Financial Accounting 1: Chapter 16-Introduction to Companies (Continued) Lecture notes Lecturer: M.J.Nsangwe SHARE CAPITAL Shares are transferable units of ownership that are issued as share capital certificates to the shareholders of companies. Authorised and issued share capital Authorised and issued share capital are terms that are specific to the share capital of companies. An incorporated company discloses in its Memorandum of Incorporation (MOI) its authorised share capital. The authorised share capital is the maximum number of shares that may be issued to shareholders of a company. The issued share capital is the actual numbers of shares already issued to shareholders. The difference between the authorised share capital and issued share capital can be called the unissued share capital. It is logical that the issued share capital may never exceed the authorised share capital and that issued share capital is the share capital balance used in the statement of financial position. Classes of Shares Shares are classified into different classes of shares according to the rights and privileges inherent in the shares. The classes of shares cater for the preference of investors for investments with differing levels of risk. However, within a particular class of shares, each share must have equal rights. The main class of shares are class A and class B shares, commonly referred to as ordinary shares and preference shares. Ordinary shares (Class A) Ordinary shares are held by ordinary shareholders, who are the effective owners of the company. Ordinary shareholders have the right to vote at shareholders' meetings of the company. They appoint the directors and they ultimately control the company. They receive dividends from current or accumulated profits only once the preference dividend, where applicable has been declared. On liquidation or winding-up of the Page 1 of 4
company, ordinary shareholders are usually paid once all the claims from payables and the preference shareholders have been settled. If company issues only one class of shares, they will be ordinary shares. Preference shares (Class B) Preference shares are owned by preference shareholders who have preferential rights over ordinary shareholders. The main right is that preference shareholders receive dividends before ordinary shareholders, normally at a fixed annual dividend per share. If the company is liquidated, the preference shareholders will receive the payment of their capital investment before ordinary shareholders, subject to their terms of issue. Preference shareholders do not normally have voting rights. Different kinds of preferential rights may be attached to preference shares resulting in several classes of preference shares. A combination of these rights is possible. The most frequently used preference shares are: Cumulative preference shares Although preference shares may receive a fixed dividend every year, they are only entitled to the dividend once the dividend has been declared. (A dividend is declared when it is proposed by the board of directors and is approved by the shareholders) With cumulative preference shares the shareholder is entitled to receive a dividend every year. If no preference dividend is declared, the shareholders retain the right to receive the