At Risk Investments

At Risk Investments

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Hi

Can anyone advise in relation to 'at risk' loans.

I have a client who has loans in the company of £270,000 which has been spent on pre-development funding for a community development.  The loans are only repayable on the acceptance of the planning for the development and if the development does not go ahead then the loans are not payable.

At present I have shown the loans in the creditors and based on the way the accounts were prepared last year the expenses that the loans have covered are in the P&L - meaning the company is showing a large deficit on the balance sheet.

I have considered the option of removing the expenses of £270,000 and putting as prepaid expenses on the balance sheet - but this is a change of accounting policy from last year.  The directors want me to include the loan money as income on the P&L - but then when it is repaid it will need to be shown as an expense on the P&L.

Can anyone help or point me in the right direction ?

Thanks

 

Replies (10)

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paddle steamer
By DJKL
24th May 2016 10:30

If the development does go ahead what will be its accounting treatment within the accounts?

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Replying to DJKL:
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By mjea
24th May 2016 10:34

If the development goes ahead then the loans will be repaid from further funding received - through grants etc.

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Hitch photo
By Kevin Kavanagh
24th May 2016 10:32

Loans are loans; they're not income when paid in, and not expenses when repaid. As for the development costs - to the extent that there is a realistic expectation of income being generated as a result of the expenditure it should be carried forward. Otherwise it should be written off.

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Replying to Kevkava:
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By mjea
24th May 2016 10:36

Thanks - I agree - as it is a community development it is not for profit so there will never be the 'income' to cover these expenses - more than likley it will come from investment from individuals, with some grant funding that will cover some of the costs.

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By johngroganjga
24th May 2016 10:37

Just tell them that they can't include the loan as income because it is a loan - the clue is in the name.

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Replying to johngroganjga:
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By mjea
24th May 2016 10:38

Thanks - it's just an unusual situation so thought it was worth checking to see if anyone had any bright ideas !

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By cheekychappy
24th May 2016 10:43

We don't know what the terms of the grants and loans are.

We don't know what costs have been incurred.

The accounting treatment depends on a number of factors.

The only thing that is certain is that you won't include the loans as income and the loan repayments as expenses.

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paddle steamer
By DJKL
24th May 2016 10:48

My initial post was more concerned with the asset/expenses rather than the loans, the costs currently being incurred may be re the creation of an asset (planning costs etc?) if that is the case then if the planning does succeed these costs would likely (in part) be a part of the asset cost in the balance sheet, accordingly is writing them off to the profit and loss account appropriate treatment?

I appreciate this is a community project not business but I would certainly carry within trading stock planning etc costs re a development and only expense the costs as and when the planning did not succeed.

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Replying to DJKL:
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By mjea
24th May 2016 10:51

I agree with you - but I didn't prepare the accounts last year and the expenses were put through the P&L so rather than change the accounting treatment I prepared on the same basis. I think it may be an idea to now capitalise the costs as they will form part of an asset if the development goes ahead - and if it does not go ahead then the loans and expenses will be written off.

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Replying to mjea:
paddle steamer
By DJKL
24th May 2016 11:03

I think as a matter of routine one should review the accounting treatment of ones predecessors rather than following them blindly over the cliff.

What were the costs in prior year and current year is imho the question that needs asked?

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