Monday, April 26, 2010

What is share premium account

Share Premium

Share Premium - Market Value vs. Book Cost

A share premium is the amount paid for an equity in excess of its nominal value, that is; its market value less its book cost.

For example, five years ago when a UK limited company was registered, it issued 100 shares for £1 each (their nominal value). Today, after years of successful trading the company has a market value currently of £100,000. On the basis that no further shares have been issued, the market value of each unit of equity is now (£100,000 divided by 100) £1,000.

If one share was sold today and £1,000 was received, the share premium would be (£1,000 less £1) £999.

The purchaser would be deemed to have paid a premium on the purchase which would be recorded in the share premium account in the company's books.

Conversely, had the company's trading performance been very poor or if it had remained dormant since its formation, it might still be valued at £100 in total. The purchase of one share would therefore remain at its initial cost of £1. As the original nominal value was £1, no share premium would be deemed to have been paid on this transaction.

Share Premium Account

The sum of share premium which a company receives for all past transactions of its equities would be disclosed as a separate note in the annual accounts.

An illustration of such disclosures is shown below.

Share Capital Account 30 June 2008 30 June 2007
Ordinary shares of £1 each 2,000 1,500
Share premium account 500 0
2,500 1,500
During the year ended 30 June 2008 500 ordinary shares of £1 each were issued to ABC limited at a price of £2 each. The amount received as consideration in excess of the nominal value is shown in the share premium account.

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