Unlike capital reduction, the term reconstruction normally means the sale of the undertaking of an existing company, a new company specially form for that purpose.And, reorganization is the term used to denote a rearrangement of a company’s share capital either by consolidation of shares of different classes or by the sub-division of the shares into different classes. For example, to make 1,000 ordinary share of $100 each into 100,000 shares at $1 each or 2,000 ordinary shares of $5 each into 10,000 at $1 each.

The situation when a company resorts to reconstruction and reorganization is as follows:

To enlarge the power in the Memorandum Of Association’

To amalgamate two or more companies;

To change domicile of the company;

To rearrange the capital and rights of members as between themselves;

To effect a compromise with creditors by which shares or debentures are issued to them in satisfaction of their debts.

The accounting treatment of the old company under reconstruction are the same as those for liquidation of a vendor company in an amalgamation. For the new company, the accounting entries are similar to a purchasing company.

If you found this post useful, keep updated with future posts by subscribing to FMAccounting (for free) through RSS or email.

Related Entries

• Basic Understanding Of Company Reconstruction(Part1)
• Rights Issue: Understanding Its Purpose, Mechanism & Difference Between Bonus Issue
• Illustrated Example Of Capital Reduction-Pan Malaysia Industries
• Technical Summary Of IAS 33 Earnings per Share
• PN17 Company’s FCW Proposes 5-into-1 Capital Reduction