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.

Budgeting Blues

The Division Manager looked at me.  “Don’t ask me why we didn’t meet budget.  Those budget numbers aren’t mine.  They’re way too high.  I never agreed to that.”  If you are a financial analyst, that quote might be very familiar to you.  It should be so simple, right?  The division budgeted $X million in sales.  The year is half over, so they should have reached 50% of $X million, but they’re actually less than that.  All you want is a reasonable explanation.  Instead, you get an argument about the budget.

Sometimes, it’s a stalling tactic, but sometimes the person really doesn’t remember or doesn’t know where the budget numbers came from.  Budgeting is more of an art than a science.  In theory it’s easy.  Every division does some crystal ball gazing and submits their best forecast for the coming year.  The numbers are assembled for the whole company and after a negotiation about who gets what share of the available resources, the budget is set.

In reality, it can get a lot more complicated.  The negotiations can go back and forth.  Numbers get adjusted.  To understand the final number, you have to understand the history.  The problem with spreadsheets is that when you change a cell, whatever was there before is lost.  So there may be nothing to tell you that the final sales number was increased due to a sales promotion that actually never happened.

Some budgeting systems solve this by allowing you to enter a series of budget adjustments instead of changing the cells directly, but if you’re like most of us, still using spreadsheets, having a system that locks in previous versions of a spreadsheet can save you a lot of hassle later on.  If you have locked in versions of the budget, not only will you understand what’s in the numbers, you’ll be able to prove it.