GAAP for write offs during acquisition

How to treat loans written off during a company acquisition under GAAP.

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Hi all

I just want to be 100% sure on the accounting treatment for slightly unusual loan write offs during an acqusition.

Company V purchased Companies A and B in 2023. Companies A and B were part of a larger group of connected and related entities that were not purchased, and a variety of loan accounts existed between A and B and the other entities, together with Director Loan Accounts. As part of the SPA terms, the acquisition was done with a clause removing all of these outstanding loans (including DLAs) from the Balance Sheets of A & B on completion - they were then settled out of the sales proceeds, and outside of the two acquired companies. 

However, the accounting records were not updated to fully reflect this aspect of the deal. I know that the loans need to be written off (they do not exist following the acquisition date and are not payable by the new ownership) but I am questioning the correct GAAP.  Currently I have journalled the loan amounts to a "capital redemption reservc" in the bottom half of the Balance sheet. Is this correct treatment under GAAP?

I welcome all informed opinions!

Thanking you in advance.

C

Replies (4)

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By Ruddles
12th Jan 2024 17:02

It's all a bit vague. What exactly do you mean by "they were then settled out of the sales proceeds, and outside of the two acquired companies"?

Perhaps some numbers - who owed what to whom, and who paid what to whom - might help.

Thanks (2)
Replying to Ruddles:
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By StoicChris
15th Jan 2024 08:49

Thanks for your reply.

It was the vendors' responsibilities to settle these third party debts from the sales proceeds. Thus, the settlement of the loans took place outside of the company accounts. On the day before the acquisition deal was signed the loans of a total of £300,000 existed, but the day after the deal was signed the loans no longer existed for the companies acquired.

This is my quandary. We still have these loans on the books in the acquired companies, and they need to be written off because we acquired the companies without the loans. As I said, I have journaled the loans to a "Capital Redemption Reserve" in Capital & reserves section to tidy up the Balance Sheet, and I believe that is the correct treatment - I was just hoping for confirmation, or a better way to go.

Thanks

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John Toon
By John Toon
15th Jan 2024 10:14

If the loans were settled from sales proceeds, then either cash moved around and it should be really easy to follow the transactions. Alternatively, (and more usual) these things are settled net and so there's likely to be an adjustment to investment proceeds in the new holding company and possibly new intercompanies with Holdco replacing the pre-existing ones.

It's unlikely an equity reserve would arise from this unless merger accounting rules apply.

Without seeing the SPA's and more details no one can easily contribute to this in any meaningful way.

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By paul.benny
15th Jan 2024 11:25

Agree with John. Difficult to give a definitive answer without sight of the SPA and a schedule of the amounts and counter parties.

However, in your response this morning, you do make clear that the vendor of A and B was settling the loans. So there is no write off.

So if A had a loan from vendor, the entries would be Dr cash Cr loan... but then you need to identify what happened to the cash (notionally) received. Draw the T accounts and follow the cash.

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