To cut a very long story short, we have taken over from the previous accountants who were involved in a poorly effected share for share exchange to incorporate a holding company into the structure. The relevant bit is that shares in X Ltd of £100,000 £1 shares were swapped for £200,000 £1 shares in Holdings Ltd. So Holdings balance sheet was:
Fixed asset investments £100,000
Net Assets £100,000
Share Capital £200,000
Share premium -£100,000
Shareholder funds £100,000
Clearly the negative share premium is incorrect.
We believe the balance sheet should be:
Fixed asset investments £100,000
Unpaid SC £100,000
Net Assets £200,000
Share Capital £200,000
Shareholder funds £200,000
However a corporate lawyer has suggested this:
Fixed asset investment £200,000
Net Assets £200,000
Share capital £200,000
Shareholder funds £200,000
The lawyer believes that this is ok as the shares were issued at par and the carrying value is less than the value of the business.
My issue is that it would now appear the shareholders of Holdings have a base cost of £200,000 rather than £100,000. Is it simply a case that their base cost hasn't changed even though the investment is held at £200,000 in holdings (and the lawyer is correct), or were we correct, or is the answer something else?
Many thanks
Jonathan
Replies (22)
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Something else
Start with Joe Bloggs. Joe originally had 100 £1 shares in X Ltd, which he'd paid £100 for.
He now has 200 fully paid £1 shares in Holdings Ltd. His base cost for those 200 shares is still £100, irrespective of what happens in Holdings Ltd's balance sheet (which deals with Holdings Ltd, and not Joe et al). He's paid no more or less for them as a result of the exchange.
I think Holdings Ltd's balance sheet should be:
Fixed Asset Investments £X
Net Assets £X
Share Capital £200K
Share Premium £X - £200K (assuming that's a positive figure, which you do suggest).
Shareholders' Funds £X
Where £X is the value of X Ltd (did you see what I did there?) at the time of the aquisition, because fixed assets should be shown at cost, being the fair value of the consideration given. Since X Ltd is worth £X it follows that the shares given to acquire X Ltd at the time of acquisition must also have been worth £X.
EDIT: Damn. I had my share premium formula wrong. When I said £200K - £X, I actually meant £X - £200K. Now corrected
Firstly, what was the value of X Ltd? Its issued share capital is irrelevant.
Secondly the base cost of the old shares just rolls into the new shares. The number of shares makes no difference..
It hasn't paid only £200K
It's paid £2.5m for its acquisition of X.
It issued new shares worth £2.5m for the acquisition. Since those shares have a nominal value of just £0.2m they have been issued at a premium of £2.3m.
Holdings balance sheet should be:
Investment/Net assets £2.5m
Share capital £0.2m
Share premium £2.3m
Shareholders' funds £2.5m
And that's still not going to have any bearing on Joe Bloggs who has 200 of the shares with a base cost of £100.
Holdings hasn't "paid" anything for X
It has issued shares to acquire X, the value of those shares being the value of X. So if you want to insist that it has paid for X then it has paid £X.
So:
Fixed asset investments £2,500,000
Share capital £200,000
Share premium £2,300,000
[EDIT - as usual, crossed with Steve]
Agree with the above.
And the transaction wasn't "poorly effected" - just misunderstood by the OP.
You said that the share for share exchange had been "poorly effected". If you had said that the preparation of the accounts to record it had been poorly carried out and thought through I would have agreed with you.
Can you explain
Why you consider that it was poorly effected (or what you would have done differently)?
Sorry, but you've lost me
From what you've posted there's nothing to indicate that the exchange was poorly effected. As John has said, the accounting entries may have been incorrect but the accounting entries merely reflect the transaction, they don't form any part of the transaction.
Perhaps it's just the terminology that's confusing me. Is it that you are trying to tell us that insufficient documentation has been kept in order to evidence the fact that the transaction did take place? In that case I think "handled" would be more appropriate than "effected".
Not sure you're right
If the share for share exchange has happened, surely that means it has been properly effected. The share for share exchange has been brought about/accomplished/made happen. Whether there is paperwork sufficient to show how this effective transaction has taken place is a separate issue.
Then why only worried about accounts treatment
If you really think the transfer could be made up, why is your OP only worrying about the accounts treatment? The correct accounting treatment for transactions that have not happened is not to make any entries at all. The fact that you are making entries means that the share transaction must have been effected (you even have a lawyer telling you shares have actually been issued at par). Whether it was a good idea to structure the transaction that way is irrelevant. Whether the accounting entries originally made were wrong is irrelevant. If the share for share exchange has actually happened, it has been effected. It is you that is using the word incorrectly.
Incidentally, I really don't see your argument that everyone else must be getting confused with affected. Their comments make less sense, not more, if they think you mean the transaction has been influenced or simulated poorly.
A whole different question
You were the one that said everyone was misunderstanding your use of effected. If you couldn't face being challenged on that then you shouldn't have made such a big thing of it. I don't think it's made up, I was making the point that it could be given the evidence. Without evidence you cannot say the transaction was effected at all, let alone good or bad. I won't answer anything else, no one else cares, and we've all got better things to do with our time.
Since you say you won't answer anything else, this question is probably pointless but, if you the evidence is not enough to know the transaction has happened, why did you say this in your OP?
The relevant bit is that shares in X Ltd of £100,000 £1 shares were swapped for £200,000 £1 shares in Holdings Ltd.
This unequivocally states that the transaction has happened, that it has been effected. If you are now saying you have doubts that it has happened, then you have an entirely different problem to the one you asked about. There was a lawyer involved apparently (as you've spoken to them and they have confirmed shares were issued) so is it possible that you have simply not seen the evidence, rather than it not existing? Have you considered asking them to see the paperwork? That they may not understand enough about accountants to give the correct accounting treatment is largely moot.
Schrodinger's share exchange?
Based on the information supplied, it seems that the transaction both occurred and did not occur.