True or False: A bonus issue can convert non-distributable reserves into distributable share reserves, enabling freer dividend payments.

True or False: A bonus issue can convert non-distributable reserves into distributable share reserves, enabling freer dividend payments.

• A. True
• B. False
• C. Not applicable
• D. Cannot determine

Answer: (A)

A bonus issue is the capitalization of reserves to issue additional shares to existing shareholders without cash changing hands. In practice, this means a portion of the company’s reserves is converted into share capital, increasing the number of shares in issue while reducing the reserves. When non-distributable reserves are involved in this capitalization, they are effectively converted into capital rather than being retained purely as reserve assets. Once these amounts are capitalized, the company has adjusted its equity structure in a way that can affect how much of its equity is available for future distributions. Because the reserves have been transformed into share capital rather than left as purely non-distributable reserves, the balance sheet shows a different mix of equity that can support dividend decisions under the rules governing distributable reserves. In this sense, a bonus issue can be seen as converting non-distributable reserves into a form that can underpin future distributions, hence the statement is considered true.

A bonus issue is the capitalization of reserves to issue additional shares to existing shareholders without cash changing hands. In practice, this means a portion of the company’s reserves is converted into share capital, increasing the number of shares in issue while reducing the reserves. When non-distributable reserves are involved in this capitalization, they are effectively converted into capital rather than being retained purely as reserve assets. Once these amounts are capitalized, the company has adjusted its equity structure in a way that can affect how much of its equity is available for future distributions. Because the reserves have been transformed into share capital rather than left as purely non-distributable reserves, the balance sheet shows a different mix of equity that can support dividend decisions under the rules governing distributable reserves. In this sense, a bonus issue can be seen as converting non-distributable reserves into a form that can underpin future distributions, hence the statement is considered true.