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EXTERNAL RECONSTRUCTION, MERGERS, AMALGMAATIONS AND ACQUISTIONS

Advance Accounting in external reconstruction, mergers, amalgamations and acquisitions

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EXTERNAL RECONSTRUCTION, MERGERS, AMALGMAATIONS AND ACQUISTIONS

  1. 1. 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.
  2. 2. 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.
  3. 3. 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
  4. 4. 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?
  5. 5. • 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?
  6. 6. 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.
  7. 7.  Eg: Price Waterhouse + Coopers & Lybrand = PriceWaterhouseCooper (PwC)  Arab Malaysian + MBF = Ambank Group Bhd F Sdn Bhd N Sdn Bhd F&N Sdn Bhd
  8. 8. 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
  9. 9. 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)
  10. 10. 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 buyer 3. any costs directly attributable to the acquisition
  11. 11. PURCHASE CONSIDERATION  … is the setttlement of the purchase price, which could consists of any or a combination of the following: 1. cash 2. shares in the purchasing company 3. liabilities in the purchasing company 4. other assets 5. incidental expenses
  12. 12. 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 xx PS Holders xx PS Holders xx OS Holders xx OS Holders xx xx xx * If Liquidation Expenses paid by seller
  13. 13. 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- PS Loss On Realisation xx Profit On Realisation xx Dividend xx Dividend xx Purchase Considerations: OS xx Bank xx xx xx
  14. 14. 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
  15. 15. JOURNAL ENTRIES a) To Record the purchase price Dr Purchasing Company's Account Cr Realisation Account b) Assets Taken Over Dr Realisation Account Cr Relevant Assets (carring Value) c) Liabilities Taken Over Dr Relevant Liabilities Cr Realisation Account d) Liquidation Expenses paid by seller/old company Dr Realisation Account Cr Bank e) Profit on Realisation Dr Realisation Account Cr Capital Account f) Purchase considerations received from buyer Dr Bank (cash), shares Cr Purchaser g) Close off the capital account Dr Capital Account Cr Purchaser Considerations & All remaining assets h) Asset and Liabilities not taken over Dr Capital Account/Sundry Members' Account Cr Asset Not Taken over i) Transfer of debentures to debenture holders Accounts Dr Debentures Cr Debenture holders' Account j) Premium paid to the debenture holders Dr Ralisation Account Cr Debenture holders' Account k) Transfer of preference share capital Dr Preference share capital Cr Sundry Members' Account (PS Column) l) Premium Payable to the preference share holders Dr Realisation Account Cr Sundry Members' Account (PS Column) m) Transfer of ordinary share capital and reserves Dr Ordinary share capital Reserves Cr Sundry Members' Account (OS Column) n) Discharging the amount owing to the debenture holders Dr Debenture holders account Cr Relevant Assets o) Settling the amount due to the preference shareholders Dr Sundry Members' Account (PS column) Cr Relevant Assets p) Distribution of remaining assets to the ordinary shareholders Dr Sundry Members' Account (OS column) Cr Remaining Assets
  16. 16. 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
  17. 17. JOURNAL ENTRIES a) Being agreed consideration transferred Dr Business Purchase Account Cr Seller b) to record the assets acquired at fair value Dr Relevant Assets Cr Bussiness Purchase Account c) To record the liabilities taken over Dr Business Purchase Account Cr Liabilities taken over d) To record goodwill or premium paid Dr Goodwill Cr Business Purchase Account e) Payment of consideration Dr Seller Cr Share Capital (OS/PS) Share Prmium Cash (if any) f) To record liquidation expenses paid by new company Dr Business Purchase Account Cr Bank g) To record formation expenses for new company Dr Formation Expenses/Preliminary Expenses Cr Bank
  18. 18.  Example 1 CONVERSION OF A BUSINESS ENTITY INTO THE COMPANY

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