INSTITUTE OF ACCOUNTANTS.

Lyttelton Times, Volume CXIII, Issue 13689, 4 March 1905, Page 2

INSTITUTE OF ACCOUNTANTS.

THE QUESTION OF “SHARE PREMIUM.” At a mooting of tbo Christchurch branch of tho Incorporated Institute of Accountants on Thursday night, Mr W. 11. Gmidry, by request, road a paper upon tho question of “ Share Premium.” Tho question under consideration was whether share premium should bo credited to profit and loss, and if not, should an auditor sign a sheet as correct in cases in which tbo sum was shown as profit, (n answering tho question, Mr Gundry said that it was first necessary to consider what premium on shares really was. Professor Lawrence R. Dicksee, of London University, had said that when a company sold its shares at an excess of value over its assets it was virtually receiving a sum for goodwill, or words to that effect, and accountants would bo disinclined to doubt so patent a fact. The premium was contributed to tho funds of tho company, owing to tho confident opinion of the investors in the soundness and remunerative possibilities of the undertaking, and a company was debarred by law from selling its shares under par, or at a discount. These were the bases of tho argument: To whom does the premium belong? They must disabuse their minds of any similar questions in a partnership which might necessarily differ according to mutual agreement—the value either to remain in the business or go to a vendor. In the case of a company originally fprmcd, and when soiling its shares at a premium, the amount so received would belong to the whole of the shareholders in some form, say in reserve or goodwill. The question then became one of a company which was firmly established issuing further shares at a premium. Did the amount then received belongto the old shareholders only or to the shareholders at the time the allotment • was made ? He was of opinion that the applicant for shares was not a shareholder until the allotment was on the minute book, and that being so, he immediately became a participator in the premium he had himself paid to the company. It was clear that in taking np shares the investors had taken into consideration the goodwill they were purchasing, and to such goodwill or premium they were entitled to a share. Presuming that tho issue of shares was made immediately prior to the balancing period, and the amount derived carried at once to profit, it would be available for a dividend to the old shareholders, and the contributors would receive no benefit therefrom. Mr F. W. Pixley, F.C.A., barristor-at-law, said that premium on shares should not be carried to profit, “ but if the directors insist upon it the auditor has no power to object.” Hence the uncertainty of the question. A few years ago, Mr Gundry said, he had had a practical instance on this subject. A company received a few thousand pounds for premium on its third issue of shares, and, as the auditor of the company,' he strongly opposed the receipt being passed to profit, and was supported in this view by the directors. The money was subsequently carried to reserve. If it should bo necessary at a future date to vote a portion of the reserve fund back to profit and loss, for the purpose of paying a dividend, the contributors thereto would participate in the premium fund they created. A question was raised as to whether the premium received and transferred to reserve fund was or was not a profit chargeable with income tax. He contended that it was not, as tax had been paid on the previous profits which had enabled tho company to obtain a premium on its shares, and that it was a capital entry of money introduced into the company. In this his opinion was upheld. The crux of the matter was, to whom did the contributed premium belong at the moment the applicant for shares became a legal shareholder? The opinion he had expressed appeared to be supported by recognised authorities, but ho had not conio across any definitely settled point of law on the subject. Therefore he was still of the opinion that the premium on company shares should not, in equity, ho placed to the credit of profit and loss, but that the only power an auditor possessed at present was to report his opinion on the problem.