Share this content
0
348

Share for share exchange and hive up of trade and

Share for share exchange and hive up of trade and assets

Didn't find your answer?

Search AccountingWEB

We have currently taken on a client that was in the process of completing a share for share exchange and hive up of trade of assets. Intial calculations and clearance has been sought but they left the previous agent's prior to completing and submitting the accounts that accurately reflected the transactions that occured.

All of the below transaction have occurred on the same day:

1. Company A has purchased a 75% share holding (100 shares) in Company B for consideration of £450,000. Company A already own the other 25% of Company B, so therefore now 100% of Company B.

2. 69,391 ordinary £1 shares were issued for £450,000. These shares were issued to the shareholder that held then sold the 100 shares in Company B.

3. The trade and assets of Company B were sold to Company A for £1.

4. A director/shareholder of Company A had his shareholding of 27,600 Ordinary shares re-purchased back from the company for a consideration of £115,000.

5. The reserves of Company A at time of these transactions were £105,091.

6. Company B is now effectively dormant and is not worth anything.

Due to the nature of so much occuring on day, I am struggling how to accurately reflect all this with the correct journals.

Am I right in thinking that the end goal should be the investment in the subsidiary should be written down to Nil, the new share capital of the company accurately reflected and that the difference on the intercompany balance after the transfer of the trade and assets should be cleared to nil by way of intercompany dividends?

I would greatly appreciate any guidance on this.

Replies

Please login or register to join the discussion.

12th Jun 2019 12:54

Just look at the transactions one at a time and account for them as they require. The fact that multiple transactions occurred on the same day does not affect how you deal with each one.

I am not sure what you mean by “difference on the intercompany balance”. There obviously won’t be one unless somebody makes a wrong accounting entry.

Thanks (0)
avatar
By johnt27
12th Jun 2019 14:36

Robertbrown9004 wrote:

Am I right in thinking that the end goal should be the investment in the subsidiary should be written down to Nil, the new share capital of the company accurately reflected and that the difference on the intercompany balance after the transfer of the trade and assets should be cleared to nil by way of intercompany dividends?

Mostly right except any write down to the investment line is actually a transfer to goodwill. This point is often missed in such transactions and results in the acquiring company often taking an immediate hit to P&L rather than being reduced over time by amortisation.

Thanks (0)
avatar
12th Jun 2019 14:51

Thanks for your reply John. That's what I was trying to do, but struggling mainly on the issue of the share exchange for the sale of 100 shares of Company B in exchange for the 69,391 shares in company A. I have sought tax advice on this, to which they explained that the disposal/sale of the 100 shares would not be treated as a disposal but instead treated as being acquired at the same time Company B shares were originally acquired, for the same cost.

In Company A I have the following in mind:

Dr Investment 450,000
Cr Share capital 69,391
Cr share premium 380,609

Dr Net assets of Company B
Cr Interco

Then suggest capital reduction in Company B and dividend up the reserves clearing the inter-company accounts in both sets of books.

Company B is then worthless, so Company A should write down the carrying value of the investment to Nil in the P&L.

I would then do another capital reduction in Company A to release the high share premium account.

Is this correct or am I missing anything?

Thanks (0)
avatar
By johnt27
to Robertbrown9004
12th Jun 2019 15:42

I think the jnls should be for Company A as follows:

1/2 DR Investment 450,000
CR Share Cap 69,391
CR Share Premium £380,609

3 DR Goodwill 1
CR Cash/Interco 1

4 DR Share cap 27,600
CR Cap Redemption Reserve 27,600
DR P&L Reserve 115,000
CR Cash 115,000 (Any stamp duty?)

5 DR Inteco 105,091
CR Divi rec'd 105,091 (this may differ slightly depending on reserves in Co B)

6 DR Goodwill 450,000 (plus original 25% share investment)
CR Investment 450,000 (plus original 25% share investment)

I've ignored the asset transfers as I don't know the make up of the balance sheet being transferred.

Thanks (0)
avatar
13th Jun 2019 10:17

Thank you for the breakdown John and Goodwill reasoning does make sense.

After thinking I was done with this, I am now confused about the sale of the trade and assets for £1. As it states they have bought them for £1 rather than them being hived up to the parent, so I believe I should dispose of these to the profit & loss and hive up the remainder of the balance sheet.

Is this correct?

Thanks (0)
avatar
By johnt27
to Robertbrown9004
13th Jun 2019 11:46

Without seeing the documentation it's hard to comment, but I suspect the £1 has been put in by an overzealous lawyer who has understood the intention of the transaction - if it was to hive up the assets at book values.

If not, and you're only paying £1 for everything then that's your goodwill figure and the client is going to take a £450k hit to the P&L after the transaction, assuming you take the view it's impaired. It does then make you wonder how the £450k stacks up on the share for share deal!

If you step away from the machinations of the deal and go back to basics. Goodwill is calculated by consideration less market value of assets acquired.

Co A is paying £450,001 (plus previous investment) for net assets of circa £100k (of which it already owns 25%). If you're saying net assets are only worth £1 (consideration being market value) then they are impaired so goodwill is £450k. You then have to judge if £450k is reasonable for whatever it is you're then buying - if it's IP, customers lists or other then technically this isn't goodwill at all but a separate intangible asset (and goes back to my point about being missed in the drafting of contracts). If it is goodwill - just why would you pay £450k for £1 of assets?

Thanks (0)
Share this content