Whether a company can provide loan to its subsidiary without any interest depends upon local laws and regulations of each jurisdiction. However, accounting treatment for such loans is provided in IAS 39 and IFRS 9.
If the loan is short, no special treatment is required and its only shown as short term liability in the balance sheet.
If the loan is long term, it is recognized as long term liability at discounted value. The interest rate to be used for such discounting is the interest rate prevailing in the market for the similar loans. The difference of original loan amount and discounted value is recognized as interest income immediately in the profit and loss account. The accounting entey at beginning should be:
Dr. cash/bank (full amount)
Cr. Long term liability (discounted value)
Cr. Interest income (difference of above 2)
After the initial recognition, every year this liability shall be unwinded to bring it to the current year's discounted value. This will result in an interest expense and credit to the liability. By the end of loan term, the amount of the liability should be equal to original loan amount and amount of interest expenses charged over the period should be equal to interest income recorded in the initial year.
