Page 68 - 23. COMPILER QB - IND AS 109_32

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e. 31 March 2021
Particulars Dr. Amount (Rs) Cr. Amount (Rs)
Loan from bank A/c Dr. 9,50,000
Interest expense (profit and loss) Dr. 11,40,000
To cash A/c 20,90,000
(Being first instalment of the new loan and payment
of interest accounted for as an adjustment to the
amortised cost of loan)

Q43. (December 21 – 12 Marks)

Ram Limited is a company incorporated in India. It provides Rs. 25,00,000 interest free loan to its wholly
owned Indian subsidiary Balram Limited. There are no transaction costs.
How should the loan be accounted for, in the light of provisions of related Ind AS, in the books of Ram

Limited, Balram Limited and Consolidated Financial Statements of the group, considering the following
scenarios:
i. The loan is repayable on demand.
ii. The loan is repayable after 3 years. The current market rate of interest for similar loans is 12% P.A.
for both holding and subsidiary.
iii. The loan is repayable when Balram Limited has funds to repay the loan.

Briefly, analyse the above scenarios. Also pass Journal Entries in the books of Ram Limited and Balram
Limited in case of Scenario (a) and (b).
Present Value of Rs. 1 payable in 3 years’ time at an annual discount rate of 12% is 0.7118.
Suggested SOLUTION

Ind AS 109 requires that financial assets and liabilities are recognized on initial recognition at its fair value, as
adjusted for the transaction cost. In accordance with Ind AS 113 Fair Value Measurement, the fair value of a

financial liability with a demand feature (e.g., a demand deposit) is not less than the amount payable on
demand, discounted from the first date that the amount could be required to be paid.
Using the guidance, the loan will be accounted for as below in various scenarios:
Scenario (a)
Since the loan is repayable on demand, it has fair value equal to cash consideration given. The parent and

subsidiary recognize financial assets and liability, respectively, at the amount of loan given. Going forward, no
interest is accrued on the loan.
Upon repayment, both the parent and the subsidiary reverse the entries made at origination.
Scenario (b)

Both parent and subsidiary recognize financial assets and liability, respectively, at fair value on initial
recognition. The difference between the loan amount and its fair value is treated as an equity contribution to
the subsidiary. This represents a further investment by the parent in the subsidiary.
Accounting in the books of RAM Ltd (Parent)
S.No. Particulars Amount Amount
On the date of loan

1 Loan to Balram Ltd (Subsidiary) Dr. 17,79,500
Deemed Investment (Capital Contribution) in Balram Ltd Dr. 7,20,500

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