The intercompany loan nobody will ever call
Updated: 12 hours ago
If a parent never intends to call its loan to a subsidiary, can the expected credit loss be nil?
It is one of the most common balances in a set of separate financial statements. The parent has lent money to a subsidiary. There is no repayment schedule, so the loan is repayable on demand. The board has no plan to ask for it back, and the group will keep funding the subsidiary for as long as it takes. Surely the expected credit loss is nil?
Under IFRS 9 the answer can be the opposite. The intention never to call the loan is the one fact the standard tells you to set aside, and for a subsidiary that could not pay if asked, the loss can be a large share of the balance.
Where the question arises
Intercompany balances are eliminated on consolidation, so the expected credit loss (ECL) lives in the lender's own separate financial statements: the parent's, or those of a subsidiary that lends to a fellow subsidiary. It applies wherever IFRS 9's impairment model applies, including separate financial statements under IFRS and FRS 101 accounts in Ireland and the UK. The borrower books nothing; the allowance belongs to the lender.
The loan is measured as if you called it today
IFRS 9 sets a hard limit on how far ahead you look. Paragraph 5.5.19 says:
"The maximum period to consider when measuring expected credit losses is the maximum contractual period (including extension options) over which the entity is exposed to credit risk and not a longer period, even if that longer period is consistent with business practice."
A loan repayable on demand can be called at any moment, so the period over which you are contractually exposed is close to nil. The ECL is therefore measured as if repayment were demanded at the reporting date. "We never call these loans" is business practice, and 5.5.19 says in terms that business practice does not lengthen the period.
Two consequences follow:
12-month and lifetime ECL are the same number. Both assume the loan is called at the reporting date. You still stage the loan, because the stage drives the IFRS 7 tables, but the stage does not change the measurement.
The exception does not help. Paragraph 5.5.20 lets some facilities look beyond the contractual notice period, but it is written for revolving facilities, such as credit cards and overdrafts, that combine a drawn amount with an undrawn commitment and are managed on a collective basis (B5.5.39). A plain intercompany loan is not one of them.
So the only question is: could the subsidiary pay?
If the subsidiary has enough accessible, highly liquid resources to repay in full if asked today, the ECL is likely to be immaterial. The only exposure is the risk of default in the few days it would take to pay.
If it could not, you ask how you would expect to get your money back, and you weight each route by its probability:
Repaid over time: you give the subsidiary time to pay from its future cash flows.
Sale of assets or refinancing: the subsidiary sells assets or raises other finance to pay you.
Insolvency: you recover what a liquidation would return to unsecured creditors.
The shortfall under each route is discounted at the loan's effective interest rate (B5.5.44), and this is the second trap. An interest-free demand loan is normally recognised at the amount repayable, with no day-one discount, because the lender can have its money back at any time (IFRS 13.47 makes the same point for the borrower's liability). Its effective interest rate is therefore 0%. A route that recovers every euro, however slowly, produces no loss. On an interest-free demand loan, waiting is not a credit loss; failing to recover is.
One group, two loans, two answers
The worked example in our Intercompany ECL template has two demand loans from the same parent, Tolkerry Holdings Ltd, at 31 December 2026. The board intends to call neither of them.
Tolkerry Property | Tolkerry Retail | |
Balance repayable on demand | €500,000 | €850,000 |
Interest | 3% | Interest-free |
Liquid resources available | €650,000 | €120,000 |
Could it repay if asked today? | Yes | No |
Expected credit loss | €10 | €369,918 |
Tolkerry Property could hand the money back tomorrow, so its ECL is a rounding difference. Tolkerry Retail could not, so the parent has to work out how it would recover the €850,000:
Recovery route | Chance | Weighted loss |
Repaid over five years, interest-free: 90% recovered | 40% | €34,000 |
Sale of assets, cash in one year: 50% recovered | 35% | €148,750 |
Insolvency: 12% recovered | 25% | €187,168 |
Expected credit loss | 100% | €369,918 |
That is an allowance of 43.5% of the balance, on a loan the parent never intends to call. Notice what drove it: not the time the subsidiary would need, but the share of the balance each route would fail to recover. The insolvency figure comes from a recovery waterfall: after the costs of the insolvency and the preferential creditors, unsecured creditors would receive about 14 cent in the euro, and weighted across three economic scenarios the loss given default is 88%.
"But we will always support the subsidiary"
The usual objection is that the parent will never let the subsidiary fail. But that support would come from the lender itself, so it cannot reduce the lender's own loss: you would be lending more money to get your money back. IFRS 9 counts the cash flows from collateral and other credit enhancements only where they are part of the contractual terms and are not recognised separately (B5.5.55). A letter of support you give the subsidiary's directors for their going-concern assessment is not a credit enhancement of your own loan. A guarantee from another group company that forms part of the loan's terms is different: the cash it would bring in counts.
What the accounts should show
The loss allowance against the loan in the lender's separate statement of financial position, and impairment losses as a separate line in profit or loss (IAS 1.82(ba))
The reconciliation of the loss allowance by stage (IFRS 7.35H) and the gross carrying amounts by credit risk grade (IFRS 7.35M)
The allowance for doubtful debts on related-party balances and the expense recognised in the period (IAS 24.18)
The judgements: why the loan is treated as repayable on demand, the liquid resources assessment, and the recovery routes and their probabilities (IFRS 7.35G and IAS 1.122)
Qualifying entities under FRS 101 can take exemptions from some of these disclosures. The measurement is the same.
Doing it for the whole group
One loan is a calculation; a group of them is a model. The Intercompany ECL template does it end to end for up to 20 balances in one Excel workbook:
A register for term loans, demand loans, cash-pool current accounts, intercompany trade balances and financial guarantees
Staging tests: low credit risk, significant increase in credit risk, 30 and 90 days past due, and credit-impaired
A demand-loans tab that asks "could it repay now?" and weights the recovery routes, exactly as above
PD, LGD and EAD by balance across three weighted scenarios, discounted at the effective interest rate
The IFRS 7.35H reconciliation, the 35M grade table, the IAS 24 table and the journals, with 20 built-in checks
Tolkerry Holdings is its worked example, so you can watch every number in this post being produced before you enter your own.
Lending interest-free for a fixed term instead? That loan starts one step earlier, with the day-one fair value. The free Intercompany Loans template works that out, together with the interest income that unwinds over the term.
The intention never to call the loan is the one fact IFRS 9 tells you to set aside. What decides the number is the subsidiary's position today: whether it could pay if asked and, if it could not, how you would get your money back.
