# ASC 835-30-05: Interest — Imputation of Interest — 05 Overview and Background

Source: FASB Accounting Standards Codification, Basic View

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## ASC 835-30-05: 05 Overview and Background

[Read section](https://asc.understandingaccounting.org/asc/835/30/#05-overview-and-background)

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##### [835-30-05-1](https://asc.understandingaccounting.org/asc/835/30/#835-30-05-1)

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This Subtopic addresses the imputation of interest.

##### [835-30-05-2](https://asc.understandingaccounting.org/asc/835/30/#835-30-05-2)

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Business transactions often involve the exchange of cash or property, goods, or service for a note or similar instrument. When a note is exchanged for property, goods, or service in a bargained transaction entered into at arm's length, there should be a general presumption that the rate of interest stipulated by the parties to the transaction represents fair and adequate compensation to the supplier for the use of the related funds. That presumption, however, must not permit the form of the transaction to prevail over its economic substance and thus would not apply if interest is not stated, the stated interest rate is unreasonable, or the stated face amount of the note is materially different from the current cash sales price for the same or similar items or from the [fair value](https://asc.understandingaccounting.org/glossary/f/#fair-value "The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.") of the note at the date of the transaction. The use of an interest rate that varies from prevailing interest rates warrants evaluation of whether the face amount and the stated interest rate of a note or obligation provide reliable evidence for properly recording the exchange and subsequent related interest.

##### [835-30-05-3](https://asc.understandingaccounting.org/asc/835/30/#835-30-05-3)

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This Subtopic provides guidance for the appropriate accounting when the face amount of a note does not reasonably represent the present value of the consideration given or received in the exchange. This circumstance may arise if the note is non-interest-bearing or has a stated interest rate that is different from the rate of interest appropriate for the debt at the date of the transaction. Unless the note is recorded at its present value in this circumstance, the sales price and profit to a seller in the year of the transaction and the purchase price and cost to the buyer are misstated, and interest income and interest expense in subsequent periods are also misstated.