Recognition of related-party recharges

Keywords: Mazars, Thailand, Accounting, Related Party Transactions Financial Statements

03 March 2020

Scenario

Company A is a Thai registered company, which also has a subsidiary in Thailand. During 2019, Company A shared resources to assist its subsidiary with factory construction.

As a result, Company A has calculated and issued an invoice at the end of 2019 to the subsidiary for THB 1.5 million (excluding VAT) for staff expenses related to this assistance.

Question

How should these transactions be reported in the financial statements of both Company A and the subsidiary?

Response

As noted in the scenario, Company A shared resources with a subsidiary to build a factory. The staff members worked on behalf of Company A. Afterwards, Company A issued an invoice to the subsidiary to recharge its expenses. Therefore, it appears that Company A has provided a service to the subsidiary. Thus, Company A should recognize this transaction as service income in its statement of income.

Thus, Company A should record these transactions as follows:

 

Class of transaction

Debit (THB)

Credit (THB)

When issuing the invoice to recharge expenses to the subsidiary

     

Other receivables – subsidiary

Asset

1,605,000

 

                Service income

Income

 

1,500,000

                Output VAT (THB 1.5 million x 7% VAT)

Liability

 

105,000

       

When receiving a payment from the subsidiary 

Cash at bank

Asset

1,605,000

 

                Other receivables – subsidiary

Income

 

1,605,000

The subsidiary should record the transactions as follows:

 

Class of transaction

Debit (THB)

Credit (THB)

When receiving the invoice recharging expenses from Company A

     

Cost of building

Asset

1,500,000

 

Input VAT

Asset

105,000

 

                Other payables – subsidiary

Liability

 

1,605,000

       

When making a payment to Company A

     

Other payables – subsidiary

Liability

1,605,000

 

                Cash at bank

Asset

 

1,605,000

However, the subsidiary can capitalize the cost of wages as building costs if the conditions for doing so are met (wages incurred and work performed are directly attributable to the construction of the assets). Otherwise, the costs would need to be expensed.

For more information, please visit the FAP website

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