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1. https://www.sdmayer.com/insights/blogs/audit-assurance/classify-shareholder-advances/
The link (GAAP) indicates that depending on the terms of shareholder loan, it can be classified as either debt or equity. Can you please explain what to look out for in the financial disclosure of publicly listed companies to discern whether it's classified as debt or equity?
2. I was reading this case on Enron (out of curiosity), https://www.econcrises.org/2016/12/07/enron-corporation-2001/ and it seems that depending on the terms of the shareholder loan, it may be seen as a debt from bank's perspective but seen as equity by the company, meaning companies can abuse the terms to manipulate the capital structure.
Excerpt:
The General Partner and Limited Partner in Chewco were SPE’s also created by Enron called Big River and Little River, respectively. So, Big River and Little River each borrowed $11.5 million from Barclays (for a combined $23 million). The documents governing these loans to Big River and Little River closely resemble promissory notes and loan agreements. Nevertheless, they were labeled “certificates” and “funding agreements” rather than simply being called “loans.” In fact, instead of requiring Big River and Little River to pay interest to Barclays, the Big River and Little River SPE’s were required to pay “yield” at a specified percentage rate (Powers Report, 2002). If you think that sounds an awful lot like an interest rate, that’s because, for all intents and purposes, it was. In other words, the money capitalizing the general and limited partners of Chewco only met the 3% requirement for equity contribution by deceptive paperwork regarding the debt Read More