![]() ![]() Under IFRS 9, you need to classify the loan as either at amortized cost, fair value through profit or loss (FVPL) or fair value through other comprehensive income (FVOCI). Is the loan held at amortized cost or FVOCI? If your loan IS a financial asset under IFRS 9, then proceed to the second question:Ģ. If your loan is NOT a financial asset under IFRS 9, then forget about impairment and ECL model. 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.e. Please read about different forms of intercompany financing and the classification challenges here. Sometimes, there is no formal contract and the financing provided from a parent to a subsidiary can represent a capital contribution in fact. If you take action today and subscribe to the IFRS Kit, you’ll get it at discount! Click here to check it out! Have you already checked out the IFRS Kit ? It’s a full IFRS learning package with more than 40 hours of private video tutorials, more than 140 IFRS case studies solved in Excel, more than 180 pages of handouts and many bonuses included. Sometimes, they sign a formal contract arranging a loan. Is your intercompany loan a financial asset?Ĭompanies within the same group can provide financing to each other in many different ways. However, before you start calculating the amount of ECL, you need to answer one very important question:ĭo you have to apply ECL model on your intercompany loan?Īs I have already mentioned, ECL model applies to all financial assets held at amortized cost or FVOCI (debt only).ġ. Having that said – simplified approach is NOT available for loans, thus you have to go with general approach. IFRS 9 specifies types of assets for which you can apply general approach and simplified approach. Let me remind you that you have NO choice here. You can read more about general ECL model rules here. Simplified approach – the impairment is recognized in the amount of life-time ECL and it is not necessary to determine the stage of a financial asset.General approach – you need to recognize an impairment based on the stage in which the financial asset currently is in the amount of either 12-month ECL or life-time ECL and.IFRS 9 requires recognizing impairment of all financial assets held at amortized cost and at fair value through other comprehensive income, in the amount of expected credit losses (further “ECL”). The new standard IFRS 9 Financial Instruments has been in place for some time, so most accountants have already familiarized themselves with new rules. I think these reasons are enough to care, aren’t they? This issue becomes even more important when other shareholders are involved, too – in this small example, non-controlling interest is 40% and these shareholders are also interested in subsidiary’s results.Īlso, in many jurisdictions, ECL provision can affect the amount of income tax paid to the state authorities. In subsidiary’s individual financial statements, this intercompany ECL provision directly affects the subsidiary’s results and you simply have lower amount available for dividend. The impairment of a loan in subsidiary’s accounts decreases the amount of profit available for distribution to shareholders. OK, do you pay yourself a dividend from that subsidiary? How much? Why should you book it – won’t it will be eliminated on consolidation? One year later, the subsidiary assessed that the impairment on that loan amounting to its expected credit loss (ECL) is CU 10 000. You got a loan from the subsidiary of CU 100 000. Imagine you hold 60% in a company A and you exercise control of that company. Short answer – YES, you should, in most cases. Why would you do that when all intercompany balances are eliminated on consolidation and there’s nothing left in the consolidated financial statements – no loan, no provision? ![]() Should you ever recognize impairment, or a provision on your intercompany loan (if you are a lender, of course)?
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