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com/

Illustration 14: SPPI or contractual cash flow test

SPPI test for loan with zero interest and no fixed repayment terms
Parent H Ltd. provides a loan to its Subsidiary S Ltd. The loan is classified as a current liability in Subsidiary
S’s financial statements and has the following terms:
– Interest free loan.
– No fixed repayment terms
– Repayable on demand of Parent H Ltd.
Does the loan meet the ‘SPPI’ or contractual cash flows characteristic test?

Solution
Yes. The terms for the repayment of the principal amount of the loan on demand satisfies the criterion
of SPPI.

Illustration 15 SPPI Test for loan with zero interest repayable in ten years
Parent H Ltd. provides a loan of INR 100 million to Subsidiary B. The loan has the following terms:
– No interest
– Repayable in ten years.
Does the loan meet the ‘SPPI’ or contractual cash flows characteristic test?

Solution
Yes. The terms for the repayment of the principal amount of the loan on demand satisfies the criterion
of SPPI

Illustration 16 : SPPI Test for loan with interest rate

Entity A Ltd. lends Entity B Ltd. INR 5 million for ten years, subject to the following terms:
– Interest is based on the prevailing variable market interest rate.
– Variable interest rate is capped at 10%.
– Repayable in ten years.
Does the loan meet the ‘SPPI’ or contractual cash flows characteristic test?

Solution
Contractual cash flows of both a fixed rate instrument and a floating rate instrument are payments of
principal and interest as long as the interest reflects consideration for the time value of money and
credit risk.

Therefore, a loan that contains a combination of a fixed and variable interest rate meets the contractual cash
flow characteristics test.

Illustration 17: Trade receivables – Amortised cost

H Ltd. makes sale of goods to customers on credit of 60 days. The customers are entitled to earn a cash
discount @ 5% per annum if payment is made before 60 days and an interest @ 12% per annum is charged
for any payments made after 60 days. Company does not have a policy of selling its debtors and holds them
to collect contractual cash flows. Evaluate the financial instrument.

Solution
In the above case, since H Ltd. has a contractual right to receive cash flows from its customers and
therefore such trade receivable are financial assets for H Ltd.

Further, H Ltd. business model test to collect will satisfy as the objective is to hold its trade receivable to
collect contractual cash flows till the end of maturity period. And such trade receivable recorded in books
represents contractual cash flows that are solely payments of principal and interest if paid beyond credit
period.
Hence such trade receivables are classified at amortised cost.

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Illustration 18: : Security Deposits – Amortized Costs

A Ltd. (the ‘Company’) has obtained the premises from B Ltd. on lease to carry on its business. The lease
contract period is 5 years. As per the lease agreement, A Ltd. has paid security deposits to B Ltd. amounting
to ₹ 10 Lac which is refundable after the expiry of lease agreement. How would such deposits be treated in
books of the A Ltd.?

Solution
In the above case, since A Ltd. has a contractual right to receive cash flows from its Lessor, B Ltd. and
therefore such security deposits receivable are financial assets for A Ltd.

Further, A Ltd. business model test to collect will be satisfied as the objective is to hold its security deposits
receivable to collect contractual cash flows till the end of maturity period. And such trade receivable
recorded in books represents contractual cash flows that are solely payments of principal and interest.
Hence such security deposits receivables are classified at amortised cost.

Illustration 19: Hold-to-collect’ or ‘hold-to-collect & sell’ business model test

Entity A has surplus funds – INR 50 million
A has not yet found suitable investment opportunity so it buys medium dated (5-year maturity) high quality
government bonds in order to generate interest income.

If a suitable investment opportunity arises before the maturity date, the entity will sell the bonds and use the
proceeds for the acquisition of a business operation. It is likely that a suitable business opportunity will be
found before maturity date.
Whether the investment opportunity will meet the ‘hold-to-collect’ or ‘hold-to-collect & sell business model
test?

Solution
Government bonds would not meet the ‘hold-to-collect’ business model test because it is considered
likely that the bonds will be sold well before their contractual maturity.
However, it is likely that such investment would meet the ‘hold-to-collect and sell’ business model test.

Illustration 20 :
ABC Bank gave loans to a customer – Target Ltd. that carry fixed interest rate @ 10% per annum for a 5-
year term and 12% per annum for a 3-year term. Additionally, the bank charges processing fees @1% of
the principal amount borrowed. Target Ltd borrowed loans as follows:
- 10 lacs for a term of 5 years
- 8 lacs for a term of 3 years.
Compute the fair value upon initial recognition of the loan in books of Target Ltd. and how will loan
processing fee be accounted?

Solution
The loans from ABC Bank carry interest @ 10% and 12% for 5- year term and 3- year term respectively.
Additionally, there is a processing fee payable @ 1% on the principal amount on date of transaction. It is
assumed that ABC Bank charges all customers in a similar manner and hence this is representative of the
market rate of interest.

Amortised cost is computed by discounting all future cash flows at market rate of interest. Further, any
transaction fees that are an integral part of the transaction are adjusted in the effective interest rate
and recognized over the term of the instrument.

Illustration 21: Deposits carrying off-market rate of interest:

Containers Ltd provides containers for use by customers for multiple purposes. The containers are returnable at the end of
the service contract period (3 years) between Containers Ltd and its customers. In addition to the monthly charge, there
is a security deposit that each customer makes with Containers Ltd for ₹ 10,000 per container and such deposit is
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refundable when the service contract terminates. Deposits do not carry any interest. Analyse the fair value upon initial
recognition in books of customers leasing containers. Market rate of interest for 3 year loan is 7% per annum.

Solution
In the above case, lessee (ie, customers leasing the containers) make interest free deposits, which are refundable at the end of 3
years. Now, this money if it was to lent to a third party would fetch interest @ 7% per annum.
Hence, discounting all future cash flows (ie, ₹ 10,000)
Fair value on initial recognition = 10,000 / (1+0.07)3 = 8,163.
Differential on day 1 = 10,000 8,163 = 1,837
The differential on day 1 shall be treated as follows:
- Scenario 1 – If fair valuation is determined using level 1 inputs or other observable inputs, difference on day 1
recognized in profit or loss
- Scenario 2 – If fair valuation is determined using other inputs, difference on day 1 shall be recognized in profit or
loss unless it meets definition of an asset or liability.

However, in case of security deposits level 1 fair value is not available. Therefore, in the above case, the fair valuation is
made based on unobservable inputs and hence applying scenario 2, difference can be recognized as an asset if it meets the
definition. Now, since the lessee gets to use the containers in return for making an interest free deposit plus monthly charges,
the lost interest representing day 1 difference between value of deposit and its fair value is like ‘’prepaid lease rent’ and can be
recognized as such. Prepaid rent (ROU Asset) shall be charged off to profit or loss in a straight-lined manner as ‘lease rent
and can be recognized as such. Prepaid rent (ROU Asset shall be charged off to profit or loss in a straight lined manner
as depreciation as per Ind AS 16.

Illustration 22: Accounting for transaction costs on initial and subsequent measurement of a financial asset
measured at fair value with changes through other comprehensive income:
An entity acquires a financial asset for CU100 plus a purchase commission of CU2. Initially, the entity recognizes the asset
at CU102. The reporting period ends one day later, when the quoted market price of the asset is CU100.
If the asset were sold, a commission of CU3 would be paid. How would transaction costs be accounted in books of the
entity?

Solution
- On that date, the entity measures the asset at CU100 (without regard to the possible commission on sale) and
recognizes a loss of CU2 in other comprehensive income.
- If the financial asset is measured at fair value through other comprehensive income in accordance with Ind AS
109.4.1.2A, the transaction costs are amortized to profit or loss using the effective interest method.

Illustration 23: Determining fair value upon initial measurement

The shareholders of Company C provide C with financing in the form of loan notes to enable it to acquire investments in
subsidiaries. The loan notes will be redeemed solely out of dividends received from these subsidiaries and become redeemable
only when C has sufficient funds to do so. In this context, 'sufficient funds' refers only to dividend receipts from subsidiaries.
Analyse the initial measurement of loan notes.

Solution
In this case –
Loan notes are repayable only then C earns returns in form of dividends from subsidiaries. Hence, C cannot be forced to
obtain additional external financing or to liquidate its investments to redeem the shareholder loans. Consequently, the
loan notes are not considered payable on demand.
Accordingly –
- Loan notes shall be initially measured at their fair value (plus transaction costs), being the present value of the
expected future cash flows, discounted using a market-related rate. The amount and timing of the expected future cash
flows should be determined on the basis of the expected dividend flow from the subsidiaries. Also, the valuation
would need to take into account possible early repayments of principal and corresponding reductions in interest
expense.
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- Since the loan notes are interest-free or bear lower-than-market interest, there will be a difference between the
nominal value of the loan notes - i.e. the amount granted - and their fair value on initial recognition. Because the
financing is provided by shareholders, acting in the capacity of shareholders, the resulting credit should be
reflected in equity as a shareholder contribution in C's balance sheet. Conversely, in books of shareholders, the
difference between amount invested and its fair value shall be recorded as ‘investment in C Ltd’ being
representative of the underlying relationship between shareholders and C Ltd.

Illustration 24 : Use of cost v/s fair value determination for equity instruments
Silver Ltd. has made an investment in optionally convertible preference shares (OCPS) of a Company – Bronze Ltd. at ₹ 100
per share (face value ₹ 100 per share). Silver Ltd. has an option to convert these OCPS into equity shares in the ratio of 1:1
and if such option not exercised till end of 9 years, then the shares shall be redeemable at the end of 10 years at a
premium of 20%.
Analyse the measurement of this investment in books of Silver Ltd.

Solution
The classification assessment for a financial asset is done based on two characteristics:
i. Whether the contractual cash flows comprise cash flows that are solely payments of principal and interest on the
principal outstanding
ii. Entity’s business model (BM) for managing financial assets – Whether the Company’s BM is to collect cash flows;
or a BM that involves realisation of both contractual cash flows & sale of financial assets;

In all other cases, the financial assets are measured at fair value through profit or loss.
In the above case, the Holder can realise return either through conversion or redemption at the end of 10 years, hence
it does not indicate contractual cash flows that are solely payments of principal and interest. Therefore, such
investment shall be carried at fair value through profit or loss. Accordingly, the investment shall be measured at fair value
periodically with gain/ loss recorded in profit or loss.

Illustration 25 : Accounting for assets at amortised cost (SIMILAR PP NOV’19)

A Ltd has made a security deposit whose details are described below. Make necessary journal entries for accounting
of the deposit in the first year and last year. Assume market interest rate for a deposit for similar period to be 12% per
annum.
Particulars Details
Date of Security Deposit (Starting Date) 1-Apr-20X1
Date of Security Deposit (Finishing Date) 31-Mar-20X6
Description Lease
Total Lease Period 5 years
Discount rate 12.00%
Security deposit (A) 10,00,000
Present value factor at the 5th year 0.567427

Solution
The above security deposit is an interest free deposit redeemable at the end of lease term for ₹ 10,0,000. Hence, this
involves collection of contractual cash flows and shall be accounted at amortised cost.
Upon initial measurement –
Particulars Details
Security deposit (A) 10,00,000
Total Lease Period (Years) 5
Discount rate 12.00%
Present value factor of 5th year end 0.56743
Present value of deposit at beginning (B) 5,67,427
Prepaid lease payment at beginning (A-B) 4,32,573
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Journal Entries
Year – 1 beginning
Particulars Amount Amount
Security deposit A/c Dr. 5,67,427
Prepaid lease expenses Dr. 4,32,573
To Bank A/c 10,00,000

Subsequently, every annual reporting year, interest income shall be accrued @ 12% per annum and prepaid
expenses shall be amortised on straight line basis over the lease term.
Year 1 end
Particulars Amount Amount
Security deposit A/c (5,67,427 x 12%) Dr. 68,091
To Interest income A/c 68,091
Depreciation (4,32,573 / 5 years) Dr. 86,515
To Prepaid lease expenses 86,515

At the end of 5th year, the security deposit shall accrue ₹ 10,00,000 and prepaid lease expenses shall be fully
amortised (i.e. depreciated as per Ind AS 116, this prepaid lease rent would be shown as ROU asset). Journal entry for
realisation of security deposit –
Particulars Amount Amount
Security deposit A/c Dr. 1,07,143
To Interest income A/c 1,07,143
Depreciation (4,32,573 / 5 years) Dr. 86,515
To Prepaid lease expenses (ROU Asset) 86,515
Bank A/c Dr. 10,00,000
To Security deposit A/c 10,00,000

Illustration 26: Accounting for assets at FVTPL

A Ltd. invested in equity shares of C Ltd. on 15th March for ₹ 10,000. Transaction costs were ₹ 500 in addition to the
basic cost of ₹ 10,000. On 31 March, the fair value of the equity shares was ₹ 11,200 and market rate of interest is
10% per annum for a 10-year loan. Pass necessary journal entries. Analyse the measurement principle and pass
necessary journal entries.

Solution
The above investment is in equity shares of C Ltd and hence, does not involve any contractual cash flows that are solely
payments of principal and interest. Hence, these equity shares shall be measured at fair value through profit or loss. Also, an
irrecoverable option exists to designate such investment as fair value through other comprehensive income.

Journal Entries
Particulars Amount Amount
Upon initial recognition –
Investment in equity shares of C Ltd. Dr. 10,000
Transaction cost Dr. 500
To Bank A/c 10,500
(Being investment recognized at fair value plus transaction costs upon
initial recognition)
Profit and Loss A/c Dr. 500
To Transaction cost 500
(Being transaction cost incurred on assets measured at FVTPL transferred to
P&L A/c)

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Subsequently –
Investment in equity shares of C Ltd. Dr. 1,200
To Fair value gain on financial instruments 1,200
(Being fair value gain recognized at year end in P&L)
Fair value gain on financial instruments Dr. 1,200
To Profit and Loss A/c 1,200
(Being fair value gain transferred to P&L A/c)

Illustration 27: Accounting for assets at FVOCI

Metallics Ltd. has made an investment in equity instrument of a company – Castor Ltd. for 19% equity stake.
Significant influence not exercised. The investment was made for₹ 5,00,000 for 10,000 equity shares on 01 April 20X1.
On 30 June 20X1 the fair value per equity share is ₹ 45. The Company has taken an irrevocable option to measure
such investment at fair value through other comprehensive income.

Solution
The Company has made an irrecoverable option to carry its investment at fair value through other comprehensive
income. Accordingly, the investment shall be initially recognised at fair value and all subsequent fair value gains/ losses shall
be recognised in other comprehensive income (OCI).
Journal Entries
Particulars Amount Amount
Upon initial recognition –
Investment in equity shares of C Ltd. Dr. 5,00,000
To Bank a/c 5,00,000
(Being investment recognized at fair value plus transaction costs upon initial
recognition)
Subsequently –
Fair value loss on financial instruments Dr. 50,000
To Investment in equity shares of C Ltd. 50,000
(Being fair value loss recognised)
Fair value reserve in OCI Dr. 50,000
To Fair value loss on financial instruments 50,000
(Being fair value loss recognized in other comprehensive income)

Illustration 28: Accounting for assets at FVOCI (SIMILAR RTP MAY’19 & MTP OCT’20)
XYZ Ltd. is a company incorporated in India. It provides INR 10,00,000 interest free loan to its wholly owned Indian
subsidiary (ABC). There are no transaction costs.
How should the loan be accounted for, in the Ind AS financial statements of XYZ, ABC and consolidated financial
statements of the group?
Consider the following scenarios:
a) The loan is repayable on demand.
b) The loan is repayable after 3 years. The current market rate of interest for similar loan is 10% p.a. for both holding
and subsidiary.
c) The loan is repayable when ABC has funds to repay the loan.

Solution
Ind AS 109 requires that a financial assets and liabilities are recognized on initial recognition at its fair value, as adjusted
for the transaction cost. In accordance with Ind AS 113 Fair Value Measurement, the fair value of a financial liability with
a demand feature (e.g., a demand deposit) is not less than the amount payable on demand, discounted from the first
date that the amount could be required to be paid.
Using the guidance, the loan will be accounted for as below in various scenarios:

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Scenario (a)
Since the loan is repayable on demand, it has fair value equal to cash consideration given. The parent and
subsidiary recognize financial asset and liability, respectively, at the amount of loan given. Going forward, no interest
is accrued on the loan.
Upon repayment, both the parent and the subsidiary reverse the entries made at origination.

Scenario (b)
Both parent and subsidiary recognize financial asset and liability, respectively, at fair value on initial recognition. The
difference between the loan amount and its fair value is treated as an equity contribution to the subsidiary. This
represents a further investment by the parent in the subsidiary.
Accounting in the books of XYZ Ltd (Parent)
S No. Particulars Amount Amount
1 On the date of loan
Loan to ABC Ltd (Subsidiary) Dr. 7,51,315
Deemed Investment (Capital Contribution) in ABC Ltd Dr. 2,48,685
To Bank 10,00,000
(Being the loan is given to ABC Ltd and recognised at fair value)
2 Accrual of Interest income
Loan to ABC Ltd Dr. 75,131
To Interest income 75,131
(Being interest income accrued) – Year 1
3 Loan to ABC Ltd Dr. 82,645
To Interest income 82,645
(Being interest income accrued) – Year 2
4 Loan to ABC Ltd Dr. 90,909
To Interest income 90,909
(Being interest income accrued) – Year 3
5 On repayment of loan
Bank 10,00,000
To Loan to ABC Ltd (Subsidiary) 10,00,000

Accounting in the books of ABC Ltd (Subsidiary)

S.No. Particulars Amount Amount
1 On the date of loan
Bank Dr. 10,00,000
To Loan from XYZ Ltd (Payable) 751,315
To Equity (Deemed Capital Contribution from ABC Ltd) 2,48,685
(Being the loan is given to ABC Ltd and recognised at Fair value)
2 Accrual of Interest
Interest expense Dr. 75,131
To Loan from XYZ Ltd (Payable) 75,131
(Being interest expense recognised) – Year I
3 Interest expense Dr. 82,645
To Loan from XYZ Ltd (Payable) 82,645
(Being interest expense recognised) – Year II
4 Interest expense Dr. 90,909
To Loan from XYZ Ltd (Payable) 90,909
(Being interest expense recognised) – Year III
5 On repayment of loan
Loan from XYZ Ltd (Payable) Dr. 10,00,000
To Bank 10,00,000

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Working Notes:-
1 Computation of Present value of loan
Rate 10%
Amount of Loan 10,00,000
Year 3
Present Value 7,51,315
2 Computation of interest for Year I
Present Value 7,51,315
Rate 10%
Period of interest - for 1 year 1
Closing value at the end of year 1 8,26,446
Interest for 1st year 75,131
3 .Computation of interest for Year 2
Value of loan as at the beginning of Year 2 8,26,446
Rate 10%
Period of interest - for 2nd year 1
Closing value at the end of year 2 9,09,091
Interest for 2nd year 82,645
4 Computation of interest for Year 3
Value of loan as at the beginning of Year 3 9,09,091
Rate 10%
Period of interest - for 3rd year 1
Closing value at the end of year 3 10,00,000
Interest for 3rd year 90,909

Scenario (c)
Generally, a loan, which is repayable when funds are available, can’t be stated to be repayable on demand. Rather, the
entities need to estimate repayment date and determine its measurement accordingly. If the loan is expected to be
repaid in three years, its measurement will be the same as in scenario (b).

In the Consolidated Financial Statements (CFS), the loan and interest income/expense will get knocked-off as intra-group
transaction in all three scenarios. Hence the above accounting will not have any impact in the CFS. However, if the loan is
in foreign currency, exchange difference will continue to impact the statement of profit and loss in accordance with the
requirements of Ind AS 21.

Illustration 29 : Trade creditors at market terms

A Company purchases its raw materials from a vendor at a fixed price of ₹ 1,000 per tonne of steel. The payment terms
provide for 45 days of credit period, after which an interest of 18% per annum shall be charged. How would the creditors be
classified in books of the Company?

Solution
In the above case, creditors for purchase of steel shall be carried at amortised cost, ie, fair value of amount payable
upon initial recognition plus interest (if payment is delayed). Here, fair value upon initial recognition shall be the price per
tonne, since the transaction is at market terms between two knowledgeable parties in an arms-length transaction and
hence, the transaction price is representative of fair value.

Illustration 30
An entity is about to purchase a portfolio of fixed rate assets that will be financed by fixed rate debentures. Both
financial assets and financial liabilities are subject to the same interest rate risk that gives rise to opposite changes in fair
value that tend to offset each other. Provide your comments.

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Solution
The fixed rate assets provide for contractual cash flows and based on business model of the entity, such fixed rate assets
may be classified as ‘amortised cost’ (if entity collects contractual cash flows) or fair value through other comprehensive
income (FVOCI) (if entity manages through collecting contractual cash and sale of financial assets).

In the absence of fair value option, the entity can classify the fixed rate assets as FVOCI with gains and losses on
changes in fair value recognised in other comprehensive income and fixed rate debentures at amortised cost.
However, reporting both assets and liabilities at fair value through profit and loss ie FVTPL corrects the
measurement inconsistency and produces more relevant information. .Hence, it may be appropriate to classify the
entire group of fixed rate assets and fixed rate debentures at fair value through profit or loss (FVTPL).

Illustration 31: Issue of borrowings with fixed rate of interest

A Ltd has made a borrowing from RBC Bank for ₹ 10,000 at a fixed interest of 10% per annum. Loan processing fees
were additionally paid for ₹ 500 and loan is payable after 5 years in bullet repayment of principal. Details are as
follows:
Particulars Details
Loan amount ₹ 10,000
Date of loan (Starting Date) 1-Apr-20X1
Date of repayment of principal amount (Finishing Date) 31-March-20X6
Interest rate 10.00%
Interest charge Interest to be charged and paid yearly
Upfront fees ₹ 500
How would loan be accounted in books of A Ltd?

Solution
The loan taken by A Ltd shall be measured at amortised cost as follows:
=Initial measurement – At transaction price less processing fees
= 10,000 – 500 = 9,500
Subsequently – interest to be accrued using effective rate of interest as follows:
Year end Opening balance Interest @ 11.42% Repayment of interest Closing Balance
& principal
1 9,500 1,085 1,000 9,585
2 9,585 1,095 1,000 9,679
3 9,679 1,105 1,000 9,785
4 9,785 1,117 1,000 9,902
5 9,902 1,098* 11,000 -
* Difference due to approximation

Computation of IRR
IRR would be the rate using which the present value of cash flow should come out to be ₹ 9,500 i.e. (₹ 10,000 less
₹ 500).
For this, we should first compute present value of cash flows using any two rates as follows:
Year end Opening balance Repayment Closing PVF @ Present PVF@ 13% Present
/Cash flows balance 10% Value at Value at 13%
10% rate rate
1 9,500 1,000 8,500 0.909 909 0.885 885
2 8,500 1,000 7,500 0.826 826 0.783 783
3 7,500 1,000 6,500 0.751 751 0.693 693
4 6,500 1,000 5,500 0.683 683 0.613 613
5 5,500 11,000 (5,500) 0.621 6,830 0.543 5,970*
10,000 8,945
*Difference is due to approximation
Taking 10% as discount rate, present value (PV) comes out to be ₹ 10,000.
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If rate is increased by 3% over a base rate of 10%, PV decreases by ₹ 1,055 (i.e. ₹ 10,000less ₹8945).
To decrease PV by ₹ 1,055, rate should be increased = 3%
To decrease PV by Re.1, rate should be increased = 3%
1,055
To decrease PV by ₹ 500, rate should be increased = 3 % X 500
1,055
= 1.42%

This would mean that the discount rate to get present value of cash flows equivalent to 9,500 should be
11.42% (i.e. 10% + 1.42%).

Illustration 32: Issue of borrowings with fixed rate of interest

A Ltd has made a borrowing from RBC Bank for ₹ 10,000 at a fixed interest of 12% per annum. Loan processing fees were
additionally paid for ₹ 500 and loan is payable 4 half-yearly installments of ₹ 2,500 each. Details are as follows:
Particulars Details
Loan amount ₹ 10,000
Date of loan (Starting Date) 1-Apr-20X1
Date of loan (Finishing Date) 31-March-20X3
Description of repayment Repayment of loan starts from 30-Sept-20X1 (To be paid half
yearly)
Installment amount ₹ 2,500
Interest rate 12.00%
Interest charge Interest to be charged quarterly
Upfront fees ₹ 500
How would loan be accounted in books of A Ltd?
Consider IRR is 16.60% p.a.

Solution
The loan taken by A Ltd shall be measured at amortised cost as follows:
- Initial measurement – At transaction price less processing fees = 10,000 – 500 = 9,500
- Subsequently – interest to be accrued using effective rate of interest as follows:

Date Amount of Re- Upfront Amount Days IRR Revised Loan

Loan payment fees of Interest Calculation Interest Balance
paid computed
1-Apr-20X1 10,000 - 500 - - 9,500 - -
30-Jun-20X1 - - - 300 90 (300) 389 9,589
30-Sep-20X1 - 2500 - 300 92 (2,800) 401 7,190
31-Dec-20X1 - - - 225 92 (225) 301 7,266
31-Mar 20X2 - 2500 - 225 90 (2,725) 297 4,838
30-Jun-20X2 - - - 150 91 (150) 200 4,888
30-Sep-20X2 - 2500 - 150 92 (2,650) 204 2,442
31-Dec-20X2 - - - 75 92 (75) 102 2,473
31-Mar-20X3 - 2500 - 75 91 (2,575) 102 -
IRR 16.60%

Illustration 33(Old SM 34) : Accounting treatment of processing fees belonging to undisbursed loan Amount
X Ltd. had taken 6-year term loan in April 20X0 from bank and paid processing fees at the time of sanction of loan. The
term loan is disbursed in different tranches from April 20X0 to April 20X6. On the date of transition to Ind AS, i.e. 1.4.20X5, it
has calculated the net present value of term loan disbursed upto 31.03.20X5 by using effective interest rate and
proportionate processing fees has been adjusted in disbursed amount while calculating net present value.
What will be the accounting treatment of processing fees belonging to undisbursed term loan amount?
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Solution
Processing fee is an integral part of the effective interest rate of a financial instrument and shall be included while
calculating the effective interest rate.
(a) Accounting treatment in case future drawdown is probable
It may be noted that to the extent there is evidence that it is probable that the undisbursed term loan will be
drawn down in the future, the processing fee is accounted for as a transaction cost under Ind AS 109, i.e., the fee
is deferred and deducted from the carrying value of the financial liabilities when the draw down occurs and
considered in the effective interest rate calculations.
(b) Accounting treatment in case future drawdown is not probable
If it is not probable that the undisbursed term loan will be drawn down in the future, then the fees is recognised
as an expense on a straight-line basis over the term of the loan.

Illustration 34(OLD SM 35) Accounting treatment of prepayment premium and processing fees for obtaining new loan
to prepay old loan
PQR Limited had obtained term loan from Bank A in 20X1-20X2 and paid loan processing fees and
commitment charges.

In May 20X5, PQR Ltd. has availed fresh loan from Bank B as take-over of facility i.e. the new loan is
sanctioned to pay off the old loan taken from Bank A. The company paid prepayment premium to Bank A to clear
the old term loan and paid processing fees to Bank B for the new term loan.

Whether the prepayment premium and the processing fees both will be treated as transaction cost (as per Ind AS 109,
Financial Instruments) of obtaining the new loan, in the financial statements of PQR Ltd?

Solution
(a) Accounting treatment of prepayment premium
Ind AS 109, provides that if an exchange of debt instruments or modification of terms is accounted for as an
extinguishment, any costs or fees incurred are recognised as part of the gain or loss on the extinguishment in the
statement of profit and loss.
Since the original loan was prepaid, the prepayment would result in extinguishment of the original loan. The difference
between the CV of the financial liability extinguished and the consideration paid shall be recognised in profit or loss as
per Ind AS 109.
Accordingly, the prepayment premium shall be recognised as part of the gain or loss on extinguishment of the old
loan.

(b) Accounting treatment of Unamortised processing fee of old loan

Unamortised processing fee related to the old loan will also be required to be charged to the statement of profit and
loss.

(c) Accounting treatment of Processing fee for new loan

Transaction costs are “Incremental costs that are directly attributable to the acquisition, issue or disposal of a
financial asset or financial liability. An incremental cost is one that would not have been incurred if the entity had not
acquired, issued or disposed of the financial instrument.”
It is assumed that the loan processing fees solely relates to the origination of the new loan (i.e. does not represent
loan modification/renegotiation fees). Hence, the processing fees paid to avail fresh loan from Bank B will be
considered as transaction cost in the nature of origination fees of the new loan and will be included while
calculating effective interest rate as per Ind AS 109.

Illustration 35(OLD SM ILL 36) Accounting treatment of share held as stock in trade
A share broking company is dealing in sale/purchase of shares for its own account and therefore is having inventory of
shares purchased by it for trading.
How will these instruments be accounted for in the financial statements?

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Solution
Ind AS 2, Inventories, states that this Standard applies to all inventories, except financial instruments (Ind AS 32,
Financial Instruments: Presentation and Ind AS 109, Financial Instruments).

Accordingly, the principles of recognising and measuring financial instruments are governed by Ind AS 109, its
presentation is governed by Ind AS 32 and disclosures are in accordance with Ind AS 107, Financial Instruments:
Disclosures, even if these instruments are held as stock-in trade by a company.

Further Ind AS 101, First-time Adoption of Indian Accounting Standards does not provide any transitional relief from the
application of the above standards.

Accordingly, in the given case, the relevant requirements of Ind AS 109, Ind AS 32 and Ind AS 107 shall be applied
retrospectively.

Illustration 36(OLD SM 37)

Bonds for ₹ 1,00,000 reclassified as FVTPL. Fair value on reclassification is ₹ 90,000. Pass the required journal entry.

Solution
Particulars Amount Amount
Bonds at FVTPL Dr. 90,000
Loss on reclassification Dr. 10,000
To Bonds at amortised cost 1,00,000

Illustration 37(OLD SM 38)

Bonds for ₹ 1,00,000 reclassified as FVOCI. Fair value on reclassification is ₹ 90,000. Pass the required journal entry.

Solution
Particulars Amount Amount
Bonds at FVOCI Dr. 90,000
OCI (Loss on reclassification) Dr. 10,000
To Bonds at amortised cost 1,00,000

Illustration 38(OLD SM ILL 39)

Bonds for ₹ 100,000 reclassified as Amortised cost. Fair value on reclassification is 90,000.
Pass the required journal entry.

Solution
Particulars Amount Amount
Bonds at Amortised cost Dr. 90,000
Loss on reclassification Dr. 10,000
To Bonds at FVTPL 1,00,000

Illustration 39 (OLD SM 40) Bonds for ₹ 100,000 reclassified as FVOCI. Fair value on reclassification is ₹ 90,000.
Pass the required journal entry

Solution
Particulars Amount Amount
Bonds at FVOCI Dr. 90,000
Loss on reclassification Dr. 10,000
To Bonds at FVTPL 1,00,000

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