Saturday, 25 May 2013

Reserves, Bonus Shares, and Rights Issue

In financial accounting, the term reserve is most commonly used to describe any part of shareholders' equity, except for basic share capital. In nonprofit accounting, an "operating reserve" is commonly used to refer to unrestricted cash on hand available to sustain an organization, and nonprofit boards usually specify a target of maintaining several months of operating cash or a percentage of their annual income, called an Operating Reserve Ratio.


•Profits and gains made by the company that have not been distributed to shareholders
•Most common type of reserve is earned by the company that are held back for use within the company
•Other reserves may be created in certain circumstances - a reserve is created (asset revaluation reserve) when assets are re-valued at greater than their book value
•‘retained profits’ ,i.e. profits

Bonus issue of shares simply takes one form of shareholders’ equity (reserves) and transforms it into another form (share capital)

Bonus shares are additional shares a shareholder receives for an existing holding of shares in a company. If you dispose of bonus shares received on or after 20 September 1985, you may make a capital gain. You may also have to modify the cost base and the reduced cost base of your existing shares in the company if you receive bonus shares.

A rights issue is an issue of rights to buy additional securities in a company made to the company's existing security holders. When the rights are for equity securities, such asshares, in a public company, it is a way to raise capital under a seasoned equity offering. Rights issues are sometimes carried out as a shelf offering. With the issued rights, existing security-holders have the privilege to buy a specified number of new securities from the firm at a specified price within a specified time. 

In a public company, a rights issue is a form of public offering (different from most other types of public offering, where shares are issued to the general public).

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