Net investment in foreign operation

The inclusion of long-term loans and receivables as part of the net investment in the foreign operation is only permitted where settlement is neither planned nor likely to occur in the foreseeable future. In other words, the parent must regard them as permanent as equity. For example, a loan to a foreign entity that is repayable on demand may seem to be a short-term item, rather than part of capital. However, if there is demonstrably no intent or expectation to demand repayment (for example, the short-term loan is allowed to be continuously rolled over, whether or not the subsidiary is able to repay it), the loan has the same economic effect as a capital contribution. On the other hand, a long-term loan with a specified maturity (say 10 to 15 years) does not automatically qualify to be treated as being part of the net investment simply because it is of a long duration, unless management has expressed its intention to renew the note at maturity. The burden is on management to document its intention to renew by auditable evidence, such as board minutes. Otherwise, absent management's intention to renew, the note's maturity date implies that its settlement is planned in the foreseeable future.

Dear Sanjay

Thanks for replying. I fully agree to your comments as the net investment in foreign operations should have a character of equity i.e the intention is not to get its repayment during the life time of the company but instead only at the time of liquidation of the company. Even a settlement period should not be defined for such contribution as you cannot decide the repayment date of equity capital to the shareholders of the company.

In the above case, the loan is not repayable on demand and even its repayment is not defined in the loan agreement and the loan carries interest as well.  I personally believe that in such a case you cannot consider this loan as net investment in foreign operation as you cannot earn interest on an equity contribution even though such contribution doesnt increase your shareholding in the subsidiary.

Would appreciate if you share your thoughts on this.