Page 52 - 23. COMPILER QB - IND AS 109_32

Q34 (Nov. 20)

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On April 1 , 2020, Star Limited has advanced a housing loan of ₹ 15 lakhs to one of its employees at an
interest rate of 6% per annum which is repayable in 5 equal annual installments along with interest at each
year end. Employees are not required to give any specific performance against this benefit. The market rate of
similar loans for housing finance by banks is 10% per annum.

The accountant of the company has recognized the staff loan in the balance sheet equivalent to the amount
of housing loan disbursed i.e. 15 lakhs. The interest income for the year is recognized at the contracted rate in
the Statement of Profit and Loss by the company i.e.₹ 90,000 (6% of 15 lakhs).
Analyze whether the above accounting treatment made by the accountant is in compliance with the relevant
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 2020-21 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 March 31s', 2021.
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 employees 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) i.e. @ 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%

31 March 2021 15,00,000 3,00,000 90,000 3,90,000 0.909 3,54,510
31 March 2022 12,00,000 3,00,000 72,000 3,72,000 0.826 3,07,272

31 March 2023 9,00,000 3,00,000 54,000 3,54,000 0.751 2,65,854
31 March 2024 6,00,000 3,00,000 36,000 3,36,000 0.683 2,29,488
31 March 2025 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 service
rendered by employees or for termination of employment. Difference of loan proceeds and present value of

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