I am the newly appointed CFO of a small non-UK financial services group reporting under UK GAAP (FRS102).
I have a subsidiary with a discretionary bonus accrual which would ordinairly be settled by that company in cash. I wish instead to issue group equity to the value of the bonus accrual (i.e. conserving cash in the group, or making further cash available for shareholder dividend). In principal this is permitted, but I am struggling with how the actual accounting and mechanics would work. I would be grateful for assistance.
Following what I see to be the most direct approach, could the subsidiary use cash to the value of the bonus provision to pay for newly issued shares in the group?
Subsidiary:
- CR cash
- DR bonus provision
Parent
- DR Cash
- CR Equity
Thank you.
Replies (12)
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Do you mean that instead of paying employees a cash bonus, you're going to issue shares in the parent company? If so, do the terms of the bonus scheme allow for this?
Even if you issue shares instead of a cash bonus, you'll still need to account for PAYE and NI. But being CFO, you'll know all about that.
Recurring practice of paying a cash bonus when business performs to forecast looks potentially contractual to me (or at least potentially so). Customary behaviour can create a contractual term - it doesn't have to be in writing.
That aside, your employees may not be wholly happy about getting valueless shares instead of actual money. Presumably your group isn't listed (lots of other considerations about issuing shares if it is). So minority shares that can't ever be readily turned into cash have very little value. Not only that, you hand out shares, there's a tax liability on the recipient. Or if you settle that on behalf of the employees, there is cash out from the group, thereby partly defeating the object of retaining cash.
No idea who is getting what and why.
If I were due the bonus I would want to to know.
Particularly, why can you not pay me in money?
Should I look for a new employer, if money is now a problem?
In Sub
DR Bonus provision
CR Inter company
in Holdco
Dr Inter Company
Cr Share Capital
Cr Share Premium
What administrative/reporting processes are required by employer I have not got a clue.
Until repaid. In effect holdco is paying something on behalf of its sub, maybe sub can somehow repay holdco later.