Knowing what is required and what the options are allows lenders to plan and prepare their business for a future event.
Below are the main
accounting policies that are most likely to impact lenders.
Profit and Loss Accounts for lenders
Revenue recognition
Interest, fees and default fees should be charged on an accruals basis. So regardless of when the amounts become receivable they should be recognised on a strict accruals method.
Cost of sales
Most lenders would include the following in their cost of sales:
- Credit agency and underwriting costs
- Lead generation costs
- Bad debt provisions and write offs
You could also consider including the following costs:
- Staff costs relating to the underwriting and issue of loans
- Bank charges in regards the issue of loans
Sale of debt
Any revenue from the sale of debt should be recognised at the point of sale.
Bad debt expense
Debt should be written off and any provision reversed at the point that the debt is either sold or when you stop collecting the debt.
Interest payable
Where the business is funded by long term debt in a traditional manner then interest should be shown below operating profit. Where the business’ operation is orientated towards taking on deposits; then interest payable could be treated as cost of sales.
Reverse charge VAT charges
Ensure that the VAT charge, if relevant, follows the cost that it relates to.
Balance Sheets for lenders
Bad debt provision
Debt should be provided for based on actual and historic performance or recovery. Beware, that general provisions will be disallowed by HMRC.
Other provisions
Consider a dilapidation provision. Where you lease your offices there is most likely to be a contractually requirement for you to restore the office back to the condition they were originally let to you.
On the basis, then you should consider the likely cost and ensure that a provision is put through each year.
R&D
Any development of score cards, algorithms, debt management systems or other bespoke systems can be potentially capitalised should you consider that there is some economic life beyond a year.
Note, that the R&D tax treatment may not follow this.
Website costs
All website costs of the website may be capitalised, to the extent that it is a ecommerce website. Note, that microsites that have no ecommerce functionality cannot be capitalised.
Bank
Balances held by payment processors and similar organisations are not bank accounts and should be treated as “other debtors”. Only balances held by regulated banks should be treated as bank balances.
Wisteria act for over 20 UK lenders and are one of the leading accountancy firms in this sector. If you have any questions or queries about accounting within the lending sector please call us on 020 8429 9245 or email us at
[email protected].