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Consideration paid on behalf of an acquirer

Acquisition of shares, consideration paid by another group company, followed by hive-up!

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First time poster, long time lurker.

How would you account for this scenario in the individual company accounts of the following:

Company A owns 100% of the share capital of company B. Company B acquires 100% of shares of an external company, C. The consideration for C of £1m is paid by company A on behalf of company B. The book value and fair value of company C's net assets at the point of acquisition is £250k, so the consideration exceeds the net assets by £750k.

A few months later, the trade and assets of company C are hived up into company A at book value (still £250k), with the amount owed by A to C in respect of this transfer left as an outstanding amount on intercompany.

The difficulty here is establishing whether any goodwill should be recognised in the final position (either under UK GAAP or IFRS).

Cracking on with the individual steps, without much thought about the overall substance of the transaction, it seems you would start with:
Stage 1
Company B
Dr Invesment                  £1m
Cr Interco with A            £1m

Company A
Dr Interco with B                      £1m
Cr Cash/3rd party liability        £1m

Stage 2
Then, when the assets of C are hived up into A, you'd have:
Company C
Dr Interco with A                       £250k
Cr Net Assets (Various)             £250k

Company A
Dr Net Assets (Various)             £250k
Cr Interco with C                       £250k

Company B
Cr Investment in C                     £750k            (the implicit goodwill of £750k in the initial consideration is no longer recoverable through its investment in C)
Dr Impairment Expense             £750k

But accounting for it in this way means the goodwill associated with C's business is effectively written off in B.

One solution would be for the legal documentation to say A is paying C £1m for its trade and assets, but failing that, if the S&PA states the consideration is at the book value/fair value of the identifiable assets (£250k), can we use an alternative method to reflect the scenario more fairly, e.g. :

Stage 2
Company C
Dr Interco with A                       £250k
Cr Net Assets (Various)             £250k

Company A
Dr Net Assets (Various)             £250k
Dr Goodwill                               £750k
Cr Interco with C                       £250k
Cr Interco with B                        £750k              (reducing the amount outstanding from company B from £1m to £250k, all else equal)

Company B
Cr Investment in C                    £750k               (reflects the fact C no longer holds the trade and assets on which the £750k arises)
Dr Interco with A                       £750k               (leaves £250k owed to company A)

Any thoughts appreciated.

Thanks

 

Replies (13)

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By frankfx
10th Mar 2021 19:56

Have a look at the numerous
," hive up '
threads here on AW

Then reframe your question in the light of previous responders views.

Hope that helps

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Replying to frankfx:
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By kadabra064
10th Mar 2021 20:47

I have already searched and cannot find anything that deals with this situation.

If you could kindly provide an example of a thread that provides insight, I'd be most grateful, otherwise please allow others to respond to the question.

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Replying to kadabra064:
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By Hugo Fair
10th Mar 2021 21:43

Try https://www.accountingweb.co.uk/any-answers/hive-up-of-subsidiary-s-good... ... or any of the other 27 results listed by typing "hive" into the AW search box.
I can't say I understand all of them (it's not my area) but it's not hard to find the previous threads ... which may help?
If not and you want professional advice on your specifics, then paid advice is likely to be more pertinent than the thoughts of relatively random posters here.
BTW, I can't see how frankfx is not "allowing others to respond to the question"?

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Replying to Hugo Fair:
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By kadabra064
10th Mar 2021 22:28

As I said, I have searched already hence why I am asking the question on an accountancy forum to see if anyone else has experienced a similar scenario.

The link you provided is completely irrelevant to my question, as are, to the best of my knowledge, all questions previously asked on this board.

Virtually every technical question on this answers board could be answered by paying for professional advice, and yet here we are.

I've consulted this site many times and found the discussions on various obscure accountancy scenarios very useful.

I thought I'd contribute with my own, so the next time a professional finds themselves Googling various scenarios, maybe this discussion could be of some use.

But apparently that was misguided of me, I should instead have expected the dismissive, unhelpful replies that are par for the course for forum newbies on the world wide web.

Thanks (1)
Flag of the Soviet Union
By thevaliant
10th Mar 2021 22:13

In my opinion, your first postings are correct.

You are right in that in the individual books, an impairment has gone through company B as it cannot support the carrying value of the investment.

However, ON CONSOLIDATION (are you consolidating?) there would be a final additional step on the consolidation schedule, being:

DR Cost of invesments £750k (to put the investment back to £1m before eliminating)
CR Impairment expense £750k (undoing the impairment - there has been no impairment on the investment, because, as you will see, there can be no investment)

CR Cost of investment £1m (to remove cost of investment fully now)
DR Share capital and reserves £250k
DR Consolidated goodwill £750k

Then you either amortise consolidated goodwill over 10 years (or the UEL if you can truly assess it) under UKGAAP, or if under IFRS test for annual impairment.

Yes, the individual accounts of B look a right mess, but I would like to hope no one will look at B stand alone, and anyone with any brains will look at the consolidated set of A.

If you don't have to consolidate, I might consider doing so, at least for a year or two, just to show the true picture of what has happened.

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Replying to thevaliant:
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By kadabra064
10th Mar 2021 22:38

Thanks, that's very helpful.

To be clear, I'm not talking about any consolidated accounts, I'm specifically interested in the individual accounts.

In my view, the simplistic steps in the first scenario don't give a true and fair view, and the goodwill that would have arisen had company A bought the trade and assets directly from C (without B acquiring the shares in C), or the goodwill that would have been permitted to be recognised if A had bought the shares in C directly (rather than B) and A had then immediately hived up the trade and assets after (in that case, I know A would be permitted to recognise goodwill AS IF it has acquired the trade and assets directly). But the introduction of B means I'm unsure whether A can still be granted a similar "concession" to recognise goodwill.

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Replying to kadabra064:
Flag of the Soviet Union
By thevaliant
10th Mar 2021 23:50

I genuinely do not know. I think I have heard about PWC suggesting this route, and effectively A generating 'goodwill' but I personally think this is wrong.

A better move would be for A to acquire the trade and assets for £1m.
Therefore A would instead
DR Assets £250k
DR Goodwill £750k
CR Interco with C £1m

C loses all its assets, but gains an intercompany with A worth £1m.
So
CR Net assets £250k
DR interco with A £1m
CR Gain on disposal £750k

THEN C dividends to B £1m
So C:
DR Dividend £1m
CR Interco with B £1m

B then receives dividend and impairs investment in full (its now worthless):
CR Dividend received £1m
DR Interco with C £1m
DR Impairment charge £1m
CR Cost of investment £1m

A/B/C agree to novate all intercompanies, such that C doesn't owe B £1m, and is owed £1m by A. Instead it owes nothing, and B is owed £1m by A, which it can then ALSO dividend away (and I would suggest do so).

Then file DS01 for C, and make that impaired investment an actual disposal.

Don't ask about the tax implications of the above, I've no idea; though this is exactly what a client did about ten years ago. I assume there is no tax impact (the dividends are not chargeable to tax, and the impairment isn't a disposal) though when C is struck off, that might trigger something.

Thanks (1)
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By paul.benny
11th Mar 2021 09:00

Presumably the transaction has already taken place, but all this does beg the question of why B was the acquirer. This has created a whole load of needless complexity- and therefore probably cost and potentially tax risk.

And if the transaction was so poorly designed, that suggests there may other nasties, financial or otherwise lurking - eg in the reps and warranties, price adjustments, liabilities taken on.

With no disrespect to the OP, the message to the business should be that the finance function needs to be more closely involved in such transactions in future.

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Replying to paul.benny:
Flag of the Soviet Union
By thevaliant
11th Mar 2021 09:29

To be fair, especially with no question around tax, it smacks of being some sort of exam question because its so convulted.

Having said that, because I *did* answer, I can confirm that a client of mine did exactly this about ten years ago. They somehow screwed up the legals and had wanted one trading company only. They ended up with three, then hived the trade up to make two trading and one dormant.

Before eventually undoing all this and hiving the trade back down again. They never took professional advice, just told their solicitors what they wanted (or what they thought they wanted) and solicitor prepared docs. We only found out during year end audits, often six months after they have made a complete dogs dinner of the whole arrangement.

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Replying to paul.benny:
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By kadabra064
11th Mar 2021 11:04

I'm trying to solve a problem for a separately managed sub-group of our overall UK group.

For some reason they incorporated a newco (company B) to acquire the share capital of two legal entities that formed a sub-business of another group. One of those companies was swiftly disposed of, while the other was retained (company C) with its trade and assets ultimately hived up to A.

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Replying to kadabra064:
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By paul.benny
11th Mar 2021 11:30

Does seem somewhat nuts. I'm sure someone thought it was a good idea.

You have my sympathy in trying to sweep up afterwards.

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By johnt27
11th Mar 2021 09:38

To answer the pertinent question - yes you recognise the goodwill. This is standard hive up accounting, often performed wrong by writing off the investment to P&L to the detriment of reserves.

The fact that it passes through an intermediate company is to a degree somewhat irrelevant although I do think it's confused the picture. To my mind the hive up to A, essentially passes through B at the FV (£1m) and eliminates the intercompany balances.

It does raise an "interesting" technical question as to whether your double entry in Stage 1 above should be treated as a capital contribution rather than an intercompany loan but that point is probably moot if the hive up has been actioned.

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Replying to johnt27:
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By kadabra064
11th Mar 2021 10:59

Thank you, good to have some confidence that that intermediary company is irrelevant.

I hadn't even considered the capital contribution point, but yes I think there's an argument that in substance A makes a capital contribution to B at the outset.

Thanks for your help.

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