DEBT

MANAGEMENT
PART 3
ENTER
 CONTENTS
 Debt - Related Controls
01
 Debt - Related Policies
02
 Debt - Related Procedures
03

04
01
01.
02
DEBT - RELATED
03

04
CONTROLS
 DEBT - RELATED CONTROLS

01
 Technical, and therefore subject to
02 some degree of calculation error.
 Verify that the correct interest rates
03 and calculation dates are used.
 Can be used to manipulate reported
04 earnings and used to detect such
issues.
 Controls over the approval of debt
terms, borrowings, and repayments.
 DEBT - RELATED CONTROLS

General Debt
01 Extinguishment
Transaction
of Debt
02 Control
03

04
Interest Rate Convertible Debt
Calculations
 General Debt Transaction Control

 Require approval of the terms of all new borrowing

01
agreements
02  Require supervisory approval of all borrowings and
03
repayments
 Investigate the reasoning for revenue recognition
04 related to attached rights that is not recognized
ratably.
 Interest Rate Calculations

01
 Require written and approved justification for the interest
02
rate used to value debt.
03  Include in the month - end closing procedure a task to
record interest expense on any bonds for which interest
04
payments do not correspond to the closing date.
 Extinguishment of Debt

01  Include in the debt procedure a line item to

02
charge unamortized discounts or premiums to
expense proportionate to the amount of any
03
extinguished debt.
04  Report to the board of directors the repayment
status of all debt.
 Convertible Debt
 Verify the market value of equity on conversion dates
01 when the market value method is used.
 Verify the market value of equity on debt retirement
02
dates when offsetting equity entries are being
03 reversed.
 Include a review of accrued interest expense on all
04
recently converted debt.
 Verify expense calculations associated with any
sweetened conversion offers.
01
02.
02
DEBT - RELATED
03

04
POLICIES
 DEBT - RELATED POLICIES

01

02

03
General Debt
04 Extinguishment Convertible
Transaction
of Debt Debt
Policies
 General Debt Transaction Policies

01  All notes and bonds shall only be issued

subsequent to approval by the board of directors.
02
 Debt sinking funds shall be fully funded on
03 scheduled dates.
04
 Recognition of unearned revenue for attached
rights shall match offsetting discount
amortization as closely as possible.
 Extinguishment of Debt

01  Debt shall not be extinguished early if the

02 primary aim is to report a gain or loss on the
03 extinguishment.
 When interest rates allow, the company shall
04
repurchase its debt with less expensive debt.
 Convertible Debt

01

02
 Debt conversions to equity shall always be
03
recorded using the book value method.
04
01
03.
02
DEBT - RELATED
03
PROCEDURES
04
 SUMMARY
 Of these types of debt, bond offerings in particular
01 present a number of challenges from the perspective of
accounting and control systems because there are ways
02 to manipulate expense recognition in a company ’ s favor.
 However, for the majority of companies that are restricted
03 to basic lines of credit and loans, the accounting and
04 control systems are relatively straight-forward, primarily
involving the approval of new debt and the proper
recognition of interest expense in the correct reporting
periods.
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02

03

04
A PICTURE IS WORTH A
THOUSAND WORDS
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02

03

04