Loan with mandatory variable repayment
Posted: 24 Mar 2024, 18:17
Hey
We have a 3 year loan for say EUR 500,000. It’s repayable with bullet payment at end of the loan and has market interest rate. However if monthly cash generation is more than 25% above agreed cash generation targets then half of the excess above that must be repaid immediately to reduce loan capital. Same every month.
Question :
is the variable payment ignored for purpose of loan accounting, eg you ignore potential variable payments and so just use amortised cost based on final repayment, then have P&L adjustment when any variable payments are needed? Same issue re effective interest rate - just ignore potential variable payment at the start, use the same effective interest throughout and use P&L adjustments to correct amortised cost liability after each variable payment. Does that sound right?
Thanks!
We have a 3 year loan for say EUR 500,000. It’s repayable with bullet payment at end of the loan and has market interest rate. However if monthly cash generation is more than 25% above agreed cash generation targets then half of the excess above that must be repaid immediately to reduce loan capital. Same every month.
Question :
is the variable payment ignored for purpose of loan accounting, eg you ignore potential variable payments and so just use amortised cost based on final repayment, then have P&L adjustment when any variable payments are needed? Same issue re effective interest rate - just ignore potential variable payment at the start, use the same effective interest throughout and use P&L adjustments to correct amortised cost liability after each variable payment. Does that sound right?
Thanks!