Question：Farnham, a limited liability company, has a bank overdraft of $450,000, secured by a floating charge over its inventory. It also has a deposit with the same bank of $200,000. The bank confirmation letter states that the bank has the right to offset these balances, and has set an overall net borrowing limit on the company of $300,000. The finance director has disclosed these amounts as "Secured overdraft $250,000" under "Current liabilities", with no further description in the notes other than the nature of the security.
A. Insist that the company discloses in the notes the full amount of the overdraft and that it is in breach of its borrowing limit.
B. Insist upon classification of $200,000 under current assets and $450,000 under current liabilities.
C. None, as the treatment is correct.
D. Accept the treatment but include an emphasis of matter paragraph in the audit report explaining that these amounts have been offset, and disclosing the overdraft limit.
The correct answer is: None, as the treatment is correct.
The treatment adopted by the directors is correct as there is a legal right of set off as stated in the bank confirmation letter.
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