Accounting for Loans to Other Entities: Valuation & Recording
The information presented pertains to accounting purposes and will be reflected in the accounts designated for subgroups 53 and 54. When a company receives a loan and pays interest, it is required to withhold taxes from the lending company, which are then payable by the latter.
Investments in Financial Assets
Loans to Other Companies
When a company has excess liquidity, it can, as discussed previously, acquire shares in other companies as an investment, or it may choose to purchase debt securities or make loans to businesses that need funds.
Valuation Rules for Loans
The General Accounting Plan (PGC) standard for recording and valuing loans is Rule 9, “Financial Instruments.” This rule indicates that these loans should initially be recorded in the accounts at their fair value, which is the amount tendered plus any associated expenses. Subsequently, they are recorded at amortized cost. Accrued interest is credited to the profit and loss account using the effective interest rate method. At least at year-end, the company must make value adjustments to credits granted if there is reason to believe there is any possibility of delays in payment or non-payment of the agreed amount.
Accounting Treatment of Loans
We will analyze the accounting for a short-term loan granted to an unrelated company, where it has been agreed that upon maturity, the principal plus accrued interest will be returned. In this situation, we can distinguish two cases:
- Case 1: No Initial Costs. When the lender does not incur any expense for granting the loan, the interest rate agreed upon in the operation coincides with the effective interest rate.
- Case 2: With Initial Costs. Where the lender incurs expenses for the grant, initially, account 542 (Short-term credits) shall be recorded for the amount of the loan plus incurred costs. The subsequent measurement will be made by the amortized cost, and the effective interest rate of the operation will need to be calculated. At the end of the fiscal year, the calculated effective interest rate will be compared with the agreed interest on the loan, applying the effective interest rate to the latter and making appropriate adjustments.
Understanding Short-Term Loans to Other Companies
As mentioned above, a company can make an investment by granting a loan to another. A company with a cash surplus lends a sum of money to another, expecting to receive the borrowed amount plus agreed interest after a period, as stipulated in the loan agreement. These loans may be granted long-term or short-term. They can also be granted to companies with which there is a relationship of domination or influence, or to completely unrelated businesses.
Identification of Relevant Accounts
- To record the loan: Since loans can be long or short-term and can be granted to group companies, partners, jointly controlled entities, or companies with no connection, the relevant accounts are collected in several subgroups: 24, 25, 53, and 54.
- To register interest: Interest income from these loans is recorded in subgroup 76, as it is a financial income. It is possible for interest to accrue throughout the year but be charged in the following year.