Contribution by Ultimate Controlling Party

EElene9y ago

Hello, I have a question regarding the contributions in the Company by its Ultimate Controlling Party, who is not a direct shareholder of the Company but a shareholder of its shareholder. Imagine a case when X Company is fully owned by Y Company. 100% Shares of Y Company is owned by Z Company. So, Z is the Ultimate Controlling Party of X. Z has contributed some cash directly to X (not through Y). Should this amount be recognized as an equity or gain? As far as I am concerned the equity is made of contributions only by shareholders. Can we consider the Ultimate Controlling Party as a shareholder too? Or should we record this amount as a gain through profit & loss / gain through other comprehensive income?

P2-D2Tutor9y ago#1

Hi, What do you mean by "has contributed some cash directly to"? If you mean that X has borrowed the cash from Z then we have an intra-group loan that would be eliminated on consolidation. Thanks

EElene9y ago#2

Hi, Thanks for a timely response! But no, X has no contractual obligation of cash outflows in future and therefore the transaction is not a loan by nature. Suppose that it was something like grant gifted. Should it be accounted as an additional paid in capital or gain in this case?

EElene9y ago#3

P.S. I am interested in proper accounting treatment for the Standalone Financial Statement of X Company, not consolidated.

P2-D2Tutor9y ago#4

If it was paid in capital then shares would be issued and there aren't any shares issued based on what you've said. It is therefore either a loan or some form of revenue transaction. I still believe that it would be treated as a loan.

EElene9y ago#5

Thanks again, but I still do not understand the issue. Sorry for disturbing one more time :):). The real terms of the case included the loan received by X Company from Z Company - (an ultimate controlling party of X), amounting 50 mln in total. The loan was interest free and from a related party therefore there was an evidence that the fair value differed from transaction price. In order to calculate the fair value of the loan for initial recognition, I have discounted the future contractual cash flows at Company's cost of debt. Present value equaled 32 mln. My question refers to the accounting treatment for the other 18 mln. I assume that this amount is an excess cash due to favorable terms of the loan agreement. This is contribution by an ultimate controlling party which does not imply an obligation of repayment in future. If the loan had been taken from the real shareholder of the Company instead of its ultimate controlling party, I would consider the excess amount as an additional paid in capital, but now I'm confused. How should I account for this 18 mln?

P2-D2Tutor9y ago#6

If you think about it using double entry then you should find that the entry then goes through profit or loss. DR Bank $50m CR Loan $32m CR SPL $18m It has nothing to do with any paid in capital as explained previously. Thanks

Sign into reply to this topic.