Long Term Loan Accounting Treatment

Accounting for long-term loans Treatment

Postings to transfer loans to the accounts are:. Project of improvement, loans that are part of the long-term investment. When someone could only confirm, the double booking is welcome on the accounts. Than the payments are DR Long Term Loan CR Bank. Qualifying long-term loan obtained from a bank at a market rate of interest.

Short- or long-term

Eddy James from the Financial Reporting Faculty examines the accounting of directors' loan according to FRS 102 in our article serial about the new UK-GAAP at the latest. We are often asked how companies should prepare their accounts in accordance with the new UK GAAP guidelines for directors' loan accounting. However, there is not always a simple response, as the appropriate treatment depends on the facts and circumstance of each case.

Credits between a business and its managers are often granted on an unofficial footing. It is probable that, in these conditions, the loan will be regarded as due on demand and will therefore be designated as a short-term financial asset or short-term financial obligation. When it can be established that the loan is not redeemable on request or that it has been subject to formal deferment, the accounting treatment changes and the Director's loan is categorised as long-term, i.e. a borrower or lender with a maturity of more than one year.

However, the categorisation remains unaffected if the creditor merely acknowledges his readiness to await reimbursement, as this does not alter his right to call for reimbursement. In order to prevent accounting uncertainties, it is appropriate to make every effort to document appropriately the conditions of directors' loan.

Director credits redeemable on request are normally valued at face value, while all fixed-term borrowings are generally valued at amortized costs. If a loan has been granted without interest or at a lower commercial rate, the use of the amortized costs treatment means that the loan is initially recognised at a lower value than the value of the loan itself.

There is no mention in the norm of how this distinction is to be taken into account. Managing directors often conclude such agreements in their role as the owner of the company. Therefore, in many cases it will make good economic sense to recognise the differences directly in shareholders' funds as contributions or distributions. It is in line with the treatment of intra-group borrowings between a holding company and its subsidiaries, as described in our help page on intra-group borrowings at non-market conditions.

Otherwise, the treatment of the distinction will be a question of judgment and will in turn vary according to the facts and circumstance of the case. If, for example, an interest-free loan is granted to a manager to allow him to buy a seasonal pass on conditions available to other employees, it appears appropriate to recognise the excess as worker service and recognise it accordingly.

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