advance proceed received

[daljeet]

Hi,

Would like to check whether consideration received in advance for a disposal of subsidiary meets the definition to be classified as financial liability?

[JRSB]

is it contractually repayable if the acquisition does not proceed...

[Marek Muc]

it probably is as, but I would ask:
1. do you have a contractual obligation to repay it?
2. what are the conditions that trigger this repayment?
3. to what extent are they within your control?

[daljeet]

See my replies in below.

it probably is as, but I would ask:
1. do you have a contractual obligation to repay it? - as long condition preceding of the contract (change of name from shareholders register, transfer of legal owner to the buyer) will fulfill, no obligation to return.

2. what are the conditions that trigger this repayment? - as explained in above.

3. to what extent are they within your control? - the company do not foresee any problem in meeting the above conditions and fulfilled the conditions subsequently.

[Marek Muc]

these are standard clauses, so this is not a financial liability, i.e. your obligation is to deliver the control over a subsidiary and not cash

what's your opinion, JRSB?

[JRSB]

I agree on the basis that the conditions are trivial/administrative

[pub_acco]

It generally sounds reasonable to classify such an advance as non-financial, but can we also make an argument that it is a financial liability because it is an obligation to deliver another financial asset (stake in subsidiary)? At least in the separate FS this view is correct, but in the parent's consolidated FS, I think the standards do not provide a clear answer. IAS 32 excludes interests in subs from its scope, so the standard is technically silent on whether interest in a sub is a financial asset or not....

[daljeet]

these are standard clauses, so this is not a financial liability, i.e. your obligation is to deliver the control over a subsidiary and not cash

what's your opinion, JRSB?

Yes your assessment makes sense on the obligation of the company. thank you.

[JRSB]

Interesting point pub. I guess shares in a subsidiary could be a 'liability' in some cases

[pub_acco]

Loss making subs may be financial liabilities

[Marek Muc]

interesting pub_acco's view nevertheless

[Leo]

@ pub_acco : can we say that investments in subsidiaries are recognised in the books based on their historical costs and exempt from the fair value perspective so it isn't a financial asset ? The standard gave examples of shares but it's always when a company buys 100 shares from Apple, something like that. It was neither an associate (equity method), nether a subsidiary (consolidation).

Thus, the cash received in advance in exchange of the shares of the subsidiary isn't a financial liability either ?

[pub_acco]

That would be a valid argument to support one accounting policy. My point is that the standards do not seem clear enough and we might need to establish our own accounting policy.

IAS 32.4(a) explicitly excludes investments in subs from the scope, so the definitions of financial instruments in IAS 32 do not technically apply, whereas we can also speculate that investments in subs are listed in IAS 32.4 because they ARE financial instruments - obvious non-financial things are not listed there. IAS 32.4(a) is also explicit that derivatives related to investments in subs are in scope, but is silent about prepayments. Some might see similarities between derivatives and prepayments here while others might not.

[Leo]

Thanks !

This remains me another post in this forum

viewtopic.php?f=4&t=772