Quasi Capital accounting entry, Accounting - Auditing

[Pradeep Sarangi]

What will be the accounting entries for Quasi Capital added by the shareholders into the business ?

would it may apply under unsecured loan or any other treatments for same ?

Please guide !!

Regards

Pradeep

Posts / Replies

[YAGAY andSUN]

When shareholders contribute quasi capital into a business, it's important to understand that quasi capital refers to funds injected into the business by shareholders that are not considered traditional equity (i.e., not in the form of share capital) or debt, but they might carry characteristics of both. Quasi capital could be provided as subordinated loans, advances, or convertible instruments, and the exact accounting treatment can vary depending on the specific arrangement and local accounting standards.

Accounting Entries for Quasi Capital

Here are the typical accounting entries depending on the nature of the quasi capital:

1. If the Quasi Capital is Treated as an Unsecured Loan (Subordinated Loan):

   • This is common if the quasi capital is structured as a loan with no specific maturity, or the repayment is subordinated to other debts.

   Entry:

   • Debit: Bank (Asset)

   • Credit: Unsecured Loan or Shareholder Loan (Liability)

   This treatment treats the quasi capital like an unsecured loan, and it would show up on the liabilities side of the balance sheet. The terms of the loan (interest, repayment schedule, etc.) would need to be clearly documented.

2. If the Quasi Capital is Treated as Equity or Hybrid Capital (Convertible loan or preference shares):

   • This could involve hybrid instruments that could convert into equity at a later time, or it might be treated similarly to equity for accounting purposes.

   Entry:

   • Debit: Bank (Asset)

   • Credit: Hybrid Equity (Equity or Liability – depending on the instrument)

   If the quasi capital is treated as a hybrid (like a convertible debenture or preference share), part of the funds might be recorded under equity, and part may be treated as a liability. The classification depends on the specific terms of the instrument (such as whether it’s likely to convert into equity).

3. If the Quasi Capital is Treated as a Loan with Specific Repayment Terms (Other than Unsecured Loan):

   • This could be a loan provided by shareholders with a set repayment schedule and specific terms.

   Entry:

   • Debit: Bank (Asset)

   • Credit: Loan Payable (Liability)

   This would be treated as a liability, with the exact nature of the liability (repayment schedule, interest, etc.) reflecting the loan agreement.

Quasi Capital vs. Unsecured Loan

• Unsecured Loans: Typically refer to funds loaned to the business that are not secured by any collateral. The interest rate may be fixed, and repayment terms are set.

• Quasi Capital: This is a broader term and can encompass unsecured loans, but it might also include elements of equity or hybrid instruments, like convertible loans or subordinated debt that may not need to be repaid for a long period, or could convert into equity under certain conditions.

Treatment Under Financial Statements

1. Liability Side (Unsecured Loan): If quasi capital is structured as an unsecured loan, it will appear as a liability on the balance sheet under "Loans from Shareholders" or "Subordinated Loans."

2. Equity Side (Hybrid Capital): If it has characteristics of equity, like subordinated debt that is likely to be converted into shares or preference shares, it may be classified under equity or as a hybrid between debt and equity.

Key Considerations

• Repayment Terms: If there is no specific repayment obligation or if the loan is subordinated (paid after other debts), it might be treated as quasi-equity.

• Interest Payments: If interest is paid regularly, it might resemble debt. If not, and if it’s treated more as a long-term equity, interest may not be required.

• Convertible Features: If the quasi capital can be converted into equity, the treatment may need to reflect that aspect and could be recorded as hybrid capital.

Conclusion

The accounting treatment of quasi capital largely depends on the specific terms of the arrangement between shareholders and the company. If it's treated as an unsecured loan, it will appear on the liabilities side of the balance sheet. However, if it’s considered hybrid capital or has equity-like characteristics, it may be treated differently in the accounts, such as under equity or as a hybrid liability-equity item. Always ensure that the terms and conditions of the quasi capital arrangement are clearly understood and appropriately classified according to local accounting standards (like IFRS, GAAP, etc.).