FINANCIAL REPORTING STANDARDS IMPLEMENTATION COMMITTEE

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1 FINANCIAL REPORTING STANDARDS IMPLEMENTATION COMMITTEE FRSIC Consensus 31 Classification of Amount due from Subsidiaries and Amount due to Holding Company that is Repayable on Demand Preamble FRSIC Consensus 31 Classification of Amount due from Subsidiaries and Amount due to Holding Company that is Repayable on Demand was developed by the Financial Reporting Standards Implementation Committee ( FRSIC ) and issued by the Malaysian Institute of Accountants ( MIA or Institute ) on 4 July The Consensus contained herein is issued as part of the Institute s initiatives to promote best practices in compliance with the highest standards in financial accounting. Malaysian Institute of Accountants

2 FRSIC CONSENSUS 31 CLASSIFICATION OF AMOUNT DUE FROM SUBSIDIARIES AND AMOUNT DUE TO HOLDING COMPANY THAT IS REPAYABLE ON DEMAND A FRSIC Consensus is an applicable technical and professional standards guidance issued by the Council and shall be binding on members as stated in Section 130 of the By-Laws (on Professional Ethics, Conduct and Practice), effective from 1 August It should be read in conjunction with the respective applicable accounting standards. Nothing in the FRSIC Consensus is to be construed as amending or overriding the accounting standards or other statements adopted or issued by the Malaysian Accounting Standards Board ( MASB ) and other relevant laws. Notwithstanding the By-Law, where any conflict or inconsistency arises between the provisions of an applicable approved accounting standard and a provision in this Consensus, the provisions of the applicable approved accounting standard shall prevail. Background 1 It is common for entities within the same group to provide loans to other entities within the same group (i.e. intra-group loans). Some intra-group loans have clear terms and conditions such as repayable on demand while some are not. Scope 2 This Consensus addresses the classification of amounts due from subsidiaries and amount due to holding company arising from intra-group loans that are repayable on demand. For the purpose of this consensus, the amount due from subsidiaries that are repayable on demand does not represent capital injection of the parent into the subsidiaries, which are within the scope of MFRS 127 Separate Financial Statements. 3 This Consensus also does not deal with impairment of receivables which are within the scope of MFRS 139 Financial Instruments: Recognition and Measurement or MFRS 9 Financial Instruments. 2 of 5

3 The Issue 4 It was observed that it is common for entities to classify amounts due from subsidiaries arising from intra-group loans that are repayable on demand as current assets in the statements of financial position of the parent company. Such classification is mainly driven by the repayable on demand feature of such loans, even in situations where such loans are not expected to be repaid within twelve months after the end of reporting period. 5 Some are of the view that the amounts due from subsidiaries that are repayable on demand but are not expected to be repaid within twelve months after the reporting period, would not satisfy paragraph 66(c) of MFRS 101 Presentation of Financial Statements. Accordingly, such amounts should be classified as non-current. 6 It was also observed that some subsidiary companies classify such amount (i.e. amount due to holding company) as current liability to reflect the classification of such amount in the separate financial statements of the holding company. 7 As the practice of classifying amount due from subsidiaries as current asset based on repayable on demand feature is prevalent, FRSIC was asked to provide guidance for consistent application of the matter. Consensus and Basis of Consensus Classification of amount due from subsidiaries in the separate financial statements of the holding company 8 Paragraph 66 of MFRS 101 states that An entity shall classify an asset as current when: (a) it expects to realise the asset, or intends to sell or consume it, in its normal operating cycle; (b) it holds the asset primarily for the purpose of trading; (c) it expects to realise the asset within twelve months after the reporting period; or (d) the asset is cash or a cash equivalent (as defined in MFRS 107) unless the asset is restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period. An entity shall classify all other assets as non-current. 9 Paragraph 66(c) of MFRS 101 requires an asset to be classified as current asset when an entity expects to realise the asset within twelve months after the end of reporting period. 3 of 5

4 10 Some of the indicators that the amount are unlikely to be realised within twelve months after the reporting date are: (a) The parent does not have an intention to collect and recover the amounts due from subsidiaries within twelve months after the reporting date. (b) The parent and subsidiaries do not expect that funds are available for repayment within twelve months after the reporting date. 11 Accordingly, FRSIC is of the view that the classification of amount due from subsidiaries arising from intra-group loans (as either current or non-current assets) should be based on the expected timing of realisation, rather than the repayable on demand feature of such balances. Classification of amount due to holding company in the financial statements of the subsidiaries 12 Paragraph 69 of MFRS 101 states that An entity shall classify a liability as current when: (a) It expects to settle the liability in its normal operating cycle; (b) It holds the liability primarily for the purpose of trading; (c) The liability is due to be settled within twelve months after the reporting period; or (d) It does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period. Terms of a liability that could, at the option of the counterparty, result in its settlement by the issue of equity instruments do not affect its classification. An entity shall classify all other liabilities as non-current. 13 Paragraph 72 of MFRS 101 further states that an entity classifies its financial liabilities as current when they are due to be settled within twelve months after the reporting period, even if: (a) the original term was for a period longer than twelve months; and (b) an agreement to refinance, or to reschedule payments, on a long-term basis is completed after the reporting period and before the financial statements are authorized for issue. 14 In addition, paragraph 73 of MFRS 101 clarifies that if an entity expects, and has the discretion, to refinance or roll over obligation for at least twelve months after the reporting period under an existing loan facility, it classifies the obligation as non-current, even if it would otherwise be due within a shorter period. 15 Based on the guidance above, for amount due to holding company arising from intra-group loans to be classified as non-current, an entity must have, at the reporting period, an unconditional right to defer its settlement for at least twelve months thereafter. 4 of 5

5 16 Accordingly, FRSIC is of the view that the amount due to holding company that is repayable on demand does not meet the above condition and hence, shall be classified as a current liability in the financial statements of subsidiaries. 17 The principles in paragraphs 8 to 16 above are also applicable where subsidiaries advance loans to parent company. Asymmetrical consideration 18 The classification of amount due from subsidiaries in the separate financial statements of the holding company (current or non-current asset) does not affect the classification of such amount as liability (current or non-current) in the financial statements of the subsidiaries. Issuance date of this Consensus 19 This Consensus is issued on 4 July References MFRS 101 Presentation of Financial Statements 5 of 5