What is the Bangladesh standard on Audit(BSA-300) ? Describes in details

 

Corporate Accounting Treatment

Term Finance -Interest calculation sheet:

Term finance refers to a type of loan or financing that is provided for a specific period, typically used for funding capital expenditures or significant investments. This kind of financing is essential for businesses looking to acquire fixed assets, expand operations, or manage cash flow needs.

Key Characteristics of Term Finance:

1.Loan Duration:

Short-term:

 Generally, lasts up to one year. These loans are often used for working capital needs or to manage short-term cash flow.

Medium-term:

 Typically spans from one to five years. This duration is common for financing equipment purchases or business expansion.

Long-term: 

Lasts more than five years and is often used for large capital projects, such as infrastructure development or significant acquisitions.

2.Interest Rates:

Term loans can have either fixed or variable interest rates.

Fixed Rate: 

The interest rate remains constant throughout the loan period, making it easier for borrowers to plan their repayments.

Variable Rate:

 The interest rate may fluctuate based on market conditions, which can lead to changes in repayment amounts over time.

3.Repayment Structure:

Repayment is usually structured in periodic installments, which can be monthly, quarterly, or annually. These payments include both principal and interest.

4.Secured vs. Unsecured:

Secured Loans:

 Often backed by collateral, such as property or equipment. This reduces the lender's risk and may result in lower interest rates.

Unsecured Loans:

 Do not require collateral, making them riskier for lenders, which can lead to higher interest rates

Purpose:

Term finance is primarily used for long-term investments in fixed assets (like machinery, buildings, or vehicles) or for financing business expansions, acquisitions, or significant projects.

Advantages of Term Finance

Access to Capital: 

Provides businesses with the necessary funds to invest in growth opportunities without depleting existing resources.

Predictable Payments:

 Fixed repayment schedules help in budgeting and financial planning.

Potential Tax Benefits: Interest payments on business loans may be tax-deductible, providing a financial advantage.

Disadvantages of Term Finance

Debt Burden: 

Taking on loans increases the overall debt load, which can be risky if the business does not generate sufficient revenue to cover repayments.

Collateral Requirement: For secured loans, borrowers must be willing to risk their assets.

Long-term Commitment: Borrowers are obligated to adhere to repayment schedules, which may limit financial flexibility.

Practical Example

Scenario: A manufacturing company needs to purchase new machinery costing $100,000.

Loan Type: Medium-term financing for 5 years.

Interest Rate: Fixed at 6% per annum.

Repayment Schedule: Monthly payments.

Monthly Payment Calculation: Using the amortization formula for fixed-rate loans:

$$M = P \frac{r(1 + r)^n}{(1 + r)^n - 1}$$M=P(1+r)n−1r(1+r)n​

Where:

$M$M = monthly payment

$P$P = principal loan amount ($100,000)

$r$r = monthly interest rate (annual rate / 12 months = 0.06/12 = 0.005)

$n$n = number of payments (5 years * 12 months = 60)

Calculating the monthly payment:

$$M = 100,000 \frac{0.005(1 + 0.005)^{60}}{(1 + 0.005)^{60} - 1} \approx 1,933.28$$M=100,000(1+0.005)60−10.005(1+0.005)60​≈1,933.28

The company would repay approximately $1,933.28 each month for 60 months.

Conclusion:

Term finance is a vital component for businesses seeking to invest in growth and development. By understanding its features, benefits, and potential drawbacks, companies can make informed decisions about how to finance their operations and achieve their long-term objectives.