Accounting for corporate finance: Old UK GAAP excluding FRS 26: lenders: accrual accounting: purchased debt
The following guidance covers Old UK GAAP (applied before 2015) where FRS 26 was not applied.
Balance sheet: debt purchase
A company may buy a security on the market, rather than on issue, for less than its redemption value. This may be for a number of reasons, for example the security may carry a fixed interest rate that is lower than the current market rate of interest.
Following historic cost accounting, the company must record its asset at cost (unless its net realisable value is lower). The lender will accrue the market discount over the period to redemption on the outstanding amount in the same way as any other discount, the market discount being the difference between
- the amount paid for the security on the market and
- the redemption value.
See CFM22110 for the accounting treatment of discounted securities.
Sale of debt
If the lender sells a debt asset, such as a loan, it will recognise a profit or loss on the receipt of the sales proceeds over or under the carrying value of the loan at the time of sale.
On 31 March 2009 Company A sold its loan of £10,000 made to Company D to Company E for £10,500. This situation could arise for example because the loan made to Company D is fixed interest and is paying interest in excess of market rates.
The bookkeeping in Company A would be:
|On 31 March 2009|
|Cash at Bank||10,500|
|Loan with Company D||10,000|
|Profit on sale of loan (in P&L)||500|