Your final essay is to give the best advise that you can to the company that you work for.
You are an accountant at a partnership. The partnership has four partners, and, according to the partnership agreement, all have an equal stake in the company.
This partnership was approached by a corporation that would like to acquire them by a stock acquisition. The partnership has no authorized stock, and the corporation does not want to pay cash for the partnership.
The partnership is valued at $4,000,000 today.
Reading the partnership agreement, you find that the partnership can be terminated at any time with the consent of the partners. They do not want to dissolve the partnership.
The corporation very much wants to purchase the partnership.
In your expansive knowledge of accounting, what would you suggest the partnership do, as well as the corporation to make this consolidation happen?
The only solution involves consolidating the partnership and the corporation. How would you, the accountant, resolve this issue, including pros and cons for several different methods?
IFRS 10 defines control having 3 components- a) Power b) Right to variable return and c) Linkage between power and return. If a party to the transaction has power over to affect its variable return then said person is said to have control. Further. IFRS literature requires consolidation of Partnership firms as well if the Corporation has control over it.
In the given case, 4 partners have 25% each stake and does not want to dissolve it and at the same time Corporation wishes to purchase the Partnersip. This can be achieved in either of following ways-
1. Each partner diluting their stake in Partnership by half with compensation for dilution and allows the Corporation to control the partnership and thus allowing it to consolidate.
2. Each partner receives the cash and purchases the stock of the Corporation and allows the Corporation to become substantial partner in the Partnership. Thus, allowing each partner's to taste success of the Partnership as well.
Pros of consolidation-
1. Pooling together of the networth of the group as one
2. Each party in win-win situation
3. Partner's also being relevant by become stock holders
4. Continuation of partnership
Cons of consolidation-
1. Actual results of Partnership shall not be visible
2. Comparison of standalone performance of Partnership will not be possible.
3. Partners may also have to face losses if the coporation overall makes losses even though partnership is making profit
Your final essay is to give the best advise that you can to the company that...
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