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CS Professional · Corporate Restructuring, Valuation and Insolvency · Accounting in Corporate Restructuring: Concept and Accounting Treatment

Which statement correctly describes the accounting of the resulting company when a demerger satisfies the conditions of an 'arrangement' under a court scheme, with the demerged undertaking being a business and the resulting company being a newly formed entity under the book-value method?

The resulting company records the transferred assets and liabilities at the carrying amounts shown in the demerged company's books. Fair value or market capitalisation is not used under the book-value method, and liabilities are recorded together with the assets.

  1. AIt records the transferred assets and liabilities at the carrying amounts in the demerged company's booksCorrect
  2. BIt records them at fair values determined by the valuer
  3. CIt records only the assets and ignores liabilities until paid
  4. DIt records them at market capitalisation of the demerged company

Explanation

Under the book-value (pooling-type) method, the resulting company incorporates the assets and liabilities at the carrying amounts in the demerged company's books. Fair value applies in the purchase method, not here. Liabilities are always recorded along with the assets.

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