Loan assignment

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JRSB
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Loan assignment

Post by JRSB »

Entity A acquires Entity B from Entity C for €20m.
Immediately before the transaction, Entity B owes €15m to Entity C (its parent company)
As part of the agreement, the debt remains in Entity B but it now owes it to Entity A (new parent) rather than C (old parent).

Standalone financial statements of Entity A now show:

Dr Investment in sub €20m.

Cr Bank/liability (consideration paid/due) €20m

Dr Loan receivable from sub €15m

Cr ??


It seems like it should be obvious (and probably is..). :D
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Marek Muc
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Re: Loan assignment

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not obvious at all!

Dr Investment in sub €5m only? All in all, Entity A paid 5m for equity and 15m for the receivable from B
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Re: Loan assignment

Post by JRSB »

That's a good idea, even if legally that is not specified like that, but it could show the substance.

However it could turn out the figures are reversed ie, paid €20m but the loan received will be €25m, which makes that approach tricky.
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Marek Muc
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Re: Loan assignment

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Well that would mean that, for example, the receivable is worth 20m only (despite the stated face value of 25m) and equity 0m, then it would be:

Dr investment in sub: 0
Dr receivable from sub: 20
Cr cash: 20

or it could be eqity 2 m , receivable 18 etc...
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Re: Loan assignment

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Again, makes sense. The question clearly is why would they assign the debt for less than face value .

But it could be that Entity C had carried it along with an ECL such that in their view it was sold at carrying value.

However the buyer doesn't know that, and in the buyer's eyes the debt will be receivable at the gross amount €25m.
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Marek Muc
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Re: Loan assignment

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I guess the first step would be to allocate the price between equity and receivable based on relative fair values
for equity, you're in the scope of IAS 27, so recognition at cost (= allocated part of the price)
for receivable, it's IFRS 9, so initial recognition at fair value, if the fair value is higher than allocated price, then this applies:
https://ifrscommunity.com/knowledge-bas ... ins-losses

this is how I would approach this, what do you think?
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JRSB
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Re: Loan assignment

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It's a great thought and actually takes it back to the exact same answer as another question I had before, again relating to a transaction where it doesn't appear to be conducted at commercial terms, but with a reason. Tricky!
Suppose the underlying assets have €20m value - one might consider that they have also acquired a €25m loan but fully credit impaired (POCI) due to whatever operational reason led to the decision to dispose. At a later time when the assets perform the allowance might be revised with the result that the value of the loan becomes realised through P&L.
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JRSB
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Re: Loan assignment

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I suppose the deferred gain would equally be released with a similar result.
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Marek Muc
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Re: Loan assignment

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I'm not sure I understand the last paragraph... In general, when you acquire an asset, you should ignore any impairment losses recognised previously by the seller and have a fresh look at the fair value of what you acquired
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Re: Loan assignment

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YEs, I suppose it would be that given the circumstances that might be the conclusion of the new buyer (which would explain why the situation arises - it's impaired).
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Re: Loan assignment

Post by pub_acco »

In this specific tricky case it sounds most plausible the loan receivable is impaired. I am wondering what would happen in A's separate FS if A simply received 5m cash from C in addition to the stake in B. Recognize a bargain purchase gain or a provision for unknown constructive obligations?
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Re: Loan assignment

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is it even possible to require a parent to cover obligations of its subsidiary? I guess it is not, then why pay someone to take over the ownership?

and generally you shouldn't recognise 'unknown constructive obligations'
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Re: Loan assignment

Post by pub_acco »

Provisions shouldn’t be unknown :lol: Was just kidding.

Seriously, the above transaction could be economically rational if C owes a constructive obligation for B’s liability while A doesn’t or does less (eg A can simply close B whereas C feels obliged to pay termination benefits to B’s employees).
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Re: Loan assignment

Post by Marek Muc »

;)

if C owes a constructive obligation for B’s liability - this would not normally automatically change after B is acquired by A, there should be a separate contractual provision between A and C in order for A to take over that liability, which in turn would make the case clear cut that there is an additional liability to be recognised by A, which would increase the consideration for B
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Re: Loan assignment

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In the original scenario I think the explanation is that the seller considered it impaired but the buyer just looked at the contractual amount without considering fair value.
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