Page 64 - 23. COMPILER QB - IND AS 109_32

Q40. (July 21 – 6 Marks)

Government of India provides loans to MSMEs at a below-market rate of interest to fund the set-up of a
new manufacturing facility. Sukshma Limited's date of transition to Ind AS is 1st April 2020.
In the financial year 2014-2015, the Company had received a loan of Rs 2.0 crore at a below - market rate

of interest from the government. Under Indian GAAP, the Company had accounted for the loan as equity and
the carrying amount was Rs 2.0 crore at the date of transition. The amount repayable on 31st March 2024
will be Rs 2.50 crore.
The Company has been advised to recognize the difference of Rs 0.50 crores in equity by correspondingly
increasing the value of various assets under property, plant & equipment by an equivalent amount on

proportionate basis. Further, on 31st March 2024 when the loan has to be repaid, Rs 2.50 crore should be
presented as a deduction from property, plant & equipment.
Discuss the above treatment and share your views as per applicable Ind AS.
SOLUTION

Requirement as per Ind AS:
A first-time adopter shall classify all government loans received as a financial liability or an equity instrument
in accordance with Ind AS 32. A first-time adopter shall apply the requirements in Ind AS 109 and Ind AS 20,

prospectively to government loans existing at the date of transition to Ind AS and shall not recognise the
corresponding benefit of the government loan at a below-market rate of interest as a government grant.
Treatment to be done:
Consequently, if a first-time adopter did not, under its previous GAAP, recognise and measure a government
loan at a below-market rate of interest on a basis consistent with Ind AS requirements, it shall use its
previous GAAP carrying amount of the loan at the date of transition to Ind AS as the carrying amount of the

loan in the opening Ind AS Balance Sheet. An entity shall apply Ind AS 109 to the measurement of such loans
after the date of transition to Ind AS.
In the instant case, the loan meets the definition of a financial liability in accordance with Ind AS 32.
Company therefore reclassifies it from equity to liability. It also uses the previous GAAP carrying amount of
the loan at the date of transition as the carrying amount of the loan in the opening Ind AS balance sheet.

It calculates the annual effective interest rate (EIR) starting 1st April 2020 as below: EIR = Amount /
Principal(1/t) i.e. 2.50/2(1/4) i.e. 5.74%. approx.
At this rate, Rs 2 crore will accrete to Rs 2.50 crore as at 31st March 2024.
During the next 4 years, the interest expense charged to statement of profit and loss shall be:
Year ended Opening Interest expense for the Closing

amortised cost year (Rs) @ 5.74% p.a. amortised cost
(Rs) approx. (Rs)
31st March 2021 2,00,00,000 11,48,000 2,11,48,000

31st March 2022 2,11,48,000 12,13,895 2,23,61,895
31st March 2023 2,23,61,895 12,83,573 2,36,45,468
31st March 2024 2,36,45,468 13,54,532 2,50,00,000

An entity may apply the requirements in Ind AS 109 and Ind AS 20 retrospectively to any government loan
originated before the date of transition to Ind AS, provided that the information needed to do so had been

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