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Inherent interest calculation and FRS102 (1a)

Calculation of interest position under FRS102 1a

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Hi, We are preparing a set of accounts for a Limited company under FRS102 (1a). The company rents property to third parties, during the year one third party terminated  their lease and an agreement was entered into whereby the tenant would pay the company £50k over 4 years, with no interest. If I am correct under FRS102 (1a) we are required to calculate an inherent interest charge and account for this at the start. Therefore if we assumed that the inherent interest charge was say £5k, presumably on day 1 we would need to recognise the termination receipt in P&L at £45k, and filter the £5k difference as interest through over the repayment term. Any confirmation would be much appreciated.

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By paul.benny
30th Jul 2020 17:36

Sounds about right.

In your example, your initial receivable is £45k. In year 1, the former tenant pays £12.5k, which you would book (say) £10k against the receivable and the balance to P&L as interest received.

The notional interest should be credited to P&L on a reducing balance - I'd probably spread over the years using sum of digits.

Finally, consider how likely it is for the full amount actually to be paid - and review annually. Depending on materiality, a provision may be appropriate

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