CFM22090 - Accounting for corporate finance: UK GAAP before 1 January 2005: lenders: accrual accounting: fixed rate loans

Accounting for fixed rate loans

A fixed rate loan pays interest at an amount that is fixed for the duration of the loan or is fixed for a period of the loan.

Under the accruals basis of accounting, interest income for a fixed rate loan will be recognised in the profit and loss account based on the rate of the loan. Therefore, for example, where a company lends £100m at 8% for five years (and the loan is provided at face value) interest income will amount to £8M for each year.

Where loans are made part way through an accounting period, finance income will reflect this. Thus if the above loan was advanced on, say, 30 June and the company had a 31 December accounting date, finance income recognised in the first accounting period would be 6 months worth, i.e. £4M.

Under the accruals basis, finance income is recognised in the profit and loss account irrespective of when the interest is actually received.

Example

On 31 March 2005, Company A lends £500,000 to Company H. The loan is a five year fixed rate loan at an interest rate of 6%. Interest is payable by Company H annually on 31 March each year. Company A has a 31 December year-end.

The bookkeeping would be:

The finance income recognised as at 31 December 2005 of £22,500 amounts to 9 months interest on £500,000 at 6%.