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Hi Mike,
In consolidation questions, when a parent issues a loan note as part of financing the cost of acquisition of a Sub (for example $100 8% loan notes issued by parent for every 250 shares acquired in a Subsidary), then am i correct in saying that effectively, the parent is saying they have a liability to the sub based on the number of shares acquired? In other words, at acquisition date, the parent is effectively signing an “IOU” to the sub??
Or, is issuing a loan note as part of the acquisition cost of purchasing a subsidary, a situation where the parent goes to a bank and gets a loan to finance part of the acquisition cost of the subsidary???
Or could it be both of the above scenarios??
Hope you can clarify this for me
Thanks
LiamHi Liam
Good question …… but totally way off track! It’s neither of your options. The loan note issued as part of the purchase consideration is given to the former holders of the shares in the subsidiary which the parent company is now buying. The $100 loan for every 250 shares acquired (your figures) is part of the money / value given to these shareholders who are now selling their shares to the acquiring parent.
Is that clear – or do you want me to try to explain it in different words?
Hi Mike,
Thanks for the prompt reply
When you say ” the loan note issued as part of the purchase consideration is given to the former holders of the shares in the subsidiary which the parent company is now buying”, what exactly are the former holders of the shares in the sub receiving?? As in what exactly does the loan note represent??
Thanks
Liam
It represents a promise from the parent / acquiring company to pay an amount of money in the future to the people who used to own shares in the subsidiary but who sold their shares to the acquiring parent
OK?
Thanks Mike – that makes it clearer now
And, one final question for you – If a loan note issued by the parent as part of acquiring a sub is a promise to to pay an amount of money in the future, then should the loan note be discounted to its present value?? This does not appear to be done in the Consolidation Questions on F7……..
Thanks
Liam
Hi mike,
on the same question, what about the percentage aspect, when does it come into play? Is it an annual interest which should affect reserves or what??
plz help…Hmm – not really sure that I understand the question. Give me the context in which “the percentage aspect” applies and what do you mean by “Is it an annual interest which should affect reserves or what?”
Give me a clearer (understandable) question and I’ll answer it as soon as possible
hello there i am tommy and i have a worry about the treatment of the loan note issued by the parent as part of the purchase consideration. what i dont understand is why the loan note is to appear in the consolidated statements whereas it is said that a group represents a single entity and one can’t owe himself.
It’s because a loan note which is part of the purchase consideration is given to the former shareholders of the subsidiary.
What you’re getting confused about is when a parent issues a loan note to the subsidiary AND NOT THEREFORE TO THE FORMER SHAREHOLDERS OF THE SUBSIDIARY. Ask yourself “To whom is the loan note issued?” If it’s the former shareholders ie it’s part of the purchase consideration, then there’s no concept of cancellation.
If on the other hand, the parent borrows from the subsidiary and issues a loan note, then it’s an asset of the subsidiary and a liability of the parent and then it’s cancellable
Ok?
Hi Mike, my question is on loan note but not part of consideration. if a parent accept a loan note of $1,000,000 from subsidiary at year end. An extract of statement of financial position
parent sub
10% loan notes 2,500 1,000.How will it be treated in the SOFP?
Thank u
“if a parent accept a loan note of $1,000,000 from subsidiary at year end”
By this I assume that the parent has lent money to the subsidiary so the parent, in its own records, has:
Dr Loan Receivable $1 million
Cr Cash $1 millionand, at the same time, the subsidiary has recorded teh receipt of the money:
Dr Cash $1 million
Cr Loan liability $1 millionSo the parent is showing an asset and the subsidiary is showing a liability, both for the same amount of $1 million
OK so far?
Now cancel the $1 million asset against the $1 million liability
Your extract …
… parent sub
10% loan notes 2,500 1,000.Suggests that both entities are showing a liability in respect of loans whereas the parent should be showing an asset
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