News

Farm Loan? Watch out for unforseen costs

Boosting asset values to secure a bank loan could attract considerable expense beyond interest payments.

Farmers seem to be at particular risk as capital outlay with rising land prices and new machinery can be high. In an effort to attract banks to help fund these purchases, many are revaluing their existing land and buildings and recording this entry on their company’s balance sheet.   The pitfall to this is producing an asset value that exceeds the Companies Act audit limits.

“The asset limit is currently £3.26 million,” said Sharon Edwards. “This includes fixed assets and current assets such as stock, bank balances and debtors and could be surpassed by many farm businesses.”

The requirement to have an audit performed on accounts can be costly. A minimum rise of at least £2,000 per year can be expected. Depending on the size of the business, this could be as much as £5,000 in the first year.

The auditor would need to attend the client’s year end stock take, visit their premises to make detailed notes of the systems in place and perform audit tests on their books and records. They may also need to write to the client’s customers and suppliers to confirm balances. A lot more time is taken up dealing with the company year-end than if the company is audit exempt.

“Another thing to consider is that when revaluing assets on the balance sheet, you have to revalue all assets of the same class – you cannot just pick and choose”. “The valuation must then be kept up to date year on year.  However, the company is not required to revalue the assets on its balance sheet just because a formal valuation has been undertaken.  You should therefore consider whether an adjustment to the balance sheet is necessary. If not, you could overcome the audit requirement.”

We recommend anyone arranging large amounts of finance should talk to their accountant. Particularly if assets need to be re-valued to give the level of security required by the bank. They will be able to prepare some calculations to advise you on the likely effect of increasing the asset values and give you plenty of warning if your company is likely to change from being audit exempt to requiring an audit.

---
« Back to main news page