The subsidiary credits a capital contribution from its parent directly to equity, not to profit or loss, because FRS 102 excludes contributions from equity investors from income. The parent adds the same amount to the carrying amount of its investment in the subsidiary and then has to ask whether that larger investment is still recoverable.

This page deals with the double entry on each side of a group contribution. The wider legal background, including how a contribution differs from a share subscription or a loan, is covered in capital contributions: funding a company without new shares.

Why does the subsidiary not record the contribution as income?

The FRS 102 glossary defines income as increases in assets or decreases in liabilities that increase equity, “other than those relating to contributions from equity investors”. Paragraph 2.49 then splits changes in equity into income less expenses on one side and contributions from, less distributions to, equity holders on the other. A parent that puts value into its subsidiary without receiving anything in return is acting as an owner, so the credit belongs in equity.

The subsidiary shows the receipt in its statement of changes in equity, which under paragraph 6.3 reconciles each component of equity and shows separately investments by and distributions to owners. The ICAEW helpsheet on loans at non market rates notes that a capital contribution can be taken either to retained earnings or to a separate component of equity, often called a capital contribution reserve. A separate reserve makes the source visible and helps when the directors later need to decide what is distributable.

What entries does each company make?

The entries depend on the form the contribution takes. The common cases are:

Form of contribution Subsidiary Parent
Cash gift Debit bank, credit capital contribution reserve Debit investment in subsidiary, credit bank
Parent waives a loan it made to the subsidiary Debit loan payable, credit capital contribution reserve Debit investment in subsidiary, credit loan receivable
Parent pays a subsidiary expense and does not recharge it Debit expense, credit capital contribution reserve Debit investment in subsidiary, credit bank
Interest free fixed term loan from parent Loan at present value, difference credited to equity Loan receivable at present value, difference debited to investment

The last row comes from ICAEW technical release TECH 02/17BL, paragraph 9.50, which sets out that for an interest free loan not repayable on demand the parent debits the cost of investment with the capital contribution and the subsidiary credits equity with the same amount, after which each side unwinds interest over the loan term. That only applies to loans with a fixed term or notice period; a loan repayable on demand is carried at the cash amount.

How does the parent account for the larger investment?

Paragraph 9.26 of FRS 102 lets a parent measure investments in subsidiaries in its own accounts at cost less impairment, at fair value through other comprehensive income, or at fair value through profit or loss, applying one policy to each class of investment. Most owner managed groups use cost less impairment, and the contribution is simply added to cost.

The addition is where problems tend to start. Money is often contributed because the subsidiary is struggling, so the parent should not assume the new carrying amount is supported. Paragraph 27.7 requires an entity to assess at each reporting date whether there is any indication of impairment and, if there is, to estimate recoverable amount. The ICAEW example of an interest free intercompany loan makes the same point, noting that the investment will be tested for impairment where there are indications. The detailed impairment steps are explained in investments in subsidiaries in the parent’s accounts.

Is the contribution distributable in the subsidiary?

TECH 02/17BL treats gratuitous contributions of assets from owners in their capacity as such as profits as a matter of law (paragraph 3.8). Paragraph 3.14(c) says such a gift is a realised profit when it is received in the form of qualifying consideration, which under paragraph 3.11 includes cash and the release of a liability of the company. A cash gift or a loan waiver from the parent can therefore usually support a dividend by the subsidiary, subject to the rest of the distributable profits test.

The exception is the interest free loan. Paragraph 9.53 explains that the equity credit is not a realised profit because the legal form is a loan, and paragraph 9.54 explains that the extra interest charged over the term is not a loss in law and can be used to eliminate that credit. The subsidiary cannot distribute an equity credit that arose only from discounting a loan.

Does a contribution affect the parent’s own distributable profits?

Making the contribution does not create a loss for the parent, because one asset is exchanged for another. Two later events can. An impairment of the investment is a realised loss, and TECH 02/17BL paragraph 3.15(c) includes writing down or providing for impairment of an asset among realised losses. Circular funding is the second risk. Paragraph 9.19 says a dividend from a subsidiary is not a realised profit for the parent if the parent provides the funds for it, or reinvests the proceeds, by way of a capital contribution and the steps are linked. A group that routes money down as a contribution and straight back up as a dividend has not created distributable profit for the parent.

What happens in the consolidated accounts?

Paragraph 9.15 of FRS 102 requires intragroup balances and transactions to be eliminated in full. The parent’s addition to its investment and the subsidiary’s equity credit cancel on consolidation, so a contribution has no effect on group net assets. Any impairment recorded only in the parent’s separate accounts is also reversed on consolidation, though the group may need its own impairment review of the subsidiary’s assets or goodwill. The broader mechanics are in FRS 102 consolidated accounts.

How might this work in practice?

Illustration only. A parent owns all the shares of a trading subsidiary, carried at cost of 200,000 pounds. The subsidiary owes the parent 150,000 pounds on an intercompany account repayable on demand. To strengthen the subsidiary’s balance sheet before a bank review, the parent formally waives 100,000 pounds of the balance and also gives 50,000 pounds in cash.

  • Subsidiary: debit intercompany payable 100,000, debit bank 50,000, credit capital contribution reserve 150,000.
  • Parent: debit investment in subsidiary 150,000, credit intercompany receivable 100,000, credit bank 50,000. The investment is now carried at 350,000 pounds.
  • Parent impairment review: the subsidiary has made losses for two years, which is an indicator. If recoverable amount is estimated at 280,000 pounds, the parent records an impairment of 70,000 pounds in profit or loss, which is a realised loss.
  • Group: all of the above eliminates; the subsidiary’s net assets are unchanged at group level.

What are the tax points to keep in mind?

HMRC’s Capital Gains Manual at CG43500 notes that capital contributions are not a concept recognised in UK company law and that a contribution received by a UK company should be reported within distributable reserves as a gift. If the money can be repaid in any circumstances, HMRC regards it as a loan within the loan relationships rules, and it will look for evidence such as the accounting treatment. For the parent, CG43500 also explains that a contribution not made as part of the terms of a share issue is not allowable expenditure on a later disposal of the shares, following the Fenston Will Trusts decision. Where base cost is important, for example ahead of a sale where the substantial shareholding exemption may not apply, subscribing for new shares can be the better route.

What mistakes come up?

  • Crediting the subsidiary’s profit and loss account. A contribution from an owner acting as owner is not income.
  • Expensing the contribution in the parent. It belongs in the investment, subject to impairment.
  • No paperwork. A board minute and a written waiver or gift letter show that the amount is not repayable, which supports both the accounting and the tax treatment.
  • Ignoring impairment. Topping up a loss making subsidiary does not make the investment recoverable.
  • Treating every equity credit as distributable. Credits from discounting interest free loans are not realised profits.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.