Practical issues arising from
group reorganisations
Financial Reporting Faculty webinar
21 July 2010
Introduction
• Nigel Sleigh-Johnson
Head of ICAEW Financial Reporting Faculty
Speakers
• Andy Simmonds
Partner, Deloitte
• Rosie Ware
Senior Manager, Deloitte
Agenda
• What are group reorganisations?
• Building blocks for an accounting approach
• Legal considerations
• Practical application
– New holding company added to an existing group
– New holding company + refinancing
– Hive up of trade and assets for book value
– Demerger disposal
In the last webinar ...
IFRS 3 Business combinations
•Acquisition accounting only
•Changes from 2004 to 2008 version
•Acquisition costs
•Contingent consideration
•Stepped acquisitions
•Reacquired rights ... and much more ..
Group reorganisations
UK GAAP
FRS 6 deals with
acquisitions and mergers
Group reorganisations
may be dealt with by the
merger method
Group reorganisations
UK GAAP
IFRS GAAP
FRS 6 deals with
acquisitions and mergers
‘Common control’
transactions scoped out
of IFRS 3
Group reorganisations
may be dealt with by the
merger method
Look for guidance in
other national GAAPs
Group reorganisations
UK GAAP
IFRS GAAP
FRS 6 deals with
acquisitions and mergers
‘Common control’
transactions scoped out
of IFRS 3
Group reorganisations
may be dealt with by the
merger method
Look for guidance in
other national GAAPs
Definition of a group reorganisation
“.. the ultimate shareholders remain the same, and the
rights of each such shareholder, relative to the others,
are unchanged..”
FRS 6.13(b)
Examples of group reorganisations
Transfer a business
or subsidiary within a
group
Add a new parent to
an existing group
Transfer a
partnership into a
company
Restructure involving
a refinancing
Acquisition and merger compared
Acquisition
Consideration
paid in shares
Fair value
Consideration
paid in loans
Actual amount
Acquired net
assets
Fair value
Pre-acq. results
and net assets of
acquiree
Excluded
Balancing figure
Goodwill –
shown as asset
Acquisition and merger compared
Acquisition
Merger
Consideration
paid in shares
Fair value
Nominal value
Consideration
paid in loans
Actual amount
Actual amount
Acquired net
assets
Fair value
Book value
Pre-acq. results
and net assets of
acquiree
Excluded
Included
(comparatives
restated)
Balancing figure
Goodwill –
shown as asset
Adjustment to
reserves
Acquisition and merger compared
Acquisition
Merger
Group
reorganisation
Consideration
paid in shares
Fair value
Nominal value
Nominal value
Consideration
paid in loans
Actual amount
Actual amount
Actual amount
Acquired net
assets
Fair value
Book value
Book value
Pre-acq. results
and net assets of
acquiree
Excluded
Included
(comparatives
restated)
Consol: include
Entity: exclude
Balancing figure
Goodwill –
shown as asset
Adjustment to
reserves
Adjustment to
reserves
Could we use acquisition accounting?
Benefits
• Intangibles and goodwill recognised – may have positive tax
consequences
Drawbacks
• There is no ‘acquirer’
• Consideration should be at fair value
• ‘Acquired’ net assets should be remeasured to fair value,
incurring cost for no benefit
Legal considerations
Shares issued as
consideration
Legal considerations
Shares issued as
consideration
Merger relief
(CA 2006 s612)
Situation:
- Shares issued by orphan entity
- In exchange for 90%+ shareholding
Entries in issuing entity:
Dr Investment - nominal value of shares
Cr Share capital – nominal value
Legal considerations
Shares issued as
consideration
Merger relief
(CA 2006 s612)
Situation:
Group
reconstruction relief
(CA 2006 s611)
Situation:
- Shares issued by orphan entity
- Shares issued by a wholly-owned sub.
- In exchange for 90%+ shareholding
- In exchange for any group assets
Entries in issuing entity:
Entries in issuing entity:
Dr Investment - nominal value of shares
Dr Investment - previous book value
Cr Share capital – nominal value
Cr Share capital – nominal value
Cr Share premium - balance
Example 1
New holding company added to an existing
group
New holding company
Shareholders
Old parent
Sub
Sub
Sub
Sub
New holding company
Shareholders
Old parent
Consolidated balance sheet
Old parent
Net assets
Sub
Sub
Sub
Sub
Share capital (Old)
Reserves
£
100
20
80
100
New holding company
Shareholders
New parent
Old parent
Consolidated balance sheet
Old parent
Net assets
Sub
Sub
Sub
Sub
Share capital (Old)
Reserves
£
100
20
80
100
New holding company
Shareholders
New parent
Entity balance sheet
New parent
Investment
£
10
Share capital (New)
10
Old parent
Consolidated balance sheet
Old parent
Net assets
Sub
Sub
Sub
Sub
Share capital (Old)
Reserves
£
100
20
80
100
New holding company
Shareholders
New parent
Entity balance sheet
New parent
Investment
£
10
Share capital (New)
10
New parent
Consolidated balance sheet
Old parent
Net assets
Sub
Sub
Sub
Sub
Share capital (Old)
Reserves
£
100
20
80
100
New holding company
Shareholders
New parent
Entity balance sheet
New parent
Investment
£
10
Share capital (New)
10
New parent
Consolidated balance sheet
Old parent
Net assets
Sub
Sub
Sub
Sub
Share capital (New)
Reserves (80 + 10)
£
100
10
90
100
Example 1a
New holding company added, and additional
funds raised
What if …new cash was raised?
Shareholders
Old parent
Sub
Sub
Sub
Sub
What if …new cash was raised?
New cash
funding
Shareholders
New parent
Old parent
Sub
Sub
Sub
Sub
What if …new cash was raised?
New cash
funding
Shareholders
1. Still a group reconstruction?
Yes, if ultimate
shareholders and their
relative rights are the same
New parent
Old parent
Sub
Sub
Sub
Sub
2. Merger criteria in Companies
Act met?
If no, disclose true and fair
override
Example 2
Hive up of trade and assets for book value
Hive up of trade and assets
Parent
Subsidiary
Trade and
assets
Hive up of trade and assets
Parent
Subsidiary balance sheet
Subsidiary
Trade and
assets
Net assets
£
60
Hive up of trade and assets
Parent balance sheet
Parent
Investment in Sub
£
100
Subsidiary balance sheet
Subsidiary
Trade and
assets
Net assets
£
60
Hive up of trade and assets
Parent balance sheet
Parent
£
100
Investment in Sub
Subsidiary balance sheet
Subsidiary
Trade and
assets
Net assets
£
60
Consolidated balance sheet
Goodwill
Net assets
£
40
60
100
Hive up of trade and assets
Parent balance sheet
Parent
Sell trade
and assets
to Parent
for 60 on
inter-co.
Subsidiary
Trade and
assets
£
100
Investment in Sub
Subsidiary balance sheet
Net assets
£
60
Consolidated balance sheet
Goodwill
Net assets
£
40
60
100
Hive up of trade and assets
Parent balance sheet
Parent
Sell trade
and assets
to Parent
for 60 on
inter-co.
Subsidiary
Trade and
assets
£
100
Investment in Sub
Subsidiary balance sheet
Inter-co receivable
£
60
Consolidated balance sheet
Goodwill
Net assets
£
40
60
100
Hive up of trade and assets
Parent balance sheet
Parent
Sell trade
and assets
to Parent
for 60 on
inter-co.
Subsidiary
Trade and
assets
Investment in Sub (?)
£
100
Net assets
Inter-co payable
60
(60)
Subsidiary balance sheet
Inter-co receivable
£
60
Consolidated balance sheet
Goodwill
Net assets
£
40
60
100
Hive up of trade and assets
Parent balance sheet
Parent
Sell trade
and assets
to Parent
for 60 on
inter-co.
Subsidiary
Trade and
assets
£
60
40
60
(60)
Investment in Sub (-40)
Goodwill (+40)
Net assets
Inter-co payable
Subsidiary balance sheet
Inter-co receivable
£
60
Consolidated balance sheet
Goodwill
Net assets
£
40
60
100
Example 3
Demerger disposal
Demerger disposal
Shareholders
Parent
A
B
C
D
Demerger disposal
Shareholders
Parent
A
B
C
Shares of subsidiary D
paid to shareholders
as a dividend
(an ‘in-specie’ dividend)
D
Demerger disposal
Shareholders
D
Parent
A
B
C
Demerger disposal
Shareholders
D
Parent
A
B
C
Accounting in D:
- no change
Accounting in Parent (UK GAAP)
- include D to date of demerger
- deduct book value as a dividend
Accounting in Parent (IFRS)
- include D to date of demerger
- deduct fair value as a dividend
- gain on ‘disposal’ = fair value
less book value
Summary
• FRS 6 is useful for reconstructions under UK and IFRS
• Key principle is that the ultimate shareholders, and their
relative rights, remain the same
• On a merger basis:
– No goodwill arises – adjustments due to changes in capital go to
reserves
– Assets and liabilities usually remain at book value
– Restatement of comparatives on a combined basis – only in
consolidated accounts
• Companies Act is relevant to accounting for share issues and
distributions
Questions
Please use the chat facility to ask any questions and we
will do our best to answer them
Andy Simmonds
Rosie Ware
Nigel Sleigh-Johnson
Marianne Mau
IFRS 3 Factsheet
Contact the faculty:
• t 0207 920 8533
• e frfac@icaew.com
• w icaew.com/frf
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