• SS2 FINANCIAL ACCOUNTING THIRD TERM: ACQUISITION/PURCHASE OF BUSINESS
• SS2 FINANCIAL ACCOUNTING THIRD TERM: PURCHASE OF BUSINESS- FORMAT PREPARATION OF NEW BUSINESS ACCOUNT
• SS2 FINANCIAL ACCOUNTING THIRD TERM: COMPANY AMALGAMATION
• SS2 FINANCIAL ACCOUNTING THIRD TERM: COMPANY FORMATION
• SS2 FINANCIAL ACCOUNTING THIRD TERM: NIGERIAN FINANCIAL SYSTEM
• SS2 FINANCIAL ACCOUNTING THIRD TERM: TYPES OF SHARES
• SS2 FINANCIAL ACCOUNT THIRD TERM: PREPARATION OF ACCOUNTS FOR ISSUE OF SHARES
• SS2 FINANCIAL ACCOUNTING THIRD TERM: LOAN CAPITAL-DEBENTURE TYPES
• SS2 FINANCIAL ACCOUNTING THIRD TERM: CAPITAL MARKET- REQUIREMENTS FOR ENLISTING IN THE CAPITAL MARKET
• SS2 FINANCIAL ACCOUNTING THIRD TERM: COMPANY FORMATION

SS2 Financial Accounting Third Term: Acquisition/Purchase of Business

What is Acquisition of Business?

Business Acquisition is the process of buying a company to build on strengths or weaknesses of the company making the purchase. It can also be defined as a corporate action in which a company acquires ownership of another company by buying most, if not all of the other company’s ownership stakes. This thus enables the acquiring company to assume control of the newly-purchased company. An acquisition occurs when a buying company obtains more than 50% ownership in a target company. As part of the exchange, the acquiring company often purchases the target company’s stock and other assets, which allows the acquiring company to make decisions regarding the newly acquired assets without the approval of the target company’s shareholders. Acquisitions can be paid for in cash, in the acquiring company’s stock or a combination of both.

The process begins with defining the type of business that would make a good acquisition. Generally businesses within the same segment or a highly complementary market segment are targeted. Once defined the target business is approached and if interest is shown due diligence is performed to ascertain the financial and other conditions of the business. When the financial terms are agreed upon, and the contract is signed the merger portion of the acquisition begins. Overlapping processes, personnel and products are evaluated and the better-performing pieces are retained.

Purchase Considerations during Acquisition

Each business acquisition comes with its own unique challenges, some very complex and others routine, involving business, legal and interpersonal relationship issues.  To have the greatest likelihood of handling these items properly, and of success in the purchase process and ownership of the business, it is in the best interest of the buyer(s) to dully take a lot of considerations into view by investigating the new business venture as well as consulting the services of professionals such as Lawyers, Accountants etc.  Below are some important considerations and steps a buyer should take in making the decision to purchase a business.

1. Due Diligence: This is the legal term for carefully evaluating every aspect of the new business enterprise that is about to be acquired. A buyer should therefore hire the services of professional advisors whose function it will be to create a due diligence checklist and a list of questions and issues that need to be answered and resolved to the buyer’s satisfaction even as the buyer reviews and gains a better understanding of the business. Some example of questions to be answered include-
   • What is the recent financial history of the business?
   • Any competition issues?
   • Is the price being paid for the business the “right” price?
   • Why is the business for sale?  Does any other party have a priority right to purchase it?
   • What are the cashflow, equipment, personnel and other needs of the business to operate successfully?
   • What is actually being purchased: inventory, equipment, raw materials, accounts receivable, contracts, a client list, a customer list, a lease?
   • What is the condition of the assets being purchased? etc
2. Financing Considerations:If the purchase is to be financed, then the purchase Contract must provide that the buyer has a reasonable opportunity to apply for and obtain a binding commitment for such financing.   The buyer must diligently pursue such financing as obtaining a loan commitment can take some time, and closing on the financing may be a challenging process to the buyer, especially if the financing is being provided through a special governmental program such as an SBA loan, such as the 7(a) or 504 loan programs.
3. Management of the Business:Before purchasing the business, the buyers should have a solid understanding of the choice of entity to operate the business, who will own such entity, who will run the day-to-day affairs of the business (e.g., the officers or managers), how the officers or managers will be compensated and incentivized, and how the owners will monitor the officers or managers.
4. Carefully set up the Buyer’s Acquisition Team:Buying a business involves many risks and, to be done most successfully, requires an experienced team of professionals and advisers to assist the buyer through the purchase process.  Each member of the buyer’s acquisition team should bring the right amount of skills, training and expertise to enable buyer to properly work through the purchase process:  an attorney experienced in buying businesses to recognize the critical issues and risks and help the buyer navigate through them; a banker, investment banker or a business intermediary / broker to assist in obtaining acquisition financing and, if desired or needed, equity investment; and an experienced accountant to review the tax returns and financial statements of the business and work with the lender.

Goodwill 

Goodwill can be defined as an asset, but it cannot be seen or touched, hence it is referred to as an intangible asset. It can also be defined as the excess of the purchases considerations over the total value of assets less liabilities. It arises as a result of connection, reputation, and efficiency of a business. It is not a tangible asset and cannot be realized until the business is sold.

Reasons for Goodwill

• For patent and copy right protection
• The location of a business premises may also induce the purchaser to pay for goodwill.
• Managerial skill: The effectiveness and efficiency of the management of a company can give them the necessary reputation,
• Quality of goods: The quality, durability of the products of a company can bestow good name on it.
• Possession of partial monopoly: when a company is not faced with much competition in the market , then
• it can become a monopolist.

Goodwill Valuation

There is no actual method of valuing goodwill. Yet, the following methods can be used-

1. Number of year
2. Super profit
3. Number of times of the gross annual fee income
4. Excess of value of a business over the realizable value.

Characteristics of Goodwill

1. The value is subjective
2. It cannot be sold separately apart from other assets of the business
3. It may fluctuate from day to day

Reasons for Acquisition

Companies perform acquisitions for various reasons. They may be seeking to achieve economies of scale, greater market share, increased synergy, cost reductions, or new niche offerings. If they wish to expand their operations to another country, buying an existing company may be the only viable way to enter a foreign market, or at least the easiest way: The purchased business will already have its own personnel (both labor and management), a brand name and other intangible assets, ensuring that the acquiring company will start off with a good customer base.

Acquisitions are often made as part of a company’s growth strategy when it is more beneficial to take over an existing firm’s operations than it is to expanding on its own. Large companies eventually find it difficult to keep growing without losing efficiency. Whether because the company is becoming too bureaucratic or it runs into physical or logistical resource constraints, eventually its marginal productivity peaks. To find higher growth and new profits, the large firm may look for promising young companies to acquire and incorporate into its revenue stream.

When an industry attracts too many competitor firms or when the supply from existing firms ramps up too much, companies may look to acquisitions as a way to reduce excess capacity, eliminate the competition, or focus on the most productive providers.

If a new technology emerges that could increase productivity, a company may decide that it is most cost-efficient to purchase a competitor that already has the technology. Research and development may be too difficult or take too much time, so the company offers to buy the existing assets of a company that has already gone through that process.

ASSESSMENT

1. What is business acquisition?
2. What are some reasons for business acquisition?
3. What are the methods for measuring goodwill valuation?
4. What is goodwill?
5. What are the factors to be taken into consideration when making a business acquisition?

SS2 Financial Accounting Third Term: Company Amalgamation

What is Company Amalgamation? 

Amalgamation is the blending of two or more existing companies into one company. For example, if two existing companies such as Dangote Flour and Flour Mill Plc go into liquidation to form a new company Dan Flour Mill,  it will be a perfect example of amalgamation.

Amalgamation can also be defined as the combination of one or more companies into a new entity. An amalgamation is distinct from a merger because neither of the combining companies survives as a legal entity; a completely new entity is formed to house the combined assets and liabilities of both companies. This sense of the term amalgamation has generally fallen out of popular use, and the terms “merger” or “consolidation” are often used instead.

Reasons for Amalgamation 

The main objective of amalgamation is to achieve synergetic benefits which arise, when two companies can achieve more in combination than when they are individual entities. Asides this however, there are other reasons which shall be found below-

(i) To reap economies of scale

(ii) To eliminate competition

(iii) To build up goodwill

(iv) To reduce the degree of risk through diversification

(v) Managerial effectiveness.

Process of Amalgamation

The following procedure is followed in an amalgamation-

1. The terms of amalgamation are finalized by the board of directors of the constituent companies.
2. A scheme of amalgamation is prepared and submitted for approval to the respective High Court.
3. Approval of the shareholders of the constituent companies is obtained.
4. Approval of SEBI is obtained.
5. A new company is formed (where necessary) and issues shares to the shareholders of the transferor company.
6. The transferor company is liquidated and all assets and liabilities are taken over by the transferee company.

Accounting for Amalgamation

ASSESSMENT

1. What is amalgamation?
2. What are some of the reasons for company amalgamation?
3. What is the process for company amalgamation?

SS2 Financial Accounting Third Term: Purchase of Business- Format Preparation of new Business Account

Introduction

Purchase of business is the process of acquisition of old business by a company. Promoters can acquire a business and sell it to another company at a profit. The persons who sells the business to another company is called the “vendor”. The money paid by the purchaser is called “purchase price”, the purchase of a business must involve agreement between the parties.

In the purchase of business,the assets,name and connection of the business will be taken over,hence,goodwill must be paid for. A revaluation of assets and liabilities will be required, the amount paid to acquire the business is known as the consideration. The excess of the purchase consideration over the net value of the asset is called”goodwill”, if on the other hand,the purchase consideration is lower than the net assets,the purchaser has gained the advantage of “capital reserve”.

In some cases he may acquire all the assets without cash and leave the vendor to discharge the liabilities of the business. Lastly,the purchase consideration can be paid in cash or shares.

New Business Account (Entries in the book of the purchaser)

Procedures for purchase of business with cash.

1. Purchase consideration.

Debit: Business purchase account with the purchase consideration

Credit: Vendor Account

1. Agreed valuation of each asset acquired

Debit: Assets Account

Credit: business purchase account

1. Agreed valuation of liabilities

Debit:business purchase account

Credit:liabilities account.

1. Balance of the business purchase account[excess of consideration over assets]

Debit:goodwill account

Credit business purchase account

1. Balance of the business account[excess of assets over consideration]

Credit:capital reserve

Debit:business purchase account.

1. On settlement of the vendors account

Debit:vendor account

Credit:bank account

1. On settlement of the vendors account with shares

Debit: vendor account

Credit:shares capital account

ASSESSMENT

1. What are the steps taken to purchase a business?
2. The persons responsible for the sale of a business are called what?

SS2 Financial Accounting Third Term: Loan Capital-Debenture Types

What is Loan Capital?

Loan Capital is the part of a company’s capital that is not equity capital but earns a fixed rate of interest instead of dividends, and must be repaid within a specified period; irrespective of the company’s financial position. Loan capital may be obtained from a bank or finance company in the forms of long-term loans, or from debt-equity investors in the form of debentures or preferred stock (preference shares). It is usually secured by a fixed and/or floating charge on the company’s assets. Unlike debt capital, it does not include short-term loans (such as overdraft).

Loan Capital can also be defined as a long-term capital that is employed from sources other than common stock or savings. That is, loan capital is what a company has borrowed or issued in preferred stock. Loan capital is distinguished by the fact that a company is required to pay coupons or dividends periodically. That is, unlike common stock, loan capital carries a fixed liability for a company. Likewise, it is usually collateralized by one or more of the company’s assets.

In the same vein, A debenture is a type of debt instrument that is not secured by physical assets or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer. Both corporations and governments frequently issue this type of bond to secure capital. Like other types of bonds, debentures are documented in an indenture.

Types of Debentures

• Redeemable and Irredeemable (Perpetual) Debentures
• Convertible and Non-Convertible Debentures
• Fully and Partly Convertible Debentures
• Secured (Mortgage) and Unsecured (Naked) Debentures
• First Mortgaged and Second Mortgaged Debentures
• Registered Unregistered Debentures (Bearer) Debenture
• Fixed and Floating Rate Debentures
• Zero Coupon and Specific Rate Debentures
• Callable and Puttable Debentures/Bond
  
  

Distinction between Shares and Debentures

Comparison Chart

BASIS FOR COMPARISON	SHARES	DEBENTURES
Meaning	The shares are the owned funds of the company.	The debentures are the borrowed funds of the company.
What is it?	Shares represent the capital of the company.	Debentures represent the debt of the company.
Holder	The holder of shares is known as shareholder.	The holder of debentures is known as debenture holder.
Status of Holders	Owners	Creditors
Form of Return	Shareholders get the dividend.	Debenture holders get the interest.
Payment of return	Dividend can be paid to shareholders only out of profits.	Interest can be paid to debenture holders even if there is no profit.
Allowable deduction	Dividend is an appropriation of profit and so it is not allowed as deduction.	Interest is a business expense and so it is allowed as deduction from profit.
Security for payment	No	Yes
Voting Rights	The holders of shares have voting rights.	The holders of debentures do not have any voting rights.
Conversion	Shares can never be converted into debentures.	Debentures can be converted into shares.
Repayment in the event of winding up	Shares are repaid after the payment of all the liabilities.	Debentures get priority over shares, and so they are repaid before shares.
Quantum	Dividend on shares is an appropriation of profit.	Interest on debentures is a charge against profit.
Trust Deed	No trust deed is executed in case of shares.	When the debentures are issued to the public, trust deed must be executed.

Key Differences Between Shares and Debentures

The following are the major differences between Shares and Debentures:

1. The holder of shares is known as a shareholder while the holder of debentures is known as debenture holder.
2. Share is the capital of the company, but Debenture is the debt of the company.
3. The shares represent ownership of the shareholders in the company. On the other hand, debentures represent indebtedness of the company.
4. The income earned on shares is the dividend, but the income earned on debentures is interest.
5. The payment of dividend can be made only out of current profits of the business and not otherwise. Unlike the interest on debentures which has to be paid by the company to debenture holders, no matter company has earned profit or not.
6. Dividend is not a business expense and so is not allowed as deduction. On the contrary, interest on debentures is a expense and so allowed as a deduction.
7. In the event of winding up, debentures get priority of repayment over shares.
8. Shares cannot be converted as opposed to debentures are convertible.
9. There is no security charge created for payment of shares. Conversely, security charge is created for the payment of debentures.
10. A trust deed is not executed in case of shares whereas trust deed is executed when the debentures are issued to the public.
11. Unlike debenture holders, shareholders have voting rights.
12. Shares are issued at a discount subject to some legal compliance. Debentures can be issued at a discount without any legal compliance.

ASSESSMENT

1. What is loan capital?
2. What are the key differences between shares and debentures?
3. List the types of debentures

SS2 Financial Accounting Third Term: Company Formation

Introduction to Company Formation

Company Formation is all about the process of founding (i.e., incorporating) a new business enterprise. It is also sometimes called company registration. Company Formation can also be defined as the procedures undertaken to register a business enterprise as a limited company and give it a legal status. In other words, a business becomes a distinct legal entity as soon as it is incorporating. Please note [therefore] that when a business enterprise is incorporated, it becomes an individual ‘person’ in the eyes of the law. Incorporated businesses are completely separate from their owners in terms of finances, liabilities, contractual agreements, and ownership of property and assets. The constitution of the Federal Republic of Nigeria does not view unincorporated businesses (such as sole traders) as distinct legal entities. Therefore, there is no separation between a sole trader business and its owner in terms of finances, assets and liabilities.

Procedure for the formation of a Company

During the formation of a Limited Liability Company, the following procedures must be followed-

1. The first step is to get the promoters; they are individuals who conceive he idea of a company and undertake to fulfill all legal requirements of the venture.
2. The following documents will be filled with the registrar of companies. These are memorandum and article of association and statement of nominal capital.
3. The document are stamped and logged with the registrar of companies for verification
4. When the registrar of companies receives and approves the necessary documents the registrar issues a certificate of incorporation.

Memorandum of Association

The memorandum of association contains the external rules of the company, it refers to the object and power of the company and how it intends to deal and interact with the outside world; it contains the following-

1. The name of the company and the word limited liability at the end.
2. The registered office.
3. The object of the company.
4. The declaration that the liability is limited.
5. The amount of the authorized capital

Articles of Association

This is a document which states the internal regulations of a limited company.it contains the regulations which govern the internal management of the company affairs. The following are found in the article-

1. The right and responsibilities of the shareholder.
2. The duties and power of the directors.
3. How directors may be appointed.
4. The right and duties of the members as between each other and the company.
5. The procedure for accounting and auditing of the company’s book etc.

Prospectus

This is a document issued by limited companies inviting the public to subscribe to its shares.the prospectus contains detailed information about the company.it is prepared by only public companies.

Certification of Incorporation

This is a document which gives legal authority to the company to operate as a legal personality.it is issued by the registrar of companies after due consultation with the various documents submitted.

Private and Public Companies 

Privately-held companies are are only owned by  either solely by their founders, management or a group of private investors. On the other hand, Public companies are companies that have sold portions of their stocks to the public via a process called initial public offering. This therefore means that such companies are not owned by a close-knit group anymore as  shareholders have claim to part of the company’s assets and profits.

Quoted and Unquoted Companies 

Quoted companies are companies whose shares can be bought and  sold on the Stock Exchange. On other hand, unquoted companies are companies whose securities were previously issued on the stock exchange; but not anymore.  In other words, a company is classified as a  quoted company if it is traded on the stock exchange. Such a company also has to abide by various rules and regulations such as being audited regularly, publishing its accounts  and most especially must make it easy for shareholders to sell easily etc. In the same vein, the unquoted securities have none of the above safety nets, and when you decide to sell, you may not find a buyer easily. The value of the security is hard to determine, as there is no market price. You have to agree a value at arms length with the buyer. An if you need to sell urgently, you may need to accept steep losses.

ASSESSMENT

1. What is company formation?
2. What are the procedures for company formation?
3. What is the Memorandum of association and what does it contain?
4. What is a Certificate of incorporation?
5. What are the things contained in an article of association?

SS2 Financial Accounting Third Term: Nigerian Financial System

What is Financial System?

A financial system is a conglomerate of various markets, instruments, operators, and institutions that interact within an economy to provide financial services such as resource mobilization and allocation, financial inter-mediation and facilitation of foreign exchange transactions to exchange foreign trade. Financial system in a market economy is comprised of both of monetary and non-monetary claims (i.e., served debt and equity). Places, institutions or communication systems that provide a market where financial claims can be bought and sold. Specialists such as brokers and underwriters who aid in the direct transfer of funds from surplus to deficit units.

The Components of the Nigerian Financial System and its Operations

The Nigerian financial system comprises of the regulatory/supervisory authorities, banks and non-banking financial institutions. The regulatory bodies are the Central Bank of Nigeria (CBN)  which is at the apex, the Nigerian Deposit Insurance Corporation (NDIC), Security and Exchange Commission (SEC), the Federal Ministry of Finance (FMF), the Nigerian Supervisory Board (NISB), and the Federal Mortgage Bank of Nigeria (FMBN).

The CBN is a major regulator and supervisor in the money market, with the NDIC playing a complementary role. The CBN exclusively regulates the activities of finance companies and promotes the establishment of development banks. The National Board for Community banks, while the final granting of licence is the CBN’s responsibility. The SEC is the Apex regulator/ supervisor in the capital market, with NSE as self-regulatory institution. The FMF and the CBN share control over Bureaux de change while the NISB is the regulatory authority in the insurance sector. The FMBN regulates mortgage financial business in Nigeria (CBN, 1990). Developmentally, the Nigeria financial system has witnessed a rapid growth in the last two decades. This could be seen from the widespread establishment of many financial institutions. The growth can be claimed to due to the oil boom and the awareness of the importance of money by Nigerians.

Features of the Nigerian Financial System

The major feature of the Nigerian financial system is the dominant role the Federal and State Government play in the financial intermediation; either directly or indirectly. There are a number of government parastatals which the government often lend money to. The state and federal governments also borrow money from the financial system. The governments are also involved in the financial intermediation indirectly through ownership of banks or financial institutions. Other functions of the the Nigerian Financial System can be seen below-

1. A high level of confidence must be in place in the system.
2. An efficient financial system must be able to sustain the intermediation process.
3. An efficient financial system must have in place a large number of intermediaries and participants who must stand ready to engage in healthy competition amongst themselves and within confines and boundaries specified by law and the various professional standards in place for the participants.
4. There should be a high degree of flexibility in the market. Also, the instruments (financial assets) employed and the methods of operation should be market based, so that the market can respond and adapt to changes in the economic and financial structure, no matter how small the change may be.
5. An efficient financial system must allow for balance in operations of the market. It requires that there should be an optimal mix of various types of financial institutions with respect to both the transfer of current savings and the stock the past savings.

Functions of the Money Market and Capital Market in the Nigerian Financial System

Money Market: A well-developed money market is essential for a modern economy. Though, historically, money market has developed as a result of industrial and commercial progress, it also has important role to play in the process of industrialization and economic development of a country. Importance of a developed money market and its various functions are discussed below-

1. Financing Trade: Money Market plays crucial role in financing both internal as well as international trade. Commercial finance is made available to the traders through bills of exchange, which are discounted by the bill market. The acceptance houses and discount markets help in financing foreign trade.

2. Financing Industry: Money market contributes to the growth of industries in two ways:

(a) Money market helps the industries in securing short-term loans to meet their working capital requirements through the system of finance bills, commercial papers, etc.

(b) Industries generally need long-term loans, which are provided in the capital market. However, capital market depends upon the nature of and the conditions in the money market. The short-term interest rates of the money market influence the long-term interest rates of the capital market. Thus, money market indirectly helps the industries through its link with and influence on long-term capital market.

3. Profitable Investment: Money market enables the commercial banks to use their excess reserves in profitable investment. The main objective of the commercial banks is to earn income from its reserves as well as maintain liquidity to meet the uncertain cash demand of the depositors. In the money market, the excess reserves of the commercial banks are invested in near-money assets (e.g. short-term bills of exchange) which are highly liquid and can be easily converted into cash. Thus, the commercial banks earn profits without losing liquidity.

4. Self-Sufficiency of Commercial Bank: Developed money market helps the commercial banks to become self-sufficient. In the situation of emergency, when the commercial banks have scarcity of funds, they need not approach the central bank and borrow at a higher interest rate. On the other hand, they can meet their requirements by recalling their old short-run loans from the money market.

5. Help to Central Bank: Though the central bank can function and influence the banking system in the absence of a money market, the existence of a developed money market smoothens the functioning and increases the efficiency of the central bank.

ASSESSMENT

1. What is Financial system?
2. List 5 features of the Financial system?
3.  List the functions of the money market and the capital market in the Nigerian financial system.

SS2 Financial Accounting Third Term: Types of Shares

Definition of Shares

Shares can be defined as the units of capital or ownership of a limited liability company, it is the division of the company’s ownership into numerous equal parts. i.e the interest which a shareholder has in the company. A company cannot commence  business until it raises by selling to the public for subscription.

Types of Shares

1. Ordinary shares: These carry no special rights or restrictions.  They rank after preference shares as regards dividends and return of capital but carry voting rights (usually one vote per share) not normally given to holders of preference shares (unless their preferential dividend is in arrears).Some companies create more than one class of ordinary shares – e.g. “A Ordinary Shares”, “B Ordinary shares” etc. This gives flexibility for different dividends to be paid to different shareholders or, for example, for pre-emption rights to apply to some shares but not others.

2. Deferred ordinary shares: A company can issue shares which will not pay a dividend until all other classes of shares have received a minimum dividend. Thereafter they will usually be fully participating.  On a winding up they will only receive something once every other entitlement has been met.

3. Non-voting ordinary shares: Voting rights on ordinary shares may be restricted in some way – e.g. they only carry voting rights if certain conditions are met. Alternatively, they may carry no voting rights at all.  They may also preclude the shareholder even attending a General Meeting. In all other respects they will have the same rights as ordinary shares.

4. Redeemable shares: The terms of redeemable shares give the company the option to buy them back in the future; occasionally, the shareholder may (also) have the option to sell them back to the company, although that’s much less common. The option may arise at or after a specific date, between two dates or be effective at any time the shares are in issue. The redemption price is usually the same as the issue price, but can be set differently. A company can only redeem shares out of profits or the proceeds of a new share issue, which may restrict its ability to redeem shares even if the directors would like to exercise the option. If a company chooses to have redeemable shares, it must also have non-redeemable shares in issue. At no point can all of its share capital be made up of redeemable shares.

5. Preference shares: These shares are called preference or preferred since they have a right to receive a fixed amount of dividend every year.  This is received ahead of ordinary shareholders.  The amount of the dividend is usually expressed as a percentage of the nominal value.  So, a N1, 5% preference share will pay an annual dividend of 5 naira. The full entitlement will be paid every year unless the distributable reserves are insufficient to pay all or even some of it.  On a winding up, the holders of preference shares are usually entitled to any arrears of dividends and their capital ahead of ordinary shareholders.  Preference shares are usually non-voting (or only have a vote only when their dividend is in arrears).

6. Cumulative preference shares: If the dividend is missed or not paid in full then the shortfall will be made good when the company next has sufficient distributable reserves.  It follows that ordinary shareholders will not receive any dividends until all the arrears on cumulative preference shares have been paid. By default, preference shares are cumulative but many companies also issue non-cumulative preference shares.

7. Redeemable preference shares: Redeemable preference shares combine the features of preference shares and redeemable shares. The shareholder therefore benefits from the preferential right to dividends (which may be cumulative or non-cumulative) while the company retains the ability to redeem the shares on pre-agreed terms in the future.

Distinctions between Issues of Shares

Shares can be issued on the following terms:

• Shares Issued at a Discount: This means that the shares are quoted below the nominal value. The issuance of shares at a discount must be stipulated by the provisions of the company’s act e.g shares of N3 nominal value would be issued for N2. The difference between the nominal vale and issuing value is N1.
• Shares Issued at a Premium: Shares are issued at a premium when the issuing value is more than the nominal vale.the difference is called premium. The premium will be regarded as capital reserve and will be posted to share premium account.e.g shares of N3 nominal vale was issued at N5.the premium is N2, it occurs as a result of the attractive nature of the shares of the company.
• Shares Issued at a Par: here, shares are nit issued at a discount or premium but at the actual price,this means that the nominal price is equal to the issuing price.e.g shares of N2 nominal value was issued at N2.

ASSESSMENT

1. Define Shares
2. List the 6 types of shares
3. What are the terms for which Shares can be issued?
4. What is the difference between the redeemable preference shares and redeemable shares?

SS2 Financial Account Third Term: Preparation of Accounts for Issue of Shares

Introduction

As seen in the previous lecture on shares, there are three classes of shares namely- shares issued at par, shares issued at premium and shares issues at discounts. In this lecture, we shall now discuss the procedures for preparing the accounts for these various classes of shares. Read on below-

Preparation of Account for Issue of Shares at Par

A company may issue shares at their face value or at a price other than the face value. When shares are issued at a price equal to their face value it is termed as shares issued at par. When issue price of a share is more than its face value, it is known as shares issued at a premium. If issue price of a share is less than its face value, it is called as shares issued at a discount. Below are the accounting entries or procedures for preparing the account for  the issue of shares are as follows–

1. On receipt of applications money:

Bank a/c Dr.

To share application a/c

(Being share application money received)

2. On allotment of shares:

(a) Share application a/c Dr.

To share capital a/c

(Being appropriation of application money towards share capital)

(b) Share Allotment a/c Dr.

To share capital a/c

(Being allotment money due on shares @ Rs. per share)

3. When allotment money is received, the following entry is passed:

Bank a/c Dr.

To share allotment a/c (Being allotment money received)

4. (a) If any call is made on the shares, the following entries are passed:

Share call a/c Dr.

  To share capital a/c

(b) On receipt of call money:

Bank a/c Dr.

To share call a/c

Preparation of Account for Issue of Share at Premium (Accounting Entries) 

The following are the entries for issuance of shares at premium-

(a) Bank a/c Dr.

To share application a/c

(Being application money received)

(b) Share application a/c Dr.

To share capital a/c

(Being application appropriated towards capital a/c)

(c) Share Allotment a/c Dr.

To share capital a/c

To securities premium a/c

(Being allotment money and premium money due on share)

Bank a/c Dr.

To share allotment a/c

(Being allotment money received)

Please note that there are no restrictions on the issue of shares at a premium. However, it is only prosperous companies because of their financial strength and high earning capacity which are in a position to offer shares at a premium.

Preparation of Account for issue of Shares at Discount

Shares can be issued at discount subject to the following conditions:

(a) The shares must belong to a class already issued.

(b) Discount rate should not be more than 10%.

(c) One year must have passed since the date at which the company was allowed to commence business.

(d) The issue of such shares must take place within two months after the date of court’s sanction or within such extended time as the court may allow.

(e) The issue must be authorised by a resolution passed by the company in general meeting and sanctioned by the Company Law Board.

Accounting Treatment:

i. Generally, the ‘Discount on Shares’ is recorded at the Time of Allotment:

 Share Allotment A/c … Dr. (With the amt., due)Discount on Issue of Shares A/c … Dr. (With discount)

To Share Capital A/c (Total amount)

(Being the allotment money due)

(ii) To Write off ‘Discount on Shares’

Profit & Loss A/c/Securities Premium Reserve A/c ……..Dr

To Discount on Issue of Shares A/c

Note. Discount on issue of shares is recorded at the time of allotment made due.

Illustration:

(Shares Issued at discount and calls in arrears. Trendy Shoe Company invited applications for 12,000 equity shares of N100 each at a discount N4 per share (allowed at the time of allotment). The amount was payable as follows: On Application N30, on allotment N36, on first and final call N30.

The public applied for 10,000 shares and these were allotted. All money due was with the exception the first and final call on 400 shares.

Required:

Journalise the above transactions in the books of the Company.

ASSESSMENT

1. What are the conditions for which Shares can be issued at discount subject?
2. What are the accounting entries or procedures for preparing the account for the issue of shares?

SS2 Financial Accounting Third Term: Capital Market- Requirements for Enlisting in the Capital Market

 What is a Capital Market?

A capital market is any financial market in which long-term debts and equity-backed securities are traded (i.e., bought and sold). These securities are typically  Capital markets are defined as markets in which money is provided for periods longer than a year. Capital markets channel the wealth of savers to those who can put such wealth to long-term productive use; such as companies or even governments making long-term investments. The capital is typically overseen by financial regulators or monitors such as the Nigerian Securities and Exchange Commission (SEC).

The Requirements for enlisting in the Capital Market

1. Application for Listing will only be entertained if sponsored by a Dealing Member of The Exchange.
2. The company must be a public company, which will issue or has issued an invitation to the public to subscribe for its shares or has satisfied Council that the public is sufficiently interested in the company’s shares to warrant Listing.
3. All securities for which listing is sought shall first be registered with the Securities and Exchange Commission.
4. All application and documents to be considered or approved by Council should always be submitted to The Exchange at the earliest possible date. The final prospectus for approval must be forwarded to The Exchange at least seven working days before the date for the completion board meeting.
5. Before the grant of Listing, all applicant companies shall sign a General Undertaking that they will provide promptly certain information about their operations and that they will follow certain administrative procedures.
6. Where it is desired to increase the authorized share capital, the directors shall state, in the explanatory circular or other documents accompanying the notice of meeting, whether or not they presently have any intention of issuing all or any part thereof.
7. A company which applies for Listing shall comply with the minimum public float requirement prescribed by the Listing standard criteria chosen by the Issuer.
8. Subscriptions list must remain open for a maximum period of 28 working days.
9. A maximum of 10% of an offering will be allowed to staff of a company (or its subsidiaries or associated companies) on special application forms. Such offerings may be placed in Trust for the employees.  Where a proportion of the shares in a placement or public offer is reserved for employees, the company shall provide The Exchange along with the General Undertaking a list of members of staff who have been allotted shares, the number of such shares, the capacity in which they work for the company and the number of years of service with the company.
10. All companies admitted to Listing on The Exchange shall pay a listing fee as laid down in Appendix iv and these fees are subject to review from time to time.
11. All clauses in the company’s Memorandum & Articles of Association that restrict the transfer of fully paid-up shares must be expunged.
12. All Listed companies shall advertise the Notice of their annual general meetings in at least two widely read newspapers at least 21 days before the annual general meeting and such advertisement must be conspicuously placed to cover a reasonable portion of a page.
13. The subscription monies pending allotment and return of funds to subscribers shall be deposited in a designated bank account appointed by the Issuing House and the company. All accrued interests in respect of cleared allotments shall be paid to the company to offset part of the cost of the Issue.
14. Return monies arising from an unsuccessful application or abortion of an offer/issue shall attract interest at the rate determined by the Commission.
15. These general requirements are not exhaustive and Council may add thereto or subtract therefrom as considered necessary subject to the approval of the Securities and Exchange Commission.

ASSESSMENT

1. What is capital market?
2. List 7 requirements for enlisting on the capital market?

SS2 Financial Accounting Third Term: Company Formation

Procedure for the formation of a Company

During the formation of a Limited Liability Company, the following procedures must be followed-

1. The first step is to get the promoters; they are individuals who conceive he idea of a company and undertake to fulfill all legal requirements of the venture.
2. The following documents will be filled with the registrar of companies. These are memorandum and article of association and statement of nominal capital.
3. The document are stamped and logged with the registrar of companies for verification
4. When the registrar of companies receives and approves the necessary documents the registrar issues a certificate of incorporation.

Memorandum of association

The memorandum of association contains the external rules of the company, it refers to the object and power of the company and how it intends to deal and interact with the outside world; it contains the following

1. The name of the company and the word limited liability at the end.
2. The registered office.
3. The object of the company.
4. The declaration that the liability is limited.
5. The amount of the authorized capital

Articles of association

This is a document which states the internal regulations of a limited company.it contains the regulations which govern the internal management of the company affairs.the following are found in the article;

1. The right and responsibilities of the shareholder.
2. The duties and power of the directors.
3. How directors may be appointed.
4. The right and duties of the members as between each other and the company.
5. The procedure for accounting and auditing of the company’s book etc.

Prospectus

This is a document issued by limited companies inviting the public to subscribe to its shares.the prospectus contains detailed information about the company.it is prepared by only public companies.

Certification of incorporation

This is a document which gives legal authority to the company to operate as a legal personality.it is issued by the registrar of companies after due consultation with the various documents submitted.

Share capital

There are various terms used in connection with the share capital

1. Authorized or registered capital or nominal capital: this is the total amount stated in the memorandum of association and approved by the registrar of companies which a company can issue out.
2. Issued capital: this is the total amount that the directors decide to issue to the public for subscription.
3. Called up capital: this is the total amount asked for on all shares.
4. Paid up capital: this is the total amount of shares paid for on the issued capital.
5. Uncalled-up capital: the total amount which has not been called up on the issued share capital.
6. Calls in arrears: this relates to amount called for but not yet received.
7. Calls in advance: this relates to money received prior to payment being requested.

Test and Exercise

Explain the procedures for formation of company.