IAS 33 Earnings per share

Jamesw2

A capitalisation or bonus issue of shares takes the form of a share issue for zero consideration. Typically it involves a transfer from a companys reserves to its issued share capital as follows:

dr Reserves
cr Share Capital.

Can anyone explain? Like if i had a bonus issue of 1:5 held creating an additional 2,000,000 shares @ mv 3euro per share is my journal entry

dr Reserves 6,000,000
cr Share Capital 6,000,000

or do i use nominal value of share?

Can anyone explain what are the main reasons for doing a bonus issue in the first place??

aka accounts 2010

Usually bonus shares are issued with the intent of rewarding the investor, although having said that the ex-bonus (post bonus) price of the share is adjusted to bonus ratio. So for e.g, if the price of a share before bonus is 100 and a bonus of 1:1 is issued, then ex-bonus share price would adjust to 50, which means that the total market value will remain the same. There is generally a case where the price of the share increases after bonus effect is incorporated. The main financial effect of bonus share is that it increases the number of shares outstanding and reduces the earnings per share (EPS). Basic EPS = (Net Profit after tax / no. of equity shares outstanding).

hivizman

Bonus issues are accounted for by crediting the share capital account with the nominal value of the shares issued and debiting this amount to the reserve (or reserves) that are being "capitalised". For example, your company making a bonus issue of 2,000,000 ordinary shares with an assumed nominal value of €1 per share by capitalising a balance on share premium account would debit €2,000,000 to the share premium account and credit €2,000,000 to the share capital account.

Companies make bonus (also called "scrip" or "capitalisation") issues for various reasons. One reason may be to reduce the market price of each share. For example, if the current share price is €20, some investors may think that the share price is "too big", whereas if a bonus issue of one new share for every existing share is made, the share price should fall to €10, and these investors may be more willing to buy shares in the company.

Another reason is as a sign of commitment. If a company has a large retained earnings credit balance, this could be used to pay extra dividends at some future time. However, by capitalising some of the retained earnings, the company's distributable reserves will be reduced. Directors may be signalling that they believe that shareholders will be better off in the long term by reinvesting resources within the company rather than taking them out as extra dividends.

Some companies may make bonus issues instead of paying a cash dividend. For example, a couple of years ago, Lloyds TSB in the UK was not allowed to pay a cash dividend by the UK government while it was receiving financial support, but it made a one for twenty bonus issue so that shareholders were given the impression that they were receiving something from the company.

In finance theory, the making of a bonus issue should not affect the overall value of the company, as no real resources are either coming into or leaving the company. However, more sophisticated versions of finance theory refer to "signalling" effects, as mentioned earlier - if directors make a bonus issue, this may be a signal that they expect the company to grow faster than investors currently expect. If investors react to the signal provided by the bonus issue and revise their rating of the company, the company's overall market value could increase.