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Treatment of Contra to clear debt

Client A owes client B £15 and agrees to give a "client" instead of payment

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I have a client (Company A)that is owed £15k from another company (company b) Instead of payment the client has agreed to accept a "client" from company B to clear off the debt. So in effect Company B has paid their debt.

Should the fact they are giving them a client with a "goodwill" value of £15k mean that this go on the balance sheet as an intangible asset and therefore CR Debtors DR Goodwill? Or should the £15k debt simply be written off to Bad Debts as there is no guarantee the client they are getting will generate income?

If the client they are acquiring should appear on the balance sheet as an Intangible Asset is therr any requirement for Company A to actually pay £15k to Company B as this would be classed as a Capital Transfer?

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By johngroganjga
09th Jul 2020 11:42

You don’t write the debt off, as it will have been paid.

No the creditor doesn’t have to pay the debtor for the goodwill as well as releasing him from his obligation to pay the pre-existing debt. That would be to pay twice for the goodwill.

Yes - in the first instance I would agree that you debit goodwill, but thereafter you subject it to impairment reviews.

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Replying to johngroganjga:
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By Nine2five
09th Jul 2020 11:57

So do you believe the accounting entries be DR Goodwill and CR Debtors and then subject to impairment reviews thereafter.

That was my thinking in terms of physically having to pay for the goodwill. He will be paying twice as he is not going to receive the pre-existing debt. Are you not aware of any requirements by HMRC that physical payment would need to be made as it is a capital transfer?

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Replying to Nine2five:
By johngroganjga
09th Jul 2020 12:13

I am not sure what you mean by "it is a capital transfer".

HMRC's job is to collect tax. They are not the police. It is none of their business how tax payers execute their transactions, only to collect the tax liabilities that result from them. Even the police would have no interest in this transaction. This is a free country. Everything is lawful unless the law specifically provides otherwise. What laws do you think are being broken here?

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Replying to Nine2five:
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By thevaliant
09th Jul 2020 13:23

"So do you believe the accounting entries be DR Goodwill and CR Debtors and then subject to impairment reviews thereafter."

Yes, this is correct (as John says).
No payment should be made, by either party. That would just cause more problems.
I can't speak to the tax issues (if any) that arise.

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By johnt27
09th Jul 2020 14:39

I'm going to put a dissenting viewpoint across here as is this not in effect a barter transaction?

It can't be a goodwill transaction as no business combination has occurred. It could potentially be an intangible asset (customer contract) assuming there is some value you can leverage from the customer being passed over to settle the debt. But assuming there is no pre-existing contract then there is nothing to recognise.

On the face of it then, on the basis my assumptions are right, this would be more akin to a marketing cost to acquire a new customer. The likelihood from which you will generate revenue being uncertain.

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Replying to johnt27:
By johngroganjga
09th Jul 2020 15:33

I agree that “goodwill“ is probably shorthand for an intangible asset of another type. But I do not agree that what is being received here in settlement of the debt is marketing expenditure. It’s the opportunity to generate profits from a new customer.

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Replying to johngroganjga:
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By johnt27
09th Jul 2020 16:07

Isn't that the definition of marketing cost - the opportunity to attract new customers who will generate profits (hopefully)?

I suppose the difference in recognition criteria would be in respect of whether or not the future economic benefit is probable or possible? If it's the former then it's an asset, if it's the latter then it's a P&L cost.

It's not clear from the question either way

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Replying to johnt27:
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By Wilson Philips
09th Jul 2020 16:40

It might help if the OP could clarify exactly what has been transferred.

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Replying to johnt27:
By johngroganjga
09th Jul 2020 17:09

No. A marketing cost is expenditure on activities to attract new customers.

This is a recommendation by the debtor to one of its customers to use the services of the creditor. The creditor obviously believes that the likely value of that connection is in excess of £15,000, or else he would insist on the debt being paid in cash. Contrariwise, the debtor must believe it is worth less than £15,000, or else he would prefer to pay the debt in cash and retain the customer.

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