Capital surplus, also called share premium, is an account which may appear on a
corporation's
balance sheet, as a component of
shareholders' equity
In finance, equity is ownership of assets that may have debts or other liabilities attached to them. Equity is measured for accounting purposes by subtracting liabilities from the value of the assets. For example, if someone owns a car worth $2 ...
, which represents the amount the corporation raises on the issue of shares in excess of their
par value
Par value, in finance and accounting, means stated value or face value. From this come the expressions at par (at the par value), over par (over par value) and under par (under par value).
Bonds
A bond selling at par is priced at 100% of face va ...
(nominal value) of the shares (
common stock
Common stock is a form of corporate equity ownership, a type of security. The terms voting share and ordinary share are also used frequently outside of the United States. They are known as equity shares or ordinary shares in the UK and other Co ...
).
This is called Additional paid in capital in US GAAP terminology but, additional paid in capital is not limited to share premium. It is a very broad concept and includes tax related and conversion related adjustments.
Taken together, common stock (and sometimes preferred stock) issued and paid (plus capital surplus) represent the total amount actually paid by investors for shares when issued (assuming no subsequent adjustments or changes).
Shares for which there is no par value will generally not have any form of capital surplus on the balance sheet; all funds from issuing shares will be credited to common stock issued.
Some other scenarios for triggering a capital surplus include when the Government donates a piece of land to the company.
The capital surplus/share premium account (SPA) is generally not distributable, but may be used to:
* write off the expenses/commission relating to the issue of those shares, or
* make a
bonus share
Bonus shares are shares distributed by a company to its current shareholders as fully paid shares free of charge.
*to capitalise a part of the company's retained earnings
*for conversion of its share premium account, or
*distribution of treasury ...
issue of fully paid-up shares.
Within the framework of capital increase by share premium a larger proportion of capital increase is placed into a capital reserve while the subscribed capital is increased by a minimum amount. This is because the initial losses are covered by the capital reserve. If capital increase was carried out fully or to a significant degree through the increase of subscribed capital, equity could easily fall to below the subscribed capital due to the losses.
It may also be used to account for any gains the firm may derive from selling
treasury stock
A treasury stock or reacquired stock is stock which is bought back by the issuing company, reducing the amount of outstanding stock on the open market ("open market" including insiders' holdings).
Stock repurchases are used as a tax efficient ...
, although this is less commonly seen.
Capital surplus is also a term used by economists to denote capital inflows in excess of capital outflows on a country's
balance of payments
In international economics, the balance of payments (also known as balance of international payments and abbreviated BOP or BoP) of a country is the difference between all money flowing into the country in a particular period of time (e.g., a ...
.
Background
Many firms authorize shares with some nominal par value, often the smallest unit of currency commonly in use (such as one penny or $0.01), in many jurisdictions due to legal requirements. The firm may then sell these shares for a much higher price (as the par value is a largely archaic and fictional concept).
Any premium received over the par value is credited to capital surplus.
Share premium reserve account
According to Companies Act 2006 s.610 in the United Kingdom the share premium account may be used only for certain specific purposes. However, UK company law in this connection was significantly relaxed in 2008 by permitting the share premium account to be converted into share capital and then the share capital to be reduced (effectively allowing the elimination of the share premium account by a two-stage process).
Under companies ordinance 1984 (Nepal) s.84:
companies ordinance 1984 (iNDIA)
(1) If a company issues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate amount or value of the premiums on those shares shall be transferred to an account called "the share premium account".
(2) The share premium account may be applied by the company in paying up unissued shares to be allotted to members as fully paid bonus shares, or in writing off-
(a) the company's preliminary expenses; or
(b) the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of the company,
or
(c) in providing for the premium payable on redemption of debentures of the company.
(3) Subject to this, the provisions of this Act relating to the reduction of a company's share capital apply as if the share premium account were part of its paid up share capital.
A company's SPA is a part of creditors' buffer.
Assets:
:Cash: $450
Liabilities:
:Nil
Shareholders' equity
In finance, equity is ownership of assets that may have debts or other liabilities attached to them. Equity is measured for accounting purposes by subtracting liabilities from the value of the assets. For example, if someone owns a car worth $2 ...
:
:Common stock: $100
:Preference stock: $25
:Share premium: $325
SPA = Number of new shares issued x (issue price - par value)
See also
* Bond (finance)
In finance, a bond is a type of security under which the issuer (debtor) owes the holder ( creditor) a debt, and is obliged – depending on the terms – to repay the principal (i.e. amount borrowed) of the bond at the maturity date as well as ...
* Common stock
Common stock is a form of corporate equity ownership, a type of security. The terms voting share and ordinary share are also used frequently outside of the United States. They are known as equity shares or ordinary shares in the UK and other Co ...
* Preferred stock
Preferred stock (also called preferred shares, preference shares, or simply preferreds) is a component of share capital that may have any combination of features not possessed by common stock, including properties of both an equity and a debt in ...
* Treasury stock
A treasury stock or reacquired stock is stock which is bought back by the issuing company, reducing the amount of outstanding stock on the open market ("open market" including insiders' holdings).
Stock repurchases are used as a tax efficient ...
* Paid in capital
Paid-in capital (also paid-up capital and contributed capital) is capital that is contributed to a corporation by investors by purchase of stock from the corporation, the primary market, not by purchase of stock in the open market from other st ...
* Reserve (accounting)
In financial accounting, reserve always has a credit balance and can refer to a part of shareholders' equity, a liability for estimated claims, or contra-asset for uncollectible accounts.
A reserve can appear in any part of shareholders' equity e ...
* Shareholders' equity
In finance, equity is ownership of assets that may have debts or other liabilities attached to them. Equity is measured for accounting purposes by subtracting liabilities from the value of the assets. For example, if someone owns a car worth $2 ...
External links
Capital Surplus
References
{{DEFAULTSORT:Capital Surplus
Accounting terminology
Financial capital