My view

The key wording in such a context is as follows: Any amounts outstanding in terms of this loan shall be payable by the Borrower as mutually agreed by the Board of Directors of the Shareholder and Borrower. In my opinion the meaning of the words indicate that it’s a matter of the parties agreeing how much must be repaid and when should that amount be paid. There is no doubt that the parties agree that the loan has to be paid back. To support such a view the parties also indicate that the loan will be repaid subject to liquidity and solvency of the company and prior to dividends. These words suggest that the parties have every intention that the loan be repaid, it just a matter of how much and when. This loan is a financial liability and not equity as IAS 32 states that a “Financial Liability” is a contractual obligation to: deliver cash. The entity has an obligation to deliver cash, as stated previously it’s just a matter of how much and when. IAS 32.13 explains that: a contract and contractual refer to an agreement between two or more parties that has clear economic consequences that the parties have little, if any, discretion to avoid, usually because the agreement is enforceable by law. The wording suggests that there is a contract albeit there does not appear to be one officially in writing. Until those words are placed in a representation letter of some other form that clearly obligates the entity to repay the loan, it must be deemed to be equity. The crucial words are: agreement is enforceable by law. As it stands there does not appear to be document that can be enforced in terms of contract law. It is not sufficient for the auditor to document the entities point of view as both parties must agree to such terms. Both parties must be communicated with to establish whether there is an agreement be it oral or written. If its oral the auditor must document date of discussions with whom and what was discussed and then get both parties to sign the working paper.