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I have a question in front of me in which the parent company bought the subsidiary for some shares, plus an issue of 8% loan notes redeemable in 2 years time.
When the goodwill was being calculated, the consideration line was calculates as the value of the shares + the loan notes.Is that always correct? Are loan notes always included in the consideration.
What through me was that in a different question payment was made as well as a loan. That loan was not part of consideration. So, is there a difference between loan notes and a loan, in that a loan is just a loan not payment, but loan notes are a form of payment?
Also, shouldn’t there be a payment of 8% from the parent to the sub because of the loan note? It doesn’t seem to be in the income statement.
Think about this! To whom is the parent giving the loan note (from whom has the parent “borrowed” money, who is going to receive the money when the loan matures?) Why, it’s the former shareholders of the new subsidiary The parent, instead of paying cash or shares has given a promise to pay (a loan note) to the former shareholders. So it’s part of the purchase consideration / the acquisition cost
What you are probably getting it confused with is where, after the acquisition, the subsidiary borrows money from the parent and issues a loan note. So the parent has a receivable from the subsidiary and the subsidiary has a payable to the parent. They will clearly cancel out as also will the interest payable and receivable on that loan note
You need to be perfectly clear about these two different types of loan note – the firs is given to the former shareholders as part of the purchase consideration. The second is from the subsidiary to the parent (or the other way round would work exactly the same)
OK?
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