Companies Flashcards
Explain the process of a company who is going public and seeking a listing, highlighting
TWO advantages and TWO disadvantages for the company
Seeking a Listing - company shares are traded on stock exchange (secondary market).
A public company is one that can offer share issues and debenture issues to the general public.
Advantages: the company will have the possibility of acquiring/hiring more capital and the company has more options for long-term borrowing (debentures).
Disadvantages: the company will have many shareholders and this can cause difficulties in control and public companies are highly regulated and this causes higher costs and restraints.
Explain the difference
between a Reserve and a Provision. Provide ONE example of each.
Reserves are part of the shareholders funds (equity). they are classified as capital and revenue reserves.
Revenue reserves are profits reinvested in the company (internal growth) and can therefore be used to finance the dividend payments - Retained Earnings.
Capital Reverses are not created from profit and therefore they can not be used to finance dividend payments. The capital reserves are created with accordance to the Companies Act - Share Premium.
Hence, reserves are owned by the shareholders and contribute to the increase in the size of the net asset value (the size of the business)
Provisions represent a charge against profit (expense) that shall require a future payment. It is therefore a fair estimate of an expense payable with an uncertain timing.
Example: Provision for a court case brought against a company
How is a gain on disposal treated differently from a gain on revaluation on the financial statements? Why are these gains accounted for in a different manner?
A gain on revaluation is when professional architects estimate land and buildings at a higher value than their current net book value. Land and buildings are not for resale, and they aren’t being disposed. Their revaluation is found to be prudent about their current value.
Gain in disposal is different because the NCA is being sold. Its net book value was lower than its selling price. the depreciation value did not reflect the actual value.
They are accounted for differently because the gain on disposal, will generate revenue for the firm. On the other hand, in the revaluation gain, there are no monetary transactions, even though the value of land and buildings have increased.
Are all public companies listed?
For a company to be listed, its shares must be traded on stock exchange (a secondary market).
A public company can be listed on a stock exchange - this will facilitate the trade of shares and results in a larger capital base. However, not all public companies have to be listed, public companies which are not listed on any stock exchange are called unlisted public companies.
However, public companies over a certain size must be listed on an exchange.
What is a bonus issue?
A bonus issue is the distribution of free shares to existing shareholders, by the capitalisation of reserves. Ideally, the statutory non-distributable reserve of share premium is utilised.
What is a public issue?
A public issue of shares is a call to the public to subscribe in the purchase of ordinary shares, which in most cases is at a premium.
What is a rights issue?
A rights issue is a call to existing shareholders to purchase additional shares, in addition to their existing shares.
Mention ONE instance when the Capital Redemption Reserve is used.
When a company decides to redeem the redeemable preference shares out of profits that are otherwise available for paying dividends, it needs to create the Capital Redemption Reserve. The amount in the CRR is equal to the nominal value of the redeemable preference shares.
