This has to be complete madness! but its absolutely correct under new accounting rules – FRS102.
Take a simple example of a £5,000 interest-free loan repayable in three years’ time:
if the market rate for such a loan was, say, 7% then the present value of the loan would be £4,081 (£5,000 x 1/(1.07)3).
Unfortunately, FRS 102 does not contain any requirements about how the above financing shortfall of £919 should be accounted for on initial recognition. It is therefore necessary to consider the particular facts in order to determine the accounting treatment.In simple terms, the financing shortfall of £919 is either interest income or an interest expense when the loan is made. That then reverses as interest receivable or payable as the discounting unwinds.
- Parent – Subsidiary Loans
- Subsidiary to Subsidiary Loans
- Loans with Directors and Shareholders