Part payment in shares

Part payment in shares

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Company A provides a service to company B. When payment is due B has insufficient funds to pay in full and so A agrees to accept part payment in shares in B. The shares have zero current value (B has negative net worth).  Firstly, is the correct accounting treatment to recognise the face value of the shares in P&L as a sale and in the BS as an intangible asset and then to write down the asset to zero?  Secondly, is the resulting impact on corporation tax zero? 

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By johngroganjga
10th Apr 2014 08:15

From what you say the issue price of the shares received by B was the value of the debt waived - but you don't mention what that was.  To square the circle check that that was what was B's return of allotments said.  A's purchase cost is obviously the same figure.

In A's books the shares are an investment, not an intangible asset.  Yes you must make a provision for any diminution in value that has occurred.

The issue of the shares has no immediate corporation tax consequences.  You don't mention what percentage of B's shares A is holding after this transaction.  There may be corporation tax consequences in future of A's interest is a controlling one.

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By chicken farmer
10th Apr 2014 09:03

Sorry, but ...

I don't belive that the B shares have a 'zero current value'. Why would A accept the shares as settlement of its debt if they were? It would have been much simpler to write off the debt. If B is in such a bad state why has it not been placed in liquidation? The B shares must therefore have some 'hope' value.

Also are A and B connected in any way?

 

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By rosspowell
10th Apr 2014 09:11

Thanks both....

A and B are not connected.  B is at R&D stage and may not reach commercialisation but if it does so successfully the shares could have value, hence A's decision to accept them rather than invoice the full amount for the work and just write off part of it as a bad debt. So, as you say, the shares have some "hope" value but at the time of the transaction they could probably not be sold and are therefore without value in a commercial sense.  B moves from fund raising round to round and therefore dips in and out of negative net worth, hence has not been placed in liquidation.

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By johngroganjga
10th Apr 2014 09:19

The question of the value of the shares is a distraction as it only arises when A's next accounts after the acquisition come to be prepared and its directors and accountants have to consider whether there has been a diminution in value that has to provided for.

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Replying to WhiteRose:
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By rosspowell
10th Apr 2014 09:28

Thanks johngroganjga, that makes sense. So, is it not the case that A will have accepted the shares in lieu of cash (face value of shares will equal cash foregone) and should therefore account for them as a sale at that value in P&L and come y/end, if they have no value, provide for a full diminution in value?  Secondly, if that is correct and the P&L effect would therefore be zero what would the corporation tax impact be?

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By johngroganjga
10th Apr 2014 09:37

Any provision for diminution in the value of the shares will not be an allowable deduction for CT purposes.

So as I said the issue of the shares will have no CT consequences, except that A will lose the opportunity to obtain a CT deduction by making a bed debt provision.  The two companies account for the value of the sale when A invoices it.  If A is VAT registered, and the supply is taxable, the debt will obviously include VAT. 

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By rosspowell
10th Apr 2014 10:02

Thanks, so the net CT effect will be that A will pay CT on the value of the shares booked as a sale (less any allowable costs) with no allowance for diminution? Consequently will have to pay CT when it has received no cash to do so?

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By johngroganjga
10th Apr 2014 10:11

Yes because it has chosen to take payment in kind (because presumably it considers that it is in its interest to do so) and find the cash to pay the tax (and VAT?) out of its other resources. It doesn't have to do this.  It is exercising its choice to do so.

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