Long-term loan accounting presentation

Uncertain on disclosure requirement of long term loan

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Hi,

I'm looking for advice on the appropriate accounting treatment under FRS102 for a long term loan. It is inter company and let's assume at market rate of interest. The agreement is £5m debt repayable over x5 annual capital repayments of £1m after 12m, 24m etc plus interest. The agreement states interest is payable at a variable market rate at the end of every 12m period (let's say 4% currently). 
 

I'm familiar with amortised cost accounting but unsure how this scenario fits in because  in most amortised cost examples you are repaying a fixed amount at regular intervals (which is a mixture of capital & interest). However in this case we are paying back the capital & interest separately and at the end of the reporting period all due interest has been settled. I'm therefore unsure how disclosure/account for the loan at the end of year 1, i.e. after repayment of £1m capital and year 1 interest, is the disclosure simply: current loan £1m, non-current £3m? Or is there a NPV element to this scenario? 
 

Any advice, useful examples, guidance etc would be greatly appreciated.

Replies (4)

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By paul.benny
12th Nov 2022 11:27

I think what you are describing is year 1 repayment £1m + £200k interest (£5m @4%); year repayment £1m + £160k interest, etc, rather than a fixed annual repayment of £1.1m ish.

On that basis, I agree with your proposed disclosure.

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Replying to paul.benny:
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By benjaega
12th Nov 2022 11:34

Thanks Paul, yes that’s exactly the scenario I’m referring to :-)

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By Tax Dragon
12th Nov 2022 13:18

Whether or not it's a market rate of interest, it doesn't sound like commercial terms. Which may (or, by definition of "may", may not) have tax and/or accounting consequences.

(As described, interest doesn't accrue at current rates: if year end rate is higher, borrower pays more; if less, less. That sounds particularly peculiar - or nonstandard, if you prefer. So much so that I suspect I have simply misunderstood your description and you meant it accrues (daily?) at current rates but is charged annually - which still strikes me as atypical.)

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By benjaega
12th Nov 2022 14:41

Yes, interest accruing daily and settled by the end of each year

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