Loan repayments made by other entity

[keret]

Entity A has access to a loan facility and borrows money under this facility.

Entity A enters into a loan agreement with Entity B and lends the money borrowed under the loan facility to Entity B with the same terms as the loan facility, essentially passing through to Entity B the terms of the facility available to Entity A.

Entity B makes repayments directly to the provider of the loan to Entity A, meeting all of Entity A's obligations under the loan facility.

How would this series of transactions best be recorded? The origination of the loans is easy enough, but how to best record the repayments made by Entity B?

 

[kirby]

Hopefully, B is a subsidiary of A and the bank is OK with this. Most loan agreements restrict the usage of funds to operating expense or investment but typically not to a loan to someone else. Reason is that makes A a "straw borrower" because the real borrower is B. If B is not as creditworthy as A then there is a REALLY BIG problem and that is the USUAL reason these goofy arrangements are performed. So please check that bank is OK with all this else there can be a legal problem.

 

[keret]

Hopefully, B is a subsidiary of A and the bank is OK with this.

Entity B is an associated/related party of Entity A. Entity A continues to carry all obligations under the original loan facility.

Most loan agreements restrict the usage of funds to operating expense or investment but typically not to a loan to someone else.

Funds under the loan facility were advanced for investment purposes from Entity A to Entity B, with Entity B to make all repayments under the loan facility. There are no restrictions under the loan facility on the use of the funds advanced under the loan facility.

Reason is that makes A a "straw borrower" because the real borrower is B. If B is not as creditworthy as A then there is a REALLY BIG problem ...

The creditworthiness of Entity A or Entity B is not in question.

and that is the USUAL reason these goofy arrangements are performed.

This "goofy arrangement" was performed simply because Entity A already had access to a loan facility and Entity B could make use of that facility if such a pass-through arrangement was set up.

So there is no need to check with the lender in relation to this arrangement and there is no foreseeable legal problem.

The question posed simply relates to how best for Entity A to account for this arrangement in its accounts given that repayments are being made by Entity B with no cash passing through Entity A.

 

[kirby]

What exactly is the relationship of Entity B to Entity A. As a "related" party there could be from1% to 100% ownership of one to the other or they could be sister companies. Makes a difference so please tell us.
Also, if these are banking entities and one is an FDIC insured bank and the other a bank holding company then that is important to know too.

 

[keret]

What exactly is the relationship of Entity B to Entity A.

In this case, for the time being, Entity A is an individual and Entity B is a private trust whose sole purpose is that of trading and investment in securities. So to put it in context of what was mentioned previously, Entity A (the individual) had access to a loan facility and decided to on lend the funds to Entity B (the private trust). The arrangement was documented and intended to provide Entity B (the trust) with the use of these funds for trading/investment purposes, with Entity B agreeing to make all payments under the facility and intending to treat this as an arms-length financing arrangement like any other (ie as though it had been conducted with an unrelated third party).

As a "related" party there could be from1% to 100% ownership of one to the other or they could be sister companies.

What impact does ownership (ie the 1-100% referred to) generally have on the accounting of the transaction, given the nature of the transaction remains the same? Can this transaction be treated as though it is between unrelated parties?

Would the accounting for this change if Entity A is a company or individual and Entity B is a company or trust? If so, other than a situation where there are industry-specific requirements (eg the banking example referred to above), why would the type of entity involved (ie individual, company, trust) change the accounting for a transaction given the nature or substance of the transaction is the same?

Does it matter that kind of trust it is (fixed vs discretionary)? If so, how?

Thanks for your interest and help with these queries.