Demerger, Slump Sale and Corporate Restructuring Accounting

Understand Demerger, Slump Sale and Corporate Restructuring

Key rules to remember

Net assets of the demerged undertaking

Net assets = Assets transferred − Liabilities transferred

Use book values for common control pooling and fair values for the acquisition method.

Difference in the resulting company (common control)

Difference = (Share capital issued + other consideration) − Share capital of the transferor

Per Appendix C, para 12 this difference is transferred to capital reserve and shown separately from other capital reserves, with its nature and purpose disclosed. If the transferor's share capital is higher, the result is a credit to capital reserve. The reserves of the transferor are carried over with their identity preserved, so they are not part of this difference.

Gain or loss in a slump sale

Gain or loss = Lump-sum consideration − Net book value of the undertaking

A positive result is a gain. Do not give separate values to individual assets.

Goodwill (acquisition method)

Goodwill = Consideration − Fair value of net identifiable assets acquired

A negative result is a bargain purchase gain, recognised as per Ind AS 103.

Common control disclosures

Para 13 of Appendix C: (a) names and nature of business, (b) date control obtained, (c) shares issued and percentage exchanged, (d) difference and its treatment

Give these in the first financial statements after the combination.

How to solve Demerger, Slump Sale and Corporate Restructuring questions

1. 1Identify the transaction: demerger, hive-off, slump sale or itemised sale. Check who receives the consideration.
2. 2Decide the accounting basis: common control pooling or acquisition method at fair value.
3. 3List the assets and liabilities of the undertaking transferred, at the right values.
4. 4Compute net assets taken over and the consideration (shares issued at face value, or at fair value for acquisition method).
5. 5Find the difference and treat it: capital reserve for pooling, goodwill or bargain gain for acquisition.
6. 6Pass entries in the books of the resulting company and then the demerged company or seller.
7. 7In the demerged company, remove the net assets and adjust shareholder balances (reserves or capital) as the scheme directs.
8. 8Prepare the post-demerger balance sheet and add the required disclosures.

Quickest way: Net assets and difference shortcut

Common mistakes in Demerger, Slump Sale and Corporate Restructuring

• Treating a slump sale like an itemised sale and valuing each asset separately in the seller's books.

  Students see a list of assets and allocate the price automatically.

  Fix: In a slump sale, take one lump-sum price and compare it only with the net book value of the undertaking.

• Confusing demerger with hive-off.

  Both move an undertaking out of a company.

  Fix: Check who receives the consideration. In a demerger, the shareholders of the demerged company receive shares of the resulting company.

• Recording a capital reserve difference as goodwill under the pooling method.

  Students apply the acquisition method to every combination.

  Fix: For common control, use Appendix C: the difference goes to capital reserve, presented separately with its nature and purpose disclosed.

• Changing the names of reserves of the transferor.

  Students merge all reserves into one line.

  Fix: Preserve the identity of reserves. A General Reserve of the transferor stays a General Reserve in the transferee.

• Using fair values in a common control pooling problem.

  Fair value is the habit from acquisition problems.

  Fix: Use the values given in the transferor's books unless the question states otherwise, and read the scheme carefully.

• Forgetting the disclosures in the first financial statements.

  Students stop after the journal entries.

  Fix: List names, nature of business, date of control, shares issued and the difference with its treatment.

Worked examples