1.26 Query
Presentation in Accounts of Cooley Loan taken from United States Agency for International Development (USAID).
Facts:
(1) The Company had borrowed a sum of Rs. 80 lacs from the United States of America, Agency for International Development (AID) as Cooley Loan for establishing a factory at Thana, as per the loan agreement dated 24th April, 1969. This loan is covered under the Guarantee of XYZ & Co., who holds 45% Equity Shares of the Company. As will be noticed from the Loan Agreement, the Company has not furnished any security to AID by way of mortgage or hypothecation of its assets nor has created any charge in favour of the lender. The outstanding balance of the loan is shown in the Company’s Balance Sheet as unsecured loan. The Company sends regularly its Annual Published Accounts to the lender.
(2) AID while scrutinising our 1972 Annual Accounts have raised the following query: “The subject Cooley Loan is fully guaranteed by XYZ & Co., but has been erroneously shown under the heading ‘Unsecured Loans’ in the Balance Sheet. This error should be corrected.”
(3) The company maintains that the manner of presentation of the Cooley Loan as unsecured loan in the Balance Sheet is correct. This view has been corroborated by our auditors. The lender – AID, however, do not agree with this view and have insisted on the opinion of the Institute of Chartered Accountants of India on this matter based on the generally accepted accounting practice in India.
(4) Question: We shall be grateful if you will please provide us with your considered opinion as to now the said loan should be shown in the Balance Sheet according to the Indian Companies Act, and the generally accepted accounting practice in India.
Opinion April 14, 1974
Schedule VI to the Companies Act, 1956, requires inter alia, the disclosure of the following matters about the loans payable by a Company –
(a) Amount of secured loans
(b) Amount of unsecured loans
(c) Nature of the security in respect of the secured loans
(d) Where loans have been guaranteed by Managers and/or Directors—a mention of the fact.
According to accounting conventions commonly followed in India, the security in respect of secured loans is construed to mean any security given in respect of the assets of the Company only and does not include a guarantee given by any third party. In India, a loan guaranteed by a third party without a charge on the assets of the company concerned is treated as unsecured in the annual accounts. The Act also requires that any guarantee given by Directors etc. on behalf of the Company should be indicated and therefore by implication, the disclosure of any other guarantee is not mandatory.
In the opinion of the Expert Advisory Committee the treatment of the Cooley Loan mentioned in your letter under reply as unsecured is in order. It may be desirable to indicate in the annual accounts of the company that the loan is being guaranteed by XYZ & Co. ______________________________ |