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Deferred payment
Extract from FRS 102- Section 23.5
23.5 When the inflow of cash or cash equivalents is deferred, and the arrangement constitutes in effect a financing transaction, the fair value of the consideration is the present value of all future receipts determined using an imputed rate of interest. A financing transaction arises when, for example, an entity provides interest-free credit to the buyer or accepts a note receivable bearing a below-market interest rate from the buyer as consideration for the sale of goods. The imputed rate of interest is the more clearly determinable of either:
(a) the prevailing rate for a similar instrument of an issuer with a similar credit rating; or
(b) a rate of interest that discounts the nominal amount of the instrument to the current cash sales price of the goods or services. An entity shall recognise the difference between the present value of all future receipts and the nominal amount of the consideration as interest revenue in accordance with paragraphs 23.28 and 23.29 and Section 11.
OmniPro comment
See below illustration of Section 23.5 in the example below.
Example 6: Deferred payment example
Company A sold goods worth CU50,000 with unusual credit terms on 01/12/13. The credit provided is for a period of up to 31/12/15. The normal cash price for these goods would be CU35,000. The difference of CU15,000 is determined to be a financing transaction. The effective interest rate is calculated at 18.62% as per below. The effective interest rate is determined so as to write the deemed interest income into the P&L over the life of the transaction. The effective interest rate is determined through trial and error or through the use of excel formula.
Here the journals required on initial recognition of revenue are:
|
|
CU |
CU |
|
Dr Trade Debtors |
35,000 |
|
|
Cr Revenue |
|
35,000 |
Being journal to recognise the sale
At the end of year 1, the following journal would be posted
|
|
CU |
CU |
|
Dr Trade Debtors |
536 |
|
|
Cr Interest Cost |
|
536 |
Being journal to reflect the deemed interest for the year under the effective interest rate method. The same journal would be posted for the other years.
Example 7: Deferred payment example
If we take example 6 and assume a cash price cannot be determined. In this case the rate to use would be the interest rate that would be charged by a bank to that particular customer. If we assume the rate the customer would pay if the CU50,000 was borrowed from a bank with similar security would be 5%. The present value of CU50,000 at a discount rate of 5% is CU45,167 (CU50,000/((1/1.05)^2.0833). 2.0833 represents the length of the credit i.e. 2 years and one month. The journals as per example above will be the same.
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