An overview of Effective Interest Rate as per IND AS 109

  • CA Arpit Arora
  • | Finance - Articles
  • 01 May 2018
  • 27,552 Views
  • 12 comments
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Basic understanding of amortising upfront fees by factoring the same into interest expense by EIR method using Goal seek formula.

1. Entity has taken loan from bank on which it has incurred transaction costs primarily in form of upfront processing fees. Further these loans have multiple changes in interest rate (as contemplated in the contract based on changes in market interest rate).

2. The loans are carried at their notional amount and the transaction costs paid are expensed off in the P&L when paid under IGAAP

3. Under Ind AS all such financial liabilities are carried at amortized cost using effective interest method. Transaction cost are netted off in borrowings upon initial recognition.

4. The transaction costs have been deducted from the loan balance (when paid) and the interest has been recalculated on the effective Interest rate. Such calculation is done based on the EIR method using the goal seek function.(IND AS 109).

Comparative Computation of Interest cost under IGAAP and IND AS

Interest cost under IGAAP

IGAAP
Loan Amount ₹ 7000000.00
Loan Tenure (in months) 18
EMI ₹ -435000.00
Processing Fees ₹ 40000.00
Start Date 01-04-2017
Interest Rate (Contracted) 14.49%
Interest Cost ₹ 829999.99
Month O/S-Opening EMI Principal Interest O/S-Closing
01-04-2017 7000000.00 7000000.00
01-05-2017 7000000.00 435000.00 350502.00 84498.00 6649498.00
01-06-2017 6649498.00 435000.00 354732.96 80267.04 6294765.03
01-07-2017 6294765.03 435000.00 359014.99 75985.01 5935750.04
01-08-2017 5935750.04 435000.00 363348.72 71651.28 5572401.32
01-09-2017 5572401.32 435000.00 367734.75 67265.25 5204666.57
01-10-2017 5204666.57 435000.00 372173.73 62826.27 4832492.85
01-11-2017 4832492.85 435000.00 376666.29 58333.71 4455826.55
01-12-2017 4455826.55 435000.00 381213.08 53786.92 4074613.47
01-01-2018 4074613.47 435000.00 385814.76 49185.24 3688798.71
01-02-2018 3688798.71 435000.00 390471.99 44528.01 3298326.73
01-03-2018 3298326.73 435000.00 395185.43 39814.57 2903141.30
01-04-2018 2903141.30 435000.00 399955.77 35044.23 2503185.53
01-05-2018 2503185.53 435000.00 404783.69 30216.31 2098401.84
01-06-2018 2098401.84 435000.00 409669.89 25330.11 1688731.95
01-07-2018 1688731.95 435000.00 414615.08 20384.92 1274116.87
01-08-2018 1274116.87 435000.00 419619.95 15380.05 854496.92
01-09-2018 854496.92 435000.00 424685.25 10314.75 429811.67
01-10-2018 429811.67 435000.00 429811.68 5188.32 -0.01
7000000.01 829999.99

Interest cost under IND AS

IND AS
Loan Amount as considered for EIR ₹ 6960000.00 (Net off Processing Fees)
Loan Tenure(in months) 18
EMI ₹ -435000.00
Processing Fees ₹ 40000.00
Start Date 01-04-2017
Interest Rate (EIR) 15.24% (Using Goal Seek formula)
Interest Cost ₹ 869999.98
Month O/S-Opening EMI Principal Interest O/S-Closing
01-04-2017 6960000.00 6960000.00
01-05-2017 6960000.00 435000.00 346580.87 88419.13 6613419.13
01-06-2017 6613419.13 435000.00 350983.80 84016.20 6262435.32
01-07-2017 6262435.32 435000.00 355442.66 79557.34 5906992.66
01-08-2017 5906992.66 435000.00 359958.17 75041.83 5547034.49
01-09-2017 5547034.49 435000.00 364531.04 70468.96 5182503.45
01-10-2017 5182503.45 435000.00 369162.01 65837.99 4813341.44
01-11-2017 4813341.44 435000.00 373851.80 61148.20 4439489.64
01-12-2017 4439489.64 435000.00 378601.18 56398.82 4060888.46
01-01-2018 4060888.46 435000.00 383410.89 51589.11 3677477.57
01-02-2018 3677477.57 435000.00 388281.70 46718.30 3289195.87
01-03-2018 3289195.87 435000.00 393214.39 41785.61 2895981.47
01-04-2018 2895981.47 435000.00 398209.75 36790.25 2497771.72
01-05-2018 2497771.72 435000.00 403268.56 31731.44 2094503.16
01-06-2018 2094503.16 435000.00 408391.65 26608.35 1686111.51
01-07-2018 1686111.51 435000.00 413579.81 21420.19 1272531.70
01-08-2018 1272531.70 435000.00 418833.89 16166.11 853697.81
01-09-2018 853697.81 435000.00 424154.71 10845.29 429543.10
01-10-2018 429543.10 435000.00 429543.13 5456.87 -0.02
6960000.02 869999.98

Accounting Entries Under IGAAP and IND AS

Accounting Entries Under IGAAP

IGAAP
Accounting Head Dr Cr Category Remarks
Bank Account ₹ 6960000.00 BS Month 1
Loan ₹ 7000000.00 BS
Processing Fees ₹ 40000.00 PL
Interest 829999.99 PL Month 1 to 18 cumulative
Bank Account 829999.99 BS
Loan 7000000.01 BS Month 1 to 18 cumulative
Bank Account 7000000.01 BS

Accounting Entries Under IND AS

IND AS
Accounting Head Dr Cr Category Remarks
Bank Account ₹ 6960000.00 BS Month 1
Loan ₹ 6960000.00 BS
Processing Fees ₹ – PL
Interest 869999.98 PL Month 1 to 18 cumulative
Bank Account 869999.98 BS
Loan 6960000.02 BS Month 1 to 18 cumulative
Bank Account 6960000.02 BS

Download above in Excel Format

IND AS 109- Amortization of Processing Fees

IND AS 109 requires amortization of processing fees charged on the loan using effective interest rate method.

One may use weighted average principal outstanding to amortize the processing fees over the loan tenure.

Such amortization depends upon interest rate and tenure of the loan and will be in line with the interest income/expense.

Loan Amount (Rs) 100000

 
Interest Rate (p.a) 18%
Tenure of Loan(months) 75
Op. Book EMI Interest Principal Cl. Book Principal Based  Amortization
1 100,000.00 2,230.07 1,500.00 730.07 99,269.93 2.26%
2 99,269.93 2,230.07 1,489.05 741.02 98,528.90 2.25%
3 98,528.90 2,230.07 1,477.93 752.14 97,776.77 2.23%
4 97,776.77 2,230.07 1,466.65 763.42 97,013.35 2.21%
5 97,013.35 2,230.07 1,455.20 774.87 96,238.47 2.20%
6 96,238.47 2,230.07 1,443.58 786.49 95,451.98 2.18%
7 95,451.98 2,230.07 1,431.78 798.29 94,653.69 2.16%
8 94,653.69 2,230.07 1,419.81 810.27 93,843.42 2.14%
9 93,843.42 2,230.07 1,407.65 822.42 93,021.00 2.12%
10 93,021.00 2,230.07 1,395.31 834.76 92,186.24 2.10%
11 92,186.24 2,230.07 1,382.79 847.28 91,338.96 2.08%
12 91,338.96 2,230.07 1,370.08 859.99 90,478.98 2.06%
13 90,478.98 2,230.07 1,357.18 872.89 89,606.09 2.04%
14 89,606.09 2,230.07 1,344.09 885.98 88,720.11 2.02%
15 88,720.11 2,230.07 1,330.80 899.27 87,820.84 2.00%
16 87,820.84 2,230.07 1,317.31 912.76 86,908.08 1.98%
17 86,908.08 2,230.07 1,303.62 926.45 85,981.63 1.96%
18 85,981.63 2,230.07 1,289.72 940.35 85,041.28 1.94%
19 85,041.28 2,230.07 1,275.62 954.45 84,086.83 1.92%
20 84,086.83 2,230.07 1,261.30 968.77 83,118.06 1.90%
21 83,118.06 2,230.07 1,246.77 983.30 82,134.76 1.87%
22 82,134.76 2,230.07 1,232.02 998.05 81,136.70 1.85%
23 81,136.70 2,230.07 1,217.05 1,013.02 80,123.68 1.83%
24 80,123.68 2,230.07 1,201.86 1,028.22 79,095.47 1.80%
25 79,095.47 2,230.07 1,186.43 1,043.64 78,051.83 1.78%
26 78,051.83 2,230.07 1,170.78 1,059.29 76,992.53 1.76%
27 76,992.53 2,230.07 1,154.89 1,075.18 75,917.35 1.73%
28 75,917.35 2,230.07 1,138.76 1,091.31 74,826.04 1.71%
29 74,826.04 2,230.07 1,122.39 1,107.68 73,718.35 1.68%
30 73,718.35 2,230.07 1,105.78 1,124.30 72,594.06 1.66%
31 72,594.06 2,230.07 1,088.91 1,141.16 71,452.90 1.63%
32 71,452.90 2,230.07 1,071.79 1,158.28 70,294.62 1.60%
33 70,294.62 2,230.07 1,054.42 1,175.65 69,118.96 1.58%
34 69,118.96 2,230.07 1,036.78 1,193.29 67,925.68 1.55%
35 67,925.68 2,230.07 1,018.89 1,211.19 66,714.49 1.52%
36 66,714.49 2,230.07 1,000.72 1,229.35 65,485.14 1.49%
37 65,485.14 2,230.07 982.28 1,247.80 64,237.34 1.47%
38 64,237.34 2,230.07 963.56 1,266.51 62,970.83 1.44%
39 62,970.83 2,230.07 944.56 1,285.51 61,685.32 1.41%
40 61,685.32 2,230.07 925.28 1,304.79 60,380.53 1.38%
41 60,380.53 2,230.07 905.71 1,324.36 59,056.16 1.35%
42 59,056.16 2,230.07 885.84 1,344.23 57,711.93 1.32%
43 57,711.93 2,230.07 865.68 1,364.39 56,347.54 1.29%
44 56,347.54 2,230.07 845.21 1,384.86 54,962.68 1.25%
45 54,962.68 2,230.07 824.44 1,405.63 53,557.05 1.22%
46 53,557.05 2,230.07 803.36 1,426.72 52,130.33 1.19%
47 52,130.33 2,230.07 781.95 1,448.12 50,682.22 1.16%
48 50,682.22 2,230.07 760.23 1,469.84 49,212.38 1.12%
49 49,212.38 2,230.07 738.19 1,491.89 47,720.49 1.09%
50 47,720.49 2,230.07 715.81 1,514.26 46,206.23 1.05%
51 46,206.23 2,230.07 693.09 1,536.98 44,669.25 1.02%
52 44,669.25 2,230.07 670.04 1,560.03 43,109.21 0.98%
53 43,109.21 2,230.07 646.64 1,583.43 41,525.78 0.95%
54 41,525.78 2,230.07 622.89 1,607.19 39,918.59 0.91%
55 39,918.59 2,230.07 598.78 1,631.29 38,287.30 0.87%
56 38,287.30 2,230.07 574.31 1,655.76 36,631.54 0.84%
57 36,631.54 2,230.07 549.47 1,680.60 34,950.94 0.80%
58 34,950.94 2,230.07 524.26 1,705.81 33,245.13 0.76%
59 33,245.13 2,230.07 498.68 1,731.40 31,513.74 0.72%
60 31,513.74 2,230.07 472.71 1,757.37 29,756.37 0.68%
61 29,756.37 2,230.07 446.35 1,783.73 27,972.64 0.64%
62 27,972.64 2,230.07 419.59 1,810.48 26,162.16 0.60%
63 26,162.16 2,230.07 392.43 1,837.64 24,324.52 0.55%
64 24,324.52 2,230.07 364.87 1,865.20 22,459.32 0.51%
65 22,459.32 2,230.07 336.89 1,893.18 20,566.14 0.47%
66 20,566.14 2,230.07 308.49 1,921.58 18,644.56 0.43%
67 18,644.56 2,230.07 279.67 1,950.40 16,694.15 0.38%
68 16,694.15 2,230.07 250.41 1,979.66 14,714.49 0.34%
69 14,714.49 2,230.07 220.72 2,009.35 12,705.14 0.29%
70 12,705.14 2,230.07 190.58 2,039.49 10,665.64 0.24%
71 10,665.64 2,230.07 159.98 2,070.09 8,595.56 0.20%
72 8,595.56 2,230.07 128.93 2,101.14 6,494.42 0.15%
73 6,494.42 2,230.07 97.42 2,132.66 4,361.76 0.10%
74 4,361.76 2,230.07 65.43 2,164.65 2,197.12 0.05%
75 2,197.12 2,230.07 32.96 2,197.12 0.00 0.00%
4,383,693.63
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Author Bio

Name: CA Arpit Arora
Qualification: CA in Job / Business
Company: Reliance Brands Limited
Location: New Delhi, New Delhi, IN
Member Since: 16 Apr 2018 | Total Posts: 5
I am from Delhi; believe to work while enjoying the same;believe in positivity. View Full Profile

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12 Comments

  1. Jess says:

    Hi, im late into the game… Great workings there, can you help on sending the excel template for amortising borrowing fees on EIR method? Many thanks

      Reply
  2. Rahul says:

    Please provide a practical scenario where I have floating rate and initial fees also so what could be treatment on EIR when my rate change due to floating

      Reply
  3. Parul says:

    Hi.. Thanks for explaining the concept clearly.
    I have a issue my principal payments are fixed but Company is not paying they pay as per funds available and so there is penalty also. Interest paid monthly principal paid quarterly
    Loan was taken in March 2016.
    ind as applicable April 19
    can you please help

      Reply
    1. arpit.arora says:

      As we are using principal outstanding as weights, principal shall be reduced by the repayment as and when loan is repaid.

      Let me explain more clearly, repayments till date will be actual repayments and future repayments will be fixed in proportion to the agreement so that principal o/s becomes zero at the end of tenure.

        Reply
  6. vamsy says:

    what if the repayment of principal is not fixed and that is done in an increasing trend. this will affect the EIR and the transaction cost needs to be debited to pl is a mess. can you help in solving this issue?

      Reply
    1. Kirti says:

      Even I have the same issue. If the principal payments are not fixed and loan has been disbursed in different tranches with different tranche maturity, what would be the treatment?

        Reply
      1. arpit.arora says:

        Weighted average principal can be used to amortise the processing fees.
        principal outstanding as on each period can be changed in case of any uneven payments.

        Can send you an excel template if you want

          Reply
    2. arpit.arora says:

      Weighted average principal can be used to amortise the processing fees.
      principal outstanding as on each period can be changed in case of any uneven payments.

      Can send you an excel template if you want

        Reply

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