CFM92430 - Debt cap: the available amount: ancillary and financing expenses

This guidance applies to worldwide group periods of account ending before or straddling 1 April 2017.

The meaning of ancillary expenses related to borrowing and financing expenses for finance leases and debt factoring

Amortisation of ancillary expenses relating to amounts borrowed

Where a company borrows funds it is likely to incur expenses in relation to securing those funds, such as borrowing fees. It is common for such expenses to be recognised as through the profit and loss account over the period of the borrowing. These expenses will form part of the available amount for the worldwide group.

An ancillary expense relates to amounts borrowed if it is incurred directly in bringing the borrowing into existence (or altering its terms) or in making payments in respect to the borrowing. Thus arrangement fees, or legal expenses incurred in connection with an issue of securities, will fall into this category. Sometimes expenses ancillary to borrowing are incurred but the borrowing is not brought into existence. If this happens then the expenses can still be included in the available amount as long as they would have qualified as ancillary expenses if the borrowing had been brought into existence or the terms had been altered.

The financing cost implicit in payments made under finance leases

Where a person acquires an asset under a finance lease they will pay periodic rental amounts to the lessor for the use of the asset.

The accounting treatment of such payments is to compare the sum of all the rental payments with what would be the acquisition cost of the asset. The amount by which the sum of the rentals exceeds the acquisition costs is the financing expense amount. This will then be spread over the term of the lease.

The amounts that are brought into account as financing costs are included within the available amount.

The financing costs relating to debt factoring

Debt factoring is an arrangement where a business uses an agent to collect debts on its behalf. The factoring agent advances funds to the business in the amount of the debts that are due to the business, and the agent then receives the debts as and when they fall due. The fee payable by the business for this service includes an element of financing income to represent the advance of funds.

This element will be a financing cost to be taken into account for the purposes of calculating the available amount.