The formulas
- Average debt = (opening + closing) / 2
- Expected interest expense = average debt x rate - interest capitalized
- Implied rate = (recorded expense + capitalized) / average debt
How it works
Interest expense is predictable when the debt balance and the rate are known, which makes it a good candidate for a substantive analytic. The simple average assumes the balance moved evenly; with lumpy borrowings, use a monthly average.
Variable-rate debt needs the average rate for the period, not the year-end rate. Fees amortized to interest expense, commitment fees and interest capitalized on construction all move recorded expense away from the simple product, so list them in the reconciliation.
Illustrative figures only. Check the result against your firm's methodology before relying on it.
Common questions
How do I handle several loans?
Run each loan separately, or enter total debt with a weighted average rate.
Should amortized debt issuance costs be included?
Yes, if they are recorded in interest expense. Add them to the expectation or remove them from recorded expense.
Does the implied rate help?
It is a quick check. An implied rate far from the contract rate points to missing borrowings, misposted fees or a cutoff error.
Sources
Runs in your browser. The figures you type are not sent to CORAA or stored. Check the result against your firm's methodology before relying on it.