Question

In: Accounting

Divestitures: 1.What happens when a company engages in an equity carve out? 2. How does the...

Divestitures:

1.What happens when a company engages in an equity carve out?

2. How does the subsidiary account for the equity carve out transaction?

3. Does the parent record anything when the subsidiary engages in an equity carve-out transaction?

4. What happens when a company engages in a spin-off?

5. How does the parent account for a spin-off transaction?

6. Does the subsidiary record anything when a parent engages in a spin-off transaction?

Expert Solution

Divestitures: Divestitures is Divestment, which is in contrast to Investments, selling the shares, assets, investments of the company to the public in order to maximise the value and efficiency of the parent company when the subsidiary company is not performing well.

1.What happens when a company engages in an equity carve out?

Equity Carve Out is one of the types of divestnents, where the company sells a certain portion of its subsidiaries equity through stock market. It is also Called as Split off or partial Spin off.In equity carve out the management control lies in the parent company as only a ceratin portion of the shares are sold to the public typically 20%. The proceeds from the sale of such shares are tax free and are used for the financial growth of the subsidisry.Equity carve out seperates the parent compay from the subsidiary while the parent company retains its control providing its support in the success of the subsidiary. The Subsidiary is a new orgainsation having its new set of share holders, Board of Directors and Financial statements.

2. How does the subsidiary account for the equity carve out transaction?

The company prepares the combined consolidated financial statements for Equity Carve out.

3. Does the parent record anything when the subsidiary engages in an equity carve-out transaction?

Yes, the parent company records when the subsidiary engages in an Equity carve out transactions. It depends upon whetehr the subsidiary sells primary or secondary shares and whether the company has legal control.

When the parent company has legal control and subsidiary sells Primary shares, it records as Additional Paid In Capital (APIC)

Cash A/c... Dr

Minority Interest A/c...Cr

Additional Paid In Capital A/c...Cr

When the parent company has legal control and subsidiary sells Secondary shares, it records on Consolidated Income Statement

Cash A/c... Dr

Minority Interest A/c...Cr

Gain On Carve Out A/c...Cr

When the company loses its control the accounting will be as follows irrespective of the issue of primary or secondary shares

Equity Investment in Subsidiary Company A/c...Dr

Minority Interest A/c.... Dr

Net Assets Of Subsidiary Company A/c...Cr

Gain On Carve Out A/c....Cr

4. What happens when a company engages in a spin-off?

Spin off is another type of Divestment where the parent company distributes its 100% of subsidiary shares to its own share holders on a pro rata basis on the number of shares the share holders having in a company andcreating a seperate legal entity having its Board of Directors.It is Non cash nad tax free transactions. So the new investors can invest in both the companies.

5. How does the parent account for a spin-off transaction?

The parent company accounts its disposal of the subsidiary company on its balance sheet calles Net Assets on discontinued operations.

Retained Earnings A/c... Dr

Net Assets of Discontinued operations A/c...Cr

6. Does the subsidiary record anything when a parent engages in a spin-off transaction?

The Subsidiary records the spin off at book value as follows

Asset A/c... Dr

Liabilities A/c..Cr

Equity A/c...Cr

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