Inception of loan with tax-deductible issue costs
A borrowing entity paying tax at 30% records a loan at £9.5 million, being the proceeds received of £10 million (which equal the amount due at maturity), less transaction costs of £500,000, which are deducted for tax purposes in the period when the loan is first recognised. For financial reporting purposes, IAS 39 requires the costs, together with interest and similar payments, to be accrued over the period to maturity using the effective interest method.
Inception of the loan gives rise to a taxable temporary difference of £500,000, being the difference between the carrying amount of the loan (£9.5 million) and its tax base (£10 million). This analysis is explained in more detail at 6.2.1.B above.
Initial recognition of the transaction costs gives rise to no accounting loss (because they are included in the carrying amount of the loan). However, there is a tax loss (since the costs are included in the tax return for the period of inception). Accordingly, the initial recognition exception does not apply and a deferred tax liability of £150,000 (£500,000 @ 30%) is recognised.
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