Accounting for Intercompany Transactions - Final

Date Issued: August 2014

Author: Matt Murray

1.0: Purpose

The following policy is intended to be a resource for finance professionals at Ingredion (the
“Company”) for guidance on specific accounting methods and application of US Generally
Accepted Accounting Principles (“US GAAP”). This policy does not replace or alter applicable
US GAAP; however, it is merely intended to assist in the consistent accounting across the
Company. Since all circumstances cannot be addressed in their entirety by these
guidelines, professional judgment is necessary in their application. When handling is in
question, please contact the Corporate Controller’s Group (Corporate Controller or Director
of Accounting Policy/Research).

2.0: Persons Affected

This policy is applicable to all domestic and international locations for Ingredion, Inc. and all
consolidated subsidiaries.

3.0: Applicable US GAAP Accounting Guidance

ASC 810 - Consolidation

4.0: Policy

The purpose of the following policy is to provide guidance on recording, eliminating and
settling (if necessary) transactions between affiliates otherwise known as intercompany
transactions. The US GAAP accounting rules state that intercompany balances and
transactions should be eliminated in consolidation and that the income statement and
financial position of Ingredion should be reflected as if the intercompany transaction had
never taken place. An intercompany transaction occurs when one affiliate of Ingredion is
involved in a transaction with another affiliate of Ingredion.

4.1 The following situations common to Ingredion result in intercompany (Due to and Due
from) balances between entities:

a. Cross charges – “shared service” functional costs that are allocated to an affiliate
based on a pre-determined, appropriate methodology (headcount, # of licenses,
percentage of employee time, etc.). The purpose of an allocated charge is to
reflect expenses incurred by one entity on behalf of another entity and to reflect
the expenses on the appropriate entity (and reporting unit/segment). See
section 4.4 for additional guidance.

Example: Thailand allocates $50,000 to Australia for back-office service costs

based on % of employee’s time spent by Thailand related to the Australia
business.

b. Corporate service fee – “shared service” functional costs that are allocated by
Ingredion Incorporated (US) to an affiliate based on a pre-determined,
appropriate methodology (headcount, percent of employee time, sales, etc.).
The purpose of an allocated charge is to reflect the cost of services performed by
Accounting for Intercompany Transactions - Final
Date Issued: August 2014
Author: Matt Murray

Ingredion Incorporated (US) for the benefit of another entity and to reflect the
expenses on the appropriate entity. See section 4.5 for additional guidance.

Example: Ingredion Incorporated (US) charges Germany $45,000 for legal,

human resources, procurement, etc servicesprovided to Germany; however,
these services related to activities performed for the benefit of various affiliates,
including Germany.

c. Direct charge – direct costs paid by one affiliate on behalf of another affiliate. See
section 4.6 for additional guidance.

Example: Entity A receives an invoice from a third party consulting firm for
amounts incurred by Entity B. Entity A pays the invoice on behalf of Entity B
which creates an intercompany payable/receivable between the two entities as
Entity B incurred the expense, though Entity A paid the invoice.

d. Royalty charge – charge to an affiliate that is based on a royalty agreement

related to the use of intellectual or other property. See section 4.7 for additional
guidance.

Example: Entity A uses certain tradenames that are registered and owned by
Entity B and Entity B charges Entity A for the use of these tradenames based on
a percentage of net sales for each period.

e. Sales of product to affiliates – sale of product (both manufactured and non-

manufactured) from one Ingredion entity to another via an arm’s length
transaction. See section 4.8 for additional guidance.

Example: Entity A sells finished product to affiliate, Entity B, in order to service

customers in Entity B’s region before Entity B sell’s the product to the end
customer.

f. Transfer or sale of fixed assets between affiliates – transfer or sale of property,

plant, and equipment from one Ingredion location to another via an arm’s length
transaction. See section 4.9 for additional guidance.

Example: Entity A has a fully depreciated spray dryer that is not in use that
potentially could be refurbished and used by another entity. As such, Entity A
sells the fixed asset to Entity B for use in Entity B’s operations.

g. Lending agreements between affiliates – intercompany loans between affiliates

for temporary or long-term borrowing needs, which are at arm’s length terms.
See section 4.10 for additional guidance.

Example: Entity A needs additional financing to support day-to-day operations.

Instead of borrowing from a third party, Entity A and affiliate, Entity B, enter into
an intercompany borrowing arrangement at market interest rates.
Accounting for Intercompany Transactions - Final
Date Issued: August 2014
Author: Matt Murray

4.2 Intercompany balances should generally be reconciled on a monthly basis. Any

intercompany out of balance represents an unreconciled difference and should be identified
and corrected in a timely manner in accordance with the Account Reconciliation policy.

4.3 All transactions between affiliates should be recorded to the appropriate Due to/Due
from account in Hyperion in order to properly reflect the transactions as intercompany with
the appropriate party. In addition, all intercompany gains or losses (and income and
expenses) between affiliates should be eliminated in consolidation. Balance sheet
intercompany accounts are listed below, which include a description of their use:

 Due from Affiliates – Short Term – current amounts owed from affiliates in non-
lending arrangements

 Due from Affiliates – Loan – Short Term – current amounts owed from affiliates in
lending arrangement supported by necessary legal documents related to loan

 Due from Affiliates – Long Term – amounts owed from affiliates in non-lending
arrangements expected to be repaid in excess of 12 months from the balance sheet
date.

 Due from Affiliates – Loan – Long Term – amounts owed from affiliates in lending
arrangements with maturity dates in excess of 12 months and which are expected to
be repaid in excess of 12 months from the balance sheet date.

 Due to Affiliates – Short Term – current amounts owed to affiliates in non-lending

arrangements

 Due to Affiliates – Loan – Short Term – current amounts owed to affiliates in lending
arrangement supported by necessary legal documents related to loan

 Due to Affiliates – Long Term – amounts owed to affiliates in non-lending

arrangements expected to be paid in excess of 12 months from the balance sheet
date.

 Due to Affiliates – Loan – Long Term – amounts owed to affiliates in lending

arrangements with maturity dates in excess of 12 months and which are expected to
be paid in excess of 12 months from the balance sheet date.

4.3.1 Any intercompany balance expected to be outstanding greater than 12 months

should be memorialized in a loan agreement. See section 4.10 for more information on
the requirements of intercompany loan agreements.

4.4 Intercompany cross charges must be classified as one of the following: general office,
corporate service fees or non-cash settled (regional allocations).

4.4.1 General office cross charges include all cash settled “shared service” allocations
that are not corporate service fees. All general office cross charges should be
Accounting for Intercompany Transactions - Final
Date Issued: August 2014
Author: Matt Murray

recorded to the SAP account, cost center, and Hyperion account detailed below by
both the party who is allocating and the party that is receiving the charge:

Cross-Charge SAP Hyperion Cash Income Statement

Cost Center
Type Account Account Settled Classification
General Office 787785*  XXXX285 (IC Cross-Charge) G&A Other Y Operating Income

Example: Thailand allocates $50,000 to Australia for back office service costs. This
charge is invoiced by Thailand and cash settled by Australia.

Thailand

Dr. Due from Australia $50,000

Cr. Gen Office Cross-Chg $50,000

Australia

Dr. Gen Office Cross-Chg $50,000

Cr. Due to Thailand $50,000

4.4.2 Note that mark-up (if applicable) should be included in the same account as
noted above and should be included within Operating Income

4.4.3 Also note that these cross charges could have withholding tax consequences.
Please consult the Accounting for Income Tax policy for additional information on
withholding taxes.

4.5 Corporate service fee charges only include specific costs that are allocated to each
affiliate from Corporate and billed as such. These cross charges are invoiced and cash
settled. All corporate service fees should be recorded to the SAP account, cost center, and
Hyperion account detailed below by both the party who is allocating and the party that is
receiving the charge.

Income
Cross-Charge SAP Hyperion Cash
Cost Center Statement
Type Account Account Settled
Classification
Corp Service Fee 787784*  XXXX285 (IC Cross-Charge) IC Service Fee Y Operating Income

Example: Corporate charges Germany $45,000 for the Corporate service fee. This
cross charge is invoiced by Corporate and cash settled.

Corporate

Dr. Due from Germany $45,000

Cr. Corporate Service Fee $45,000

Germany
Accounting for Intercompany Transactions - Final
Date Issued: August 2014
Author: Matt Murray

Dr. Corporate Service Fee $50,000

Cr. Due to Corporate $50,000

4.6 Direct charges – direct charges are defined as direct costs paid by one affiliate on behalf
of another affiliate. The following journal entries should be recorded by each entity:

Affiliate Paying Bill

Dr. Due from Affiliate – Short Term
Cr. Cash / Accounts Payable

Affiliate Incurring Expense

Dr. Expense (recorded to appropriate expense category)
Cr. Due to Affiliate – Short Term

4.6.1 Intercompany balances resulting from direct charges should be settled in cash
within a relatively short period of time not to exceed 60 days.

4.7 Intercompany royalties are payments made by one entity (the licensee) to another
entity (the licensor) in exchange for the right to use intellectual property owned by the
licensor.

4.7.1 Royalty agreements (otherwise known as Trademark and Technical License and
Technical Assistance Agreements) should include the following:

 Legal name of licensor

 Legal name of licensee
 Rights and limitations of license use
 Term of agreement
 Payment terms
 Basis of calculation
 Royalty currency
 Withholding tax treatment

4.7.2 Intercompany royalties should be recorded by both the licensor and licensee on
an accrual basis (i.e. in the period earned by the licensor and the period incurred by
the licensee). As an example, royalties earned in November business (based on a %
of net sales in November) should be accrued in November. It is not appropriate to
use a one-month lag for recording royalties.

To reflect the royalty due from the licensee, the licensor should record the following:

Intercompany Royalty - Net Basis

Licensee remits net amount to licensor and remits applicable taxes to government authority

Dr. Due from Licensee XXX

Dr. Withholding Tax Expense XXX
Cr. Royalty Revenue XXX
Accounting for Intercompany Transactions - Final
Date Issued: August 2014
Author: Matt Murray

To reflect the royalty due to the licensor, the licensee should record the following:

Net Basis
Licensee remits net amount to licensor and remits applicable taxes to government authority.

Dr. Intercompany Fees & Royalties XXX

Cr. Withholding Tax Payable XXX
Cr. Due to Licensor XXX

Note: a foreign exchange gain or loss may need to be calculated and recorded as the
royalty may be denominated in a currency other than the functional currency of the
licensor or licensee. Refer to the royalty agreement for determination of the
currency of the royalty.

4.7.3 The royalty calculation is specified in each royalty agreement, i.e. % of sales, ,
etc. The method of calculation and supporting detail should be included in the
related intercompany account reconciliation (See 4.2.7).

4.7.4 Withholding taxes (WHT) should be accrued when incurred (i.e. accrual basis)
and in accordance with local withholding tax law. The licensor should record WHT
expense on the monthly accrued royalty income, and the licensee should record a
liability to the local taxing authorities. This liability is relieved upon payment made
by the licensee to the local taxing authority. See Accounting for Income Taxes –
Appendix C for more information on accounting for withholding taxes.

4.7.4.1 Withholding taxes should be accrued in Hyperion account AccrExp –

Withholding Taxes Payable.

4.7.5 Intercompany royalties should be recorded in the currency specified in the

royalty agreement. The party who has a royalty payment or receipt that is
denominated in a non-functional currency has transactional foreign currency
exposure which requires foreign currency gains and losses to be calculated and
recorded monthly. See the policy Accounting for Foreign Currency Matters for
additional guidance.

Example: Entity EUR (licensee) pays Entity USD (licensor) a royalty for the use of
Entity USD’s trademarks equal to 2% of Entity EUR’s net sales. The royalty
agreement states the royalty is to be denominated in the licensee’s local currency.
Assume there is no withholding tax. In January and February, Entity EUR records a
royalty expense and payable of 100€ and 200€, respectively. January and February
end of month (EOM) and average rates (AVE) were 1.10 & 1.15 and 1.25 & 1.05,
respectively. In January, Entity USD records royalty revenue of $125, a receivable
of $110, and a $15 unrealized foreign currency loss. In February Entity USD records
royalty revenue of $210, a receivable of $230, and a $20 unrealized foreign currency
gain. Notice 300€ multiplied by the EOM rate is $345. This amount does not equal
the receivable recorded of $340. Entity USD is required to record an additional $5 of
Accounting for Intercompany Transactions - Final
Date Issued: August 2014
Author: Matt Murray

receivable and foreign exchange gain so that at the end February, Entity USD has a
receivable of $350, which translates to 300€.

January February
EOM 1.10 1.15
AVE 1.25 1.05

Entity USD has recorded the following journal entries:

January
DR. Due from Entity EUR $110 (100€ X 1.10)
DR. Unrealized Fx Loss $15 ($125 - $110)
CR. Royalty Revenue $125 (100€ X 1.25)

February
DR. Due from Entity EUR $230 (200€ X 1.15)
CR. Royalty Revenue $210 (200€ X 1.05)
CR. Unrealized Fx gain $20 ($230 - $210)

DR. Due from Entity EUR $5 ((300€ X 1.15)-($110 + $230))

CR. Unrealized Fx gain $5

4.7.6 The licensor should issue a physical invoice to the licensee within 30 days of
the payment date specified in the agreement. The invoice should agree to amounts
recorded in Hyperion for the period. The invoice should include the following
information:

 Gross royalty owed

 Tax withheld
 Net amount due to the licensor
 Payment terms
 Wiring instructions

4.7.6.1 Licensee is responsible for the accuracy of the royalty calculation as

the licensor does not have direct access to the information used in
determining most royalties. The licensee should refer to the royalty
agreement is any questions arise.

4.7.6.2 Once the foreign affiliate pays the necessary withholding taxes are
receives a receipt from their local tax authority, the withholding taxes payable
should be trued up to reflect the amount that was ultimately paid.

4.7.7 Payments should be made to the licensor in a timely manner in accordance

with the payment terms of the royalty agreement. Payment detail and WHT receipts
should be remitted to the licensor with reference to the invoice being paid,
specifically identifying any difference to the invoice.

To reflect payment to the licensor, the licensee should record the following:
Accounting for Intercompany Transactions - Final
Date Issued: August 2014
Author: Matt Murray

Dr. Withholding Tax Payable XXX

Dr. Due to Licensor XXX
Cr. Cash XXX

To reflect receipt of payment from the licensee, the licensor should record the
following:

Dr. Cash XXX

Cr. Due from Licensee XXX

Note: Foreign exchange gain or loss may need to be calculated for non-functional
currency transactional exposures.

Example: Continuing the previous example above, Entity EUR settles the 300€
royalty payable to Entity USD on March 15. The spot rate on the day of payment
is .95. Entity USD receives $285 to settle the recorded $345 receivable. Because the
EUR weakened against the USD, Entity USD recorded a $60 realized loss on the
transaction.

Entity USD records the following journal entries:

DR. Cash $285 (300€ X .95)

DR. Unrealized Fx gain $10 Reverse unrealized
DR. Realized Fx Loss $60 ($345-$285)
CR. Due from Entity EUR $10 Reverse unrealized
CR. Due from Entity EUR $335 Settle receivable

4.7.8 Intercompany reconciliations related to royalties should be maintained and

confirmed on a monthly basis in both local currency and US Dollars. The
reconciliations should include a detailed account of the amounts recorded, including:

1. Monthly Accrual
2. Payments
3. Receipt of payment
4. Accrual true-up
5. Foreign currency gain/loss
6. Other adjustments

In addition, the monthly royalty accrual, tax withheld, and foreign currency gain/loss
calculations should be provided with the reconciliation. All amounts should agree to
Hyperion in both local currency and US Dollars.

4.8 Sale of manufactured product between affiliates should be reflected as if the transaction
occurred between unaffiliated parties and are subject to the Company’s policy, Transfer
Pricing. Sale of raw materials from one Ingredion entity to another should be at historic
cost and generally no mark-up should be recognized from the sale.
Accounting for Intercompany Transactions - Final
Date Issued: August 2014
Author: Matt Murray

4.8.1 Intercompany profit is included in the ending inventory balances for sales of
product between affiliate. The intercompany profit included in inventory for all
intercompany inventory transactions is eliminated via an estimated reserve by the
Corporate Controller’s Group at each quarter end.

Example: Entity A manufactures 8,000 units of finished goods inventory, at a cost of $6 per
unit which is subsequently sold to Entity B on December 10, 2013. Entity A sells these units
of inventory for $8 per unit. At the date of the intercompany sale of inventory, the following
entries should be recorded by Entity A and Entity B and by Corporate (the Corporate entry
is based on the estimate of the sales of Entity B and what estimated amounts remain in
inventory at quarter end):

Entity A

Dr. Cash $64,000

Cr. Intercompany Sales ($8 * 8,000) $64,000

Dr. Intercompany COGS ($6 * 8,000) $48,000

Cr. Inventory $48,000

Entity B

Dr. Inventory $64,000

Cr. Cash $64,000

Corporate

Dr. Intercompany Gross Profit $16,000

Cr. Inventory $16,000

4.9 Intercompany transfer of fixed assets between affiliates (cross border transfers,
different legal entity) should be accounted for as if the transaction occurred between
unaffiliated parties, which should be recorded at fair market value if significant (if not
determined to be significant, transfer should be recorded at net book value) as determined
by management judgment. This would include a consideration of the remaining net book
value of the asset and the difference in the remaining net book value and the fair value of
the asset at the transfer date. Generally, “significant” would be related to assets with
original cost or remaining net book value over $1.0 million.

Intercompany transfer of fixed assets between locations that are within the same legal
entity should be recognized at net book value.

Example: Entity A has a fully depreciated spray dryer that is not in use that could be
refurbished and used by another entity in a separate country/legal entity. As such, Entity A
sells the fixed asset to Entity B for use in Entity B’s operations at a fair market value of
$50,000 determined through discussions/analysis with internal engineers. The spray dryer
had an original cost of $250,000. See below for respective journal entries to record the sale
of this fixed asset from Entity A to Entity B.
Accounting for Intercompany Transactions - Final
Date Issued: August 2014
Author: Matt Murray

Selling Affiliate – Entity A

Dr. Cash or Due from Affiliate $50,000

Dr. Accumulated Depreciation $250,000
Cr. Gross Cost – PP&E $250,000
Cr. Gain on Sale of PP&E $50,000

Purchasing Affiliate – Entity B

Dr. Gross Cost – PP&E $50,000

Cr. Cash or Due to Affiliate $50,000

Due to the fact that a gain cannot be recognized as a result of an intercompany transaction,
the gain and respective increase in gross cost of the fixed asset should be eliminated in
consolidation by the Corporate entity via the following journal entry:

Corporate Elimination Entity

Dr. Gain on Sale of PP&E $50,000

Dr. Gross Cost – PP&E $50,000

In addition, Entity B would be required to depreciate the asset over its estimated useful life
commencing when the asset is placed in service. As such, the depreciation expense should
be also eliminated in consolidation as the asset was previously fully depreciated by Entity A.

Corporate Elimination Entity

Dr. Accumulated Depreciation XX

Cr. Depreciation Expense XX

4.9.1 When a depreciable fixed asset is transferred between affiliates, a change in

the remaining useful life may be appropriate and should be considered by the
purchasing entity on the acquisition date.

4.10 Intercompany loans represent borrowings between affiliates that are generally initiated
by Corporate Treasury and supported by formal loan agreements. The formal loan
agreements should include the following information at a minimum:

 Legal name of borrower

 Legal name of lender
 Loan inception date
 Loan maturity date
 Loan type (term, revolving line-of-credit)
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Date Issued: August 2014
Author: Matt Murray

 Denomination of loan (currency)

 Interest rate of loan and payment terms
 Withholding taxes, if applicable (specifying net or gross of withholding taxes)

4.10.1 The book of record for all intercompany loans (in the currency of the loan) is
maintained by Corporate Treasury. Corporate Treasury is responsible for the
following:

 Maintaining the book of record for all intercompany loans and distributing the
record to all respective accounting individuals
 Determination of applicable arm’s length interest rates
 Monthly interest accrual calculations and related loan interest schedules
 Initiation of principal and/or interest payments
 Determination of whether or not to hedge intercompany loan

4.10.1.1 All intercompany loan agreements should provide for interest on

overdue interest. Any exceptions to this practice should be limited and should be
clearly documented in the agreement.

4.10.2 Intercompany loans with maturity dates in excess of 12 months from the
balance sheet date should be classified as long term. The loan principal should be
recorded as a long-term asset (lender) or long-term liability (borrower) in the
respective Due to/Due from Hyperion accounts. When the principal becomes due
less than one year from the balance sheet date, the loan principal should be
reclassified to a current asset (lender) or current liability (borrower).

Example: On January 1, 2013, Entity A (USD entity) lends USD 12,000,000 to Entity
B (Euro entity). The principal is due and payable on December 31, 2016 (maturity
date). The following journal entries should be recorded on January 1, 2013:

Entity A:
Dr. Long-Term Intercompany Loan Receivable $12,000,000
Cr. Cash $12,000,000

Entity B:
Dr. Cash $12,000,000
Cr. Long-Term Intercompany Loan Payable $12,000,000

4.10.3 All monthly interest should be recorded on an accrual basis and calculated in
accordance with the terms of the loan, which could be simple or compounded
(interest-on-interest) interest calculations. Monthly interest that is due in less than
one year should be classified as a current asset (for the lender) or a current liability
(for the borrower). Interest payments should be made in accordance with the terms
of the loan agreement.

Example: On January 1, 2013, Entity A (lender) has a USD 1,000,000 loan to Entity
B (borrower) with an annual interest rate of 3% calculated on a 30/360 day basis.
Interest is due quarterly, and no withholding tax is applicable.
Accounting for Intercompany Transactions - Final
Date Issued: August 2014
Author: Matt Murray

Monthly interest calculation:

Loan Principal * Interest Rate * (30/360) = Monthly interest accrual
$1,000,000 * 3% * (30/360) = $2,500

The following journal entries should be recorded by lender and borrower related to
the accrued interest payable/receivable and related interest expense/income:

Entity A:
Dr. Due from Affiliate Short Term $2,500
Cr. Financing Costs - Interco $2,500

Entity B:
Dr. Financing Costs – Interco $2,500
Cr. Due to Affiliate Short Term $2,500

4.10.4 Certain loan agreements specify that overdue interest shall bear interest at
the loan rate. This additional interest, calculated per the terms of the loan
agreement, should also be recorded on an accrual basis until the overdue interest
has been paid in full.

Example: Entity A (borrower) owes Entity B (lender) USD 2,640,000 of interest on

June 30, 2012. The loan agreement specifies that overdue interest bears interest at
the loan rate. The loan rate is 6% per year calculated on a 30/360 day basis. Entity
A pays all interest (including the interest on interest) on August 31, 2012, 60 days
late. The following formula should be used to calculate the additional interest:

Overdue Interest Amount * Loan Rate * (# days late / 360)

$2,640,000 * 6% * (60 / 360) = $26,400

See 7.1 – Illustrative Example – Accounting for Intercompany Loans for additional
detail.

4.10.5 Intercompany loans should be paid off in accordance with the maturity date
specified in the loan agreement. Any decision to permanently forgive or temporarily
delay payment of an intercompany loan should be approved by the Corporate
Treasurer, VP Tax and the Corporate Controller and consulted with Corporate Legal
and should be supported by a loan forgiveness (or similar) agreement.

4.10.6 All intercompany loan balances, both principal and interest, should be
confirmed between the lender and borrower on a monthly basis. All differences must
be researched and corrected within 30 days.

4.10.7 Intercompany loans and related accrued interest should be recorded in the
currency specified in the loan agreement regardless of the currency of the cash paid
or received by an entity. If an entity lends or borrows money in a non-functional
currency, foreign currency gains and losses may result. See Accounting for Foreign
Currency Matters for additional guidance.
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Date Issued: August 2014
Author: Matt Murray

Example: Entity A with a functional currency of USD loans 20,000,000 THB to Entity
B with a Thai Baht functional currency on January 1, 2013 as specified in the loan
agreement. Both Entity A and Entity B should account for this as a THB denominated
loan and Entity A has entered into a foreign currency transaction. Thus, foreign
currency gains and losses should be reflected in Entity A’s income statement.

4.10.8 If an intercompany loan is of a long-term investment nature, foreign currency

transaction gains and losses are reported in other comprehensive income (AOCI) as
a component of Cumulative Translation Adjustment (“CTA”) rather than through
income. Interest receivable and interest payable on intercompany loans determined
to be of a long-term investment nature would not qualify to be considered as such.
Therefore, the effects of foreign currency exchange rate fluctuations on such interest
receivable and payable should be recorded in income. This accounting election is a
special circumstance as Corporate Treasury, Tax, and Accounting should be
responsible for making this judgment. See Accounting for Foreign Currency Matters
for additional guidance including authorization requirements needed for this
accounting conclusion.

4.10.9 Intercompany loans that are denominated in a non-functional currency may

be hedged. See Accounting for Derivatives and Hedging Activities for additional
guidance on the considerations for hedging relationships.

4.10.10 Withholding taxes (WHT) on interest should be accrued monthly in

accordance with the loan agreement and local withholding tax law. WHT are
accruable at the same time the interest is properly accruable. The lender should
record WHT expense on the monthly accrued interest income, and the borrower
should record a liability to the local taxing authorities. This liability is relieved upon
payment made by the borrower to the local taxing authority. See the policy
Accounting for Income Taxes – Appendix C for more information.

4.10.10.1 Under certain loan agreements, interest may be subject to gross up

for WHT. The purpose of this treatment is for the lender to receive a fixed
amount of interest after WHT have been deducted.

Example: Entity A has a USD 20,000,000 loan to Entity B. The terms of this
loan specify an annual interest rate of 5% calculated on a 30/360 day basis.
The withholding tax rate imposed by Entity B’s local taxing authority is 10%.
The loan agreement specifies that interest should be recorded and paid gross
of withholding tax. The following monthly journal entries should be recorded
to accrue interest:

Expected Monthly Interest = $20,000,000 * 5% * (30/360) = $83,333

Gross-up Monthly Interest = $83,333 / (100% - 10%) = $92,593

Entity A:
Dr. Due from affiliate short term $83,333
Dr. WHT Expense $9,260
Cr. Financing Costs - Interco $92,593
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Date Issued: August 2014
Author: Matt Murray

Entity B:
Dr. Intercompany Finance Costs $92,593
Cr. Withholding Tax Liability $9,260
Cr. Due to affiliate short term $83,333

See 7.1 Illustrative Example – Accounting for Intercompany Loans for

additional detail.

4.10.10.2 The loan agreement may also specify that interest should be
recorded and paid net of WHT.

Example: Applying the same facts from the example above, the following
journal entries should be recorded to accrue for interest net of withholding
tax:

Monthly Interest = $20,000,000 * 5% * (30/360) = $83,333

Withholding Tax = $83,333 * .10 = $8,333

Entity A:
Dr. Due from affiliate short term $75,000
Dr. WHT Expense $8,333
Cr. Intercompany Finance Costs $83,333

Entity B:
Dr. Intercompany Finance Costs $83,333
Cr. Withholding Tax Liability $8,333
Cr. Due to affiliate short term $75,000

See 7.1 Illustrative Example – Accounting for Intercompany Loans for

additional detail.

4.10.11 Any change to intercompany loan agreements should be supported by legal

documentation that adequately states the change that was made and the effective
date of the change and is approved by the Corporate Controller, VP Tax, and VP
Treasury. Examples of changes to intercompany loan agreements could be a change
in any of the key terms of the arrangement as noted in section 4.10 above.

5.0: Definitions

Simple interest – interest charge based on the principal of the loan outstanding and
ignores the effect of compounding, so interest on interest is not recorded or due under the
loan

Compounded interest – relates to interest charges based on the principal of the loan
outstanding and the accumulated outstanding interest, so interest on interest is recorded
under this loan characteristic.
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Date Issued: August 2014
Author: Matt Murray

6.0: Responsibilities

N/A

7.0: Related Documents

7.1 – Illustrative Example –Intercompany Loans

7.2 – Corn Products Development (“CPD”) Royalty Process

8.0: Exhibits

SAP Account SAP Hyperion Hyperion Description of

Description Account Description Intended Use of
Account

9.0: Change Matrix

Section Reason for Change Date

All Initial issuance 8/19/14