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Company A borrowed a loan from a bank and paid the loan installments and the interest.Company A gave the whole loan to company B, a related-party. Company B paid to company A the principal only in installments without incurring any interest expense.
Company B made an investment with the loan.
Are these notes correct?
– Is there a problem in the matching principle for company A and company B?
– Should company B realize interest income for the unpaid interest according to the idea of interest free loans from the government IAS 20 government grants?Would it matter if the shareholders of company A accept paying the interest instead of company B?
If companies A and B are related by being members of a group of companies, it really wouldn’t matter because all the intra-group relationship transactions would be eliminated upon consolidation. The individual company’s accounts and notes would reflect those related party transactions that affected them directly
As for recognising as income the loan interest not paid – that’s an interesting question to which I don’t know the answer!
You say it’s a practical point – have you come across this in your line of work?
Thank you for your answer.
Yes, I have came across this issue twice.
The first one was exactly as the example. And the tax officer required company A to recognise income for the not-invested loan. But as for audit, it passed as both parties accept this transaction.
The second one was a related party (Company A) paying the expenses of it’s sister company (Company B) and incurring overdraft interest expense for those expenses. The company B only pay the expenses without incurring any interest expenses. It passed Both the auditors and the tax officers didn’t comment on this transaction.
How interesting! To be honest, I have never thought about this position ever before but it’s certainly food for thought
Thanks for your input 🙂
You are welcome. If you found something to add in this engagement tell me. I want to apply what I learn 😀
Hello mike
Similar to 3mr i have a real life situation in which i am a bit unsure. In a credit union , the shareholders are sold land which was purchased and eventually developed for resale by that same credit union. The land is being sold to the shareholders of the credit union below market value.
Is it that this should be disclosed in the notes , or is there more to it?Ps. I appreciate that you are taking the time to answer this practical question. Its good since these situations may not be in a text book. Your assistance helps us to be better accountants and auditors as opposed to just passing an exam.
Again, not a situation that I have ever encountered
It sounds to me that the difference between carrying value and market value should be recognized as a gain on an investment property and then the difference between amounts received from the shareholders and market value should be shown as a distribution to those shareholders (like a dividend)
But don’t you dare quote me when some manager or partner asks you how you reached this proposal … I deny all knowledge of it
OK
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