CFM33165 - Loan relationships: core rules: pre-2016 rules: GAAP: example
This guidance relates only to company periods of account beginning before 1 January 2016.
GAAP: example
Q plc acquired shares in a new subsidiary for 拢10 million. It paid the vendor company 拢8 million in cash, and issued loan notes for the remaining 拢2 million. Subsequently, Q plc found out facts about the financial position of its new subsidiary that had not come to light in the due diligence process. Discussions with the vendor company followed, as a result of which it was agreed that the purchase price should be reduced by 拢1 million. Accordingly, 拢1 million of the loan notes issued by Q plc were cancelled.
It accounted for the transaction as:
| Dr听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听Creditors (loan notes)听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听拢1 milliom |
| 听 |
| Cr听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听Cost of investment听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 听 拢1 million |
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For tax purposes, the loan notes were debtor loan relationships of Q Ltd. since, although there had been no lending of money, an instrument had been issued representing security for the creditor鈥檚 rights under the 拢2 million money debt.
The cancellation of 拢1 million of the notes did not, however, give rise to a tax charge under the loan relationships rules. Although a credit appeared in the company鈥檚 books, there was no amount that has been recognised in determining the company鈥檚 profit or loss for the period.