MyCIMA

a LTD buying a Ltd co and Partnership

Posted: Thursday 02 September 2010 by Mary/Claire McGovern
Replies : 4
Keywords: Accounting treament examples

It has been a while since I sat P8 and I expect my employers to purchase a partnership and Ltd compnay in the next few months.

I cannot remember the accounting treatment and I would be grateful if someone could direct me to a past exam question or study text.

I think I have kept all my BPP books so if anyone knows an example in any of the books, it would be really helpful.

I will Have a Crack At It

Posted by Chee Kin Tang on Thursday 02 September 2010 18:59

I am a dinosaur (having moved into non-accounting work and we were still using SSAPs then), but let me take a crack at it. Please anyone correct me if I am wrong, but I thought I should have a go so as to start the ball rolling, and also (re)educate myself.

Re. the limited company, it depends on whether you are merely buying the assets (and/or liabilities) or shares of the entity.

If buying the shares, you simply

Dr. Investment

Cr. Cash/bank (if owners of acquired company is paid in cash) or Share Capital (if shares are issued to acquire shares of the limited company)

Depending on the degree of control (subsidiary or associate), you will prepare group accounts accordingly.

If buying assets,

Dr. Assets and liabilities (of diffferent categories)

Cr Entry is same as the above

Re. partnership, it also depends. If you are acquiring the entire partnership (and it ceases to exist after that), you are buying the assets and/or liabilities. But if you are buying into a partnership (i.e. being admitted as a new partner without a dissolution), it would be treated as an investment in your company's books (but as an addition of partners in the partnership's books).

(Now if you have a controlling interest in the partnership, I believe you may have to consolidate the results as if it was a subsidiary. Could someone please cite the relevant FRS/IAS?) 

Any other complications to these transactions are above my pay-grade and low intellectual capacity not to mention my poor memory.....

 

100% ownership

Posted by Mary/Claire McGovern on Friday 03 September 2010 14:29

Thanks for the reminder.

We plan to buy 100% of a limited company  which owns 100% of the partnership. We are buyng both buisnesses as a going concern.

I can't remember how I am supposed to treat the entries in the consolidated accounts. I rememebr you have to caluclate goodwill based on fair value and kick out any inter company activites. I presume we are paying £X over the odds for the  balance sheet value and the difference between the two will be goodwill, but do I have to revalue everything?

Both organisations are very small and I do not want to deal with our audiots as they charge a fortune. I woul dbe grateful for your help again.

Goodwill or Capital Reserve

Posted by Chee Kin Tang on Friday 03 September 2010 16:28

Yes, you will have to compute the goodwill (or capital reserve=negative goodwill) on consolidation. The goodwill being the purchase consideration minus the fair value of the assets and liabilities of the ltd company at the date of the transaction.

The textbook approach (recalling from 1989 which is when I passed CIMA...:-)) is to:

Dr. Cost of Control (with the purchase consideration)

Cr. Investment

Dr. 100% Net Assets of ltd company (fair value at time of transaction)

Cr Cost of Control

(The difference between the Dr and Cr of your cost of control is the goodwill if Dr > Cr. Additionally since it is 100% owned, no minority interest will arise)

And yes, subsequent to the transaction date, you will have to eliminate any interco transactions between holding and subsidiary. But not before since the ltd company was not a subsidiary then. 

Re. the partnership, I am a bit confused with the ltd company owning 100% of the partnership. Unless I am mistaken, if the ltd company owns 100%, there are no other partners, and so it ceases to be a partnership or at least should not be called a partnership considering the definition of partnership is "two or more persons joining together in an enterprise with a view to profit" or something to that efffect.

So, then who is or are the other partner(s) in the partnership in which the ltd company "owns" 100%?

 

 

I will try and clarify

Posted by Mary/Claire McGovern on Monday 06 September 2010 15:04

The ltd company is owned by two people who also have a seperate entity which is their partnership. We plan to buy both for £X and I am presuming that I will split the cost of the investment between the Balance Sheet value at the date of purchase and the balance will be my goodwill per entity. This is a very small undertaking and I do not wish to get our audiotrs involved until year end, as they charge quite rightly by the hour and I would like to get the nuts and bolts of this done before my accountancy charges rocket.

I presume that I will have to finish the accounts for the two organisations after we have aquired them as at the purchase date; at that point, I should know the real book value of the assets and that a fair value adjustment will have to be done by the auditors at year end.

Thank you very much for your help.