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Inter company loan with market rate of interest

FRS 102 1A - Inter co loan at market interest rate

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My client has made a loan to another group Co of £150,000.

The loan will be repaid over 3 years.  The interest will be paid every 6 months.

 I have recognised the loan at the initial transaction price.   

I have a calculator to work out the effective interest rate - this came back at 5.062% per year.  (not 100% sure I have done this correctly).  this works out the interest at about £500 more than the actual interest that the Ltd Co will charge over the 4 year term.

What do I put in the accounts?  Any guidance appreciated

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By thomas
29th Nov 2019 15:32

I'm hoping that given its a market rate of interest, I can just account for this at transaction price and not worry.

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By paul.benny
29th Nov 2019 16:15

If your calculator has come up with a different total to the actual interest that will be paid, the answer is wrong. The most likely cause is that the timing of interest payments differs from that assumed in the calculation tool. The calculation also becomes complicated if interest is capitalised rather than cash-settled.

In any case, using effective interest rate is an IFRS requirement and not, as far as I know, required under FRS102. On that basis, I would account for the interest on a straight line basis over the term of the loan.

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By johnt27
29th Nov 2019 17:22

For the amounts involved it's not material so even if you did need to make some sort of discounting adjustment I wouldn't bother.

You're right to have done the calculation, albeit it may be wrong, and any difference between the imputed interest rate and actual paid would be dealt with as either a distribution or increase in equity based on FV calculations.

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By paulwakefield1
29th Nov 2019 17:35

As long as it is a basic financial instrument (it probably is but, amongst other things, that will depend on how the interest/interest rate is defined) and as long as it is at a market interest rate, you can initially record the loan at transaction price. However, any costs of providing the loan effectively also form part of the interest charge and should be deducted from the transaction value which will up your effective interest rate.
The calculation is then done using an effective interest rate. If the interest rate changes, it becomes a bit of a nightmare!

All subject to materiality of course.

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