Menu
- 20 Marks
Question
Emili PLC and Wagbo PLC are both public limited companies wholly owned by Tanimo PLC, also a public limited company. Tanimo group PLC operates in the agro-allied industry; but the directors felt that the current structure does not serve their intended purpose and are therefore considering two different restructuring plans for the group.
The statements of financial position of Tanimo PLC and its subsidiaries Emili PLC and Wagbo PLC as at May 31, 2021, are as follows:
Statements of Financial Position as at May 31, 2021
| Item | Tanimo PLC (Nm) | Emili PLC (Nm) | Wagbo PLC (Nm) |
|---|---|---|---|
| Property, Plant, and Equipment | 600 | 200 | 45 |
| Cost of Investment in Emili PLC | 60 | – | – |
| Cost of Investment in Wagbo PLC | 70 | – | – |
| Net Current Assets | 160 | 100 | 20 |
| Total Assets | 890 | 300 | 65 |
| Equity & Liabilities: | |||
| Share Capital (Ordinary Shares of N1 each) | 120 | 60 | 40 |
| Retained Earnings | 770 | 240 | 25 |
| Total Equity & Liabilities | 890 | 300 | 65 |
Tanimo PLC acquired the investment in Wagbo PLC on June 1, 2015, when the company’s retained earnings balance was N20 million. The fair value of the net assets of Wagbo PLC on June 1, 2015, was N60 million.
Emili PLC was incorporated by Tanimo PLC on June 1, 2015, and has always been a wholly owned subsidiary. The fair value of the net assets of Emili PLC as at May 31, 2021, was N310 million, and of Wagbo PLC, it was N80 million. The fair values of the net current assets of both Emili PLC and Wagbo PLC are approximately the same as their carrying amounts.
The directors are not certain what effects the following plans would have on the individual accounts of the companies and the group accounts. Local companies’ legislation requires that the amount at which share capital is recorded is dictated by the nominal value of the shares issued, and if the value of the consideration received exceeds that amount, the excess is recorded in the share premium account. Shares cannot be issued at a discount. In the case of a share-for-share exchange, the value of the consideration can be deemed to be the carrying amount of the investment exchanged.
It is the group’s policy to value non-controlling interests at its proportionate share of the fair value of the subsidiary’s identifiable net assets.
The two different plans to restructure the group are as follows:
- Plan 1
- Emili PLC is to purchase the whole of Tanimo’s PLC investment in Wagbo PLC.
- The directors are undecided as to whether the purchase consideration should be 50 million N1 ordinary shares of Emili PLC or a cash amount of N75 million.
- Plan 2
- The assets and trade of Wagbo PLC are to be transferred to Emili PLC at their carrying amount.
- Wagbo PLC would initially become a non-trading company.
- The consideration for the transfer will be N60 million, which will be left outstanding on the intercompany account between Emili PLC and Wagbo PLC.
Required:
Discuss the key considerations and the accounting implications of the above plans for the Tanimo PLC group. Your answer should show the potential impact on the individual accounts of Tanimo PLC, Emili PLC, and Wagbo PLC and the group accounts after each plan has been implemented.
Answer
There are numbers of reasons why group restructuring or reorganisation may be undertaken. Instances of such include creation of group efficiency for tax purposes, transfer to another business, debt management, etc.
Plan 1
i. Share for share exchange
Where the purchase consideration was by share exchange, a share premium account should be maintained by Emili PLC as shares are either issued at par or premium and not at a discount.
The excess of the net book value over the nominal value (referred to as
minimum premium) is calculated as viz N70m – N50m = N20m.
The effect on the group and each company is as shown below:
NOTES
1. The list of investment in Emili PLC is increased by the amount of share issued N50m + N20m = N70m
2. Cost of investment in Wagbo PLC i.e N70m + N60m = N130m is transferred to Emili PLC maintained its carrying amount.
3. Emili PLC’s issued share capital of N50m increases the nominal value
(N60 + N50 = N110).
4. Goodwill on purchase of Wagbo PLC is N10m (N70m – (N40m + N20m).
5. The retained earnings
ii. Cash purchase
The group as an entity is unaffected by the internal reorganisation. A
gain or loss of sale of Wagbo PLC will be in Tanimo PLC’s books.
The N80m Wagbo PLC’s net asset is in excess of N75m cash price and
its effects in the books are:
NOTES
1. Investment (cost) – Wagbo PLC cash purchase price is N75m
2. Net asset (current)
Emili PLC’s cash decreased by N75m and Tanimo PLC’s cash increased by N75m
3. Retained earnings
Profit on disposal of Wagbo PLC increased Tanimo’s earnings by N5m and it is eliminated on consolidation.
Plan 2
One way to simplify a group structure is rationalisation restructuring. Wagbo PLC was initially purchased at N70m and the net assets transferred to Emili PLC is N60m giving rise to goodwill of N10m. Note that investment in Wagbo PLC in Tanimo PLC book may be impaired. The investment in Wagbo PLC in Tanimo PLC’s books will be reduced to N60m and a corresponding change on the retained earnings below:
NOTES
- Uploader: Kofi