more-arw search

Q&A Forum

Intercompany Interest

Does anyone know where in the guidance I can find information about inter-company debt (the interest portion) that exceeds a threshhold in the terms of the loan? What I mean is.. say the loan has an annual interest maximum of $12M to be paid/ received in interest, but the actual interest is higher than that. Would the additional amount be relieved against equity? Added to the gross amount of the loan? Thanks!

Answers

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

Here is a different viewpoint (from how you are approaching the issue)....

If there is a maximum, should there be an excess? Should you have stopped computing/accruing interest when you reached $12M ? Should you just adjust down the accrued interest to equal the maximum?

Of course the loan documentation/provisions should prevail but.... from the limited info, that is how I would interpret it.

There is a danger that we get too caught up with "guidance" that it gets in the way of the intent of the agreement.

Anonymous
(Manager of Consolidation and Reporting ) |

Thanks! It shouldn't be accrued as interest (but that is where it is now). I just need to know what the guidance says about how/ when this would be converted to equity (as there is no intent to pay it as it is above the cap). Does my question make sense?

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

Anon,

This is my take on it...

I am NOT sure why you are concerning yourself with the excess when there should not be any excess because of the cap. You should have stopped accruing when you hit the cap. Any interest above the cap should be reversed.

The matter about interest free money/period AFTER the cap is a SEPARATE issue that your auditors can address depending on the purpose, company relationship and documentation of the intercompany loan. You work with the covenants and the intent of the parties....NOT the guidance. You should ask for clarification/confirmation from the PARTIES (especially if the documentation is silent about the issue) not the "guidance". Don't get ahead of what you are working with....which is the covenants/documentation.

Again, there should NOT be any interest to roll over. There is an interest free period after the cap was hit.....but no interest to roll over.

Let's look at it from the other side. You computed interest above the cap (and intend to roll it over to whatever portion), are you NOT in contravention of the agreement? Whether you roll it to equity (or whatever you want to do with it), the nature/basis of the amount is still interest.

If the post was Intercompany loan interest free money after a cap, it would be a whole different discussion. However, the framing and subject of the post is what to do with interest computed over the cap....which in my opinion is overplaying it.

Edward Thill
Title: VP - Finance & Operations
Company: Performance Trust
(VP - Finance & Operations, Performance Trust) |

Typically covenants are a function of loan size and/or ability to service debt in an effort to limit credit risk. If there is a dollar cap on the interest, can we assume that it is for the purpose of preserving cash? Not sure what other purpose there would be but assuming so, I would roll the interest into the loan balance. Otherwise, the borrowing party receives interest free money after your $12M threshold (or viewed differently, receives the loan balance at a less-than-intended rate).

Anonymous
(Manager of Consolidation and Reporting ) |

There is a dollar cap on the interest and then an additional revenue "royalty" that adds to the cap (but separate from interest). If we roll the interest into the balance, then the loan balance increases and interest is then calculated on a higher loan balance (so, higher interest and meeting the cap even earlier in the following years). It just seems counter-intuitive to me to record it that way!!

1415 views
Topics

Get Free Membership

By signing up, you will receive emails from Proformative regarding Proformative programs, events, community news and activity. You can withdraw your consent at any time. Contact Us.

Business Exchange

Browse the Business Exchange to find information, resources and peer reviews to help you select the right solution for your business.

Learn more

Contribute to Community

If you’re interested in learning more about contributing to your Proformative community, we have many ways for you to get involved. Please email content@proformative.com to learn more about becoming a speaker or contributing to the blogs/Q&A Forum.