Reconstructing the Regulation of Capital Reduction─From the Perspective of Accounting

When the company limited by shares reduces its share capital and cancels any paid-up share capital that is lost, the net value of the company on the financial statements remains the same and the shareholders do not suffer any loss. After the reduction of share capital, net value per share increased and the proportion of shareholders’ shareholding unchanged. In the future, if the company generates earnings, the earnings per share will increase and thus stimulate the stock upgrade. From the perspective of accounting, this kind of reductions will help improve the financial structure of the company. However, the company declares capital reduction to cover losses mostly brings negative abnormal returns in practice. Although the company repays any paid-up share capital in excess of the company''s wants, there are still objections. Due to the capital reduction is closely related with the accounting system, this paper analyzes the capital reduction and its influence from an accounting point of view. This paper uses the methods of recognizing investment losses according to International Financial Reporting Standards to indicate that the capital reduction does not directly make shareholders bear the losses. However, different financial situation analyses will prove that the combination of capital reduction and private placement issued at a discount will expand the interest conflict between controlling shareholders and minority shareholders. In addition, the capital reduction which repays any paid-up share capital in excess of the company''s wants may affects creditors’ rights. In view of the impact of various types of capital reduction is different, it is necessary to revise the rules. Existing capital reduction program design should consider the different types of capital reduction to difference which shall be approved by the board of directors or shareholders'' meeting, and whether it should be listed on the notice to convene the meeting of shareholders. The rules to protect the creditors’ interest should also be changed. To mitigate the negative evaluation of capital reduction, the forensic accounting system should be improved. Accounting treatment of stock issued at a discount may be associated with capital reduction, thus highlighting the issue of discount system. The short-term reforms should be changing the decision-maker of issuing new shares to the shareholders'' meeting, and regulating the amortization period. The long-term reform should be prohibiting from issuing new shares at a discount.