Inter Company loan leading to insolvency

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Hello all.

Can anyone throw light on inter company loan leading to insolvency of the company with a twist of these loans not show on balance sheet on account of elimination during consolidation.

Any information, knowledge,case study or actual cases would help.

look forward to responses.
Replies (3)

Protective rights is one example in IndAS 110.

impairment of intragroup loans- Example – Hawkins Petroleum plc (not filed for bankruptcy but subject to impairment)

 

https://www.pwc.com/gx/en/audit-services/ifrs/publications/ifrs-9/ifrs-9-impairment-intercompany-loans-in-depth.pdf

 

To address your PM to me, I attached screenshot. The principle of intragroup loans- show only outside liabilities nd not the loans related to subsidiaries and parent. If you can understand this principle, you don’t need an example about how can an entity can  go insolvent without showing a loan on the balance sheet.

Parent A gives loan 

By Loan a/c 100

To Bank 100

Subsidiary B receives loan proceeds

By Bank a/c 100

To Loan liability a/c 100

During consolidation if intragroup loan is recognised

By bank 100 -B

By loan investment 100- A

To loan liability 100- B 

To Bank 100- A

this is increasing assts and liabilities by 100. So this transaction is eliminated because the motive is to represent consolidated financial statements as a single entity. Coming to insolvency, if A is able to find a buyer and sells it’s shares it should markup the loan amount and working capital loan.

Disposal will for profits will be

By bank

By Tax liability

To cost of investment in B

To Profiton disposal 

if it is a total loss

Loss on disposal a/c

Capital a/c

To Cost of investment in B

Which is not possible as we discussed earlier. So, Asset stripping is the way for creditors to salvage their receivables. If anything is left in the realisation account, it will be treated as a profitable sale or else, loss on disposal. So I guess, when there is nothing left to distribute to owners

By liabilities

By loss on disposal group

Cr PPE

Cr financial assets

Cr Cash and equivalents

 

 

 


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