CFM23010 - Accounting for corporate finance: UK GAAP before 1 January 2005: borrowers: accounting standards

Overview of old UK GAAP for borrowers

This section of the loan relationships accounting guidance explains how the borrower accounts for its loan relationships. It sets out the basic principles and gives examples of how this is applied to different types of loans.

This section of the guidance deals only with UK GAAP as it stood before 1 January 2005. You should not use it for periods covered by the new accounting standards, see CFM20010.

Accounting standards

FRS 4: 'Capital Instruments' is the principal and most specific accounting standard that deals with loan relationships in the accounts of the borrower. For a summary of FRS 4 in respect of debt, see CFM23020.

UITF 33: 'Obligations in capital instruments' provides further guidance on whether a capital instrument should be treated as a liability or a share. UITF 11 ‘Capital instruments: issuer call options’ provides specific guidance in this area.

The Companies Act 1985, the Accounting Standards Board's 'Statement of Principles for Financial Reporting', FRS 18 Accounting Policies, and FRS 5: 'Reporting the Substance of Transactions' define the basic accounting by borrowers. Both the Statement of Principles and FRS 5 define a liability as an obligation to transfer economic benefits as a result of past transactions or events. Where this is likely to occur, a liability should be recognised on the balance sheet.

With more complex transactions, FRS 5 recognises that the true commercial effect of such transactions may not be adequately expressed by their legal form. When a loan is taken out as part of a series of transactions, it may not be sufficient to account for it by merely recording its legal form. Instead, the company should present its primary financial statements to show the substance of the transactions rather than the legal form.

In addition, Statement of Standard Accountancy Practice 20 (SSAP 20) 'Foreign currency translation' deals with the foreign exchange aspect of loans.