How to account for a deeply discounted security

What is the accounting treatment for a deeply discounted security under FRS102 1A Small Entities

Didn't find your answer?

We have taken on a new client who has entered in to a deeply discounted security with its parent company.  What is the accounting treatment under FRS102 1A small entities?

Replies (5)

Please login or register to join the discussion.

By Anonymous Accountant
02nd Aug 2023 16:13

I think this might be a bit vague for anyone to give a meaningful answer or point you in the right direction.

What is the security? And which company issued it?

Thanks (0)
Replying to Anonymous Accountant:
By QA2021
02nd Aug 2023 16:27

Sorry wasn't sure how much detail to put as it is the first time I have posted anything!

It is basically a loan from the parent company (based overseas) to its UK subsidiary. It is the UK subsidiary accounts that we are being asked to prepare. It will be redeemed at a premium in 13 years of £200k. No repayments during the term.

Is there anything else you need to know?

Thanks (0)
By paul.benny
02nd Aug 2023 16:23

Have you tried looking at the Standard for yourself? FRS102 1a really only reduces some of the disclosure requirements. S11 and 12 of the full standard are relevant and these give some accounting policy choices.

It strikes me as unusual that a group would create such an arrangement without understanding the accounting (and tax) impact. What are they hoping to achieve by this structure rather than a simpler loan?

Is there perhaps rather more to this than the copious information provided in the OP?

Thanks (0)
By QA2021
02nd Aug 2023 16:45

They were advised by an independent tax adviser that if the debt could be structured as a discounted security, by a non-UK company, there would be no WHT, as it wouldn't be deemed interest (as advanced at a discount).

Thanks (0)
By paulwakefield1
03rd Aug 2023 09:19

Assuming (imagine capital letters and bold) that there are no other significant terms and costs, it sounds like a Basic Financial Instrument and so under section 11 FRS102.

Next big assumption is that the effective interest rate is a commercial rate and so this does not not constitute a financing transaction. Given this is a loan to a subsidiary that may well not be the case. Not knowing the capital amount advanced, it is not possible to comment.

Given those assumptions, you should work out the effective interest rate such that it generates £200k over the 13 year life of the security.

If it is a financing transaction, life is a little more complicated and the initial measurement will be the year 13 repayment discounted at a commercial rate of interest.*

Hopefully those more versed in FRS 102 will be along to correct me where appropriate.

*Edit: The difference between reality and the FRS102 highly notional treatment in this instance is to be taken as a capital conribution (equity).

Thanks (0)