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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Old rules: loan relationships: authorised accounting methods: meaning of generally accepted accounting practice: debtors and creditors

Generally accepted accounting practice for accruals

This guidance applies to periods of account beginning before 1 January 2005

Most companies that do not have regular dealings in securities - companies other than insurance companies, banks or financial traders - will use an accruals method. Accounting practice depends on whether the company is a borrower (a ‘debtor’ in terms of the loan relationships rules) or a lender (a ‘creditor’ in loan relationships terms).

Debtor (borrower)

The accounting standard FRS 4 ‘Capital Instruments’ applies to all companies issuing capital instruments whose accounts are intended to give a ‘true and fair view’, irrespective of the size or ownership of the company. The term ‘capital instrument’ includes all forms of debt as well as shares, so you would expect the accounts of a company that is the debtor in a loan relationship to follow FRS 4 for that loan relationship.

FRS 4 requires that the company allocate the costs of the debt (such as interest payments and expenses incurred in raising the finance) to periods over the term of the debt at ‘a constant rate on the carrying amount’. This accruals basis, sometimes called the economic accruals method, gives a constant rate of return. The amount of the debt is increased by the finance cost for the period (which is taken to the profit and loss account) and reduced by any payments actually made. See CFM23020 for more on FRS 4.

Creditor (lender)

There is no separate accounting standard for creditors, but FRS 18 ‘Accounting policies’ requires that income and expenses should be recognised in the period to which they relate, irrespective of when payment is made. Where a company is the creditor in a loan relationship, generally accepted accountancy practice is to accrue interest, profits or losses over the period the debt is held. A number of methods may be appropriate - straight line, rule of 78 or economic accruals. The loan relationship will be shown as an asset, generally at cost less any provisions. There is more detail at CFM22030.