John Selwoods Q and As
John turns his attention to some topical questions on auditor resignations and on auditing FRS 102
Question: One of my audit clients is a group with significant amounts of long-term inter-group borrowing. When it conducted its FRS 102 planning it put in place market rates of interest on the loans so as to avoid re-measurement issues relating to financing transactions. I am satisfied that the rates of interest applied are market rates because my corporate finance partner assisted in the process of setting the rates and I know he did it properly. Is this the right approach?
Answer: This is an issue that comes up over and over again. It is no secret that very few people are keen on the accounting for the re-measurement differences on financing transactions, especially the dreaded dangling debits and credits. Therefore, it is not uncommon for larger groups to put in place arrangements to charge market rates of interest on inter company debt.
This is difficult, because establishing the appropriate market rate is not straightforward and neither is auditing it – and this is especially difficult in an environment where some group companies may not be very attractive lending propositions. In the scenario you describe, a corporate finance specialist has established the rate – which seems appropriate – and I would have thought they would have the ideal experience and skills in this area. Nonetheless, there are some things that you will need to be careful about: addressing the independence issues and obtaining the right amount of audit evidence.
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