UK Loan at off market rate

[Xuanchen]

Hi,

If Entity A issue a loan to a bank at 5%, but the market rate for similar loan is 3%, then Entity A would discount the cash flow of the loan to calculate it's fair value.

The difference between the consideration received and the fair value of the loan is recognized in P&L immediately is that correct?

Thank you.

Kind regards.

 

[DrStrangeLove]

No, it's not revenue. It's a loan. You wouldn't recognize it in income.

 

[Xuanchen]

So let's say Dr Cash: 100 Cr Loan: 105, where the dangling 5 should go? If it's not a immediate loss?

 

[DrStrangeLove]

That is not the correct journal entry. That 105 is not the present value of 100 at 5% per year. And you haven't said the term of the loan, or whether interest is payable during the loan or only at the end of the loan. If you're borrowing for only one year, you wouldn't use the present value.

If you're using the present value to discount a note payable, you'd balance the cash received and the amount payable at maturity with a premium or discount on note payable.

 

[Xuanchen]

Let's say 100 at 5%, 5 LC for three years. Market rate is 3%. So you discount that at 3% and you'll end up with more than 100LC. Where the difference is booked?

I understand what you say, please get to the point.