Dr. Cash 24,150 18,113 12,075 6,038 Cr. Interest income 24,150 18,113 12,075 6,038 To recognise interest income 3 column ‘(c)’) Dr. Financial asset (loan receivable) 23,472 18,220 12,578 6,514 Cr. 1234001 Unwind concessional loan discount (income) 23,472 18,220 12,578 6,514 To recognise the unwinding of the discount (Table 3 column ‘(d)’) Illustrative example 2: Interest free loan Information: On 1 July 20X0, an entity agrees to provide a $700,000 loan to a NFP organisation. The loan is provided on the following Principal: $700,000 to be repaid evenly over the loan term ($175,000 p.a.). Loan interest rate: Interest free. Term: 4 years. Interest is calculated on the amount outstanding at the beginning of the year. If borrowing in the market the market participant be subject to a rate of 7.45%. Cash flows occur at year end. Answer: Initial accounting As per Illustrative example 1, the loan (A) is separated into a market based loan (B) and the loan discount (C). The market based loan (B) is recognised at fair value using DCF analysis. However, in this case, the cash receipts for the period only consist of the principal repayments as the concessional loan is interest free. The discount rate for (B) is still 7.45%. The PV of the future cash flows at the market rate for (B) and at the concessional rate of 0% for (A) are illustrated in the following table: Table 1: Discounted cash flow analysis (A) (B) Year Principal Interest payment at Total cash PV at loan rate PV at market rate repayment loan rate (0%) flows (0%) (7.45%) $175,000 $- $175,000 $175,000 $162,866 1 (175,000 / (1.0000)1) (175,000 / (1.0745)1)
Dr. Cash 24,150 18,113 12,075 6,038 Cr. Interest income 24,150 18,113 12,075 6,038 To recognise interest income 3 column ‘(c)’) Dr. Financial asset (loan receivable) 23,472 18,220 12,578 6,514 Cr. 1234001 Unwind concessional loan discount (income) 23,472 18,220 12,578 6,514 To recognise the unwinding of the discount (Table 3 column ‘(d)’) Illustrative example 2: Interest free loan Information: On 1 July 20X0, an entity agrees to provide a $700,000 loan to a NFP organisation. The loan is provided on the following Principal: $700,000 to be repaid evenly over the loan term ($175,000 p.a.). Loan interest rate: Interest free. Term: 4 years. Interest is calculated on the amount outstanding at the beginning of the year. If borrowing in the market the market participant be subject to a rate of 7.45%. Cash flows occur at year end. Answer: Initial accounting As per Illustrative example 1, the loan (A) is separated into a market based loan (B) and the loan discount (C). The market based loan (B) is recognised at fair value using DCF analysis. However, in this case, the cash receipts for the period only consist of the principal repayments as the concessional loan is interest free. The discount rate for (B) is still 7.45%. The PV of the future cash flows at the market rate for (B) and at the concessional rate of 0% for (A) are illustrated in the following table: Table 1: Discounted cash flow analysis Year Principal repayment Interest payment at loan rate (0%) Total cash flows (A) PV at loan rate (0%) (B) PV at market rate (7.45%) 1 $175,000 $- $175,000 $175,000 (175,000 / (1.0000)1) $162,866 (175,000 / (1.0745)1)
rmg-115-accounting-for-concessional-loans.docx