Two Ind AS would be referred for the accounting of loans: Ind AS 109 (Financial Instruments) and Ind AS 113 (Fair Value Measurement). As per Ind AS 109, financial instruments have to be measured at fair value at its initial recognition as per the methodology given by Ind AS 113.
Financial Instrument defined under Ind AS 32: A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. Therefore, loan taken from bank is a financial instrument.
Say, ABC Ltd has taken a loan from a bank with the following terms:
Loan amount: Rs. 2 Crores
Rate of Interest: 8% p.a.
EMI: Rs. 13.33 Lakhs
Processing fee: Rs. 4 Lakhs
Under IGAAP, processing fee was debited to borrowing charges with full amount at the time of payment to bank. Under Ind AS, it has to be amortised over the period of the term loan. Practically, ABC Ltd has received Rs. 1.96 Crores (net of processing fee), so under Ind AS, Loan has taken for Rs. 1.96 Crores and interest will be calculated on Rs. 1.96 Crores. Effective Interest rate has to be identified presuming processing fee as interest expense which has to be booked as expense over the period of the term loan.
1. Debit the term loan account by the amount of the processing fee paid to the bank.
2. Calculate Effective interest rate considering Rs. 4 Lakhs of processing fee as interest expense which has to be amortised as interest expense over the period of the term loan.
3. Calculate actual interest as per actual interest rate i.e., 8% p.a. and interest expense to be amortised as per effective interest rate.
4. Actual interest shall be remitted to the bank as per the terms of the loan taken and the difference amount (Effective Interest – Actual interest) shall be credited to term loan account.
Difference amount pertains to the processing fee which has to be amortised monthly over the period of the term loan.
Working understanding of accounting of loan (alongwith Ind AS entries) can only be obtained through complete working of loan discounting in excel which has attached for your perusal.
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