Accounts Related Question- Profit on disposal to subsidary?

Discussion in 'Accounts & Finance' started by JohnnyChip, Feb 13, 2020.

  1. JohnnyChip

    JohnnyChip UKBF Newcomer Free Member

    9 0
    Hi all, an accounting query.

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

    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?

    I've read different answers to this Accounting q online.
     
    Posted: Feb 13, 2020 By: JohnnyChip Member since: Sep 10, 2019
    #1
  2. CA85

    CA85 UKBF Contributor Free Member

    40 2
    Not sure that your question is as clear as it could be?
    In the individual accounts of each entity the transaction will be recorded, as normal. One side shows a sale and one side shows a purchase. In the Consolidated accounts the transaction will be eliminated as it is group trading.
     
    Posted: Feb 14, 2020 By: CA85 Member since: Oct 9, 2019
    #2
  3. JohnnyChip

    JohnnyChip UKBF Newcomer Free Member

    9 0
    Thank you.

    I tried to make it clear but football finance...it's problematic haha!

    Especially when the ultimate parent company is listed on the HKSE and based in Cayman Islands.

    Take a look at these accounts and I'd be interested in your thoughts?

    Well I can't post a link but basically they sold the Fixed Assets- by which I mean stadium- to a subsidiary of the ultimate parent in Hong Kong and banked it as a Profit to offset losses. In the UK anyway, not the HK.

    Organisation/club in question is Birmingham City PLC.

    Accounts at CH to June 30th 2019.

    Pages 10 and 37 seem relevant.

    If they'd sold it to a commonly owned company, I'd have little issue- the price seems reasonable, the rent seems an alright yield- though nothing in the cashflow or on the Land Registry yet but that bit is okay.

    However, the sale to a subsidary and classing it as profit or at least to offset losses for the football club makes me wonder...

    EDIT- The subsidary is wholly owned by BSH Limited in Cayman Islands on HKSE, not by Birmingham City PLC Ltd. Does this make a material difference- maybe it's okay after all as it's a subsidary and the next largest UK company of the parent based overseas?

    If you're in accounting though, you should explore Football Finance, especially at Championship level- some very interesting transactions and aspects in recent years.

    Pride Park sold to a commonly owned company who owned the company by the owner for £81.1m...revised down to £49-50m by EFL. They apparently got an independent valuation but the EFL one came out quite differently...

    Hillsborough? DRC was £22.25m in 2014, sold for £60m in summer 2018 so the club say- but Land Registry says 2019- land inflation in Sheffield must be crazy!! It was sold to a commonly owned company, owned by the owner of course.

    Reading? Sold their ground to their parent company. Small profit but still no Land Registry entry 2 years in-granted overall biggest in the group based in China!

    Yes, there's a right treasure trove in the Championship and possibly football in general for Accounting purposes! :)
     
    Last edited: Feb 14, 2020
    Posted: Feb 14, 2020 By: JohnnyChip Member since: Sep 10, 2019
    #3
  4. CA85

    CA85 UKBF Contributor Free Member

    40 2
    It is tricky to follow without the full facts, but I think this looks ok. The UK entity has sold the asset and this is reflected in the accounts, and also in the consolidated UK accounts - all fine from the UK position. Somewhere overseas there another subsidiary of the ultimate parent who has reported the purchase of the asset in their accounts, and then (presumably) there is a consolidated set of accounts for the group as a whole where the transaction is cancelled out because it is within the group and not an external transaction.

    It is not something I have looked at, but if these clubs are selling the stadiums (moving ownership with a group) in order to have large gains reported in their accounts to comply with Financial Fair Play rules - is this not a bit short term? Large gain one year to meet the rules - but how do they meet the rules next year, they can only sell their stadium once.
     
    Posted: Feb 17, 2020 at 1:03 PM By: CA85 Member since: Oct 9, 2019
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  5. JohnnyChip

    JohnnyChip UKBF Newcomer Free Member

    9 0
    Yeah, fair- thanks for the responses btw.

    I have no particular issue with the price, nor with the rent return, seems commercial- I can post print screens etc in due course to help follow it a bit better.

    It's what you might call an 'interesting' practice- clubs are either selling to commonly owned companies that is to say other companies that the owner owns, or within a group- and the odd thing is that some of the gains are not all that large, but some are! One of them was only about £26.5m gross price, Net Book Value around £20m, that'd be Reading. Birmingham as stated, the price sounds feasible and the rent ratio would give the owners a profit so no particular issues there.

    The subsidiary is based in the UK apparently, but owned by the overseas...it's complex- this is in the Birmingham case! I can link to those consolidated accounts listed on HKSE, or get a print screen of the relevant part!

    Well this is the risk- they are perhaps gambling on promotion before a breach reported, but the rules are rolling 3 year ones which means that in effect it helps for 5 years. Rolling 3 year rules so for example say it starts in 2016/17, assessment comes in March 2019 for 2018/19 season and secondary assessment the following season- but the period doesn't reset but rolls on and on and on- so the new assessment period for 2019/20 begins in 2017/18 and so on.

    In short, selling a stadium can help for 5 years! Sell a ground in April 2018 say as it's backdated from 2016/17 to T-1, so 2015/16-2017/18 is covered by this practice and it covers the next two years until it drops off, which will be 2020/21 season!

    UEFA have an interesting measure apparently to deal with it which makes it not worth the while of a club doing it- oh and there are fair value rules with EFL FFP too, which may or may not have so far been enforced in real time.

    Derby sold Pride Park to a company owned by Mel Morris, their owner and he of Candy Crush fame, off the back of their Independent Valuation (though the company and method stated nowhere in their accounts to June 2018) for £81.1m for example...but an EFL commissioned Independent Valuation last year had it come down to £49-50m! That £31-32m gets docked from the FFP calculations and they were charged with excess losses about a month or so ago. There's also a separate charge about their amortisation method but that's a different issue.

    You're right, surely can't be done again. Other Fixed Assets however...?

    Won't let me post Print Screens I don't think.
     
    Posted: Feb 21, 2020 at 9:55 AM By: JohnnyChip Member since: Sep 10, 2019
    #5