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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Accounting for corporate finance: Old UK GAAP excluding FRS 26 lenders: accrual accounting: discounted loans

The following guidance covers Old UK GAAP (applied before 2015) where FRS 26 was not applied.

Balance sheet: timing

Sometimes a company may issue a loan which is to be redeemed (repaid) at a greater amount. Where this happens, the company will record the loan at its issue cost and then spread the difference (known as the discount) over the period to redemption. This means that the value of the asset on the balance sheet (the carrying value) increases each period. This is not a revaluation to go through a revaluation reserve, but a realised profit within the profit and loss account and will be shown as finance income.

Example

On 1 January 2008, Company A issued a loan to Company C. The terms of the loan are that Company A would advance £9,500 immediately and Company C would repay £10,000 on 31 January 2008.

The bookkeeping would be:

  Debit Credit
     
  £ £
On 1 January 2008    
Loan with Company C 9,500  
Cash at Bank   9,500
On 31 January 2008    
Cash at Bank 10,000  
Loan with Company C   9,500
Finance Income (in P&L)   500