Page 15 - 23. COMPILER QB - IND AS 109_32

Value of a share of XYZ = Rs. 8,40,000 ÷ 5,000 shares = Rs. 168
The fair value of Entity A’s investment in XYZ’s shares is estimated at Rs. 42,000 (that is, 250 shares ×
Rs. 168 per share).

ii) Share price = Rs. 8,50,000 ÷ 5,000 shares = Rs. 170 per share.
The fair value of Entity A’s investment in XYZ shares is estimated to be Rs. 42,500 (250 shares × Rs. 170
per share).

Q10 (Nov. 22)
On 1st April, 20X1 an entity granted an interest-free loan of Rs. 5,00,000 to an employee for a period of

three years. The market rate of interest for similar loans is 5% per year.
On 31st March, 20X3, because of financial difficulties, the employee asked to extend the interest-free loan for

further three years. The entity agreed. Under the restructured terms, repayment will take place on 31st March,

20X7. However, the entity only expects to receive a payment of Rs. 2,50,000, given the financial difficulty of
the employee.
Explain the accounting treatment on initial recognition of loan and after giving effect of the changes in the

terms of the loan as per Ind AS 109. Support your answer with Journal entries and amortised cost calculation,

as on the date of initial recognition and on the date of change in terms of loan.
SOLUTION

As the loan is not at a market interest rate, hence it is not recorded at the transaction price of Rs. 5,00,000.
Instead, the entity measures the loan receivable at the present value of the future cash inflows discounted at

a market rate of interest available for a similar loan.
The present value of the loan receivable (financial asset) discounted at 5% per year is Rs. 5,00,000 ÷ (1.05)3

= Rs. 4,32,000. Therefore, Rs. 4,32,000 is recorded on initial measurement of the loan receivable. This amount

will accrete to Rs. 5,00,000 over the three-year term using the effective interest method.

The difference between Rs. 5,00,000 and Rs. 4,32,000 i.e., Rs. 68,000 is accounted for as prepaid employee

cost in accordance with Ind AS 19 ‘Employee Benefits’, which will be deferred and amortised over the period

of loan on straight line basis.

The journal entries on initial recognition are:
Rs. Rs.
Loan receivable (financial asset) Dr. 4,32,000

Prepaid employee cost (asset) Dr. 68,000

To Cash / Bank (financial asset)
5,00,000
(Being loan granted to the employee recognised)

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