A client has 250,000 preference shares issued and proposes to buy these back (rather than redeeming them) at 50p per £1 share, which is the value place on the shares following deaths that have occurred. No dividend has ever been paid on the shares.
At present the £250,000 is shown as a liability under long term liabilities. Once the shares have been purchased there will be a surplus on cancellation of £125,000 which will form part of the retained profits.
Under the Companies Act 1985 IF the shares had been redeemed, £250,000 needs to be transfered to the Capital Redemption Reserve. This reserve would appear to be shareholder funds and not creditors. Since this is a purchase and cancellation of shares is it still necessary to create a reserve. Should this be for £250,000 or £125,000 the amount paid.
Any comments gratefully received
John Stuckey