Correct treatment for transactions involving the ultimate parent company(owner) taking money from subsidiary.

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anasarias13
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Correct treatment for transactions involving the ultimate parent company(owner) taking money from subsidiary.

Post by anasarias13 »

Correct treatment for transactions involving the ultimate parent company(owner) taking money from subsidiary.

1. Book it as inter company receivable in subsidiary; or
2. Book as withdrawal by owners in RE of subsidiary.
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Marek Muc
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Re: Correct treatment for transactions involving the ultimate parent company(owner) taking money from subsidiary.

Post by Marek Muc »

You're right, both answers are correct depending on circumstances ;)

Is this a specific real-life arrangement?
anasarias13
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Re: Correct treatment for transactions involving the ultimate parent company(owner) taking money from subsidiary.

Post by anasarias13 »

Thank you for accepting me in this helpful community.

Yes, these are actual transactions. But I also noticed that both Inter company receivable and retained earnings accounts are becoming huge(est. 200mil), that when you look at the FS its awkward to see. I'm thinking to advice the management that the RE account be used instead of Receivable that way both accounts will not ballooned. But what to do with the beginning balance of both accounts, reverse to each other. Any thoughts. Thanks.
Leo
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Re: Correct treatment for transactions involving the ultimate parent company(owner) taking money from subsidiary.

Post by Leo »

Hi,

I'd say that if parent will never reimburse the money, it should be treated as a dividend distribution, then, RE make sense.

If parent will reimburse it, it may be a intercompany receivable.
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Marek Muc
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Re: Correct treatment for transactions involving the ultimate parent company(owner) taking money from subsidiary.

Post by Marek Muc »

Are there any written terms of these money withdrawals?
anasarias13
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Re: Correct treatment for transactions involving the ultimate parent company(owner) taking money from subsidiary.

Post by anasarias13 »

None. Only letter of instruction stating the requested amount and use of fund.

In audited conso fs, it says the amount are of trading and financing nature, bear no interest or securities and are receivable on demand. ( The account used "due from related parties")
Leo
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Re: Correct treatment for transactions involving the ultimate parent company(owner) taking money from subsidiary.

Post by Leo »

It should be treated as an intercomoany loan then ?
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Marek Muc
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Re: Correct treatment for transactions involving the ultimate parent company(owner) taking money from subsidiary.

Post by Marek Muc »

it also seams like a loan to me, but it's also an analysis specific to the legal framework of your country
JRSB
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Re: Correct treatment for transactions involving the ultimate parent company(owner) taking money from subsidiary.

Post by JRSB »

you said the letter states 'use of fund'. what is that?
anasarias13
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Re: Correct treatment for transactions involving the ultimate parent company(owner) taking money from subsidiary.

Post by anasarias13 »

@JRSB use of fund- i mean they(ultimate parent-a holding company) asked for the money to be transferred( e.g. to pay goods purchased by their other company, which is affiliated to our company.

@Marec Muk the document used to release the fund is only a letter with exact amount to pay for the purchase of goods purchased for their other company or personal use
Leo
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Re: Correct treatment for transactions involving the ultimate parent company(owner) taking money from subsidiary.

Post by Leo »

In that case, I'd treat it as a loan. But all depends on how you interpret it.
JRSB
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Re: Correct treatment for transactions involving the ultimate parent company(owner) taking money from subsidiary.

Post by JRSB »

Agree, I'd treat as a loan and b) tell management to document it better
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