Security Premium Reserve Meaning with Example in Accounting

The term Security Premium Reserve of Shares is an key concept in the world of accounting and finance. In this article, we will understand the meaning of the Security Premium Reserve of Shares in accounting.

Understanding the Security Premium Reserve of Shares

The Security Premium Reserve of Shares is a financial term that refers to the surplus amount a company receives when it issues its shares in share market to the public at a price higher than their face or nominal value. This excess amount is known as a reserve and is recorded separately on the company’s balance sheet. The purpose of creating a Security Premium Reserve is to secure transparent accounting and financial reporting to shareholder of the company’s, as it represents the additional capital that investors are willing to pay over the nominal value of the shares issue.

Security premium is created when a company issues shares during an initial public offering (IPO) in stock market or when it raises additional capital by selling shares at a premium to their face value.

Relevance of Security Premium in Accounting

• Capital Infusion: Security premium plays a key role in a company’s ability to raise capital form investor. By issuing shares at a premium, a company may attract investors who are willing to buy share at premium for a stake in the business, the additional capital may be used for many purposes, such as funding expansion plans, repaying debts, or investing in research and development in existing company.
• Enhancing Equity: Security premium strengthen the company’s equity base, which may have a positive impact on its financial state and creditworthiness. A higher equity base can make the company more attractive to lenders and investors.
• Reflecting True Value: Security premiums provide a more accurate reflection of the market’s perception of a company’s worth. It described that investors are willing to pay more than nominal value of share due to factors like brand reputation, economy condition, growth potential, and market demand.

Formula to Calculate Issue shares at Premium

Security Premium per Share = Issue Price per share – Nominal Value Security Premium per share.

Real-life Examples of Security Premium

Let’s explore a few real-life examples to known how security premiums work in industry.

Example 1: Cuetax Inc.’s issue a IPO.

Cuetax Inc.’s a tech startup, decides to go public by issue an IPO. The company has 5 million shares with a nominal value of each share INR 10. However, due to strong demand and positive market sentiment, Cuetax Inc.’s to issue its shares at a premium of INR 20 per share.

In this scenario, the security premium per share is calculated as follows:

Security Premium per Share = Issue Price per share – Nominal Value Security Premium per share = 20 – 10 = 10

Now, if all 1 million shares are sold at this premium, Cuetax Inc.’s will generate a total security premium of INR 10 million (10 x 1,000,000 shares). This INR 10 million will be disclosed in the balance sheet in reserve and surplus head as a security premium.

Example 2: ABC Ltd.’s Additional Share Issue

ABC Ltd., an established manufacturing company, decides to raise additional capital by issuing 100,000 new shares. The nominal value of these shares is INR 50 each, but the company believes it can fetch a premium due to its strong financial performance and growth prospects. As a result, ABC Ltd. decides to issue these shares at a premium of INR 20 per share.

The calculation for the security premium generated from this additional share issue is as follows:

Security Premium per Share = Issue Price per share – Nominal Value Security Premium per share = INR 70 – INR 50 = INR 20

The total security premium generated from this issue would be INR 2 lakh (INR 20 x 100,000 shares). ABC Ltd. would record this INR 2 million as a security premium on its balance sheet.

Journal Entry for Share Issue at Premium

S.no	Particular	Dr.	Cr.
1.	Bank A/c                                                    Dr To Share Application A/c (Being application money received on shares)	XXX	XXX
2.	Share Application A/c                             Dr To Securities Premium A/c To  Equity Share Capital A/c (Being share application money transferred to Equity share capital)	XXX	XXX XXX
3.	Share Allotment A/c                               Dr To Equity Share Capital A/c (Being share allotment due)	XXX	XXX
4.	Bank A/c                                                    Dr To Share Allotment A/c (Being share allotment money received)	XXX	XXX
5.	Equity Share on Call A/c                                       Dr To Equity Share Capital A/c (Being money on share call due)	XXX	XXX
6.	Bank A/c                                                   Dr To Equity Share on Call A/c (Being share call amount received)	XXX	XXX

Provision as per Section 52 of Companies Act 2013

When a company issues shares at a premium, the corresponding amount shall be transferred to the Security Premium Account, which is stated as paid up share capital of the entity. it’s also known as free reserve which is cash realized.

Use of Security Premium

• Issuing unissued shares to company members as fully paid bonus shares.
• Writing off the company’s preliminary expenses ( expense incurred at the time of incorporation of company.
• Writing off expenses, commissions, or discounts related to the issuance of shares or debentures.
• Providing for the premium due on redeemable preference shares or debentures upon redemption.
• Acquiring the company’s own shares or other securities under section 68 of companies Act, 2013.

Conclusion

In the world of accounting and finance, security premiums stand as a significant concept with real-world implications. They not only enable companies to raise capital efficiently but also reflect market sentiment and investor confidence in investing company. Understanding how security premiums work and their proper accounting treatment is essential for financial transparency and regulatory compliance as applicable to entity.

As demonstrated by the examples provided, security premiums are not just theoretical concepts but practical tools that companies can leverage to strengthen their financial positions and support growth initiatives. Properly managed, security premiums can contribute to a company’s long-term success and competitiveness in the market. Therefore, they deserve careful attention from both financial professionals and investors alike.

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