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Treatment in the books

Arijit (Student - CMA Final) (210 Points)

02 March 2012

Dear All,

I have the following query:-

A Ltd is a holding Company and B Ltd is its wholly owned subsidiary. B Ltd was incorporated in Oct, 2010.

Right from the incorporation, A Ltd is being incurring and reimbursing all expenses on behalf of B Ltd.

My question is, what shall be the accounting treatment in the books of accounts for both the parties? Further, what can be the legal treatment according to the Companies Act, 1956 i.e, a valid answer for the Statutory Auditors?

Can we show it as Unsecured Loan in the books of A Ltd. What shall be the feasible thing to do over here?

Request for your comments in this regard

Thanks

Arijit

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1 Replies

Kolluru Krishna Murty (Partner) (315 Points)
Replied 03 March 2012

There are two possibilities here:

1.Please transfer the amounts to the books of B Ltd and then incur the Expenditure there depending on the decision given by the management of B Ltd. This is the right way of doing things,since the decisions on expenses etc have to be taken legally by Board of directors of B Ltd.This should uniformly applied whether it is expenditure or reimbursement.

2.Please go on spending on B Ltd and on yearly basis transfer the expenditure in the form of Unsecured Loan or Share Application Money.But please follow the formalities like Board minutes,register of inter company loans,conducing meetings(at least on paper) etc,.

Before all this please take the views of Directors what is the purpose of floating this company and long term view of the affairs of the company.

kkm