Note 8: Loans to (from) group companies
This note deals with the borrowing of money to be repaid with or without interest by companies within a group. A group is a collection of parent and subsidiary companies that function as a single economic unit via a common source of control. A parent company is the legal entity that has an acquired shares in the underlying company known as a subsidiary. The key in this relationship is control which can be established as follows: a. The holding of the majority of the shares i.e. 50% or more; b. Having a number of directors on the board to influence decision making; and c. Control established by way of agreement where there is power to cast majority of the votes at meetings
In terms of consolidated accounting (accounting for groups) – group related transactions are eliminated as they are unrealised and would cancel each other out by being a loan to and a loan from for another entity, hence the loans to and from group companies are shown only in the company column and not the group column also.
During the 2012 financial year, South Ocean Holdings (“SOH”) lent R 387,000 to its subsidiary Anchor Park Investments 48 (Pty) Ltd (“API”) which increased to R 6,121,000 during the 2013 year – meaning that a further R 5,734,000 was lent to them. SOH borrowed R 3,545,000 from South Ocean Electric Wire Company (Pty) Ltd (“SOEW”) during 2013. Both these loans are unsecured and bear interest at 7% p.a. Unsecured means that no security has been taken over the loan. Security includes debtors’ books, cash, cash accounts, guarantees, bonds (mortgage and special notarial). Security is often taken to lessen the risk on a loan if the borrower defaults, the lender who has rights to the security can then liquidate it in lieu of payment of the loan. On demand means that the loan has no tenor i.e. it’s not payable over a time