Page 5 - 23. COMPILER QB - IND AS 109_32

Q2 (Nov 18)

On 1st April 2017, A Ltd. lent Rs. 2 crores to a supplier in order to assist them with their expansion plans.
The arrangement of the loan cost the company Rs10 lakhs. The company has agreed not to charge interest on
this loan to help the supplier's short-term cash flow but expected the supplier to repay Rs2.40 crores on 31st
March 2019. As calculated by the finance team of the company, the effective annual rate of interest on this

loan is 6.9% On 28th February 2018, the company received the information that poor economic climate has
caused the supplier significant problems and in order to help them, the company agreed to reduce the amount
repayable by them on 31st March 2019 to Rs2.20 crores. Suggest the accounting entries as per applicable Ind
AS.

SOLUTION
The loan to the supplier would be regarded as a financial asset. The relevant accounting standard Ind AS 109
provides that financial assets are normally measured at fair value.
If the financial asset in which the only expected future cash inflows are the receipts of principal and interest

and the investor intends to collect these inflows rather than dispose of the asset to a third party, then Ind
AS 109 allows the asset to be measured at amortised cost using the effective interest method.
If this method is adopted, the costs of issuing the loan are included in its initial carrying value rather than
being taken to profit or loss as an immediate expense. This makes the initial carrying value Rs. 2,10,00,000.

Under the effective interest method, part of the finance income is recognised in the current period rather than
all in the following period when repayment is due. The income recognised in the current period is Rs. 14,49,000
(Rs. 2,10,00,000 x 6.9%)
In the absence of information regarding the financial difficulties of the supplier the financial asset at 31st
March, 2018 would have been measured at Rs. 2,24,49,000 (Rs. 2,10,00,000 + 14,49,000). The information
regarding financial difficulty of the supplier is objective evidence that the financial asset suffered impairment

at 31st March 2018.
The asset is re-measured at the present value of the revised estimated future cash inflows, using the original
effective interest rate. Under the revised estimates the closing carrying amount of the asset would be Rs.
2,05,79,981 (Rs. 2,20,00,000 / 1.069). The reduction in carrying value of Rs. 18,69,019 (Rs. 2,24,49,000 –
2,05,79,981) would be charged to profit or loss in the current period as an impairment of a financial asset.

Therefore, the net charge to profit or loss in respect of the current period would be Rs. 4,20,019 (18,69,019 –
14,49,000).

Q3 (May 19)

KK Ltd. has granted an interest free loan of Rs 10,00,000 to its wholly owned Indian Subsidiary YK Ltd. There
is no transaction cost attached to the said loan. The Company has not finalised any terms and conditions
including the applicable interest rates on such loans. The Board of Directors of the Company are evaluating

various options and has requested your firm to provide your views under Ind AS in following situations:
1. The Loan given by KK Ltd. to its wholly owned subsidiary YK Ltd. is interest free and such loan is
repayable on demand.
2. The said Loan is interest free and will be repayable after 3 years from the date of granting such loan. The
current market rate of interest for similar loans is 10%. Considering the same, the fair value of the loan at
initial recognition is Rs 8,10,150.

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