Hi
How do you account for a transfer of WIP from one company (that is ceasing to trade) to another? How does it show in the P&L of the company that is closing? Both companies are owned by the same director. The trade is being transferred over.
Many thanks in advance.
Replies (4)
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As a sale?
Company 1 is selling the WIP - it will appear in its P&L as turnover, with the WIP as a Cost of Sale (no closing WIP), giving nil gross profit, assuming that the WIP is being transferred at its carrying value.
Company 2 has a COS purchase, matched initially by closing WIP, so no gross profit or loss.
Company 2 owes Company 1 the value of the WIP. In Company 1's balance sheet, Stock (the WIP) is replaced by Debtors, due from related party.
Depends
You don't say what the WIP is being purchased for. Presumably it is being purchased for book value, settled in cash - but possibly not? If it's cash settled, then I would have expected only balance sheet entries to Bank and to WIP.
If the company is not paying for the WIP, but it is merely being written off the first company's balance sheet, then I would suggest that the directors of the transferee company are potentially in breach of their directors duties by not commanding the best value for the company's assets.
Trade and assets acquisition
We have carried out a number of hive-up's over the past few years. This is slightly different in that the trade was moving between entities in the same group. But this is broadly what we did:
Transfer of trade and assets
Presumably you are not just transferring the WIP but are also including all other balance sheet balances except reserves.
If you are, then fixed assets would be seen as fixed asset additions, brought in at net book value not at cost and depreciation separately and all other balances would simply be added to Company B’s balance sheet.
Payment
Market value is presumably equivalent to book value so cash will be transferred to company A which will equal the reserves.
However if company A is in an insolvent position you may want to pay more to make it solvent again which will make strike-off somewhat easier. You just need to get the balance sheet to a nominal net £1 position. If you do pay more than book value for the trade and assets then the difference will be taken to goodwill which should be amortised over an appropriate period.
Dividend
If company A is in a net asset position, you can arrange for the capital and reserves which are currently non-distributable to be transferred to distributable reserves. Then a dividend can be paid to the owner and the company struck-off.
Fair VAlue
Whatever value is agred make sure it's Fair Value - will make tax issues easier, otherwise as above