Introduction
In the accounting for corporate restructuring, we treat the cost and losses of simple and internal restructuring, asset based restructuring, capital restructuring, amalgamation and absorption. This is CA Final's financial reporting topic. Examiner expects your knowledge of this topic. First of all we discuss about the treatment of cost and losses of simple and internal restructuring. In this treatment, we have to record of cost of changes in operation, cost of closing any plant or product line, cost of termination the services of employees and other legal and advertising charges.
{A} Accounting Treatment for Simple and Internal Corporate Restructuring
Following Steps will be useful in this accounting :
1. # All cost and losses which have been identified in corporate restructuring will be shown in the liability side before actual payment.
2.# In accounting for corporate restructuring, it is must to know the commitment date. For example, on 15th Oct. 2010m we have decided to terminate the service of our 500 employees by giving million dollar under our corporate restructuring contract, but it has approved from both parties in 1st march 2011 but before closing of our financial year. So, in our financial statement, final payment to 500 employee will be shown as liability.
3. # Cost of future benefit will not include in it.
4. # Liability will be recognized when company has obligated to pay due of contract.
{B} Accounting for Corporate Asset based Restructuring
In corporate asset based restructuring, we include merger, acquisition, demergers and asset swap. merger means to join two or more company for working. Acquisition means to buy other company. Demergers means to transfer of part of company in other by giving the free shares of new company to existing shareholders. Asset swap means to sell the asset of company for restructure. In the accounting for these corporate restructuring, we have to pass proper journal entries and to show the effect of these restructure in our financial statement. Following is its example
Investment in Debentures account Dr. 500 crores
Bank account Cr. 500 crores
7. Diverse ltd bonus shares issue to existing shareholders
Revenue Share to Equity Share Capital account Dr. 250 Crores
Equity Share capital account Cr. 250 Crores
You can now easily make balance sheet of diverse ltd, khajana ltd and sunrise ltd. For more reference, see the example in ICAI's pdf at http://www.icai.org/resource_file/19329sm_finalnew_cp4.pdf
Accounting for Amalgamation Restructuring
If you want to know accounting for amalgamation, you can learn it at here.
Related : CA Financial Reporting Notes
In the accounting for corporate restructuring, we treat the cost and losses of simple and internal restructuring, asset based restructuring, capital restructuring, amalgamation and absorption. This is CA Final's financial reporting topic. Examiner expects your knowledge of this topic. First of all we discuss about the treatment of cost and losses of simple and internal restructuring. In this treatment, we have to record of cost of changes in operation, cost of closing any plant or product line, cost of termination the services of employees and other legal and advertising charges.
{A} Accounting Treatment for Simple and Internal Corporate Restructuring
Following Steps will be useful in this accounting :
1. # All cost and losses which have been identified in corporate restructuring will be shown in the liability side before actual payment.
2.# In accounting for corporate restructuring, it is must to know the commitment date. For example, on 15th Oct. 2010m we have decided to terminate the service of our 500 employees by giving million dollar under our corporate restructuring contract, but it has approved from both parties in 1st march 2011 but before closing of our financial year. So, in our financial statement, final payment to 500 employee will be shown as liability.
3. # Cost of future benefit will not include in it.
4. # Liability will be recognized when company has obligated to pay due of contract.
{B} Accounting for Corporate Asset based Restructuring
In corporate asset based restructuring, we include merger, acquisition, demergers and asset swap. merger means to join two or more company for working. Acquisition means to buy other company. Demergers means to transfer of part of company in other by giving the free shares of new company to existing shareholders. Asset swap means to sell the asset of company for restructure. In the accounting for these corporate restructuring, we have to pass proper journal entries and to show the effect of these restructure in our financial statement. Following is its example
Journal Entries in the books of Diverse Ltd.
In this question, diverse ltd demerge into two companies One is sunrise ltd and other is khajana ltd.
1. Our investment is taken over by khajana ltd. So, receiver of khajana ltd will be debit, our investment goes out, so our investment will credit
Khajana Ltd Account Dr. 800 Crores
Investment Account Cr. 800 Crores
2. Khajana Ltd also has taken over our unsecured loan, with this, our unsecured loan liability decreased, so it will be debit and khajana ltd will become the giver of the payment of our this liability, so khajana ltd account will credit.
Unsecured Loan Account Dr. 600 crores
Khajana Ltd. Account Cr. 600 crores
3. Because difference between investment takeover and unsecured loan account is 200 Crores, it means same will be equity share capital of khajana ltd transferred from diverse ltd.
Equity share capital account Dr. 200 crores
Khajana Ltd account Cr. 200 crores
4. Entry for transfer of assets and liabilities to sunrise ltd. (Amount in crores)
Sunrise ltd Dr. 10
Provision for depreciation account Dr 30
Secured loan against fixed assets account Dr. 300
Secured loan against working capital account Dr. 100
Current liability account Dr. 1700
Fixed asset account Cr. 600
Current asset account Cr. 1500
Capital Reserve Cr. 40
5. Transfer of Equity shares in Sunrise ltd
Equity shares of sunrise ltd Dr. 10 crores
Sunrise ltd Cr. 10 crores
6. Issue of convertible debentures by sunrise to diverse ltd will be
Investment in Debentures account Dr. 500 crores
Bank account Cr. 500 crores
7. Diverse ltd bonus shares issue to existing shareholders
Revenue Share to Equity Share Capital account Dr. 250 Crores
Equity Share capital account Cr. 250 Crores
You can now easily make balance sheet of diverse ltd, khajana ltd and sunrise ltd. For more reference, see the example in ICAI's pdf at http://www.icai.org/resource_file/19329sm_finalnew_cp4.pdf
Accounting for Amalgamation Restructuring
If you want to know accounting for amalgamation, you can learn it at here.
Related : CA Financial Reporting Notes
Comments