UK Kind of a theme I've touched upon before- but Profit on Disposal of Fixed Asset to a wholly owned subsidary?

[AnAspiringAccountant]

Hi all, an accounting query.

Hopefully this one will be simpleish- I'm relatively new to getting into accounting.

IF a company sells a fixed asset to a wholly owned subsidary- how should the profit be accounted for?

The kicker is that the ultimate parent or overall undertaking is based in Hong Kong or listed on HKSE and base din the Cayman Islands, but originally was solely UK based.

Birmingham sold St Andrews to a wholly owned subsidary last summer for £22,760,000, added to this was a deferred capital grant that was released of £1,466,357. Net Book Value on Disposal was £7,037,591...£17,188,766 was the p[profit, which was comprised of proceeds + capital grant-NBV!

Once again that seems fine, but my question is that if disposed to a wholly owned subsidary of Birmingham Sports Holdings Limited, should Birmingham City PLC, the largest UK based company show this profit as income to carry forward- whereas the Birmingham Sports Holdings Limited on the HKSE does not! Or should it cancel out?

Or should it be at Market/fair value for tax purposes- the latter seems moot as Birmingham City PLC posted a loss in any case and you can't be taxed on a loss in most circs!

I've read different answers to this Accounting q online.

 

[AnAspiringAccountant]

Suppose the simplest bit of the question is, should a sale of a fixed asset to a wholly owned subsidary be:

a) At Fair Value
b) At Net Book/Book Value?

The stuff about HKSE listings and ownership in Cayman Islands of the ultimate company only adds trickiness.

 

[Fidget]

For tax purposes, it will be market/fair value. It's anti avoidance legislation. Transfers between related parties ("related" has a rather wide definition for tax purposes btw) are at market value at the point of sale to prevent them being transferred at lower values in order to escape Corporation Tax (Capital Gains Tax in the case of transactions between related individuals) on the gain. So it doesn't matter how much is actually paid - if it's lower than market/fair value, then market/fair value will be assumed if caught by HMRC's "related party" rules.

For accounting purposes, where there's transactions between companies that make up a group, any profit/loss is shown as normal in the financial statements of the individual companies. But, a set of consolidated accounts needs to be produced for the group and any profit/loss from intercompany transactions is cancelled out on consolidation. The rationale behind that is that "the group" is a separate legal entity from the companies that make it up, but as it's not possible for an entity to make a profit or loss from itself, then they have to be cancelled out on consolidation.

 

[AnAspiringAccountant]

Thank you.

So it's fair enough then basically? Necessary in fact due to Anti Avoidance rules.

Like I say I have no particular issue with the price or the rent- 5% rent seems okay on the face of it, and

The added complication here is that the consolidated accounts are listed on HKSE. The subsidary who purchased St Andrews are wholly owned by the company with the consolidated accounts (Birmingham Sports Holdings Limited) as opposed to Birmingham City PLC or Birmingham City FC PLC. It does cancel out at that group level in those accounts, but the biggest UK company for it, ie Birmingham City PLC and Birmingham City FC PLC have posted a profit for this deal- the parent company based in Cayman Islands, listed on HKSE but the next biggest posts a profit with a sale to a subsidiary wholly owned by the parent company.

In due course, I shall post some screenshots of the relevant bits of the accounts- context always helps.

I'm unsure Birmingham or their owners were looking to avoid tax with the transaction anyway- they posted a loss for a start, as did some other clubs or owners who didn't pay tax on their deal, this was more a case of for FFP IMO.

 

[AnAspiringAccountant]

Hope this comes out okay.

Screenshots 3 and 4 are respectively the BSH Accounts on the HKSE which show no reference to the ground sale and the segmented accounts- it's all in HK$- which show the football club section of these accounts. Clearly it cancels out at that level.

What I'm intrigued by is if the biggest in the UK but still part of BSH selling to a wholly owned subsidiary of BSH should count as a profit in its UK accounts. Pre the takeover by foreign investors, Birmingham City PLC used to be the biggest in the group. For tax purposes perhaps, but beyond that...