Thursday, September 6, 2012

Guarantee of inter-company's loans

It is common for our audit client to provide corporate guarantee to a bank in favour of related companies for the loan drawn down by the related companies. Generally, your audit client may guarantee timely repayment of interest and guarantee to repay amount due should the related company default in repaying.

A bank may ask for guarantee, if:
- the borrower is not in financially sound position; or
- the loan amount is substantial to the borrower perspective; or
- the borrower is trying to ask for a discount on its interest rate

This guarantee represents a potential / contingent exposure to our audit client. This has to be disclosed in the financial statement of our audit client. The disclosure should, at a minimal, include:
- the nature of the guarantee;
- the amount guaranteed; and
- contingent exposure as of balance sheet date (i.e. the amount guaranteed maybe US$100mil on a facility, while the outstanding loan amount drawn down by related company is US$80mil as of balance sheet date).

This disclosure helps to inform the financial statement user on the contingent libility the Company has, and this could be a key concern for some of the financial statement users.

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