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Intercompany Loan from a US Parent to a Foreign Company

Eve Yu's Profile

Here is the case: A US parent lends $$ periodically to its foreign subsidiary company in China to help out its operation. There is no definite date for repayment of the loan and no interest calculated. What's the GAAP treatment on recording this transaction on both parent and sub's book? Should the foreign currency gain or loss be recorded as an adjustment on balance sheet (equity) or as income/expense on P&L? What's the journal entry on the date of transfer? Is there year- end adjustment required on both books? Is there revaluation of loan required at year-end? Thanks.

Answers

Topic Expert
Sunil Thukral
Title: Controller/Technical Accounting Advisory..
Company: Consultant
(Controller/Technical Accounting Advisory/ SEC Reporting, Consultant) |

Hi Eve,

At a high level, you can need to follow the guidance contained in ASC 830, Foreign Currency Matters (formerly FAS 52).

You need to first determine if the loan is a) long-term in nature or b) short-term in nature. If it is determined to be long-term, you will record the change resulting from foreign exchange translation in equity (as CTA), otherwise the changes will be recorded as gain/loss through the income statements.

You need to review the loan governing documents first. Please feel free to contact me if you need any additional guidance.

Kind regards,
Sunil Thukral, CPA, CFA

SunilatCFOsquared [dot] com

Eve Yu
Title: Controller
Company: ABC Company
(Controller, ABC Company) |

Hi Sunil,
I'll look into ASC830. The topics and examples that are illustrated in the code are much complex than my case.

Many thanks.
Eve

Heather Heale
Title: Financial Reporting Manager
Company: Transcat
(Financial Reporting Manager, Transcat) |

My company has a similar situation. I recently researched this topic and found and E&Y guide that was helpful. If you google "financial reporting delevopments foreign currency" A link to this guide should show up in the results. Good Luck!

David OBrien
Title: Treasury Consultant
Company: EE Treasury
(Treasury Consultant, EE Treasury) |

Eve:

Not direct to your query but another matter for consideration is the treatment of any repayment. Money flowing off-shore to on-shore is often treated as a "deemed dividend" and taxable as such. Often this result can be avoided if the monies put into the sub are carried as capital. I know there a hoops on the Chinese side but better than paying taxes on the repayment. As an alternative you may wish to consider running an off-shore pool of funds for such funding activities.

David

Anonymous
(VP -Finance / Controller) |

Just remember at the end of the day, on a consolidated basis, the intercompany effects of all of it are eliminated. You would only need to do the complex accounting if you are worried about issuing separate financial statements.

J.G. Collins
Title: Managing Director
Company: The Stuyvesant Square Consultancy
(Managing Director, The Stuyvesant Square Consultancy) |

You're going to find, I think, that without interest attached to the purported "loan" that China's authorities will treat the "loan" as a capital contribution. If this is an ongoing loan of working capital, as you seem to indicate, its probably a better treatment anyway. It makes the accounting easier, too.

Eve Yu
Title: Controller
Company: ABC Company
(Controller, ABC Company) |

Thank you all for your inputs. I just found out that the parent company do charge interest on the loan to its foreign sub.

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