ACCA Paper P2 (INT) Corporate Reporting Pocket notes

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Group reorganisations and

restructuring

In this chapter

Overview.•

Reasons for reorganisations.•

Creation of new parent company.•

Changes of ownership within a group.•

Reverse Acquisitions.•

chapter

Group re-organisations and restructuring

44 kaplanpublishing

Chapter 5Group re-organisations and restructuring

Overview

• Thekeyistolearntherulesofhowto

deal with a restructuring and then apply

them to the question scenario.

• Youmustknowhowtodealwith

the different options as past questions

have asked for comments on up to three

restructuring plans.

but has the same shareholders as the

group’s parent.

• Thecombinationintoagroupoftwoor

more entities whose shareholders are

the same before the combination.

• Theacquisitionofsharesofanother

entity which then issues shares so

that the acquired entity has control of the

combined entity.

A group reconstruction is any of the

following.

• Transferofownershipofasubsidiary

from one group entity to another.

• Additionofanewparententityfora

group.

• Transferofownershipofasubsidiaryto

a new entity which is not a group entity

Definition

Exam focus

Group re-organisations and restructuring Chapter 5

kaplanpublishing 45

Group re-organisations and restructuring

Reasons for re-organisations

There are a number of reasons why a group may wish to reorganise.

Reverse

acquisition

Disposalof

subsidiary

seeklisting

onpublic

exchange

DivisionalisationDemerger

Group re-organisations and restructuring

46 kaplanpublishing

Group re-organisations and restructuring Chapter 5

Changes of ownership within

a group

Changes of ownership within a group should

not affect the consolidated accounts as no

assets leave or are added to the group.

Subsidiary moved up

This is usually dealt with by S paying a

dividend in specie of the investment in T to

H. Note that in some jurisdictions it is illegal

for a parent to issue shares to a subsidiary

so this reorganisation cannot be carried out

by a share for share exchange.

Before After

S T

Accounting entries

S: Dr Retained earnings CR Investment in T

T: DR Investment in T CR Retained earnings

Subsidiary moved down

This transaction can occur in one of two

ways:

1 S issues share to H in exchange for the

shares in T.

2 S pays cash to H for T. H may end

up with a gain on disposal which must be

eliminated in the group accounts.

Before After

S T

Group re-organisations and restructuring

Group re-organisations and restructuring Chapter 5

kaplanpublishing 47

Subsidiary moved along

T would pay cash (or assets) to S.

Consideration cannot be in shares as T

may become a subsidiary or associate of

S and retain an interest in U. This type of

reorganisation may be done if the group

wishes to sell S, but retain U.

Accounting entries:

In T’s books: Dr Investment in U

Cr Cash

In S’s books Dr Cash

Cr Investment in U

U U

Before After

S T

Reverse acquisitions

A reverse acquisition occurs when an entity

obtains ownership of the shares of another

entity, which in turn issues sufficient shares

so that the acquired entity has control of the

combined entity.

Reverse acquisitions are a method of

allowing unlisted companies to obtain a stock

exchange quotation by taking over a smaller

listed company.

A private entity may arrange to be acquired

by a listed entity. The public entity issues

shares to the private entity so that the private

entity’s shareholders end up controlling the

listed entity. Legally, the public entity is the

parent, but the substance of the transaction

is that the private entity has acquired the

listed entity.

Definition

Group re-organisations and restructuring

48 kaplanpublishing

Group reorganisations and restructuring

were retained in the current P2 syllabus.

It was rarely examined under the previous

syllabus and, including the December 2009

exam, has not been examined under the

current syllabus.

Exam focus

The professional and

ethical duty of the

accountant

In this chapter

Overview.•

Ethical issues facing the accountant.•

Ethical codes of conduct.•

Consequences of unethical behaviour.•

chapter

The professional and ethical duty of the accountant

50 kaplanpublishing

The professional and ethical duty of the accountant Chapter 6

Overview

• Ethics are an important part of working

as an accountant.

• Ethicsislikelytocomeupaspartofthe

compulsory question, as in the Pilot

paper.

• Youmaybeaskedtocommentona

particular situation and whether the

directors have acted in an ethical manner

Ethical issues facing the

accountant

the tone for the culture and behaviour of

employees and management.

• Theapplicationofethicscansometimes

be intangible. Ethics is often described

as ‘doing the right thing’ but this can

mean different things to different

individuals.

Advising on corporate reporting

• Anauditisanindependentexamination

of and report on the financial statements

and therefore it is expected that the

auditors are independent.

• Therehasalwaysbeenanareaof

contention in the accountancy profession

as to whether auditors can actually be

independent when their clients pay for

their services.

• Anotherindependenceissueisthat

accountancy firms complete non-audit

work for their clients in addition to the

audit. This work is often of a higher value

than the audit and, again, makes it

Professional ethics are the principles and

standards that underlie the responsibilities

and conduct of a person in performing his/

her function in a particular field of expertise

• Ethicalprinciplesareimportantina

business organisation as they set

Definition

Exam focus

The professional and ethical duty of the accountant

The professional and ethical duty of the accountant Chapter 6

kaplanpublishing 51

difficult for the auditor to be completely

independent as they potentially could

lose a great deal of fee income.

• AccountancybodiessuchastheACCA

issue codes of conduct and ethical

guidelines that they require their

members to comply with.

Preparation of accounting information

• Preparersoffinancialinformationmust

prepare that information honestly and

fairly. Financial information may be relied

upon by users of the financial

statements, investors and potential

investors, banks, and suppliers, so it is

important that it is not misleading.

• Oneoftheissuesinpreparingfinancial

information is the pressure that may

be put on individuals by officers of the

organisation who are acting unethically.

If an individual’s manager is asking him

her to prepare financial information in a

misleading way, then it can be very

difficult to speak up and refuse to do

what is being asked for.

• Ethicalcodesofconductofferguidance

on how to deal with ethical issues.

Ethical codes of conduct

Professional accountants are bound by their

Institute or Association’s codes of ethics and

are expected to act in accordance with such

codes of conduct.

ACCA Code of Ethics

The ACCA Code of Ethics and Conduct

applies to all students, associates and

members. The Code is in the form of a

framework and adopts a principles-based

approach; whilst some specific rules are

included, compliance is largely concerned

with the observation of the fundamental

principles.

The professional and ethical duty of the accountant

52 kaplanpublishing

The professional and ethical duty of the accountant Chapter 6

• Integrity - Members should be

straightforward and honest in all

professional and business relationships.

• Objectivity - Members should not allow

bias, conflicts of interest or undue

influence of others to override

professional or business judgements.

professional

behaviour

Condentiality

Objectivity

Competence

anddue

care

integrity

• Professional competence and due

care - Members have a continuing

duty to maintain professional knowledge

and skill at a level required to ensure

that a client or employer receives

competent professional service based on

current developments in practice,

legislation and techniques. Members

should act diligently and in accordance

with applicable technical and

professional standards when providing

professional services.

• Confidentiality - Members should

respect the confidentiality of information

acquired as a result of professional

and business relationships and should

not disclose any such information to third

parties without proper and specific

authority or unless there is a legal

or professional right or duty to disclose.

Confidential information acquired

as a result of professional and business

relationships should not be used for the

ACCA Paper P2 (INT) Corporate Reporting Pocket notes - Kaplan 2010

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