A loan to a parent, subsidiary or fellow subsidiary is a financial asset, so under FRS 102 the lender writes it down only when there is objective evidence of impairment at the reporting date (paragraph 11.21). The loss is the carrying amount less the present value of the cash the lender now expects to recover, discounted at the loan’s original effective interest rate (paragraph 11.25(a)).

Which rules apply to an intercompany loan in the lender’s accounts?

Paragraph 11.10(c) gives loans to or from subsidiaries or associates that are due on demand as an example of a basic financial instrument. Most intercompany balances, whether a formal loan or a running current account, are measured at amortised cost under paragraph 11.14(a), and impairment is dealt with by paragraphs 11.21 to 11.26. Section 27 does not apply, because paragraph 27.1(d) excludes financial assets within Sections 11 and 12. How basic instruments are first recognised is explained in basic financial instruments under FRS 102.

A company can instead choose under paragraph 11.2 to apply the recognition and measurement rules of IFRS 9. It then uses an expected credit loss model, which recognises losses earlier; see IFRS 9 expected credit losses. The rest of this page assumes the company applies Sections 11 and 12 in full.

What counts as objective evidence that the loan is impaired?

Paragraph 11.21 requires an assessment at the end of each reporting period. Paragraph 11.22 lists loss events that give objective evidence, and each has a familiar group version:

Loss event in paragraph 11.22 How it shows up in a group
Significant financial difficulty of the borrower Subsidiary has net liabilities, continuing losses or cannot pay its own creditors
Breach of contract, such as default on interest or principal Interest accrued but never paid, or a demand not met
A concession the lender would not otherwise grant, because of the borrower’s difficulty Parent agrees not to call the loan, subordinates it to the bank or waives interest to keep the subsidiary going
Probable insolvency or financial reorganisation Directors considering administration or a winding up of the borrower

Paragraph 11.23 adds that significant adverse changes in the borrower’s technological, market, economic or legal environment may also be evidence. Paragraph 11.24 requires individually significant financial assets to be assessed individually, which will normally include an intercompany loan.

The question is whether the borrower can repay, from its own resources, the amount the lender expects. The fact that the group wants the subsidiary to survive does not make a loan recoverable if the subsidiary has no means to repay it.

How is the write down measured?

For a loan at amortised cost, paragraph 11.25(a) measures the loss as the difference between the carrying amount and the present value of the estimated future cash flows, discounted at the loan’s original effective interest rate (or the current contractual rate if the interest rate is variable). The estimate should be based on where repayment will realistically come from, such as the borrower’s future trading cash flows, the sale of its property or its share of a liquidation.

For an interest free loan repayable on demand that was recognised at the amount lent, the original effective interest rate is nil, so the expected recoveries are not discounted. For a loan carrying interest, expected recoveries are discounted at that interest rate, so a long delay in recovery increases the loss even if the full amount is eventually expected.

What does a worked example look like?

Illustration only. A parent has lent £500,000 to a subsidiary, interest free and repayable on demand. At the year end the subsidiary has net liabilities and its only realistic source of repayment is the sale of its premises, expected to release £150,000 within the year.

  • Carrying amount: £500,000.
  • Present value of expected recovery at a nil rate: £150,000.
  • Impairment loss in the parent’s profit and loss account: £350,000.

Now suppose instead the loan carried interest at 5%, all interest to date had been paid, and the parent expected to recover £300,000 in two years’ time. The present value is £300,000 divided by 1.1025, which is £272,109, so the impairment loss is £227,891.

How does this interact with the investment in the subsidiary?

A parent with a loan to a struggling subsidiary usually also holds an investment in its shares. Under paragraph 9.26 the investment in the parent’s own accounts is held at cost less impairment or at fair value, and it is assessed separately from the loan; the same problems that impair the loan will usually point to impairment of the investment as well. If the parent has also guaranteed the subsidiary’s bank borrowing, paragraph 21.1A brings that financial guarantee within Section 21, so a provision or contingent liability may be needed as well (provisions and contingencies).

Can the write down be reversed, and how is a waiver different?

Paragraph 11.26 requires a reversal where the loss decreases and the decrease can be related objectively to an event after the impairment, such as an improvement in the borrower’s credit standing. The carrying amount cannot exceed what it would have been without the impairment. See reversing an impairment loss.

A waiver is different. An impairment is an estimate; the lender keeps its legal right to be repaid. A formal release ends that right, and paragraph 11.33(a) requires the asset to be derecognised when the contractual rights to its cash flows expire or are settled. Make sure the books match the legal position, which also helps when the balances are agreed at the year end (intercompany reconciliations).

What is the tax treatment?

For corporation tax, section 354 of the Corporation Tax Act 2009 provides that no impairment loss or release debit is brought into account on a creditor relationship where section 349 applies, which is where the lender and borrower are connected companies. There are exceptions for debt for equity swaps and for insolvent creditors. HMRC’s Corporate Finance Manual at CFM35310 explains that the aim is to prevent double relief, for example a subsidiary’s losses being surrendered as group relief and the parent also deducting the bad loan, and that credits on reversal of such impairments are likewise excluded. The accounting write down is therefore usually added back. The debtor side, deemed releases and transfer pricing are covered in intercompany loans: interest, write offs and tax.

What must be disclosed, and what goes wrong?

Paragraph 33.9 requires related party disclosures to include provisions for uncollectible receivables on outstanding balances and the bad or doubtful debt expense for the period, but paragraph 33.1A removes the requirement for transactions between group members where any subsidiary party is wholly owned. See related party disclosures. Common mistakes include:

  • carrying a loan at full value because the parent controls the borrower, despite the borrower’s net liabilities;
  • treating a decision not to call the loan as neutral, when it is often a concession that signals impairment;
  • impairing the investment but not the loan, or the reverse;
  • claiming a tax deduction for the write down between connected companies; and
  • recording a waiver as an impairment, or an impairment as a waiver.

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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.