Loan Vs Receivables

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Khanyifiso7130
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Loan Vs Receivables

Post by Khanyifiso7130 »

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
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Marek Muc
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Re: Loan Vs Receivables

Post by Marek Muc »

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?
Khanyifiso7130
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Re: Loan Vs Receivables

Post by Khanyifiso7130 »

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?
DJP
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Re: Loan Vs Receivables

Post by DJP »

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.
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exIFRS
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Re: Loan Vs Receivables

Post by exIFRS »

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.
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Re: Loan Vs Receivables

Post by JRSB »

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.
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Marek Muc
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Re: Loan Vs Receivables

Post by Marek Muc »

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?
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Re: Loan Vs Receivables

Post by JRSB »

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.
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Marek Muc
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Re: Loan Vs Receivables

Post by Marek Muc »

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.
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