INTM579030 - Thin capitalisation: debt: equity ratio
What is equity?
For the purposes of this module we use the terms
‘equity’ and ‘shareholders’ funds’ as
interchangeable.
As with the consideration of debt in
INTM579020, it is useful to look at
the prescription of Schedule 4 of the Companies Act 1985 on the
balance sheet format when looking at what constitutes equity. The
following may be found under the heading of ‘Capital and
reserves’.
| Capital & reserves accounts item | Comment |
| Called-up share capital | Included as equity. |
| Share premium account | Included as equity. |
| Revaluation reserve | This is part of what is normally known as ‘shareholders’ funds’. However, a third-party lender would want to be satisfied that the revaluation was realistic, and would want evidence of that. For example, a recent valuation of company property by a qualified, independent valuer would suffice. Unless there is reason to believe otherwise, audited accounts in which revaluations occur can be accepted. However, if the revaluation amount is below the minimum level considered by auditors but it has a significant bearing on a thin capitalisation position, it should be reviewed. |
| Capital redemption reserve | Included as equity. |
| Other reserves | See ‘revaluation reserve’ above. |
| Profit & Loss Account | Included in equity. |
See also ‘capital contributions’ in
INTM503050 and ‘interest-free
loans’ in
INTM579020.
