Company account
Table of Contents
Table of Contents
Q.1.
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A)
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Memorandum and Articles of Association
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2
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B)
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Share redemption process
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5
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C)
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Relationship between Authorized share capital and
issued share capital
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7
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D)
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Define of subsidiary company
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7
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E)
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Goodwill on consideration
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8
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Q2.
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9
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A)
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Selected method calculation and justification
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9
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B)
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Calculation of value of shares price
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9
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C)
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Criticize and consideration on the method selected
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10
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References
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11
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Introduction
The report discusses the function of Memorandum and Articles of Associations
is an important for a public limited company and how the company can redeem the
share also discusses. The reports discuss the relationship between the
authorized share capital and issued share capital. After that the reports define
a subsidiary company as company act 1965. It also discuss the types of goodwill
on consolidation. The net assets value per share calculation, justification and
consideration have been presented in the question number 2.
Question 1.
A) Memorandum
and Articles of Association
Both are the
important document for a Limited Company. On the one hand, the Memorandum of
Association is the document of set up the company and on the other hand, the
Articles of Association is the document that set out how the company should be
run, governed and owned. Generally, those documents are allotted during the
incorporation step of the company.
Memorandum of Association
The memorandum is
a standard-format document that outlines the names of the first members of a
company and declares their intention to form and become part of that company. (Tapley, C. 2014). It is a
single –stage format that the original member of a limited company must
subscribe their name to be part of the company. The legal document of the
company will not be changed according to company formation and subscriber’s
names also not be changed or put off after establishment. It occurs to keep the
whole document of the company whether any original member of the company leave
or new member join to the company. According to Lord Macmillan, “The purpose of the memorandum
is to enable the shareholder, creditors and those who deal with the company to
know what is permitted range of enterprise.” Memorandum indicates the
explanation of the scope activates of the company in order to let shareholders
know investment areas for the company and also can able to know about their
risk by investing money. The memorandum actually external affairs. In this
case, the outsider can easily understand about limitation of the working of the
company in order to deal with prescribed scope. Memorandum defines the
limitations on the powers of the company established under the Act. Below the
image is the sample of the memorandum of association.
The Memorandum consists five
compulsory clauses are the name clause, the registered office clause, the
object clause, the liability clause, and the capital clause.
Firstly, the name is important for the company
due to recognize its company from other any company. The company can select any
name except king, queen, emperor, government, WHO, NOU or World Bank. Giving
the name of the company must use ‘Sdn Bhd’ for private limited company and ‘Berhad’
for public limited company end of the name. In order to that shareholder can
easily understand where they are going to invest exact company.
Secondly, every company must
have registry office to communicate to registrar companies to have
corresponsive with the company. The place of registered office can be intimated
to the Registrar within 30 days of incorporation or commencement of business,
whichever is earlier (Kumar, A. 2010). If the company wants to shift their office one place to
another place in the same state, the company will be required to take special
renovation to approve which involves in alteration in the memorandum.
Thirdly, the object clause is
more important of memorandum of association. It decides the rights and forces
of the organization furthermore characterizes its circle of exercises. A company will not able to take up the
activity, if not mention in the objective clause. However, this clause is
difficult to alter later on, thus, it should be decided sensibly. It offers
security to the shareholder by giving security that the funds upturn of the
undertaking will be safety in any other undertaking. The object clause can be
changed to enable a company to carry on its activities more economically, or by
improved means to carry on some business which under existing circumstances may
conveniently by combined with the object clause (Kumar, A. 2010).
Fourthly, the liability
clauses indicates the liability of the members are limited which the value of
the shares held by them. It means that the share will be liable to pay which
share is still not paid of their shares. The liability of shares are limited by
guarantee for their members which every member can undertake to contribute to
the assets of the company in the occasion of its weeding up.
Fifthly, the capital clause
indicates the total capital of the proposed company where the division mention
equity share capital and preference share capital. The amount of shares will be
given in every category of shares. There have some exceptional cases such as
rights and privileges that would be displayed on any kind of shareholders to
enable the public to know what are the exact nature of capital structure of the
company.
Articles of Association
Article
of association is the major document which contains the internal rules,
regulations, duties, responsibilities of the company. It provides a guidelines
to the members of the company in order to conduct activities .Actually it
defines how the company is run, owned and governed. The articles can put restrictions
on the director’s authority that the director will not pursue certain course of
action without the shareholder approval. The Articles of Association provide
for the different voting and dividend rights attached to different share
classes, as well as restrictions on the transfer of shares. These further
include a preliminary clause with word definitions provided so as to prevent
ambiguity during interpretation. This document also defines the company and
provides for its members; it provides guidelines for the resignation and
termination of directors by the Board; it also includes rules on holding annual
and extraordinary general meetings, with regard to quorum, notices of meetings,
proceedings and voting. It also indicates the maximum and minimum number of
directors the company must have and how they may be disqualified. it provides
the inclusion of alternative executives, the powers and duties of executives
and their interests and proceedings at Board meetings. The Articles of
Association also include provisions for the CEO and Company Secretary, and
details clauses relating to the company seal, auditing and accounting, winding
up and indemnity. Below the image is a sample of article of association (One, J.2009).
B) Share redemption process
Redemption
of share means returning the money of the share capital to the shareholders at
a fixed date or after a certain period of time. Generally, redemption happens
for the fixed security for example, preferred share, bond etc. Redemption of
preferred share means pack back the preferred share capital to the preferred
shareholders. It indicates an outflow of cash and it is necessary for the
company to ensure that the sufficient money is in their account before
redemption to run their business. When the redemption take places the assets
reduce in the amount and liabilities of the company reduce by an equal amount.
In
addition, redemption of preferred shares can be either at par value or premium.
When the redemption take place at par value or nominal value, then the nominal
value of the shares will be equal to the amount payable to preferred
shareholders. But if the redemption take places at premium the amount payable
to the shareholders will be greater than the nominal value. However, there
three strategies or ways used by the company to redeemed the shares are given
below-
(1)
Redemption by a fresh issue of share: A company can issue new shares (ordinary
or preference) to redeem the existing redeemable preference shares, the new
shares can be issued at par, premium or discount. It must be noted that the
amount of the new share value will be equal of the redeemed share capital in
terms of not suffer from the lack of capital. The company may prefer to
implement this form of redemption whether the company has not sufficient liquid
fund. There will not be an excessive outflow of funds and it may also new share
at premium. As example, the directors resolved to redeem all the redeemable
preference share at a premium of 10% and to make a new issue of 4000000
ordinary shares of $1 each at par for the purposes of redeeming the preference
share. All the new shares were fully paid up. The solution will be 4000000 new
ordinary shares at par are issued to replace the 4000000 11% redeemable
preference share capital redeemed. The premium on redemption of $1500000 is
provides for by writing it off against the retained earnings.
(2)
Redemption out of profit: This is the redemption process of preferred share
where the company use it profit or any reserve instead of issuing new shares.
If the company has sufficient amount of profit or reserve, it can return the
share capital of the preferred shareholders by placing the profit in the form
of capital. This process has the effect of “freezing” past profit and covering
it to become part of the paid up capital. Sometimes, company creates capital
redemption reserve from the profit in order to redeem the preferred share
capital because the capital structured needs to be maintained in its original
form. This reserve is non distributable reserve not used to cover the loss. For
Example, company wants to redeem preferred share capital amount $30000, to
recover this amount, company place $ 30000 from capital redemption reserve in
order to maintain its capital in the original form.
(3)
Redemption from fresh issue of shares and out of profit: At times, company uses
both two process together to redeem the preferred share capital. In this
process, the nominal amount of new shares and the amount of profit transferred
from the capital redemption reserve will be equal to the nominal amount of
share redeemed. For example, company ABC wants to redeem the share capital
amount $100000. It can cover its redeemed capital by issuing new shares $5000
at $10 each will be $50000 and another $50000 from its capital redemption
reserve.
C) Relationship between Authorized
share capital and issued share capital
The authorized share indicates the maximum amount of the
share capital that a company is allowed to issue by the memorandum of
association where issued share capital represents
that part of the nominal value of shares which are offered to the public for subscribes
and thus would be shareholder. The amount of the authorized share
capital can remain unused which will not affect to the authorized share capital
whereas issued share capital can be either fully paid or partly paid. Assume, the issued share capital paid partly, each
shareholder will be liable for the money owed on any shares due to the company
hold the share. Furthermore, issued share capital can never exceed to
the total authorized share capital that will be a positive relation between
them.
For example, the authorized share capital of a company ABC is $100000 and the
number of shares$ 10000 each $10 where the company ABC issues 8000 shares to
the public at $10 for each then the issued share capital is $80000
D) Define of subsidiary company
A
subsidiary company is one which actually is controlled by a holding company. A
company whose voting stock more than 50% controlled by another company is known
as subsidiary company. According to section 5 of the company’s act 1965 defines
as a subsidiary company as follows:
a)
In which the investor company
(i)
Controls the composition of the board of directors of the investee company or
(ii)
Controls more than half of the voting power of the investee company or
(iii)
Holds more than half of the issued share capital of the investee company
(excluding any part thereof which consists of preference shares); or
b) It is a subsidiary of
a subsidiary of the investor company. Below the diagram shows it clearly
The
diagram shows that the holding company holds more than 50% of the equity shares
of S1, S2, S3, S4, and S5. It also shows
clearly that the holding S1, S2, S3, S4, and S5 form a group where H is being
the holding company and other companies being subsidiaries under the holding
company. The diagram clearly presented the subsidiary company is a part of the
holding company which is controlled by the holding company. For instance, the
holding company wishes to share their equity to subsidiary company any amount
of share i.e.; 35% shares would belongs to subsidiary company under the holding
company.
E)
Goodwill on consideration
Goodwill
on consolidation represents the excess of the cost of the acquisition over the
fair value of the net assets of the subsidiary at the date of acquisition. It
is considered as the premium paid to acquire the shares. This goodwill arises
only in the consolidated account. However, there are three ways of dealings
with goodwill on consolidation.
1)
Retain goodwill at cost less impairment: Goodwill is considered as a non-depreciable
assets and will appear in the consolidated balance sheet as an intangible
non-current assets as cost less impairment. By retaining goodwill at cost it is
assumed that it has an indefinite life. FRS 3 requires goodwill to be tested
for impairment annually or more frequently if there are indicates that it might
be impaired.
2)
Amortize goodwill over a number of years:
Goodwill is capitalized and its cost is written off (amortized) against profits
over a number of years. The difficulty is the determination of the useful life.
This
method was previously allowed but it is not permitted under FRS 3. While
goodwill is no more amortized to cost in uniform additions, goodwill is to be
measured every year to figure out whether there is an impairment loss.
3)
Written off goodwill immediately against reserves: Goodwill is written off against the group’s profits in the year
of acquisition of the subsidiary. This is the most conservative method as it
assumed that there is no relationship between the goodwill and further
performance of the subsidiary. Generally. Goodwill not be shown the assets in
the balance sheet. The goodwill can be influenced with asset
and can be referenced as an expense brought about in the expectation of future
income. It would appear to make more
sense if acquired goodwill were viewed as an advantage for which thought was paid which does not lose its worth after
some time despite the fact that this is not worthy under current account
practices.
Question 2
A)
Selected method justification
The
net value of assets of the company are divided by the number of shares to reach
at the value of each share. The net asset value of share valuation is the
best method for the company in order to calculate net asset value that will help
to determine the value per share for a company. It refers to the value of a
single unit, or share, or a fund which specify the price of buying and selling.
The main reason of choosing the net
assets value to compare the company value with its market value by using market
book ratio or price book ratio. The investor can believe the company when the
net asset values is more than market value. The above explanation will help to
take a decision of Cabbort Ltd to purchase
Ramlift Co.
B)
Calculation of value share
Total assets
(-)Current liabilities
Net assets
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=$1130000
=($330000)
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=$8000000
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Calculation of Share price
Net assets / No. outstanding of shares
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=$8000000 / $415000
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=$1.93
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C)
Criticize and consideration on selected
method
According
to this method, there are number factors need be considered while valuing sharers
are as follows:
ü The
fixed assets must receive to realizable value
ü Provision
for bad debts, depreciation must be considered.
ü If
any assets and liabilities not recorded will be considered.
ü Floating
assets should be taken at market value
ü Goodwill
must be properly valued
ü The
fictitious assets such as preliminary expenses, discount on issue of shares and
debentures, accumulated losses should be eliminated.
ü The
external liabilities such as sundry creditors, bills payable, loan, debentures
should be deducted from the value of assets for the determination of net value.
References
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(2011). What is the difference between Authorised capital,
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