Capitalising parent company liabilities

Capitalising parent company liabilities

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In order to remove a net liability from a subsidiary, we are intending to capitalise the liability that the company has with the parent company. For example:

The subsidiary has total liabilities of -£82000 but included in this figure is a liability to the parent company of £103000.

What is the procedure for capitalising the liability of £103000 in order to put the subsidiary in to a net asset position?

ALSO: Another subsidiary is also in a net liability position, this time -£150000 but included in this figure is a liability to the parent company of £100000. We again intend to capitalise the £100000 but also increase the share capital by £50000 to put the subsidiary in to a net asset position.

What is the procedure for increasing share capital?

Any help would be greatly appreciated.

Replies (5)

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David Winch
By David Winch
20th Oct 2009 10:14

Parent company Balance Sheet

Are you intending to immediately write off the value of the new shares in the parent company Balance Sheet?

David

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By snopes
20th Oct 2009 11:35

One way to do it...

...is for the parent company to subscribe £103,000 cash for new shares in the first subsidiary. The subsidiary then uses the cash to repay the debt it owes to the parent.

Similarly, the parent company could subscribe a total of £150,000 for new shares in the second subsidiary. That subsidiary could then use £100,000 of the cash subscribed to repay the debt it owes to the parent. 

Be aware though, that for capital gains tax purposes the parent company will not get full, and possibly not even any, base cost for the amounts it subscribes for the new shares in either subsidiary .

 

ebenezer cuckpowder

 

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By Shaw85
31st Oct 2009 07:05

Capitalising net liabilities
Hi David,

We haven't thought about writing off the value of the shares - what are the pros and cons?

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By Shaw85
31st Oct 2009 07:06

Capitalising net liabilities
Hi David,

We haven't thought about writing off the value of the shares - what are the pros and cons?

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David Winch
By David Winch
31st Oct 2009 11:49

Not pros and cons . . .

It's not about the pros and cons, it's about the true and fair view.

The parent company currently has a debt (i.e. a loan to subsidiary) in its Balance Sheet which is worthless because the subsidiary cannot repay.  So you should have written down (or written off) the value of this debt in the parent company Balance Sheet.

Now you are going to replace this 'bad debt' with 'bad shares'.  By the same logic you cannot carry these shares as an investment in the parent company Balance Sheet at their full nominal value if the shares are worth less than that (or nothing at all).

If you put the shares in the parent company Balance Sheet at full nominal value when the shares are not worth that you are giving a misleading picture of the parent company's asset position.

David

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