Advance Accounting in external reconstruction, mergers, amalgamations and acquisitions

1. TOPIC 4: ADVANCE ACCOUNTING IN
RESTRUCTURING, MERGER, ACQUISITON
AND COMPANY TAKEOVER
CLO1: Prescribe accurately consolidated financial statements for
business combination, company’s reconstruction procedures and
relevant accounting theory application according to the situation
given.
CLO2: Conduct properly in preparing consolidated financial
statements for group accounts and Statement of Financial Position
after internal and external company’s reconstruction.
CLO3: discuss precisely the underlying accounting theory in
preparing company’s financial statement and accounting roles in
sustainable development using appropriate concepts according to
the situation given.

2. INTRODUCTION
 Variety of methods and techniques are done in business
world to raise capital and additional cash.
 Public company – company’s capital structure depends
on the issue of shares and debentures to the public
 Business partnership – business capitals rely heavily on
the owners and partners.

3. ALTERNATIVE BUSINESS EXPEND
Sole
Proprietorship
& Partnership
Expend the
business entity
Company (Sdn
Bhd/ Berhad)
Public
Company
Various scheme
(for enjoys
economies of
scale)
Merger,
Absorption &
Take Over

4. CONVERSION OF A BUSINESS ENTITY INTO A COMPANY
(Such as sole proprietorships and partnership)
• To enjoy limited
liability status
• Have access to the
capital market
• Enjoy future growth
and may eventually
become public
listed company
Why?

5. • The owner will form a company
specially to acquire their own
business as a going concern
• The new company will acquire the
assets and liabilities of the old
business
• The new company will incur a cost
which is the purchase price, agreed
upon by both the purchaser and
the seller
• Purchase price could be settled by
cash, shares in the new company,
or combination of cash and shares
or other securities.
• If the sellers of the business are
given shares in new company then
they become shareholders and in
most cases directors of the new
company
How?

6. BUSINESS COMBINATION
1. Amalgamation/Merger
* When two or more companies combine their business
together by selling their business as going concern to a
newly formed company
• A new company is formed to acquired the assets and
liabilities of the old companies and these companies
are wound up.
• The consideration given may consists of cash, shares
and/or debentures in the new company.

7.  Eg: Price Waterhouse + Coopers & Lybrand =
PriceWaterhouseCooper (PwC)
 Arab Malaysian + MBF = Ambank Group Bhd
F Sdn Bhd N Sdn Bhd
F&N Sdn Bhd

8. 2. Absorption
 when one dominant company acquired the assets and
liabilities of another company being acquired is wound up
 the purchase consideration given may consists of cash,
shares and /or debentures in the new company, as in
amalgamation.
 Eg: Celcom Bhd +Tmtouch = Celcom Bhd
 Guthrie Bhd + Golden Hope Bhd + Sime Darby Bhd = Sime
Darby
 KPJ Health Care Sdn Bhd + Hospital Penawar Holdings = KPJ
Health Care Sdn Bhd

9. 3. Take Over
 The investor acquires controls in another company
(investee)
 An investor company that controls another company is
referred to as the holding or the parent company ant the
acquired company becomes a subsidiary of the investor
 Eg:
 a) TM Bhd = MMU, Malaysia Yellow Pages, Menara Kuala
Lumpur
 b) Media Prima Bhd = Sistem Television Malaysia Bhd
(STMB), CH-9 Media Sdn Bhd, NSTP, Synchrosound
Studio Sdn Bhd)

10. PURCHASE PRICE
 Or costs acquisition as mentioned in FRS 3 Business
Combinations may comprise:
1. cash and cash equivalents payable
2. fair value of other considerations (other than cash)
given by the buyer
3. any costs directly attributable to the acquisition

11. PURCHASE CONSIDERATION
 … is the setttlement of the purchase price, which could
consists of any or a combination of the following:
1. cash
2. shares in the purchasing company
3. liabilities in the purchasing company
4. other assets
5. incidental expenses

12. ACCOUNTING ENTRIES
 Closing book of the seller;
Ledger Accounts:
Realisation Accounts
Assets taken over xx Purchase Price xx
*Liquidation Expenses Liabilities Taken Over xx
Profit on Realisation: Loss On Realisation:
Debentures Holders xx Debentures Holders xx
PS Holders xx PS Holders xx
OS Holders xx OS Holders xx
xx xx
* If Liquidation Expenses paid by seller

13. Sundry Member's Accounts- OS
Loss On Realisation xx Profit On Realisation xx
Asset Not Taken Over xx Liabilities Not Taken Over xx
Equity Not Taken xx
Purchase Consideration:
OS xx
Bank xx
xx xx
Sundry Member's Accounts- PS
Loss On Realisation xx Profit On Realisation xx
Dividend xx Dividend xx
Purchase Considerations:
OS xx
Bank xx
xx xx

14. Capital Account (for Sole proprietor)
Loss On Realisation xx Profit On Realisation xx
Asset Not Taken Over xx Liabilities Not Taken Over xx
Equity Not Taken xx
Purchase Considerations:
OS xx
Bank xx
xx xx

15. JOURNAL ENTRIES
a) To Record the purchase price
Dr Purchasing Company's Account
Cr Realisation Account
b) Assets Taken Over
Dr Realisation Account
Cr Relevant Assets (carring Value)
c) Liabilities Taken Over
Dr Relevant Liabilities
Cr Realisation Account
d) Liquidation Expenses paid by seller/old company
Dr Realisation Account
Cr Bank
e) Profit on Realisation
Dr Realisation Account
Cr Capital Account
f) Purchase considerations received from buyer
Dr Bank (cash), shares
Cr Purchaser
g) Close off the capital account
Dr Capital Account
Cr Purchaser Considerations & All remaining assets
h) Asset and Liabilities not taken over
Dr Capital Account/Sundry Members' Account
Cr Asset Not Taken over
i) Transfer of debentures to debenture holders Accounts
Dr Debentures
Cr Debenture holders' Account
j) Premium paid to the debenture holders
Dr Ralisation Account
Cr Debenture holders' Account
k) Transfer of preference share capital
Dr Preference share capital
Cr Sundry Members' Account (PS Column)
l) Premium Payable to the preference share holders
Dr Realisation Account
Cr Sundry Members' Account (PS Column)
m) Transfer of ordinary share capital and reserves
Dr Ordinary share capital
Reserves
Cr Sundry Members' Account (OS Column)
n) Discharging the amount owing to the debenture holders
Dr Debenture holders account
Cr Relevant Assets
o) Settling the amount due to the preference shareholders
Dr Sundry Members' Account (PS column)
Cr Relevant Assets
p) Distribution of remaining assets to the ordinary shareholders
Dr Sundry Members' Account (OS column)
Cr Remaining Assets

16. TO OPEN THE BOOKS OF THE BUYERS
Business Purchase Account
Purchase Price xx Asset Taken Over (New value-if any) xx
Liabilities taken Over xx Goodwill (balancing figure) xx
*Liquidation expenses xx
Capital Reserve xx
xx xx
* If Liquidation Expenses paid by new company/buyer
Bank Account
b/f (if any) xx Liquidation Expenses xx
Issuance of OS/Debenture xx Formation Expenses xx
Purchase Consideration (cash) xx
xx xx

17. JOURNAL ENTRIES
a) Being agreed consideration transferred
Dr Business Purchase Account
Cr Seller
b) to record the assets acquired at fair value
Dr Relevant Assets
Cr Bussiness Purchase Account
c) To record the liabilities taken over
Dr Business Purchase Account
Cr Liabilities taken over
d) To record goodwill or premium paid
Dr Goodwill
Cr Business Purchase Account
e) Payment of consideration
Dr Seller
Cr Share Capital (OS/PS)
Share Prmium
Cash (if any)
f) To record liquidation expenses paid by new company
Dr Business Purchase Account
Cr Bank
g) To record formation expenses for new company
Dr Formation Expenses/Preliminary Expenses
Cr Bank

18.  Example 1
CONVERSION OF A BUSINESS ENTITY INTO THE COMPANY