What is a Share Premium Account?
A share premium account is a type of business account that is often included on a company balance sheet. The purpose of the account is to provide a means of posting payments received by a shareholder for shares issued, when those payments exceed the actual cost of the share. The funds that are maintained in this type of account can be used for a variety of purposes, such as underwriting costs or for issuing bonus shares to current shareholders.
The funds that are accounted for in a share premium account come about when there is a difference between the nominal value or price of the shares and the subscription price that is paid by the shareholder. For example, if the nominal value of the share is $10 US dollars (USD), and the subscription price for that same share is $20 USD, then the difference between the two figures, or $10 USD, is posted to the share premium account.
Just about any company that is capable of issuing shares of stock will have provisions for a share premium account included in their general accounting records. The usual approach is to include the account on the company balance sheet, clearly accounting for those funds while still keeping them separated from other line items in the accounting books. This arrangement makes it relatively easy to track any deposits or disbursements from the account, simply by noting the change in the balance from one calendar month to the next.
In many nations, there are specific laws that govern the establishment and the management of a share premium fund. This is to ensure that the funds are not treated as a general contingency fund, but can only be used for purposes that are clearly outlined in the governmental regulations that provide the basis for this type of account. By placing limitations on the usage of the balance in this type of fund, a resource is created that can actually help to enhance the credit rating of the business.
Depending on regulations that apply in the area where the business is located, the funds contained in the share premium account cannot be disbursed for general purposes. Often, the balance on the account can be used for purposes such as writing off any expenses that are associated with the issuance of the shares, or issuing bonus shares to the current shareholders of the company, based on whatever internal criteria has been established by the issuer. There are also instances where specific activities are expressly forbidden by those regulations. One example would be any regulation that specifically prohibited the use of the funds in a share premium account from being used to provide dividends to company shareholders.
@Nefertini - It's interesting how different countries have different rules and regulations and laws for handling this type of account.
@Ceptorbi - The United Kingdom's Company Act of 2006 allows companies to convert share premium funds to reserves they can then use to distribute dividends.
Share premium funds are considered equity capital for the company.
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