Companies & Share Transactions

Introduction to Companies

A company is a legal (or “artificial”) person, meaning it is an entity with rights and duties separate from its shareholders. The assets of a company belong to the company itself, not to its shareholders. The Companies Act 71 of 2008 governs the formation, operation, and dissolution of companies in South Africa.

• Legal Entity: Exists independently of its owners (shareholders).

• Perpetual Succession: The company continues to exist despite changes in ownership or management.

• Limited Liability: Shareholders are not personally liable for the company’s debts beyond their investment.

Types of Companies

The Companies Act provides for two main types of companies: profit and non-profit companies.

Profit Companies

• State-owned Companies (SOC Ltd): Owned by government or municipalities.

• Private Companies ((Pty) Ltd): Cannot offer shares to the public; share transfer is restricted.

• Personal Liability Companies (Inc.): Directors are personally liable for company debts.

• Public Companies (Ltd): Shares offered to the public; freely transferable.

Formation of a Company

Forming a company involves several steps, including choosing a name, setting objectives, drafting a Memorandum of Incorporation (MOI), and registering with the Companies Commission.

• MOI: Governs the company’s operations and replaces the old Memorandum and Articles of Association.

• Registration: Requires submission of the MOI and Notice of Incorporation with the prescribed fee.

Share Capital and Shareholders

Share capital represents the funds contributed by shareholders. Shares are bundles of rights, including voting, receiving dividends, and sharing in net assets upon liquidation.

• Authorised Share Capital: Maximum number of shares a company can issue.

• Issued Share Capital: Number of shares actually issued to shareholders.

• Ordinary Shares: No fixed dividend; dividends depend on profits.

• Preference Shares: Fixed dividend rate; preferential rights on dividends and liquidation.

• Redeemable Preference Shares: Can be bought back by the company; classified as long-term borrowings, not equity.

Journal Entries for Share Issues

• On application:

• On issue:

Example: 490,000 no-par value shares issued at R22 per share. credited to stated capital.

Dividends

Dividends are distributions of profit to shareholders, declared by the board of directors. They are not expenses but appropriations of profit.

• Declaration: Creates a liability; recognised on the date of declaration.

• Solvency & Liquidity Test: Directors must ensure the company can pay debts after dividend distribution.

• Calculation: Ordinary shares: dividend per share; Preference shares: fixed % of issue price, apportioned if less than a year.

Formula for Dividends per Share:

Debentures

Debentures are long-term debt instruments issued to the public, representing loans to the company. They are not part of share capital and carry a fixed interest rate.

• Interest: Treated as an expense in the Statement of Profit or Loss.

• Journal Entry for Issue:

• Interest Payment:

Income Tax

Companies are separate taxpayers and pay income tax at a flat rate (currently 28%) on taxable income. Tax expense is recognised on the accrual basis.

• Taxable Income: Calculated by adjusting accounting profit for non-deductible expenses and non-taxable income.

• Provisional Tax: Paid in installments during the year; final assessment after submission of annual financial statements.

Formula for Income Tax:

Statement of Changes in Equity

This statement explains the movements in equity accounts (ordinary shares, preference shares, retained earnings, reserves) during the year. It reconciles opening and closing balances and details transactions such as share issues, dividends, and profit for the year.

Annual Financial Statements (AFS) and Reporting

Companies must prepare annual financial statements in accordance with IFRS or relevant GAAP. Public interest companies require audits; others may have independent reviews. The AFS must fairly present the company’s financial position and performance.

• Audit: Provides assurance that financial statements are valid, accurate, and complete.

• Corporate Governance: Ensures companies are managed in the interests of all stakeholders, integrating social, environmental, and economic issues for sustainability.

Integrated Reporting and Sustainability

Integrated reporting communicates how an organisation’s strategy, governance, and performance create value over time. The Framework identifies six capitals: financial, manufactured, intellectual, human, social and relationship, and natural.

• Sustainable Development Goals (SDGs): 17 global goals set by the United Nations to achieve a better and more sustainable future by 2030.

Summary Table: Key Company Types

Key Formulas

• Net Asset Value (NAV) per Share:

• Earnings per Share (EPS):

Conclusion

This module covers the essential aspects of companies and share transactions, including company types, share capital, dividends, debentures, income tax, and financial reporting. Mastery of these concepts is crucial for understanding the financial accounting of companies.