CFM4118 - Accounting for loan relationships: lenders: accrual accounting and expenses
Accounting for expenses
A lender will not usually directly incur expenses when making a loan:- any costs are likely to be covered by a fee charged to a borrower. However, where the lender does incur and not recharge the costs, they may be accounted for on a straight line basis, as this is a reasonable approximation to calculating a constant rate of return on the outstanding balance.
Example
KL Ltd purchases £200,000 loan notes in AG Ltd, to be repaid in 5 years, incurring costs of £2,500 in arrangement and broker's fees. The transactions will be accounted for as follows.
| On lending finance | ||
| Debit | Loans (Debtors, split between due in 1 year and over 1 year) | £200,000 |
| Credit | Cash | £200,000 |
| And at the same time | ||
| Debit | Prepayments: initial
direct costs of loans (or it may be netted
off loans, but this is not best practice) | £2,500 |
| Credit | Cash | £2,500 |
| Each of years 1 – 5
to spread the initial direct costs |
||
| Credit | Prepayments | £500 |
However, if the initial costs are not directly related to the loan in question, they cannot be carried forward and must be expensed. For example, if the lender has used its own in-house solicitor to draw up the documents, or has an in-house surveyor who has performed a valuation, a portion of those salary costs should not be deferred.
