Chapter 7.3® - Explanation of Common & Preferred Shares - Par Value & No Par Value Shares, Fundamentals of Share Equity Concepts
At least one class of shares has the right to vote, and receives the dividend in the assets if the company is liquidated or dissolved. This class of share normally is described as the ‘Common Shares’. The voting rights include the power to vote for the members of the board of directors, who administer the matters of the company. The common shares may be given additional rights in the corporation’s articles of incorporation.
The right to purchase shares on a pro rata, or proportionate, basis cab be awarded to common shareholders. This right is designed to protect the proportionate interest of each shareholder.
The common shareholders are entitled to dividends only as declared, and they are at risk if the management of the company chooses to reduce or eliminate a dividend.
The preferred shares are so designated because they confer certain preferences, or differences, over common shares. Preferred shares are not always titled ‘preferred’ and may have a variety of names. For example, Class A shares.
The most common feature of the preferred shares is a priority claim on dividends, usually at a stated rate or amount. The dividend rate on preferred shares must be specified, usually as a dollar amount per share, such as $1.20 per share. This preference does not guarantee a dividend but means that, when the board of directors does declare a dividend, preferred shareholders must get their $1.20 preferred dividend before common shareholders receive any dividends.
In exchange for the dividend preference, the preferred shareholder often sacrifices voting rights and the right to dividends beyond the stated rate or amount.
Some companies issue a class of common shares that has no voting rights or limited voting rights. This type of share is generally called restricted shares or special shares.
Samad Khan & Company has two types of common shares, variable voting and limited voting. The limited voting shares have one vote each, while the variable voting shares had in 2007, 23 votes each.
Difference Between Par Value & Non-Par Value Shares:
Par Value Shares:
The Par Value Shares have a designated dollar amount per share, as stated in the articles of incorporation and as printed on the face of the share certificates. Par value shares may be either common or preferred.
If the par value shares are sold below the par/ face value, it is called discount. Par value shares sold above the par / face value is called premium. When par value shares are issued at a premium, the par value is assigned to the share account, and any excess to the premium on share capital account, a component of contributed capital. The pat value are usually set very low, and thus a major portion of the proceeds on issuance is classified as the premium.
These types of shares do not carry a designated or assigned value per share. This allow for all consideration received on sale of the securities to be classified in the share capital account, and it avoids the need to divide the consideration into two essentially artificial components, par value and excess over par.
Fundamental of Share Equity Concepts:
The fundamental concepts that underlie the accounting and reporting of shareholders’ equity may be: