Share premium is the income received from the difference between the market and par value of securities at their placement. In other words, it is the excess of the selling price over the face value.
Features of share premium
Share premium, along with exchange and revaluation differences, is included in additional capital. The latter represents the amount of revaluation of non-current assets and refers to the company's own assets.
Share premium is generated through the placement of securities, which can be private or public. In the first case, the shares are sold among a narrow circle of well-known investors, in the second - on the free market, to everyone.
Sometimes the concept of share premium is also used in relation to LLC, in this case it represents the difference between the cost of shares with an increase in the authorized capital and their nominal price.
It can be formed both as a result of the initial placement and additional issue of shares with an increase in the authorized capital.
Share premium can only be received by joint-stock companies, because only they have access to opportunities to issue securities (shares). The issue of securities is one of the sources of obtaining financial resources that are attracted to solve strategic goals.
Share premium is considered only as additional capital, it is not allowed to spend it on the needs of consumption. It goes to the reserve fund of the enterprise or increases the amount of profit.
Calculation of share premium of the company
Share premium is calculated as follows: par value of shares - issue price of shares (issue price).
In turn, the par value is calculated as the ratio of the authorized capital to the number of shares. The issue price of a share, in a general sense, is the price at which the shares are sold to their original owners.
According to the formula, if the selling value is equal to the issue price, then there is no share premium.
Share premium cannot be negative, because the issue price cannot be lower than the face value. Otherwise, the joint-stock company will not be able to form its authorized capital.
If you try to translate accounting terminology into Russian, you can explain the essence of the concept of share premium using a simple example. The company has an authorized capital of 1 million rubles, it has issued 2 thousand shares. Thus, the nominal price of one share will be 500 rubles. (1000000/2000). Investors, positively assessing the company's prospects and expecting an increase in their own profitability when buying these shares, can offer it for a higher price. For example, they will buy shares at a price of 1,500 rubles. Accordingly, the share premium will be equal to (1500-500) * 2000 = 2 million rubles.
The company can also place its shares at a price higher than par, the positive difference between their price will also become share premium. For example, a company with a par value of 1,000 rubles. issued them at a price of 1,500 rubles. The share premium will be 500 rubles. from one security.
If we are talking about a secondary placement after the buyback from shareholders, the share premium will be the difference between the buyback price and the cost of the subsequent placement. For example, a company bought back shares at a price of 1,000 rubles, and then placed them at 1,100 rubles. The share premium will be 100 rubles. per share.
