Cost or decreased revenue?

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Aga
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Joined: 26 Apr 2019, 21:57

Cost or decreased revenue?

Post by Aga »

Hi,

A. Company issues loans for free. 0% interest and 0% commission for new customers. In addition Company will pay the customers extra money when the loans will be repaid on due date without delay. Such expenses should be classified as provisions and recognised at the date of loans issuing? Or the expenses can be classified as loan issuing cost and will decrease company revenue?

B. The assumption as in point A plus company receives other income from customers e.g. loans extension fees.
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Marek Muc
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Re: Cost or decreased revenue?

Post by Marek Muc »

Wow, I would like to take out such a loan! :)
The loan should be recognised at fair value, so you will recognise an up-front expense because of the below market interest rate and additional payment to a customer. So all of these cash flows should be discounted to recognition date and result in a day 1 loss. Then, you recognise interest income as usual. See also here:
https://ifrscommunity.com/knowledge-bas ... rate-loans

Re. point B. How do you treat such extension fees? As a part of EIR, right? As I understand, you expect that the customer will not be able to repay the original loan, and then you will earn the extension fee?
Aga
Posts: 14
Joined: 26 Apr 2019, 21:57

Re: Cost or decreased revenue?

Post by Aga »

Extension fees are a part of EIR.
Aga
Posts: 14
Joined: 26 Apr 2019, 21:57

Re: Cost or decreased revenue?

Post by Aga »

A standard loan with market interest is valued after initial recognition at amortized cost. It is not possible to predict at the beginning whether the customer will have a problem with repayment and will submit an application for extension of the repayment date. If during the loan period its duration and flows change, this is recognized as a modification (change <10%).

Regarding the loan issued with interest rate below market value, we cannot predicte at initial recognition whether the customer will use the extension option.

There was no link in the previous reply. Can you please include the link?
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Marek Muc
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Re: Cost or decreased revenue?

Post by Marek Muc »

Generally, expected cash flows should be taken into account:
https://ifrscommunity.com/knowledge-bas ... cash-flows

If the extension option is included in the contract, then you need to estimate cash flows a group of similar loans. If this is not possible, then take the contractual ones without taking the extension option into account. Once you have more data, you will be able to make better estimations.

If this option is not included in the contract, I think you should ignore it and wait until the customer comes for a new contract.

PS. I added the missing link in my previous post, thanks :)
Aga
Posts: 14
Joined: 26 Apr 2019, 21:57

Re: Cost or decreased revenue?

Post by Aga »

Sorry, I was browsing on my phone and it might not display correctly.
Thank you very much. :D
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