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I don’t get when we are supposed to apply these rules. Is it that the new parent (inserted) doesn’t measure the cost of the investment with the consideration paid but uses the subsidairy’s carrying amount, as stated below? What does the introductory paragraph tell us below? When are the below rules supposed to be used? What’s the thing of existing parent and entity and new parent? Could please make the below knowledge (rules) more clearer to me. I thought that we always measure the cost of the investment with what we paid, why is carrying amount used here?
IAS 27 has been amended to effectively allow the cost of an investment in a subsidiary, in limited reorganisations, to
be based on the previous carrying amount of the subsidiary rather than its fair value. This relief is limited to reorganisations where a new parent is inserted above an existing parent of a group (or entity), This is only
allowed when a new parent (Ceed) is inserted above an existing parent of a group or entity (Rant), and where the following criteria are satisfied and:
(i) The new parent obtains control of the original parent (or entity) by issuing equity instruments in exchange for existing equity instruments of the original parent (or entity);
(ii) The assets and liabilities of the new group and the original group are the same immediately before and after the reorganisation; and
(iii) The owners of the original parent (or entity) before the reorganisation have the same absolute and relative interests after the reorganisationWe have a parent H of a 70% owned subsidiary S
We wish to reorganise the structure of the group by creating a new parent P above the original parent H
We can do this, not at fair value of the consideration paid but at the carrying value of H’s net assets.
P will issue equity shares in P to the former shareholders in H in exchange for the former shareholders in H exchanging their shares in H (transferring them to P’s name)
Now read the pre-requisites (the three criteria)
If you use letters like P (for the new parent), H (for the original parent) and S (for the subsidiary of H and now the sub-subsidiary of P), it hopefully becomes clearer (or maybe more muddy!)
Has that made it any better for you?
I get confused in this:
P will issue equity shares in P to the former shareholders in H in exchange for the former shareholders in H exchanging their shares in H (transferring them to P’s name)
Should it read “P will issue equity shares in P to the former shareholders in H in exchange for the former shareholders in H exchanging their shares in S (AND NOT H)(transferring them to P’s name). Is it like that?
The shareholders in H company are NOT the shareholders of S company. The controlling interest in S company is owned by H company, not by H company shareholders.
No, it’s as I said. The shareholders in H company will receive an offer from the P company. The offer goes like this:
“Hey you guys that own all the shares in H company. I’m prepared to issue shares in my company P if you will transfer to me all your shares in H company. Yes, yes, I know! H company owns a controlling interest in S company but it’s company H that I want to control (and thereby I’ll also control S company)”
And all you shareholders in H company will transfer your shares in H company to me so I now control H company
In exchange, I shall issue to you shares in my P company so you still have shares in a holding company. It’s just that it’s called P company instead of H company.
Better?
I can get that but I got confused because in the scenario it was a bit different. The scenario read:
“Decany owns 100% of the ordinary share capital of Ceed and Rant. All three entities are public limited companies.The group operates in the shipbuilding industry, which is currently a depressed market. Rant has made losses for the
last three years and its liquidity is poor. The view of the directors is that Rant needs some cash investment. The directors have decided to put forward a restructuring plan as at 30 November 2011. Under this plan:”So here you see Ceed doesn’t control the original parent (Decany) but just controls Rant, so is that the reason why in Ceed’s individual (entity) financial statements, the “investment in Rant” is showed as the cash money Ceed paid to Decany for Rant and is not therefore shown at the carrying value of Rant. So I think the two situations are different and therefore in part (a) the investment in Rand (in Ceed’s entity’s statements) is shown at cash money paid because I think the situation you were describing and the situation here are DIFFERENT right? That must be the reason. Can you confirm?
What I can confirm is that, by giving me a twisted version of only half the details, it’s like asking a blind man wearing a black blindfold to find a light switch in an unlit room – and there is no light switch in the room for him to find!
Why are you wasting my time? Why did you not give me the full story? And why, in your version of events, did you imply that there was to be a new parent inserted above an existing parent suggesting a vertical group?
I quote: “limited to reorganisations where a new parent is inserted above an existing parent of a group (or entity), This is only allowed when a new parent (Ceed) is inserted above an existing parent of a group or entity”
Now, please stop playing games with me and give me the exam reference. that way, at least, I can rely on the details that I read
The reference is in the title (12/11) Dec 2011 question 2 a (ii) and the answer I quote is from the examiner. I didn’t imply that there is a parent on top of another one, the examiner writes that.
“I don’t get when we are supposed to apply these rules.”
Apply the rules where the three conditions are satisfied.
“Is it that the new parent (inserted) doesn’t measure the cost of the investment with the consideration paid but uses the subsidairy’s carrying amount, as stated below”
Yes, as stated below!
“What does the introductory paragraph tell us below?”
It tells us to use carry-over value rather than fair value of consideration paid
“I thought that we always measure the cost of the investment with what we paid, why is carrying amount used here?”
That’s what the revision to IAS 27 has allowed – it saves all sorts of problems with distributable profits and pre-acquisition reserves. It makes group internal reorganisations much easier, less expensive and more realistic in the commercial World
I don’t know if that’s any better for you – it simply reiterates in different words the effect of the IAS 27 revision
I’m afraid I don’t understand either why the answers suggest that the reorganisation meets the criteria for the following reasons:
Decany (the original parent) has not established a new entity as its parent but has rather sold its investment in a wholly owned subsidiary (Rant) to another wholly owned subsidiary Ceed. Therefore Decany remains the ultimate holding company.
Also the criteria states that the new parent achieves control by exchanging equity instruments in exchange for the equity instruments of the original parent. In this case Ceed has issued cash consideration in return for shares in Rant.
Please can you help as I have spent considerable time trying to understand the answers to this question.Hi,
This may sound crazy but there is a simple solution to this. Don’t do it and if it appears in the exam ignore it! Unless anybody is a genius at double entry bookkeeping then it is just too complex and time consuming to understand.
If it is to be examined it will be either question 2 or 3. So whichever question it is you can just do the other two optional questions.
Thanks
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