TOPIC 4: ADVANCE ACCOUNTING IN RESTRUCTURING, MERGER, ACQUISITON AND COMPANY TAKEOVER

CLO1: Prescribe accurately consolidated financial statements for business combination, company’s reconstruction procedures and relevant accounting theory application according to the situation given.

CLO2: Conduct properly in preparing consolidated financial statements for group accounts and Statement of Financial Position after internal and external company’s reconstruction.

CLO3: discuss precisely the underlying accounting theory in preparing company’s financial statement and accounting roles in sustainable development using appropriate concepts according to the situation given.

INTRODUCTION

Variety of methods and techniques are done in business world to raise capital and additional cash.

Public company – company’s capital structure depends on the issue of shares and debentures to the public

Business partnership – business capitals rely heavily on the owners and partners.

ALTERNATIVE BUSINESS EXPEND

Sole Proprietorship & Partnership

Expend the business entity

Company (Sdn Bhd/ Berhad)

Public Company

Various scheme (for enjoys

economies of scale)

Merger, Absorption &

Take Over

CONVERSION OF A BUSINESS ENTITY INTO A COMPANY

(Such as sole proprietorships and partnership)

• To enjoy limited liability status

• Have access to the capital market

• Enjoy future growth and may eventually become public listed company

Why?

• The owner will form a company specially to acquire their own business as a going concern

• The new company will acquire the assets and liabilities of the old business

• The new company will incur a cost which is the purchase price, agreed upon by both the purchaser and the seller

• Purchase price could be settled by cash, shares in the new company, or combination of cash and shares or other securities.

• If the sellers of the business are given shares in new company then they become shareholders and in most cases directors of the new company

How?

BUSINESS COMBINATION

1. Amalgamation/Merger* When two or more companies combine their business

together by selling their business as going concern to a newly formed company

• A new company is formed to acquired the assets and liabilities of the old companies and these companies are wound up.

• The consideration given may consists of cash, shares and/or debentures in the new company.

Eg: Price Waterhouse + Coopers & Lybrand = PriceWaterhouseCooper (PwC)

Arab Malaysian + MBF = Ambank Group Bhd

F Sdn Bhd N Sdn Bhd

F&N Sdn Bhd

2. Absorption when one dominant company acquired the assets and

liabilities of another company being acquired is wound up

the purchase consideration given may consists of cash, shares and /or debentures in the new company, as in amalgamation.

Eg: Celcom Bhd +Tmtouch = Celcom Bhd Guthrie Bhd + Golden Hope Bhd + Sime Darby Bhd = Sime

Darby KPJ Health Care Sdn Bhd + Hospital Penawar Holdings = KPJ

Health Care Sdn Bhd

3. Take Over The investor acquires controls in another company

(investee) An investor company that controls another company is

referred to as the holding or the parent company ant the acquired company becomes a subsidiary of the investor

Eg: a) TM Bhd = MMU, Malaysia Yellow Pages, Menara Kuala

Lumpur b) Media Prima Bhd = Sistem Television Malaysia Bhd

(STMB), CH-9 Media Sdn Bhd, NSTP, Synchrosound Studio Sdn Bhd)

PURCHASE PRICE

Or costs acquisition as mentioned in FRS 3 Business Combinations may comprise:

1. cash and cash equivalents payable 2. fair value of other considerations (other than cash)

given by the buyer3. any costs directly attributable to the acquisition

PURCHASE CONSIDERATION

… is the setttlement of the purchase price, which could consists of any or a combination of the following:1. cash2. shares in the purchasing company3. liabilities in the purchasing company4. other assets5. incidental expenses

ACCOUNTING ENTRIES

Closing book of the seller;

Ledger Accounts:Realisation Accounts

Assets taken over xx Purchase Price xx*Liquidation Expenses Liabilities Taken Over xx

Profit on Realisation: Loss On Realisation:Debentures Holders xx Debentures Holders xxPS Holders xx PS Holders xxOS Holders xx OS Holders xx

xx xx

* If Liquidation Expenses paid by seller

Sundry Member's Accounts- OS

Loss On Realisation xx Profit On Realisation xx

Asset Not Taken Over xx Liabilities Not Taken Over xx

Equity Not Taken xx

Purchase Consideration:

OS xx

Bank xx

xx xx

Sundry Member's Accounts- PSLoss On Realisation xx Profit On Realisation xxDividend xx Dividend xx

Purchase Considerations: OS xx Bank xx

xx xx

Capital Account (for Sole proprietor)

Loss On Realisation xx Profit On Realisation xx

Asset Not Taken Over xx Liabilities Not Taken Over xx

Equity Not Taken xx

Purchase Considerations:

OS xx

Bank xx

xx xx

JOURNAL ENTRIESa) To Record the purchase price

Dr Purchasing Company's AccountCr Realisation Account

b) Assets Taken OverDr Realisation Account

Cr Relevant Assets (carring Value)

c) Liabilities Taken OverDr Relevant Liabilities

Cr Realisation Account

d) Liquidation Expenses paid by seller/old companyDr Realisation Account

Cr Bank

e) Profit on RealisationDr Realisation Account

Cr Capital Account

f) Purchase considerations received from buyer

Dr Bank (cash), sharesCr Purchaser

g) Close off the capital accountDr Capital Account

Cr Purchaser Considerations & All remaining assets

h) Asset and Liabilities not taken overDr Capital Account/Sundry Members' Account

Cr Asset Not Taken over

i) Transfer of debentures to debenture holders Accounts

Dr DebenturesCr Debenture holders' Account

j) Premium paid to the debenture holdersDr Ralisation Account

Cr Debenture holders' Account

k) Transfer of preference share capitalDr Preference share capital

Cr Sundry Members' Account (PS Column)

l) Premium Payable to the preference share holdersDr Realisation Account

Cr Sundry Members' Account (PS Column)

m) Transfer of ordinary share capital and reservesDr Ordinary share capital

ReservesCr Sundry Members' Account (OS Column)

n) Discharging the amount owing to the debenture holdersDr Debenture holders account

Cr Relevant Assets

o) Settling the amount due to the preference shareholdersDr Sundry Members' Account (PS column)

Cr Relevant Assets

p) Distribution of remaining assets to the ordinary shareholdersDr Sundry Members' Account (OS column)

Cr Remaining Assets

TO OPEN THE BOOKS OF THE BUYERS

Business Purchase Account

Purchase Price xx Asset Taken Over (New value-if any) xx

Liabilities taken Over xx Goodwill (balancing figure) xx

*Liquidation expenses xx

Capital Reserve xx

xx xx

* If Liquidation Expenses paid by new company/buyer

Bank Account

b/f (if any) xx Liquidation Expenses xx

Issuance of OS/Debenture xx Formation Expenses xx

Purchase Consideration (cash) xx

xx xx

JOURNAL ENTRIESa) Being agreed consideration transferred

Dr Business Purchase AccountCr Seller

b) to record the assets acquired at fair valueDr Relevant Assets

Cr Bussiness Purchase Account

c) To record the liabilities taken overDr Business Purchase Account

Cr Liabilities taken over

d) To record goodwill or premium paid Dr Goodwill

Cr Business Purchase Account

e) Payment of considerationDr Seller

Cr Share Capital (OS/PS)Share PrmiumCash (if any)

f) To record liquidation expenses paid by new companyDr Business Purchase Account

Cr Bank

g) To record formation expenses for new company

Dr Formation Expenses/Preliminary ExpensesCr Bank

Example 1

CONVERSION OF A BUSINESS ENTITY INTO THE COMPANY