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HMRC internal manual

Corporate Finance Manual

Debt cap: group accounts: groups merging and de-merging: merger examples

Example 1 - two worldwide groups merging

Company A is the ultimate parent of a UK group that is currently within the debt cap rules. The group prepares accounts to the period ended 30 September. Company D is also the ultimate parent of a group currently within the debt cap rules and this group prepares it accounts to the period ended 30 June. Both groups merge on 1 January 2014 and a new holding company X is incorporated which has never drawn up accounts. In this scenario there is a business combination and both groups have a new ultimate parent. Both groups are worldwide groups and are both potentially subject to section 348A. All of the groups - A, D and X are parties to the merger.

The merger is a reverse acquisition with Group A identified as the acquirer. This means in practice that the consolidated financial statements of Group X are just a continuation of the financial statements of Group A. Therefore the consolidated accounts of Group X will include the consolidated figures for the whole of the period during which the acquisition took place (the period ended 30 September 2014 and comparatives for the previous accounting period). The accounts for Group X as at 30 September 2014 will therefore include results of X itself and D group from 1 January and the results of Group A from 1 October 2013. The accounts of Group X are straddling accounts for Group A.

Section 348A requires Group X to prepare financial statement for two periods, from 1 October 2013 to 31 December 2013 and for 1 January 2014 to 30 September 2014. The financial statements for the three months to 31 December 2013 will allow Group A to finalise its debt cap position before the merger. The financial statements from 1 January 2014 will include both groups A and D and will be the first accounts for which Group X has to consider the debt cap.

Group D will not have accounts for the straddling period but should finalise its debt cap calculation by reference to the period from 1 July to 31 December 2013.

Example 2 - a worldwide group merging with another group

In this example Group E is a worldwide group with a period of account to 31 March 2015. On 1 August 2014 it merges with Group F, which is not a worldwide group. Section 348A applies because Group E is a worldwide group party to a relevant event and as a result of the relevant event Group F has a new ultimate parent. Group E prepares its accounts for the straddling period to 31 March 2015.

Applying section 348A, Group E should be treated for debt cap purposes as if it has prepared two sets of financial statements, one set from 1 April 2014 to 31 July 2014, the other from 1 August 2014 to 31 March 2015. The first set of financial statements finalises the position of Group F before the merger and the second set provides the starting position for the debt cap computation for the merged group.