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Interest Free Loan to an Employee

25 September 2009 3,626 views 4 Comments

Dear All,

Would you please help me with IFRS accounting treatment for the below;

A company  gives interest free loan to an employee which is to be repaid in equal annual installments in 10 yrs time. now company wants to classify this as Held To Maturity. can they do it and if yes, what would be the accounting treatment.

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4 Comments »

  • bmoussa said:

    No they can not. this falls under “Loans & Receivables” which initially should be recognized at cost and then after measured at amortized cost. For a given year; The payable portion of this loan should be classified as short term assets where the portion due in upcoming years shall be classified as long term assets in face of Balance Sheet.

    # 26 September 2009 at 5:41 am
  • chirag_d said:

    NO u cannot treat is as Held to Maturity, the same is treated as Loans and Advance and have to initially measure at fair value and the difference of interest rate (i.e between market rate and 0%)has to be amortised over the period using the effective rate of interest method.

    # 26 September 2009 at 6:31 am
  • cmanishiyer said:

    The loan to employee is a non-derivative financial asset having fixed and determinable payments. The entity has the positive intention to hold the loan till maturity. However, the moot point to be considered here is that it a loan to employee on whom the entity has no control. Thus, the criterion of ability to hold it to maturity is not satisfied and hence the loan cannot be classified as “Held-to-Maturity”. It has to be classified as “Loans and Receivables”.

    As far as measurement is concerned, the loan should be valued at fair value. The cash outflow for disbursing the interest-free loan is not its fair value. The fair value will be much lower than that. The difference between fair value and cash outflow to be recognised in SOCI as part of profit or loss.

    # 26 September 2009 at 9:25 am
  • zohaib (author) said:

    Dear All,

    Thank you all for your valuable response. won’t it be a
    mismatch to release entire fair value and cash outflow difference into SOCI in one go(at inception), after all company is subsidizing interest of the loan which is time based. therefore i am of the view that same should be released in the Pnl over the life of the loan. this would result in capitalization of notional asset on the Balance sheet.

    Regards,

    Zohaib Durrani

    # 27 September 2009 at 6:57 am

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