Scenario

Intercompany debt, both long term and short term, arises frequently. In some cases, intercorporate borrowings may arise because an affiliate/subsidiary can borrow at a cheaper rate than others, and lending to other affiliates/subsidiaries may reduce the overall cost of borrowing. In other cases, intercompany receivables/payables arise because of intercompany sales of goods or services or other types of intercompany transactions.

Required:

Discuss how intercompany transactions and debts should be treated for consolidation purposes, in both the statement of financial position and the statement of comprehensive income.

What major problems may arise with intercompany debt between a parent and a subsidiary or between subsidiaries in different countries?

NB: refer to the related IFRSs and IASs in your discussion.