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Appendix to the ICAEW Know-How guide 'Renegotiating loan contracts under FRS 102'.

Example 1

Cash flows

Date





Original cash flows




£'000

Revised cash flows from
date of modification,
including arrangement fee


£'000

1 January 20X1

5,000 inflow*

100 outflow*

31 December 20X1

400 outflow*

40 outflow

31 December 20X2

400 outflow*

550 outflow

31 December 20X3

400 outflow*

550 outflow

31 December 20X4

5,400 outflow*

550 outflow

31 December 20X5

550 outflow

31 December 20X6

5,550 outflow

*Cash flows that do not occur due to the modification

The cash outflows over the life of the loan, over and above the repayment of the initial £5m capital, is £3.290m.

Present value of revised cash flows, incl. arrangement fee, discounted at original effective rate

Date







Revised cash flows from date of modification, incl. arrangement fee


£'000

Discount factor at original effective interest rate of 8.61%


£'000

Present value





£'000

31 December 20X1 (date of modification)

40

1/1.08610

40

31 December 20X2 550

1/1.08611

506
31 December 20X3 550 

1/1.08612

466
31 December 20X4 550 

1/1.08613

429
31 December 20X5 550

1/1.08614

395
31 December 20X6 5,550

1/1.08615

3,672
Total 5,508

Present value of revised cash flows, excl. arrangement fee, discounted at original effective rate

Date






Revised cash flows from date of modification, excl. arrangement fee


£'000

Discount factor at original effective interest rate of 8.61%



Present value



£'000

31 December 20X2

550

1/1.08611

506

31 December 20X3

550

1/1.08612

466

31 December 20X4

550

1/1.08613

429

31 December 20X5

550

1/1.08614

395

31 December 20X6

5,550

1/1.08615

3,672

Total

5,468

Journal entries for substantial modification

Year ended 31 December 20X1

£’000

£’000

Dr Cash at bank

4,900

Cr Loan payable

4,900

being initial recognition of loan

Dr Profit or loss – interest expense

422

Cr Loan payable

422

being recognition of interest expense under amortised cost method

Dr Loan payable

400

Cr Cash at bank

400

being annual repayment

Dr Loan payable

4922

Dr Profit or loss – loss on modification

78

Cr Loan payable

4,960

Cr Cash at bank

40

being derecognition of old loan and recognition of ‘new’ loan at date of modification

Year ended 31 December 20X2,
with similar entries in 20X3 to 20X6

£’000



£’000



Dr Profit or loss – interest expense

557

Cr Loan payable

557

being recognition of interest expense under the amortised cost method 

Dr Loan payable

550

Cr Cash at bank

550

being annual repayment

Journal entries for non-substantial modification

Year ended 31 December 20X1 £’000 £’000
Dr Cash at bank 4,900
Cr Loan payable 4,900
being initial recognition of loan
Dr Profit or loss – interest expense 422
Cr Loan payable 422
being recognition of interest expense under the amortised cost method 
Dr Loan payable 400
Cr Cash at bank 400
being annual repayment
Dr Profit or loss – loss on modification 546
Cr Loan payable 546
being recognition of loss on remeasurement at date of modification
Dr Profit or loss – expense 40
Cr Cash at bank 40
being recognition of modification arrangement fee
Year ended 31 December 20X2,
with similar entries in 20X3 to 20X6
£’000


£’000


Dr Profit or loss – interest expense 471
Cr Loan payable 471
being recognition of interest expense under the amortised cost method
Dr Loan payable 550
Cr Cash at bank 550
being annual repayment

Example 2

Cash flows

Date




Original cash flows



£'000
Revised cash flows from
date of modification,
including arrangement fee

£'000
1 January 20X1 5,000 inflow
100 outflow
31 December 20X1 400 outflow 40 outflow
31 December 20X2 400 outflow* 200 outflow
31 December 20X3 400 outflow* 200 outflow
31 December 20X4 5,400 outflow* 5,200 outflow
*Cash flows that do not occur due to the modification

The cash outflows over the life of the loan, over and above the repayment of the initial £5m capital, is £1.140m.

Present value of revised cash flows, incl. arrangement fee, discounted at original effective rate

Date





Revised cash flows from date of modification

£'000

Discount factor at original effective interest rate of 8.61%

Present value


£'000

31 December 20X1 (date of modification)

40

1/1.08610

40
31 December 20X2 200

1/1.08611

184
31 December 20X3 200

1/1.08612

170
31 December 20X4 5,200

1/1.08613

4,059
Total 4,453

Present value of revised cash flows, excl. arrangement fee, discounted at original effective rate

Date




Revised cash
flows from
date of modification

£'000
Discount factor
at original
effective interest rate of 8.61%


Present value



£'000
31 December 20X2 200

1/1.08611

184
31 December 20X3 200

1/1.08612

170
31 December 20X2 5,200

1/1.08613

4,059
Total 4,413

Journal entries for substantial modification

Year ended 31 December 20X1 £’000 £’000
Dr Cash at bank 4,900
Cr Loan payable 4,900
being initial recognition of loan
Dr Profit or loss – interest expense 422
Cr Loan payable 422
being recognition of interest expense under amortised cost method
Dr Loan payable 400
Cr Cash at bank 400
being annual repayment
Dr Loan payable 4922
Dr Profit or loss – loss on modification 78
Cr Loan payable 4,960
Cr Cash at bank 40
being derecognition of old loan and recognition of ‘new’ loan at date of modification
Year ended 31 December 20X2,
with similar entries in 20X3 to 20X4
£’000


£’000


Dr Profit or loss – interest expense 213
Cr Loan payable 213
being recognition of interest expense under the amortised cost method 
Dr Loan payable 200
Cr Cash at bank 200
being annual repayment

Journal entries for non-substantial modification

Year ended 31 December 20X1 £’000 £’000
Dr Cash at bank 4,900
Cr Loan payable 4,900
being initial recognition of loan
Dr Profit or loss – interest expense 422
Cr Loan payable 422
being recognition of interest expense under the amortised cost method 
Dr Loan payable 400
Cr Cash at bank 400
being annual repayment
Dr Loan payable 509
Cr Profit or loss – gain on modification 509
being recognition of gain on remeasurement at date of modification
Dr Profit or loss – expense 40
Cr Cash at bank 40
being recognition of modification arrangement fee
Year ended 31 December 20X2,
with similar entries in 20X3 to 20X4
£’000


£’000


Dr Profit or loss – interest expense 380
Cr Loan payable 380
being recognition of interest expense under the amortised cost method 
Dr Loan payable 200
Cr Cash at bank 200
being annual repayment
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