Please assist with the below, company X, which was a division of Company B, has recorded a loan to Company B in its book after it became a separate legal entity. The loan originated as follows: Company B used funds which were meant for its division at a time (i.e Company X), for its own operations (i.e Company B). No terms and conditions were agreed upon, no interest was agreed upon.
Is it okay for Company X to now record this amount as a loan even though it was never the intention of Company X to advance a loan to Company B?, Or, should Company X recognise a normal receivable?
Please advise. Thanks
Regards
Loan Vs Receivables
Re: Loan Vs Receivables
what do you mean by 'normal receivable'?
to me, all receivables are normal
if no terms were agreed upon, how company X knows that company B will pay anything back? is there a dispute between those companies?
to me, all receivables are normal
if no terms were agreed upon, how company X knows that company B will pay anything back? is there a dispute between those companies?
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Re: Loan Vs Receivables
Hi
Company X (which was a division then) realised years later that their money was used used by company B, hence, they now want to disclose a loan. Yes, there is a dispute as Company B says, it was their money since Company X was merely a division. So, i am asking if this is indeed a loan or debt?
Company X (which was a division then) realised years later that their money was used used by company B, hence, they now want to disclose a loan. Yes, there is a dispute as Company B says, it was their money since Company X was merely a division. So, i am asking if this is indeed a loan or debt?
Re: Loan Vs Receivables
It is likely neither. If there is no contractual obligation for company B to pay company X, this is not a financial liability in the books of company B. The way you describe the scenario feels like this was a capital contribution of company X into company B when they were part of the same group. This is something for Legal to check before you can advise on the right accounting treatment.
Re: Loan Vs Receivables
I was in the process of writing something similar, but @DJP has put it much better. I agree with their view, this is firstly a legal question.
In terms of receivables vs loans, in the good old days it came down to the nature of the agreement. A loan was a formal contract I X lend you Y a set amount of money under set terms. It was very specific to the specific transaction. Y would then sign to confirm the terms before the money would be paid. We also called these "two-sided agreements" as both parties signed the specific contract. Receivables were more in the nature of I X have sent/done something to/for you, now Y must pay me in accordance with our broader agreement. We also called these "one-sided" agreements as effectively one party has signed the invoice and the other's conduct (taking the good or service) evidenced the specific agreement on the other side.
In terms of receivables vs loans, in the good old days it came down to the nature of the agreement. A loan was a formal contract I X lend you Y a set amount of money under set terms. It was very specific to the specific transaction. Y would then sign to confirm the terms before the money would be paid. We also called these "two-sided agreements" as both parties signed the specific contract. Receivables were more in the nature of I X have sent/done something to/for you, now Y must pay me in accordance with our broader agreement. We also called these "one-sided" agreements as effectively one party has signed the invoice and the other's conduct (taking the good or service) evidenced the specific agreement on the other side.
Re: Loan Vs Receivables
Although many businesses record intercompany loans as receivables, even if there is no paperwork in sight? And in many such cases there is dispute as to the precise balance. I suppose one assumes the ability to acknowledge at least the existence of a balance in a group situation.
Re: Loan Vs Receivables
since there is no written nor oral agreement, I would say that we're in the scope of IAS 37 and discussing recognition of a contingent asset, which means that you need to be virtually certain that you will receive payment before you recognise an asset
https://ifrscommunity.com/knowledge-bas ... gent-asset
how does your legal team/advisor assesses the chances of receiving the payment?
are those companies still in the same group?
https://ifrscommunity.com/knowledge-bas ... gent-asset
how does your legal team/advisor assesses the chances of receiving the payment?
are those companies still in the same group?
Re: Loan Vs Receivables
I can't remember exactly but at the time (of taking effect) I read all Big4 papers about whether undocumented intercompany loans were within scope of IFRS 9 given that there are no contractual cash flows. Actually they all had a slightly different view (maybe they don't now) but I believe concluded they should be treated as though they were under IFRS 9 ie with ECLs and so on.
Re: Loan Vs Receivables
I can imagine that, but this case is different in my opinion. Here there was no cash flow between the entities (so you're not 'forced' to recognise something). There is just a claim that a cash should be paid, but this claim does not result from any explicit or implied agreement between these entities.