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It is common in South Africa to finance private companies and subsidiaries of listed companies by means of shareholders loans, because it is easier and cheaper to distribute profits from loan accounts than it is by repaying share capital or share premium or by declaring dividends, which have secondary tax on companies' implications. These shareholders' loan accounts invariably pay no interest and have no fixed or determinable repayment dates. The issue addressed here is how to account for such a shareholder's loan account acquired as part of a business combination in the books of the investor.
Under the pre-2005 statement on financial instruments there were six categories of financial assets:
1. Derivatives (clearly this loan did not fall into this category).
2. Financial assets held for trading (ditto).
3. Held to maturity investments (such a loan could not fall into this category as there are no fixed or determinable payments and fixed maturity).
4. Originated loans and receivables (such a loan could not fall into this category as it was a purchased loan).
5. Available for sale financial assets, the default category (as this loan did not fall into any of the previous categories, it ended up in this one, unless one argued that it fell into category (6)...