Page 37 - 23. COMPILER QB - IND AS 109_32

Ind AS. If not, advise the correct treatment of housing loan, interest and other expenses in the financial
statements of Star Limited for the year 20X1 -20X2 along with workings and applicable Ind AS.
You are required to explain how the housing loan should be reflected in the Ind AS compliant Balance Sheet

of Star Limited on 31st March, 20X2. Ignore defer tax impact.
SOLUTION

The accounting treatment made by the accountant is not in compliance with Ind AS 109 ‘Financial
Instruments’. As per Ind AS 109, at initial recognition, an entity shall measure a financial asset or financial

liability at its fair value. The fair value of a financial instrument at initial recognition is normally the
transaction price i.e. the fair value of the consideration given or received.

After initial recognition, an entity shall measure a financial asset either at amortised cost or at fair value
through profit and loss or fair value through other comprehensive income.
Here, the loan given to employee is not at market rate. Hence, the fair value of the loan will not be equal to
its initial loan proceeds. As per Ind AS 109, a financial instrument is initially measured and recorded in the

books at its fair value. Further, interest income to be recognised in the Statement of Profit and Loss will be
the finance income recognised at effective rate of interest i.e. @ 10% and not the rate of interest charged
by the company i.e. @ 6%.

The correct accounting treatment as per Ind AS 109 will be as under:
For measuring the fair value or present value of the loan at initial recognition, market rate of interest of

similar loan is considered (level 1 observable input) ie @ 10%, to discount the cash outflows.
The fair value of the loan shall be as follows:
Date Outstanding Principal Interest Total Discount PV
loan income inflow factor @
@ 6% 10%
31st March 20X2 15,00,000 3,00,000 90,000 3,90,000 0.909 3,54,510
31st March 20X3 12,00,000 3,00,000 72,000 3,72,000 0.826 3,07,272

31st March 20X4 9,00,000 3,00,000 54,000 3,54,000 0.751 2,65,854
31st March 20X5 6,00,000 3,00,000 36,000 3,36,000 0.683 2,29,488
31st March 20X6 3,00,000 3,00,000 18,000 3,18,000 0.621 1,97,478

Fair value of the loan 13,54,602
As per Ind AS 19, employee benefits are all forms of consideration given by an entity in exchange for services
rendered by employees or for termination of employment. Difference of loan proceeds and present value of
the loan (fair value) will be treated as prepaid employee cost irrespective of the fact that employee is not

required to give any specific performanc e against this benefit. This is because employee is required to be in
service of the company to continue availing the benefits of concessional rate of interest on housing loan.
Practically, once the employee leaves the organisation, they have to repay the outstanding loan because the
company provides the loan at concessional rate of interest only to its employees.

Hence, it is an employee benefit given by the company to its employees. This deemed employee cost of `

1,45,398 (15,00,000 – 13,54,602) will be deferred and amortised over the period of loan on straight line
basis.

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