Share premium is the aggregate consideration for issued shares above nominal value, recorded separately under applicable company law and accounting rules.
Share premium is the aggregate amount or value of consideration for newly issued shares above their nominal value. It is recorded in a separate share premium account where the applicable company law requires one and should not be confused with a stock trading above its market issue price.
For a cash issue of one share class:
For several classes or issues:
Noncash consideration requires an appropriate value under the legal and accounting framework. Issue costs and statutory reliefs should be reconciled separately.
A UK company issues 200,000 ordinary shares with a GBP 0.50 nominal value for GBP 4 per share. Qualifying issue expenses are GBP 30,000.
| Component | Calculation | Amount |
|---|---|---|
| Gross proceeds | 200,000 x GBP 4 | GBP 800,000 |
| Nominal share capital | 200,000 x GBP 0.50 | GBP 100,000 |
| Gross share premium | GBP 800,000 - GBP 100,000 | GBP 700,000 |
| Qualifying issue expenses | Given | (GBP 30,000) |
| Net share-premium effect | GBP 700,000 - GBP 30,000 | GBP 670,000 |
This simplified example assumes the expenses qualify for write-off against the premium under the applicable rules and align with the accounting treatment. The legal-account entries and financial-statement presentation should still be reconciled.
Section 610 of the UK Companies Act 2006 requires the aggregate amount or value of premiums on issued shares to be transferred to the share premium account, subject to specified reliefs. It permits that account to be used for the expenses and commission on those shares and to pay up bonus shares allotted to members.
Subject to those provisions and reliefs, the Act applies share-capital-reduction rules as though the share premium account were paid-up share capital. It is therefore inaccurate to describe the account as universally available for dividends or any management-selected purpose. Professional advice may be needed for a distribution, reduction, reconstruction, or merger.
| Term | Meaning |
|---|---|
| Share premium | Primary issue consideration above nominal value |
| Market premium | Market price above another benchmark, such as book value |
| Acquisition premium | Purchase consideration above an unaffected market value or control benchmark |
| Redemption premium | Amount payable above a security’s nominal or carrying amount on redemption |
| APIC | U.S.-style contributed-equity account above par/stated value and for specified adjustments |
An investor buying existing shares at GBP 20 from another investor does not create share premium for the issuer. The company receives no proceeds from that secondary-market trade.
IAS 32 requires incremental transaction costs directly attributable to an equity transaction to be deducted from equity. It also requires allocation when costs relate to a compound instrument or more than one transaction.
Legal allocation to a share premium account and accounting presentation in total equity are related but not identical questions. An analyst should reconcile:
The account helps explain the gap between nominal share capital and actual contribution received on issuance. It can also affect:
It does not indicate that the premium remains in cash, that the issuer is profitable, or that the shares were fairly priced.
This material is educational and is not legal, securities, tax, accounting, corporate-secretarial, transaction, or investment advice.