Agreed. Hmmmm, the position I'm settling on at the moment is:
> A recognises the disposal of its investment at the point B enters liquidation.
> At the same point, an "other receivable" is recognised (current asset if expected within 1 year, non-current if longer) equal to the value that we're virtually certain we'll be recovering from the entity when it distributes its assets in liquidation.
Agreed, so "other investment" seems like a reasonable classification.
As for your liquidation point, that might be the case when the company in liquidation controls physical/cash assets, but in most group rationalisations all the assets would have been transferred pre-liquidation, so the only thing left in the company in liquidation is intercompany balances.
In the experiences I've had with our liquidator so far, the "assets" being intercompany receivables, are distributed many months prior to dissolution. Most recent example was that assets were formally distributed in Dec 2020, but the entity wasn't dissolved until March 2021.
Duggimon, when you say "until the £1 is paid out by the liquidator and the company dissolved", the difficulty is these events do not usually coincide with each other, the distribution happens before the entity is formally dissolved.
If company A loses control of the subsidiary, I lean towards paul.benny's argument that it is no longer a subsidiary. But is it not still an investment of sorts? So perhaps a reclassification from investment in subsidiaries to "other investments" would be the sensible entry. Alternatively, as paul.benny suggests, recognising a receivable instead of an investment for the net assets which are due to be distributed.
The reason I'm interested is that over the next couple of years I'm going to be dealing with a number of situations like this at work, and it's "fun" to discuss the "correct" approach to these scenarios.
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.
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.
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.
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.
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.
My answers
Agreed. Hmmmm, the position I'm settling on at the moment is:
> A recognises the disposal of its investment at the point B enters liquidation.
> At the same point, an "other receivable" is recognised (current asset if expected within 1 year, non-current if longer) equal to the value that we're virtually certain we'll be recovering from the entity when it distributes its assets in liquidation.
This seems like an elegant solution.
Agreed, so "other investment" seems like a reasonable classification.
As for your liquidation point, that might be the case when the company in liquidation controls physical/cash assets, but in most group rationalisations all the assets would have been transferred pre-liquidation, so the only thing left in the company in liquidation is intercompany balances.
In the experiences I've had with our liquidator so far, the "assets" being intercompany receivables, are distributed many months prior to dissolution. Most recent example was that assets were formally distributed in Dec 2020, but the entity wasn't dissolved until March 2021.
Thanks for your help.
Two different views, interesting.
Duggimon, when you say "until the £1 is paid out by the liquidator and the company dissolved", the difficulty is these events do not usually coincide with each other, the distribution happens before the entity is formally dissolved.
If company A loses control of the subsidiary, I lean towards paul.benny's argument that it is no longer a subsidiary. But is it not still an investment of sorts? So perhaps a reclassification from investment in subsidiaries to "other investments" would be the sensible entry. Alternatively, as paul.benny suggests, recognising a receivable instead of an investment for the net assets which are due to be distributed.
The reason I'm interested is that over the next couple of years I'm going to be dealing with a number of situations like this at work, and it's "fun" to discuss the "correct" approach to these scenarios.
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.
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.
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.
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.
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.