Reduction of share capital

Reduction of share capital

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Hi all. Please please help because my mind has suddenly gone blank. We have done a company reconstruction using the capital reduction route as opposed to the liquidation route. One of the issues is to repay share capital in OLD company (and hence cancel shares) by issuing shares in a NEWCO to the same shareholders and in the same proportion as in the old company. The scheme has been approved by HMRC,  I just can't think what journals to put through to reflect this in the accounting records of both companies. I would be most grateful for your assistance.

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By TerryD
06th Aug 2014 15:05

Is it a share exchange, so Newco becomes the holding company of oldco?

 

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By johngroganjga
06th Aug 2014 15:12

So the old company is being wound up and struck off? I assume that must be the case if its share capital is being repaid.

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By MGD
06th Aug 2014 15:18

Yes it is a share exchange. This is the full picture. We split the trading from investment activities of OLD, also split shares into A(investment) & B(trading). Formed a holding co (HOLD) to hold entire share capital of OLD on a share for share basis. Transferred trade from OLD to HOLD at book values. Cancelled B shares relating to trade in OLD by creating a Capital Redemption Reserve. Then to transfer trade from HOLD to  NEWCO (not part of the group) again at nominal values and repay shares in HOLD (hence cancel shares) by issuing shares in NEWCO. I just need to sort out the accounting entries. Could you help please?

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By TerryD
06th Aug 2014 16:28

Sounds like you're not using the capital reduction route, but purchase of own shares, or you wouldn't a capital redemption reserve. Anyway, in OLD it's simply reorganising the details of share capital to A and B (assuming no new issues). In HOLD, debit investment with the value of Oldco, credit share capital with nominal value of shares issued, credit share premium with the difference. Then, if the B shares were just repaid, dr share capital + share premium as appropriate, cr cash. If they were purchased by the company, dr share capital, cr CRR with the nominal; dr P & L, cr cash with amount paid.

Now I'm a bit lost - we're creating a third company (non-group)?

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By TerryD
06th Aug 2014 16:31

At this point, HOLD doesn't have a trade, just an investment in OLD. Is it another share for share into NEWCO?

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By TerryD
06th Aug 2014 16:42

Sorry - misread! HOLD now has the trade

 

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By TerryD
06th Aug 2014 16:46

What was the consideration for the shares in Newco - the shares in HOLD? In which case it's the same as before: dr Investment with the value of HOLD, cr share capital with the nominal value, cr share premium with the difference. But you say NEWCO is non-group - so how are the shares in it paid for?

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By MGD
06th Aug 2014 16:49

Hold doesn't have a trade after the transfer to NEWCO and it will remain the parent of OLD which OLD is now the investment company. The trading has now gone to NEWCO (not part of the group) via NEWHOLD. So I was wrong to create a CRR in OLD. I will correct that. To take advantage of the capital reconstruction exemptions per TCGA1992 all transactions should be at book/nominal values. Having this in mind should I be creating a share premium account? Most grateful for your help

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By TerryD
06th Aug 2014 16:54

Sorry, tax isn't my subject, but if a company issues shares in exchange for other shares, then the consideration for the shares issued must be the value of the shares acquired. So you either create them with a nominal value equal to the value of the company acquired, or you have a share premium.

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By ces.hlb
13th Aug 2014 10:14

Tax versus accounts

This sounds like a demerger although  I am still slightly confused as to the full mechanics of what is going on here.

You may find there are differences between the tax rules and accounts treatment, particularly on the share values.

The TCGA 1992 rules on company reconstructions generally treat the cost of the shares as remaining the same in the shareholders' hands i.e. split the base cost of original OLD shares pro rata between remaining shares in HOLD and Newco

 However, for accounts purposes, you cannot treat the new shares as issued for book /nominal values - as TerryD says, in the accounts, you must use market values and credit any difference between share nominal values and net asset market values  to share premium. The values of the individual trading assets stay at book values - not sure if this means you end up here with a goodwill figure in the balance sheet of Newco?

Hope this helps. There is a good section on demergers in Bloomsbury's Tax aspects of the Purchase and Sale of a private company's shares.

 

 

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By MGD
13th Aug 2014 14:55

thanks a lot for this

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