1. TOPIC 3 : Redemption of shares, share buy-back and redemption of debentures

2. Learning Outcome Student will be able to understand : 1. Redemption of redeemable preference shares 2. Share buy-back 3. Redemption of debenture / loan stocks

3. INTRODUCTION Companies are required to comply with the requirement of the CA 1965 and the MASB Technical Release TRI (revised) with regard to the redemption of redeemable preference shares and share buy-back. CA 1965 required the issued capital to be maintained even after redemption or share buy back. In order to keep this requirement, company either can: a) issue new shares to replace the shares redeemed b) have sufficient retained profits to enable the redemption to take place.

4. The Financial Instrument is governed by FRS 132: Financial Instrument: Presentation, FRS 139: Financial Instrument: Recognition and Measurement The changes in issued capital and outstanding loan capital for company can be categorised into: a) Redemption of redeemable preference shares b) Redemption of loan capital i.e debentures c) Conversion from of loan capital to equity shares d) Share-buy-back

5. REDEMPTION OF REDEEMABLE PREFERENCE SHARES (RPS) A company whose AOA permits the issue of RPS has obligation to redeem the RPS at specified and determine date. RPS is a liability therefore the company has responsibility to redeem the shares. RPS recorded as liability in SOFP. Dividend paid for RPS is considered as expense (finance cost) can disclosed in SOCI. Any discount or premium payable on maturity will be amortised through the SOCI over the term of issue

6. Statutory Requirements Section 61 of the CA 1965 lays down the following rules regarding the redemption of RPS: a) The redemption does not amount to a reduction in the authorised capital. b) The shares can be redeemed only by either: i) company has enough profit which available for dividend ii) fresh issue of share made for purposes of redemption. c) Where share are redeemed other than out of the proceeds of a fresh issue, an amount equal to nominal amount of the shares redeem must be transfer out of the profit otherwise available for dividend to a capital redemption reserve. The capital redemption reserve will be treated as part of the paid up capital of company

7. Statutory Requirements d) Before the share redeemed, the premium, if any, payable on redemption shall be provided for out of profit or out of share premium account. e) The share must be fully paid before the redemption. f) If the company redeems any RPS, it is to, within 14 days after doing so, give notice to CCM specifying the amount of shares redeemed.

8. Redemption The redemption can take place if: a) the share redeemed are replaced. b) the company has sufficient profit to avail itself for the redemption. Depending on the financial position of the company, it may redeem the shares by: a) making a fresh issue of shares specially to provide the company with sufficient money whilst at the same time help to maintain the capital structure intact. b) transferring profit earned which could otherwise have been available for distribution as dividends, to a capital redemption reserve account; or c) partly making a fresh issue of shares and partly through profits that is a combination of (a) and (b)

9. Redemption of the RPS through a Fresh Issue of Shares A company may decide to issue new shares to redeem the existing RPS. If co. choose this option, co. has to make fresh issue of shares (ordinary and preference) equal to nominal amount of the RPS redeemed in order that the issued capital will remain the same as before the redemption took place. A co. with insufficient liquid funds may prefer to adopt this form of redemption as there as there will not be a net outflow of funds.

10. Redemption out of Profits Where the RPS, are redeemed and no new shares are issued to replace the nominal amount of shares redeemed, an amount equal to nominal value of shares redeemed is transferred from the retained earnings to a capital redemption reserve (CRR) to maintain the amount of issued capital. This process has the effect of freezing past profits and converting it to become part of the paid-up capital. The creation of a CRR is necessary because the capital structure has to be maintained at its original amount.

11. Redemption out of Profits The CRR is a non-distributable reserve. The balance in this account cannot be credited (transferred) back to the SOCI or retained earnings. However, companies usually utilize the CRR to issue bonus shares to the shareholders on a pro-rata basis. existing

12. Redemption Partly by Fresh Issue of Shares and Partly Out of Profits The RPS may be redeemed partly by the issue of new shares and partly transferring profits otherwise available for dividends to the CRR. The nominal amount of new shares issued and the amount of profits transferred to the CRR should equal the nominal amount of shares redeemed.

13. Redemption Value The shares redeemed can be redeemed at: a) Par b) Premium Redeem at par The amount payable to shareholders = the nominal value of shares redeemed. Redeem at premium The amount payable to shareholder = the nominal value of shares + the premium Premium on redemption should be amortised over the term of borrowing, thereby, increasing the RPS to the redemption value.

14. Redemption Value Redeem at premium The RPS will be disclosed at the amortised cost. However, CA 1965 allows the total amount of premium on redemption to be either written-off against the share premium account or out of profit otherwise available for dividend or partly against the share premium and partly against profits.

15. Pro Forma Journal Entries Debit 1. RPS are being redeemed at par Dr. RPS capital xx Cr. PS redemption account Credit xx 2. Premium on redemption Dr. Cr. Premium on redemption xx PS redemption account xx 3. Payment made to preference shareholders Dr. Cr. PS redemption account Bank xx xx

16. Pro Forma Journal Entries 4. 5. 6. Debit Issue of new shares for the redemption Dr. Bank xx Cr. Share capital Cr. Share premium (if any) Transfer of profits to CRR Dr. Retained profit Cr. CRR xx Credit xx xx xx Writing-off premium on redemption against share premium (if premium on redemption was not amortised) Dr. Share premium @ retained profit xx Cr. Premium on redemption xx

17. Redemption Complying with the Requirements of the CA 1965 Statement of Financial Position of RPS Bhd. as at 31.12.x1 RM'000 Non-current assets Current assets (except cash at bank) Cash at bank 70,000 15,000 50,000 135,000 Equity Authorised capital 50,000,000 ordinary shares of RM 1 each 50,000 40,000,000 6% redeemable preference shares of RM 1 each 40,000 90,000 Issued share capital 40,000,000 ordinary shares of RM 1 each 40,000 Retained profits 50,000 Non-current liability 30,000,000 6% redeemable preference shares of RM 1 each 30,000 Current liabilities 15,000 135,000

18. Required : Prepare journal entries to record the above transactions and a statement of financial position immediately after the redemption.

19. Redemption by Issue of New Shares Example 1 (pg 63) The directors decided to redeem all the RPS at a premium of 5% and to make a fresh issue of 30,000,000 ordinary shares of RM1 each at par for the purpose of redeeming the preference shares. All the new shares were fully paid. Answer 30,000,000 NEW ordinary shares at par are issued to replace the 30,000,000 6% RPS which was redeemed. The premium on redemption of RM1,500,000 is provided for by writing it off against the retained earnings. Premium 5% x RM30,000,000 = RM1,500,000

20. Journal entries Being redemption of PS Dr. 6% RPS capital Cr. PS redemption acc. Debit RM000 30,000 Being premium payable on redemption of PS Dr. Premium on redemption 1,500 Cr. PS redemption acc. Credit RM000 30,000 1,500 Being amount paid to the 6% redeemable preference shareholders Dr. PS redemption acc. 31,500 Cr. Bank 31,500

21. Journal entries Debit Credit RM000 RM000 Being premium on redemption written-off against profit Dr. Retained earnings 1,500 Cr. Premium on redemption 1,500 Being 30,000,000 OS issued at par for cash Dr. Bank 30,000 Cr. OS capital 30,000

22. RPS Bhd Statement of Financial Position (immediately after the redemption of preference shares) RM'000 Non-current assets Current assets (except cash at bank) Cash at bank (50,000,000 - 31,500,000 + 30,000,000) 70,000 15,000 48,500 133,500 Equity Authorised share capital 50,000,000 OS of RM 1 each 40,000,000 6% RPS of RM 1 each 50,000 40,000 90,000 Issued share capital 70,000,000 OS of RM 1 each (40,000,000 + 30,000,000) Retained profits (50,000,000 - 1,500,000) Current liabilities 70,000 48,500 15,000 133,500

23. Redemption Out of Profits Example 2 (pg 65) All the redeemable preference shares were redeemed at a premium of 5%, out of profits. Answer Since there is no new issue of shares made, the nominal value of the 6% RPS capital redeemed (RM30,000,000) must be TRANSFERRED out of profits to a capital redemption reserve account.

24. Journal entries Debit RM000 Being redemption of PS Dr. 6% RPS capital Cr. PS redemption acc. Credit RM000 30,000 Being premium payable on redemption of PS Dr. Premium on redemption 1,500 Cr. PS redemption acc. Being amount paid to the 6% redeemable preference shareholders 30,000 1,500

25. Journal entries Debit RM000 Being amount paid to the 6% redeemable preference shareholders Dr. PS redemption acc. 31,500 Cr. Bank Credit RM000 31,500 Being premium on redemption written-off against Profit Dr. Retained earning 31,500 Cr. Capital redemption reserve 30,000 Cr. Premium on redemption 1,500

26. RPS Bhd Statement of Financial Position (immediately after the redemption of preference shares) RM'000 Non-current assets Current assets (except cash at bank) Cash at bank (50,000,000 - 31,500,000) 70,000 15,000 18,500 103,500 Equity Authorised share capital 50,000,000 OS of RM 1 each 40,000,000 6% RPS of RM 1 each 50,000 40,000 90,000 Issued share capital 40,000,000 OS of RM 1 each Capital redemption reserve Retained profits (50,000,000 - 31,500,000) Current liabilities 40,000 30,000 18,500 15,000 103,500

27. Redemption Partly by Issue of New Shares and Partly Out of Profits Example 3 (pg 66) The RPS were redeemed at a premium of 5%. 10,000,000 OS of RM 1 each were issued at a premium of 10% in order to partly finance the redemption of the preference shares.

28. Answer The nominal value of the PS is reduced by RM30 million but it is replaced only by the issue of 10 million new ordinary shares. However,the fresh issue of shares (10 million OS + 1 million premium) are not sufficient to maintain existing capital structure. Since a reduction of capital is not allowed, another RM 19,000,000 must be transferred out from profits to a capital reserve redemption account.

29. Journal entries Debit Credit RM000 RM000 Being redemption of PS at a premium of 5% Dr. 6% RPS capital 30,000 Dr. Premium on redemption 1,500 Cr. PS redemption acc. 31,500 Being amount paid to the 6% redeemable preference shareholders Dr. PS redemption acc. 31,500 Cr. Bank 31,500

30. Debit RM000 Being OS issued at premium Dr. Bank (10,000 + 1,000) Cr. OS capital Cr. Share premium acc. Credit RM000 11,000 10,000 1,000 Being transfer of profits to CRR Dr. Retained earnings Cr. CRR (30,000-11,000) 19,000 Being premium on redemption Dr. Share premium Dr. Retained earnings Cr. Premium on redemption 1,000 500 19,000 1,500

31. RPS Bhd Statement of Financial Position (immediately after the redemption of preference shares) RM'000 Non-current assets Current assets (except cash at bank) Cash at bank (50,000,000 - 31,500,000 + 11,000,000) 70,000 15,000 29,500 114,500 Equity Authorised share capital 50,000,000 OS of RM 1 each 40,000,000 6% RPS of RM 1 each 50,000 40,000 90,000 Issued share capital 50,000,000 OS of RM 1 each (40,000,000 + 10,000,000) Capital redemption reserve Retained profits (50,000,000 - 19,000,000 - 500,000) Current liabilities 50,000 19,000 30,500 15,000 114,500

32. Comprehensive Example (pg 69) Stitch Bhd Statement of Financial Position as at 31 December x1 Non-current assets Investments Net current assets (except cash at bank) Cash at bank RM'000 40,000 29,500 500 2,000 72,000 Equity Authorised share capital 30,000,000 ordinary shares of RM2 each 15,000,000 6% redeemable preference shares of RM 1 each 60,000 15,000 75,000 Issued share capital 20,000,000 ordinary shares of RM 2 each fully paid 40,000 Share premium Retained profits 5,000 12,000 Non-current liabilities 15,000,000 6% redeemable preference shares of RM 1 each 15,000 72,000

33. The following transactions took place at 31.12.x1: (a) 5,000,000 10% redeemable preference shares redeemed at a premium of 15%. were (b) The redemption of the preference shares were financed partly by issuing 2,000,000 ordinary shares fully paid up at premium of 10%. All the new shares were fully subscribed. (c) Issued a three-year 4% RM 2,000,000 debentures at 97.5% with an effective interest rate of 7%. Issue costs related with the issue amounted to RM 100,000. The debentures will be classified as held-to-maturity. Required : Record above transactions in the ledger accounts and prepare a statement of financial position upon the completion of all the trasactions.

34. Answer a) 5 million 10% RPS were redeemed at a premium of 15%. Premium = 15% x 5 million = RM750,000 This RM750,000 will be written off the share premium account becoz CA 1965 allows it. Premium payable will be increasing over the year.

35. b) The redemption of the preference shares were financed partly by issuing 2 million OS fully paid up at a premium of 10%. All the new shares were fully subscribed. Issued share = 2 million x 2.20 = RM4,400,000 RM2.20 = RM 2 + (10% x RM2) Amount redeem = RM5,000,000 Issued share = RM4,400,000 RM 600,000 -> transferred from RE to CRR.

36. c) Issued a three-year 4% RM2 million debentures at 97.5% with an effective interest rate of 7%. Issue costs related with the issue amount to RM100,000. The debentures will be classify as held-to-maturity. RM2 million Discount = 2.5 % (100% - 97.5%) = 2.5% x RM2 million = RM50,000 The proceed amount = RM2 million RM50,000 = RM1,950,000 Issue cost = RM100,000 (written off against of proceeds) paid by amount of bank

37. c) Issued a three-year 4% RM2 million debentures at 97.5% with an effective interest rate of 7%. Issue costs related with the issue amount to RM100,000. The debentures will be classify as held-to-maturity. Year 2 Interest 4% x RM2 million = RM80,000 7% effective interest rate 7% x RM1,850,000 = RM129,500 The differences between RM49,500 (RM129,500RM80,000) add in carrying amount. RM49,500 + RM1,850,000 = RM1,899,500

38. PS redemption Bal c/d Bank 10% Redeemable Preference Share Capital RM'000 5,000 Bal b/d 10,000 15,000 Preference Share Redemption RM'000 5,750 10% RPS capital Premium on redemption 5,750 PS redemption Premium on redemption RM'000 750 Share premium 750 RM'000 15,000 15,000 RM'000 5,000 750 5,750 RM'000 750 750

39. OS capital Share premium Application RM'000 4,000 Bank 400 4,400 Bal b/d Application Ordinary Share Capital RM'000 40,000 4,000 Bal c/d 44,000 Premium on redemption Bal c/d Share Premium RM'000 750 Bal b/d Application 4,650 5,400 RM'000 4,400 4,400 RM'000 44,000 44,000 RM'000 5,000 400 5,400

40. Capital redemption reserve Bal c/d Retained Profits RM'000 600 Bal b/d 11,400 12,000 Bal c/d Capital redemption reserve RM'000 600 Retained earnings 600 Bal b/d Application Debentures RM'000 12,000 Bank RM'000 2,000 PS redemption 4,400 Issue cost 1,950 Bal c/d 8,350 12,000 RM'000 600 600 RM'000 5,750 100 2,500 8,350

41. Bank - issue cost Bal c/d Debentures RM'000 100 Bank (2,000 x 0.975) RM'000 1,950 1,850 1,950 1,950

42. Stitch Bhd Statement of Financial Position as at 31 December x1 RM'000 Non-current assets Investments Net current assets (except cash at bank) Cash at bank 40,000 29,500 500 2,500 72,500 Equity Authorised share capital 30,000,000 ordinary shares of RM2 each 15,000,000 6% redeemable preference shares of RM 1 each 60,000 15,000 75,000 Issued share capital 22,000,000 ordinary shares of RM 2 each fully paid 44,000 Share premium Capital redemption reserve Retained profits 4,650 600 11,400 Non-current liabilities 4% debentures 15,000,000 6% redeemable preference shares of RM 1 each 1,850 10,000 72,500

43. Complying with FRS 132 & FRS 139 The FRS allow the RPS to be carried at a) b) fair value amortised cost If the amortised cost method is adopted, the PREMIUM ON REDEMPTION will be charged in the statement of comprehensive income over the life of the shares.

44. Example 5 (pg 73) On 1.1.X5, A Bhd. issued RM20 million 5% RPS at par value of RM 1 each. These shares are redeemable in 5 years time at a premium of 10%. Assume the straight line method is used to allocate the premium. Required: Discuss the accounting treatment of the RPS

45. Working Premium on redemption = = Premium amortised = = Dividend = = Total charge = (every year) = 10% x RM 20 mil RM 2 mil RM 2 mil / 5 years RM 400,000 5% x RM 20 mil RM 1 mil 1 mil + 400,000 RM 1.4 mil Statement of comprehensive income

46. At start of year 1.1.x5 1.1.x6 1.1.x7 1.1.x8 1.1.x9 Beginning Premium Dividend Dividend Year-end RM'000 RM'000 RM'000 1,000 1,000 1,000 1,000 1,000 -1,000 -1,000 -1,000 -1,000 -1,000 20,400 20,800 21,200 21,600 22,000 bal Payable paid RM'000 RM'000 20,000 20,400 20,800 21,200 21,600 400 400 400 400 400 Extract of statement comprehensive income for the year ended 31 December FINANCE COST = PREMIUM AMORTISATION + DIVIDEND

47. Statement of financial position as at 31 December Initial RPS = RM20 million + RM400,000 (premium amortised yearly) Initial RPS = RM20 million + RM2 million (premium After 5 years) If the company dont amortised the premium on redemption The amount of RPS will be only RM20 million The premium RM2 million written off against the share acc. premium Treatment: Dr Share Premium Account 2,000,000 Cr Premium on redemption 2,000,000

48. Example 5(a) (pg 74) Redemption of the RPS by a Fresh Issue of Shares On 1.1.X5, A Bhd. issued RM20 million 5% RPS at par value of RM 1 each. These shares are redeemable in 5 years time at a premium of 10%. Assume the straight line method is used to allocate the premium. All the PS are redeemed by issuing sufficient 10 mil OS of RM 1 each at a premium of 100%. Required: Discuss the accounting treatment of the RPS

49. Journal entries RPS redeemed Dr. 5% RPS capital Cr. RPS account Debit RM mil Credit RM mil 22 Payment to the preference shareholders Dr. RPS account 22 Cr. Bank 22 22 Issue of new shares for the redemption of shares Dr. Bank 20 Cr. OS capital (10m x RM1) Cr. Share premium (10m x RM1) 10 10

50. Example 5(b) (pg 75) Redemption of the RPS out of Profits On 1.1.X5, A Bhd. issued RM20 million 5% RPS at par value of RM 1 each. These shares are redeemable in 5 years time at a premium of 10%. Assume the straight line method is used to allocate the premium. PS were redeemed and no new shares were issued. Required: Discuss the accounting treatment of the RPS

51. Journal entries RPS redeemed Dr. 5% RPS capital Cr. RPS account Debit RM mil 22 Credit RM mil 22 Payment to the preference shareholders Dr. RPS account 22 Cr. Bank 22 Transfer of retained profits to CRR Dr. Retained profits 20 Cr. Capital redemption reserve 20

52. SHARE BUY-BACK A public company may purchase its own shares through open market. Shareholders need to give an authorisation to make such a purchase by way of ORDINARY RESOLUTION passed at a general meeting. CA 1065 allows a public listed co. to buy back it shares. Shares by back does not amount to a reduction of capital (dont have any effect to authorised capital)

53. Rationale for Share Buy-back To enable co. to utilise its financial resources which are not immediately required To stabilize the supply and demand of shares To purchase shares in order to reduce the liquidity of the shares in the stock market. To reduce number of shares not taken in market

54. Advantages of Share Buy-back A reduction in the number of shares in the market is expected to improve the scarcity value, thereby making the shares more attractive for investors. (People like to buy something less) The final resources of co. may increase if the purchased shares held as treasury shares are resold at prices higher than their purchase price. The volatile fluctutations of the price of the shares may be reduced.

55. Disadvantages of Share Buy-back There could be a reduction of financial resources of co. which may otherwise be utilised for better investment opportunities that may emerge in the future Share buy-back can only made out of the retained profits and share premium acc, it may result in the reduction of fin. resources available for distribution to shareholders in the immediate future.

56. Statutory Requirements In order to embark on share buy-back, co. need to comply with Listing Requirements conditions; share buy-back must not result in the public shareholding spread fall below 25% issued and paid up share capital. Co. can only take share buy-back provided: a) Co must be solvent at the time of the repurchase and become insolvent by incurring the debt involved for SBB. b) The purchased is made through Bursa Malaysia, on which shares are quoted through the rules of BM. c) The purchased must be done in good faith and in the interest of company.

57. Statutory Requirements Section 67A of CA 1965 allows parties implementing the share buy-back scheme either: a) cancel the shares. b) keep them as treasury shares, or c) retain part of the shares purchased as treasure shares and cancel the remainder according to co. needs.

58. Treasury Shares (TS) (Saham Perbendaharaan) TS - shares bought back and not cancelled These shares maybe reissued or cancelled. Director may distribute the treasure shares as share dividend to shareholder or sell it on the market of Bursa Malaysia. When the treasury share kept, the rights attached to them (voting, dividends, participation in order distribution are suspended). Share purchased back are cancelled shares and automatically delisted. An amount equal to the NV of shares cancelled must be transferred out of distributable reserves to CRR.

59. Financing of Share Buy-back Listing Requirements of BM and Companies Act 1965 require a listed companys purchases of its own shares must be made wholly out of retained profits and/or share premium. Current practice use internal fund or bank borrowing, according to co. limit and allowable amount that approved by the BM. If co. decides to use bank borrowing, co. must be able to pay bank loan and will not have material impact on the cash flow of co.

60. Accounting of Share Buy-back 2 method :- a) b) Treasury Stock Method (TSM) Share Retirement Method Treasury Stock Method (TSM) The shares bought back are held as treasury shares (TS) and NOT cancelled. This method is appropriate if co. wishes to reissue shares in the future. TS measured at cost or at nominal value in SOFP. MASB prescribed that cost method is appropriate since it is transparent as the actual price paid for the shares re-purchased is disclosed.

61. Treasury Stock Method (TSM) TS are not asset of co, therefore the carrying amount must be set off against equity and considered as part of the unissued shares. If the TS not issued and cancelled, it results in reduction of equity. The reduction of TS implied reduction in profits or distribution for dividends. The carrying amount of TS shall not be adjusted should there be changes in subsequent change in the FV or market price. TS may be reissued in the open market when market conditions improve. The difference between the reissue price and carrying value of the TS should be ADJUSTED to or AGAINST equity.

62. Share Retirement Method (SRM) Used if the co. intend to cancel shares that repurchased. Eg: co. has surplus funds, which intends to return to shareholder, the shares repurchased are retired immediately. Share capital will be debited with the nominal value of share retired and amount equivalent to the NV of the shares re-purchased must be transferred to a CRR. This is done by utilising either the share premium or the retained profits. The consideration, including any acquisition cost and premium or discount arising from the shares re-purchased, is adjusted to share premium or any other suitable reserves (eg: retained earnings) as well.

63. Example 6 (pg 78) Buyback Bhds share capital consists of 40,000,000 OS of RM1 each. On 31.12.x9, Buyback Bhd purchased 4,000,000 of its shares from the open market at RM3 each. The balance on share premium account and retained profits on that date were RM5,000,0000 and RM30,000,000 respectively. Required: a) Show the journal entries b) Statement of Financial Position, assuming the co. adopted the TSM.

64. Journal entry Dr. Treasury shares (4m x RM 3) Cr. Bank (4m x RM 3) Debit RM mil 12 Credit RM mil 12

65. Buyback Bhd. Statement of Financial Position (extract) as at 31.12.x9 RM'000 Equity Issued and paid up capital 40,000,000 ordinary shares of RM 1 each Share Premium Retained profits Less : 4,000,000 treasury shares at cost Shareholders funds 40,000 5,000 30,000 75,000 (12,000) 63,000 As at 31.12.x9, the number of outstanding shares in issue and fully paid is 36,000,000 of RM 1 each

66. Buyback Bhd. Statement of Financial Position (extract) as at 31.12.x9 RM'000 Equity Issued and paid up capital 40,000,000 ordinary shares of RM 1 each (40,000,000 - 4,000,000) 36,000 Share Premium (5,000,000 - 5,000,000) Retained profits (30,000,000 - 3,000,000) Shareholders funds 27,000 63,000

67. Example 6(a)(pg 79) Shares Reissued Buyback Bhds share capital consists of 40,000,000 OS of RM1 each. On 31.12.x9, Buyback Bhd purchased 4,000,000 of its shares from the open market at RM3 each. The balance on share premium account and retained profits on that date were RM5,000,0000 and RM30,000,000 respectively. The co. offered for sale in open market 4 million at RM 5 and RM 2. Required: Prepare journal entries

68. Journal entries Treasury shares sold at RM 5 RM000 Dr. Bank (4m x RM 5) 20,000 Cr. Treasury shares (4m x RM 3) Cr. Share Premium (4m x RM 2) Treasury shares sold at RM 2 Dr. Bank (4m x RM 2) 8,000 Dr. Share premium 4,000 (4m x RM 1) Cr. Treasury shares RM000 12,000 8,000 12,000

69. Example 6(b)(pg 80) TS Issued as Share Dividend TS are not reissue for sale but instead are distributed to shareholders as share dividend (similar to a bonus issue) in proportion to their % of shareholdings in the company. The cost of the TS shall be applied as a reduction of the share premium and/or any other distributable reserves. Required : Prepare journal entries

70. Journal entries RM000 Distribution of TS as share dividends Dr. Share premium 5,000 Dr. Retained profit 7,000 Cr. TS at cost RM000 12,000

71. Example 6(c)(pg 80) Buyback Bhds share capital consists of 40,000,000 OS of RM1 each. On 31.12.x9, Buyback Bhd purchased 4,000,000 of its shares from the open market at RM3 each. The balance on share premium account and retained profits on that date were RM5,000,0000 and RM30,000,000 respectively. The directors decided to cancel the 4,000,000 OS purchased using the share retirement method. Required: Prepare journal entries

72. Journal entries Debit Credit RM000 RM000 Nominal value of shares cancelled on purchase of own shares Dr. OSC 4,000 Cr. Purchase of own shares 4,000 Payment of shares purchased Dr. Purchase of own shares Cr. Bank 12,000 12,000 Transfer to CRR and write-off the premium on shares purchased Dr. Share premium 5,000 Dr. Retained profit 7,000 Cr. CRR 4,000 Cr. Purchase of own shares 8,000

73. Buyback Bhd. Statement of Financial Position (extract) as at 31.12.x9 RM'000 Equity Issued and paid up capital 40,000,000 ordinary shares of RM 1 each Shares cancelled on re-purchase Capital redemption reserve Retained profits (30,000,000 - 7,000,000) Shareholders funds 40,000 (4,000) 36,000 4,000 23,000 63,000

74. REDEMPTION OF DEBENTURE/LOAN STOCKS Debentures & loan stock are issued par, premium or discount. Discount = debenture redeem below than par value Premium = debenture redeem more par value Premium payable is additional expenses for the co. CA 1965 allows the premium on redemption to be written off against PROFIT only and NOT against share premium. FRS do not allow premium on redemption to be written-off immediately or on redemption only. Instead they required discounts and premiums to be amortised over the loan term. Therefore, on the redemption date, the CARRYING AMOUNT = REDEMPTION VALUE.

75. Example 7 (pg 82) On 1.1. X1, loan issued a three-year 2% RM 100,000 debentures at par, redeemable at RM109,458. The prevailing market interest rate of similar debt issued at par and redeemable at par is 5%. Required: Prepare journal entries and SOFP (extract as at 31.12

76. Working At start of year x1 x2 x3 Debentures Finance at beginning cost (5%) Interest Debentures paid (2%) at end RM RM RM RM 100,000 103,000 106,150 5,000 5,150 5,308 (2,000) (2,000) (2,000) 103,000 106,150 109,455 First year Finance cost = Interest paid = Difference between = = Second year Finance cost = Difference = = Carrying amount = redemption value 5% x 100,000 = RM 5,000 2% x 100,000 = RM 2,000 interest expense & interest paid 5,000 2,000 RM 3,000 amortised (credited to debentures acc) 5% x 103,000 5,150 2,000 RM 3,150 = RM 5,150 amortised

77. Journal entries Debit (RM) Credit (RM) 1 Jan X1 Dr. Bank Cr. 100,000 Debentures 100,000 31 Dec X1 Dr. Finance cost/SOCI 5,000 Cr. Bank 2,000 Cr. Debentures 3,000 31 Dec X2 Dr. Finance cost/SOCI 5,150 Cr. Bank 2,000 Cr. Debentures 3,150 31 Dec X3 Dr. Debentures Cr. Bank account 109,458 109,458

78. Statement of financial position (extract) as at 31 December x1 RM Non-current liability Debentures x2 RM 103,000 106,150

79. Example 8 (pg 84) On 1.1.X1, Borrow Bhd. issued RM20 million 10% debenture at par value. These debentures are redeemable in four years time at a discount of 17.5%. The prevailing market interest rate is 6%. Required : Discuss the accounting treatment.

80. Working Discount on redemption (amortised over 4 years) Interest paid Interest expense Amortisation Schedule Debentures Year Interest at beginning expense (6%) = = = = = = 17.5% x 20 mil RM 3.5 mil 10% x 20 mil RM 2 mil 6% x 20 mil RM 1.2 mil Liability + interest cost for year Interest paid (10%) Year end RM'000 1 2 3 4 RM'000 RM'000 RM'000 RM'000 20,000 19,200 18,352 17,453 1,200 1,152 1,101 1,047 21,200 20,352 19,453 18,500 (2000) (2,000) (2,000) (2,000) 19,200 18,352 17,453 16,500

81. Extract of Statement of Comprehensive Income for year ended 31 December Statement of Financial Position as at 31 December The discount of RM 3.5 mil could be written-off in the profit and loss account.

82. Example 9 (pg 85) On 1 January X1, issued RM20 million 10% debenture at par value. These debentures are redeemable in four years time at a discount of 17.5%. The prevailing market interest rate is not known. Working Calculated sum of the four : 1+2+3+4 = 10 X1 = 4/10 X2 = 3/10 X3 = 2/10 X4 = 1/10

83. Year X1 X2 X3 X4 3,500 3,500 3,500 3,500 x 4/10 x 3/10 x 2/10 x 1/10 RM000 1,400 1,050 700 350

84. Extract of statement comprehensive income for year ended 31 December Discount payable on maturity is amortised through the SOCI, using the sum of digits methods, over the term of the debentures. If the straight line methods, the amount amortised each year RM3.5 million / 4 year = RM875,000 per year

85. Funding Redemption of debentures represents a repayment of loan capital and involves a cash flow. Redemption of debentures needs a lot of cash and co. may face financial strain. To overcome this problem, a co. may create a fund known as SINKING FUND. Each year, cos profit is set aside to the fund and a corresponding amount of cash is invested in high quality securities. When the redemption date is due, the investments are sold to finance the redemption of debentures.

86. Redemption through the Use of a Sinking Fund Sinking fund not only set up profit but cash is also invested in order enough funds to redeem the debenture. This method is suitable when the redemption is at one specific time and involved big amount cash. Or when co. is allowed to purchase it own debenture in open market, for cancellation. Some profit put in sinking fund (a reserve account) and the fund is invest in the sinking fund investments. Any income from sinking fund will reinvest. Until debentures are redeemed, the amount in sinking fund is non-distributable.

87. Transfer profits to sinking fund will reduce the distributable reserves of the co. Therefore, the co. need to ensure that sufficient cash is available from the sinking fund investment acc when the debentures are redeemed. Sinking fund investment, will be sold as when cash is required to finance the redemption. Any P&L on the sale of sinking fund investment is accounted for in the sinking fund & not in the P&L account. Likewise, any premium or discount on the redemption of debentures is dealt with in the sinking fund. Once the redemption of debentures is complete, the balance in the sinking fund account is transferred to general reserves where it becomes a distributable reserve again.

88. The accounting entries for the redemption using the sinking fund method can be considered in three stages: a) annual appropriations and reinvestment of income received on the sinking fund investments b) sale of investments c) redemption on maturity date

89. Pro forma Journal Entries (a) 1) Annual appropriation from profit Dr. Retained Earnings Cr. Sinking Fund 2) Investment of (i) above Dr. Sinking Fund Investment Cr. Bank Dr xx xx Cr xx xx 3) Income from Sinking Fund Investments received Dr. Bank (Sinking Fund Bank) * xx Cr. Sinking Fund xx * An account created specifically for the purpose of redemption through sinking fund. 4) Investment of (iii) above Dr. Sinking Fund Investment Cr. Bank (Sinking Fund Bank) xx xx

90. Pro forma Journal Entries 5) Payment of debenture interest Dr. Debenture interest Cr. Bank Dr. SOCI Cr. Debenture interest (b) Sale of sinking fund investments 1) Sale of investments Dr. Bank (Sinking Fund Bank) (with sale proceeds) Cr. Sinking Fund Investments 2) 3) Dr xx xx xx Cr xx xx xx Profit on sale of Sinking Fund Investments Dr. Sinking Fund Investments xx Cr. Sinking Fund xx Loss on sale of Sinking Fund Investments Dr. Sinking Fund Cr. Sinking Fund Investments xx xx

91. 4) Dr Transfer after debentures have been cancelled Dr. Sinking Fund xx Cr. Retained earnings (b) Redemption on maturity date 1) Debentures redeemed Dr. Debentures (at nominal value) Cr. Debentures redemption 2) 3) 4) xx Premium payable on redemption Dr. Sinking Fund Cr. Debenture Redemption xx Payment to debenture holders Dr. Debenture redemption Cr. Bank (Sinking Fund Bank) xx Transfer after the debentures have been redeemed Dr. Sinking Fund (with remaining amoun) xx Cr. Retained earnings Cr xx xx xx xx xx

92. Example 10 (pg 88) Sink Berhad borrowed RM7,000 on 1.1.x1 by issuing debenture which were redeemed 3 years later on 31.12.x3 at par. An RM2,000 was set aside from profits each year and credited to sinking fund acc. RM2,000 investment in blue chip company. At the year x2, RM400 income received from investment was reinvested together with RM2,000. However, income received at year x3, RM600 not invested in view of the impending redemption. On 31 Dec x3, the investment in SF were sold for RM7,500 to help finance the redemption. Required : Show the necessary accounting entries.

93. Open 5 ledgers. 1) Debentures 2) Debenture redemption 3) Sinking Fund 4) Sinking Fund Bank 5) Sinking Fund Investment

94. Convertible Loan Capital (Stock) CLS and debentures are referred to as compound instrument. They have the features of liability and equity. The proceeds on the issue of CLS needs to split between liability and equity. Eg: To proceed with convertible loan stock RM10 million. a) RM9 million liability b) RM1 million equity Convertible loan capital give option holder to convert the debt into equity, with period of time until maturity. Generally nominal interest rate (NIR) payable on the instruments will be less than market interest rate (MIR). [NIR < MIR]

95. Example 11 (pg 91) Kaka Bhd issued 6% convertible debentures of RM10 million on 1.1.x3. Market interest rate was 9% on 1.1.x3. Debenture convertible into 400 OS (par value RM1 each) for every RM1,000 debentures or redeemed for cash on 1.1.x6. Required: Show the working and journal

96. 1 Jan x3 Dr. Bank Cr. 6% Convertible Debentures Cr. Equity component 31 Dec x3 Dr. SOCI (9% x RM9,218,000) Cr. Bank (interest paid) Cr. 6% Convertible Debentures 31 Dec x4 Dr. SOCI (9% x RM9,218,000 + 229,620) Cr. Bank (interest paid) Cr. 6% Convertible Debentures Dr 10,000,000 829,620 850,286 Cr 9,218,000 782,000 600,000 229,620 600,000 250,286 31 Dec x5 Dr. SOCI (9% x RM9,218,000+229,620+250,286) 872,812 Cr. Bank (interest paid) 600,000 Cr. 6% Convertible Debentures 272,812

97. 1 Jan x6 convert to ordinary shares Dr Cr RM 000 RM000 6% Convertible Debentures 10,000 Ordinary Share 4,000 Share Premium 6,000 Liability component Equity component Share Premium Equity component 782 782

98. 1 Jan x6 convertible debentures are redeemed for cash Dr. 6% Convertible Debentures Cr. Bank Dr RM 000 10,000** Cr RM000 10,000 ** = 9,218,000+229,620+250,286+272,812 = 9,970,718 (rounding up) Dr. Equity component Cr. Retained Earning Note: 1) Convert to OS -> Share premium 2) Redeem for cash -> Retained Earning 782 782