Hi Admin and everybody, firstly please excuse for my bad English.
I am encountering a loan contract from parent company to a subsidiary where the interest rate is 0%. For payment term, it is stated that the principle will be repaid as an capital contribution to A company upon establishment (the date of establishment is unknown). So my concern is:
1. Should this be consider a loan? or an advance for capital contribution ? if it is a loan, should we recognize the substance of below-market element as a contribution and the residual a loan receivable? (Dr. investment, dr. loan receivable, cr. cash)
2. Since the date of establishment of A company is unknown, hence repayment date of the loan is unknown as well. How should this be classified on financial statements ? current or non-current asset? can you please provide me the paragraph in IFRS that presents guidance on classification of loan receivable on demand ?
Thank you so much for your help! I really feel struggled with this case.
Classification of undocumented loan
Re: Classification of undocumented loan
What do you mean 'establishment'? If it is not established yet, how did they make a loan? Whether or not the paperwork is in place it sounds like a capital contribution to me since that is the stated intention.
Re: Classification of undocumented loan
Sorry for the confusion. The Company A to which the capital contribution is made is not the borrower. It is as follows: Parent company (C) lends to subsidiary (D) and repayment is capital contribution in company (A).
Re: Classification of undocumented loan
Which entity will receive the interest in company A in exchange for the capital contribution?