Loan to Equity

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Wynand Brits
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Loan to Equity

Post by Wynand Brits »

Hi

I have a loan payable to a shareholder which is repayable on demand, unsecured and no interest is charged.

Are there any guidance to classify the loan to equity?

Should new shares need to be issued for the loan reclassified to equity?

Any guidance/starting point will be appreciated.

Thanks!
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JRSB
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Re: Loan to Equity

Post by JRSB »

I've certainly seen Big4 guidance on IFRS 9 about this grey area for informal loans, and some conclude that they might be partially or fully capital contributions in substance. Ie is it intended that it will ever be repaid? Presumably there are no contractual cash flows etc.
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Wynand Brits
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Re: Loan to Equity

Post by Wynand Brits »

Yes definitely in my case as well. The probability of the loan being repaid is minimal and will probably be repaid.

Do you have any Big 4 guidance on this topic?

Thanks
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Marek Muc
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Re: Loan to Equity

Post by Marek Muc »

have you seen our knowledge base on thic topic?
https://ifrscommunity.com/knowledge-bas ... vs-equity/
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nauman
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Re: Loan to Equity

Post by nauman »

You don't need to issue new shares to convert a shareholder loan to equity. Depending on the jurisdiction, a simple agreement between the shareholder (Holding company) and the borrower can convert the loan to equity, in form of shareholder contribution.
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Marek Muc
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Re: Loan to Equity

Post by Marek Muc »

So there's IFRIC 19 which deals with debt for equity swaps. It's true that transactions with shareholders are scoped out, but you can still account for the transaction under IFRIC 19 (i.e. measure issued equity at fair value and the difference to carrying amount of liability goes to P/L)

EDIT: alternatively, it can all be treated as an equity transaction

what is the relation of fair value of equity to be issued to carrying amount of the liability to be extinguished?
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JRSB
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Re: Loan to Equity

Post by JRSB »

I don't quite see the issue addressed in IFRIC 19 since it concludes that the treatment described in IFRS 9 3.3.3. is still applied.
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Marek Muc
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Re: Loan to Equity

Post by Marek Muc »

I guess that before IFRIC 19 it was too tempting to just convert liability to equity (debit liability and credit equity with the same amount)
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