Advice on consolidation after a share exchange

Advice on consolidation after a share exchange

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Hi to all in the community. I am having to prepare group consolidated accounts in my job for the first time, and hoping someone can assist with specifics regarding elimination of investment.

The details are as follows:

A holding company was created several years ago, and a share exchange effected, so that the shareholders of the trading company (now a subsidiary) became shareholders of the holding company in exactly the same ratios as before, with the holding company now owning 100% of the trading company.

The holding company books shows an investment in the sub of £500k. This is exactly the same value as the share capital in the sub. Total capital and reserves in the sub at the time were:

Share Capital £500k

Share Premium £2m

P&L account (£900k)

i.e. Net assets £1.6m

Both sets of statutory accounts are prepared under FRSSE.

Under normal circumstances (i.e. when one company purchases another), I understand that the consolidation entry using the numbers above would create a negative goodwill amount of £1.1m (maybe someone could confirm this). However, with this being a share exchange, surely the investment value in the parent company accounts is not stated at fair value? Those shares that the parent issued are presumably worth much more than the stated £500k, which is just the nominal value.

Questions:

1) Do I need to restate the investment at a fair value as part of the consolidation process?

2) If yes, where would the credit side of the entry go? How would it be reported in the consolidated accounts?

3) If no, is it correct to say that there would be a negative goodwill amount of £1.1m? How would this be treated in the consolidated accounts?

4) Pushing my luck here, but does anyone know if the answers would be any different under IFRS and US GAAP.

Thanks in advance for any help.

Andy

Replies (3)

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By johngroganjga
27th Jun 2014 07:59

What's missing here is that the holding company seems not to have accounted for its share issue properly. You say it received issue proceeds worth £1.6m but has accounted for only £500k of them. When you correct for that error in the holding company's books everything should fall into place much more easily. In particular you won't have the nonsensical capital reserve arising on consolidation.

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By andythompson
27th Jun 2014 12:49

Further comments/advice needed

Thanks for the reply John

It was a one-for-one share exchange, i.e. £1 nominal shares in the new holding company were exchanged for £1 nominal shares in the trading company (now the sub). The shareholders in the trading company became the shareholders in the holding company (in exactly the same ratios as before).

This happened before my time with the company, and when I recently asked our auditors how the investment value was determined, they quoted an extract from "Accounting Standards Board June 2008 FRSSE (Effective April 2008)", which says:

"Fixed Asset Investments must initially be measured at cost. Alternatively, they may be measured at a market value determined as at the date of their last valuation or on any other value determined on a basis which appears to the Directors to be appropriate in the circumstances of the company (in the latter case, the method of valuation adopted and of the reasons for adopting it must be disclosed in a note to the accounts). Gains and losses shall be recognised (in the profit and loss account or statement of total recognised gains and losses) using the same basis applied to tangible fixed assets in paragraphs 6.25 and 6.26 above."

So it looks like they deemed cost to be just the nominal value of the shares issued. Is this right?

Is it different treatment under FRSSE to full UK GAAP perhaps? Maybe the standards were applied differently in 2008/9?

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By joshua.mwatsama
30th Jun 2014 09:19

Its pretty straight forward
Responding to each query:

1) Revaluations only need to be booked if the fair value is less than the book cost; so, no revaluation necessary. The directors can choose to revalue to FV, but are not obligated to do so.

2) If directors chose to revalue, any gain would be booked to revaluation reserve and only released to P&L on disposal of investment.

3) Yes, being the "bargain" price paid for the asset.

4) Answer would be similar under IFRS (see IFRS 3 Business Combinations) I would imagine similar under US GAAP but don't know which standard.

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