What is securities premium reserve?

When a company issues shares to shareholders at a price over the face value (at a premium), that amount is termed as securities premium. This amount is transferred to what we call the securities premium reserve. The company is required to maintain a separate reserve for securities premium.

Utilization

Securities premium reserve can be used for the following reasons:

• Issue of fully paid Bonus share capital.
• To cover preliminary expenses of a company.
• For funding the buy-back of securities.

Since it is not a free reserve, it can only be used for a few specific purposes. The amount received as securities premium cannot be used to transfer dividends to shareholders

Treatment

When a company issues shares at a premium, the securities premium reserve account is credited along with share capital as an increase in capital is credited according to the modern rule of accounting.

For example,
Sonly Ltd. issues 1,000 shares of $10 face value at $15. Here, the amount of premium would be $5 (15 – 10) per share. Therefore, the journal entry would show:

Bank a/c (15 x 1,000)        Dr                                                15,000
To Share Capital (10 x 10,000)                                                             10,000
To Securities Premium Reserve a/c (5 x 10,000)                                   5,000

From the above example, we can see that the company receives $15,000, but transfers $10,000 to share capital and the excess $5,000 to securities premium reserve.
In the balance sheet, this securities premium reserve is shown under the title “Equity and Liabilities” under the head ‘‘Reserves and Surplus”.