CFM22090 - Accounting for corporate finance: Old UK GAAP excluding FRS 26: lenders: accrual accounting: fixed rate loans
The following guidance covers Old UK GAAP (applied before 2015) where FRS 26 was not applied.
Accounting for fixed rate loans
A fixed rate loan pays interest at an amount that is fixed for the duration of the loan or is fixed for a period of the loan.
Under the accruals basis of accounting, interest income for a fixed rate loan will be recognised in the profit and loss account based on the rate of the loan. Therefore, for example, where a company lends 拢100m at 8% for five years (and the loan is provided at face value) interest income will amount to 拢8M for each year.
Where loans are made part way through an accounting period, finance income will reflect this. Thus if the above loan was advanced on, say, 30 June and the company had a 31 December accounting date, finance income recognised in the first accounting period would be 6 months worth, i.e. 拢4M.
Under the accruals basis, finance income is recognised in the profit and loss account irrespective of when the interest is actually received.
Example
On 31 March 2008, Company A lends 拢500,000 to Company H. The loan is a five year fixed rate loan at an interest rate of 6%. Interest is payable by Company H annually on 31 March each year. Company A has a 31 December year-end.
The bookkeeping would be:
| - | Debit | Credit |
|---|---|---|
| On 31 March 2008 | - | - |
| Loan to Company H | 拢500,000 | - |
| Cash at Bank | - | 拢500,000 |
| On 31 December 2008 | - | - |
| Prepayments - finance income receivable | 拢22,500 | - |
| Finance Income (in P&L) | - | 拢22,500 |
| On 31 March 2009 | - | - |
| Prepayments - finance income receivable | 拢7,500 | - |
| Finance Income (in P&L) | - | 拢7,500 |
| Cash at Bank | 拢30,000 | - |
| Prepayments | - | 30,000 |
The finance income recognised as at 31 December 2008 of 拢22,500 amounts to 9 months interest on 拢500,000 at 6%.