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Sum of digits - small entities

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Is it OK to work out interest on Hire Purchase arrangements using sum of digits for FRS102(1a) companies?   Please point me at the relevant paragraph if you can.  I see that a bog standard HP under FRS105 is straight line.  Many thanks.

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By paul.benny
16th Sep 2019 14:32

Sum of Digits has never been explicitly mentioned- even going back to SSAP21.

Paragraph 20.11 of FRS102 (not 102(a1)) requires the lessee to allocate the finance charge to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability.

The Standard doesn't set out how this should be calculated. Sum of Digits is a pragmatic and relatively simple approximation and I would have no hesitation about using it.

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RLI
By lionofludesch
16th Sep 2019 15:04

I use one of those interest calculating spreadsheets on Excel these days.

However, out of curiosity, I compared the allocation to sum of the digits and found them to correlate with surprising accuracy. The discrepancy is unlikely to be material.

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Replying to lionofludesch:
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By In a Daze
16th Sep 2019 15:26

Same here. Makes life much more simple.

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Replying to In a Daze:
RLI
By lionofludesch
17th Sep 2019 09:40

Maybe - but it's still a faff.

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By AdShawBPR
18th Sep 2019 10:26

As Paul says, FRS102 states that the finance charge should be allocated to periods to give a constant periodic rate of charge on the remaining balance of the liability. While FRS102 provides no alternative, SSAP21 said the same but went on to say 'or a reasonable approximation thereto'. SOD will give you a good approximation for a mortgage style amortisation profile with equal repayments but if the profile varies from that, it may not. It's no harder to produce the appropriate interest rate so I'd use that but SOD would likely be good enough if the profile is 'mortgage style'.

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