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John Selwood's Q&As

Some questions crop up more than others, so here are a few of John Selwood's recent FAQs

Q: In the real world, groups often make intercompany loans with little accompanying formality. The loans are usually interest free and there is no repayment schedule, so when applying FRS 102 what repayment period should be assumed and what interest rate should be used when discounting them? I know that this is an accounting question but as an auditor I need to know the right treatment.

A: I agree that this is just as much an issue for the Financial Reporting Faculty, but there are some interesting audit implications. This is a hot topic, because FRS 102 Section 11 changes the recognition and measurement requirements for long term debtors and creditors. On initial recognition,long-term debtors and creditors are to be measured at the net present value of the discounted cashflows resulting and thereafter remeasured at amortised cost using the effective interest method. Where market rates of interest are paid on the debt there are few issues. However, in a group setting, the loans are often interest free, so the cashflows need discounting; but in most group settings there are no formal loan agreements in place and it is generally accepted that this results in the loans being repayable on demand. Therefore, most of the time intercompany balances are not long-term debt and do not need to be discounted...

This is an extract from an article in the February 2015 edition of Audit & Beyond, the magazine of the Audit and Assurance Faculty.

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