IFRS reports & accounts - Reverse acquisition move creates distributable reserves

UK healthcare company Shire is installed as a new holding company under a court-approved scheme of arrangement and creates distributable reserves of $2.95bn (£1.6bn) that offset a retained earnings deficit of $1.1bn.

During the year, Shire was incorporated as a new company with shares having a nominal value of £3.50 and in November 2005, its shares were exchanged for those of Shire Pharmaceutical on a one-for-one basis under a court-approved scheme of arrangement. Following International Financial Reporting Standards (IFRS), the transaction is accounted for as a reverse acquisition where the legal subsidiary is treated as the acquirer and as a result there is no revaluation of Shire Pharmaceuticals' assets.

Subsequently, the court approved a reduction in the nominal value of Shire's shares to £0.05 which created a new distributable reserve of $2.95bn that offsets a retained earnings deficit of $1.1bn. The financial review discloses that this reserve is available to be utilised for dividend payments.

The restructuring and reduction in share capital are similar to transactions undertaken by WPP (Accountancy, September, p92) and PartyGaming, which have both installed new holding companies. However, WPP used merger accounting principles and PartyGaming relied on US GAAP pooling of interests.

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