facts - preference share holder gave up thier right on preference share at NIL value. Company did not reserve so it created CRR using by reducing pref share capital nd creating CRR .Securities premium on preference shares still lying in books
query - 1.what will be effect of securities premium nd CRR created
2. does this transaction amount to redemption of preference shares
Actually, creating a Reserves from retained earnings or capital reserves is a company policy. Personally, I don’t see why a CRR is created for 50% as per companies act. Anyways, it is just for recording and to show it as a security deposit to external stakeholders purpose in case of defaults. While issuing at premium, securities premium account is credited. Contrastingly, during redemption it is debited. Similarly, while creating a reserve, it is credited, and when it is used up, it is debited as its value decrease. I have few examples which will demistify accounting treatments for CRR/DRR and securities premium at the time of redemption.
In my opinion, a redemption reserve should be created for 100% so that it will reduce the complexities of journalising. Well, what difference would it make when a company is required to create a reserve for 50% of redemption amount by law, another 50% is easy to show for some. Somehow, the CRR will be reversed back to general reserve upon redemption.
CAclubindia
