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HMRC internal manual

Corporate Finance Manual

Accounting for corporate finance: International Financial Reporting Standards: IAS 39: classification of financial assets: loans and receivables (L & R)

Loans and receivables

Loans and receivables (L&R) are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than:

  • those that the company intends to sell immediately or in the near term, which shall be classified as held for trading (HFT), and those that the company upon initial recognition designates as at fair value through profit or loss (FVTPL);
  • those that the company upon initial recognition designates as available-for-sale (AFS); or
  • those for which the holder may not recover substantially all of its initial investment, other than because of credit deterioration, which shall be classified as available-for-sale. For example, a change in interest rates might mean that a company is unlikely to get back what it paid for a financial asset: such an asset must be classified as AFS, even it would otherwise meet the definition of loans and receivables.

Trade debts, bank accounts and bank deposits, and simple loans to other enterprises are examples of assets that will normally fall into the loans and receivables category.

Example 1

A company (A Ltd) supplies goods to another company in the same group (B Ltd). The price of the goods is charged to an intercompany account, which does not carry interest. There are no written terms and conditions governing payment by B Ltd. The intercompany account is a financial asset of A Ltd. Since there are no written terms and conditions, in law the entire balance is payable on demand. This constitutes determinable payments; and, clearly, the intercompany account is not an asset that is quoted on an active market. It is therefore classified as L&R.

Example 2

A bank holds a portfolio of credit card debts. The credit card holders must pay a minimum of 5% of the outstanding balance each month. This is sufficient to make repayment of principal ‘determinable’. The interest payments are also determinable, because interest is charged at a fixed rate on the outstanding balance. Again, these debts fall into the L&R category.

L&R financial assets are measured at amortised cost (CFM21170). The carrying value of an L&R debt which is only repayable at a future date, and which is interest-free (or carries interest at less than a commercial rate) may need to be discounted, if the amounts involved are material.