Merger accounting for group reconstructions

FRS 102 allows merger accounting only for group reconstructions, such as inserting a new holding company or moving a subsidiary within a group, and only where the ultimate shareholders and their relative rights are unchanged, no minority interest is altered and company law does not prohibit it. Under merger accounting, carrying values are kept, no goodwill arises, and the combined results are shown for the whole year with restated comparatives, as if the entities had always been together.

What counts as a group reconstruction?

The FRS 102 glossary defines a group reconstruction as any one of these arrangements:

1. the transfer of an equity holding in a subsidiary from one group entity to another;
2. the addition of a new parent entity to a group;
3. the transfer of equity holdings in one or more subsidiaries to a new entity that is not a group entity but whose equity holders are the same as those of the group’s parent;
4. the combination into a group of two or more entities that before the combination had the same equity holders;
5. the transfer of the business of one group entity to another; or
6. the transfer of the business of one group entity to a new entity outside the group whose equity holders are the same as those of the group’s parent.

The last two items were added in the Triennial Review 2017 so that transfers of a business, not just transfers of shares, can qualify (basis for conclusions paragraph B19.2). A common example is a family that owns two trading companies directly and puts them under a new holding company, or a group that hives the trade of a subsidiary up into its parent.

When can merger accounting be used?

FRS 102 paragraph 19.6 requires every business combination to use the purchase method, with one exception for group reconstructions. Paragraph 19.27 says group reconstructions may be accounted for by merger accounting provided:

• its use is not prohibited by company law or other relevant legislation;
• the ultimate equity holders remain the same, and the rights of each equity holder, relative to the others, are unchanged; and
• no non controlling interest in the net assets of the group is altered by the transfer.

For group accounts, company law sets its own conditions in paragraph 10 of Schedule 6 to the Large and Medium sized Companies and Groups (Accounts and Reports) Regulations 2008, with the same wording in Schedule 6 to the Small Companies and Groups Regulations: the undertaking whose shares are acquired must be ultimately controlled by the same party before and after the acquisition, that control must not be transitory, and the merger method must accord with generally accepted accounting practice. FRS 102 Appendix III (paragraph A3.30) describes these as generally consistent with paragraph 19.27, and notes that merger accounting outside the Schedule 6 conditions is only possible as a true and fair override with full disclosure.

Note the word “may”. Merger accounting is an option for a qualifying reconstruction, not a requirement. A group can choose acquisition accounting instead, and paragraph 19.33 requires disclosure of which method was used.

How does merger accounting work?

Paragraphs 19.29 to 19.32 set out the method:

• Assets and liabilities are brought in at their existing carrying values, not fair values, adjusted only to align accounting policies (paragraph 19.29).
• Results and cash flows of all combining entities are included from the beginning of the financial year in which the combination occurred, and comparatives are restated to include all of them (paragraph 19.30).
• The difference between the nominal value of shares issued plus the fair value of any other consideration, and the nominal value of the shares received, is shown as a movement on other reserves. Any share premium or capital redemption reserve of the new subsidiary is also brought in as a movement on other reserves. These movements appear in the statement of changes in equity (paragraph 19.31).
• Merger expenses are charged to profit or loss at the effective date of the reconstruction, not taken to reserves (paragraph 19.32).

Schedule 6 paragraph 11 to the regulations prescribes the same mechanics for Companies Act group accounts.

How does it differ from acquisition accounting?

Point	Acquisition (purchase) method	Merger accounting
Values of assets and liabilities	Fair value at acquisition date (paragraph 19.14)	Existing carrying values (paragraph 19.29)
Goodwill	Recognised and amortised, or negative goodwill	None arises
Results included	From the acquisition date only (Schedule 6 paragraph 9(3))	For the whole year of combination
Comparatives	Not restated	Restated as if always combined
Transaction costs	Directly attributable costs added to cost (paragraph 19.11(b))	Charged to profit or loss (paragraph 19.32)
Main disclosures	Paragraph 19.25 in full	Paragraph 19.33: names, method and date

The practical effect is that a reconstruction which changes nothing economically also changes nothing in the numbers, apart from the equity analysis. Using acquisition accounting for the same reorganisation would create fair value uplifts and goodwill, and the resulting amortisation, even though no outside party has bought anything.

What does a new holding company look like in numbers?

Illustration only. Opco Ltd has share capital of £100 and retained earnings of £400,000, and is owned 60:40 by two shareholders. A new company, Holdco Ltd, issues 1,000 shares of £1 each to them in the same 60:40 ratio in exchange for all their Opco shares. Shareholders and their relative rights are unchanged and there is no minority, so the paragraph 19.27 conditions are met.

• Nominal value of Holdco shares issued: £1,000. Nominal value of Opco shares received: £100.
• The £900 difference is shown as a debit movement on other reserves.
• Consolidated equity: share capital £1,000, other reserves (£900), retained earnings £400,000. Total £400,100, the same as Opco’s equity before the reorganisation.
• The consolidated profit and loss account includes Opco for the whole year, and last year’s figures are Opco’s figures.

Holdco’s legal advisers and accountants should also consider the share for share tax treatment; see share for share exchange.

How does the parent record its investment in its own accounts?

Merger accounting is a consolidation method. The parent’s own balance sheet records an investment in the subsidiary under paragraph 9.26, at cost less impairment or at fair value. Company law then affects the cost figure:

• Merger relief under section 612 of the Companies Act 2006 applies where the issuing company secures at least a 90% equity holding in another company by issuing equity shares, and removes the requirement in section 610 to credit the premium to share premium account.
• Group reconstruction relief under section 611 applies where a wholly owned subsidiary issues shares to its holding company or a fellow wholly owned subsidiary for non cash assets of a group company, and limits the amount taken to share premium to the minimum premium value. Section 612 does not apply where section 611 does.
• Section 615 lets the premium not recorded be disregarded in measuring the investment. FRS 102 paragraph A3.24 explains that, under the cost model, this allows the investment to be carried at the nominal value of the shares issued or the transferor’s previous carrying amount, depending on which relief applies, but that this is not available if the investment is held at fair value.

What are the common mistakes?

• Using merger accounting where the shareholders’ relative holdings change, for example where one shareholder receives extra shares or cash as part of the deal.
• Using it where a minority interest is altered, which fails paragraph 19.27(c).
• Showing the new subsidiary’s results only from the reorganisation date, instead of the whole year with restated comparatives.
• Taking merger expenses to reserves instead of profit or loss.
• Assuming merger accounting in the group accounts means no share premium in the parent’s own books; that depends on sections 611 and 612.

What must be disclosed?

For each group reconstruction in the period, paragraph 19.33 requires the names of the combining entities other than the reporting entity, whether the combination was accounted for as an acquisition or a merger, and the date of the combination. The fuller business combination disclosures in paragraph 19.25 expressly exclude group reconstructions. The other reserves movements must appear in the statement of changes in equity under paragraph 19.31. For when group accounts are needed at all, see FRS 102 consolidated accounts.

Solar Protect provides tax investigation insurance for businesses and fee protection schemes for accountancy practices. Read how our cover works or get a quote.

Related Accountapedia entries

• Accounting for a hive up of a subsidiary’s trade
• Buying a trade and assets vs buying shares
• Accounting for charity mergers
• Buying more shares: associate to subsidiary
• Non controlling interests explained

Sources

• Financial Reporting Council: FRS 102 September 2024 tmKYWO6
• legislation.gov.uk: SI 2008/410, schedule 6
• legislation.gov.uk: SI 2008/409, schedule 6
• legislation.gov.uk: SI 2008/410, schedule 6
• legislation.gov.uk: SI 2008/410, schedule 6
• legislation.gov.uk: Act 2006 c. 46, section 612
• legislation.gov.uk: Act 2006 c. 46, section 611
• legislation.gov.uk: Act 2006 c. 46, section 615

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.