1 Share capital

– Chapter 23
– Methods used by a business to raise funds
– Internal sources – Profits / retained earnings
– External sources – Loans / debentures (Debt instruments)
– Owners - Share issue – 2 classes  Ordinary & Preference Shares
– Definitions:
– Share
– Equity/debt instrument to the entity
– Financial asset to the shareholder
– Equity instrument
– Contract that results in a residual interest in assets, after deducting its liabilities
2 Ordinary and Preference Dividends

– Preference shares
– Receive fixed preference dividend annually based on coupon (interest / dividend) rate
– Shareholders given preference in the case of liquidation
– No. of shares x R value x Coupon Rate
– Ordinary Shares
– Receipt of dividends dependent on profitability and cash flow of company
– No of Shares x DPS (Dividend Per Share)
3 Preference Shares

– Preference shares - types

– Cumulative and non-Cumulative  STATUS OF DIVIDENDS
– Non-Cumulative / Discretionary  no obligation by entity to pay dividends
– Cumulative / Non-discretionary  company creates a present obligation on date of issue =
all future preference dividends
– Dividends MUST be paid thus if company unable to pay dividends in any 1 year – amount will accrue
to shareholders until paid and no ordinary dividends paid until all cumulative preference dividends
paid
– Preferences share under these conditions are liabilities Dividends recognised as Finance Costs
(SOCI – P/L)
4 Preference Shares

– Redeemable and non-redeemable

– Redeemable preference shares  company will pay an amount to shareholder at a specific date
 future outflow thus liability BUT still legally considered to be shares  substance over form
– Redemption at option of company  Equity

– Redemption compulsory or
– At option of shareholder  Liability

– Non-redeemable
– No present obligation  Equity
5 Redeemable & Non-redeemable Preference
Shares

– Redeeming a preference share = returning the capital to the preference

shareholder
6 Example 2

– Glow Limited issued on 1 Jan 20X1:

– 50 000 10% non-redeemable, non-cumulative preference shares of R2 each
– 100 000 ordinary shares at R3.50 each
– Authorised: Half of authorised ordinary and preference shares have been issued  100k preference, 200k
ordinary shares
– Other information: All pref dividends were declared and paid before year end with the exception of 20X6,
when the preference dividend was declared but not paid

– Required: Prepare all journal entries from date of issue of preference shares to 31 Dec X6
– Disclose ordinary & preference shares in financial statements for the year ended 31 Dec X3
– No comparatives for SOCIE
– Part C not applicable to ACCT212
7 Solution 2

– Journals

– 1/1/20X1
DR Bank (SOFP) 100 000
CR Preference share capital (SOCIE) 100 000
Issue of 50 000 10% NRPS of R2 each.
8 Solution 2

– Journals

– 31/12/20X1 – 31/12/20X6
DR Preference Dividend (SOCIE) 10 000
CR Shareholders for dividend (SOFP) 10 000
Preference Dividends: 50 000 x R2 x 10% *

– *this journal would be repeated on 31/12/X2, 31/12/X3, 31/12/X4, 31/12/X5 &

31/12/X6
9 Solution 2

– Journals

– 31/12/20X1 – 31/12/20X5
DR Shareholders for dividend (SOFP) 10 000
CR Bank (SOFP) 10 000
Payment of Preference Dividends *

– *this journal would be repeated on 31/12/X2, 31/12/X3, 31/12/X4, 31/12/X5; NOT

31/12/X6 since the dividends were not paid in 20X6  presented as a current liability
 Glow Limited
10 Extracts from Statement of Financial Position as at 31 Dec 20X3

Not 20X3 20X2 20X1

e
Equity & Liabilities
Share Capital & Reserves

- Ordinary Share Capital 3 350 000 350 000 350 000

- Preference Share Capital 4 100 000 100 000 100 000
Current Liabilities
- Preference shareholders 10 000 0 0
for dividends
 Glow Limited
11 Extracts from Statement of Changes in Equity for the year ended 31
Dec 20X3

Ordinary Preference Retained Total

Share Share Capital Earnings
Capital
Opening Balance 350 000 100 000 xxx xxx
Ordinary Dividends (xxx) (xxx)
declared
Preference Dividends (10 000) (10 000)
declared
Total Comprehensive xxx xxx
Income
Closing Balance 350 000 100 000 xxx xxx
 Glow Limited
12 Extracts from the Notes to the financial statements for the year ended
31 Dec 20X3

3. Ordinary Share Capital 20X3 20X2 20X1

Number Number Number
Authorised:
Ordinary Shares of no par 200 000 200 000 200 000
value
Issued:
Shares in issue: O/B 100 000 100 000 0
Issued during the year 0 0 100 000
Shares in issue: C/B 100 000 100 000 100 000
 Glow Limited
13 Extracts from the Notes to the financial statements for the year ended
31 Dec 20X3

4. Preference Share Capital 20X3 20X2 20X1

Number Number Number
Authorised:
10% non-redeemable non- 100 000 100 000 100 000
cumulative preference shares of
no par value
Issued:
Shares in issue: O/B 50 000 50 000 0
Issued during the year 0 0 50 000
Shares in issue: C/B 50 000 50 000 50 000
14 Example 3

– Issued on 1 Jan 20X1:

– 50 000 10% redeemable preference shares of R2 each (FV)
– 100 000 ordinary shares at R3.50 each
– There are a total of 120 000 authorised ordinary shares.
– Payment of preference dividends is mandatory and payable on 31
Dec each year at the 10% coupon rate applied to deemed value of
R2 per share.
– Half of the authorised pref shares have been issued
– The preference shares must be redeemed on 31 Dec 20X3 at a
premium of R0.20 per share
– The effective rate of interest is 12,93699016%
15 Example 3

– Retained Earnings on 1 Jan 20X2 was R150 000

– Total Comprehensive Income (after previous information) was
R80 000 in 20X2
– Ordinary dividend of R10 000 declared in 20X2

– Required:
– All journal entries for 20X1
– Disclose ordinary & preference shares in financial statements for the year
ended 31 Dec 20X5. No comparatives for SOCIE.
16 Solution 3: Effective interest rate
table
Interest Payments Liability bal
DR/(CR) DR/(CR) DR/(CR)
1/1/20X1 (100 000)
31/12/20X1 12 937 (10 000) (102 937)
31/12/20X2 13 317 (10 000) (106 254)
31/12/20X3 13 746 (10 000) (110 000)
(110 000) 110 000
40 000 (140 000) 0
17 Solution 3: Journal Entries

– Journals 1/1/20X1
DR Bank (SOFP) 100 000
CR Preference share liability (SOFP) 100 000
Issue of 50 000 10% RPS of R2 each.
31/12/20X1
DR Interest Expense (P/L) 12 937
CR Preference share liability (SOFP) 12 937
Interest on preference shares.
DR Preference share liability (SOFP) 10 000
CR Bank (SOFP) 10 000
Preference share dividend paid.
18 Solution 3: Journal Entries
31/12/20X2
DR Interest Expense (P/L) 13 317
CR Preference share liability (SOFP) 13 317
Interest on preference shares.
DR Preference share liability (SOFP) 10 000
CR Bank (SOFP) 10 000
Preference share dividend paid.
31/12/20X3
DR Interest Expense (P/L) 13 746
CR Preference share liability (SOFP) 13 746
Interest on preference shares.
DR Preference share liability (SOFP) 10 000
CR Bank (SOFP) 10 000
Preference share dividend paid.
DR Preference share liability (SOFP) 110 000
CR Bank (SOFP) 110 000
 Statement of Profit or Loss and Other
19 Comprehensive Income of…for the year
ended 31/12/X2 (extracts)

Note 20X2 20X1

Profit before Finance Charges xxx Xxx
Finance Charges (13 317) (12 937)
Profit before tax xxx xxx
Tax xxx xxx
Profit for the year xxx xxx
Other Comprehensive Income xxx xxx
Total Comprehensive Income 80 000 xxx
 Statement of Changes in Equity of…for
20 the year ended 31 December 20X2
(extracts)

Ord Stated RE Total

Capital
Opening Balance 350 000 150 000 500 000
Ordinary Dividends (10 000) (10 000)
declared
TCI 80 000 80 000
Closing Balance 350 000 220 000 570 000
 Statement of Financial Position of…as
21 at 31 December 20X2 (Extracts)

Note 20X2 20X1

Equity & Liabilities
Issued Share Capital & Reserves 570 000 500 000

- Ordinary Share Capital 3 350 000 350 000

- Retained Earnings 220 000 150 000
Non-current Liabilities
- Redeemable Preference shares 4 0 102 937
Current Liabilities
- Redeemable Preference shares 4 106 254 0
 Notes to Financial Statements
22
of…for the year ended 31
December 20X2 (extracts)
Accounting policies
2.8 Preference Shares
Redeemable Preference shares that are mandatorily redeemable on a
specific date or at the option of shareholder are recognised as
liabilities, because, in substance, they are borrowings. The dividends
on these preference shares are mandatory and thus the mandatory
dividend steam is also recognized as a liability. This means these
dividends are included in profit or loss as part of the interest expense
that is recognized when unwinding both these liabilities using the
effective interest rate method.
 Notes to Financial Statements
23
of…for the year ended 31
December 20X2 (extracts)
3. Ordinary Share Capital 20X2 20X1
Number Number
Authorised:
Ordinary Shares of no par value 120 000 120 000
Issued:
Shares in issue: O/B 100 000 100 000
Issued during the year 0 0
Shares in issue: C/B 100 000 100 000
 Notes to Financial Statements
24
of…for the year ended 31
December 20X2 (extracts)
4. Redeemable Preference Share Liability 20X2 20X1
Number Number
Authorised:
10% Redeemable Preference Shares 100 000 100 000
Issued:
Shares in issue: O/B 50 000 0
Issued during the year 0 50 000
Shares in issue: C/B 50 000 50 000

The redeemable preference shares of no par value are compulsorily redeemable

on 31/12/X2 at a premium of R0.20 per share. The 10% preference dividends are
cumulative and mandatory and calculated on a deemed value of R2 per share.
The effective interest is 12,93699016%
25 Preference Shares

– Participating and non-participating  STATUS OF PROFITS

– Non-participating preference shares – shareholder does not participate in profits  limited
to fixed annual dividend based on coupon rate
– Participating Preference shares  shareholders receive = fixed annual dividend + fluctuating
dividend (based on profits)
26 Example 4

– A company has 1 000 12% non-cumulative, non-redeemable preference shares in issue

(all at R2 each).
– The payment of the 12% preference dividends is entirely discretionary.
– These preference shares participate to the extent of 1/5 of the ordinary dividend per
share.
– The ordinary dividend declared is 10c per share. There are 1 000 ordinary shares in issue.
– The ordinary dividend and preference dividend were declared on 25 Dec 20X5.

– Required: Journalise the ordinary and preference dividends

27 Solution 4

25 Dec 20X5
DR Ordinary dividends (SOCIE) 100
CR Ordinary shareholders for dividends (SOFP) 100
Ordinary dividends declared. (1 000 x 10c)
DR Preference dividends (SOCIE) 240
CR Preference shareholders for dividends (SOFP) 240
Preference dividends declared. (1 000 x R2 x 12%)
DR Preference dividends (SOCIE) 20
CR Preference shareholders for dividends (SOFP) 20
Participating dividends owing. (1 000 x 10c x 1/5)
28 Ordinary Shares

– Old Companies Act, each class of share had a “par value” (face value) /or “no
par value”
– New Companies Act states that share may no longer have a par value
– Those shares with a par value that were issued before effective date of new act
will remain as such until converted to no par value shares
– All shares issued after the effective date of the act will be no par value shares
29 Ordinary Shares

– Old Companies Act  Share issue costs could be written off against various
Share Capital accounts
– New Companies Act 
– Share issue costs written off against the equity account; unless issue is abandoned 
P/L
– Preliminary costs (start-up costs)  P/L
30 Conversion of Shares

– From one class to another

– Ordinary shares  Preference shares
31 Example 8

– Craig Limited has 1 000 ordinary shares (issued at R1.20) in issue

– On 1 Jan 20X2, 500 of these ordinary shares were converted into 12% preference
share equity

– Required: Journalise this conversion & disclose in the Statement of Changes in Equity
for year ended 31 Dec 20X2
32 Solution 8

– 1 January 20X2

DR Ordinary share capital (SOCIE) 600

CR Preference share capital (SOCIE) 600
Conversion of ordinary shares into preference shares.
(500 shares x R1.20)
33 Statement of Changes in Equity of Craig Limited
for the year ended 31 December 20X2

Ordinary Preference Retained Total

Share Capital Share Earnings
Capital
Opening Balance 1 200 0 xxx xxx
Conversion of (600) 600 0
Ordinary shares to
Preference shares
Total xxx xxx
Comprehensive
Income
Closing Balance 600 600 xxx xxx
34 Rights Issue

– Shares are offered to existing shareholder’s in proportion to their existing

holdings
– Issued at a price lower than market price  incentive
– Example: A shareholder is offered 2 shares for every 5 held at a price of R5
when the market price is R6
35 Example 9

– A company has 1 000 ordinary shares in issue (each issued at R 2.50)

– The company wishes to offer its shareholder’s: 1 share for every 4 shares held
at an issue price of R3 each
– The current market price immediately before this issue is R4
– All shareholders accept the offer

– Required: Journalise and disclose in the Statement of Changes in Equity

36 Solution 9

– Calculations:

– No. of shares issued

– (1 000 shares / 4 x 1) 250 shares

– Proceeds received
– (250 shares x R3) R750
37 Solution 9

– Journals

DR Bank (SOFP) 750

CR Ordinary share capital (SOCIE) 750
Issue of shares to existing shareholders at R3 each (Market Price: R4)
38 Statement of Changes in Equity of…
for the year ended xxx

Ordinary Retained Total

Share Capital Earnings
Opening Balance 2 500 xxx xxx
Rights Issue 750 750
Total Comprehensive xxx xxx
Income
Closing Balance 3 250 xxx xxx
39 Share Splits

– Shares are split  more shares

– Share splits often occur as a result of the company believing that the market
price per share is too high.
– Share split results in a lower market price due to supply & demand
– Improves share marketability as a lower price may attract new investors and
increase the liquidity of it’s shares.
40 Share Splits

– Previously: 200 shares at R2 each = R400

– Share split resulting in 400 shares from 200 shares
– Share capital Rand value total remains the same.
– R400/400 shares = R1 per share
– Market price per share has been reduced from R2 per share to R1 per share.
– No journal entry (no change in share capital/cash resources)
– Only disclosure change will take place in the share capital note in terms of the
number of shares.
41 Share Consolidations

– Shares are consolidated  less shares

– Share consolidations often occur as a result of the company believing that the
market price per share is too low.
– Share consolidation results in a higher market price due to supply & demand
– Opposite of share splits
42 Share Consolidations

– Previously: 200 shares at R2 each = R400

– 200 shares consolidated into 100 shares
– Share capital Rand value total remains the same.
– R400/100 shares = R4 per share
– Market price per share has been increased from R2 per share to R4 per share.
– No journal entry (no change in share capital/cash resources)
– Only disclosure change will take place in the share capital note in terms of the
number of shares.
43 Capitalisation Issues

– Shares issued to existing shareholders for free – “fully paid up”

– Done by converting idle reserves (sitting in retained earnings) into capital
44 Example 12

– Already in issue:
– 1 000 x ordinary shares in issue (issued at R1.50)
– Capitalisation issue:
– 600 fully paid up shares to its existing shareholder’s in proportion to their existing
shareholding at the current market price of R1 each
– Retained earnings of R800 at beginning of the year and total comprehensive income
of R150 for the year

– Required: Journalise and disclose in the Statement of Changes in Equity

45 Solution 12: Capitalisation Issue

– Journals

DR Retained Earnings (SOCIE) 600

CR Ordinary share capital (SOCIE) 600
Capitalisation issue of 600 ordinary shares to existing shareholders (at
current market price of R1 each)
46 Statement of Changes in Equity of…
for the year ended xxx

Ordinary Retained Total

Share Capital Earnings
Opening Balance 1 500 800 2 300
Capitalisation Issue 600 (600) 0
Total Comprehensive 150 150
Income
Closing Balance 2 100 350 2 450
47 Financing of Redemption

– Redeemable preference shares can be liability / equity depending on the terms

of the redemption:
– Compulsory / option of shareholder = liability
– Option of the entity = equity
– Manner of payment – Bank loan / new issue of shares / debentures 
“Financing of Redemption”
– Redemption at premium (in excess of issue price) / discount
– Premium usually offset against Retained Earnings
48 Example 14

– Company is to redeem all its preference shares at original issue price of R2 each
– Doesn’t want to issue any more ordinary shares unless absolutely necessary (if
so, will be issued at R6 each)
– R 80 000 in the bank, but only want to use R30 000 for redemption
– Any more cash required = issue a maximum of 10 000 debentures at R1 each
(redeemable after 3 years at R1 each)
– If more cash still needed = loan of up to R40 000 (repayable after 4 years)
– Retained Earnings = R150 000
49 Example 14

– Required:
(i) Calculate the number of ordinary shares needed
to be issued to finance redemption and
(ii) All related journal entries
Scenarios:
A: 10 000 preference shares to be redeemed
B: 35 000 preference shares to be redeemed
C: 70 000 preference shares to be redeemed
50 Solution 14(i): The financing plan

A: 10 000 B: 35 000 C: 70 000

Cash needed 20 000 70 000 140 000
Cash available through
- Cash in bank (20 000) (30 000) (30 000)
- New debenture issue 0 (10 000) (10 000)
- New bank loan 0 (30 000) (40 000)
- New share issue 0 0 (60 000)

Shares to be issued 0 0 10 000

51 Solution 14(ii): Journal Entries
A B C
DR Preference shares (NCL) 20 70 140
CR Preference shares (CL) (20) (70) (140)
Pref shares to be redeemed.
DR Bank (SOFP) N/A 10 10
CR Debenture liability (SOFP) N/A (10) (10)
Issue of debentures.
DR Bank (SOFP) N/A 30 40
CR Loan liability (SOFP) N/A (30) (40)
Loan raised.
DR Bank (SOFP) N/A N/A 60
CR Ordinary share capital (SOCIE) N/A N/A (60)
Issue of ordinary shares.
DR Preference shares (CL) 20 70 140
CR Bank (SOFP) (20) (70) (140)
52 Redemption at a premium

– A redemption that requires a company to pay the preference shareholder an

amount in excess of its issue price is referred to as a redemption at a premium.
– Preference share is mandatorily redeemable = Liability
– Preference share is NOT mandatorily redeemable = Equity
53 Example 15

– A company is opting to redeem all of its 20 000 preference shares (issue price R2) at R3 each.
– The company will fund this out of a new share issue of 10 000 ordinary shares.
– The rest of the redemption payment must be funded by raising a bank loan.
– These preference shares were being redeemed at the option of the company and had
therefore been recognised as equity.
– Scenario (i): ordinary shares are to be issued at R4 each
– Scenario (ii): ordinary shares are to be issued at R3 each

– Required: For each scenario, calculate the cash required to finance the redemption and show
all related journal entries.
54 Solution 15

Scenario (i) Scenario (ii)

Need to redeem preference shares 60 000 60 000
(20 000 x R3)
Cash available through:
- New share issue (40 000) (30 000)
- New bank loan needed (20 000) (30 000)
55 Solution 15
Scenario (i) Scenario (ii)
DR Preference share capital (SOCIE) 40 000 40 000
DR Retained earnings (SOCIE) 20 000 20 000
CR Preference shares (CL) (60 000) (60 000)
Preference shares to be redeemed.
DR Bank (SOFP) 40 000 30 000
CR Ordinary share capital (SOCIE) (40 000) (30 000)
Issue of ordinary shares.
DR Bank (SOFP) 20 000 30 000
CR Loan (SOFP) (20 000) (30 000)
Loan raised.
DR Preference shares (CL) 60 000 60 000
CR Bank (SOFP) (60 000) (60 000)
Preference shares redeemed.
56 Example 16

– On 1 Jan 20X1 a company issued:

– 50 000 10% redeemable preference shares of R2 each
– 100 000 ordinary shares at R3.50 each
– The preference shares MUST be redeemed on 31 Dec 20X3 at a premium
of 20c per share.
– The 10% preference dividend is based on a deemed value of R2 per share.
The payment of the dividend is mandatory and is due on 31 Dec each year.
– The effective rate of interest on the preference share liability is
12,93699016%
– The authorized share capital consists of:
– 120 000 ordinary shares
– 100 000 preference shares
Example 16

– The company redeems the preference shares on due date 31 Dec 20X3. In order to finance the
redemption, it issued the remaining authorized ordinary shares on 20 Dec 20X3 at R4 each.
Further cash of R20 000 can be used from savings and thereafter a bank overdraft can be
arranged.
– Accounting policy is to set-off any premium on redemption against retained earnings (current
balance of R200 000). Retained earnings on 1 Jan 20X3 was R220 000
– The preference shares have been correctly classified as amortised cost financial liabilities.
– Total Comprehensive Income before the above information was R100 000

– Required: Prepare the journal entries and disclose in the financial statements for the year
ended 31 Dec 20X3.
58 Solution 16

– Calculation of financing plan

Cash needed for redemption 110 000

50 000 shares x R2.20
Cash available through:
- New share issue (80 000)
(120 000 shares – 100 000 shares) x R4
- Cash in bank (20 000)
- Bank overdraft (10 000)
59 Solution 16

20 Dec 20X3
DR Bank (SOFP) 80 000
CR Ordinary share capital (SOFP) 80 000
Issue of 20 000 ordinary shares at R4 each.
DR Financial Liability: Preference share (SOFP) 110 000
CR Preference shares (CL) 110 000
Redemption of preference shares due.
DR Preference shares (CL) 110 000
CR Bank: Savings (SOFP) 100 000
CR Bank: Overdraft (SOFP) 10 000
Payment to preference shareholders.
 Statement of Profit or Loss and Other
60 Comprehensive Income of…for the year
ended 31/12/X3 (extracts)

20X3 20X2 20X1

Profit before Finance Charges xxx xxx Xxx

Finance Charges (see example 3) (13 746) (13 317) (12 937)
Profit before tax xxx xxx xxx
Tax xxx xxx xxx
Profit for the year 90 378 xxx xxx
Other Comprehensive Income 0 xxx xxx
Total Comprehensive Income 90 378 xxx xxx
(R100 000 – [R13 746 x 70%])
61 Statement of Change in Equity of…
for the year ended 31 Dec 20X3
Ordinary Retained Total
Share Capital Earnings
Opening Balance 350 000 220 000 570 000
Ordinary share Issue 80 000 80 000
Total Comprehensive 90 378 90 378
Income
Closing Balance 430 000 310 378 740 378
 Statement of Financial Position of…
62 as at 31 December 20X3 (Extracts)

20X3 20X2 20X1

Equity & Liabilities
Issued Share Capital & Reserves
- Ordinary Share Capital 430 000 350 000 350 000
- Retained Earnings 310 378 220 000 xxx
Non-current Liabilities
- Redeemable Preference shares 0 0 102 937
Current Liabilities
- Redeemable Preference shares 0 106 254 0
 Notes to Financial Statements
63
of…for the year ended 31
December 20X3 (extracts)
Accounting policies
2.8 Preference Shares
Redeemable preference shares which are redeemable on a specific
date or at the option of shareholder are recognised as liabilities as
the substance is borrowings. The dividends on such preference
shares are mandatory and so the mandatory dividend stream is also
recognized as a liability. These dividends are presented in profit or
loss as part of the interest expense recognized when unwinding both
these liabilities using the effective interest rate method.
 Notes to Financial Statements
64
of…for the year ended 31
December 20X3 (extracts)
3. Ordinary Share Capital 20X3 20X2
Number Number
Authorised:
Ord Shares of no par value 120 000 120 000
Issued:
Shares in issue: O/B 100 000 100 00
Issued during the year 20 000 0
Shares in issue: C/B 120 000 100 000
 Notes to Financial Statements
65
of…for the year ended 31
December 20X3 (extracts)
4. Redeemable Preference Share Liability 20X3 20X2
Number Number
Authorised:
10% Redeemable preference shares of no par value 100 000 100 000
Issued:
Shares in issue: O/B 50 000 50 000
Redeemed during the year (50 000) 0
Shares in issue: C/B 0 50 000

The redeemable preference shares were compulsorily redeemable on 31 December 20X3 at a

premium of 20c per share. The 10% preference dividend is mandatory and cumulative and is
based on a deemed value of R2 per share. The effective interest rate is 12.93699016%.
66 Solvency and Liquidity Test

– A company CANNOT declare a dividend unless the following is met:

– Distribution is
– Pursuant to existing legal obligation of entity
– Pursuant to court order
– Board of entity has authorised distribution by resolution
– Reasonable appears that the entity will satisfy the solvency and liquidity test
immediately AFTER the proposed distribution
– Board of the company has applied the solvency and liquidity test
67 Solvency and Liquidity Test

– Solvency:
– Assets (at FV) > Liabilities (at FV)
– Liquidity:
– Ability to pay current debts as and when they fall due within the following 12 months
after the test / distribution