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Hi, i’m getting confused with loan note and term loan. Could you explain the difference please?
There long term loans and short term loans repayable on a certain period of time
The expression is not a “term loan”
It’s a loan that has a long term to run (or a short term)
Better?
Good question! Very simply, I don’t know.
Maybe the loan is the transfer of money from one to another whereas the loan note is the documentary evidence supporting the transfer of money from one to another.
But I don’t know and it’s one of those (many) things that I’ve never bothered to think about!
So when the question says for example in Pandar : ” Pandar invested $50m in an 8% loan note from Salva”, is it an investment in Salva where Pandar receives interest or is it a loan from Salva where it is Salva who receives interest?
If you invest money, surely this is you spending money! So when Pandar invests %50 million, that’s Pandar paying money out and will now receive interest
OK?
Pandar is investing and Salva is giving a loan note in terms of documentary evidence you mentioned above, is this how it is?
Pandar is lending money to Salva
In Pandar’s records the journal entry would be:
Dr Investment in Salva 8% Loan Note $50m
Cr Cash $50mAt the same time, Salva will record:
Dr Cash $50m
Cr Long Term Liability 8% Loan NoteIs that OK?
Yes!
In the Premier question, it says that the consideration consisted of an issue of a $100 6% loan note for every 500 shares acquired in Sanford.Here in Premier’s records, it would be :
Dr Investment in Sanford 6% loan note $800,000
Cr Cash $800,000In the books of Sanford
Dr Cash $800,000
Cr Long term liability 6% Loan note $800,000?No!
In Premier the entry would be:
Dr Investment in Sanford $800,000
Cr 6% Loan Note $800,000In Sanford ………… no entry at all!
The loan note is being given to the former shareholders in Sanford who accepted our offer to buy their shares from them
OK?
Because when we “issue of a $100 6% loan note for every 500 shares acquired in Sanford.” that’s our liability to pay $100 when we redeem the loan some time in the future
It’s our obligation
You may as well have asked that, if the consideration had been cash instead of loan note – “issue of a $100 note for every 500 shares acquired in Sanford.” – why would we credit Cash?
No, Sanford plc, the entity, receives nothing!!!
The former Sanford shareholders that have accepted Premier’s offer to buy their Sanford shares from them … THEY will receive the consideration paid by Premium to acquire those shares. I repeat, Sanford (the entity) will get nothing
So where do these 6% loan notes go? They go into the pockets and purses of the people that used to own Sanford shares and then, each year, Premier will pay them individually their 6% on the face value of the loan notes owned by these people individually.
Then, after whatever time period was originally stated on the issue of the loan note, Premier will pay all these people their $100 cash and the people will hand back the piece of paper that confirmed the loan
Any better?
When it says : “Premier acquired 80% of equity share capital in Sanford”, it means Premier bought 4000 shares in Sanford and now has to pay Sanford.
It says that the consideration consisted of ” a share exchange of 3 shares in Premier for every 5 acquired shares in Sanford”: it means Premier is giving away 2400 of his own shares to Sanford as part payment
It says ” and the issue of a $100 6% loan note for every 500 shares acquired in Sanford” : Premier will pay the remaining consideration of $800k at maturity date of the loan note issued by Premier
Am I wrong?
“When it says : “Premier acquired 80% of equity share capital in Sanford”, it means Premier bought 4000 shares in Sanford and now has to pay Sanford.”
NOOOOOOOOO!!!!
Premier bought all these shares from people who were shareholders but along came Premier and said to all the Sanford shareholders “Here’s an offer from us to buy those shares that you own in Sanford”
And the holders of 80% of those shares said “Oh yes, that sounds like a good offer” so they sold their shares in Sanford to Premier and, in exchange, Premier paid them
In an exam question the Premier equivalent may pay cash or by way of loan note (effectively an IOU) or by giving these people Premier shares in exchange for the Sanford shares that they have just acquired
“it means Premier is giving away 2400 of his own shares to Sanford as part payment” – no! As just explained in the previous line, these 2,400 Premier shares are being given to the former Sanford shareholders and these people are now shareholders in Premier instead of being shareholders in Sanford
“It says ” and the issue of a $100 6% loan note for every 500 shares acquired in Sanford” : Premier will pay the remaining consideration of $800k at maturity date of the loan note issued by Premier” – this loan note will be redeemed (bought back) by Premier on maturity date but that payment is again made to the former sanford shareholders
As I said in my last post, Sanford entity will receive NOTHING as a result of this take-over
“Am I wrong?” – what do you think?
Is that any better? This is REALLY important that you fully understand the mechanics of one entity (Premier) acquiring control of another (Sanford)
Yes i understand that it is the ex shareholders of Sanford who are the recipient of the consideration and not Sanford plc.
Can we consider the loan note as a form of deferred consideration? Or vice versa?
“Can we consider the loan note as a form of deferred consideration?” – we certainly can but in the case of loan notes the examiner will normally say “ignore the time value of money”
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