In intercompany reliance, what may lenders require to address potential risk signals?

• A. May require adjustments, disclosures, and independent verification
• B. Ignore intercompany transactions
• C. Increase loan size without review
• D. Exclude intercompany results from financials

Answer: (B)

Intercompany reliance hinges on preventing distortions from related-party transactions. When lenders use information from affiliated entities, they want to ensure intercompany activities don’t misstate earnings, assets, or liabilities. The best approach is to require adjustments to the financials to reflect arm’s-length treatment and to remove or properly net intercompany profits, require disclosures that clearly explain the nature and terms of these transactions, and obtain independent verification to confirm intercompany balances and terms are accurate. This combination helps ensure the financial picture the lender assesses reflects real economic substance rather than internal transfers between related parties.

Ignoring intercompany transactions would leave risk signals unaddressed. Increasing the loan size without review or excluding intercompany results from financials would misrepresent the borrower’s true financial position and cash flows, undermining risk assessment.