Company-owned notes disregarded: Overview, definition, and example
What does "company-owned notes disregarded" mean?
"Company-owned notes disregarded" is a term often used in financial and legal contexts to refer to the treatment of notes (such as promissory notes or debt instruments) that are issued by a company but are owned by the company itself. In such cases, the company’s own notes are not considered in certain calculations, such as determining the total debt, net worth, or other financial metrics for the purpose of valuation, reporting, or compliance. Essentially, the company’s own holdings of its own debt are disregarded or excluded from these financial assessments to avoid inflating liabilities or distorting financial ratios.
For example, if a company issues a promissory note and then repurchases it, that repurchased note is "disregarded" when calculating the company's overall debt because it essentially cancels itself out.
Why are company-owned notes disregarded?
Company-owned notes are disregarded because including them in financial assessments could distort the company's actual financial position. Since the company is both the issuer and the holder of the notes, there is no net impact on its overall debt load or financial standing if it owns its own debt. By excluding these notes, businesses can present a more accurate picture of their financial health and avoid inflating liabilities that do not represent external obligations.
For investors, regulators, and other stakeholders, disregarding company-owned notes provides a clearer view of a company's true financial position, focusing on external debt and obligations that actually affect the company's finances.
Understanding "company-owned notes disregarded" through an example
Imagine a company, XYZ Corp., that issues $1 million in bonds to external investors. At some point, XYZ Corp. buys back $200,000 of its own bonds, which it holds in its own treasury. When calculating XYZ Corp.'s total outstanding debt for financial reporting or compliance purposes, the $200,000 worth of bonds that the company owns are disregarded. This exclusion ensures that XYZ Corp.'s reported debt accurately reflects only the amount it owes to external creditors, not to itself.
In another example, a company might issue a convertible note to an investor but later repurchase that note. The repurchased note would not count towards the company’s debt when calculating key financial ratios like its debt-to-equity ratio, as it is considered self-held and thus disregarded in such assessments.
An example of a "company-owned notes disregarded" clause
Here’s how a clause like this might appear in a financial agreement:
“For the purpose of determining the company’s total liabilities under this Agreement, any notes owned by the Company, including but not limited to repurchased debt or treasury-held notes, shall be disregarded and excluded from the calculation of total outstanding debt.”
Conclusion
"Company-owned notes disregarded" refers to the practice of excluding debt instruments that a company holds in its own name from certain financial calculations. This helps ensure that a company’s true financial position is accurately represented by removing self-held debt from liabilities. For businesses, understanding and applying this concept is important for presenting clear and truthful financial reports. For investors and stakeholders, disregarding company-owned notes helps provide a clearer view of external debt obligations and the company's financial health.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.