Page 11 - 23. COMPILER QB - IND AS 109_32

To Equity – Retained earnings (Balance sheet) 19,200 reversal
To Preference shares (Long-term Borrowings) (Balance 5,47,200

sheet)

Q7 (May 21 & Newly Added in Latest ICAI Module for May22 Onwards)

On 1 April 20X1, Sun Limited guaranteed a Rs. 10,00,000 loan of Subsidiary – Moon Limited, which Bank STDK
has provided to Moon Limited for three years at 8%.
Interest payments are made at the end of each year and the principal is repaid at the end of the loan term.
If Sun Limited had not issued a guarantee, Bank STDK would have charged Moon Limited an interest rate of
11%. Sun Limited does not charge Moon Limited for providing the guarantee.

On 31 March 20X2, there is 1% probability that Moon Limited may default on the loan in the next 12
months. If Moon Limited defaults on the loan, Sun Limited does not expect to recover any amount from Moon
Limited.
On 31 March 20X3, there is 3% probability that Moon Limited may default on the loan in the next 12
months. If Moon Limited defaults on the loan, Sun Limited does not expect to recover any amount from Moon

Limited.
Provide the accounting treatment of financial guarantee as per Ind AS 109 in the books of Sun Ltd., on initial
recognition and in subsequent periods till 31 March 20X3.
SOLUTION

1. 1 April 20X1
A financial guarantee contract is initially recognised at fair value. The fair value of the guarantee will be
the present value of the difference between the net contractual cash flows required under the loan, and

the net contractual cash flows that would have been required without the guarantee
Particulars Year 1 Year 2 Year 3 (Rs.) Total (Rs.)
(Rs.) (Rs.)
Cash flows based on interest rate of 11% (A) 1,10,000 1,10,000 1,10,000 3,30,000

Cash flows based on interest rate of 8% (B) 80,000 80,000 80,000 2,40,000
Interest rate differential (A-B) 30,000 30,000 30,000 90,000
Discount factor @ 11% 0.901 0.812 0.731

Interest rate differential discounted at 11% 27,030 24,360 21,930 73,320
Fair value of financial guarantee contract (at
inception) 73,320

Journal Entry
Particulars Debit (Rs.) Credit (Rs.)
Investment in subsidiary Dr. 73,320

To Financial guarantee(liability) 73,320
(Being financial guarantee initially recorded)

23. 10