22.1.12 Foreign Currency Interest Free Sponsor’s Loan

Enquiry:

Pursuant to TR-32, the sponsors’ interest free loans repayable at the discretion of borrower company are required to be classified as part of the ‘equity’ instead of a liability. One such loan from sponsors’ received in foreign currency was disclosed as a liability and accordingly translated at year-end exchange rate every year. After change of its status as mentioned above, please let us know:

1. Whether the translation at the year-end exchange rates will still be required? and
2. What should be the accounting treatment of net cumulative amount of translation differences included in carrying value of loan?

Please note that sponsor is a foreign parent company.

Opinion:

The Committee considered your queries and its views are as follows:

1. According to paragraph 2.17 of the Technical Release (TR) – 32 ‘Director’s Loan’, a loan from a parent to a subsidiary in its capacity as shareholder, is in substance an additional contribution by the parent. Further, a loan from a parent to an entity which is agreed to be paid at the discretion of the entity does not pass the test of liability and shall be recorded as equity at face value and this is not subsequently re-measured.

In relation to the query, the interest free loan received from the parent and repayable at the discretion of the subsidiary under the initial agreed loan terms, shall be recorded at the exchange rate when loan was received, thereafter; translation of this amount is not required.

2. In the above scenario, the net cumulative amount of translation differences included in the carrying value of loan is required to be eliminated; consequently, related comparative amounts shall be restated.

TR-32 is applicable for preparation of financial statements for the period beginning on or after 1 January 2016. As required under paragraph 4.2 of TR – 32, the change in accounting policy resulting from the initial application of TR – 32 shall be accounted for retrospectively in accordance with IAS 8 ‘Accounting Policies, Changes in Accounting Estimates and Errors’.

(March 15, 2017)