CFM22080 - Accounting for corporate finance: Old UK GAAP excluding FRS 26: lenders: accrual accounting: expenses
The following guidance covers Old UK GAAP (applied before 2015) where FRS 26 was not applied.
Accounting for expenses
A lender will not usually directly incur expenses when making a loan:- any costs are likely to be covered by a fee charged to a borrower. However, where the lender does incur such expenses and these are not recharged to the borrower, they may be accounted for on a straight line basis, on the basis that this represents a reasonable approximation to calculating a constant rate of return on the outstanding balance.
Example
KL Ltd purchases £200,000 loan notes in AG Ltd, to be repaid in 5 years, incurring costs of £2,500 in arrangement and broker’s fees. The transactions will be accounted for as follows.
On lending finance
- Debit - Loans (Debtors, split between due in 1 year and over 1 year) - £200,000
- Credit - Cash - £200,000
And at the same time
- Debit - Prepayments: initial direct costs of loans (or it may be be netted off loans, but this is not best practice) - £2,500
- Credit - Cash - £2,500
Each of years 1 - 5 to spread the initial direct costs
- Credit - Prepayment - £500
However, if the initial costs are not directly related to the loan in question, they cannot be carried forward and must be expensed. For example, if the lender has used its own in-house solicitor to draw up the documents, or has an in-house surveyor who has performed a valuation, a portion of those salary costs should not be deferred.