How do I account for a rights issue that increases share capital?

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AcadiFi · Accepted Answer

A rights issue gives existing shareholders the right to buy new shares at a subscription price below market — the 'discount' compensates for dilution. Accounting is straightforward issuance: Dr Cash, Cr Share capital (par) and Cr APIC (premium above par). Example: Vermillion Resources has 40M shares outstanding at $25 market, par $1. It announces 1-for-5 rights at $18 subscription. 8M new shares issued, gross proceeds $144M. Journal: Dr Cash $144M, Cr Share capital $8M, Cr APIC $136M. Theoretical ex-rights price (TERP) = (40 × 25 + 8 × 18) / 48 = $23.83. For EPS the weighted-average shares calculation must include a bonus-element adjustment: multiply pre-rights shares by market/TERP = 25/23.83 = 1.049 retroactively. This dampens EPS dilution relative to a plain issuance and is frequently tested. Ratios: book value per share rises if subscription price > BV, falls otherwise. Debt-to-equity drops because equity rises with no debt change.

How do I account for a rights issue that increases share capital?

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