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Interest Rate Swap

21 February 2009 5,310 views One Comment

Dear Experts,
An Org has signed a IRS agrrement with a bank against floating int rate of term loan from another bank.
Before the maturity of agreement period term loan is repaid and another loan obtained from another bank.
Based on int cap and fluctuation in int rate loss/proft is recognised in Income Statement and Asset/ Liabilty is accounted.
Due to repayment of term loan against which IRS agreement was made. Can we continue to account for IRS against another loan obtained. Or IRS agreement is to be cancelled.

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One Comment »

  • admin (author) said:

    A comment from Ram (IFRSLIST member)

    I think you have two questions:-

    1) Accounting treatment of IRS obtained against the loan which is cancelled/accounting treatment of IRS itself considering that it is against an exisiting loan in the books of account.
    2) Whether the IRS is to be cancelled upon cancellation of the loan for which it was obtained.

    My thoughts on above are as below :-
    1) IRS in the given case , i think envisages interest payment on notional amount which is a fixed rate, where the basis of it is an undeying variable rate interest term loan transaction.

    The difference between the variable interest rate and IRS fixed rate is to be paid or received depending on the the status of comparision between fixed and floating rate at a reporting date. The net difference is either a gain (if variable rate > fixed rate on the IRS) or an outlow (if variable rate is < fixed rate on the IRS). This situation may change based on the profile of actual term loan vis-a-vis IRS notional amount.
    If the tenure is a single tenure of IRS and it runs through longer than the individual accounting periods, there will be mark to market of the IRS instrument by issuing bank on each reporting date, which needs to be accounted for as per IAS 39 (profit or loss is recognised through income statement or it is debited/credited to a swap reserve accoutning depending on whether or not an entity follows hedge accounting). This mark to market is in addition to the net payable/receivable between the issuing bank and client as per the IRS notional profile.
    2) Whether the IRS needs to be cancelled depends on the business decision and requirement to hedge interest rate movements on loans obtained by the organisation. I believe that IRS which is based on a term loan gets cancelled as there is no need to hedge something which is not existing.
    When a new loan is obtained, it is obtained at the prevailing interest rate and the hedging requirement (obtaining a fixed rate IRS) is different when the deal is transacted and it is at this point in time that a decision to hedge or not hedge should be taken, which then follows the accounting treatement suggested in 1) above.

    Cheers!
    Ram

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