Share Premium Account
What is 'Share Premium Account'
A share premium account is typically listed on a company’s balance sheet. This account is credited money paid, or promised to be paid, by a shareholder for a share but only when the shareholder pays more than the cost of a share. This account can be used to write off equity-related expenses, such as underwriting costs, and may also be used to issue bonus shares.
BREAKING DOWN 'Share Premium Account'
Another way to look at a share premium account balance is the difference between the par value of a company’s shares and the total amount a company received for shares recently issued. For example, a company has issued 300 shares of its stock. The shares are given a par value or are valued at $10 each; however, the company has been paid $15 per share. Thus, the company has $4,500 in equity capital. Of this $4,500, only $3,000 is share capital. The remaining $1,500 is of the same general nature as share capital; the $1,500 represents funding generated from shareholders as a return for their partial ownership of the company. On the company’s balance sheet, this $1,500 is written up as part of shareholders’ funds, depicted in what is known as the share premium account.
The Ebb and Flow of the Share Premium Account
Over the course of a period of time, the balance of the share premium account increases and decreases. This is because it is standard operating practice for a company to issue new shares that fall in line with the shares’ current market value instead of shares’ arbitrary par value.
Continuing with the company in the example above, over a two-year period, it suffers downswings in the market and is paid $6 per share on 100 new shares issued in the first six months of the two-year time period. This subtracts $400 from the share premium account, leaving it with just over $1,000. However, in the later portion of the two-year period, the company experiences a surge in the market. It issues 400 new shares valued at $20 per share. Shareholders pay $35 per share, adding $6,000 to the share premium account, leaving the account’s balance at over $7,000.
The share premium account is a reserve that cannot be distributed. A company can use the balance of the account only for purposes that have been established in its bylaws. In most cases, a company cannot use the account to pay out dividends to shareholders or to offset operating losses. The share premium account is usually utilized to pay off equity expenses, which include underwriter fees. The account can also be used in the issuance of bonus shares and for costs or expenses related to this issuance.