Page 116 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Unit 6: External Reconstruction of Companies

3. External reconstruction involves any combination. notes
4. The objective of the external reconstruction is to reorganise the financial structure of the
company.
5. Shareholders of the old existing company become the shareholders of the newly formed
company.
6. The objectives of the reconstruction of a company are not the same as those of business
combination.
7. On the reconstruction of the company it may or may not go into liquidation.

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Caselet Hitachi’s Difficulty in Finding Buyers
n November 1998, Hitachi unveiled a three year-plan (fiscal 1999 to 2002), “i.e. HITACHI
Plan.” The plan set the growth vision of becoming the “best solution partner”. Under
Ithe plan, Hitachi split its Consumer Products Group and Industrial Components &
Equipment Group into two new subsidiaries in April 2002.
They were Hitachi Home & Life Solutions and Hitachi Industrial Equipment Systems. Hitachi
also completed splits of businesses, including the display, printer, telecommunications
equipment, and substation and system LSI businesses. However, none of the split
businesses have been divested.
In January 2003, Hitachi launched a new plan (fiscal 2003 to 2005), “i.e. HITACHI Plan
II”, calling for a thorough restructuring of its business portfolio. In the early phase of the
new plan, Hitachi will exit underperforming businesses altogether amounting to 20% of
its 8 trillion yen consolidated sales, while focusing on two business domains: “new era
lifeline support solutions” and “global products incorporating advanced technologies”.
It has been publicly reported that approximately 30 money-losing businesses have been
listed for divestiture. However, since the plan was announced, no divestitures have been
made. The greatest challenge confronting Hitachi seems to be finding suitable buyers for
underperforming businesses.
Source: http://www.abeam.com/research_reports/eng/RR057_E (Corporate%20Restructuring).pdf

6.2 accounting for external reconstruction

The accounting procedure in case of external reconstruction is the same as in case of amalgamation
or absorption in the nature of purchase. However, there are no different kinds in this case, unlike
in case of amalgamation or absorption, which were of two kinds viz, in nature of merger and in
the nature of purchase. The steps in accounting for external reconstruction are outlined below:

1. Ascertainment of discharge of purchase consideration
2. Closing the books of vendor company (Vendor company is the company which is being
liquidated and taken over) or transferor company
3. Passing opening entries in the books of purchasing company (i.e., Transferee Company) or
the new company floated

Notes In case of amalgamation in the nature of merger, only share capital must be
transferred to equity shareholders account and all other items belonging to shareholders
must be transferred to realisation account.

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