Best treatment of fixed assets to acquire shares

I'm interested to hear views on the best treatment for the acquisition of shares via fixed assets

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My son and 3 friends have set up a company with £1000 each of share capital. 2 have paid for their shares in cash; the other 2 have acquired theirs by contributing fixed assets currently worth £8000, and which originally cost £10,000. It appears to me that there could be 3 possible treatments:

1. Show the value of the fixed assets simply as £2000 equivalent to the value of the shares acquired - the 2 individuals are relaxed about having contributed a higher value than the cash equivalent of the shares, because they don't actually have cash available. The assets could subsequently be upvalued if desired.

2. Show the value of the fixed assets as gross £8000 with a share premium account of £6000. The 2 cash paying shareholders would therefore benefit from any future conversion of share premium into shares.

3. Show the value of the fixed assets as gross £10,000 and cumulative depreciation of £2000 to recognise the true original cost. This might be relevant for insurance purposes? The share premium would still be £6000.

I used to be an accountant, now retired for quite a few years. I'd appreciate any opinions on a preferred treatment. Thank you.

 

 

Replies (3)

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By David Ex
09th Jun 2022 11:40

They need to appoint an accountant. I hope they have a comprehensive shareholder agreement in place as friends soon become ex-friends if (or rather when) things go wrong.

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By paul.benny
09th Jun 2022 12:51

Agree with David. No disrespect - but you have a fundamental conflict of interest if you are advising (however informally) one of the shareholders.

As for how to treat the 'excess' contributions - what have they agreed? It could be that the assets are deemed to be equivalent to the cash contributed by the others - if so, they should be recognised at £1000. No premiums, no uplift.

Not sure it was wise to have contributed so much cash/asset equity - could have been £1 each and dealt with these assets some other way

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By Paul Crowley
09th Jun 2022 12:58

Appoint the accountant before doing anything
Is the business risky
Why not just have one £1 share each
What is the equipment really worth
Bringing in at £10K less £2 depn makes no sense, Think about tax
Get a decent sharehoder agreement

There will be disputes about unequal contributions, probably fairly soon
A share premium account on a small trading company?
Never seen one yet

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