Below market rate loans
Example 1a
Example 1b
Example 2a
Example 2b
Example 3a
Example 3b
Fixed term loan with no demand
features, or subsidiary has early
repayment option
Repayable on demand at the
option of the parent
Fixed term loan with no demand
features, or parent has early
repayment option
Repayable on demand at the
option of the subsidiary
Fixed term loan with no demand
features, or borrower has early
repayment option
Repayable on demand at the
option of the lender
Lender
Parent recognises loan at fair
value, initial measurement
difference recognised as an
investment in subsidiary.
Parent recognises loan at fair
value, initial measurement
difference recognised as an
investment in subsidiary.
Subsidiary recognises loan at fair
value, initial measurement
difference recognised as a
distribution to parent.
Subsidiary recognises loan at fair
value, initial measurement
difference recognised as a
distribution to parent.
Lender recognises loan at fair
value, initial measurement
difference recognised as interest
expense or distribution if done
under instruction of parent.
Lender recognises loan at fair
value, initial measurement
difference recognised as interest
expense or possibly a
distribution.
Borrower
Subsidiary recognises loan at fair
value, initial measurement
difference recognised as a capital
contribution.
Subsidiary recognises loan at
amount payable (discounted
from the demand date, if
material).
Parent recognises loan at fair
value, initial measurement
difference recognised as income
from subsidiary.
Parent recognises loan at
amount payable (discounted
from the demand date, if
material)
Borrower recognises loan at fair
value, initial measurement
difference recognised as interest
income or capital contribution if
done under instruction of parent.
Borrower recognises loan at
amount payable (discounted
from the demand date, if
material)
Comments
Notes
See Note 1.
See Note 2. and 3.
See Note 1.
See Note 2 and 3.
See Note 1.
See Note 2 and 3.
Parent lending to subsidiary
Subsdiary lending to parent
Loans between subsidiaries
Treatment reflects that the subsidiary has made a distribution to
the parent by lending the parent funds at an below market rate.
Treatment reflects that the parent contributed to the subsidiary by
lending the subsidiary funds at a below market rate.
Note 1 - If the term loan is below market rate, and the borrower has the option to repay the loan early, then we consider the accounting would normally be the same for a fixed rate loan without the option.
This is because the below market nature of the loan would be such that on an arms length basis, the option would not be expected to be exercised.
Note 2 - Based on arm's length behaviour, a lender would immediately give notice for repayment as the loan is below market rate. However, a consideration is that the lender might not be able to get the
funds back immediately if the proceeds have already been invested in a project. This situation could, therefore, have measurement implications for the lender as the fair value of the loan would not
necessarily be the same as the loan amount.
Note 3 - From the borrower perspective, the loan is repayable immediately on demand. FRS 102.12.11 means that the fair value of a loan that is due on demand is not less than the amount repayable
discounted from the demand date. In this case the lender and borrower accounting would not be a mirror image.
Above market rate loans
Lender
Borrower
Comments
Notes
Fixed term loan with no demand features, or parent has early
repayment option
Repayable on demand at the option of the subsidiary
Note 4 - If the parent (lender) has the right to immediately demand, the borrower should not record the loan at less than the amount repayable. FRS 102.12.11. However, as the loan is above market rate the
fair value of the loan is greater than the nominal amount payable. Hence, despite the lender's demand feature the borrower should also recognise the loan at fair value, which is higher than nominal amount.
Note 5 - A term loan where the lender has the option to early repay, would in the case of an above market rate loan, likely be accounted for in the same way as a term loan without the early repayment
feature. This is because the above market nature of the loan would be such that on an arms length basis, the option would not be expected to be exercised
Subsidiary recognises loan at fair value, initial measurement
difference recognised as a distribution to parent.
Subsidiary recognises loan at amount repayable. (discounted from
the demand date, if material).
See Note 4 and 5.
Note 6.
Note 6 - Assuming arm's length behaviour, the lender could expect that the borrower would exercise their right to repay immediately and borrow the funds from the market at the lower market rate.
Therefore, the fair value should assume immediate exercise, resulting in the loan being recognised at the immediately repayable amount. In some cases there may be a challenge that the fair value is
different to the amount repayable if there was practical restriction on the ability of the subsidiary to exercise its option (eg lack of availability of funds or alternative sources).
This treatment also reflects that the subsidiary has made a
distribution to the parent by borrowing funds at an above market
rate.
Parent recognises loan at amount repayable. (discounted from the
demand date, if material).
Parent recognises loan at fair value, initial measurement difference
recognised as income from subsidiary.
Example 4a
Example 4b
Intra group loans - Examples
Example 1a - Parent lending to subsidiary - Fixed term loan with no demand features, or subsidiary has early repayment option, Below market rate
Fact pattern: Workings present value:
Loan amount 100,000
Interest rate 5% Cash flows Discount factor Present value
Loan date 01-Jan-14 2014 5,000 0.9091 4,545
Repayment date 31-Dec-15 2015 105,000 0.8264 86,777
Market rate 10% 91,322
Current UK GAAP: FRS 102:
Opening balance Interest Payments Closing balance Opening balance Interest Payments Closing balance
31-Dec-14 100,000 5,000 5,000 100,000 31-Dec-14 91,322 9,132 5,000 95,455 31-Dec-15 100,000 5,000 105,000 - 31-Dec-15 95,455 9,545 105,000
-Parent accounts Parent accounts
Dr. Loan receivable 100,000 Dr. Loan receivable - Balance sheet 91,322
Cr. Bank 100,000 Dr. Investment in subsidiary - Balance sheet 8,678
Initial recognition Cr. Bank - Balance sheet 100,000
Initial recognition
Dr. Bank 5,000
Cr. Interest income 5,000 Dr. Bank - Balance sheet 5,000
Year to 31-Dec-2014 Dr. Loan receivable - Balance sheet 4,132
Cr. Interest income - Profit and loss 9,132
Dr. Bank 105,000 Year to 31-Dec-2014
Cr. Interest income 5,000
Cr. Loan receivable 100,000 Dr. Bank - Balance sheet 5,000
Year to 31-Dec-2015 Dr. Loan receivable - Balance sheet 4,545
Cr. Interest income - Profit and loss 9,545
Subsidiary accounts
Dr. Bank - Balance sheet 100,000
Dr. Bank 100,000 Cr. Loan receivable - Balance sheet 100,000
Cr. Loan payable 100,000 Year to 31-Dec-2015
Initial recognition
Subsidiary accounts
Dr. Interest expense 5,000
Cr. Bank 5,000 Dr. Bank - Balance sheet 100,000
Year to 31-Dec-2014 Cr. Loan payable - Balance sheet 91,322
Cr. Capital contribution - Equity 8,678
Dr. Loan payable 100,000 Initial recognition
Dr. Interest expense 5,000
Cr. Bank 105,000 Dr. Interest expense - Profit and loss 9,132
Year to 31-Dec-2015 Cr. Bank - Balance sheet 5,000
Cr. Loan payable - Balance sheet 4,132
Year to 31-Dec-2014
Dr. Interest expense - Profit and loss 9,545
Cr. Bank - Balance sheet 5,000
Cr. Loan payable - Balance sheet 4,545
Dr. Loan payable - Balance sheet 100,000
Cr. Bank - Balance sheet 100,000
Example 1b - Parent lending to subsidiary - Repayable on demand at the option of the parent, Below market rate
Fact pattern: Workings present value:
Loan amount 100,000
Interest rate 5% Cash flows Discount factor Present value
Loan date 01-Jan-14 2014 5,000 0.9091 4,545
Repayment date On demand (Only expected to be able to repay after 2 years) 2015 105,000 0.8264 86,777
Market rate 10% 91,322
FRS 102:
Opening balance Interest Payments Closing balance
Current UK GAAP: 31-Dec-14 91,322 9,132 5,000 95,455 31-Dec-15 95,455 9,545 105,000 -Opening balance Interest Payments Closing balance
31-Dec-14 100,000 5,000 5,000 100,000 Parent accounts 31-Dec-15 100,000 5,000 105,000
-Dr. Loan receivable - Balance sheet 91,322
Parent accounts Dr. Investment in subsidiary - Balance sheet 8,678
Cr. Bank - Balance sheet 100,000
Dr. Loan receivable 100,000 Initial recognition
Cr. Bank 100,000
Initial recognition Dr. Bank - Balance sheet 5,000
Dr. Loan receivable - Balance sheet 4,132
Dr. Bank 5,000 Cr. Interest income - Profit and loss 9,132
Cr. Interest income 5,000 Year to 31-Dec-2014
Year to 31-Dec-2014
Dr. Bank - Balance sheet 5,000
Dr. Bank 105,000 Dr. Loan receivable - Balance sheet 4,545
Cr. Interest income 5,000 Cr. Interest income - Profit and loss 9,545
Cr. Loan receivable 100,000
Year to 31-Dec-2015 Dr. Bank - Balance sheet 100,000
Cr. Loan receivable - Balance sheet 100,000
Subsidiary accounts Year to 31-Dec-2015
Dr. Bank 100,000 Subsidiary accounts
Cr. Loan payable 100,000
Initial recognition Dr. Bank - Balance sheet 100,000
Cr. Loan payable - Balance sheet 100,000
Dr. Interest expense 5,000 Initial recognition
Cr. Bank 5,000
Year to 31-Dec-2014 Dr. Interest expense - Profit and loss 5,000
Cr. Bank - Balance sheet 5,000
Dr. Loan payable 100,000 Year to 31-Dec-2014
Dr. Interest expense 5,000
Cr. Bank 105,000 Dr. Interest expense - Profit and loss 5,000
Year to 31-Dec-2015 Cr. Bank - Balance sheet 5,000
Year to 31-Dec-2015
Dr. Loan payable - Balance sheet 100,000
Cr. Bank - Balance sheet 100,000
Year to 31-Dec-2015 Note - Based on arm's length behaviour, a lender would immediately give notice for repayment as the
loan is below market rate. However, a consideration is that the lender might not be able to get the funds back immediately if the proceeds have already been invested in a project. In this case the lender only expects the borrower to be able to repay the loan in 2 years time.
Intra group loans - Examples
Example 2a - Subsidiary lending to parent - Fixed term loan with no demand features, or parent has early repayment option, Below market rate
Fact pattern: Workings present value:
Loan amount 100,000
Interest rate 5% Cash flows Discount factor Present value
Loan date 01-Jan-14 2014 5,000 0.9091 4,545
Repayment date 31-Dec-15 2015 105,000 0.8264 86,777
Market rate 10% 91,322
Current UK GAAP: FRS 102:
Opening balance Interest Payments Closing balance Opening balance Interest Payments Closing balance
31-Dec-14 100,000 5,000 5,000 100,000 31-Dec-14 91,322 9,132 5,000 95,455 31-Dec-15 100,000 5,000 105,000 - 31-Dec-15 95,455 9,545 105,000
-Parent accounts Parent accounts
Dr. Bank 100,000 Dr. Bank - Balance sheet 100,000
Cr. Loan payable 100,000 Cr. Loan payable - Balance sheet 91,322
Initial recognition Cr. Income from subsidiary - Profit and loss 8,678
Initial recognition
Dr. Interest expense 5,000
Cr. Bank 5,000 Dr. Interest expense - Profit and loss 9,132
Year to 31-Dec-2014 Cr. Bank - Balance sheet 5,000
Cr. Loan payable - Balance sheet 4,132
Dr. Loan payable 100,000 Year to 31-Dec-2014
Dr. Interest expense 5,000
Cr. Bank 105,000 Dr. Interest expense - Profit and loss 9,545
Year to 31-Dec-2015 Cr. Bank - Balance sheet 5,000
Cr. Loan payable - Balance sheet 4,545
Subsidiary accounts
Dr. Loan payable - Balance sheet 100,000
Dr. Loan receivable 100,000 Cr. Bank - Balance sheet 100,000
Cr. Bank 100,000 Year to 31-Dec-2015
Initial recognition
Subsidiary accounts
Dr. Bank 5,000
Cr. Interest income 5,000 Dr. Loan receivable - Balance sheet 91,322
Year to 31-Dec-2014 Dr. Distribution to parent - Equity 8,678
Cr. Bank - Balance sheet 100,000
Dr. Bank 105,000 Initial recognition
Cr. Interest income 5,000
Cr. Loan receivable 100,000 Dr. Bank - Balance sheet 5,000
Year to 31-Dec-2015 Dr. Loan receivable - Balance sheet 4,132
Cr. Interest income - Profit and loss 9,132
Year to 31-Dec-2014
Dr. Bank - Balance sheet 5,000
Dr. Loan receivable - Balance sheet 4,545
Cr. Interest income - Profit and loss 9,545
Dr. Bank - Balance sheet 100,000
Cr. Loan receivable - Balance sheet 100,000
Example 2b - Subsidiary lending to parent - Repayable on demand at the option of the subsidiary, Below market rate
Fact pattern: Workings present value:
Loan amount 100,000
Interest rate 5% Cash flows Discount factor Present value
Loan date 01-Jan-14 2014 5,000 0.9091 4,545
Repayment date On demand (Only expected to be able to repay after 2 years) 2015 105,000 0.8264 86,777
Market rate 10% 91,322
FRS 102:
Opening balance Interest Payments Closing balance
31-Dec-14 91,322 9,132 5,000 95,455 31-Dec-15 95,455 9,545 105,000 -Current UK GAAP:
Parent accounts Opening balance Interest Payments Closing balance
31-Dec-14 100,000 5,000 5,000 100,000 Dr. Bank - Balance sheet 100,000
31-Dec-15 100,000 5,000 105,000 - Cr. Loan payable - Balance sheet 100,000 Initial recognition
Parent accounts
Dr. Interest expense - Profit and loss 5,000
Dr. Bank 100,000 Cr. Bank - Balance sheet 5,000
Cr. Loan payable 100,000 Year to 31-Dec-2014
Initial recognition
Dr. Interest expense - Profit and loss 5,000
Dr. Interest expense 5,000 Cr. Bank - Balance sheet 5,000
Cr. Bank 5,000
Year to 31-Dec-2014 Dr. Loan payable - Balance sheet 100,000
Cr. Bank - Balance sheet 100,000
Dr. Loan payable 100,000 Year to 31-Dec-2015
Dr. Interest expense 5,000
Cr. Bank 105,000 Subsidiary accounts
Year to 31-Dec-2015
Dr. Loan receivable - Balance sheet 91,322
Subsidiary accounts Dr. Distribution to parent - Equity 8,678
Cr. Bank - Balance sheet 100,000
Dr. Loan receivable 100,000 Initial recognition
Cr. Bank 100,000
Initial recognition Dr. Bank - Balance sheet 5,000
Dr. Loan receivable - Balance sheet 4,132
Dr. Bank 5,000 Cr. Interest income - Profit and loss 9,132
Cr. Interest income 5,000 Year to 31-Dec-2014
Year to 31-Dec-2014
Dr. Bank - Balance sheet 5,000
Dr. Bank 105,000 Dr. Loan receivable - Balance sheet 4,545
Cr. Interest income 5,000 Cr. Interest income - Profit and loss 9,545
Cr. Loan receivable 100,000
Year to 31-Dec-2015 Dr. Bank - Balance sheet 100,000
Cr. Loan receivable - Balance sheet 100,000
Year to 31-Dec-2015 Note - Based on arm's length behaviour, a lender would immediately give notice for repayment as the
loan is below market rate. However, a consideration is that the lender might not be able to get the funds back immediately if the proceeds have already been invested in a project. In this case the lender only expects the borrower to be able to repay the loan in 2 years time.
Intra group loans - Examples
Example 3a - Loan between subsidiaries - Fixed term loan with no demand features, or borrower has early repayment option, Below market rate
Fact pattern: Workings present value:
Loan amount 100,000
Interest rate 5% Cash flows Discount factor Present value
Loan date 01-Jan-14 2014 5,000 0.9091 4,545 Repayment date 31-Dec-15 2015 105,000 0.8264 86,777
Market rate 10% 91,322
Current UK GAAP: FRS 102:
Opening balance Interest Payments Closing balance Opening balance Interest Payments Closing balance
31-Dec-14 100,000 5,000 5,000 100,000 31-Dec-14 91,322 9,132 5,000 95,455 31-Dec-15 100,000 5,000 105,000 - 31-Dec-15 95,455 9,545 105,000
-Subsidiary (borrower) accounts Subsidiary (borrower) accounts
Dr. Bank 100,000 Dr. Bank - Balance sheet 100,000
Cr. Loan payable 100,000 Cr. Loan payable - Balance sheet 91,322
Initial recognition Cr. Interest income(Profit and loss) / Capital contribution(Equity) 8,678
Initial recognition Dr. Interest expense 5,000
Cr. Bank 5,000 Dr. Interest expense - Profit and loss 9,132
Year to 31-Dec-2014 Cr. Bank - Balance sheet 5,000
Cr. Loan payable - Balance sheet 4,132
Dr. Loan payable 100,000 Year to 31-Dec-2014
Dr. Interest expense 5,000
Cr. Bank 105,000 Dr. Interest expense - Profit and loss 9,545
Year to 31-Dec-2015 Cr. Bank - Balance sheet 5,000
Cr. Loan payable - Balance sheet 4,545
Subsidiary (lender) accounts
Dr. Loan payable - Balance sheet 100,000
Dr. Loan receivable 100,000 Cr. Bank - Balance sheet 100,000
Cr. Bank 100,000 Year to 31-Dec-2015
Initial recognition
Subsidiary (lender) accounts
Dr. Bank 5,000
Cr. Interest income 5,000 Dr. Loan receivable - Balance sheet 91,322
Year to 31-Dec-2014 Dr. Interest expense(Profit and loss) / Distribution(Equity) 8,678
Cr. Bank - Balance sheet 100,000
Dr. Bank 105,000 Initial recognition
Cr. Interest income 5,000
Cr. Loan receivable 100,000 Dr. Bank - Balance sheet 5,000
Year to 31-Dec-2015 Dr. Loan receivable - Balance sheet 4,132
Cr. Interest income - Profit and loss 9,132
Year to 31-Dec-2014
Dr. Bank - Balance sheet 5,000
Dr. Loan receivable - Balance sheet 4,545
Cr. Interest income - Profit and loss 9,545
Dr. Bank - Balance sheet 100,000
Cr. Loan receivable - Balance sheet 100,000
Example 3b - Loan between subsidiaries - Repayable on demand at the option of the lender, Below market rate
Fact pattern: Workings present value:
Loan amount 100,000
Interest rate 5% Cash flows Discount factor Present value
Loan date 01-Jan-14 2014 5,000 0.9091 4,545 Repayment date On demand (Only expected to be able to repay after 2 years) 2015 105,000 0.8264 86,777
Market rate 10% 91,322
FRS 102:
Opening balance Interest Payments Closing balance
Current UK GAAP: 31-Dec-14 91,322 9,132 5,000 95,455 31-Dec-15 95,455 9,545 105,000 -Opening balance Interest Payments Closing balance
31-Dec-14 100,000 5,000 5,000 100,000 Subsidiary (borrower) accounts 31-Dec-15 100,000 5,000 105,000
-Dr. Bank - Balance sheet 100,000
Subsidiary (borrower) accounts Cr. Loan payable - Balance sheet 100,000
Initial recognition
Dr. Bank 100,000
Cr. Loan payable 100,000 Dr. Interest expense - Profit and loss 5,000
Initial recognition Cr. Bank - Balance sheet 5,000
Year to 31-Dec-2014 Dr. Interest expense 5,000
Cr. Bank 5,000 Dr. Interest expense - Profit and loss 5,000
Year to 31-Dec-2014 Cr. Bank - Balance sheet 5,000
Dr. Loan payable 100,000 Dr. Loan payable - Balance sheet 100,000
Dr. Interest expense 5,000 Cr. Bank - Balance sheet 100,000
Cr. Bank 105,000 Year to 31-Dec-2015
Year to 31-Dec-2015
Subsidiary (lender) accounts Subsidiary (lender) accounts
Dr. Loan receivable - Balance sheet 91,322
Dr. Loan receivable 100,000 Dr. Interest expense(Profit and loss) / Distribution(Equity) 8,678
Cr. Bank 100,000 Cr. Bank - Balance sheet 100,000
Initial recognition Initial recognition
Dr. Bank 5,000 Dr. Bank - Balance sheet 5,000
Cr. Interest income 5,000 Dr. Loan receivable - Balance sheet 4,132
Year to 31-Dec-2014 Cr. Interest income - Profit and loss 9,132
Year to 31-Dec-2014
Dr. Bank 105,000
Cr. Interest income 5,000 Dr. Bank - Balance sheet 5,000
Cr. Loan receivable 100,000 Dr. Loan receivable - Balance sheet 4,545
Year to 31-Dec-2015 Cr. Interest income - Profit and loss 9,545
Dr. Bank - Balance sheet 100,000
Cr. Loan receivable - Balance sheet 100,000
Year to 31-Dec-2015 Note - Based on arm's length behaviour, a lender would immediately give notice for repayment as the
loan is below market rate. However, a consideration is that the lender might not be able to get the funds back immediately if the proceeds have already been invested in a project. In this case the lender only expects the borrower to be able to repay the loan in 2 years time.
Intra group loans - Examples
Example 4a - Parent lending to subsidiary - Fixed term loan with no demand features, or parent has early repayment option, Above market rate
Fact pattern: Workings present value:
Loan amount 100,000
Interest rate 15% Cash flows Discount factor Present value
Loan date 01-Jan-14 2014 15,000 0.9091 13,636
Repayment date 31-Dec-15 2015 115,000 0.8264 95,041
Market rate 10% 108,678
Current UK GAAP: FRS 102:
Opening balance Interest Payments Closing balance Opening balance Interest Payments Closing balance
31-Dec-14 100,000 15,000 15,000 100,000 31-Dec-14 108,678 10,868 15,000 104,545 31-Dec-15 100,000 15,000 115,000 - 31-Dec-15 104,545 10,455 115,000
-Parent accounts Parent accounts
Dr. Loan receivable 100,000 Dr. Loan receivable - Balance sheet 108,678
Cr. Bank 100,000 Cr. Income from subsidiary - Profit and loss 8,678
Initial recognition Cr. Bank - Balance sheet 100,000
Initial recognition
Dr. Bank 15,000
Cr. Interest income 15,000 Dr. Bank - Balance sheet 15,000
Year to 31-Dec-2014 Cr. Loan receivable - Balance sheet 4,132
Cr. Interest income - Profit and loss 10,868
Dr. Bank 115,000 Year to 31-Dec-2014
Cr. Interest income 15,000
Cr. Loan receivable 100,000 Dr. Bank - Balance sheet 15,000
Year to 31-Dec-2015 Cr. Loan receivable - Balance sheet 4,545
Cr. Interest income - Profit and loss 10,455
Subsidiary accounts
Dr. Bank - Balance sheet 100,000
Dr. Bank 100,000 Cr. Loan receivable - Balance sheet 100,000
Cr. Loan payable 100,000 Year to 31-Dec-2015
Initial recognition
Subsidiary accounts
Dr. Interest expense 15,000
Cr. Bank 15,000 Dr. Bank - Balance sheet 100,000
Year to 31-Dec-2014 Dr. Distribution to parent - Equity 8,678
Cr. Loan payable - Balance sheet 108,678
Dr. Loan payable 100,000 Initial recognition
Dr. Interest expense 15,000
Cr. Bank 115,000 Dr. Interest expense - Profit and loss 10,868
Year to 31-Dec-2015 Dr. Loan payable - Balance sheet 4,132
Cr. Bank - Balance sheet 15,000
Year to 31-Dec-2014
Dr. Interest expense - Profit and loss 10,455 Dr. Loan payable - Balance sheet 4,545
Cr. Bank - Balance sheet 15,000
Dr. Loan payable - Balance sheet 100,000
Cr. Bank - Balance sheet 100,000
Example 4b - Parent lending to subsidiary - Repayable on demand at the option of the subsidiary, Above market rate Fact pattern:
Loan amount 100,000 Interest rate 15% Loan date 01-Jan-14 Repayment date On demand Market rate 10%
Current UK GAAP: FRS 102:
Opening balance Interest Payments Closing balance Opening balance Interest Payments Closing balance 31-Dec-14 100,000 15,000 15,000 100,000 31-Dec-14 100,000 15,000 15,000 100,000 31-Dec-15 100,000 15,000 115,000 - 31-Dec-15 100,000 15,000 115,000
-Parent accounts Parent accounts
Dr. Loan receivable 100,000 Dr. Loan receivable - Balance sheet 100,000
Cr. Bank 100,000 Cr. Bank - Balance sheet 100,000 Initial recognition Initial recognition
Dr. Bank 15,000 Dr. Bank - Balance sheet 15,000
Cr. Interest income 15,000 Cr. Interest income - Profit and loss 15,000
Year to 31-Dec-2014 Year to 31-Dec-2014
Dr. Bank 115,000 Dr. Bank - Balance sheet 15,000
Cr. Interest income 15,000 Cr. Interest income - Profit and loss 15,000 Cr. Loan receivable 100,000
Year to 31-Dec-2015 Dr. Bank - Balance sheet 100,000
Cr. Loan receivable - Balance sheet 100,000
Subsidiary accounts Year to 31-Dec-2015
Dr. Bank 100,000 Subsidiary accounts Cr. Loan payable 100,000
Initial recognition Dr. Bank - Balance sheet 100,000
Cr. Loan payable - Balance sheet 100,000 Dr. Interest expense 15,000 Initial recognition
Cr. Bank 15,000
Year to 31-Dec-2014 Dr. Interest expense - Profit and loss 15,000
Cr. Bank - Balance sheet 15,000 Dr. Loan payable 100,000 Year to 31-Dec-2014
Dr. Interest expense 15,000
Cr. Bank 115,000 Dr. Interest expense - Profit and loss 15,000
Year to 31-Dec-2015 Cr. Bank - Balance sheet 15,000
Dr. Loan payable - Balance sheet 100,000
Cr. Bank - Balance sheet 100,000 Year to 31-Dec-2015
Note - Assuming arm's length behaviour, the lender could expect that the borrower would exercise their right to repay immediately and borrow the funds from the market at the lower market rate. Therefore, the fair value should assume immediate exercise, resulting in the loan being recognised at the immediately repayable amount. In some cases there may be a challenge that the fair value is different to the amount repayable if there was practical restriction on the ability of the subsidiary to exercise its option (eg lack of availability of funds or alternative sources).
