Page 84 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Unit 5: Internal Reconstruction of Companies
Pavitar Parkash Singh, Lovely Professional University

unit 5: internal reconstruction of companies notes

contents

Objectives
Introduction
5.1 Reconstruction of Companies
5.2 Summary
5.3 Keywords
5.4 Review Questions

5.5 Further Readings

objectives

After studying this unit, you will be able to:

l z Describe the meaning and types of reconstruction
l z Explain the two types of internal reconstruction viz. alternation and reduction of share
capital

l z Recognise the internal reconstruction procedure with practical illustrations
introduction

In previous unit, we have discussed the meaning of amalgamation, types of amalgamation,
difference between merger and purchase. Also, we have focused on Accounting Standards
(AS)-14 in detail. Then with the help of illustrations accounting treatment of amalgamation has
also been discussed.
Reconstruction means reorganization of a company’s financial structure. In reconstruction of a
company, usually the assets and liabilities of the company are revalued, the losses suffered by
the company are written off by a deduction of the paid-up value of shares and/or varying of
the rights attached to different classes of shares and compounding with the creditors. It may be
done without liquidating the company and forming a new company in which case the process
is called internal reconstruction. However, there may be external reconstruction in which case
the undertaking being carried on by the company is transferred to a newly started company
consisting substantially of the same shareholders with a view to the business of the transferee
company being continued by the transferee company. An attempt is made that the newly started
company has a sound financial structure and a good set of assets and liabilities recorded in the
books of the transferee company at their fair values.
Further, we will focus on the reconstruction of companies in two ways. We will discuss internal
reconstruction in this unit and external reconstruction will be specifically elaborated in the next
unit.

5.1 reconstruction of companies

The word reconstruction of a company implies the reorganization of the financial structure of
the company. It is different from amalgamation and absorption. In the case of heavy losses,
over capitalization or several financial problems, the reconstruction of a company is adopted
to remove these defects and to reorganize the financial structure. Thus term ‘reconstruction of a

lovely professional university 79