Inter-company loans in the separate or individual financial statements. See also Loans at below market interest rates and Loans to an employee for further discussions on related party loans.
The accounting for the below-market element of an inter-company loan in the separate or individual financial statements of the entities is not addressed by a specific Standard. As a result, the accounting for such transactions is conducted by applying the principles set out in the Conceptual Framework, in particular its definitions of assets, liabilities and equity. The effect of this in accounting for the below-market element relating to the following types of inter-company loans is discussed below in more detail:.
IFRS 9 and intercompany loans
Fixed term loan from a parent to a subsidiary. Where a loan is made by a parent to a subsidiary and is not on normal commercial terms, the difference between the loan amount and its fair value should be recorded as:. The definition of expenses similarly excludes distributions to equity participants. Under the Framework this contribution is not income. This thinking also underpins the way to account for the below-market element of other inter-company loans.
Loans between fellow subsidiaries. Where a loan is made between fellow subsidiaries, additional analysis may be needed. As in the other situations described above, the entities involved should assess whether the facts and circumstances indicate that part of the transaction price is for something other than the financial instrument.
If it is, then the fair value of the financial instrument should be measured. In some circumstances however it will be clear that the transfer of value from one subsidiary to the other has been made under instruction from the parent company.
In these cases, an acceptable alternative treatment is to record any difference as a credit to equity capital contribution and for any loss to be recorded as a distribution debit to equity. Loans from subsidiary to parent. Where a loan is made by a subsidiary to its parent on terms that are favourable to the borrower, any initial difference between loan amount and fair value should usually be recorded:.
If the loan contains a demand feature, it should, as in other scenarios, be recorded at the full loan amount by the parent the borrower. Loans to related parties that are not repayable.
Related party disclosures. Where there are significant uncertainties, such as the expected terms of a loan, the disclosures should refer to this. Example — Loan to a subsidiary at below-market interest rate.
Step 1: Assess whether the loan is on normal commercial terms. Step 2: Split the loan into the below-market element and the loan element. The difference between this amount and the CU transaction price of the loan is CU21 which represents the non-financial element of the loan.
Step 3: Account for the below-market element. The substance of the below-market element is a capital contribution by the parent to the subsidiary, leading to the following entries being recorded by the parent and the subsidiary on 31 December 20X0 in their separate or individual financial statements:.
Amounts in CU. Investment in subsidiary Inter-company loans. Equity capital contribution Inter-company loans. No further entries will be required in future periods in respect of this element of the loan. Step 4: Account for the residual loan element. The remaining part of the loan, representing the fair value of the financial element of the loan on initial recognition is recorded as follows:.Consolidated financial statements are the financial statements of a group presented as those of a single economic entity.
Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. A group is a parent and all its subsidiaries. Non-controlling interest is the equity in a subsidiary not attributable, directly or indirectly, to a parent.
A parent is an entity that has one or more subsidiaries. Separate financial statements are those presented by a parent, an investor in an associate or a venturer in a jointly controlled entity, in which the investments are accounted for on the basis of the direct equity interest rather than on the basis of the reported results and net assets of the investees.
A subsidiary is an entity, including an unincorporated entity such as a partnership, that is controlled by another entity known as the parent. Separate financial statements need not be appended to, or accompany, those statements. Control also exists when the parent owns half or less of the voting power of an entity when there is: 2. The existence and effect of potential voting rights that are currently exercisable or convertible, including potential voting rights held by another entity, are considered when assessing whether an entity has the power to govern the financial and operating policies of another entity.
Potential voting rights are not currently exercisable or convertible when, for example, they cannot be exercised or converted until a future date or until the occurrence of a future event.
Relevant information is provided by consolidating such subsidiaries and disclosing additional information in the consolidated financial statements about the different business activities of subsidiaries. For example, the disclosures required by IFRS 8 Operating Segments help to explain the significance of different business activities within the group.
In order that the consolidated financial statements present financial information about the group as that of a single economic entity, the following steps are then taken:. Non-controlling interests in the net assets consist of:.
Profits and losses resulting from intragroup transactions that are recognised in assets, such as inventory and fixed assets, are eliminated in full. Intragroup losses may indicate an impairment that requires recognition in the consolidated financial statements. IAS 12 Income Taxes applies to temporary differences that arise from the elimination of profits and losses resulting from intragroup transactions.
When the end of the reporting period of the parent is different from that of a subsidiary, the subsidiary prepares, for consolidation purposes, additional financial statements as of the same date as the financial statements of the parent unless it is impracticable to do so. In any case, the difference between the end of the reporting period of the subsidiary and that of the parent shall be no more than three months.
The length of the reporting periods and any difference between the ends of the reporting periods shall be the same from period to period.Welcome to AccountantAnswer Forum, where you can ask questions and receive answers. Although you need not be a member to ask questions or provide answers, we invite you to register an account and be a member of our community for mutual help. You can register with your email or with facebook login in few seconds.
You can register with your email or with facebook login in few seconds Get AccountantAnswer App. How to treat an interest free loan under IFRS? I just wander how to account for this under IFRS?
What happens to the interest we are forgoing? Your comment on this question: Your name to display optional : Email me at this address if a comment is added after mine: Email me if a comment is added after mine Privacy: Your email address will only be used for sending these notifications.
To avoid this verification in future, please log in or register. Your answer Your name to display optional : Email me at this address if my answer is selected or commented on: Email me if my answer is selected or commented on Privacy: Your email address will only be used for sending these notifications.
You should discount the loan given at the market interest rate to find the fair value of loan and record the loan at fair value. The difference between the fair value and the amount paid could be recognized as a finance expense and charged to income statement or you may also defer this charge and amortize over the period of two years.
Over the period of the loan, interest receivable will be added to the loan using the effective interest method. Your comment on this answer: Your name to display optional : Email me at this address if a comment is added after mine: Email me if a comment is added after mine Privacy: Your email address will only be used for sending these notifications.
Related questions 0 answers. Can a parent give a loan to a subsidiary without interest? Can a short term loan of 1 year to unrelated party requires discounting at the beginning?
Inter company loans with no interest. Send feedback Privacy Learn Contact. Snow Theme by Q2A Market. Powered by Question2Answer.Welcome to AccountantAnswer Forum, where you can ask questions and receive answers. Although you need not be a member to ask questions or provide answers, we invite you to register an account and be a member of our community for mutual help. You can register with your email or with facebook login in few seconds. You can register with your email or with facebook login in few seconds Get AccountantAnswer App.
Inter company loans with no interest. Can a company provide loans to a subsidiary company without any interest? What is the accounting treatment as per IFRS in such cases? Your comment on this question: Your name to display optional : Email me at this address if a comment is added after mine: Email me if a comment is added after mine Privacy: Your email address will only be used for sending these notifications.
To avoid this verification in future, please log in or register. Your answer Your name to display optional : Email me at this address if my answer is selected or commented on: Email me if my answer is selected or commented on Privacy: Your email address will only be used for sending these notifications. Whether a company can provide loan to its subsidiary without any interest depends upon local laws and regulations of each jurisdiction.
If the loan is short, no special treatment is required and its only shown as short term liability in the balance sheet.
If the loan is long term, it is recognized as long term liability at discounted value. The interest rate to be used for such discounting is the interest rate prevailing in the market for the similar loans. The difference of original loan amount and discounted value is recognized as interest income immediately in the profit and loss account. The accounting entey at beginning should be: Dr. Long term liability discounted value Cr. Interest income difference of above 2 After the initial recognition, every year this liability shall be unwinded to bring it to the current year's discounted value.
This will result in an interest expense and credit to the liability. By the end of loan term, the amount of the liability should be equal to original loan amount and amount of interest expenses charged over the period should be equal to interest income recorded in the initial year. What happens to the portion recorded in equity? The discounted portion. Your comment on this answer: Your name to display optional : Email me at this address if a comment is added after mine: Email me if a comment is added after mine Privacy: Your email address will only be used for sending these notifications.
Related questions 2 answers. How to treat an interest free loan under IFRS? Can a parent give a loan to a subsidiary without interest? Can a short term loan of 1 year to unrelated party requires discounting at the beginning? Can a parent company get a loan on behalf of the subsidiary? Send feedback Privacy Learn Contact.Should you ever recognize impairment, or a provision on your intercompany loan if you are a lender, of course?
One year later, the subsidiary assessed that the impairment on that loan amounting to its expected credit loss ECL is CU 10 Also, in many jurisdictions, ECL provision can affect the amount of income tax paid to the state authorities. The new standard IFRS 9 Financial Instruments has been in place for some time, so most accountants have already familiarized themselves with new rules. You can read more about general ECL model rules here.
IFRS 9 specifies types of assets for which you can apply general approach and simplified approach. Having that said — simplified approach is NOT available for loans, thus you have to go with general approach. However, before you start calculating the amount of ECL, you need to answer one very important question:. Please read about different forms of intercompany financing and the classification challenges here. Therefore, your first task is to determine whether the intercompany loan is a financial asset under IFRS 9 or some sort of a capital contribution accounted for in line with different standard i.
IAS While the first criterion in met by most intercompany loans, there could be some special features of intercompany financing that prevent loan being classified at amortized cost. For example, imagine the parent provides a loan to its subsidiary to finance a construction of an apartment house.
If you apply general model, then you need to assess the credit risk of your intercompany loan at the end of each reporting period. In order to determine the stage, you need to monitor the credit risk. Very important note: Collaterals or similar credit enhancements do NOT affect the assessment of significant credit risk, only in some circumstances.
The measurement of both types of ECL is similar — the only difference is probability of default applied at your calculation. This is the easiest parameter to find out.
Imagine a parent granted a loan to a subsidiary some years ago and is performing the assessment of this loan at the reporting date. Please remember that ECL is a weighted average of possible outcomes and as a minimum you should consider 2 outcomes : default and no default. I have received loads of questions related to intercompany loans, so let me answer a few of them:. Question 1: We are a parent and we took a loan from our fully controlled subsidiary.
Does the existence of control of lender have the impact on ECL recognized by the borrower subsidiary? Question 2: We provided a loan to our underperforming sister company under the common control of a parent.
The parent issued a letter of comfort to our borrower to express its support of the going concern of the borrower meaning that the parent will provide sufficient funds to the subsidiary to keep it going in the foreseeable future — at least 12 months. Should we still calculate ECL on that loan? However, a letter of support does NOT have the same contractually binding character as a financial guarantee offered by the bank or by some other entity.The majority of related company loans including intragroup loans as well as loans to associates or joint ventures are debt instruments that fall within the scope of IFRS 9.
This means that even though some loans may seem similar to a capital contribution, they should typically be accounted for in accordance with IFRS 9 instead of IAS 27 i.
Similarly, a loan to an associate or joint venture that is not equity accounted but, in substance, forms part of the net investment i. Undocumented loans are typically considered to be repayable on demand from a legal perspective and also fall within the scope of IFRS 9.
In some jurisdictions, it is possible that under local laws an undocumented loan is considered a capital contribution. In such cases, entities should consider seeking legal advice to support this conclusion. For example, loans that are linked to underlying asset or borrower performance, such as a profit-linked loan, will fail the SPPI test.
In addition, certain non-recourse loans, i. Related company loans are never eligible for the Simplified Approach. This means that a minimum of month ECL must be provided for all loans, including those that are not past due and are considered to be of a high credit quality.
Expected Credit Loss on Intercompany Loans
Challenges This new forward-looking model is a major change from the previous incurred loss model and entities should not underestimate the application challenges it presents. This includes: Sourcing and incorporating forward-looking information. Assessing for significant increases in credit risk.
Estimating a risk of default. Estimating the ECL. For more information, contact: Dr. It is important not to underestimate the challenges of applying the new IFRS 9 model to intercompany loans. Related insights April Guidance for auditors during the coronavirus pandemic.
IFRS 9 Financial Instruments, effective for periods beginning on or after 1 January 30 June year-endsrequires impairment allowances to be recognised on the basis of expected, rather than incurred credit losses.
Applying IFRS 9 to related company loans can present a number of application challenges as they are often advanced on terms that are not arms-length or sometimes advanced on an informal basis without any terms at all. In addition, they can contain features that expose the lender to risks that are not consistent with a basic lending arrangement.
Preparers need to be aware of these issues when applying IFRS 9. While loans to subsidiaries eliminate on consolidation, and are therefore excluded from consolidated financial statements, preparers need to remember that financial statements prepared under Part 2M. In making these additional parent entity disclosures, the ECL model must be applied when determining appropriate amounts of total current assets, and total assets, of the parent entity.
Many groups fund the operations of associates and joint ventures using long-term loan funding rather than injecting equity, particularly in the exploration industry.
Such loans do not eliminate on consolidation and must be tested for impairment using the ECL model in the group financial statements. While the AASB amendments only apply for periods beginning on or after 1 January and therefore do not technically apply to 30 June year-endswe recommend that these are considered because they serve to clarify the process, rather than being a new requirement.
Financial statements for the half-year ending 30 June must apply these amendments. Loans to other related parties also do not eliminate on consolidation and the ECL model must be applied to such balances in the consolidated financial statements.
For each type of related party loan receivable, including loans to KMPs, IAS 24, paragraph 18 requires entities to disclose information such as:.
Listed entities will additionally be required to disclose information about the amount of impairment allowances for loans to KMPs:. New expected credit loss model applies to intercompany loans Most preparers of financial statements for 30 June are aware of the change in the way provisioning impairment allowances are calculated for financial assets such as loans receivable, trade debtors and contract assets under IFRS 15 Revenue from Contracts with Customers.
While expected credit losses on these loans may not be material in quantitative terms, they are likely to be considered qualitatively material. Additional disclosures are therefore required by IAS 24 Related Party Disclosures and in remuneration reports for listed entities. Listed entities will additionally be required to disclose information about the amount of impairment allowances for loans to KMPs: In aggregate for all loans to KMPs — refer Corporations Regulation 2M.