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FRS 105 and BBL Loans

Are others using the amortised cost method to account for BBLs?

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According to https://www.gov.uk/government/publications/accounting-standards-the-uk-t... "In FRS 105, financial instruments are typically recognised at transaction price and measured on an amortised cost basis". 

Whereas, according to https://library.croneri.co.uk/cch_uk/adi/669-10 " Under FRS 105, there is a simpler way of accounting for these types of loans because the amortised cost method, which uses an effective interest rate, does not apply to FRS 105 reports. In other words, the interest charge is simply the interest paid to the bank."

Nowithstanding the conflicting advice above, and Croneri's contention that the amortised cost method does not apply to FRS 105,  I've been opting for the amortised cost basis (together with disclosure note) for FRS 105 BBLs. Not dissimilar to FRS 102. But how are other practitioners accounting for BBLs under FRS 105 please?     

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By Roland195
25th Oct 2021 11:02

I thought the point of FRS 105 was that you didn't have to waste your time with ridiculous drivel like this.

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Replying to Roland195:
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By I'msorryIhaven'taclue
25th Oct 2021 11:10

You'd be excused for thinking so.

The fact remains that, as is evident from the links provided, some bodies and professional authorities interpret FRS 105 for such loans in a polar opposite manner to others.

Simple interest charged, or amortised cost method? Am I going OTT by adopting the latter?

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Replying to I'msorryIhaven'taclue:
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By Roland195
25th Oct 2021 11:40

I'msorryIhaven'taclue wrote:

Am I going OTT by adopting the latter?

In my opinion, yes. Surely the amounts would be immaterial?

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By I'msorryIhaven'taclue
25th Oct 2021 11:45

Hmm BBLs £15k, £25k & £40k for 3 separate companies to date. Generally 25% of t/o. Some with not immaterial o/d DLAs.

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Replying to I'msorryIhaven'taclue:
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By Paul Crowley
25th Oct 2021 12:05

Interest at 2.5% of a maximum of 25% of turnover is quite small to start with
Shifting the interest between years?
The difference between version a and version b immaterial in my opinion and just a matter of timing

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By Paul Crowley
25th Oct 2021 11:35

Most simple version
Hence ignored for the first year
Definitely no interest against grant confusion

If client thinks the accounting theory is daft then is the client wrong?

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By I'msorryIhaven'taclue
25th Oct 2021 11:59

Thanks Paul. Rightly or wrongly I've been posting govt interest credits for first year with DR Interest Charges P&L / Cr Grant Income (ie "other income") as per detailed guidance at
https://www.accaglobal.com/content/dam/ACCA_Global/Technical/fact/tf-CV1...

So aside from the above journal, the loan is effectively treated more or less the same in Year 1 accounts whether simple or amortised cost method is used.

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Replying to I'msorryIhaven'taclue:
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By Paul Crowley
25th Oct 2021 12:16

I am saying what I have done
Not what accounting theory would suggest
When I mentioned the grant against interest to a few clients they genuinely thought I was joking.
BBLs were being doled out April 20 onwards so this issue has been around for nearly 18 months with very little on Aweb Any answer

https://www.google.com/search?q=bounce+back+loan+limited+company+directo...

Quite a bit on here suggesting directors that claimed and frittered might be held accountable

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By I'msorryIhaven'taclue
25th Oct 2021 12:35

Thanks Paul, much appreciated. It's others' accounting treatments I'm interested in. Looks like I'm dotting too many "i"s and crossing too many "t"s.

The directors have indeed claimed and frittered in all 3 cases - which by way of mitigation influenced me to some extent to err on the side of caution by going with the amortised cost method for FRS 105 BBLs (as that would also appear to be the recommended treatment within inter alia the ACCA link I've linked to above) accompanied by disclosure notes regarding BBL, o/d DLA, as well as considering (as a separate matter) going concern.

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Replying to I'msorryIhaven'taclue:
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By AdShawBPR
28th Oct 2021 08:43

I've also followed the guidance and entered debit to interest expense and credit to government grant income followed by amortised cost. Most of these BBLs have the same profile so I've just set up template to run the numbers each time. Takes seconds so might as well.

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Replying to AdShawBPR:
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By I'msorryIhaven'taclue
28th Oct 2021 11:25

Thanks AD, good to know I'm not the only one. The ACCA guidance (I linked to above) contains Excel codes for setting up a template (FRS 102 style) which like you I've incorporated into my working papers.

Illuminating that Paul Benny's reference (just below in this thread) to the FRS105 standard's EIR guidance:
The 'Basis for Conclusions' at the end of FRS105 states that the effective interest method is considered too onerous for micro entities (para 19(h))

does not dovetail well with the ACCA amortised cost guidance on the matter.

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By johnt27
25th Oct 2021 12:41

The issue here is the use of the term "effective interest rate". This appears in FRS 102 but not 105, however both make reference to use of "amortised cost".

So the accounting for loans is principally the same ie an interest rate is applied to the capital balance and charged to P&L - this is the amortised cost bit.

The difference between the two standards, and this is referred to in the Croner-i BBL example, is the "effective interest rate". As the example says this may be for some companies 5%, when a BBL was capped at 2.5%, and so under FRS 102 there is an argument (not a strong one in my opinion) that you would charge 5% on the discounted BBL loan. As CBILS rates were not fixed and lenders had scope to set a rate in relation to risk this meets the effective interest rate definition and no further thought is required. For FRS 105 all of this is irrelevant as the interest rate charged is the interest rate applied in the accounts.

You should still, under FRS 105, account for the government grant element of the interest in the first year.

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By paul.benny
25th Oct 2021 13:12

Always helps to read the actual standard....

The 'Basis for Conclusions' at the end of FRS105 states that the effective interest method is considered too onerous for micro entities (para 19(h)).

I note the suggestion to book an actual interest amount with an offsetting grant income. Notwithstanding the ACCA guidance, I would argue that the grant is made to the lender to allow them to lend at a discounted rate and is not a grant to the borrower. The borrowers did not apply to government to receive the discounted rate and payment goes directly to lender.

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Replying to paul.benny:
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By johnt27
25th Oct 2021 13:46

paul.benny wrote:

I note the suggestion to book an actual interest amount with an offsetting grant income. Notwithstanding the ACCA guidance, I would argue that the grant is made to the lender to allow them to lend at a discounted rate and is not a grant to the borrower. The borrowers did not apply to government to receive the discounted rate and payment goes directly to lender.

I disagree with this. Effectively it was the government who funded the various loan schemes, in particular BBL, and the government guarantee and interest rate cap at 2.5% was to avoid the issues seen with CBILS in the early days. Lenders could have chosen to offer a lower rate, but why would you, when you are getting free interest with minimal risk - essentially their fee for dealing with the loan admin as facilitators of the scheme.

The 12 months interest free period offered falls well within the definition of government grant within FRS 102 being the incentive for taking a BBL and not looking for alternative finance at a time of need. If you argue that the payment going directly to the lender negates the accounting treatment that causes problems when accounting for capital grants that go direct to suppliers or funders which is incredibly common.

I'm not sure you can argue on treatment when the various professional bodies have all agreed the treatment and recommended to their members...

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