CFM22030 - Accounting for corporate finance: UK GAAP before 1 January 2005: lenders: accrual accounting

Accruals basis

The accr uals basis of accounting requires income and expenditure to be accounted for in the period to which it relates, rather than when cash is received or paid. Whilst there is no specific standard setting out how to do this for lenders, the requirement will be achieved by reflecting the accounting requirements for borrowers as set out in FRS 4.

FRS 4 requires the finance costs of a debt to be allocated to periods over the term of the debt at a constant rate of return of the carrying amount.

Other methods a company might use are the straight-line method or the rule of 78, which may be a reasonable approximation to a constant rate of return in some circumstances.

Banks and insurance companies are required, by law, to follow the accounting methods set out in the SORPs.