Accounting Double Entry - Liability Transfer

Transfer of a liability from sub to parent

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Hi,

Could someone please advise the correct accounting treatment. The subsidiary company I work for holds tenant deposits which are refunded at the end of the lease terms. My director now wishes to derecognise these from the sub's balance sheet and transfer the liability across to our parent company. What are the correct journal entries to do this, given that there will be no actual transfer of the cash? Any help would be much appreciated!

Thanks

S

Replies (20)

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By Ruddles
22nd Nov 2023 16:43

Getting the journals right is the easy part. Have you thought about how the liabilities will be legally transferred?

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Replying to Ruddles:
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By S_123
22nd Nov 2023 17:04

Hey Ruddles,

Yes, my director is dealing with the legalities of it all. I just need some guidance on the bookkeeping side - any suggestions?

Thanks!
S

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Replying to Ruddles:
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By Justin Bryant
22nd Nov 2023 17:07

It ain't too difficult as you should know by now for liabilities to be validly transferred for tax (and other) purposes by being contractually assumed (usually with an indemnity from the transferor to the transferee) by the transferee as opposed to novated, although the likes of DN and this bloke don't seem to get that.

https://www.taxation.co.uk/articles/buy-to-let-incorporations-spotlight-...

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Replying to Justin Bryant:
By Ruddles
22nd Nov 2023 17:16

I never mentioned tax, did I?

The transferee may well be prepared to indemnify the transferor (under a legally binding agreement between transferor and transferee) but that is not the same as legally transferring liability. Without the consent of the creditor, the original debtor remains on the hook (ie he is the one that is sueable) for the original debt. (With the debtor then pursuing the transferee under the indemnity.)

There endeth the lesson.

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Replying to Ruddles:
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By Justin Bryant
22nd Nov 2023 17:22

I could accuse you of sparpling (or reading too much DN nonsense) by using the phrase "legally transferring the liability" here.

One should instead say "validly transferring the liability (for tax and other purposes)" to avoid misunderstandings and confusion with a novation as an alternative valid method here.

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Replying to Justin Bryant:
By Ruddles
22nd Nov 2023 17:34

Well, you did say "legally transferring the liability ..." before correcting yourself.

But since I am concerned only with how one legally discharges oneself of all obligations under the original contract (an indemnity does not do that) I see nothing wrong with the phrase "legally transferring the liability".

I'll end there - if anyone is interested in how this would otherwise end, I suggest they do a bit of digging on the site.

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Replying to Ruddles:
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By S_123
23rd Nov 2023 09:37

Sorry, what would the journals be then? I can't get my head around them...

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Replying to S_123:
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By Leywood
23rd Nov 2023 10:12

I would suggest you wait until the legals are completed, because it may never happen, then refer that paperwork to the Company Accountant for advice.

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Replying to S_123:
By Ruddles
23rd Nov 2023 10:18

If Company 2 is taking over the liability to repay the rent deposits, how does it intend to do that if the cash rests with Company 1?

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Replying to Ruddles:
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By S_123
23rd Nov 2023 10:21

We have sufficient funds in our parent company to cover these deposits. I just wanted a general idea of the journal entries I would need to post to account for this.

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Replying to S_123:
By Ruddles
23rd Nov 2023 13:21

Assuming that it would be correct to recognise the cash/liability on the balance sheet(s) in the first place (see other comments - you should take further advice on that point) the journals are simple:

Company 1

Dr Other creditors (or wherever the liability currently is) £x
Cr Intercompany loan £x

Company 2

Dr Intercompany loan £x
Cr Other creditors £x

Job done

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Replying to S_123:
By johngroganjga
23rd Nov 2023 10:23

If you have to ask this question you can't be an accountant. Leave the accounting entries to the accountants who prepare the accounts of the two companies, and then only when the liabilities have been transferred in the full legal sense.

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Replying to johngroganjga:
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By S_123
23rd Nov 2023 10:34

You don't have to be so condescending - I asked a simple question and you've gone off on a tangent, instead of just being helpful. Good day.

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Replying to Justin Bryant:
Stepurhan
By stepurhan
22nd Nov 2023 21:39

Justin Bryant wrote:

I could accuse you of sparpling (or reading too much DN nonsense) by using the phrase "legally transferring the liability" here.

One should instead say "validly transferring the liability (for tax and other purposes)" to avoid misunderstandings and confusion with a novation as an alternative valid method here.

You have yet to provide an example of a creditor transferring a liability to another party without agreement of the person they owe. The closest I have seen is a creditor pursuing two parties (because a second party has also accepted liability), not ceasing to pursue the original party.

So are you going to continue to spout this nonsense or are you going to provide a case where that happened?

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By WhichTyler
23rd Nov 2023 10:26

there's a case for saying that deposits shouldn't be on either company's balance sheet at all (but I'm not a lettings expert) as they are not at the company's disposal. Are they held in a separate bank account?

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Replying to WhichTyler:
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By S_123
23rd Nov 2023 10:36

Yes, they are in a separate account but we have sufficient funds in our parent company so we won't be transferring the cash over - hence why the journals are boggling my brain a little! :0

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Replying to S_123:
paddle steamer
By DJKL
23rd Nov 2023 11:04

Residential Properties?

If so you likely now have problems and may also have issues re liability to tenants if they become aware you have retained these.

https://www.gov.uk/tenancy-deposit-protection

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Replying to DJKL:
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By S_123
23rd Nov 2023 11:11

No, not residential. Thanks

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By Tax Dragon
23rd Nov 2023 13:07

I am not an accountant and wouldn't know the answer, but I don't find John's comment condescending.

I am not a lawyer either. (If you're wondering what I do do - why I'm here - it's tax.)

Fwiw, I question whether there is a liability in the first place. These are deposits, not loans. See WhichTyler's comment.

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Danny Kent
By Viciuno
23rd Nov 2023 13:52

What is the motivation behind this?

I assume you (and your employer) are aware that the journals will not remove the debt from your balance sheet, just move it from one creditor to another?

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