I'm of the awkward generation who studied under IFRS but trades within the UK GAAP regime and I am unsure if I may be confusing the two here. I have checked the FRSSE (briefly) re the below scenario to no avail.
I have a client purchased a building with some rather nice credit terms; £250k in £500/wk instalments with only £35k down. Repayment is 8.26923077 years.
Of course, to recognise the building and corresponding loan amount and subsequent payments would be straightforward enough. But we're accountants; that's not good enough!
My plan/ploy is the time value of money over that 8 year period.
My question is:
If I effectively "Fair Value" that liability, assuming 3.5% inflation pa for example (which I calculate as £161,768.24 starting point) and subsequently recognise the unwinding of the liability as interest income... Is this then a legitimate deductible finance expense under any head of tax?
If you need reference material see p. 161 Appendix 3 of the FRSSE which details the above scenario as applied to a provision.
Any input whatsoever would be gratefully received.
Chris
Replies (4)
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I take it you've heard of...
... double-entry?
Let's assume that the building's got a life of 100 years... that makes it's current fair value under the same assumptions about £7,090? Where should we post the other £154,768?
It is a loan relationship...
... so with unconnected parties, any valid GAAP debit would seem to be deductible.
My discounting the building was facetious humour. There's merit in your suggestion, but at the same time it makes no sense to me.
Whilst I agree that £215K tomorrow is more of a debt than £215K in (an average) 4 years time, it just doesn't sit well with me that the property doesn't come in at its fair value.
Either:
the building's only worth £197K, as a matter of fact.or there's some other consideration (is the property leasehold with perhaps some onerous conditions or covenants?).or your discount rate's too high.
Certainly by my reading, FRS15 is consistent with IAS16, that you bring the fixed asset in at cost (which means the fair value of the consideration per IAS16 and not defined in FRS15, so borrow from FRS7). The fact that you're using the FRSSE doesn't stop the other standards applying (paragraph 5 of the FRSSE) with respect to treatment (it's mainly there to reduce disclosure), unless the FRSSE explicitly states a different treatment (which I'm not aware of).
Whether any of that's right and whether you're right sounds like one for Steve Collins!