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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If the development does go ahead what will be its accounting treatment within the accounts?
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.
Just tell them that they can't include the loan as income because it is a loan - the clue is in the name.
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.
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.
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?