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How do I value non cash consideration for shares

What are the accounting entries when shares are issued for a non cash consideration.

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My client has issued shares, some for cash and some in exchange for an assignment of IP. They were all issued on the same date and the cash consideration was £175 per share. There is no contract for the IP. Do I account for all the shares at the same value and account for the IP as an asset at that value? 

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Psycho
By Wilson Philips
16th Sep 2019 19:32

Other way round - you need, somehow, to put a value on the IP.

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By Accountant A
16th Sep 2019 20:33

So shares have been issued in exchange for shares but that is not evidenced by a contract?! The company has no evidence that it owns the IP? I think ownership needs to be established before it goes anywhere near the balance sheet.

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By Gillian Mill
17th Sep 2019 11:39

hi
so on further digging
There is a contract giving ownership of any IP from the individual to the company. That is part of the employment contract.
The shares seem to be a "thank you" are they now an employment bonus?

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Replying to Gillian Mill:
Psycho
By Wilson Philips
17th Sep 2019 12:32

An employee has been awarded shares in return for transfer of IP and some cash. You need to establish (a) the value of the IP and (b) the value of the shares issued/transferred. And thus whether there is any difference between (b) and (a)+cash.

Or are you saying that the terms of the contract are such that any IP created by the employee whilst in employment of the employer automatically belongs to the employer? In which case, does the contract provide that the employee will be remunerated for the creation of said IP?

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Replying to Wilson Philips:
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By Gillian Mill
17th Sep 2019 18:08

Hi
the contract states any IP created by the individual (researcher) during their research while under contract belongs to the company. There is no mention of remuneration / compensation for the IP. There is a fixed remuneration for the research work.
With this share issue several employees and outside contractors received shares but all paid £175 per share except this one.

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By Clinton Lee
17th Sep 2019 20:01

As Wilson Philips says, you need to put a value to the IP. I take it the IP rights have not been secured. This makes valuing the IP a bit trickier.

There have been numerous cases of founders of tech businesses setting up a company and then selling their own code, domain names, web dev work to the company at, er, inflated prices, in order to book a large director loan.

Returning to the valuation, could you tell us some more about the nature of this IP?

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Replying to Clinton:
Psycho
By Wilson Philips
17th Sep 2019 22:21

I no longer think that the value of the IP is relevant. The contract states that it already belongs to the employer. The employee appears simply to have been given shares in return for their services. They might be valued at £175, they might be worth something else.

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Replying to Wilson Philips:
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By Clinton Lee
17th Sep 2019 23:43

Possibly. But ....

There is a contract for transfer of IP from this person to the company. In exchange for handing over that IP he got employed. That's my understanding from the exchange following the OP.

Does such act of employment constitute "consideration" for purposes of contract law? If not, the contract is not valid (which suggests shares act, in this case, as the price the company paid for the IP being transferred).

IANAL

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Replying to Clinton:
Psycho
By Wilson Philips
18th Sep 2019 07:37

But the questioner says that there is no contract for transfer of IP. The employment contract simply says, as is common, that any IP created by the employee is the property of the company.

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Replying to Wilson Philips:
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By Clinton Lee
18th Sep 2019 07:48

There are two IPs - that created by the (now) employee prior to his employment and that which he will be creating in the future as an employee.

The latter, as you rightly point out, is the property of the company. But the latter IP is not the problem.

When the OP says there is no contract, she presumably means that there is no written contract.

Maybe we need clarity as to whether the original IP was actually gifted to the company.

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Replying to Clinton:
Psycho
By Wilson Philips
18th Sep 2019 09:42

I'm not sure that there are two lots of IP, although it's always possible. Questioner will need to clarify.

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Replying to Wilson Philips:
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By Tax Dragon
18th Sep 2019 10:18

I'd be pretty sure there are not. Questioner simply needs to read more clearly - and check whether an election under s431 was made, as that determines the value to use.

Shouldn't the employer (have) provide(d) the employee with relevant info?

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By Gillian Mill
18th Sep 2019 12:43

Hi All
I know i'm not giving all the facts but I am aware that the IP is sensitive.
I can clarify some points. There was no IP before the relationship between the individual and the company. It has arisen since the research contract started.
There is no s431 election and the research contract is short term (under 12 months)
Presumably the £175 paid on this share issue by external investors and other employees could be considered a fair market price. It is certainly higher than previous issues and far more than the face value of the share.

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Replying to Gillian Mill:
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By Tax Dragon
18th Sep 2019 13:23

Why can't you just take the figure off the P11D?

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Replying to Tax Dragon:
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By The Dullard
18th Sep 2019 13:47

P11D? Surely it either falls under s 62 or it falls under ERS, and in neither case is anything touching a P11D.

Value the shares, agree the value with HMRC, make the appropriate share return (or payroll it, if appropraite) and debit wages and salaries and creditshare capital/share premium. The IP is a burgundy bloater.

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Replying to The Dullard:
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By Tax Dragon
18th Sep 2019 14:13

The Dullard wrote:

Value the shares, agree the value with HMRC, make the appropriate share return (or payroll it, if appropraite) and debit wages and salaries and creditshare capital/share premium.

You're speaking as for the employer. And the "make the appropriate return" is my point. Most employers wouldn't want employees making conflicting returns and so would tell the employee the figures. That's my experience anyway.

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Replying to Tax Dragon:
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By The Dullard
18th Sep 2019 14:34

The inference I was aiming for was that the OP should get the client to engage somebody to deal with this that knows what they're doing.

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Replying to The Dullard:
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By Gillian Mill
18th Sep 2019 15:55

And the real irony of that is the client employs a large London firm of specialist lawyers to deal with share matters as the long term aim is to float the company.

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Replying to Tax Dragon:
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By Gillian Mill
18th Sep 2019 13:52

Hi TaxDragon
if only life was that easy, there isn't a P11d!
If i raise that with the client I'll get, "but we were paying for IP"
and so the circle starts again.
It may be easier to raise a contract for the IP and somehow separate it from the research contract. Give it to the lawyers to figure out.

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Replying to Gillian Mill:
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By Tax Dragon
18th Sep 2019 14:17

The

Gillian Mill wrote:

"but we were paying for IP"

argument sounds like nonsense. If the IP does not exist, what they are paying for is the employee's work in creating the IP. It's just part of their remuneration for doing the work, not a separate payment for IP.

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Replying to Tax Dragon:
Psycho
By Wilson Philips
18th Sep 2019 14:26

Perhaps not a perfect analogy but similar to the brickie who helps to build a house for his builder employer and then 'transfers' the completed walls to his employer expecting an additional payment. Nonsensical.

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Replying to Gillian Mill:
Psycho
By Wilson Philips
18th Sep 2019 13:56

It depends on the external investors and their risk profile. In many cases external investors are prepared to pay a bit more than the market value of the shares in hope/expectation that the rewards will justify the price paid. HMRC would certainly look at the price paid when considering market value but, on its own, is unlikely to be conclusive.

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Replying to Wilson Philips:
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By Tax Dragon
18th Sep 2019 14:23

S421 imports the TCGA definition of market value. Discussions we may have had around the meaning of that term are therefore also imported into this thread.

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Replying to Tax Dragon:
Psycho
By Wilson Philips
18th Sep 2019 14:26

Agreed

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By Tax Dragon
18th Sep 2019 16:34

My apologies. I've been thinking throughout that you acted for the employee, although rereading the question it's clear that I was wrong.

I'm not now sure what the question is.

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Replying to Tax Dragon:
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By Tax Dragon
18th Sep 2019 16:36

Although The Dullard's first reply now makes much more sense.

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Replying to Tax Dragon:
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By Gillian Mill
18th Sep 2019 16:57

The original question was how to value the share premium and IP on the company BS. The lawyers issued the shares and I get sent the SH01 etc and see "non-cash consideration". The client is an R&D firm full of scientists who can't answer a straight forward question but assure me its all fine!!

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