Settling sub's bonus accrual with parent's equity

I know I can do it, but what are the mechanics?

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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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By paul.benny
26th Oct 2020 10:15

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.

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Replying to paul.benny:
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By John Passaquar
26th Oct 2020 11:28

Hi Paul
Correct. There is no bonus scheme, it's an entirely discretionary amount.
Thanks

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Replying to John Passaquar:
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By Paul Crowley
26th Oct 2020 11:39

If no bonus scheme, why accrued?

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Replying to Paul Crowley:
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By John Passaquar
26th Oct 2020 12:04

No formal bonus scheme, i.e. no contractual terms, etc. It's simply a discretionary amount included in the budget each year and accrued so long as the business performs as forecast, which it has. There is no obligation to settle in cash, or even to settle anything at all (we could write it back).

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Replying to John Passaquar:
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By paul.benny
26th Oct 2020 14:27

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.

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By Tax Dragon
26th Oct 2020 10:25

IANAL.

Can a company own shares in its parent?

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Replying to Tax Dragon:
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By John Passaquar
26th Oct 2020 11:34

I guess not! I should have clarified that the 'purchase' would be for the benefit of the employees (either in their name or via an EBT or similar).

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By Paul Crowley
26th Oct 2020 10:34

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?

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paddle steamer
By DJKL
26th Oct 2020 10:54

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.

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Replying to DJKL:
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By John Passaquar
26th Oct 2020 11:32

Thank you. The inter-co DR/CR will then be there 'forever'?

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Replying to John Passaquar:
paddle steamer
By DJKL
26th Oct 2020 11:45

Until repaid. In effect holdco is paying something on behalf of its sub, maybe sub can somehow repay holdco later.

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By Tax Dragon
26th Oct 2020 11:47

I would encourage you to take professional advice. It's not all about the accounting.

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