Financial Reporting and Ethics - The Institute of Chartered ...

AMALGAMATION, ABSORPTION AND RECONSTRUCTIONrealizable value. Where the realizable value of an assetis not given in an examination question, it is assumedthat the asset will realize its book value; in that case, therewill be neither profit nor loss.(b)(c)(d)(e)(f)Determine the extent that the realizable value of assetswill go in repaying the company’s debts in order of priority,assuming that the company is going on liquidation. Inliquidation, repayment is made in order of priority, asfollows:! Priority costs! Priority debts.! Secured creditors! Unsecured creditors.! Preference shares, and! Ordinary shares.From step (b) above, determine the maximum amount ofloss that each interest group can bear in liquidation andhence, the amount of reduction possible in the proposedcapital reduction scheme. What is being considered insteps (b) and (c) above is the right of creditors andshareholders. The principle here is that they must beprotected by the same scheme more than their position inan immediate liquidation. For example, if from step (b)it is ascertained that in an immediate liquidation, securedand unsecured creditors will be paid in full, then theyshould not be made to suffer any loss in the scheme thatwould not be acceptable to them. The scheme will berestricted to both ordinary and preference shares and is,therefore, capital reduction. On the other hand, if they willnot be paid in full, they may be persuaded to accept areduction lesser than what it will be in an immediateliquidation. It is in this case that they will be enticed withfuture prospects by allotting ordinary shares to them. Ifthey accept, then it is capital reconstruction.Formulate the scheme, taking into consideration all theprinciples of formulating an acceptable capital reductionscheme and the peculiar circumstances of the companyin question. One may have to refer back to the principlesof formulating capital reduction scheme, in dealing withthe assignment.Summarise the proposed reduction scheme.If required, prepare a revised balance sheet afterimplementing your proposed scheme.59