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Capital Reconstruction Essay

2244 words - 9 pages

Capital Reconstruction

1.1 Definition

Generally, reconstruction can be defined as the process of re-build after the thing being damaged or destroyed.

In accounting, reconstruction of capital, which also known as capital reconstruction can be defined as the plans made by a company for the restructuring of its capital base. Capital reconstruction involves major alterations in the capital base of a company. It is related to the term capital restructuring. In other word, when a company suffered losses for a several years and showed losses in the statements of financial position, company may go for reconstructing.When a company's balance sheet shows huge accumulated losses, heavy ...view middle of the document...

Roughly the external and internal reconstruction need to be done if there is a financial difficulties. Company can choose either reconstruct internally or externally. Both have an advantages and disadvantages.

1.3.1Internal Reconstruction

Internal reconstruction is when the financial structure of a company is reorganized the company without forming a new company and liquidating existing in the company (Verma, 2009). It is an arrangement made by companies whereby the claims of share holders, debenture holder, creditors and other liabilities are reduced or altered, so that the accumulated losses are written off, assets are valued at its fair value and the balance sheet shows the true and fair view of the financial position. Internal may refer to environment inside the company. Thus, the following can be included into internal reconstruction (Verma, 2009):
a. Alteration of shared capital
b. Reduction of shared capital

a. Alteration of shared capital
According to Section 62 of the Malaysian Companies Acts 1965, internal reconstruction is there if shared capital is altered. It is possible when:
a. Increase in shared capital by creation of new shares. A company can increase the
shared capital by issuing shares. However this should be done within Registered
Capital by involving the clause in the Memorandum relating to the authorised capital.
b. Consolidating and dividing all the shares in large amount. A company can
consolidate and divide all or any specified shared of smaller amount into shares of
higher denomination.
c. Converting fully paid share into stock or converting the stock into paid-up
shares.A company can convert all or any part of its fully paid-up shares into stock or reconvert that stock into fully paid shares.
d. Subdividing its shares into small amount. A company can sub-divide its shares of higher denomination into shares of smaller denomination subject to the condition that in case of partly paid-up shares, the proportion between the paid-up and the unpaid amount on the shares continue to be the same after sub-division as before.
e. Canceling the share which have not been taken. Such a cancelation does not amount to reduction of share capital.

b. Reduction of shared capital
Capital reduction is a process of decreasing a company's shareholder equity through share cancellations and share repurchases. The reduction of capital is done by companies for numerous reasons including increasing shareholder value and producing a more efficient capital structure.
In other words, reduction of capital is a capital re-organisation that has the effect of allowing the return to shareholders of capital would otherwise not be distributable. A reduction of capital is used to increase distributable reserves to make dividend payments possible, or to make a large return of capital more efficient.

There are a number of possible mechanisms, including: a. Share buy back, b. the conversion of share capital and...

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