INTRODUCTION – STATEMENT OF COMPREHENSIVE INCOME
In England in 1897 the House of Lords ruled in the case, Salomon V Salomon & Co. Ltd, that a company is a separate legal entity from its owners. The owners’ liability to the company is limited to the amount of money the owner has invested in the company. This compares to the sole trader, who must make good all debts incurred by the business, even if he must provide funds from his own private resources. The owners of a company may walk away if the business is unable to pay its debts i.e. the members cannot be sued in their own right for the debts of the company. The exception to this is where a company traded fraudulently; the owners may be sued in their personal capacity. The owners are known as members or shareholders.
A company which is registered at the Office of Registrar General as a limited liability company according to Law 7/2009 of 27/04/2009 Relating to Companies must have the word “limited” after its name which indicates to third parties that the liability of the owner is limited to the amount invested. A company may be limited by shares or by guarantee. For the most part, companies are limited by shares.
Dividends represent the return given to the shareholders/owners for investing money in the company. There are two major categories of shares – preference shares and ordinary shares. The preference shareholder is entitled to a dividend before the ordinary shareholder can receive anything. The directors of the company decide on the dividend to be paid to the ordinary shareholder, based on their assessment of the requirement of the company to hold on to its reserves for working capital purposes and for future expansion. Should the directors decide that no dividend is payable to the ordinary shareholder, the shareholder is powerless to alter this decision.
The dividend to ordinary shareholders is expressed as Rwandan franc per share i.e. RWF.07 per share. The company may pay the dividend twice yearly – the interim dividend and the final dividend. When the interim dividend is paid, the necessary journal is:
DR Dividends paid account (Retained Earnings)
The rule is that a company that has no profits including retained profits cannot pay a dividend.
TRANSFER TO RESERVE
As said earlier, the directors decide the level of profits which must be retained for future growth. The profits are transferred to reserves, by completing the following entry:
DR Statement of Comprehensive Income
CR Reserves in Statement of Financial Position
STATEMENT OF FINANCIAL POSITION
SEE CHAPTER 9 IAS 1 FOR DETAILS ON THE LAYOUT OF STATEMENT OF FINANCIAL POSITION.
The total amount of share capital the company can issue is governed by the companys’ own Memorandum and Articles of Association. This is known as the authorised share capital of the company. The Memorandum and Articles also state the minimum amount for which the shares can be issued. This figure is normally shown, by way of example, as follows:
Authorised share capital – 100,000 shares of RWF1 each
Note: Not all the authorised shares are issued and the value shown is the nominal share price or par value.
When the company issues some of the shares, it must issue them at the par value or above. Where the shares are issued at par value, the double entry is:
CR Share Capital
When the company issues the shares above the minimum price, the journal entry is:
DR Bank (Total received)
CR Share Capital (with the par value)
CR Share Premium (with the difference between the par value and the issued price)
The share premium account is a capital reserve in the company. It cannot, be distributed to the members by way of dividend.
The share premium account must be disclosed as part of the shareholders’ funds in the Statement of Financial Position. This is achieved by:
- Including the share premium account with the Capital Reserves in the Statement of Financial Position and showing by way of note, the make-up of the figure for Capital Reserves (including share premium), or,
- Showing the share premium account in the Statement of Financial Position separately from Share Capital and Capital Reserves
CORPORATION TAX / INCOME TAX EXPENSE
The tax levied on a company is generally referred to as Corporation Tax (or Income Tax Expense as referred to in International Accounting Standards). The accounting entries for this are as follows:
DR Tax Charge – Statement of Comprehensive Income
CR Corporation Tax / Income Tax (Accruals) – Statement of Financial Position
ISSUE OF SHARES
When a company issues shares, it may issue them in a number of different ways such as rights issue, par value, at a premium and a bonus issue.
If a company issues ordinary shares for cash, it must first offer them to its existing ordinary shareholders in proportion to their shareholdings.
Shares issued at the same value to the value stated in the memorandum and articles of association i.e. authorised share capital RWF50,000 RWF1 shares – shares issued for RWF1 each.
At a Premium
Shares issued at a value above the par value – this premium is recorded in the share premium account, e.g. issue of 10,000 RWF1 shares at RWF1.50, the premium of RWF5000 is recorded in the Share Premium Account.
In issuing shares, a company may capitalise available reserves in paying up the shares wholly or in part. The effect is to convert the reserves into permanent capital. The members pay for their additional shares by foregoing whatever right they had to the reserves. A bonus issue is usually made at 1 share for every x owned as per the register
Issue and Forfeiture of Shares
The recording of an issue and forfeiture of shares is best explained by way of example.
A company is required to state the objects for which it has been incorporated in its memorandum of association. The company in the course of its business then pursues these objects. If the company pursues any object which is not in accordance with the provisions of the memorandum of association, it is beyond the company’s capacity and is termed ultra vires.
Some cases in English Law have been used across the world and the two below are such:
Case: Ashbury Railway Carriage and Iron Company V Riche 1875
In this case, it was held that if a company has a main or dominant object, than all other activities specified in the memorandum of association are deemed to be subordinate or ancillary to that main object.
Case: German Date Coffee Ltd. 1882
A company was formed to obtain a German patent and carry on the business associated with that patent. The company failed to obtain a German patent but obtained a Swedish patent. The company traded using only the Swedish patent, although the memorandum specifically provided that the business of the company would be conducted once the German patent had been obtained.
Held: The Company must be wound up, as it had not obtained the German patent and the main object of the company could only be conducted when the German patent had been obtained. The deciding factor in this case was that it was impossible for the company to carry on its main objective as the German patent had not been obtained and all other activities specified in the memorandum of association were subordinate or ancillary to that main object.
The modern tendency is to state in substantial detail the objects of the company. But to ensure that the object clauses are not translated in too rigid a way certain clauses are inserted. These are:
- Plenipotentiary Clause (means “catch all”)
A clause is inserted which enables the directors in their absolute discretion to decide that a particular contract be entered into by the company as such a contract would be for the benefit of the company.
- Independent Objects Clause
The company incorporates a clause, which provides that all of the objects are to be independent of each other. By doing so, the rigid application of the objects without this clause can be circumvented so the first object will not be deemed to be the main object of the company and subsequent objects treated as ancillary thereto.
Where a contract is ultra vires, the third party may be able to enforce that contract against the company by virtue of the modification of the ultra vires rule.
RETURNS, STATUTORY BOOKS, DIRECTORS’ REPORTS,
NOTICES, RESOLUTIONS AND ACCOUNTS TO BE FILED
From Law No. 7/2009 of 27/04/2009 Relating to Companies
Article 258 : Filing financial statements Every company, other than a small private company, shall ensure that, within thirty (30) days after the financial statements of the company and any group financial statements are required to be signed, copies of those statements together with a copy of the auditor’s report on those statements are filed with the Registrar General for registration.
Article 253 : Financial statement preparation The Board of Directors of every company shall ensure that, within three (3) months following the end of a financial statement the audit is made and signed by at least one representative of the company. Such an audit shall be submitted to the Registrar General.
Article 254 : Standards for financial statement preparation The financial statements of a company shall comply with international standards. Members of the Board of directors shall provide such information and explanations as are necessary for auditing process to be conducted.
Article 255 : Obligation to provide consolidated financial statement The Board of Directors of a company that has one or more subsidiaries, shall, ensure that, within six (6) months after the financial year, a consolidated balance is prepared. Such a consolidated financial statement shall be signed by at least one of the parent company’s shareholders.
Such consolidated financial statements shall not be required for the case of a subsidiary of any company incorporated in Rwanda or for a virtually wholly owned subsidiary of any company incorporated in Rwanda which has obtained the approval of the minority shareholders.
Article 259 : Providing a financial summary A small private company shall file with the Registrar General a financial summary for registration.
Article 260 : Where a company does not have financial statement
A company shall have a Statement of Financial Position date in each calendar year. A company may not have a Statement of Financial Position date in the calendar year in which it is incorporated where its first financial statement date is in the following calendar year and is not later than eighteen (18) months after the date of its formation or incorporation.
Article 269 Format of the Annual Report
Every annual report for a company shall be in writing and be dated and shall:
- describe, so far as the Board believes is material for the shareholders to have an
appreciation of the state of the company‟s affairs and is not harmful to the business of the company or of any of its subsidiaries, especially any change during the accounting period in:
- the nature of the business of the company or any of its subsidiaries;
- the classes of business in which the company has an interest, whether as a shareholder of another company or otherwise;
include financial statements for the accounting period and any group financial statements for the accounting period completed and signed in accordance with this Law;
- where an auditor’s report is required in relation to the financial statements or group financial statements, included in the report, include that auditor‟s report;
- state particulars of entries in the interests register made during the accounting period;
- state the amount which represents the total of the remuneration and benefits received by or due and receivable from the company and any related corporation by:
- executive directors of a company engaged in the full time employment of the company and its related corporations, including all bonuses and commissions received by them as employees;
- separate statement, the non-executive directors of the company;
- ]state the total amount of donations made by the company and other subsidiaries during the accounting period;
- state the names of the persons holding office as directors of the company as at the end of the accounting period and the names of any persons who ceased to hold office as directors of the company during the accounting period;
- state the amounts payable by the company to the person or firm holding office as auditor of the company as audit fees and, as a separate item, fees payable by the company for other services provided by that person or firm;
- be signed on behalf of the Board of Directors by two (2) directors of the company or, where the company has only one director, by that director;
- disclose related party transactions and full information about the nature and extent of the conflict of interest;
- Any other details which are necessary for the report to be well understood.
Any company whose subsidiary companies are located outside Rwanda shall also comply with the provisions of this article within eight (8) weeks after the dates contained therein. The above is only a summary and guide. For full details, it is recommended the student acquires a copy of the Law No. 7/2009.of 27/04/2009 Relating to Companies.
- Register of members. Gives names, addresses and amount of shares held by each shareholder. It enables those interested to establish the identities of the shareholders.
- Register of debenture holders. Gives names, addresses and amount of debentures held. It enables those interested to establish the identities of the debenture holders.
- Register of charges. Give details of charges on the company. It enables those interested to establish the amount of charges, what they have been secured on and the parties involved.
- Register of Directors and Secretaries. Give particulars of those concerned. Open to those interested.
- Register of Directors’ interests in shares and debentures. Gives details of shares and debentures held by directors or their close relatives.
- Minute Book – General meetings. Gives account of items discussed and resolutions passed.
- Minute Book – Directors’ meetings. Gives account of items discussed and decisions taken. It is not open for inspection.
- Record of declarations by directors of interests in company contracts. Give details of declarations by directors of personal interests in company contracts. Its purpose is to avoid ethical problems and conflict of interest claims arising from directors having a personal interest in company business.
A copy of the directors’ report must be attached to its Statement of Financial Position and laid before the members of the company at the company’s annual general meeting. The directors’ report must refer to the state of affairs of the company and any of its subsidiaries. It must also refer to the amount, if any, which is to be paid by way of a dividend together with the amount of reserves, which it is proposed to carry. It must deal with any change during the financial year in the nature of the business of the company or of any of the company’s subsidiary companies. It must give a fair review of the development of the business of the company and of its subsidiaries, if any, during the financial year. It must give particulars of any important events affecting the company or any of its subsidiaries, if any, which have occurred since the end of the financial year. It must give an indication of likely future development in the business of the company and of its subsidiaries. It must give an indication of the activities, if any, of the company and its subsidiaries, in the field of research and development. Where shares in the company have been acquired by the company by forfeiture or acquired by another person which are subject to a lien or other charge, the directors’ report must state the number and nominal value of shares acquired, the maximum number and nominal value of shares held at any time during the year, the number and nominal value of shares disposed of during the year, the value or consideration of that disposal, the number and nominal value of shares as a percentage of the called-up share capital of the company and the amount of the charge (if relevant). The directors’ report must also distinguish between subsidiaries and associated companies. Two directors on behalf of the board must sign the directors’ report.
- Directors’ meetings – no provision for a specified period of notice to be given.
- Annual meetings – minimum period of notice is not stated in the Law, but annual reports must be sent to shareholders 15 days before the Annual Meeting (Article 268).
- The following persons are entitled to receive notice of Annual and Special meetings:- (a) Every member of the company
- Personal representatives or the official assignee in bankruptcy if the member they represent would have been entitled to receive such notice
- Auditors of the company
- If any of the rules relating to the giving of notice are breached in accordance with either the provisions of the laws relating to Companies or the articles of association of the company, it is possible for a shareholder to bring proceedings to have the meeting and the resolutions passed at that meeting rendered invalid.
- Directors’ meetings – all questions arising may be decided by a majority of votes.
- Annual Meeting – two types of resolutions may be passed i.e. ordinary resolution or special resolution. An ordinary resolution is a resolution which requires a simple majority of the number of votes cast Ordinary resolutions
- Rights and obligations of shareholders – changes by Board of Directors (BoD) to confirmed
- Divide, subdivide or consolidate shares
- Appointment of directors (unless provided otherwise by the memorandum of association
- Removal from office of a director
- A director of a private limited company may be removed from office by special resolution passed at a meeting called for that purpose.
- Approval of the directors’ remuneration,
- The rescinding of decisions made by the BoD regarding remunerarion of directors or compensation for loss of office. Shareholders with at least 10% of the shares can call the meeting to which the motion is put. An ordinary resolution will decide.
- Per Article 238 – the appointment of an inspector to investigate the company’s affairs
Article 142 : Powers exercised by special resolution
The shareholders exercise a power to :
- adopt articles of association , if it has , to alter or to revoke them ;
- approve a major transaction – see Article 189 of Law 7/2009;
- approve an amalgamation of the company;
- put the company into liquidation;
Such power shall be exercised by special resolution. A special resolution shall only be rescinded by a special resolution.
Accounts to be Filed
Accounts must be prepared for two purposes – for shareholders and for publication.
Definitions of Criteria:
Turnover – Income from sale of goods and services, net of trade discounts, VAT and other sales taxes.
Statement of Financial Position Totals – Fixed assets and current assets
Employees – Total number of employees employed each week in the year divided by the number of weeks in the year.
DISCLOSURE REQUIREMENTS FOR EMPLOYEES
- Average number of staff under contracts of service and the aggregate amount respectively of wages and salaries, social welfare costs and other pension costs.
- The average number of staff sub-divided into categories selected by the directors having regard to the manner in which the company’s activities are organised.
DISCLOSURE REQUIREMENTS FOR DIRECTORS’ EMOLUMENTS
The amount of
- Emoluments (including fees, percentages, taxed allowances, pension contributions and estimated money value of taxed benefits-in-kind).
- Directors’ and past directors’ pensions, except from a Pension scheme.
- Particulars of commitments relating wholly or firstly to pensions payable to past directors.
- Compensation to directors or past directors for loss of office.