Share capital and share issues

Equity is the residual interest in the assets after deducting liabilities. In a company it has two broad sources: capital contributed by shareholders, and profits earned and retained.

Share capital and share premium. In many jurisdictions shares have a nominal (par) value — say 1.00 per share — fixed in the company's constitution. When shares are issued: - the number of shares × nominal value is credited to Share capital; - anything received above nominal is credited to Share premium (called additional paid-in capital under US GAAP). Both are contributed capital. The premium is not income: a company can't make a profit by selling its own shares. Where shares have no nominal value, the whole amount received is credited to share capital. Company law usually restricts how share capital and share premium may be used (they generally can't be paid out as dividends).

Issue costs. Incremental costs directly attributable to issuing new shares — underwriting, legal and registration fees — are deducted from equity (IAS 32.37), typically from share premium, net of any tax benefit. They are not an expense. Costs that would have been incurred anyway (management time, a stock-exchange listing of existing shares) are expensed.

Shares issued for non-cash assets (equipment, a business) are measured at the fair value of what is received (IFRS 2 for goods and services; IFRS 3 in a business combination), with the excess over nominal credited to share premium.

Other components of equity include retained earnings (accumulated profits less dividends) and other reserves — for example the revaluation surplus (IAS 16) and the fair value reserve for FVOCI investments. Each component is shown in the statement of changes in equity.

Is it really equity? Under IAS 32 an instrument is equity only if the issuer has no contractual obligation to deliver cash. Preference shares that must be redeemed on a fixed date (or at the holder's option) are a financial liability, whatever their legal name, and their "dividends" are interest expense.