Interest restriction: groups, periods and financial statements: financial statements: amounts recognised in financial statements
Once the worldwide financial statements for a period of account are established, certain amounts recognised in these statements will need to be identified and used for the relevant calculations.
In particular, the amounts recognised in the financial statements will be relevant for the calculation of adjusted net group-interest expense needed for the fixed ratio debt cap. They will also be used for the calculation of qualifying net group-interest expense and group-EBITDA figures which drive the group ratio percentage and group ratio debt cap.
Items of profit or loss
References in the rules to amounts ‘recognised’ in financial statements means amounts recognised as items or profit or loss. Typically this will be the amounts recognised in the ‘income statement’ (which can also be referred to as the ‘profit and loss account’) where this statement is prepared.
This will therefore exclude amounts taken to ‘other comprehensive income’. However, amounts recognised in the financial statements will include amounts transferred (or recycled) from other comprehensive income to profit or loss.
Analysis of amounts
A recognised amount can includes an amount which itself is comprised within on or more amounts shown on face of the financial statements.
In the majority of cases it will not be possible simply to read the requisite figures from the income statement. It may often be possible to identify relevant amounts from the notes to the accounts. However, in some cases it may be necessary to interrogate the amounts shown in the accounts to identify their components.
For example, the line for ‘finance costs’ in a group’s income statement is likely to contain not only amounts that would fall within net group-interest expense, such as bank interest, but also such items as exchange differences on borrowings and unwind of discounts on provisions.
In addition, in calculating amounts of adjusted net group-interest expense, qualifying net group-interest expense} and group-EBITDA it will be necessary to identify items such as dividends on preference shares and interest paid to related parties. These items may be shown in the notes to the accounts, or it may be necessary to identify these amounts from the accounting records which underpin the financial statements.
Where the amounts in the financial statements are expressed in a currency that is not sterling, the relevant amounts within profit and loss will need to be translated into their sterling equivalents using the average rates for the period.
It may be appropriate for this to be done when the amounts have been aggregated and adjusted, rather than translating each individual recognised amount. Indeed, for the group ratio percentage, it should not be necessary to translate amounts to sterling to calculate the ratio, as the percentage should be the same in whichever currency is used to perform the calculation.