US GAAP Accounting for Corporate Restructuring or Equity Refinancing

USA Discussion in 'Technical Queries' started by alcapitalus, Dec 14, 2018.

  1. alcapitalus

    alcapitalus

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    Dear Friends

    I am working for a privately held corporation in which it has struggled to maintain above water and instead of closing shop, existing and new shareholders are willing to put in "New Money". However, they wish to take a tax loss on their existing investments (old money) and, as a result, the Company is willing to cancel or repurchase their exist shares at $1 per share (say originally bought at $100 per share) and then reissue new shares for $1 per share equal to the number shares they previously had on hand + issue additional shares for the new money they will put in at $1 per share, as well.

    Events:
    Year 1 - Original shares bought $100 x 1,000 shares = $100,000
    Year 2, Day 1 - Company cancels or repurchases all 1,000 shares @ $1 from existing shareholders
    Year 2, Day 2 - Company then reissues new 1,000 shares @ $1 to existing shareholders
    Year 2, Day 3 - Company then issues additional 100,000 shares @ $0.50 to existing shareholders
    Year 2, Day 4 - Company then issues additional 200,000 shares @ $0.50 to new shareholders

    Obviously, the Company has a lower valuation and old money shareholders will face dilution and their interest will fall; however, What is my US GAAP accounting entry for Day 1, 2, 3 and 4?

    Side note, what is the FASB related to this event?

    Thank you!!
     
    alcapitalus, Dec 14, 2018
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  2. alcapitalus

    kirby VIP Member

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    Need more info

    Do the old shares have a par value or a stated value? If so, what is the amount?
    Will the new shares have a par value or a stated value. If so, what is the amount?
     
    kirby, Dec 15, 2018
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  3. alcapitalus

    alcapitalus

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    Par value of $0.001, old and new
     
    alcapitalus, Dec 15, 2018
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  4. alcapitalus

    kirby VIP Member

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    Because of the par value, your equity before the day 1 and 2 etc should look like

    Common stock at par < $1 >
    Additional capital < $99,999 >

    Day 1 - repurchase shares

    DR Common Stock at par $1
    DR Additional capital $99,999
    CR Cash <$100,000>

    Day 2 Issue new shares

    DR Cash $1,000
    CR Common Stock at par <$1>
    CR Additional capital <$999>

    Day 3 issue shares
    DR Cash $50,000
    CR Common Stock at par <$10>
    CR Additional capital <$49,990>

    Day 4 is just double of day 3 entry

    NOW - stuff your mgmt needs to consider :
    They need to read the IRS "wash sale rule"
    which will not allow allow a tax loss if certain conditions are not met in a sale and buyback. And a sale and buyback is exactly what is going on here.
    As well as , the IRS rules that kick in when a company does a share repurchase such as this one and the payment to the shareholders is treated by IRS as a dividend and not as a purchase.
    Lots of research to do for your tax advisers.

    Good luck.
     
    Last edited: Dec 16, 2018
    kirby, Dec 16, 2018
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  5. alcapitalus

    alcapitalus

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    I really appreciate this,

    On day one the company repurchases the entire interest from existing shareholders for only $1000, so the question now becomes, how is the $99,000 gain recorded? and what FASB ASC code should I research? Thank you again
     
    alcapitalus, Dec 23, 2018
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  6. alcapitalus

    kirby VIP Member

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    Reminder- The IRS wash sale rule is going to affect you and you will most likely not achieve the tax result you seek.
    Pressing on -
    I have to expand the day 1 entry above as company paid $1,000 for the shares
    DR Common Stock at Par $1
    CR Additional Capital $999
    CR Cash <$1,000>

    Which leaves <$99,000> in the Additional Capital account in a company with NO shareholders.

    What made sense to me was to return that to the original shareholders. It is NOT a gain as you suggest.

    DR Additional Capital $99,000
    Cr Cash <$99,000>

    So additional warning - if you do a 100% stock repurchase then IRS may apply either liquidation rules or dissolution rules to your company. I cannot predict which will apply. Again, lots of tax research needed to be done by your tax advisers.
     
    kirby, Dec 23, 2018
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