IFRS 9 extension of repayment period of loan to related party

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Aady001
Posts: 59
Joined: 04 Dec 2020, 17:06

IFRS 9 extension of repayment period of loan to related party

Post by Aady001 »

Hi All,
I have one query where I need your inputs.

Company H has given a loan of $1 million, to its subsidiary Company S, on Jan 2020 for a period of 3 years.
Interest rate = 1% (Below market rate)
Loan term extended by H in Dec 2022 by 3 years
No extension or prepayment option given in the original loan agreement.
The entire loan is payable at the end of the loan term through a single payment and interest was payable quarterly.

Company S is doing the first time adoption of IFRS, transition date = 1 Jan 2021

On 1 Jan 2021, S determines the present value of the loan on Jan 2020, and recognises the difference between PV and the loan received as equity.

Query:
As there is a change in the contractual cash flows due to extension, whether the impact of change should be recognised in the Income statement or partially in equity and partially in the income statement, considering it's a loan from holding company?


Thanks
Leo
Posts: 908
Joined: 05 Apr 2020, 22:31

Re: IFRS 9 extension of repayment period of loan to related party

Post by Leo »

There are two things. When it's a parent sub relationship, and the interest is below market, the difference between the fair value and the consideration received would be considered and a capital contribution.

When the cash flow has changed, assessment is needed to determine if it's a derecognition or not. It dekend son whether is a substantial modification.

Often we perform the 10% test and the qualitative test. Of substantial then we recognise the old loan and recognise the new loan. Difference is recorded in the PL. If it's only a modification, the new loan is recorded by applying the old eir and the difference is recorded in the PL
Aady001
Posts: 59
Joined: 04 Dec 2020, 17:06

Re: IFRS 9 extension of repayment period of loan to related party

Post by Aady001 »

I think since the loan term extension is of the same period, it should be treated as a substantial change.
However, I am not sure that even in case of holding subsidiary transaction the effect of modification will go to Income statement and not equity.

Also, if say suppose the modification is concluded as substantial, then will the below accounting will happen in the books of S?

Derecognition of earlier contract:
Borrowing...............................Debit
Income statement / Equity...........Credit

Recognition of new contract as per the revised interest rate:
Income statement / Equity...........Debit
Borrowing...............................Credit
Leo
Posts: 908
Joined: 05 Apr 2020, 22:31

Re: IFRS 9 extension of repayment period of loan to related party

Post by Leo »

Not necessarily, if the new loan is at market rate, then there might not be any difference between the carrying amount of the old loan and the new one. Its likely to be a modification, not a substantial modification.

When it's a modification, I lm not sure if you recognise anything into equity. Its not written in the GAAP.
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