03-16-2009, 09:33 PM
Dear,
You did not explain in your earlier post that same funds were relent to the associate. The impression was that the loans were not specifically relent.
First of all you should establish the basics to acquire and relent such loans. This may require to check that whether or not the business objective clauses of memorandum of association cover such arranging and relenting to associates. You may also confirm that appropriate authority of a special resolution of meeting of members/shareholders was in place to cover this transaction, as stipulated by section 208 of CO84.
The scenario which you have now mentioned is one of in its nature. I could not find any particular example in IAS-18 to support my comments. There is no opinion of ICAP technical committee on any such issue. Therefore, the conclusion will probably depend upon logic and may be a matter of professional judgment and agreement with auditors.
The paragraph which you have referred, in my personal view, may not be good enough to make a reason to set off the mark-up income against the markup expense merely on the ground that same amount has been relent. Paragraph 34 of IAS-1 interalia states that
"An entity undertakes, in the course of its ordinary activities, other transactions that do not generate revenue but are incidental to the main revenue-generating activities. An entity presents the results of such transactions, when this presentation reflects the substance of the transaction or other event, by netting any income with related expenses arising on the same transaction."
This paragraph provides examples of related expenses that are incurred to generate the gains through the activities which are not mainly revenue generating activities e.g. gain on sale of property, plant and equipment.
The financing obtained from bank and then relent to the associates are related to separate distinct business activities i.e. "financing" and "investing". These activities result in similar amount of income and expenditure due to structure of transaction. In fact, no cost is incurred to earn any gain that is essential feature to apply the above paragraph. Further, such markup income is not some incidental gain. These were planned, approved and structured income and expenses relating to two differently identifiable business activities.
It's a fact that the underlying activities i.e. "financing" and "investing" are quite dissimilar, the level of risk associated with the earning of income and incurrence of cost are different (you may not be defaulting to the bank but associate may default its obligations or vise versa), the timings of receipts and payments are different (so the corresponding financial instruments are not settled simultaneously), and there is no legal right to offset the related financial instruments giving rise to such cost and revenue. The paragraphs 92 to 98 of Framework of IFRSs are also not supportive to offset such expense of income.
Despite the above
The revenue has to be accounted for on gross basis since it is the gross inflow of economic benefits. However, at the same time this income could be considered to recoup the related costs since in substance no economic benefits have flown to the entity. This transaction, if shown separately may also result in excessive payment of income tax in a specific scenario.
I think if you have a properly documented agreement with associate where it undertakes to re-imburse/recoup the markup incurred by you and you also give a detailed disclosure of such transaction in the financials and set off the markup income and expense, it may not attract objection from regulators. I have seen some companies which have set off certain incomes against expenses for various reasons on the basis of professional opinions. However, since it is a complex matter, I advise you to get the opinion of Technical Advisory Committee of ICAP or some professional firm to support the accounting treatment being made.
Regards,
KAMRAN.
