Accounting for share capital and reserves in a Hong Kong company

Accounting for Share Capital and Reserves in a Hong Kong Company

Every share a Hong Kong company issues has no nominal value. The new Companies Ordinance (Cap. 622) abolished par value outright. That single change rewrites how share capital transactions hit the financial statements. No more splitting proceeds between a nominal share capital account and a share premium account. The full amount received goes to share capital.

Hong Kong Share Capital Accounting Entries

A company allots 10,000 ordinary shares at HK$10 each. The entry:

Debit: Cash at bank HK$100,000 Credit: Share capital HK$100,000

That is the whole entry. No share premium account exists under the no par value regime.

File Form NSC1 (Return of Allotment) with the Companies Registry within one month of the allotment. Where shares are allotted for non-cash consideration, assets, services, file Form NSC11 instead. Both forms update the public register with the number of shares allotted, the class of those shares, and the amount paid or unpaid.

Hong Kong Company Reserves Accounting

Reserves in a Hong Kong company comprise retained earnings, revaluation reserves, and capital reserves created by share buy-backs or redemptions. Section 662 of the Companies Ordinance requires a company that purchases its own shares to transfer an amount equal to the purchase price to a capital redemption reserve. This reserve is non-distributable. It sits in the equity section of the balance sheet.

The journal entry for a share buy-back:

Debit: Share capital (for the nominal value, which is zero under no par value) Debit: Retained earnings (for the excess over the nominal amount) Credit: Cash at bank (for the total purchase price)

Then transfer an amount equal to the purchase price from retained earnings to a capital redemption reserve. File Form NSC2 (Notice of Alteration of Share Capital) with the Companies Registry within 15 days of the buy-back.

Hong Kong No Par Value Share Accounting

All shares have no nominal value. The entire proceeds of issuance are credited to share capital. The register of members records the number of shares held by each member, the class, and the amount paid or unpaid, but no par value.

This simplification reaches share splits and consolidations. A share split under no par value needs no journal entry. Total share capital is unchanged. Update the register of members and file Form NSC2 to notify the Registrar of the alteration.

Allotment of Shares and Related Filings

Directors must pass a resolution authorising the allotment. Issue share certificates to the allottees within two months. The return of allotment on Form NSC1 must include the names and addresses of the allottees, the number and class of shares allotted, and the amount paid or unpaid.

For shares allotted as fully paid for non-cash consideration, file Form NSC11. It requires a statement of the consideration. If the consideration is shares in another company or a business, attach a valuation report.

Share Buy-Back and Share Redemption

A Hong Kong company may purchase its own shares out of distributable profits or out of the proceeds of a fresh issue of shares. Cancel the purchased shares and reduce share capital accordingly. Create a capital redemption reserve as described above.

Share redemption of redeemable shares follows the same treatment. Redeem the shares at the agreed price. Transfer the redemption amount to the capital redemption reserve. File Form NSC2 for both buy-backs and redemptions.

Alteration of Share Capital

A company may alter its share capital by increasing, consolidating, subdividing, or cancelling shares. Under the no par value regime, an alteration of share capital does not change the total amount of share capital unless new shares are issued. File Form NSC2 to notify the Registrar of any alteration.

The accounting depends on the type. A consolidation of shares, every 10 shares of HK$1 each into 1 share of HK$10, requires no journal entry. Total share capital stays the same. A cancellation of shares reduces share capital: debit share capital, credit retained earnings or a capital reserve.

Ordinary Shares, Preference Shares, and Non-Voting Shares

A company may issue different classes of shares. Ordinary shares. Preference shares. Non-voting shares. Record each class separately in the register of members and in the financial statements. Preference shares may carry a fixed dividend rate and may be redeemable. Non-voting shares carry no voting rights but may have other rights, such as priority in a winding-up.

The accounting for each class follows the same no par value rules. Credit the proceeds of issuance to the share capital account for that class. The financial statements must disclose the number and class of shares issued, the rights attached to each class, and any changes during the year.

Register of Members and Directors' Loan Account

The register of members is a statutory record. It must contain the names and addresses of members, the number and class of shares held, the amount paid or unpaid, and the date of entry and cessation of membership. Keep the register at the company's registered office or at another location in Hong Kong.

A directors' loan account arises when a director borrows money from the company or when the company pays expenses on behalf of a director. Record this account as a receivable in the financial statements. Disclose it in the notes under HKFRS. Directors' loans are subject to restrictions under the Companies Ordinance. Any outstanding balance must be disclosed in the directors' report.

Financial Statements, Schedule 4 Accounts, and HKFRS

Share capital and reserves appear in the equity section of the balance sheet. Under Schedule 4 of the Companies Ordinance, the financial statements must show:

• Called-up share capital
• Share premium account (if any, for companies that had a share premium before the no par value regime)
• Capital redemption reserve
• Revaluation reserve
• Retained earnings

Under HKFRS, the presentation is similar. The statement of changes in equity shows the movement in each reserve during the year: profit or loss, dividends, share issuances, and transfers to reserves.

The financial statements must be audited by a practising certified public accountant registered with the HKICPA. The auditor's report confirms whether the financial statements give a true and fair view and comply with the Companies Ordinance.