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if a parent gives a loan to its foreign sub of $400…then apart frm eliminating the loan amt frm d receivables n payables…are we supposed to add or deduct any exchange loss on retranslating the loan in the sofp….bcoz if no such adjustment is made …then the sofp figures tally pls help…thank you
You are supposed to remove each and every intra-company transaction whatsoever. However, you are supposed to present each and every related aspect of loan in individual FS only.
This is one super complicated question, but I did some research and here’s what I found.
It depends on the timing of the loan and whether it is downstream or upstream.
If it’s been on the parent’s books for more than a year before parent gainig control, the gain or loss is posted to P/L this is because similar gain or loss must’ve been posted to P/L on previous periods (this is for upstream trans ie parents’ loan to sub).
So, in consolidation, using the historical rate will automatically adjust the gain or loss to the balancing figure of the exchange reserve, then the double entry will be on the historic rate
: DB Non Current Liability
CR Financial Asset
If the loan is on the same period of acquisition, it is then a monetary item and on practice it is adjusted on the transferred consideration and is cleared on the acquisition date.
Hope this is helpful!Illustration 3-5: Intercompany loan that is of a long-term investment nature
Assume a US parent has a loan denominated in USD to its foreign subsidiary whose functional currency is the local currency. The loan does not have a stated maturity date, and the US parent does not intend to seek repayment in the foreseeable future. Therefore, this intercompany loan qualifies as an intercompany transaction of a long-term investment nature. Since this loan is denominated in the functional currency of the US parent, the US parent does not deem this loan to be a foreign currency transaction on its books. However, since the functional currency of the foreign entity is its local currency while the loan is denominated in USD, the foreign entity deems this loan to be a foreign currency transaction.
In the standalone financial statements of the foreign entity, the foreign transaction gain or loss related to this intercompany loan is recorded in income. However, the transaction gain or loss would be reclassified as a translation adjustment and recorded in other comprehensive income in the US parent’s consolidated financial statements since both parties to the intercompany transaction are included in the US parent’s consolidated financial statements.Found this from https://www.ey.com/publication/vwluassetsdld/financialreportingdevelopments_bb2103_foreigncurrency_18july2013/$file/financialreportingdevelopments_bb2103_foreigncurrency_18july2013.pdf?OpenElement or you can google (foreign currency intercompany loan in consolidation)
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