Appendix 5B Items 1.4 and 1.5: Where Interest Goes and How to Code It in Xero

Interest is a small number on many an Appendix 5B. It is also one of the few lines where the form and the accounting standard can point in different directions. The form gives interest two lines, both in Section 1. AASB 107 gives an entity a choice. This article sets out what each document says, and how to code interest in Xero so the quarterly report comes out the same way every time.

Scope: this article covers a single Australian entity lodging an Appendix 5B under ASX Listing Rule 5.5, with figures in Australian dollars. All figures below are illustrative.

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What the form provides

Section 1 of the Appendix 5B, cash flows from operating activities, has two interest lines:

• Item 1.4 Interest received
• Item 1.5 Interest and other costs of finance paid

Section 2 (investing activities) and Section 3 (financing activities) have no line labelled interest. Section 3 does have item 3.6, repayment of borrowings, and item 3.7, transaction costs related to loans and borrowings.

Dividends received are handled differently. The form shows them twice, at item 1.3 and item 2.4, and note 3 to the form says they may be classified as operating or investing, depending on the entity's accounting policy. The notes give interest no such alternative line.

What AASB 107 says

Note 2 to the form says that if the report is prepared under Australian Accounting Standards, the definitions and provisions of AASB 107 Statement of Cash Flows apply to it. Three paragraphs of AASB 107 matter here.

• Paragraph 31: cash flows from interest received and interest paid are each disclosed separately.
• Paragraph 32: the total amount of interest paid in the period is disclosed, whether it was expensed or capitalised under AASB 123.
• Paragraph 33: for entities other than financial institutions, the standard records that there is no consensus on classification. Interest paid and interest received may be operating cash flows. Alternatively, interest paid may be a financing cash flow and interest received an investing cash flow.

So the standard allows a choice, and the form's layout has interest lines in Section 1 only. If the annual financial report presents interest paid under financing activities, note that the form has no line labelled interest outside Section 1. In Section 3, the only line not tied to a named type of cash flow is item 3.9, Other (provide details if material). Agree with your auditor which line interest goes on in the quarterly report, write the choice down, and apply it every quarter.

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Why the placement matters

Item 1.5 feeds item 1.9, net cash from or used in operating activities. Item 1.9 is item 8.1, the first line of the Section 8 calculation of estimated quarters of funding available. Moving interest between sections from one quarter to the next changes both item 1.9 and the starting point of the runway calculation. We covered that calculation in Appendix 5B Section 8: The Cash Runway Calculation and the Two Quarter Rule.

Coding interest received in Xero

Interest credited to a call account can arrive through the bank feed as its own statement line. A term deposit may have no bank feed, and its interest may be added to the deposit, so record those amounts in Xero from the bank's statement. Code interest received to a dedicated interest income account, and map that account to item 1.4.

Keep interest income in its own account, separate from other income.

Coding interest paid in Xero

Interest paid takes more care when one loan repayment covers both principal and interest. On the Appendix 5B those two amounts sit in different sections.

Part of the payment	Xero account	Appendix 5B item
Interest $15,000	Interest expense	1.5 Interest and other costs of finance paid
Principal $85,000	Loan liability	3.6 Repayment of borrowings
Total bank line $100,000

In Xero, on the Create tab when you reconcile, click Add details and split the transaction across more than one line. Click Save Transaction, then Reconcile. Use the lender's statement to split the amount. Coding the whole $100,000 to the loan account understates item 1.5 and overstates item 3.6. Coding it all to interest does the reverse.

Keep two other amounts out of the interest account. Fees paid to arrange a loan have their own line on the form, item 3.7, transaction costs related to loans and borrowings. Interest that has been capitalised into an asset is still part of the total interest paid that AASB 107 paragraph 32 asks you to disclose, so tag it in Xero so it can be found at quarter end.

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Three checks before the board signs

1. Interest paid agrees to the lender. Item 1.5 for the quarter should agree with the interest shown on each lender's statement for the cash paid in those three months, plus any other costs of finance you have chosen to report there.
2. Section 7 and item 1.5 tell the same story. The Section 7 box asks for each facility's lender, interest rate, maturity date and security. A drawn facility with an interest rate and a nil item 1.5 needs a reason, such as interest that accrues and is paid at maturity.
3. Related-party lenders are picked up in Section 6. Item 6.1 is the aggregate of payments to related parties and their associates included in item 1. If a director or a director's company lent money to the entity, check whether the interest paid to them belongs in that total. We covered Section 6 in Appendix 5B Section 6: Director Fees and Related-Party Payments.

None of this takes long once the Xero accounts are set up to match the form. The work is in the set-up: one account for interest received, one for interest expense, and loan repayments split when they are reconciled rather than at quarter end. For the wider mapping, see Reconciling Your Xero Bank Feed to Appendix 5B Sections 1 and 2.

Syed Samir Ahmad
Founder, Genius Accounting Solutions
CA ANZ | Xero Partner