Intra-group loan interes

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    evalstngj
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    Kaplan study pack says interest should be eliminated but exam kit (Highveldt) has accrued for same interest as receivable by addiing to parent’s retained earnings. Under what circumstance is this allowed?


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    MikeLittle
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    It’s always allowed. It’s ignored for the purposes of the Consol I/S, but for the parent’s own accounts and the Subsid’s own accounts ( ie, not the consol accounts ) both companies should reflect loan interest receivable and payable as though they were ( as indeed they are ) separate entities. It’s ONLY for the consol exercise that we eliminate / ignore the intra-group interest receivable and payable


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    Sangria9
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    Mike,
    from the view of the group:
    why don’t we eliminate accrued interest in Highveldt’s profit for the period (assume Highveldt accounted for it) and increase Samson’s (subsidiary) profit for the year while calculating profit relates to NCI and to the group?

    If it is intra-group loan, should NCI be charged with finance costs in their profit or they shouldn’t?


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    MikeLittle
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    Hi – it is necessary to put through the loan interest payable and the equivalent investment income receivable. For the subsidiary ( borrowing ) company, the entry will be Dr I/S and Cr Payables whereas for the parent ( lending ) company the equivalent entry is Dr Receivables and Cr I/S.

    Now cancel the Receivable against the same amount out of the payable.

    But you’ll notice that we DO NOT cancel the Retained Earnings ( I/S ) element of the entries – just the Receivable against the Payable.

    Why would it not be fair to charge the nci with interest on the loan? If the subsidiary had had to borrow from anywhere else, they would have had to stand their share of the cost of that alternative borrowing.

    Does that answer it?


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    Sangria9
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    I am still confused, I don’t see consistency..

    We charge NCI with their share of finance costs on intra-group loans.
    And the same time, we don’t let NCI to earn their profit on intra-group sales when we eliminate PUP.

    In the group accounts shall we need to show investment income and finance costs in separate lines? Won’t this inflate (blow up) expenses and incomes in group SOPL?


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    MikeLittle
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    Hi

    Yes, we show investment income and finance charges on separate lines.

    Don’t forget, the nci will get their own copy of the subsidiary’s financial statements. these adjustments are only for the purposes of preparing consolidated financial statements for the benefit of the members of the parent company …. and, when all is said and done, they are only consolidation adjustments

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