Newco acquired a business from the administrator and over subsequent months, made voluntarily made payments to the creditors of the failed business. The owners of Newco are former employees of Oldco but were not shareholders or directors.
Some of these payments were the result of arm-twisting – as in “if you don’t pay Oldco balances, we won’t supply Newco”; I’m told the others were freely made. Aside from the obvious question of “Why?”, how to account for the payments? I see two options:
- Treat as P&L expense but probably disallow in tax comp
- Treat as part of the cost of acquiring the business – so report as goodwill or other intangible assets