Recording long-term credit transactions sounds simple enough- record the debt, and expense the interest. Yet this is not always the case. Consider the Institute of Chartered Accountants of Ontario (ICAO). In July 2008, the ICAO announced that it was restating its financial statements due to an error of close to $1 million, which reduced members' equity. Costs associated with debt had been capitalized rather than expensed when a complex swap took place with two different lenders.
The good thing is that the ICAO can readily obtain the credit that it needs. Consider another organization, such as Air Canada. The airline has been in and out of the news for many years, and seems always close to financial ruin. Air Canada's share price increased when it announced that it had signed a deal with the Canadian Imperial Bank of Commerce (CIBC) for a loan of $100 million. Other loans listed for Air Canada were with foreign organizations, such as one loan of US$195 million from General Electric Capital Corp. This might be a problem-with a changing US dollar, the actual loan repayment and interest amounts will vary in terms of Canadian dollars unless the loan was hedged.
APPLYING YOUR PROFESSIONAL JUDGMENT
1. What are the risks associated with foreign currency loans? How would these risks be disclosed in the financial statements?
2. How does the financial stability of an organization affect its interest rates? How can the auditor use loan interest rate information during the conduct of the audit?