Can a parent company get a loan on behalf of the subsidiary?

Question

We have a related company owned by our company's main shareholder. This related company is new and it needs funds to start a new project. However banks are reluctant to give loans to this company as it is new. Can we (parent) get a loan and transfer the loan to the subsidiary? We can charge a slightly higher rate of interest from the related company. Is this allowed under IFRS? What are the complications and issues in this kind of transaction?

Answer 1

The IFRS 10 does not prohibit a parent from obtaining loan on behalf of a subsidiary and then transfering the same to the subsidiary entity. However, the excess interest chared by the parent shall be removed while consolidating financial statements of the group.

Another aspect to be considered in such transactions is the implications of local laws. Many jurisdictions have laws to regulate capital transactions between group companies.