Company transformation: when is the best time for it and how can it affect the book value of assets?
January 1st is not only a day for which many of us have prepared a list of resolutions, but also a day on which it is favourable to merge or demerge a company. In this newsletter, we outline the opportunities that a company transformation offers you, including the chance to get a more realistic view of your company’s assets.
A legal tool that provides a more realistic view of a company’s accountingThe legal transformation of a company requires a sum of accounting, legal and, in some cases (see below), valuation work. Accounting work includes the preparation of financial statements before the “start date”, which in simple terms is the date from which the legal transformation will be effective. By using the standard year-end 2021 financial statements, you save yourself some accounting work while maintaining the calendar year structure of financial reporting.
How does a company’s transformation relate to making the financial statements more realistic?The transformation of a company is one of the few exceptions that allow the replacement of the historical principle of financial reporting derived from actual amounts paid with the principle of fair value. An example is a company owning an apartment building in the wider centre of Prague – these assets are often written off and reported in the range of tens of millions of crowns, though the real value of the building may in fact exceed CZK 150 million. Only company transformation allows you to make the book value of your assets more realistic within the framework of Czech financial reporting. The revaluation of assets (and liabilities) can be achieved in well-defined cases and requires an expert report prepared by a court-appointed expert. This expert opinion then values the assets of the demerged or spun-off part and may also value individual assets and liabilities. The fair values determined by the valuer then replace the original book values and become the basis for subsequent current accounting (e.g. depreciation, etc.).
What is the transformation of a company?The legal transformation or conversion of a company is a significant change to the legal structure of companies that are owned or controlled. The most commonly used tools are: Merger A merger joins two or more companies into one legal entity. A typical example of a merger is the merger of a subsidiary with its parent company. In Czech practice, one of the most common reasons for mergers is bringing together operating assets and financial resources (loans), a transformation often required by banks when providing acquisition financing. Demerger – in particular demerger by spinoff On the other hand, in the case of a demerger the assets of one company are divided among several new companies. In a popular spinoff from an existing company, assets are separated and allocated to a new or existing company. From an industrial company, you can spin off any of the business activities or, for example, real estate that is owned and managed. A demerger is very advantageous if you are considering selling part of your business or bringing a new investor (including a bank) into part of your business operations. If you are contemplating these steps, it is a beneficial to carry out the division as soon as possible so that the relationships between the original and spun-off company (e.g. resulting from mutual liability, etc.) are reduced over time.
Experience of RSM CZ in the field of valuation for the purpose of company transformationsIn 2001, RSM CZ started to operate an valuation institute, which, following legislative changes, evolved into today’s valuation office. It is one of the most respected in the country and deals with extensive valuation issues. We draw our information from the well-known Capital IQ commercial database operated by Standard & Poors and, in addition to the Czech Republic, we are licensed to provide services in Slovakia. In the case of valuations for transformation purposes, we have considerable experience with the following types of companies:
- Real estate companies – owners of residential, administrative and commercial properties, owners of hotels, logistics and industrial complexes
- Development companies – owners of land or buildings ready for the implementation of a development project who wish to implement a specific development project in a separate company
- Infrastructure companies – telecommunications, electricity distributors, water companies
- Agricultural companies
- Industrial companies – automotive, diversified industrial manufacturers
- The food industry
- IT companies – establishing companies and start-ups with local or international reach