Example 1
Cash flows
Date |
Original cash flows £'000 |
Revised cash flows from £'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, |
£’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 | ||