UNIT 2 ACCOUNTING FOR CORPORATE RESTRUCTURING
1.** Discuss briefly accounting for corporate restructuring.
2** Inter-company transactions
3. Purchase consideration
4. Inter-company holdings
5. PROBLEMS (REFER: RSN PILLAI VOL II - TEXTBOOK)
1Q) Discuss briefly accounting for corporate restructuring
INTRODUCTION
Restructuring basically relates to the modification and change in the existing structure of a company. It may involve bringing changes in the ownership through capital restructuring/ may related to sell in company away some business and including some other corporate restructuring deals with the business portfolio changes that organization to either deal with problems being faced by them to create a more profitable enterprise.
REASONS FOR CORPORATE RESTRUCTURING
Corporate restructuring refers to the process of making significant changes to a company's organizational structure, operations, or financial structure. There are various reasons why a company might undergo corporate restructuring. Some of the common reasons include:
1. Financial Distress:
Debt Repayment: When a company has a significant amount of debt that it struggles to repay, restructuring may involve refinancing or negotiating new terms with creditors to alleviate financial pressure.
Bankruptcy: In extreme cases, companies facing severe financial distress may undergo bankruptcy proceedings, leading to a complete restructuring of the organization.
2. Strategic Reorientation:
Market Changes: Shifts in the market, changes in consumer preferences, or technological advancements may prompt a company to restructure to realign its business strategy with the evolving business environment.
Mergers and Acquisitions: Companies may undergo restructuring as a result of mergers, acquisitions, or divestitures to enhance their competitiveness or focus on core business activities.
3. Cost Reduction:
Operational Efficiency: Companies may restructure to improve operational efficiency, streamline processes, and reduce costs. This could involve layoffs, process optimization, or outsourcing non-core functions.
Technology Adoption: Integration of new technologies or automation can lead to restructuring as companies seek to modernize their operations and reduce labor costs.
4. Organizational Performance:
Management Changes: Changes in leadership or management philosophy may lead to a restructuring aimed at implementing new strategies, goals, and management styles.
Performance Improvement: Companies undergoing poor performance may restructure to enhance productivity, innovation, and overall organizational effectiveness.
5. Adaptation to External Factors:
Regulatory Changes: Changes in regulatory environments can necessitate restructuring to ensure compliance and adapt to new legal requirements.
Global Economic Factors: Economic downturns or recessions may force companies to restructure in response to declining revenues and market challenges.
6. Shareholder Value Enhancement:
Shareholder Activism: Pressure from activist investors may drive companies to undertake restructuring measures aimed at increasing shareholder value.
Dividend Payouts: Companies may restructure to free up cash for dividends or share buybacks, enhancing shareholder returns.
7. Risk Mitigation:
Diversification: Companies may restructure to diversify their business lines or geographic presence, reducing dependency on a single market or product.
Risk Management: To address specific risks such as legal liabilities, companies may undergo restructuring to isolate or minimize potential negative impacts.
8. Crisis Management:
Reputation Management: In the face of a crisis, companies may restructure to rebuild trust, repair their reputation, and navigate through turbulent times.
It's important to note that corporate restructuring is a complex process, and companies often undergo it for a combination of reasons rather than a single factor. The specific nature of the restructuring depends on the circumstances and goals of the company.
- To improve the Balance Sheet of the company (by disposing of the unprofitable division from its core business)
- Staff reduction (by closing down or selling off the unprofitable portion)
- Changes in corporate management
- Disposing of the underutilized assets, such as brands/patent rights.
- Outsourcing its operations such as technical support and payroll management to a more efficient 3rd party.
- Shifting of operations such as moving manufacturing operations to lower-cost locations.
- Reorganizing functions such as marketing, sales, and distribution.
- Renegotiating labor contracts to reduce overhead.
- Rescheduling or refinancing of debt to minimize the interest payments.
- Conducting a public relations campaign at large to reposition the company with its consumers.
- Establishment and management charges are reduced.
- The competition among the amalgamating companies can be eliminated
- The bargaining capacity can be improved in the purchase of inputs
- Production can be carried out on a large scale
- Manufactured products can be easily marketed
- Research & development facilities are increased
- Capital amount is increased by the combination of companies
- Amalgamation may lead to the elimination of healthy competition
- Reduction of employees may take place
- There could be additional debt to pay
- The goodwill & identity of the old company is lost
- Business combinations could lead to a monopoly in the market, which is not always possible.
- Amalgamation by nature of merger
- Amalgamation by nature of the purchase
2** Inter-company transactions
Stranger companies are not usually merged. Usually, the companies which have some connections or dealings, may be amalgamated or absorbed. Therefore, it is common, even before amalgamation or absorption, that the selling company may be indebted to purchasing company or purchasing company may be indebted to selling company through purchases and sales. Therefore, before the companies are merged, there may exist debtor-creditor relationship between them. such mutual indebtedness must be eliminated by passing set off entries. It is important to note that inter company owings do not require any special treatment as far as the vendor company is concerned. When its business merged with the business of purchasing company, it passes usual closing entries and preparation of Realisation Account.
Transferor Company: Inter-company transactions do not require any special accounting treatment in the books of the transferor company. Even if such transactions resulting in inter-company owings are found in the books of the transferor company, a realisation account is opened and any owing to or owing from the transferee company is transferred to this account as if the transferee company has t over these items.
Transferee Company:
Even in the books of transferee company, the usual entries for taking over assets and liabilities of the transferor company and payment for purchase consideration are passed in spite the existence of inter-company owings. However, the following adjusting entries are also passed.
(a) To eliminate mutual debt included in Creditors and Debtors:
Sundry Creditors Account Dr.
To Sundry Debtors Account
(b) To eliminate mutual debt included in B/R and B/P
Bills Payable Account Dr.
To Bills Receivable Account
(c) To eliminate mutual debt included in Loan given and Loan taken:
Loan (given) Account Dr.
To Loan (Taken) Account
Inter-Company Stocks
Inter-Company owings generally arise because of purchases and sales that are made before the amalgamation or absorption. When the vendor company has purchased goods from purchasing company it is possible that some of which remains unsold at the time of merger. Similarly, when the purchasing company has purchased goods from vendor company some of which remains in the stock at the time of merger. Such stock therefore includes profit element which is unrealised. No special treatment is required in the books of vendor company. The purchasing company, in addition to usual acquisition entries, will pass an additional entry for such unrealised profit .
a) If the amalgamation is in the nature of purchase:
Goodwill/Capital Reserve Account Dr.
To Stock Account
(with the amount of unrealised profit)
(b) If the amalgamation is in the nature of Merger:
General Reserve/Profit & Loss Account Dr.
To Stock Account
(with the amount of unrealised profit)
3Q) Purchase consideration
The term purchase consideration to be determined at the time of amalgamation is that price which the shareholders of the transferor company would receive for its assets and liabilities from the transferee company, AS-14 states, "Consideration for amalgamation means the aggregate of shares and other securities issued and the payment made in the form of cash or other assets by the transferee company to the shareholders of the transferor company". Purchase considerations restricted to the total amount payable to the shareholders of the selling company alone. Any amount agreed to be paid to the debenture-holders or creditors of the selling company cannot be included in the purchase consideration. The amount of purchase consideration can be computed under any of the following four methods:
1. Lump sum Method
The purchasing company may agree to pay a lump-sum to the vendor company on account of the purchase of its business. In fact, this method is not based on any scientific thoughts and techniques. This method is an unscientific and non-mathematical method of ascertaining purchase consideration.
Example:
A purchasing company agreed to take over a business of selling company for Rs. 5,00,000 In such a case, the purchase consideration is Rs. 5,00,000. No calculations are needed.
2. Net worth or net assets method
Under this method, purchase consideration is calculated by adding up the values of various assets taken over by the purchasing company and then deducting therefrom the values of various liabilities taken over by the purchasing company. The values of assets and liabilities for the purpose of calculation of purchase consideration are those which are agreed upon between the purchasing company and the vendor company and not the values at which the various assets and liabilities appear in the Balance Sheet of the vendor company.
Agreed value of Assets taken over - Agreed value of liabilities taken over= Net Assets
The following relevant points are to be noted while ascertaining the purchase price under this method.
1) If the transferee company agrees to take over all the assets of the transferor company, it would mean inclusive of cash and Bank balances.
(2) The term all assets, however, does not include fictitious assets, like Debit balance of Profit and Loss Account, Preliminary Expenses Account, Discount and other expenses on issue of shares and Debentures, Advertising Expenses Account etc.
(3) Any specific asset, not taken over by transferee company, should be ignored while computing the purchase price.
(4) If there is any goodwill, pre-paid expenses etc. the same are to be included in the assets taken over unless otherwise stated.
(5) The term liabilities will always signify all liabilities to third parties. Trade liabilities are those incurred for the purchase of goods such as Trade Creditors or Bills Payable.
( 6) Other liabilities like Bank Overdrafts, Tax payable. Outstanding expenses etc. are not a part of trade liabilities.
(7) Liabilities do not include accumulated or undistributed profits like. General Reserve Securities Premium, Workmen Accident Fund. Insurance Fund, Capital Reserve, Dividend Equilisation Fund etc.
3. Net Payment Method
The agreement between selling company and purchasing company may specify the amount payable to the share-holders of the selling company in the form of cash or shares or debentures in purchasing company. AS 14 states that consideration for amalgamation means the aggregate of shares and other securities issued and the payment made in the form of cash or other assets by transferee company to the share-holders of transferor company. Thus, under net payment method purchase consideration is the total of shares, debentures and cash which are to be paid for claims of Equity and Preference share-holders of the transferor company.
The following points are to be noted while ascertaining the purchase price under net payment method:
1) The assets and liabilities taken over by the transferee company and the values at which they are taken over are not relevant to compute the purchase consideration.
(2) All payments agreed upon should be added, whether it is for equity share holders or preference share-holders.
(3) If any liability is taken over by purchasing company to be discharged later on, such amount should not be deducted or added while computing purchase consideration.
(4) When liabilities are not take over by the transferee company, they are neither added or deducted while computing consideration.
(5) Any payment made by transferee company to some other party on behalf of transferor company are to be ignored.
4.Intrinsic value method (shares exchange method)
Under this method, net value of assets is calculated according to net assets method and it is divided by the value of one share of transferee company which gives the total number of shares to be received by the share-holders of transferor company from the transferee company. When the number of shares to be received by the transferor company is known then it is divided by the existing shares of the transferor company and thus the ratio of shares can be found out. Suppose in exchange of 50 shares of transferor company, 100 shares of transferee company is available, then every one share in the transferor company, two shares in the transferee company is available .Therefore, the ratio is 1: 2. This method is also known as Share Proportion Method.
Intrinsic Value = Assets available for equity shareholders / Number of equity shares
Fractional Shares. Sometimes owing to certain ratio in which shares are to be given, it is not possible to find the whole number of shares. Any fraction of shares so arrived at, in the absence of any agreement, is always settled in cash at market value.
4Q) Inter-company holdings
Comments
Post a Comment