Consolidated accounts and capital reduction

Consolidated accounts and capital reduction

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My client group consists of a holding company and a wholly owned subsidiary. Prior to a reduction of share capital the respective balance sheets looked like this (£000's):

Holding Co:

Investment in subsid   £2,000

Share capital               £2,000

Subsidiary:

Net assets                  £1,500

Share Capital             £2,000

P&L                             £-500

Total Cap and res     £1,500

Consolidated Balance Sheet:

Net Assets                 £1,500

Share Capital             £2,000

P&L                             £-500

Cap & res                  £1,500

A capital reduction took place in the subsidiary company, such that share capital was reduced to £2k and £1998k is credited to P&L reserve. So subsidiary balance sheet is now:

Net assets                £1,500

Share Capital                  £2

P&L                           £1,498

TOTAL                       £1,500

On the assumption that all else remains the same, what will the new consolidated balance sheet look like? Logic tells me that consolidated share capital  will be £2k,but the share capital of the holding company remains £2,000k so not sure.I've not done many consolidations since my study days (many years ago!) so any help/suggestions would be much appreciated.

Replies (10)

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By johngroganjga
27th Oct 2015 09:42

The consolidated share capital will not change because that is just the holding company's own figure, and that has not changed.

I think there can be no substitute for working through the consolidation numbers and seeing what happens. If any anomalies present themselves by all means report back.

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By johngroganjga
27th Oct 2015 13:17

Reserves

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Replying to NYB:
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By broadsides
27th Oct 2015 13:30

Ah, OK. So at consolidated level, the balance sheet is presented as if the capital reduction hadn't happened i.e. Share capital will be £2,000k consolidated P&L reserves will be £-500k.

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By johngroganjga
27th Oct 2015 13:35

Not quite as if it hadn't happened, but absolutely in accordance with the fact that it has happened. It's just that the happening of it has not changed the financial position of the group so it would be entirely correct for the group accounts to reflect that.

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Replying to RogerMT:
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By broadsides
28th Oct 2015 13:39

But aren't the group's distributable profits £1498k rather than £-500k? I realise that consolidated reserves are irrelevant for the purposes of determining the legality of a dividend, but the reality is that if the ultimate shareholders wanted to extract dividends from the holding company, they could extract up to £1498 - i.e. Subsid would declare a dividend to holding co of £1498 and holding co would declare an identical dividend.

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By johngroganjga
29th Oct 2015 13:52

Such a dividend would be a return of capital to be credited by the holding company against the cost of its investment.

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Replying to Red Leader:
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By broadsides
02nd Nov 2015 09:57

Would dividend be illegal

Interesting. Just so I'm  clear are we saying that a dividend of £1498  would not be legally payable to the shareholders of the holding company (on the basis that the holding company would have no reserves)? or is it simply an adjustment on consolidation?

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By johngroganjga
02nd Nov 2015 10:20

The holding company would have to impair its investment in its own accounts - so it amounts to the same thing.

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Replying to lionofludesch:
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By broadsides
02nd Nov 2015 10:32

Many thanks

Understand. Many thanks for your thoughts, much appreciated.

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Replying to broadsides:
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By Lisa_MCHD
11th Oct 2022 07:46

For the purpose of the Consolidated accounts - what is the P&L amount after capital reduction since the share capital will not change?

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