Forecasting Interest in Suspense
What follows is automatically calculated and applied to Figurewizard forecasts without intervention from a user. Examples can be seen in the sample assets and liabilities forecast.
Interest and the Balance Sheet
The general rule concerning interest charges is that they are only applied to the accounts as and when they arise.
In the case of formal agreements such as contracts for asset finance or loans where interest is fixed for the duration, the interest is described as being in suspense and disclosed in the balance sheet - First as an asset to be balanced by current liabilities (interest payable within 12 months) and long term liabilities representing interest payments due after twelve months.
How Interest in Suspense is Calculated
Take for example an asset finance loan of £3,000 taken out at the beginning of the financial year with interest fixed at 7% p.a. (£210 p.a.) repayable over 48 months.
An interest suspense account is first created for the 36 months interest payable of £630 that remains at the end of the first financial year, which is then cancelled out in the balance sheet by its current and long term liabilities as follows:
| Interest Suspense Acc. | £630 | Current Asset |
| Short term Interest payable - payable within 12 months | £210 | Current Liability |
| Long Term Interest payable - payable after 12 months | £420 | Long Term Liability |
The reason for this self - cancelling approach is to disclose fixed interest liabilities in the balance sheet, while maintaining the rule that interest is only charged to profits as and when it arises.
Exceptions to Interest Suspense
Disclosing interest in the balance sheet in this way only applies to liabilities for fixed term loans where the values of interest payable are also fixed, making them known quantities.
Estimates for future interest payable on the likes of bank overdrafts or factoring / invoicing debt, with values that will fluctuate or any other interest rates that may vary over time, are not required to be disclosed in your balance sheet.
When applicable Figurewizard calculates and applies interest suspense accounts to your balance sheet forecasts.
At last an article that explains a suspense account with an example that makes sense!
Finally, someone came up with a super simple example!! Thanks
We use Figurewizard extensively for profit, balance sheet and cash flow forecasts. With IFRS 16 coming into force whereby similar accounting to interest suspense will be used to calculate and apply capital values of leased assets for the balance sheet,
i.e. something new. Will Figurewizard be adding this as a new feature to its forecasts and what will be required of us to implement it?
Thank you for making an important point. Yes we are on the case for IFRS 16. All of the information needed to add the new capital values that will result is already present on the form dealing with fixed assets. Once it has been confirmed for non-plc companies it will be implemented without any direct input from our users. Leashold premises may have to be added but whether this will be part of the standard is not clear as yet.