Capital redemption reserves – purchase of own shares out of capital

One area of accounting that regularly causes much procrastination and soul searching amongst our profession was the accounting treatment of a purchase of own shares out of capital under the 1985 Companies Act.

I am not surprised to report that the 2006 Companies Act does not exactly clear this matter up. The new act includes over 20 pages of narrative on the matter.

The guidance has not changed particularly, and the accounting treatment is given in section 734. In very simple terms:

If the permissible capital payment is less than the nominal amount of the shares, the difference must be transferred to the company’s capital redemption reserve.

If the permissible capital payment is greater than the nominal value:

• (a) the amount of any capital redemption reserve, share premium account or fully paid share capital of the company, and
• (b) any amount representing unrealised profits of the company for the time being standing to the credit of any revaluation reserve maintained by the company,

may be reduced by a sum not exceeding (or by sums not in total exceeding) the amount by which the permissible capital payment exceeds the nominal amount of the shares.