Report on Equity

8/14/2019 Report on Equity

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Equity

1.0 Introduction

Abalance sheet, also known as a "statement of financial position", reveals a company's

assets, liabilities and owners' equity (net worth). The balance sheet, together with the income

statement and cash flow statement, make up the cornerstone of any company's financial

statements.

assets = liabilities + shareholders' equity

This means that assets, or the means used to operate the company, are balanced by a

company's financial obligations along with the equity investment brought into the company

and its retained earnings.

Assets are what a company uses to operate its business, while its liabilities and equity are two

sources that support these assets. Owners' equity, referred to asshareholders' equityin a

publicly traded company, is the amount of money initially invested into the company plus

anyretained earnings, and it represents a source of funding for the business. Refer to the table

1:
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Table 1: Nature of Owners Equity

2.0 Corporations

A corporation is a legal entity having an existence separate from that of its owners.

It owns property on its own name, the assets belong to the corporation itself and not to the

owners. It has a legal status in court. As a legal entity, it may enter into contracts and is

responsible for its own debts and pays taxes on its earnings. A corporation may have any

number of investors. In dollar value of business activity, corporations hold an impressivelead.

There are two types of limited company that define the way that money can be raised

through shares.

A private limited company can sell shares only to designated people and there is a

limit how much capital they can raise through this method.


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A public limited company can issue shares to the public. This means anyone can

have a share in the company.

It is important to note that once a share is issued, it only raises money for the

company the first time it is sold. After that the proceeds any sale of that share goes to the

owner of the share. It is like a second hand car. When a BMW is sold second hand, then the

money goes to the owner of the car and not BMW.

A company may wish to issue shares because:

A large amount of money can be raised through a share issue.

Unlike a loan the money does not have to be repaid over a fixed period of time.

Forming a corporation also allows to:

Reward and retain key staff by giving workers a piece of the business.

Have more options for raising funds. Instead of going into more debt, you can attract

equity investor.

Shift tax liability away from you to the corporate entity.

But there are some disadvantages as well:

It takes more time and money to incorporate than to form other types of businesses.

Corporations are subject to more regulation at both the federal and state level.

The management structure of a corporation is more rigid, giving you, as the owner,

less flexibility to run things as you see fit.

2.1 Formation of a Corporation

2.1.1 Stockholder Records in a Corporation

Common or preferred stockholder whose name is registered on the books of a

corporation as owning shares as of a particular date. Dividends and other distributions are

made only to shareholders of record. Common stockholders are usually the only ones entitled


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to vote for candidates for the board of directors or on other matters requiring shareholder

approval.

3.0 Paid-In-Capital of a Corporation

3.1 Authorization and Issuance of Capital Stock

The capital market is the market for securities, where companies and governments can

raise long term funds. It is a market in which money is lent for periods longer than a year.

It consists of:

Primary Market

Secondary Market

Primary Market:

The primary market is that part of the capital market that deals with the issuance of

new securities.

Companies, governments or public sector institutions can obtain funding through the

sale of a new stock or bond issue.

Include all types of securities being sold for the first time.

After being offered in primary market it becomes the part of secondary market.

Primary offer consists of:

IPO (initial public offering) :-where unlisted company is selling the securities to the

public for the first time.

FPO (follow on public offering) :-new offering of the listed company that have sold

securities before

Features of primary markets are:

This is the market for new long term capital. Therefore it is also called the new issue

market (NIM).


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In a primary issue, the securities are issued by the company directly to investors.

The company receives the money and issues new security certificates to the investors.

Primary issues are used by companies for the purpose of setting up new business or

for expanding or modernizing the existing business.

The primary market performs the crucial function of facilitating capital formation in

the economy.

The new issue market does not include certain other sources of new long term

external finance, such as loans, debts etc.

Secondary Market

The secondary markets are where existing securities are sold and bought from one

investor or speculator to another, usually on an exchange

Also,

Secondary market is the market where stocks are traded after they are initially offered

to the investor in primary market (IPO's etc.) and get listed to stock exchange.

Secondary market comprises of equity markets and the debt markets.

Secondary market is a platform to trade listed equities, while Primary market is the

way for companies to enter in to secondary market

3.2 Common Stock

Common stock is defined as Common stock is one form of securities issued by a

public corporation. Essentially, the purchase of common stock provides the shareholder with

a specified amount of equity ownership in the issuing company, as well as various rights and

privileges connected with the operation of the corporation. Common stock is the most widely

issued type of public stock, and is the stock type of choice for most initial offerings to the

general public.

3.2.1 Characteristic of Common Stock


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There have 3 characteristic for common stock:

1. Stock rights

Common stock represents a bundle of rights and powers. They include:

The right to receive dividend payments typically from earnings -- if

authorized by the board of directors

The power to sell the stock (liquidity rights) and realize capital gains

on public trading markets or in private transactions-- if there are willing buyers

The right to receive consideration in a merger or other fundamental

transaction -- if approved by the board and the shareholders

The right to vote to elect directors and to approve fundamental

transactions (mergers, sale of assets, amendments to articles, dissolutions)

The right to receive a proportionate distribution of assets on corporate

liquidation -- if the board and shareholders approve a dissolution

Shareholders are often said to have a residual claim to the income and assets of the

business. Financially, they stand last in line behind corporate creditors, such as bondholders,

short-term lenders, banks, trade creditors. When a company is unable to pay its debts, and the

company is forced into bankruptcy, shareholders receive nothing.

2. Uncertain returns

The returns on common stock are uncertain. The company might not have earnings

with which to pay dividends. The board might not declare dividends, but instead reinvestearnings in the company. There may not be a market into which to sell stock. The market

might, because of structural or informational flaws, not value stock efficiently. The board

might approve a merger that imposes a price that does not reflect the stock's future return

potential. The board might approve a dissolution and liquidation of the company's assets at a

price that does not reflect the company's ongoing business value.


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3. Value based on dividends

Professional stock valuators focus on cash dividends. Some companies do not pay

dividends, and most companies pay less in dividends than has been earned. In addition, many

shareholders realize returns when they sell the stock (capital gains) or receive a higher price

in a fundamental corporate transaction, such as a merger.

In the end, stock has value because of the possibility of cash returns:

Earnings. Even if current earnings are retained and reinvested, the

reinvested earnings should produce future earnings that eventually will be paid as

dividends.

Capital gains. If a shareholder sells stock on the market, it is because

the buyer values the potential for future returns - that is, dividends.

Merger. If a company is acquired in a merger, and its shareholders paid

for their stock, the acquirer values the company's potential for creating returns -

dividends.

For this reason, professional stock valuators say that only dividends are relevant. But

stock markets are more realistic about human nature. Market traders know, for example, that

stock prices in mergers often involve more than the acquirer's valuation of future dividends.

Sometimes the acquirer's managers have big egos and just want to run a bigger business. The

selling shareholders know this and will demand a higher merger price.

3.3 Preferred Stock

Preferred stock can be defined as an element of shareholder equity that has

characteristics of both equity and debt. A preferred share carries additional rights above and

beyond those conferred by common stock. Preferred shareholders may have an advantage

over common stock shareholders in dissolution, bankruptcy or liquidation, for instance.

Preferred shares also generally have a dividend requirement, which makes them appear

similar to debt. The dividend structure usually has rights attached to it, such as whether the

dividends are cumulative or whether the shares participate in enterprise earnings. The


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dividend rate may or may not be fixed or tied to some type of index that controls the

movement of the rate, either up or down.

3.3.1 Characteristics of Preferred Stock

When comparing characteristics of preferred shares to characteristics of similar securities,

look at the following:

Dividend rate. What amount of income is received periodically?

Cumulative vs. noncumulative.Will dividends accrue if they are not paid on time, or

are the dividend lost if the company is unable to, or decides not to, pay it?

Participatingvs. nonparticipating.Is there a right to participate in earnings or value

over and above the stated rate?

Liquidation preference.Will preferred shareholders receive a distribution upon

liquidation before the common shareholders?

Redeemable vs. nonredeemable.Do the preferred shares have a fixed term, and can

they be bought back by the company at a specified price, time or interval?

Redeemable shares may have a sinking fund, a cache into which the company pays

over time to fund retiring them. The most important provisions regarding redemption

are the call price and the length of time until the company will redeem the preferred

shares.

Votingvs. nonvoting.Do the preferred shares come with voting rights? Common

stock lets holders participate in running the company; special classes of shares may

not have such rights.

Put options.Can a shareholder make the company repurchase the shares for a fixed

price (usually par value)?

Convertible vs. nonconvertible.Can the shares be converted for common stock, or

into some other stock or debt instrument?

3.4 Comparison between Common Stocks and Preferred Stocks

Corporations issue preferred stock to raise cash. Thus, although you buy or sell them

the same way you trade regular common stocks; preferred stocks are more like bonds than

common stocks.


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Investors buy them for the steady dividends, which typically equate to 4% to 8%

yields. Most preferred stocks pay dividends quarterly. Unlike common stocks, there is not

much share price appreciation if your company comes up with a hot product. Further, in most

cases, the dividend never goes up either.

Preferred stock is a hybrid between common stockand abond. Each share of preferred

stock is normally paid a guaranteed dividendwhich receives first priority (i.e., the common

stockholders cannot receive a dividend until the preferred dividend has been paid in full) and

has dibs over the common stockholders at the company's assets in the event of bankruptcy (its

claim is still subordinate to that of the bond holders, however). In exchange for the higher

income and perceived safety, preferred shareholders forgo the possibility of large capital

gains.

The terms of preferred stock issues can vary widely, even among the same

corporation. Arguably, the most important characteristic of a preferred stock is if it is

cumulative or non-cumulative. In a cumulative issue, dividends that are not paid (referred to

as "in arrears") build up. Before any dividend can be paid on the common stock, the entire in

arrears balance must be paid in full. If a preferred issue is non-cumulative and a dividend

payment is missed, the shareholders are out of luck; they will, most likely, never receive that

money from the company even if and when the enterprise encounters prosperous times.

Common stocks holders are generally the primary owners and have voting rights.

Preferred stocks holders are secondary owner and generally dont have voting rights.

Preference is given to preferred stock owners as to assets in liquidation and for

common stocks owners can make a residual claim on assets at the time of liquidation paying

to the creditors and clearing the taxes.

3.5 Book Value per Share of Common Stock

Worth of each share of stock per the books based on historical cost. It differs from

market price per share. Book value per share can be computed for common stock and

preferred stock as follows:
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In most situations, the book value per Share or BV can be a pretty meaningless value.

Technically, it is considered to be the accounting value of each share, which can be drastically

different than what the market value per share is for a common stock. There is also very little

that market value and book value have in common. Market value or price per share is a

reflection of supply and demand for a stock. Usually this is based on some expectation of

future performance.

There is one circumstance where situation where BV can be useful and that is when

the market price or value is currently set below the book value. When this occurs, the

company is considered undervalued and might be considered an attractive stock to buy.

3.6 Market Value

3.6.1 Market Price of Preferred Stock

Market price of preferred stock is the price as determined dynamically by buyers and

sellers in an open market for capital stock which provides a specific dividend that is paid

before any dividends are paid to common stock holders, and which takes precedence over

common stock in the event of liquidation.

33333 Market Price of Common Stock

Market price of common stock also called share price, this figure is simply the price

of one share of stock. This is the most visible piece of financial data for a company, and the

media tends to focus on this single piece of financial data. This value can be sometimes

found in the Income Statement, but if not, it is just as easily found by going to a stock-price


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lookup website, searching for the historical stock price for the day the financial statement was

submitted.

3.6.3Importance of Market Price of Common Stock:

The Market Price of Common Stock as a sole financial indicator is useless.

Comparing this value to the earnings per share provides a limited view on how "expensive"

the stock is - companies with a high Price to Earnings Ratio have a stock price that may be

overvalued - meaning there is high demand to purchase the stock and the price may have

gone up. Stock traders also focus on this value, as their incremental purchases and sell-offs

are how they intend to make a profit. Stock investors rely on much more financial data than

just the stock price.

4.0 Stock Splits

Companies often split shares of their stock to try to make them more affordable to

individual investors. Unlike an issuance of new shares, a stock split does not dilute the

ownership interests of existing shareholders. When a company declares a stock split, its share

price will decrease, but a shareholders total market value will remain the same. For example,

if you own 100 shares of a company that trade at $100 per share and the company declares a

two for one stock split, you will own a total of 200 shares at $50 per share immediately after

the split. If the company pays a dividend, your dividends paid per share will also fall

proportionately.

A stock may split two for one, three for two, or any other combination. A reverse

stock split occurs when a company reduces its number of outstanding shares, such as a one

for two split. For a history of a companys stock splits, check the companys web site or

contact its investor relations department.
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5.0 Treasury Stock

5.1 Recording Purchases of Treasury Stock

A corporation may choose to reacquire some of its outstanding stock from its

shareholders when it has a large amount of idle cash and, in the opinion of its directors, the

market price of its stock is too low. If a corporation reacquires asignificantamount of its own

stock, the corporation's earnings per share may increase because there are fewer shares

outstanding.

If a corporation reacquires some of its stock and does not retire those shares, the

shares are called treasury stock. Treasury stock reflects the difference between the number of

shares issuedand the number of shares outstanding. When a corporation holds treasury stock,

a debit balance exists in the general ledger account Treasury Stock (a contra stockholders'

equity account). There are two methods of recording treasury stock: (1) the cost method, and

(2) the par value method.

Under the cost method, the cost of the shares acquired is debited to the account

Treasury Stock. For example, if a corporation acquires 100 shares of its stock at $20 each, the

following entry is made:

Treasury Stock 2,000

Cash 2,000

Stockholders' equity will be reported as follows:
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5.2 Reissuance of Treasury Stock

In ordinary trading companies the key factor is the difference between the prevailing

share price and the price the treasury shares are sold to the market. Where the shares are sold

at a discount to the share price investors may have concerns about dilution. These types of

issues are well understood and account for the existence of pre-emption rights in company

law.

For an investment company, shares sold from treasury would normally be at the

prevailing share price (or very close). The critical issue, in terms of shareholders being

prepared to waive their pre-emption rights, is less to do with shares being sold at a discount to

the share price than at a possible discount to NAV (net asset value).

NAV enhancement: One market view is that any re-sale of shares at a discount to

NAV inevitably erodes value for existing shareholders. It maintains that repurchased shares

should always be cancelled following a repurchase as this provides the greatest possible uplift

of NAV per share. The contrasting view focuses on the round-trip.

This identifies the whole process of repurchasing, holding and re-selling shares as one

exercise and considers its overall impact on NAV and other issues (such as liquidity). The

round-trip perspective takes a more holistic view of the operation. It recognises that there is

an opportunity cost in selling the re-issued shares at a discount, but that this should beweighed against potential other benefits.


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5.3 Benefits of Stock Buybacks

1 Increased Shareholder Value - There are many ways to value a profitable company but

the most common measurement is Earnings Per Share (EPS). If earnings are flat but the

number of outstanding shares decreases. An increase in period-to-period EPS will result.

2 Higher Stock Prices - An increase in EPS will often alert investors that a stock is

undervalued or has the potential for increasing in value. The most common result is an

increase in demand and an upward movement in the price of a stock.

3 Increased Float - As the number of outstanding shares decreases, the shares remaining

represent a larger percentage of the float. If demand increases and there is less supply,

then fuel is added to a potential upward movement in the price of a stock.

4 Excess Cash - Companies usually buy back their stock with excess cash. If a company

has excess cash, then at a minimum you can bank that it doesn't have a cash flow

problem. More importantly, it signals that executives feel that cash re-invested in the

corporation will get a better return than alternative investments.

5 Income Taxes - When excess cash is used to buyback company stock, in lieu of

increasing or paying dividends, shareholders often have the opportunity to defer capital

gains and lower their tax bill if the stock price increases. Remember that dividends are

taxed as ordinary income in the year they are received whereas the sale of appreciated

stock is taxed when sold. Also, if the stock is held for more than one year the gain will

be subject to lower capital gain rates.


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6 Price Support - Companies with buyback programs in place use market weakness to buy

back shares more aggressively during market pullbacks. This reflects confidence that a

company has in itself and alerts investors that the company believes that the stock is

cheap. Frequently you will see a company announce a buyback after its stock has taken ahit, which is merely an overt action to take advantage of the discount on the shares. This

lends support to the price of the stock and ultimately provides security for long-term

investors during rough times.

7 Now that we've shown a few reasons to be bullish on "buyback stocks," should you go

out and buy every buyback you can find? Definitely not. Not all buybacks are equal and

some buybacks seem to be nothing more than an attempt to manipulate the stock price.

5.4 Potential Pitfalls

1 Manipulation of Earnings - Above we described how a buyback improves the earnings

per share number. Analysts rate stocks on many factors, but one of the most important

numbers is the Earnings Per Share. Assume that an analyst estimates earnings using a

higher number of outstanding shares existing before a buyback is executed. If the timing

is right, companies could buyback shares and appear to beat consensus estimates that

were based on a larger number of outstanding shares. So, watch out for announcements

just prior to earnings.

2 Buyback Percentage - The higher the percentage of the buyback, the greater the potential

for profits. Unfortunately, the buyback percentage is not typically part of an

announcement so in order to determine if there is any significance to the announcement

you'll need to do some research. Don't assume that a large number of shares is

necessarily a large percentage.

3 Execution of Buyback - There is a difference between announcing a buyback and

actually purchasing the stock. A buyback announcement may initially boost the price of


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a stock, but this phenomenon (when it occurs) is usually short lived. Don't be fooled into

believing that all announcements are implemented. A good portion of announced

buybacks are not executed in full.

4 High Stock Prices - Beware of a buyback program announced when a stock is at or

nearing an all-time high. A stock buyback can be used to manipulate less than desirable

EPS expectations. One way of investigating this is to compare the P/E (Price/Earnings)

ratio relative to other stocks in the sector or industry. If a higher than normal P/E ratio

exists, then it doesn't make a whole lot of sense for a company to buy it's stock at a

premium unless there is something in the works that will add substantially to earnings.

6.0Retain Earnings

Earnings notpaidout as dividends but instead reinvested in the core business or used to

pay offdebt. Its also called earned surplus oraccumulated earningsorinappropriate profit.

6.1 Importance of Retain Earnings

In general terms, the capital retained by a company is used to maintain the existing

business or could be used to grow the business. This is seen as a means for boosting sales and

profits.

Some companies like those in the manufacturing sectors tend to spend a large portion

of their profits on new equipments in order to maintain its operations. This could cause

retained earnings to be slim. In this case, such large amounts of money are required to keep

the business running. On the other hand, some companies that do not invest heavily on

machinery and equipment could use a good portion of their profits to grow the business by

opening more branches etc.

Just like individuals set money aside for future investment purposes, so also

companies must retain some of their earnings for future growth. These earnings should be
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invested back into the business or in other ventures that can generate more money. Retained

earnings are meant to boost the value of a company which indirectly boosts investors capital.

If a company is able to use its retained earnings to produce exceptionally good results, it is

better they keep those earnings instead of paying them out to investors. This is very important

because some companies pay as high as 90 percent of their earnings as dividends.

In times like these when liquidity seems tight and some companies are having

difficulties generating sufficient cash for their operations, the retained earnings serve as a

boost that complements these shortfalls. Be that as it may, investors believe that management

knows best. After all, shareholders are responsible for voting directors on the board. So, if a

company has a tradition of paying a particular percentage of earnings as dividends and it has

worked well over the years, so be it.

7.0 Equity Market in Malaysia

7.1 Bursa Malaysia

Bursa Malaysia is an exchange holding company approved under Section 15 of the Capital

Markets and Services Act 2007. It operates a fully-integrated exchange, offering the complete

range of exchange-related services including trading, clearing, settlement and depository

services. Bursa Malaysia today is one of the largest bourses in Asia with just under 1,000

listed companies offering a wide range of investment choices to the world. Companies are

either listed on Bursa Malaysia Securities Berhad Main Market or ACE Market.

In assisting the development of the Malaysian capital market and enhancing global

competitiveness, Bursa Malaysia is committed to maintaining an efficient, secure and active

trading market for local and global investors.

Equitiesoffer considerable potential for capital growth and are long term risk investments. It

involves company shares which represents part ownership by the investor in a particular

company. Ownership of equities will often entitle the investor to a portion of the company's

profits through dividends.

A share is a security which represents a portion of the owner's capital in a business.

Shareholders are the owners of the business and share the success or failure of the business.


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7.2.3 Fixed Income securities

The holders of the fixed income securities are creditors of the company rather than

shareholders. Holders of fixed income securities have no rights in the company beyond

the payment of a fixed interest on their loans and repayment of the loans in accordance

with the terms on which they were issued. Fixed income securities may be secured or

unsecured, with the secured fixed income securities ranking before the unsecured. Both

principal types of fixed income securities are debentures and loan stocks.

a Debentures/ Debenture Stocks

A debenture is similar to a mortgage. It is a long-term loan secured on certain fixed orfloating assets of a company. A debenture stock is a debenture issued as a fixed-

interest stock. Such securities are issued under trust deeds, and in the event of the

borrower defaulting on the interest or capital repayment, the debenture holder has the

right to appoint a receiver to sell the company's assets and secure repayment of the

loan.

b Loan Stocks

A loan stock is a security issued by a company in respect of a loan made by investors.

Loan stocks may be secured, unsecured, convertible or non-convertible, but are often

unsecured, unlike debentures.

i. Unsecured loan stocks carry higher risk than debentures, and in the event of awinding-up, unsecured loan stock holders rank alongside all other unsecuredcreditors.

ii. Convertible loan stocks carry the right to be converted into ordinary sharesof the company on pre-arranged terms and within a limited period. Theobjective of issuing a convertible loan stock is to obtain fixed interest financeat a relatively low rate of interest and at the same time make it attractive to

potential holders by the offer of equity participation at a later date.iii. Notes

There also fixed income securities with a maturity date, and may or may notbe redeemable.

iv. Bonds

Like debentures, bonds are fixed income securities issued to lenders of

long-term loans, with a maturity date.

7.2.4 Exchange-Traded Fund (ETF)

Exchange-Traded Fund (ETF) is an investment fund that trade like stocks. Cheap, flexible,

and tax-friendly, it allows investment of any size in a myriad of different portfolios of

securities, equities, bonds, commodities etc. ETF is more than just cheap fund. It is an


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entirely different animal from unit trust funds. ETF can be bought and sold instantaneously

on a stock exchange as opposed to unit trust funds, which almost always trade at end-of-day

prices.

ETF is designed to track performance of an index. It offers additional benefits ofdiversification and market tracking while retaining the features of convenience and flexibility

of ordinary stocks. Investors can buy or sell ETF through their stockbrokers anytime during

trading hours.

7.2.5 Warrants and Others

a. Warrants/Transferable Subscription Rights (TSRs)

Warrants/TSRs give the holders the right, but not an obligation, to subscribe for new

ordinary shares at a specified price during a specified period of time. Thewarrants/TSRs (usually attached to an issue of loan stock) are issued by the company.

Warrants have a maturity date (up to 10 years) after which they expire worthless

unless the holder had exercised to subscribe for the new shares before the maturity

date.

b. Call Warrants

Call warrants also give a right, but not an obligation, to buy a fixed number of shares

at a specified price within a limited period of time. But unlike warrants/TSRs, call

warrants are issued by third parties based on existing shares. Therefore, they donot increase the issued capital or dilute the earnings of the company as a warrant/TSR

would do. Call warrants have maturity dates of not more than two (2) years.

c. Property Trusts

A property trust fund involves a listed company which invests its funds in landed

properties. It operates just like a unit trust except that it invests in property rather than

shares. It therefore provides investors access to retail and commercial properties.

d. Close-end Funds

A closed-end fund involves a listed company which invests in shares of other

companies. A closed-end fund company has a fixed number of shares in issue at any

point of time, the price of which will fluctuate according to net asset value and market

forces.


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7.3 Listingcriteria for local and foreign company

7.3.1 Main Board

For quantitative requirement, the local and foreign company must fulfil one of the

criteria for listing

i. Market Capitalization Test

The minimum paid up capital requirement is at least RM500 million upon listing

comprising ordinary share of at least RM0.50 each; and incorporated and

generated operating revenue for at least 1 full FY prior to submission.

ii. Profit Test

Profit after tax at of at least RM6 million for the most recent full financial year

and uninterrupted profit after tax of 3-5 full financial years with aggregate of at

least RM20 million.

iii. Infrastructure Project Corporation test

Must have the right to build and operate an infrastructure project in or outside

Malaysia:-

with project costs of not less than RM500 million; and for which a concession or licence has been awarded by a government

or a state agency, in or outside Malaysia, with remaining concession oflicence period of at least 15 years

Applicant with shorter remaining concession or licence period may be considered

if the applicant fulfil the profit requirements under profit test

7.3.2 ACE Market

No minimum operating track record or profit requirement, No minimum IPO

price. This is the new rule form Bursa Malaysia on 3 August 2009. Compare the

previous known as MESDAQ market, the minimum paid up capital is

RM2,000,000 and for a technology incubator company, the minimum issued and

paid up share capital is not less than RM20,000,000

Above is the quantitative listing requirement, the company also need to fulfil other

requirement for qualitative criteria and others requirement set by Securities

Malaysia.


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8. Financial Reporting Standard (FRS)

Financial Reporting Standard (FRS) is a guideline and rules set by the Accounting Standards

Board (ASB) that companies and organizations can follow when compiling financial

statements. FRS also known as financial accounting standard which defined as definitive

benchmarks prescribed by a country's Accounting Standards Board (as in the UK), or

Financial Accounting Standards Board (as in the US) for reporting of accounting data in

financial statements. These rules must be applied to all financial statements in order to

provide a true and fair view of the firm's financial position, and a standardized method ofcomparison with financial statements of the other firms.

Financial Reporting Standard (FRS) which are guideline and rules for equity in accounting or

financing for companies. Below are the related FRS for equity:

8.1Financial Reporting Standard 101 : Presentation of financial statement

The objective of FRS is to prescribe the basis for presentation of general purpose financial

statements, to ensure comparability both with the entitys financial statements of previous

periods and with the financial statements of other entities. FRS set outs the overall framework

and responsibilities for the presentation of financial statements, guidelines for their structure

and minimum requirements for the content of the financial statement. Financial statement set

out by FRS 101 are balance sheet, income statement, statement of changes in equity, cash

flow statement and notes accompanying the financial statements.

8.2.1 Statement of Changes in Equity

The income statement disclosed the changes to net asset that arise through operations. Income

increases net assets and expenses reduce net assets. There are some changes to assets which

are gain but are not disclosed in the income statement but required by specific standards to

be shown in the statement of changes in equity. Examples of such gains are surplus on

revaluation of property, plant and equipment, certain foreign exchange differences and

changes in values of certain financial instrument.

Another major item to be disclosed in this statement is retrospective adjustments to retained

earnings for material errors and changes in accounting policies. Other non-operating


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transactions such as the issue of shares which increase the net assets and dividends paid that

reduce net asset are disclosed here too.

The following items are to be presented on the face of the statement of changes in equity.

a. net profit or loss for the period

b. Items of income, gain, expense or loss that are directly recognised in the reserves in

compliance with other accounting standards

c. the total profit attributable to the equity holders and minority interest

d. the effect of changes in accounting policies and corrections of errors

Following are items that can be presented on the face of the statement of changes inequity or

in the notes:

i. capital transactions with equity holders and showing separately distribution to

equity owners

ii. opening and closing balance of retained profit at the end of the period and the

changes for the period, and

iv. opening and closing balance of each class of equity capital, share premium

and each reserve and separately disclosing the changes during the periods.

8.2 Financial Reporting Standard 132 : Financial Instruments: Disclosure and

Presentation

The objective of FRS 132 financial instruments: Disclosure and Presentation is to

enhance financial statement users understanding of the significance of on-balance-sheet

and off-balance sheet financial instruments to an enterprises financial position,

performance and cash flows.

8.2.1 Financial Instrument

An equity instrument is any contract that evidences a residual interest in the assets of

an enterprise after deducting all of its liabilities. Examples of equity instrument are

ordinary share, preference shares, share options and warrants.


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8.2.2 Presentation of liabilities and equity

The issuer of a financial instrument shall classify the instrument, or its component parts, on

initial recognition as a financial liability, a financial asset or an equity instrument in

accordance with the substance of the contractual arrangement and the definitions of a

financial liability, a financial asset and an equity instrument.

For instance, preference share that are redeemable for a fixed amount at a fixed future date

is a financial liability and not an equity. A financial instrument that gives the holder the right

to return to the issuer for cash or another financial asset ( a puttable instrument) is a

financial liability.

FRS state that the financial instrument is an equity instrument if, and only if, both

conditions

( a) and (b) below are met,

(a) The instrument included no contractual obligation:

i to deliver cash or another financial asset to another enterprise ;or

ii. to exchange financial assets or financial liabilities with another entity under conditions

that are potentially unfavourable to the issue.

(b) If the instrument will or may be settled in the issuers own equity instruments, it is:

i. a non- derivative that includes no contractual obligation for the issuer to deliver a

variable number of its own equity instruments; or

ii. a derivative that will be settled only by the issuer exchanging a fixed amount of

cash or another financial asset for a fixed number of its own equity instruments.

For this purpose the issuers own equity instrument do not include instrument that

are themselves contracts for the future receipt or delivery of the issuers own

equity instrument.

In other words, if the obligations to deliver cash or other financial asset or exchange

financial instruments on potentially unfavourable terms do not exist, then the financial


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instrument is an equity instrument. Issuer do not have a contractual obligation to

distribute dividends. Hence, instruments that entitle holders to such dividend are equities.

8.2.3 Compound Financial Instrument

Compound financial instrument or hybrid instruments are classified by the issuer

according to substance of contractual arrangement and the definitions of a financial

liability and equity instrument Their components are classified separately as financial

liabilities, financial assets or equity instruments.

For example, a bond that grants an option to the holder to convert it into a fixed number

of ordinary shares is a compound instrument and it comprises two components,

a. a financial liability( a contractual agreement to deliver cash or other financial asset);

and

b. an equity instrument ( an option to convert into ordinary shares)

8.2.4 Treasury share

The cost of an entitys own equity instruments that it has reacquired is deducted from

equity. Gain or loss is not recognised on the purchase, sale, issue, or cancellation of

treasury shares.

8.2.5. Interest, dividends, gains and losses

Distributions (such as dividends) to holders of a financial instrument classified as equity

should be charged directly against equity, not earnings.

Report on Equity

Documents

Transcript of Report on Equity