Chapter 9 Loan relationships

Question 1

9.1 Definition

Answer 1

A company has a loan relationship if:
• It owes or is owed money as respects a money debt, and
• That debt arose from a transaction for the lending of money

Question 2

9.2 Treatment of income and expenses

Answer 2

Debits are expenses and credits are income. Loan relationship income and expenses include the following:
• Interest payable and receivable
• Costs to issue the debt
• Debt collection costs
• Pre-loan and abortive expenses
• Profit or loss on the acquisition or disposal of an existing loan relationship (related transaction)
• Loans written off (impairments or bad debts), results in an expense
• Release of loans – when the debtor is no longer required to pay back the loan. This results in an expense of the company releasing the debt and income in the company that had its obligation to pay the debt released
We account for income and expenses on an accrual’s basis, this is the same as the accounting treatment.

Question 3

9.3 Purpose of the loan relationship

Answer 3

If the loan was for trade purposes, the income and expenses would be in trade profits. A loan has a trade purpose if the funds are used to generate income which is taxed as trade profits, examples are:
• Loans to buy plant and machinery to use in business
• A bank overdraft to fund the working capital of the business
• A bank lending money to customers
If the loan arose for non-trade purposes, they are pooled together and included as non-trading loan relationship income or deficit for the period, examples are:
• A loan to buy an investment property or shares
• A company lending money to its employees or customers
• A company receiving interest on positive bank deposits
• Interest on overpaid or underpaid corporation tax