It is of 3 types External reconstruction is one in which the company undergoing reconstruction is liquidated to take over the business of an existing company. ADVERTISEMENTS: Here is a compilation of top four accounting problems on alteration of share capital and internal reconstruction with its relevant solutions. Internal reconstruction is done when there is a chance for the existing company to bounce back. External Reconstruction. Cash Flow Statement. Assets Rs. No matter what sort of reconstruction it is, it’s important to renovate, recreate, and reassume the business processes and visions as businesses grow. For lectures included in the course, click / tap Course Contents. On the other hand, external reconstruction can be done immediately without any need for permission from the court. There is no transfer of assets and liabilities, because there is not a formation of new company. If it done without liquidating the company and forming a new company, the process is called internal reconstruction. INTERNAL RECONSTRUCTION Meaning: It refers to the reconstruct the business without its liquidation. Meaning of Internal Reconstruction : When the company reconstructs its financial structure internally without undergoing liquidation, it is internal reconstruction. By closing this banner, scrolling this page, clicking a link or continuing to browse otherwise, you agree to our Privacy Policy, Coursera IPO Financial Model & Valuation Free Download, All in One Financial Analyst Bundle (250+ Courses, 40+ Projects), 250+ Courses | 40+ Projects | 1000+ Hours | Full Lifetime Access | Certificate of Completion. Internal reconstruction is a method of reconstructing an earlier state in a language's history using only language-internal evidence of the language in question. The nature of internal reconstruction. They are the company’s shareholders, debenture holders, creditors etc. Internal Restructuring of a Company: Causes, Modes and Procedure. It is a case of … Application of Different Cash flow Methods, Basic Terminologies of Accounting for Hire Purchase System, Sample Merry Christmas Wishes Letter to Clients, Connect With Friends and Share Information, Methods for Accounting Treatment of Containers. This has been a guide to Internal vs External Reconstruction. The approach is similar when it comes down to internal and external reconstruction. 12. It does not require the binding of the existing company. It is done to ensure an inner re-arrangement of financial structure. To resolve the problem of over-capitalization/ huge accumulated losses/ overvaluation of assets. Internal reconstruction needs a lot of time and statutory requirements to occur because in internal reconstruction the company has to take the permission of every stakeholder and also of the court. They are the company’s shareholders, debenture holders, creditors, etc. Company restructuring is a process in which a company changes the organizational structure and processes of the business. The purpose of internal reconstruction is to set off the past losses against future profits. Share Capital - Alteration Of Share Capital, Advanced Corporate Accounting Section 106 relating to variation of shareholders’ rights. Under internal reconstruction, the accumulated trading losses and fictitious assets are written off against the sacrifice made by these interest holders in the form of a reduction of the paid-up value of their interest. Ans:- if there is a creditor of company with a claim of Rs. IR is a restructuring method that doesn’t create a new company via liquidation. Internal Reconstruction. Very slow, tedious, and takes a long time. External reconstruction is done to start the whole thing afresh. Since a new company is established losses of the old company can’t be set off against the profits of the new company. Internal reconstruction of a company is done through the reorganization of its share capital. When businesses get started, they’re not perfect. External reconstruction: Introduction Reconstruction refers to certain arrangements made by financially unsound companies. It is a scheme of reorganization in which all interested parties in the capital structure volunteer to sacrifice. Methods of Internal Reconstruction Convert fully paid up shares into stock or reconvert that stock into fully paid up shares. 3.3K views. It Read more… By Pushkaraj G | Views 5720. Management Accounting MCQs. a recourse undertaken to make necessary changes in the capital structure of a company without liquidating the existing company. the reorganization of the company, without liquidating the existing company and forming a new one. CFA Institute Does Not Endorse, Promote, Or Warrant The Accuracy Or Quality Of WallStreetMojo. "And reduced ” words are to be shown in the balance sheet as per ____ requirement. And both of these depend on the decision and the permission of the stakeholders involved in the whole process. You may also have a look at these following articles –, Copyright © 2021. External reconstruction. Alteration of share capital and internal reconstruction -Past Year Questions. Equity shares of Rs.100 each 1,00,00,000 Fixed assets 1,25,00,000 It is a scheme of reorganization in which all interested parties in the capital structure volunteer to sacrifice. Management Accounting. Internal reconstruction means a recourse undertaken to make necessary changes in the capital structure of a company without liquidating the existing company. Internal Reconstruction 5.6 Question 2 The following is the Balance sheet of Weak Ltd. as on 31.3.2012: Liabilities Rs. Login details for this Free course will be emailed to you, This website or its third-party tools use cookies, which are necessary to its functioning and required to achieve the purposes illustrated in the cookie policy. In case of external reconstruction, the undertaking being carried on by the company is transferred to a newly started company consisting substantially of the same shareholder. 10 each fully paid into Rs. Differences between amalgamation and external reconstruction  1. New Company: In case of Internal reconstruction no new company is formed: In case of External Reconstruction a new company is formed: 4. Internal reconstruction refers to making internal arrangements for … External reconstructionrefersto closing/liquidating the company and starting again a new or a fresh. You can access this course for life time - in your CA Raja Classes App as well as Website in Desktop / Laptop. Some completely change the idea of business and create a new one. Internal reconstruction is the reorganization of the financial affairs of the company internally without undergoing liquidation. The need for internal reconstruction. 10 each fully paid. The provision of reduction of share capital, which was earlier available under Sections 100-105 of the Companies Act, 1965, has now been dealt under section 66 of the Companies Act of 2013 (hereinafter referred to as 'the Act'). As a result, it becomes important to sometimes reconstruct the existence of the businesses. In case of internal reconstruction the existing company will be ----- a. You are asked to submit a scheme of reconstruction. external or internal. Ratio Analysis. Internal reconstruction is a method of corporate restructuring where an arrangement is made by the company of the organization where in changes in the assets and liabilities are made to improve the financial position without liquidating the company or transferring the ownership to external party, whereas external reconstruction is the one where an existing company is liquidated and taken over by another newly formed company and the transfer of assets and liabilities takes place, and the same is considered similar to amalgamation. There is an overvaluation of assets and undervaluation of liabilities. The Company having now turned the corner, the Directors expect it to earn good profit in future. 100, as per the Internal Reconstruction Scheme 50% of the claim needs to be waived off, The creditor may readily agree for it, otherwise, the company is on the verge of liquidation, so Rather then … It is a scheme of reorganization in which all interested parties in the capital structure volunteer to sacrifice. Generally, share capital is reduced to write off the past accumulated losses of the company. That is technically, a new company will be floated or formed to take over the existing company. It is also termed as re-organization which permits the existing company to be continued. Accounts of Holding Companies. Internal reconstruction is basically concerned with the complete overhauling of financial position of a firm.The main purpose is to improve the profitability of the existing company. Illustration 1: The summarised Balance Sheet of Sunrise Ltd. as on 31st December, 2006 was as under: On 31.12.2006 the following scheme of capital reduction was taken: (a) The equity shares were […] Amalgamation of companies involves liquidation of two or more companies, while external reconstruction involves liquidation of only one company,  2. Welcome to "A complete Study on Internal Reconstruction of a Company" This course focusing on the course topic designed exclusively for you to learn only what you want to learn at your affordable prices. Shareholders c. memorandum of association d. Articles of association 13. Internal reconstruction refers to making internal arrangements for overcoming financial difficulties. But if you want to start afresh and your stakeholders are with you, you can be better off by taking the path of external reconstruction since no permission is required from a court in the case of external reconstruction. Internal reconstruction of a company is done through the reorganization of its share capital. It focuses on relieving the company from debts and losses by negotiating with the creditors and reducing the outstanding amount towards them, so as to reach a favorable position. The reconstruction arrangement made by a company, to come out of its financial difficulties, may be external or internal. Both of these reconstructions ensure the change in. Sections 100 to 105 of the Companies Act with respect to reduction of share capital. Here we discuss the top differences between internal and external reconstruction along with infographics and comparative table. When change is required in the face value of shares of the company. Internal and external reconstruction are both valid for the companies that want to reconsider their approach and future strategy. Solution: It is suggested that the 7,000 shares paid up value to be reduced by Rs 60 so that the amount of reduction comes to Rs 4, 20,000. A scheme of re-organisation is prepared in which all parties sacrifice. (a) company law (b) AS (b) Income tax (b) Stock Exchange 3. Some prefer to stick to the old and reconstruct the internal processes. The basic purpose is to reorganize the financial structure of the company. There is a difficulty to meet the financial crisis and there are continuous losses. Corporate Accounting 500 MCQs . 3. (Being conversion of 50,000 equity shares of Rs. The idea of reconstruction is to create something new that would serve the world better. Internal reconstruction refers to the internal re-organization of the financial structure of a company. Every 20 years Buddhist temples are reconstructed. Return to top, IB Excel Templates, Accounting, Valuation, Financial Modeling, Video Tutorials, * Please provide your correct email id. Therefore, in the process of internal reconstruction, only the rights of the shareholders and creditors are changed with a certain reduction of capital, and the rights/claims of the debenture-holders are kept outside the purview of the procedure of internal reconstruction. It is a scheme in which efforts are made to bail out the company from losses and put it in a profitable position. By Sayantan Mukhopadhyay | Reviewed By Dheeraj Vaidya, CFA, FRM. 5 each. Chapter Wise MCQs . The accounting required for both internal reconstruction and external reconstruction are complex. Sep 5, 2020 - Internal Reconstruction and Capital Reduction Multiple Choice Questions and Answers It can set off past losses against future profits. Marginal and Absorption Costing. It decides to convert its capital into 20,000 equity shares of Rs. Standard Costing. Generally, share capital is reduced to write off the past accumulated losses of the company. Sections 94 to 97 of the Companies Act relating to alteration of share capital. Board of directors b. (a) shareholders (b) A/A (a) NCLT of Companies Act, 2013 d) SEBI 2. Reconstruction may be external or internal which are described below: 1. Methods of Internal Reconstruction (Reduction of Share Capital, Compromise/Arrangements & Surrender of Shares) By Team BAF on June 26, 2016 in Queries. It is also termed as re-organization which permits the existing company to be continued. Internal Reconstruction is an arrangement made by companies whereby the claims of shareholders, debenture holders, creditors and other liabilities are altered/ reduced, so that the accumulated losses are written off, assets are valued at its fair value and the balance sheet shows the true and fair view of the financial position. Under this scheme company continues its legal existence. Budget and Budgetary Control. Company can alter the share capital provided it is authorized by ----- a. It needs a lot of time and statutory requirements to occur because in internal reconstruction the company has to take the permission of every stakeholder and also of the court. In the case, external reconstruction the losses of an old company can’t be set off against the profit of the new company. When the capital structure of a company is complex and is required to make it simple. In the case of internal reconstruction, the losses of the company can be set off against the future profit of the company. Internal reconstruction needs a lot of time and statutory requirements to occur because in internal reconstruction the company has to take the permission of every stakeholder and also of the court. In the case of internal reconstruction, the losses of the company can be set off against the future profit of the company. Liquidation ... A scheme of compromise and arrangement is an agreement between a company and its members and outside liabilities when the company faces financial problems. Within the company, there are several reasons for such treatment but here are some common ones: Purpose of Capital reduction in order to pay off the unnecessary capital of the company which is of no use. Liquidated b. Internal reconstruction of a company means a recourse undertaken to make the necessary changes in the capital and debt structure of the company . The scheme of internal reconstruction is approved by ____. 5,00,000 equity stock ) Variation of Shareholders rights: • When a company has issued different classes of shares with different rights or privileges attached to such shares e.g. MCQ on Internal Reconstruction,State the Right Alternative,case of sub-division of share capital ... A company has issued capital of 10,000 equity shares of Rs. It necessarily involves the reduction of share capital. Capital reduction and reconstruction is a way to reduce the capital amount of the company. External reconstruction refers to closing/liquidating the company and starting again a new or a fresh. When a company is suffering losses for the past several years and facing financial crisis, the company can sell its business to another newly formed company. Internal Reconstruction: Internal reconstruction refers to the internal re-organization of the financial structure of a company. However, both of these processes are much complex than they are perceived. On the other hand, external reconstruction can be done immediately without any need for permission from the court. The scheme of internal reconstruction involves ___ company. In internal reconstruction neither the existing company is liquidated, nor is a new company incorporated. The founders learn as they grow. Funds Flow Statement It refers to the internal re-organization of the financial structure of a company. 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