A company, say B Ltd. is a first-time adopter of Ind AS from FY 2017-18. In April, 2015 it had taken a 10 year term loan. The processing of loan required upfront payment of loan processing fees which was duly paid. As per the terms of loan, it would be disbursed in 5 equal installments from April 2015. As on transition date, i.e. April 1, 2016 B Ltd. has recognised the term loan at fair value by calculating net present value of disbursed loan by using effective interest rate method. Effective interest rate was calculated after adjusting processing fees related to disbursed loan amount.
What should be the treatment of processing fees related to undisbursed loan amount?
Ind AS 109, Financial Instruments, defines effective interest rate as the rate that exactly discounts estimated future cash flows or contractual cash flows through expected life/contractual term of the financial instrument to the gross carrying amount or amortised cost of the financial instrument. While calculating the effective interest rate of a financial instrument, estimated/contractual cash flows should be adjusted with the fees paid or received between parties to the contract that are integral part of the effective interest rate except in cases where the financial instrument is measured at fair value through profit or loss (FVTPL). As per para B5.4.2 of Ind AS 109, such fees includes transaction costs or processing fees.
Accordingly, in the present case, assuming that balance loan amount will be disbursed in future years, total processing fees whether related to disbursed or undisbursed loan amount, should be included in calculation of effective interest rate as on transition date, i.e. April 1, 2016.
- Issue 2 of Ind AS Transition Facilitation Group Clarification Bulletin 10