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The End of Par Value

October 24, 2018
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The End of Par Value

By Nithea Nadarajah

Wider scope, more punishing sanctions.

Ushering in sweeping reforms, the Companies Act 2016 (CA2016) consists of 620 sections and 13 schedules and was introduced in stages beginning from 31 January 2017. In addition to vesting additional duties and responsibilities on directors and officers of the company, the CA2016 imposes substantially more severe punishments for breach of law, said moderator Simon Tay Pit Eu, Executive Director, Professional Practices & Technical, MIA, at the recent MIA MPERS Conference 2018. For example, a breach under Section 591 of the CA2016 which covers false or misleading statements, is punishable (upon conviction), by a fine not exceeding RM3 million or imprisonment for a term not exceeding 10 years, or both.

While directors and company officers face more responsibilities, the reporting burden on auditors has been lightened. “To a certain extent, the CA2016 is a relief,” remarked Siew Kar Wai, Partner, PricewaterhouseCoopers Risk Services Sdn Bhd. Previously, under the CA 1965, auditors were required to provide “a fair bit” of extra reporting which are no longer necessary under the new legislation, although their duty of care remains unchanged.

Moreover, the CA2016 mandates full compliance to the applicable approved accounting standards issued by the Malaysian Accounting Standards Board (MASB). This supports full convergence of local and international accounting practices into a single source of reference with the force of law.

During the session, the panellists highlighted key areas impacting financial statements under the CA 2016.

End of the Par value Regime

The par value regime, viewed as a misleading practice riddled with complications, was abolished retrospectively along with its related concepts such as the share premium account, the capital redemption reserve and the authorised share capital which will no longer be relevant. Instead the amounts standing in the share premium account and the capital redemption reserves will be recognised as part of the company’s share capital.

Tham Hon Sin, Technical Director, Technical & Training Department, Crowe Malaysia, observed that there could be issues when redeeming preference shares. “How are you going to calculate the amount of preference shares that will be redeemed as well as to set aside the reserve with the abolishment of share premium accounts? The transitional period of 24 months granted to companies to utilise the amount standing in credit in the share premium account and capital redemption reserve may be insufficient, especially relating to large corporations with huge amounts of reserves where extensive planning is needed to analyse the financial implications upon redemption.”

In relation to the issuance of bonus shares, Tham pointed out that there is no specific requirement in the CA2016 except for a provision under Section 84 which merely allows a company to subdivide its shares. For example, if a company were to issue bonus shares to its shareholders, no double entry is required and the value of the share capital reflected in the financial statement remains unchanged. The company’s officers would need to put through a memorandum of entry to record the bonus issue exercise as well as to disclose the increased number of shares in circulation.

Dividend Distribution and Solvency Test

The CA2016 pays close attention to dividends and solvency as part of good business governance. Pursuant to Section 131 of the CA2016, dividend is to be paid out of a company’s profits and should not be paid if the payment will lead to the company’s insolvency. A company is regarded as solvent if it is able to pay its debts (as and when the debts become due) within 12 months from the date of dividend distribution. “This requirement is necessary as it imposes a duty on directors to act in the interest of not only the company’s shareholders but that of its creditors as well,” said Norhisham Abd Bahrin, Partner, Corporate and Mergers & Acquisitions, Azmi & Associates.

Under the CA2016, directors are fully authorised to declare and distribute dividends with no requirement to pass a shareholders’ resolution. Moreover, should the dividends distributed exceed the amount deemed appropriate, this excess can be recovered from the shareholders, unless the shareholders have received the distribution in good faith and have no knowledge that the company did not satisfy the solvency test. The company’s director or manager who will fully phase out any dividend  in contravention of Section 131 or 132 of the CA2016 will also be liable to the company to the extend of the amount exceeding the value of any distribution of dividend that could properly have been made.  Furthermore, any director or officer found guilty of improper or unlawful distribution, will be liable to imprisonment for a term not exceeding five years, or a fine not exceeding RM3 million, or both.

Tham cautioned that “even after dividend declarations are made, directors are advised to exercise good corporate governance and to closely monitor their company’s financial health. Should there be even a whiff of insolvency issues, a swift decision must be taken to disallow the distribution.”

A solvency test is not a gauge of a company’s profitability but that of its liquidity and its ability to pay debts as they become due, said Siew. “Cash flow projections for a period of 12 months (beginning from the dividend distribution date), will be used to determine a company’s solvency status.”

Siew noted that the word ‘debt’ is not defined in the CA2016 which raises the question of “whether certain non-financial liabilities (such as provisions) and off-balance sheet items (such as possible contingent liabilities) should be included in the solvency test.” For example, if possible non-contingent liabilities are included in the cash flow projections, how would one determine their monetary value?

Directors and managers of companies are thus advised to scrutinise these issues to ensure that when dividends are paid, the company remains solvent.

Disclosures in Financial Statements

The CA2016 enhances accountability and transparency by requiring the appropriate disclosure of directors’ remuneration and/or compensation for loss of office as well as loans provided to directors. Remuneration and/or compensation (if any) paid to auditors will also be accorded the similar treatment, explained Siew.

“Although there are lesser disclosure requirements under the CA2016, there would not be a reduction of information provided in the financial statements as companies would now be legally complied to adhere to the applicable approved accounting standards issued by the MASB which has been given due weight by the CA2016,” explained Tham.

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