisations are deemed to have legally binding commitments for making payment of the calls made (Jena, Mishra and Rajib 2016). In case, a shareholder fails to pay allotted money or a part or call by the stipulated fixed amount for payment, the board of directors of the organisation progress in forfeiting the shares on which allotted money or call has been in-arrear.

There are certain procedures related to accounting for forfeiture and reissue of shares. In such instances, a notice needs to be provided to the defaulter by asking the person to clear the unsettled amount along with the accrued interest at a certain point of time. There is another significant aspect that needs to be mentioned in the notice as well.

It needs to inform the defaulter that if the payment is not made within the stipulated time before the due date, the shares for which the notice is served would be forfeited (Beams, Brozovsky and Shoulders 2017). During the time of share forfeiture, the name of the shareholder would be removed from the member register and the amount incurred by the individual on shares is forfeited to the organisation. This could be treated in the form of capital gain and the amount would be credited to the “Forfeited Shares Account”. There is possibility of reissuing the forfeited shares at a loss. However, the loss incurred on reissuance could not exceed the profit made on forfeiture of the reissued shares. Moreover, it is necessary to consider certain provisions associated with the forfeiture and reissue of shares and they are briefly discussed as follows:

Firstly, if any shareholder could not pay any call or instalment related on or before the stipulated date, the board of the organisation has the right to provide a notice to the individual asking for payment (Carnegie and O’Connell 2014). In addition, the individual is needed to make the interest payment as well, which is accrued on or before the stipulated timeframe. Secondly, the notice to be sent to the defaulter would comprise of certain components within the same. An additional date after the due date would be provided on which the shareholders needs to make the overall outstanding payment, as per the notice. In case, if the shareholder misses the due date again or event of non-payment takes place, the shares in relation to which the call has been made would be liable to be forfeited. If the defaulter does not meet any of the requirements mentioned in the notice, the board would forfeit the shares of the defaulter and the decision would come into effect (Collier 2015).

Provisions associated with forfeiture and reissue of shares

Once the decision of forfeiture is taken, the shares could be sold or disposed on certain terms and conditions, as deemed appropriate by the board of the organisation. However, it needs to be mentioned that before selling or disposing the shares, the board has the full right of cancelling the forfeiture on certain terms as deemed fit. It might sometimes happen that when a shareholder realises about the inability of paying the calls made, the individual has an option of surrendering the shares voluntarily to the organisation (Dagwell, Wines and Lambert 2015). The impact related to surrender of shares is identical to that of forfeiture. The only difference is that at the time of surrender, the shareholder undertakes the initiative and the organisation need not have to make the formality of serving the notice and waiting until the end of the stipulated period.

Even though it is possible for the organisation to cancel the forfeited shares, they might intend to issue the shares again. The reissue accounting would be identical as in the case for reissue. However, there would be difference in conditions between the two situations. For instance, the shares forfeited on the part of an organisation might be utilised for one-time payment, instead of instalments (Lyons 2018). At the time of dealing with the issue of forfeited shares, it is necessary to take into account the overall number of shares and the desired impact on share capital. As per the recent changes in the Corporations Act 2001, all the Australian business organisations are needed to disclose their overall capital amounts and its composition in respect of the number of shares. This denotes the authorised capital of an organisation and it is restricted to issue any further capital. This could be identified as the nominal or par share value and it is the share amount at the incorporated date. The only funds that an organisation obtains from issuance of shares include those from the initial issue. The owners of the shares obtain considerable benefits with the increase in the share values.

Various journal entries are inherent related to forfeiture and reissue of shares. At the time shares issued at par are forfeited, it is necessary to ascertain the amount with which credit has been made to the Share Capital Account. This amount could be divided into two portions. These include the amount obtained and the amount not obtained due to which the forfeiture of shares is conducted. The received amount could be considered as a capital gain for the organisation and it is to be credited to the Share Forfeiture Account. The amount not obtained might fall in Calls-in-Arrear Account. In case, the organisation does not have any Calls-in-Arrear Account, credit could be made to share allotment accounts or other call accounts (Fogarty, Zimmerman and Richardson 2016). For example, it is assumed that an organisation issues equity shares of $10 each at par. An additional assumption is made that the allotted and applications amounts are obtained at $2.50 per share each in relation to all the shares. However, the first call and the second call are $3 per share and $2 per share respectively and they are not obtained in relation to 500 shares, which are forfeited. If there is no Calls-in-Arrear Account, the journal entry for forfeiting the shares is discussed as follows:

Impact of the Corporations Act 2001 on issuance of shares

Equity Share Capital Account…………………………..Dr               $5,000

To Equity Share First Call Account                                                 $1,500

To Equity Share Second Call Account                                             $1,000

To Forfeited Shares Account                                                           $2,500

The narration for the above-stated journal entry would be the receipt of application and allotted amounts at $5 per share for not paying the first call at $3 per share and the last two calls at $2 per share (Garrett 2018). If the amounts that are not obtained on the non-repayment of the first two calls are transferred to Calls-in-Arrear Account, there is no need for “Equity Share First Call Account” and “Equity Share Second Call Account”. Instead, the Calls-in-Arrear Account could be used to replace them. For this scenario, a change in the journal entry is obvious, which is depicted as follows:

Equity Share Capital Account…………………………..Dr               $5,000

To Calls-in-Arrear Account                                              $1,500

To Forfeited Shares Account                                            $2,500

The journal entry would have the same narration as in the previous case. Alternatively, the call amount in relation to forfeited shares is credited to Forfeited Shares Account and debit would be made to Share Capital Account (Jain 2014). 

In case, the market price of the shares is greater in contrast to their par value, it is quite obvious that the organisation would intend to seek advantage of the situation. As a result, it might issue shares at a price, which is more than the par value. This situation could be defined as issuing shares at premium (Rani 2014). However, the current Australian law does not require the ASX listed business organisations to have authorised capital or par value shares. If they seek permission from the constitutions, they are allowed to issue additional shares in the market at a bearable price. However, the legal changes are not retrospective, as there are a number of business organisations having amounts in their books of accounts, which could be considered as share premium reserve or share premium account. These are the additional amounts obtained in excess of par values, which the organisations have obtained from issuing shares. Moreover, they need to keep aside this amount from share and issued capital (Saini 2015). Since there are no par values of the shares, the amount obtained from share issues for future would raise the overall share capital.

An illustration could be considered here, in which a business organisation had issued shares at $1 each in the past. However, at present, it is planning to issue 1,000,000 new ordinary shares for $1.50 each. The amounts are to be incurred entirely on application and anyone having plans to make investments would have to pay $1.50 for every share. If it is assumed that the shares are subscribed fully, the journal entries for recording the applications received would be the following:

Journal entries inherent related to forfeiture and reissue of shares

Bank Trust Account…………………………………….Dr                      $1,500,000

To Application Account                                                                         $1,500,000

(Amount obtained for share application)

Application Account…………………………………….Dr                      $1,500,000

To Share Capital Account                                                                      $1,500,000

(Shares issued at $1.50 per share)

Bank Account…………………………………….Dr                                 $1,500,000

To Bank Trust Account                                                                      $1,500,000

(Amounts obtained transferred on issuance of shares)

On the other hand, according to the Australian regulations, the proprietary firms are not allowed to provide shares to the public. This is because they are considered as private issues and they could be sold to certain group of purchasers only. However, a public listed entity could sell shares privately, if it obtains the necessary permission from the Australian constitution. The large institutional investors could purchase the shares for avoiding the cost and time taken in an overall public issue. However, there are restrictions on the part of ASX regarding the share percentage, which the listed public organisations could issue privately.

An organisation might sell the right of purchasing a number of shares in the organisation at a later point of time in future. Such right could be termed as the company-issued call option. At the time an organisation is involved in issuing options for few useful considerations, the equity of the shareholders would be increased from the amount obtained (Thornton 2018).

Conclusion:

Based on the above discussion, it could be evaluated that In case, a shareholder fails to pay allotted money or a part or call by the stipulated fixed amount for payment, the board of directors of the organisation progress in forfeiting the shares on which allotted money or call has been in-arrear. In case, the market price of the shares is greater in contrast to their par value, it is quite obvious that the organisation would intend to seek advantage of the situation. As a result, it might issue shares at a price, which is more than the par value. This situation could be defined as issuing shares at premium.

References:

Beams, F.A., Brozovsky, J.A. and Shoulders, C.D., 2017. Advanced accounting. Pearson.

Carnegie, G.D. and O’Connell, B.T., 2014. A longitudinal study of the interplay of corporate collapse, accounting failure and governance change in Australia: Early 1890s to early 2000s. Critical Perspectives on Accounting, 25(6), pp.446-468.

Collier, P.M., 2015. Accounting for managers: Interpreting accounting information for decision making. John Wiley & Sons.

Dagwell, R., Wines, G. and Lambert, C., 2015. Corporate accounting in Australia. Pearson Higher Education AU.

Fogarty, T.J., Zimmerman, A.B. and Richardson, V.J., 2016. What do we mean by accounting program quality? A decomposition of accounting faculty opinions. Journal of Accounting Education, 36, pp.16-42.

Garrett, A., 2018. Case Analyses of Accounting Concepts and Methodologies (Doctoral dissertation, University of Mississippi).

Jain, S., 2014. Fundamental of Accounting for CAP-CPT, 2e. Pearson Education India.

Jena, S.K., Mishra, C.S. and Rajib, P., 2016. Share Repurchases: A Literature Review. Asian Journal of Finance & Accounting, 8(2), pp.1-30.

Lyons, J.C., 2018. The Study of Key Accounting Principles on a Case-by-Case Basis (Doctoral dissertation, The University of Mississippi).

Rani, A., 2014. Oversubscription and pro-rata allotment of shares-A new approach in accounting. Asian Journal of Multidisciplinary Studies, 2(6).

Saini, M.K., 2015. Legal and tax implications of buy back of shares. Clear International Journal of Research in Commerce & Management, 6(6).

Thornton, S.C., 2018. A Collection of Case Studies on Financial Accounting Concepts (Doctoral dissertation, University of Mississippi).

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