How to account for loan fees?

Correctly reflecting loan fees added to loan

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Hi,

Please could someone help me with how to correctly account for a loan with fees? (numbers rounded for simplicity). Client has borrowed £95,000 to which a set up fee of £5000 has been added. So total loan is £100,000 over 60mths with an interest rate of 15% on the whole amount. I have calculated the monthly breakdown of the repayment and interest to split across the Loan Account and the Interest Payable expense for the 60 repayments.

They have received the £95,000 into the bank, so dr bank, cr loan account but how do I account for the £5000 fees? From reading up it appears it would be incorrect to dr an expense account for the whole £5000 in one go, but if I don't then the amount shown as owing in the loan account is incorrect. Should I debit an asset account for the £5000 then depreciate it over the 5 years? 

Many thanks

Replies (8)

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By ireallyshouldknowthisbut
21st May 2024 12:34

Well you need to either expense it, or charge it over the term.

The answer to which is a materiality / what results do we want question.

NB this is absoutely not a fixed asset/depreciation, its a prepayment.

Thanks (2)
Replying to ireallyshouldknowthisbut:
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By accountaholic
21st May 2024 13:02

Agreed.

I'd break it down into two steps:

Step 1 - Dr bank charges £5K, Cr loan £5K. The balance sheet is now correct.
Step 2. - As for all P & L costs, review to accrue missing costs and prepay any relating to future periods.

Personally I'd prefer to expense in one hit rather than prepay, as I doubt you'd get anything back if you repaid the loan tomorrow.

Thanks (1)
Replying to ireallyshouldknowthisbut:
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By Paul Crowley
21st May 2024 14:27

I agree.
Is is just a timing issue, no permanent tax difference.

Thanks (1)
Stepurhan
By stepurhan
21st May 2024 12:55

If it is an expense you have incurred in arranging the loan and is non-refundable, even if you repaid the loan now, then it is an expense now.

Thanks (1)
Replying to stepurhan:
paddle steamer
By DJKL
21st May 2024 14:12

Depends if FRS102.

When we had these I would

Dr Prepaid
CR Bank

(We paid them direct rather than offset from loan but if latter

Dr Prepaid £5,000
Dr Bank £95,000
Cr loan £100,000

Then release over loan term

Thanks (3)
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By Bobbo
21st May 2024 13:37

What you need is an effective interest calculation as the £5,000 transaction fee is part of the overall cost of borrowing.

In terms of ledger posting, putting it to a code within liabilities rather than an asset code would be more correct. For reporting purposes the unamortised arrangement fee (debit balance) would be set against the loan balance (which would match the statements from the lender).

That you would not get the any element of the £5,000 back if you repaid the loan tomorrow is frankly irrelevant.

Thanks (1)
Replying to Bobbo:
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By TheTaxMan_
21st May 2024 22:05

Bobbo wrote:

What you need is an effective interest calculation as the £5,000 transaction fee is part of the overall cost of borrowing.

In terms of ledger posting, putting it to a code within liabilities rather than an asset code would be more correct. For reporting purposes the unamortised arrangement fee (debit balance) would be set against the loan balance (which would match the statements from the lender).

That you would not get the any element of the £5,000 back if you repaid the loan tomorrow is frankly irrelevant.

I agree with this comment.

Thanks (1)
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By HG23
23rd May 2024 17:00

Thank you all for your replies, the obvious thing to do seemed to me to expense it to bank charges in one go, for the date the loan was taken, however after reading up on the guidance for FRS102 that seemed to be incorrect. I think I will set it up as a prepayment and expense it over the term.

Thanks (0)