Share Premium

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Share premium is the amount received by a company over and above the face value of its shares.

Face value of a share is its value that is printed on the share certificate. For example, face value of a $1 share is one dollar. But just because the value of share is printed $1 does not necessarily mean that the share is worth only one dollar. If a company has a history of good financial performance, it can sell its shares at a price higher than the face value of the shares. This difference between the selling price and the face value of a share is known as share premium.

It is important to note that share premium arises only when the “company” sells the shares. It arises only when a company issues new equity shares. It does not arise when the “investor” sells shares at a price greater than face value. If a company sells a share whose face value is $1 at a price of $2, the company earns a share premium of $1. But subsequently if the investor sells the same share to someone else at a price of $4, no share premium will be gained by the company. The investor will benefit from this gain.

Share premium is a non-distributable reserve. The company can use it only for the purposes that are defined in the bylaws of that company. It cannot be used for purposes not defined in the company’s laws. Usually the companies are not allowed to use the share premium for payment of dividends to the shareholders and to set off the operating losses. Share premium can usually be used for paying equity related expenses such as underwriter’s fees. It can also be used to issue bonus shares to the shareholders. The costs and expenses relating to issuance of new shares can also be paid from the share premium.

The amount of share premium is presented in the balance sheet as part of the equity capital. It is presented below the amount of issued share capital

Negative Share Premium

It is possible for share premium to be negative. Share premium represents the amount received by a company over and above the face value of its shares, and it is recorded in the shareholders' equity section of the balance sheet.

A negative share premium arises when a company issues shares at a discount to their nominal or face value. In this case, the amount received for the shares issued is less than the nominal or face value of the shares, resulting in a negative share premium. This can happen when a company needs to raise capital quickly and is willing to issue shares at a discount to attract investors.

It is important to note that negative share premium is not a desirable outcome for a company, as it can indicate that the company is in a weak financial position and is unable to raise capital at market rates. Negative share premium may also affect the valuation of the company and reduce the confidence of investors. Therefore, companies should aim to issue shares at or above their nominal or face value to avoid negative share premium.

Quote Guest, 9 July, 2014
clear and comprehendsive explanation. Good!
Quote Guest, 13 October, 2014
Exactly what i needed to know about share premium. thx!
Quote Guest, 10 November, 2014
what is difference between share premium and securities premium?

Actually I had given an auditor exam and the question there was premium received on issue of shares shall be credited  to a separate account?
Quote anyomous, 25 March, 2015
How do we calculate the premium to be fixed for issue of shares at premium
Quote Guest, 16 April, 2015
Great explanation. Thanks
Quote Guest, 2 June, 2015
Thanks.It clarified my concept completely.
Quote Guest, 4 February, 2016
premium received on the issue of share is shown in .....
a) debit side of profit and loss a/c
b)credit side p and l a/c
asset side of balance sheet
d)liabilities side balance sheet
Quote Guest, 9 February, 2016
Thanks for a great explanation
Quote Guest, 4 March, 2016
Thanks for the above information.
But how can we calculate the amount of premium?
Quote Daan, 10 March, 2016
I have a client who has just gone through a MBO. The result is that the share premium increased from R 500 000 to R 5 000 000. The share premium account gets credited with R 4 500 but what account gets debited?
Quote Guest, 8 April, 2016
How to account the minus share premium?

Face value 2$, Market price 1$= share premium=-1$
Quote Guest, 20 May, 2016
Can anybody explain  share premium account value. For example

Company issues 1 share nom value $1000 and sell it for $$2000

Share premium Account = $1000

Company buys assets for $1000 which promptly drop to 0.

Assets = Equity + liabilities

Company folds  what is the share value worth?

How would you write the above equation.
Quote Guest, 19 June, 2016
really good explanation! thanks a lot!
Quote Guest, 19 August, 2016
fantastic explanation
Quote Guest, 18 October, 2016
can a company having losses issue shares at premium
Quote MDZ, 19 December, 2016
How to calculate Cash dividend when Share premium is given?

Paid-up Capital (100,000 x 10)  1000,000
Share Premium                             200,000

The director of Co. decided to declare cash dividend @ 10% of Share capital.
Quote Guest, 10 April, 2018
what is the effect of the share premium to the income statement? will it be recognised as an income?
Quote Guest, 4 November, 2018
I'm currently doing fm acca.  Do I included the share premium in a ROE ratio?
Quote Guest, 8 February, 2021
This is a really good explanation!!! Thank you!!
Quote Vit. A., 22 March, 2023
Share premium does not directly impact the income statement. Share premium is a component of shareholder equity, which is reported on the balance sheet rather than the income statement.

When a company issues shares at a price higher than the par or face value of the shares, the excess amount received is recorded as share premium. This means that share premium represents the amount paid by investors that is in excess of the par or face value of the shares.

Since share premium is not recognized as income, it is not reported on the income statement. Instead, it is recorded as a component of shareholder equity on the balance sheet, along with other reserves, such as retained earnings and common stock. Share premium can be used by a company for a variety of purposes, such as to finance growth or pay dividends to shareholders, but it does not impact the company's net income or earnings per share.
Quote Vit. A., 22 March, 2023
Guest wrote:
I'm currently doing fm acca. Do I included the share premium in a ROE ratio?
Yes, share premium is included in the calculation of the return on equity (ROE) ratio. ROE is a financial ratio that measures a company's profitability by calculating the amount of net income generated per dollar of shareholder equity. Share premium is a component of shareholder equity, along with common stock, retained earnings, and other reserves.
The formula for calculating ROE is:

ROE = Net Income / Shareholder Equity

where Shareholder Equity includes common stock, retained earnings, and any other reserves, including share premium.

By including share premium in the calculation of ROE, the ratio reflects the total amount of capital invested by shareholders, including any premium paid for the shares. This provides a more accurate measure of the return generated by the company's equity capital.

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