The new Company Law came into effect on 2024/7/1. Article 214, Paragraph 2 stipulates that when using reserves to offset company losses, the company must first use discretionary and statutory reserves. If these are insufficient, capital reserves may be used in accordance with regulations. This provision provides a new capital operation pathway for loss-making companies.
1. Legal Basis for Using Housing Provident Fund to Offset Losses
Article 214, Paragraph 2 of the new Company Law stipulates that when using reserves to offset company losses, discretionary and statutory reserves must be used first. If these are insufficient, capital reserve may be used in accordance with applicable regulations. In substance, this mechanism involves transferring capital reserve into retained earnings.
II. Huachanda Case: Capital Reserve Used to Offset Losses
On 2024-7-2, Huachanda (300278) released an announcement on using capital reserves to offset losses.
Core Data (as of 2023-12-31)
- Undistributed profits of the parent company:-18.56 hundred million yuan
- Surplus Reserve:1,296 ten thousand yuan
- Capital Reserve:18.94 billion yuan
The company plans to use 1,296 million yuan from the parent company's surplus reserve and 18.43 hundred million yuan from its capital reserve, totaling 18.56 hundred million yuan, to offset the parent company's cumulative losses.
Sequence of operations: First use surplus reserves of 1,296 million yuan; if insufficient, use capital reserves of 18.43 billion yuan. This complies with the new Company Law provision that states when arbitrary and statutory reserves are still insufficient to cover losses, capital reserves may be used.
3. Sino-Environment Case: Using Surplus Reserves to Offset Losses
On 2024-7-3, China Gold Environment (Stock Code: 300145.SZ) announced a plan to use surplus reserves to offset losses.
Core Data (as of 2023-12-31)
- Undistributed profits of the parent company:-49,696.98 ten thousand yuan
- Parent Company Surplus Reserve:25,045.66 ten thousand yuan(All from statutory surplus reserve)
- Consolidated Statement of Retained Earnings:-47,566.94 ten thousand yuan
The company plans to use 25,045.66 million yuan of retained earnings from the parent company to offset prior-year losses, thereby converting the parent company's undistributed profits to a positive balance and creating conditions for future dividend distributions.
Implementation Results
- Reduction in accumulated losses of the parent company:25,045.66 ten thousand yuan
- Surplus reserve of the parent company after adjustment:0 ten thousand yuan
- Undistributed profits of the parent company after adjustment:-24,651.32 ten thousand yuan
- Undistributed profits in the consolidated statement after adjustment:-22, 521.27 ten thousand yuan
IV. Key Practical Considerations
1. Compensating Order
Capital reserves may only be used to cover losses after voluntary and statutory surplus reserves have been applied, if those are insufficient.
2. Decision Process
Subject to proposal by the Board of Directors, approval by the Shareholders' General Meeting, and disclosure in accordance with applicable regulations.
3. Accounting treatment
Transferring capital surplus or retained earnings to undistributed profits is an internal transfer within equity and does not affect total assets.
4. Tax impact
Using provident fund to cover losses is an accounting treatment that does not generate taxable income and is not subject to corporate income tax.
V. Policy Significance
The new Company Law allows capital reserves to offset losses, providing the following benefits for loss-making enterprises:
- Restore dividend capabilityAfter offsetting accumulated losses, the company may distribute profits to shareholders in future years.
- Optimize financial structure: Improve retained earnings metrics and enhance corporate image
- Simplify the operation procedure: Compared to reducing capital to offset losses, this procedure is simpler.
Policy Original Attachment
Capital Reserve and Surplus Reserve Used to Offset Losses (Case Study) (PDF)