CIMA BA3 Syllabus B. RECORDING ACCOUNTING TRANSACTIONS - Bonus (capitalisation) issue - Notes ^{12 / 18}

A company may wish to increase its share capital without needing to raise additional finance.

A bonus issue raises no funds.

A company can make a bonus issue to re-classify some of its reserves as share capital.

Any reserve may be re-classified in this way, including a share premium account or other reserve.

Therefore, these reserves will be debited and share capital credited.

Such a re-classification increases the capital base of the company and gives greater protection to the company’s creditors.

Advantage

• Increases share capital without reducing present shareholders' holdings

• Capitalises reserves, therefore less is available for distribution as dividends

Disadvantages

• Does not increases cash

• If profits fall, the payment of dividends could be jeopardised