USA Equity refinancing Cost

[sayazali]

I have a quick question to y'all, we have equity refinancing cost in the parent company that relates to the new company. Right now, the cost is sitting on the Balance sheet. Once the new entity formed, we will move this cost to the new entity. The question is what will be the Journal entries if we want to avoid cash payments between the entities if possible.

 

[Werner Reisacher]

You may want to address the potential tax implications first. In general, the cost involved in the financing of the Mother Company is the liability of the shareholders and cannot be passed on to the subsidiaries. Just a thought. Make sure you have no problems with State and local taxes. If your subsidiary should be outside the US, you would most probably have an issue. It all depends on the legal status of the legal entities and under which jurisdiction they are taxed.
If there is no problem on that side,
Debit: Subsidiary
Credit: the balance sheet account on which you parked the pending transfer.

 

[Kat Maple]

Hello sayazali

I do not know why the above post discussed cost as if it only involved the mother company and cannot be passed to subsidiaries when your post said that the refinancing related to the new company. Mystery to me because then they proceeded to give an entry to pass it to the sub. Oh well.

I saw that the above post gave only the parent entry and lacked the sub entry which is like making a one sided journal entry. I can help fix that. So the full set would be on parent books debit Investment in Sub and credit the refinancing cost. On the sub books the entry would be debit the refinancing costs and credit an equity account called additional paid in capital.

This only works for US GAAP because I read that IFRS does not allow this

Hope this helps!

Kat

 

[Werner Reisacher]

I am glad you bring the IFRS aspect into the discussion. I actually had GAAP vs. IFRS and the rules and regulations about the allocation of mother company HQ management fee allocations accross global companies' networks in my mind. Depending on the size of the companies, these are often negotiated directly with the various government tax authorities in the global jurisdictions. That's why I put more emphasis on the question of whether such a transaction is legal, rather than the two-book entires.
And yes, I should have added that if it is allowed, the subsidiary would Credit: the MotherCompaniy's intercompany account and Debit: Financing expenses to balance the intercompany accounts at consolidation level.

 

[Kat Maple]

Hi Werner

Just need to point out that in your last post you said the sub would credit the mother company's intercompany account - but that is not correct. That creates a mismatch and an error in consolidation because the parent did not post a debit to an intercompany receivable account but to the Investment In Sub account. The correct account for the sub to credit is an equity account called additional paid in capital.


Hope this helps!

Kat

 

[Werner Reisacher]

Thank you Kat,
And you always hear me saying - the devil is in the details. You and I do agree when it comes to accounting, but we seem to struggle with the semantics of the question. I assumed that the mother company negotiated an equity financing on behalf of the sub, and paid a fee in connection with the equity financing. Therefore I assumed that they Debit: "equity cost temp. a/c Credit: Bank. when they paid the fee. etc. and when they pass the expense (cost) on to the sub, Debit: sub Credit: "equity cost temp. a/c.
Sayazali, can you please define what do you mean when you say "equity financing cost"? Please describe the flow of the funds.

 

[Kat Maple]

Hi Werner,

In the above post you discuss the parent accounting, and I have no problem with that. My post prior to this one concerned the entries you suggested for the sub because they are not correct and would cause an error in consolidation. That is the issue and this was not addressed by you. Do you want to reply to that one or just leave as is?

Thanks

Kat