Page 15 - 35. FR APRIL 22 MTP QP ANSWERS

of the classification of the joint arrangement. Such facts and circumstances would indicate that
the arrangement is a joint venture.

(b) 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 inflow Discount PV
loan income @ 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.

35. 14