Answer
The Companies Registry’s FAQ confirms that there is no requirement under Division 3 of Part 13 of the CO Cap. 622 for an amalgamated company to increase its share capital upon amalgamation. In other words the CO Cap. 622 does not require the amalgamated company to increase the amount of its share capital by the amount of the share capital of the amalgamating companies whose shares are cancelled and which cease to exist as entities separate from the amalgamated company. Therefore, the share capital of the amalgamated company will be the amount of share capital of the company whose shares are not cancelled.
If the amalgamated company chooses to increase its share capital above this amount by, for example, capitalizing any of the reserves that have arisen as a result of the amalgamation, then this should be regarded as an increase in accordance with section 170(2)(c) and therefore the notification and filing requirements of section 171 apply.
If the amalgamated company does not choose to increase its share capital then the impact of the amalgamation on the amalgamated company’s statement of financial position is illustrated in the following examples:
Vertical Amalgamation
Using example 1 below, assume Company A wholly owns two subsidiaries, Company B and Company C, since the date that these subsidiaries were incorporated. Company A decides to amalgamate with Company B and continue as one company. Before amalgamation, Company A has $1 share capital and Company B has $1 million share capital. Upon amalgamation1 , the share capital of the amalgamated company is $1, as the $1 million Company B share capital is eliminated against the cost of investment in Company B which was previously recorded in Company A’s statement of financial position. Company B ceases to exist as an entity separate from the amalgamated Company A and its shares are cancelled.
(i) Before amalgamation: Consolidation
|
Holding company A
$ |
Subsidiary company B
$ |
Subsidiary company C
$ |
Consolidation adjustments
$ |
Consolidated group
$ |
| Investment in subsidiaries |
1,000,100 |
- |
- |
(1,000,100) |
- |
| Other net assets |
800,000 |
1,200,000 |
50,000 |
|
2,050,000 |
| Total net assets |
1,800,100 |
1,200,000 |
50,000 |
(1,000,100) |
2,050,000 |
| Share capital |
1 |
1,000,000 |
100 |
(1,000,100) |
1 |
| Retained earnings |
1,800,099 |
200,000 |
49,900 |
|
2,049,999 |
| Total equity |
1,800,100 |
1,200,000 |
50,000 |
(1,000,100) |
2,050,000 |
To achieve the amalgamation, Company A needs to make the same journal entries into its own books to absorb B as it would have done on consolidation immediately prior to the amalgamation. As court-free amalgamation is a new concept for Hong Kong, there is no specific accounting guidance. However, as all court-free amalgamations can only occur within wholly-owned groups under the CO Cap. 622, the most relevant guidance is found in Accounting Guideline 5 Merger Accounting for Common Control Combinations issued by the HKICPA. This Guideline sets out a generally accepted methodology for accounting for two or more entities as if they had always been part of the same group as from the date that common control of these entities first occurred. This includes bringing in all assets and liabilities at their carrying amounts in the previous financial statements and restating the comparative amounts to include the combined history of the entities. This can be seen from the following amalgamation workings:
(ii) Amalgamation: Workings
| |
Before amalgamation:
Holding company A
$ |
Before amalgamation:
Subsidiary company B
$ |
Amalgamation adjustments
$ |
After amalgamation:
Amalgamated holding company A
$ |
| Investment in subsidiaries |
1,000,100 |
- |
(1,000,000) |
100 |
| Other net assets |
800,000 |
1,200,000 |
|
2,000,000 |
| Total net assets |
1,800,100 |
1,200,000 |
(1,000,000) |
2,000,100 |
| Share capital |
1 |
1,000,000 |
(1,000,000) |
1 |
| Retained earnings |
1,800,099 |
200,000 |
|
2,000,099 |
| Total equity |
1,800,100 |
1,200,000 |
(1,000,000) |
2,000,100 |
(iii) After amalgamation: Consolidation
|
Amalgamated holding company A
$ |
Subsidiary company C
$ |
Consolidation adjustments
$ |
Consolidated group
$ |
| Investment in subsidiary |
100 |
- |
(100) |
- |
| Other net assets |
2,000,000 |
50,000 |
|
2,050,000 |
| Total net assets |
2,000,100 |
50,000 |
(100) |
2,050,000 |
| Share capital |
1 |
100 |
(100) |
1 |
| Retained earnings |
2,000,099 |
49,900 |
|
2,049,999 |
| Total equity |
2,000,100 |
50,000 |
(100) |
2,050,000 |
Horizontal Amalgamation
Using the same facts as in example 1, assume that instead of a vertical amalgamation, Companies B and C decide to amalgamate horizontally, where the shares of Company B will be cancelled and the shares of Company C will not be cancelled. Before the amalgamation, Company B has $1 million share capital and Company C has $100 share capital. Upon amalgamation2 , the share capital of the amalgamated company is $100, as the shares of Company B are cancelled. The $1 million Company B share capital is credited to the reserves of the amalgamated Company C which represents a capital contribution from Company A as the amalgamated Company C receives the net assets of Company B for nil consideration. From the effective date of amalgamation, Company B ceases to exist as an entity separate from the amalgamated Company C.
(i) Before amalgamation: Consolidation
|
Holding company A
$ |
Subsidiary company B
$ |
Subsidiary company C
$ |
Consolidation adjustments
$ |
Consolidated group
$ |
| Investment in subsidiaries |
1,000,100 |
- |
- |
(1,000,100) |
- |
| Other net assets |
800,000 |
1,200,000 |
50,000 |
|
2,050,000 |
| Total net assets |
1,800,100 |
1,200,000 |
50,000 |
(1,000,100) |
2,050,000 |
| Share capital |
1 |
1,000,000 |
100 |
(1,000,100) |
1 |
| Retained earnings |
1,800,099 |
200,000 |
49,900 |
|
2,049,999 |
| Total equity |
1,800,100 |
1,200,000 |
50,000 |
(1,000,100) |
2,050,000
|
To achieve the amalgamation, Company C needs to make the journal entries into its own books to absorb the net assets of B. This can be seen from the following amalgamation workings:
(ii) Amalgamation: Workings
|
Before amalgamation:
Subsidiary company B
$ |
Before amalgamation:
Subsidiary company C
$ |
Amalgamation adjustments
$ |
After amalgamation:
Amalgamated subsidiary company C
$ |
| Investment in subsidiaries |
- |
- |
|
- |
| Other net assets |
1,200,000 |
50,000 |
|
1,250,000 |
| Total net assets |
1,200,000 |
50,000 |
|
1,250,000 |
| Share capital |
1,000,000 |
100 |
(1,000,000) |
100 |
| Other reserves |
- |
- |
1,000,000 |
1,000,000 |
| Retained earnings |
200,000 |
49,900 |
|
249,900 |
| Total equity |
1,200,000 |
50,000 |
|
1,250,000 |
(iii) After amalgamation: Consolidation
|
Holding company A
$ |
Amalgamated subsidiary company C
$ |
Consolidation adjustments
$ |
Consolidated group
$ |
| Investment in subsidiary |
1,000,100 |
- |
(1,000,100) |
- |
| Other net assets |
800,000 |
1,250,000 |
|
2,050,000 |
| Total net assets |
1,800,100 |
1,250,000 |
(1,000,100) |
2,050,000 |
| Share capital |
1 |
100 |
(100) |
1 |
| Other reserves |
- |
1,000,000 |
(1,000,000) |
- |
| Retained earnings |
1,800,099 |
249,900 |
|
2,049,999 |
| Total equity |
1,800,100 |
1,250,000 |
(1,000,100) |
2,050,000
|
Extended Question 1 (modified): What if the shares of Company C, instead of Company B, will be cancelled in the horizontal amalgamation?
Example 2 above shows the impact on the financial statements if Company B’s shares will be cancelled in a horizontal amalgamation with Company C. If instead Company C’s shares are cancelled (i.e. Company B’s shares are not cancelled) and, consequently, Company C ceases to exist as an entity separate from the amalgamated Company B, the amalgamation workings would be the same as example 2 but the results would be different. Example 3 below illustrate the amalgamation workings if Company C's shares are cancelled as follows:
(i) Amalgamation: Workings
|
Before amalgamation:
Subsidiary
company B
$ |
Before amalgamation:
Subsidiary company C
$ |
Amalgamation adjustments
$ |
After amalgamation:
Amalgamated subsidiary company B
$ |
| Investment in subsidiaries |
- |
- |
|
- |
| Other net assets |
1,200,000 |
50,000 |
|
1,250,000 |
| Total net assets |
1,200,000 |
50,000 |
|
1,250,000 |
| Share capital |
1,000,000 |
100 |
(100) |
1,000,000 |
| Other reserves |
- |
- |
100 |
100 |
| Retained earnings |
200,000 |
49,900 |
|
249,900 |
| Total equity |
1,200,000 |
50,000 |
|
1,250,000 |
(ii) After amalgamation: Consolidation
|
Holding company A $ |
Amalgamated subsidiary company B
$ |
Consolidation adjustments
$ |
Consolidated group
$ |
| Investment in subsidiary |
1,000,100
|
- |
(1,000,100) |
- |
| Other net assets |
800,000 |
1,250,000 |
|
2,050,000 |
| Total net assets |
1,800,100 |
1,250,000 |
(1,000,100) |
2,050,000 |
| Share capital |
1 |
1,000,000 |
(1,000,000)
|
1 |
| Other reserves |
- |
100 |
(100) |
- |
| Retained earnings |
1,800,099 |
249,900 |
|
2,049,999 |
| Total equity |
1,800,100 |
1,250,000 |
(1,000,100) |
2,050,000
|
Footnote:
1 In accordance with section 685(3)(c) of the CO Cap. 622, on the effective date of an amalgamation, the amalgamated company succeeds to all the property, rights and privileges, and all the liabilities and obligations, of each amalgamating company. Consequently, the net assets of each of the amalgamating company or companies as at the effective date of amalgamation will be included in the amalgamated company’s statement of financial position.
2 In accordance with section 685(3)(c) of the CO Cap. 622, on the effective date of an amalgamation, the amalgamated company succeeds to all the property, rights and privileges, and all the liabilities and obligations, of each amalgamating company. Consequently, the net assets of each of the amalgamating company or companies as at the effective date of amalgamation will be included in the amalgamated company’s statement of financial position.
