Query
An Ind AS compliant entity has borrowed Rs. 10,00,000 from a bank who has charged Rs. 91,760 as the processing charges. The coupon interest rate is 12% and the loan is repayable in 5 years in equal installments of Rs. 2,77,410. The bank disbursed the loan amount net of its processing charges.
How would you account for this transaction?
Answer
Ind AS 32, Financial Instruments: Presentation, defines a financial liability as a contractual obligation to deliver cash or another financial asset to another entity. Initially, a financial liability is measured at its fair value plus or minus transaction costs that are directly attributable to its acquisition. However, if the financial liability is measured at fair value through profit or loss, transaction costs should not be adjusted withfair value of the liability. The transaction price of a liability should be taken as its fair value, unless otherwise justified. Further, at the time of subsequent measurement, generally, a financial liability is measured at amortised cost which is calculated at initially recognised value of the liability plus interest amount calculated at effective interest rate minus amount of repayments of liability. Effective interest rate refers to the rate that exactly discounts estimated future cash payments through the life of a financial liability to its carrying amount.
In the given case, the entity has taken a loan which is to be repaid to the lender bank in cash over the period of 5 years. So, the loan is a financial liability. Accordingly, it should be measured initially at fair value less transaction costs, i.e., Rs. 9,08,240 (Rs. 10,00,000 – Rs. 91,760). Subsequently, the loan shall be measured at amortised cost. For this purpose, the entity has to calculate the effective interest rate which will come at 16%, as follows:
Present value of cash outflows at 16% for 5 years:
= Rs. 2,77,410 * Present value annuity factor of 16% for 5 years
= Rs. 2,77,410 * 3.27
= Rs. 9,08,240
Under amortised cost model, the loan shall be measured as follows:
Year | Opening balance (1) | Interest (2) (1 * 16%) |
Historical cost (3) (3-5) |
Interest paid (4) (3 * 12%) |
Principal repaid (5) [(2,77,410)-(4)] |
Amortised cost at the end of year (1+2-4-5) |
1 | 9,08,240.00 | 1,45,318.40 | 10,00,000.00 | 1,20,000.00 | 1,57,410.00 | 7,76,148.00 |
2 | 7,76,148.00 | 1,24,183.74 | 8,42,590.00 | 1,01,110.80 | 1,76,299.20 | 6,22,922.14 |
3 | 6,22,922.14 | 99,667.54 | 6,66,290.80 | 79,954.90 | 1,97,455.10 | 4,45,179.69 |
4 | 4,45,179.69 | 71,228.75 | 4,68,835.70 | 56,260.28 | 2,21,149.77 | 2,38,998.44 |
5 | 2,38,998.44 | 38,411.56 | 2,47,685.98 | 29,724.02 | 2,47,685.98 | 0.00 |
Under amortised cost method, the amount of transaction costs are amortized over the period of liability in the form of interest. In this case,
Total interest as per effective interest rate= Rs. 4,78,810
Total interest paid to the lender bank= Rs. 3,87,050
Difference between the above is for loan processing fees= Rs. 91,760
Journal entries
1. At the time of taking loan
Bank A/c | Dr. 9,08,240.00 | ||
To Loan A/c | 9,08,240.00 | ||
(Being loan taken & measured at fair value) |
2. At the end of 1styear
(a) Interest Expense | Dr. 1,45,318.40 | ||
To Loan A/c | 1,45,318.40 | ||
(Being interest due for the year) | |||
(b) Loan A/c | Dr. 2,77,410.00 | ||
To Bank A/c | 2,77,410.00 | ||
(Being loan and interest thereon repaid) | |||
(c) Statement of profit & loss | Dr. 1,45,318.40 | ||
To Interest Expense | 1,45,318.40 |
Similarly, the interest of Rs. 124,183.74; Rs. 99,667.54; Rs. 71,228.75 and Rs. 38,411.56 should be booked in subsequent years.
Source : PTI