In: Accounting
Bossier Ltd has just acquired all the issued shares of Millus Ltd. The accounting staff at Bossier Ltd has been analyzing the assets and liabilities acquired in Millus Ltd. As a result of this analysis, it was found that Millus Ltd had been expensing its research outlays. Over the past 3 years, the company has expensed a total of $60,000, including $20,000 immediately before the acquisition date. One of the reasons that Bossier Ltd acquired control of Millus Ltd was its promising research findings in an area that could benefit the products being produced by Bossier Ltd. There is disagreement among the accounting staff as to how to account for the research abilities of Millus Ltd. Some of the staff argue that, since it is research, the correct accounting is to expense it, and so it has no effect on accounting for the group. Other members of the accounting staff believe that it should be recognized on consolidation, but are unsure of the accounting entries to use, and are concerned about the future effects of recognition of an asset, particularly as no tax advantage remains in relation to the asset.
Question 1: What accounting is most appropriate for these circumstances? Please advise.
Solution:
As in the given question Bossier Ltd has just acquired all the issued shares of Millus Ltd. therefore it clearly shows a relation of Holding Company and Subsidiary company.
So let’s understand the meaning of Holding company and Subsidiary company.
Subsidiary company [Sec 2 (87)] means a company in which the holding company Controls composition (>50%) of the Board – Exercises or controls more than 50% of total share capital either by itself or together with one or more subsidiaries.
Key features
Sec 188 – Related party transactions
1. In case of 100% subsidiary, special resolution passed by holding company is enough for transactions between holding company & subsidiary
2. “Arms length transaction” – transaction between 2 related parties that is conducted as if they were unrelated, so that there is no conflict of interest
3. Details of RPT to be mentioned in Board report, along with justification for entering in to the same.
4. If Board / AGM do not ratify a RPT, contract voidable at company’s option. If contract is with related party of director, the concerned director to indemnify for any loss caused to company
Hence the accounting will be done separately as like they are different companies.
The effect of Millus Ltd.(Subsidiary Company) for this entry of Research expense will be given a vice versa effect in the books of Bossier Ltd. in the consolidation statement, individual entry would not have any effect in the books of Bossier Ltd. (Holding Company).