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Accounting treatment of loan forgiven

Loan from German Co to UK subsidiary

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I have a German Co with a wholly owned UK subsidiary. The German company has forgiven a portion of the loan it made to the subsidiary. What is the accounting treatment? My thinking is that it is exceptional item in subsidiary's p&l but holding Co seem to be wanting a separate reserve. The do not want additional shares 

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15th May 2019 10:33

It’s obviously a profit, and probably an exceptional one. Who’s saying it isn’t, and what are their reasons?

The German company has forgiven the loan by a formal deed of waiver haven’t they? If not, don’t worry about the accounting treatment until they do.

You don’t ask about the tax treatment. Presumably you have that sorted.

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By Buzzard
to johngroganjga
15th May 2019 12:40

There is a formal waiver
Holding Co wants it in a 'equity' reserve which is what is confusing me
The German Co is asking about accounting treatment!
Tax position... I am now beginning to wonder...
Thank you

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By Buzzard
to johngroganjga
15th May 2019 12:40

There is a formal waiver
Holding Co wants it in a 'equity' reserve which is what is confusing me
The German Co is asking about accounting treatment!
Tax position... I am now beginning to wonder...
Thank you

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By johnt27
to Buzzard
15th May 2019 13:52

They want it in an equity reserve as they're arguing the profit made on loan waiver isn't realised. If that's the case then this is accounted for in other comprehensive income and reserves.

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15th May 2019 10:45

I'd say it's a capital contribution, so your accounting entry for the portion of the loan forgiven would be Dr Loan payable, Cr Capital contribution. Decent summary article at: https://www.osborneclarke.com/insights/corporate-law-101s-capital-contri...

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to Mike Bath
15th May 2019 11:00

But it's not a capital contribution is it? The commercial end-result might look the same but the simple fact is that there is a loan relationship and debits and credits arising from that relationship need to be accounted for and taxed accordingly.

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By Buzzard
to Wilson Philips
15th May 2019 12:41

Both cos have it as a loan

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to Mike Bath
15th May 2019 12:19

I'm not sure that it was ever a 'gift' if both parties booked it as a loan.

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By johnt27
15th May 2019 11:29

What are you reporting under? You've tagged both FRS 102 and 105.

Are the loans commercial ie charging interest at commercial rates with/without a fixed term etc.

Accounting treatment is here: https://www.frc.org.uk/getattachment/ca0f7a89-687c-4533-838a-089f91d2596...(October-2015).pdf

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16th May 2019 12:44

How long has the UK company been a subsidiary?
Domestic German tax law may allow the parent company to claim a loss reflected by the sum forgiven subject to a potential claw back.
On the accounting side a popular term used by multi national companies is "capital contribution"
See final paragraph on https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg43500

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