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HMRC internal manual

Corporate Finance Manual

Old rules: loan relationships: authorised accounting methods: accruals basis: allocating payments

Allocating payments

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

Any authorised accruals basis must allocate payments

  • under a loan relationship (such as issue costs, interest, discount to maturity and so on), or
  • arising as a result of a related transaction (profit on sale etc) to an accounting period (FA96/S85(2)(b)).

For an accruals basis, this will ignore

  • when payments are actually made
  • when they are due and payable (S85(3)(a))

Where the payments relate to more than one period, the apportionment must be just and reasonable (S85(3)(b)). Generally accepted accounting practice, applied correctly, will be expected to satisfy these conditions.

Example: borrower

AG Ltd issues loan notes for £500,000 to be repaid in 5 years. It spends £10,000 in lawyers’ fees, arrangement fees and other related expenses. These costs, although incurred at the issue date, must be spread over the life of the loan, because they relate to the whole period of the loan.

The relevant UK accounting standard FRS 4 achieves this by requiring that the debt is stated in the accounts at the net amount realised, £500,000 - £10,000 = £490,000. The £10,000 fees are written back over the life of the loan, by being debited to the profit and loss account and credited to the debt in the balance sheet. By the repayment date, the debt is shown as £500,000.

This is a ‘just and reasonable’ apportionment for the purposes of FA96/S85(3)(b).

Example: lender

KL Ltd purchases £200,000 loan notes in AG Ltd, incurring costs of £2,500 in arrangement and broker’s fees. These costs should be spread over the life of the investment.

The balance sheet will initially show the asset at total cost, £202,500, reducing to £200,000 over the life of the loan, with corresponding debits in the profit and loss account. This is a ‘just and reasonable’ apportionment for the purposes of FA96/S85(3)(b).