Modifying your Year End Position? Laura Fallon

Buried in with all the IFRS 9 changes this year has been a change to the way local authorities are required to treat restructured loans that are classified as modifications. The change has generated the potential for quite large one-off revenue windfalls for some authorities - £6.5m for one London Borough, £1.4m for a Welsh Unitary and £2.0m for an English Unitary to give three examples.

Loan restructuring applies when existing loans have their terms changed or when an existing loan is repaid and then replaced with a new loan. Usually this will involve the payment of a one-off premium or discount. If the terms are deemed similar enough the restructure is classed as a modification. However, different rules are applied to loans restructured prior to 1st April 2006 so some older loans are considered modifications even if they do not meet the present day ‘similarity’ test – for some authorities it may be time to dust off the old manuals, reach into the archived loan agreements and track down that colleague who was working in the department in 1983!

The sudden credit to the general fund comes about because under the new rules you are required to account for interest at the original loan rate with premiums or discounts paid being accounted for in the year they are incurred. Because loans were almost always restructured to a lower interest rate, the result of charging a higher interest rate on a lower (in cash terms) interest rate product is a lower liability in your balance sheet and a nice big chunk of income to make up the difference…

… any catch? Of course there is; in future you have a higher interest rate therefore your interest costs will be higher than under the previous accounting treatment. There is sadly no free change-in-accounting-standards lunch to be had. Whilst you don’t have the choice to adopt this new treatment, you do have the choice (but not the obligation) to move the resultant short term income into a reserve to cover the long term costs. Otherwise as a result of restructures past there may be an expected boost enjoyed in your year-end accounts this year.

If you would like more information on the accounting treatment for restructured loans please contact Laura Fallon at