IFRS treatment for interest free loans

4 November 2009 11,054 views 2 Comments

ACo, an offshore company, makes non-interest bearing loans of $10m in FY00, to ZCo a related entity in a tax paying jurisdiction. Repayment terms are 5 equal annual installments from FY05, ending FY10.

Whilst i agree that one would generally FV the loan by discounting the future receivables to PV using market rates, what would one do with the difference between the PV (say $8m) and the $10m? I think one would immediately recognise that “unearned interest” of $2m in the income statement as a Dr, and in future years recognise the PV would accrete back to $10m, with the income statement credited with interest receivable for the FV movements?

Or would you recognise unearned interest receivable on the balance sheet?

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  • riyer said:

    As per AG 64(the last sentence)of IAS 39

    Any additional amount lent is an expense or a reduction of income unless it qualifies for recognition as some other type of asset.

    The additional amount lent can qualify as investments in the related party(since in substance, it is infusion of additional capital). If the other party is not related, any deferred cost will have to satisfy the requirements of IAS 38 “Intangible assets”, to warrant recognition.And obviously deferred cost can never satisfy the requirement of IAS 38.

    Hope this clarifies.



  • professor1964 said:

    The FV of the loan is the discounted receivable using market rates, the difference between the PV (say $8m) and the $10m should be deferred and amortized over the term of the loan on the same basis as the accretion.

    The free interest is an additional cost to the company. However, this difference is not a transaction cost (e.g., costs paid to the broker, legal costs, commissions) as defined under IFRS (more closely mirrors premiums/discounts, financing costs or holding costs) and therefore should not be expensed immediately but should rather be deferred and amortized on the same basis as the amount that is being accreted.

    On the financials you would present the long term loan receivable on a discounted basis and would also show a deferred charge that is amortized on the same basis.

    Don’t adjust for any changes in market interest rate as this should be accounted for using the amortized cost method.


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