Prior Year Adjustment

crispy

Hello,

Could anyone give me any feedback on the following:

Company has a taken out a loan of £ 100,000 on 1/9/08 which at the end of year 31/8/09 has an accrued interest charge of 5%pa (£ 5,000). Subsequently during April '10 this rate is re-negotiated at a rate of 3%pa from the loan date. Should the change be apllied to adjust the opening retained profit figure ie:

Dr Interest Accrual £ 2,000
Cr Accum. Profit & Loss £ 2,000
(To adjust the opening balance sheet Account balances)

Or should the change just be incorporated into the current financial year ? (published accounts for the year ending 31/8/09 have already been produced).

Sorry if this is unclear, thank you for any feedback.

Monsoon

Interesting one.

I would post the changes as at the date it was renegotiated.
It's a bit like a credit note.
They legitimately paid, say, £5k in last financial year.
This year they receive a £2k rebate because the interest rate has gone down and it's been backdated; I would debit Loan (Liability) and credit loan interest (expense).

I wouldn't adjust the retained profit as then this won't allow for any tax relief unless the previous year accounts get restated. My gut feel is that restating the accounts isn't correct as the 5% rate was correct when they were prepared.

I guess it also depends how their loan repayments have been affected by the change - when will the rebate materialise?

crispy

Thanks Monsoon,

The loan principle plus accrued interest is due to be paid April '10 - I think you are right not to change the opening balance figures. As at the Year End date the loan agreement document did specify an interest rate of 3 %pa so will therefore apply prospectively.

I am afraid I do not much more than the basics of Corp. Tax, if there were say a material error in the previous years published accounts that required the opening balances to be restated, how would this be treated in the curretn year's tax return? .(Sorry this may seem a stupid question)

Thank you

Monsoon

If there was a material error, then the right thing to do would be to amend the submitted accounts and CT600, and use the correct figures going forwards.

crispy

Thanks again for your advise - makes sense

Steve Collings

Hi,

Prior year adjustments (FRS 3) would only be done in respect of 'fundamental' errors in the previous year's financial statements. An immaterial adjustment should really be done in the current year as Monsoon says.

kind regards
Steve