The Company Act regulates dividends policies of companies, which are based on the accounting for shareholders' equity. Therefore, the Company Act has its own requirements that regulates companies' accounting for shareholders' equity.
The Company Act states that contributed capital from shareholders must be displayed in "stated capital" but may reclassify no more than half of contributed amount into "capital reserve." Any excess of capital surplus over the legally defied "capital reserve" is "other capital surplus" (typically comes from the legal decrease in stated capital or capital reserve) can be distributed to shareholders.
Of course, retained earings can be distributed to shareholders as dividends, in which companies are required to raise 1/10 amount of the dividends as "earned reserve." The excess of earned surplus over "earned reserve" is called "other earned surplus."
Companies may pay dividends or purchase treasury stock within the total amount of "other capital surplus" and "other earned surplus."
Is this comfusing? Yes, shareholders' equity is summerized as follows:
- Stated capital (legally defined)
- Capital surplus (=additional paid-in capital), including (a) capital reserve (legally defined), and (b) 0ther capital surplus (distributable)
- Earned surplus (=retained earnings), including (a) earned reserve (legally defined), and (b) other earned surplus (distributable)