Equity Components in Spanish Joint-Stock Companies (SA)

Posted on Nov 4, 2024 in Economy

About Equity Components in SA

General Considerations:

In certain situations, the following may occur: Financial Patrimony (FP) > Net Patrimony (PN)
Redeemable shares can be part of the PN under specific circumstances.
When negative results from calls exceed the amount provided as FP.

Relating to Net Patrimony (PN):

Represents the residual ownership of the company’s assets.
The amount is determined by the difference between Assets (A) and Liabilities (P).
It can also be determined by adding the amount of FP to other net worth items.
There are differences between accounting PN and PN computed for distribution purposes.
Dividends are part of the net income according to the relevant regulations.
Reserves generally serve to strengthen the company’s financial situation.
It is the sum of equity, value adjustments, and non-repayable subsidies, donations, and bequests.
Expenses related to incorporation and capital increases are directly charged to PN without going through the Profit & Loss (P&L) account.
Adjustments for changes in value can be either debit or credit.

Specific Considerations for Limited Liability Companies (SRL):

Penalties must be paid before registration in the Mercantile Registry (RM).
FP is composed of adjustments for changes in value, grants, and donations.
It represents the company’s assets after deducting all liabilities.

About PN Components in SA According to the Capital Companies Act (Ley de Sociedades de Capital):

Redeemable shares can be part of the PN under specific circumstances.
The amount of share capital not required is considered a negative component of PN.
Adjustments for changes in value with an outstanding debit balance imply losses, while a credit balance implies profits.
Losses from previous years can be offset by profits of the current year or with capital.
The profit/loss of the fiscal year is a component of PN until it is distributed.

Accounting Treatment of PN

PN represented by primary financial instruments is recognized only if the company has received contributions or commitments.
Financial instruments representing PN can never result in income or expenses.

Regarding Equity (FP)

Financial instruments related to equity are always considered FP.

Accounting Treatment of FP

Expenses related to company formation are not recognized as income/expenses but as a reduction in equity.
Primary financial instruments are recognized as FP only if the company has received contributions.
Financial results from non-operating activities are not considered equity instruments.

Comparing Equity to Debt

Both are sources of financing for the company.
FP is remunerated with dividends, while debts are paid with interest.

Regarding Own Equity Instruments

Represents the residual assets of the company after deducting all liabilities.
The economic nature of the financial instrument, rather than its legal form, determines its classification.
Shares with voting rights are considered equity instruments according to the Spanish General Accounting Plan (PGC).

Regarding Equity Instruments (from the Issuer’s Perspective)

Expenses related to withdrawn or abandoned equity instruments are recorded in the income statement.
All transactions related to equity instruments are recorded in equity as a variation of FP.
Shares are a form of self-financing.
Redeemable shares may be part of PN.
They can be primary or secondary.
They are characterized by not representing a liability, having no maturity date, and determining the company’s ownership.
Share capital is recorded upon registration in the Mercantile Registry (RM).

About Primary Financial Investment Instruments

Accrued dividends must be recognized separately.
If investments are classified as held for trading, unrealized losses are recognized as capital losses.
From the issuer’s perspective, they represent PN.
From the investor’s perspective, they represent financial investments.
The investor’s accounts are measured at historical cost or fair value.

Capital Reductions

Considerations:

Variations in the theoretical value of shares may occur.
A capital reduction in statutory cases reflects a qualitative, not quantitative, change in PN.
Depreciation of equity instruments always implies a capital reduction.
It is required when losses have decreased PN below two-thirds of the share capital, and a fiscal year has passed without PN recovery.
To offset negative results, available reserves are used before reducing capital.
When done to offset losses, the amount of retained earnings after the reduction cannot exceed 10% of the new share capital.

Capital Reduction for Dividend Distribution and Liability Coverage

Causes a reduction in:

The net consideration for dividend payments.
The net consideration for covering capital losses.
The amount of guarantees offered to unsecured creditors.

Regarding Capital According to the Law

Reflects the issued capital in registered companies.
In Joint-Stock Companies (SA), the account “Issued Capital Pending Subscription” records the nominal value and issue premium of shares, which are part of PN.

Regarding Company Capital

Shares representing the capital of an SA must be fully subscribed by partners and paid at least one-fourth of their face value.
Labor or services cannot be considered capital contributions.
It is always a positive component of FP.
In Limited Liability Companies (SRL), the capital amount must be fully paid before registration in the Mercantile Registry (RM).

Table: Accounting Entries for Various Financial Transactions

(Note: The table provided in the original HTML is complex and requires further context to be accurately interpreted and represented in HTML. It’s recommended to provide more information about the specific transactions and accounting standards being used to ensure accurate representation.)