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How to treat loan arrangement fees under FRS102

How to treat loan loan arrangement fees in accounts under FRS 102

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Dear colleagues, I would be most grateful for your comments on this issue. A client investment company took out a a number of loans to invest in properties.  How do you treat loan arrangement fees under FRS102 when (a) they are paid separately and not added to the loan and (b) they are unpaid and added to the loan? In both cases I would like to know where the debit side of the transaction would go to. The ICAEW gave me an answer I totally disagree with. Thank you in advance.

   

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By johngroganjga
11th Sep 2018 12:12

What was the answer you totally disagree with, and why do you disagree with it?

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Replying to johngroganjga:
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By MGD
11th Sep 2018 12:35

A lot of nonsense and I will make a complaint because we pay our fees, we expect good service.
That such fees should be offset against the loan. So in case a. when fees are paid in advance, eg £20k, by offsetting them against the loan, the lender has suddenly lost £20k according to the ICAEW because the loan has been reduced by £20K. In case b. when fees are unpaid, according to the ICAEW they are a debit and a credit in the loan account thus these fees suddenly disappear and are therefore not due to the lender because they are not part of the loan liability. What a lot of nonsense. I kept reiterating that such fees are always expensed and didn't agree with them but apparently I was wrong.

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Replying to MGD:
By johngroganjga
11th Sep 2018 12:50

The answer you have been given by the ICAEW is correct, but you don’t seem to understand it.

It’s what DJKL is trying to explain to you.

Of course the fees are expensed but they are expensed over the term of the loan.

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Replying to johngroganjga:
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By MGD
11th Sep 2018 12:57

I agree with DJKL and I understand very well what ICAEW is saying because I was the one in the conversation. According to them the total amount is offset against the loan. This is totally different to amortising it separately through the P&L over the term of the loan. No offsetting.

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Replying to MGD:
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By MGD
11th Sep 2018 13:00

Unless of course it was added to the loan in which case it would augment the liability and not reduce it. The debit side would still be amortised separately over the term of the loan as per DJKL and I agree with that.

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Replying to MGD:
By johngroganjga
11th Sep 2018 13:02

Yes but did you continue the conversation to deal with what happens to the balance on the loan account when the loan has been repaid. There will be a debit balance equal to the arrangement fee left there for all eternity won't there, unless you do something to write it off over the term of the loan? Perhaps you put the phone down on the ICAEW before you got to that part.

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paddle steamer
By DJKL
11th Sep 2018 12:19

Dr Bank arrangement fees (For tax include as part of loan relationship debits)

However there will likely (depending on loan terms) be a prepaid element to the fees so imho it is likely a prepayment ought to be established and released over the term of the loan, certainly that is how I treat our such costs. (Property investment company)

The nominal called "Bank arrangement fees" in the detailed P & L within our accounts comes under the head "Interest payable and similar charges" in the statutory P & L, down below Operating Profit.

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Replying to DJKL:
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By MGD
11th Sep 2018 12:27

In other words DJKL, arrangement fees are expensed and as a loan relationship debit it would be tax allowed. Yes???? I include them in bank charges because they are not really interest.

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Replying to MGD:
paddle steamer
By DJKL
11th Sep 2018 12:40

Yes, but given the arrangement fees (and associated costs re the loans) relate to an arrangement that will likely endure for over a year not all the cost ought to be recognised in year one, or certainly that is what my reading led me to believe (we are carrying > £50,000 of prepayment so the point was somewhat important)

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Replying to DJKL:
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By MGD
11th Sep 2018 12:54

It makes sense since we prepare accounts on an accruals basis but I read somewhere that the full amount of arrangement fees can be expensed in year one????? Any comments on this?

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Replying to MGD:
By johngroganjga
11th Sep 2018 12:55

You will need to explain where you have read it before anyone can comment on what you have read.

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Replying to johngroganjga:
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By MGD
11th Sep 2018 13:05

I think it was an article by the tax department of a firm of CAs but I will find out.

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paddle steamer
By DJKL
11th Sep 2018 13:28

Are maybe ICAEW not treating upfront payment to arrangement fees as part of the loan.

So loan of £1,000,000 for 10 years, arrangement fee say £100,000 and interest at 5% on the £1,000,000 (no capital repayments) would be:

Dr bank 1,000,000
Cr loan £1,000,000

then payment for arrangement fee

Dr loan 100,000
Cr bank 100,000

then each year you pay £50,000 to bank

Opening loan £900,000 (1,000,000-100,000 paid)

Year 1
An arrangement fee of £10,000 added, interest £50,000 added, less £50,000 paid to bank reduces, loan at year end £910,000

Year two same, end year £920,000 o/s.

and so on until year 10 when loan sum of £1,000,000 redeemed.

in effect arrangement fee payment treated as a cashflow payment towards the integrated loan and fee package.

I frankly think it is poor accounting (understating liabilities) but I have seen this sort of thing described re FRS102 and financial instruments.

see link, example well down the sheets.

https://www.icaew.com/-/media/corporate/files/technical/financial-report...

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Replying to DJKL:
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By MGD
11th Sep 2018 14:18

DJKL - If the arrangement fee isn't paid and is added to the loan then to bring it into the accounts as was with my client you,
DR Bank charges £100k (or if you prefer Interest & similar charges)
Cr Loan £100K
then in year 1
Dr Prepayments £90K (100 -10)
Cr Bank charges £90K
Yr 2
DR Bank charges 10k
CR Prepayments 10K
and so on
Do you agree?

Or should it be
DR Loan 100k
CR Loan 100k
and in YR 1
DR bank charges 10k
CR loan 10k ie adding back to the loan the 10k which is paid as part of the £50k annual repayment????

I agree with you that the way is done under FRS102 is poor accounting

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Replying to MGD:
paddle steamer
By DJKL
11th Sep 2018 14:39

I think the ICAEW illustration in effect shows the loan o/s as the loan amount offset by the prepayment, in effect instead of reflecting year 1

Prepayment DR £90,000
Loan CR £1,000,000

it shows

Loan £910,000

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Replying to DJKL:
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By MGD
11th Sep 2018 14:44

Get it. Thanks ever so much DJKL. I am most grateful for your clarification. Have a nice afternoon.

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By Tim Vane
11th Sep 2018 14:19

Did you try asking Tonto?

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Replying to Tim Vane:
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By MGD
11th Sep 2018 14:45

you should try much harder to be funny

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Replying to MGD:
By Tim Vane
11th Sep 2018 16:37

No, I'm good thanks. I make it a general rule in life not to try hard at anything as it's far too tiring. I laugh at my own jokes and that's good enough for me, as I have no need to seek validation from others. But thanks for the advice.

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