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Can a parent give a loan to a subsidiary without interest?


Can a parent give a loan to a subsidiary without interest? Is it allowed under IFRS?

asked Oct 8, 2014 in IAS 27 - Separate Financial Statements by anonymous

2 Answers

0 votes
The IFRSs do not preclude any entity from lending and borrowing money free of interest. This practice, however, may give rise to a tax issue depending on the transfer pricing rules applied by each jurisdiction.
Note that IAS 39 requires all loans receivable and payable to be initially recognized at fair value. IFRS 13, Fair Value Measurement, applies to IFRSs that require or permit fair value measurements or disclosures and provides a single IFRS framework for measuring fair value and requires disclosures about fair value measurement. The Standard defines fair value on the basis of an 'exit price' notion and uses a 'fair value hierarchy', which results in a market-based, rather than entity-specific, measurement. Thus, both the parent and subsidiary shall determine the fair value of the free-interest loan using the market interest rate on a loan similar to the one borrowed by the subsidiary from its parent (i.e. similar in terms of maturity, installments, currency, collaterals etc.). This market interest rate shall be used to discount future cash payments of the loan and arrive at its present value. Thus, a difference would result between the nominal and present value of the loan that shall be accounted for in accordance with IFRS 10, Consolidated Financial Statements (previously, IAS 27 Consolidated and Separate Financial Statements). These latter two Standards regard such difference as an additional investment by the parent in its subsidiary (in the parent's separate financial statements) while the subsidiary shall treat the difference as a reserve in equity.
Hesham Fathy
Chairman & CEO
Business Consultants Misr (BCM)
answered Dec 3, 2014 by anonymous
0 votes
Yes it is allowed as long as the IAS24 and IFRS12 disclosure requirements are met, but that is a red flag for auditors and the tax authorities as an interest free loan to a related party is viewed as a tax avoidance technic used by many companies.
answered Dec 3, 2014 by Fusion01 Level 3 Member (5,690 points)


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