Company - A form of business structure incorporated to operate as a business entity.
A company is a legal person
- Incorporated via registration by Companies Decree 2011
- has limited liability (Note1)
- has rights, powers and responsibilities
- has its own separate legal existence
- need never die
- has financing advantages
- is subject to greater public scrutiny and regulation
Note 1: Limited liability refers to the fact that the shareholders of the company are liable only to the extent of any amounts unpaid on their shares in the event of the winding up of the company. Contrast this to a partnership, where the partners are jointly and severally liable for all partnership debts.
Types of companies
Proprietary (Pty) companies
- Minimum of 1 member, maximum of 50
- Minimum of 1 director
- Cannot raise funds from the public
- Classified as large or small
- Can invite public to subscribe for securities
- Can list on Pacific Stock Exchange
- Minimum 1 member, no maximum
- Minimum of 3 directors
- Must prepare published financial statements and be audited
Note 1: A public company is not required to have chare capital and my be limited by guarantee. This means that members agree/guarantee to contribute a certain amount in the event of liquidation
Large vs small proprietary companies
Small proprietary companies must satisfy at least two of the following criteria:
- Annual gross operating revenue
- Value of gross assets at year end
- Number of employees
Entities that do not satisfy the criteria for classification as a small proprietary company are classified as large Note 1:
Small proprietary companies are not required to prepare formal financial statements or have them audited, must maintain sufficient records to allow financial statements to be prepared and audited if required. Large proprietary companies must prepare formal financial statements, have them audited and provide a copy to shareholders and ASIC
Other types of companies
Listed corporations
◦Public companies listed on the Pacific Stock Exchange, ASX, NZX etc.
Disclosing entities
◦An entity with enhanced disclosure (ED) securities (Note 1)
Foreign companies
◦Incorporated outside of Australia or in an external territory of Australia
No-liability company
◦Shareholders are not liable for debts of the company. Sole object of the company must be mining.
Note 1: An entity which has its shares listed on the ASX, is issuing securities pursuant to a disclosure document, or is a borrower who has issued debentures.
Forming a company
To register a company, a person lodges the prescribed application form with ASIC
On registration, the company legally comes into existence
A certificate of registration and an Australian Company Number (ACN) are issued
Management of the company is governed by replaceable rules or constitution.
Replaceable rules
- Deals with issues relating to directors and members, inspection of companies books and records, shares and share transfers
- Necessary if a company wants different rules
- Public company must lodge constitution with ASIC—Constitution/replaceable rules represent a contract with shareholders
Administration of a company
Directors manage on behalf of the members
Certain registers and records must be maintained
- Minute books – records actions/decisions in meetings
- Financial records – to enable statements to be audited
- Registers of members, debenture holders and charges
- Required to be kept at the company’s registered office
Funding a company
A public company can raise funds by issuing securities:
- Shares (equity)
- Debentures (debt)
- Options (equity)
Debentures represent a claim on the assets of the company and may be secured by a fixed or floating charge of the company’s assets.
Background to the Corporations Act
The Corporations Act has arisen from significant amendments resulting from CLERP.
CLERP = Corporate Law Economic Reform Program
Federal Government program, commenced in 1997 and still running
Wide ranging reforms. Major changes to date include:
◦Recent “Companies Decree 2011”
Issue of shares
A company can issue shares on any terms or conditions it determines
Share capital may include different classes:
- Ordinary - a class of share that has no prefernece relative to other classes.
- Preference - Shares which receives prefenetial treatment over ordinary shares such as a preference in dividend distribution, and/or a preference in asset distribution if the company wound up.
Shares can be issued at any price, payable in full or
by instalment
Key features of share capital
Shares may have different rights in respect of voting, sharing in profits or return of capital
Rights of shareholders include:
- The right to vote for directors of the company
- The right to share in assets on the winding-up/liquidation of the company
- The right to share in new share issues (for the same class of shares)
Ordinary shareholders have no specific right to dividends.
Accounting for share issues
Most of the following examples assume that shares are issued via an Intial Public Offering (IPO) /prospectus process. Such processes involve the shareholders applying for a number of shares in response to a prospectus issued by the company. The company will then issue the shares to new shareholders based on the applications it has received.
Such share issues are accompanied by disclosure documents. Commonly the disclosure documents specify a minimum number of applications which must be received in order for the share issue to proceed.
The Corporations Act requires
- That the minimum subscription be achieved within 4 months of the issue of the disclosure document; and
- shares be allotted within 13 months of the issue of the disclosure document.
- On issuing new shares the company may require the full amount owing on the shares to be paid at the time of application. Alternatively it may require a portion to be paid on application, with the balance being due at some time in the future (on allotment and/or at call).
- There are a number of different account used to facilitate this application, allotment and call process.
Payable in full on application (Example 1)
- ABC issued a prospectus for the issue of 100,000 $5 shares on 1 January 2008.
- The prospectus specified that the $5 was payable in full on application.
- The company received applications for a total of 100,000 shares – these applications were received throughout the month of January.
- On 31 January 2008 ABC issued 100,000 shares.
- Share issue costs of $1,500 were incurred by ABC.
Required:
Prepare the journal entries to account for the issue of shares by ABC.
Solution:
Step 1
Step 2
Issue of shares – Deposit on application, balance on allotment (Example 2)
- ABC issued a prospectus for the issue of 100,000 $5 shares on 1 January 2008.
- The prospectus specified that $3 was payable on application, with the balance payable on allotment.
- The company received applications for a total of 120,000 shares – these applications were received throughout the month of January.
- The Directors decided to issue 5 shares for every 6 applied for, refunding the money in relation to unsuccessful applications.
- On 31 January 2008 ABC issued 100,000 shares.
Required:
Prepare the journal entries to account for the issue of shares and the subsequent receipt of allotment monies.
Solution:
- ABC issued a prospectus for the issue of 100,000 $5 shares on 1 January 2008.
- The prospectus specified that $2.50 was payable on application, a further $1.25 was payable on allotment and the final $1.25 was payable at call.
- On 31 January 2008 ABC issued 100,000 shares.
- On 31 May 2008, the company made the call for the outstanding balance of $1.25 per share. The call was payable by 30 June 2007.
- At 30 June 2008, the call on 10,000 shares remained unpaid.
Prepare the journal entries to account for the issue of shares and the subsequent receipt of allotment monies.
Solution:
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