ACCA Taxation (F6) Practice Exam

What happens to shares in the event of a reorganisation?

1. New shares are issued based on book value

2. New shares replace old ones with cost allocated by market value

3. Shareholders must sell their shares immediately

4. Old shares are nullified and replaced with cash

The correct answer is: New shares replace old ones with cost allocated by market value

In the context of a reorganisation, the process often involves replacing old shares with new ones, where the cost allocation is typically done by market value. This approach is significant because it reflects the current valuation of the company at the time of the reorganisation, ensuring that shareholders receive an equitable value for their ownership stake. When a company undergoes a reorganisation, it may do so to improve its capital structure, change its share distribution, or facilitate a merger or acquisition. By using market value as the basis for allocating costs to the new shares, the company aims to maintain fairness and transparency, aligning the value of shareholders’ investments with the company’s current market standing. This method allows shareholders to participate in the new equity structure based on what their previous shares are worth in the market, rather than just a historical value or book value, which may not accurately represent the company’s worth at the time of reorganisation. In contrast, the other options imply either a disregard for market conditions or an immediate cash-out scenario, which typically do not reflect standard practices associated with reorganisations. Thus, the correct understanding of the treatment of shares during a reorganisation lies in the valuation based on market value, leading to the issuance of new shares that accurately represent the shareholders