Expenses incurred for assets of another entity

Does the pure accounting way recommend to transfer expenses incurred by A for an asset bought by B?

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I am helping to manage the accounts for a set of property owning ventures.

The investors own two different holding companies as they are financed differently, each of the two themselves owning companies in a few European countries that purchase properties.

There were some costs incurred by a property owning company (PropCo 1A) in HoldCo 1 with the view to purchase a property that was then purchased by PropCo 2A under HoldCo 2. So effectively, the expense is treated as per any other costs for a sunk deal for PropCo 1A.

Our accountants have told us we should transfer the costs on our accounts from PropCo 1A to PropCo 2A.

Transferring between two separate companies would presumably mean it should be done by way of a recharge, as currently the costs correctly sit with PropCo 1A under its obligations. PropCo 2A doesn't really have any obligation for this cost. Would a recharge in this way be appropriate? There is no service being performed by PropCo 1A to PropCo 2A as there is no legal connection with the two companies. Soesn't a recharge need to be part of a bigger service?

But at the same time I understand the accountant's view that the accounts should reflect the actual substance of where the actual benefit lies (i.e. asset ownership). Although I have an accounting degree, I was initially working in VAT for the last few years, so I'm not used to considering anything apart from legal form on a technical level.

Maybe I should just listen to the accountant, but there something missing in my understanding of the correct thing to do here that I can't seem to grasp from my conversation him.

I'm also considering what impact this has on finance arrangement costs for loans to our PropCos but invoiced to our HoldCo, i.e. if those costs need to be reallocated... because that would impact on how we have been recording Intercompany loans as well.

Replies (5)

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By David Ex
15th Jan 2024 12:17

RVNmax wrote:

Maybe I should just listen to the accountant,

That works for me.

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By Ruddles
15th Jan 2024 12:27

Surely it is a matter for the companies (ie their directors/owners) to agree on the treatment. I couldn't comment further without understanding the nature of the costs. If it was the case that A incurred some costs in anticipation of the purchase, but later withdrew from the transaction, so that B incurred the same costs in its successful purchase, then I would indeed just treat the costs as abortive costs in A.

But if B were to benefit from the costs (eg perhaps it was able to rely on a valuation report commissioned by A) then I would say that it would be in order for B to recompense A for the expense.

But as I say that is a matter for the companies to agree on, not the accountant, who should just ensure that the accounts reflect what has been agreed.

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Replying to Ruddles:
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By RVNmax
15th Jan 2024 16:22

Ruddles wrote:

Surely it is a matter for the companies (ie their directors/owners) to agree on the treatment. I couldn't comment further without understanding the nature of the costs. If it was the case that A incurred some costs in anticipation of the purchase, but later withdrew from the transaction, so that B incurred the same costs in its successful purchase, then I would indeed just treat the costs as abortive costs in A.

But if B were to benefit from the costs (eg perhaps it was able to rely on a valuation report commissioned by A) then I would say that it would be in order for B to recompense A for the expense.

But as I say that is a matter for the companies to agree on, not the accountant, who should just ensure that the accounts reflect what has been agreed.

paulwakefield1 wrote:

I agree with Ruddles.

As far as the financing costs are concerned, if they have been properly charged to the holdco, then there is certainly a sound logic to recharging them to the propco benefitting from the loan financing (I assume this is property specific financing). But again by agreement.

Thanks for your replies, I think that really helps.

The types of costs involved are exactly as you stated; valuations, due diligence services etc, and these reports were relied upon by B.

What I'm trying effectively trying to understand mainly is what exactly you mean by "in order". The accountant is pushing to put things in order, and my boss doesn't really care. I suppose the purist in me agrees with the accountant to make sure the costs sit with the company that best reflects the benefits.

It's the type of thing that you wouldn't need to worry about if the two companies were truly operating separately.

In case we go for the recharging/recompensing, so would we simply have A invoicing B to ensure the transfer is documented for a stand-alone service of the same service(s) that was supplied to A?

FYI the intercompany costs in question are legal and arrangement fees for the loans. The actual loans are borrowed by the propcos and the interest costs sit with them.

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By paulwakefield1
15th Jan 2024 13:51

I agree with Ruddles.

As far as the financing costs are concerned, if they have been properly charged to the holdco, then there is certainly a sound logic to recharging them to the propco benefitting from the loan financing (I assume this is property specific financing). But again by agreement.

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By RVNmax
04th Apr 2024 16:03

I have another question along the same lines but in the more simple case of a parent and its subsidiaries.

For asset-related loans drawn by the subsidiaries to which the parent has incurred legal expenses in acting as the agent, where would these expenses sit when no agreement to recharge between companies is in place?

The accountant after initially sending the accounts to the auditors where these costs were expensed by the parent, now proposes to have the subsidiary capitalize these costs.

We have not formally agreed for an arrangement between parent and subsidiaries, but is there anything in the standards that deems either method the preferred choice?

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