Sandeep Garg (Consolidation and IndAS Application) (1056 Points)
17 March 2016Hi,
Please let me know the likely treatment of Inter corporate loan given at below market rate with journal entries as per the below example -
Holding co. H extends an interest free loan of INR 100 mn to Subsidiary B repayable after 5 years.
Thanks
CA Sachin Rastogi
(Audit/IFRS Manager)
(338 Points)
Replied 21 August 2016
The fair value of the loan for the lender will be arrived by discounting the future cash inflows at market rate of interest which will be below 100. Assume that it is 90. So Lender will debit Loan receivable with 90 , book impairment loss of 10 in P&L and credit cash with 100. Subsequent to this, the loan of 90 will be unwind by booking an interest income in P&L and giving a debit to the loan receivable. This will continue as long as the loan of 90 becomes 100 on the date of redemption (at a future date).
Receiver will mirror the above entries by booking a gain of 10 in PL on initial recognition. Subsequent to this, he needs to book an interest expense on this loan.
Hope it is clear to you.
Sandeep Garg
(Consolidation and IndAS Application)
(1056 Points)
Replied 30 August 2016
As per the guidances available (all Big 4's also), 10 will be treated as "Capital contribution from Parent" in subsidiary books and "Investment in Equity of Subsidiary" in Parent's books.
And this 10 will remain forever inn both the books unless investment in subsidiary is disposed off.
CA Sachin Rastogi
(Audit/IFRS Manager)
(338 Points)
Replied 30 August 2016
Sandeep you are right. The treatment what you mentioned is right when it is between holding company and subsidiary which I failed to read in your question. My reply is based on an assumption the loan is between 2 unrelated parties. Thanks
CA Sachin Rastogi
(Audit/IFRS Manager)
(338 Points)
Replied 30 August 2016
One more thing even after repayment of debt by subsidiary to holding company in full the 10 will remain in investment of holding company and capital of subsidiary as long as the subsidiary is disposed off. Hope it is clear now.
Sandeep Garg
(Consolidation and IndAS Application)
(1056 Points)
Replied 30 August 2016
Hi Sachin, one more query i have regarding corporate guarantee provided by holding to subsidiary for taking bank loan.
As per IndAS, we need to value the same. So which value we should consider i.e. sanctioned amount of guarantee or outstanding amount of loan against that guarantee.
CA Sachin Rastogi
(Audit/IFRS Manager)
(338 Points)
Replied 30 August 2016
Well I have not seen a single case where people are valuing and disclosing financial guarantees may the disclosure doesn't qualify on materiality grounds. It make sense to value it on the sanction amount and not the outstanding amount assuming that subsidiary has drawn down the full sanctioned limit. But suggest you to value it only when the amount is material else you can ignore it.
CA Sachin Rastogi
(Audit/IFRS Manager)
(338 Points)
Replied 30 August 2016
Further, this disclosure if required is valid only for standalone FS and not the consolidated one.
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