Page 35 - 23. COMPILER QB - IND AS 109_32

Q22 (April 21 – 4 Marks)

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 the loan
processing fee be accounted for?
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 the 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
recognised over the term of the instrument.
Hence loan processing fees shall be reduced from the principal amount to arrive at the value on day 1 upon

initial recognition.
Fair value (5 year term loan) = 10,00,000 – 10,000 (1% x 10,00,000) = 9,90,000
Fair value (3 year term loan) = 8,00,000 – 8,000 (1% x 8,00,000) = 7,92,000.
Now, effective interest rate shall be higher than the interest rate of 10% and 12% on 5 year loan and 3 year
loan respectively, so that the processing fees gets recognised as interest over the respective term of loans.

Q23 (April 21 – 4 Marks)
A Ltd. (the ‘Company’) makes a borrowing for Rs. 10 lacs from RBC Bank, with bullet repayment of Rs. 10

lacs and an annual interest rate of 12% per annum. Now, the Company defaults at the end of 5th year and
consequently, a rescheduling of the payment schedule is made beginning 6th year onwards. The Company is
required to pay Rs. 1,300,000 at the end of 6th year for one time settlement, in lieu of defaults in payments
made earlier.
Does the above instrument meet the definition of financial liability? Please explain.

Analyse the differential amount to be exchanged for one-time settlement
SOLUTION

a) A Ltd. has entered into an arrangement wherein against the borrowing, A Ltd. has contractual obligation
to make a stream of payments (including interest and principal). This meets the definition of financial
liability.
b) Let’s compute the amount required to be settled and any differential arising upon one time settlement at
the end of 6th year –
♦ Loan principal amount = Rs. 10,00,000
♦ Amount payable at the end of 6th year = Rs. 12,54,400 [10,00,000 x 1.12 x 1.12 (Interest for

5th & 6th year in default plus principal amount)]
♦ One-time settlement = INR 13,00,000

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