when take a below-market loan partially, how the discount is calculated

All topics related to IFRS Standards.
Post Reply
Rustam
Posts: 6
Joined: 24 Sep 2021, 17:08

when take a below-market loan partially, how the discount is calculated

Post by Rustam »

Hi everyone,
Our company often takes a below-market loan. But, the loan is disbursed in several parts within 1-2 years within the framework of one agreement. In this case, how are the fair value of the loan and the discount determined? Once when sign the contract? Or every time when every part is disbursed?
Thanks in advance for the answers!
DJP
Trusted Expert
Posts: 116
Joined: 26 Jun 2020, 15:57

Re: when take a below-market loan partially, how the discount is calculated

Post by DJP »

When you sign the contract you should determine what the relevant rate is. For that you should look at market rates for the relevant repayment dates and credit risk of the counterparty. Your transfer pricing department (in case you have one) should be able to support you with determining the discount rate. You then recognise the liability at its discounted amount. The difference -- i.e. the discount -- between the cash received and the liability recognised should be recognised either as an equity contribution or go straight to P&L (policy choice).
Rustam
Posts: 6
Joined: 24 Sep 2021, 17:08

Re: when take a below-market loan partially, how the discount is calculated

Post by Rustam »

Thank you for answer DJP,
But the question is deeper. We have relevant market rate and we have identified that the difference between the cash received and the liability should be recognized either as an equity contribution or go straight to P&L…

The question is as follows:
Let’s say, we signed a loan agreement for 10 million dollars at 1st September 2021. The loan is in a below-market rate and the discount is calculated as 1 million dollars.
The loan is withdrawn: on 1st November 2021 - 3 million dollars, on 15th December 2021 - 2 million dollars and on 20th January 2022 - 5 million dollars.

When should I recognize the discount? on 1st September 2021, when the agreement is signed?
Or on 1st November 2021, on 15th December 2021 and on 20th January 2022 pro rata?
Or should I calculate the discount every time separately? If I should calculate the discount every time separately, how will I split the payment schedule?
DJP
Trusted Expert
Posts: 116
Joined: 26 Jun 2020, 15:57

Re: when take a below-market loan partially, how the discount is calculated

Post by DJP »

You shall determine the rate when you sign the contract.

Then you recognise the discount only at the time of each withdrawal. But first, I would check:

1) is the difference immaterial?
2) are the loans repayable on demand?

If the answers to either 1 or 2 are affirmative, most likely you don't have to recognise any discount.
Rustam
Posts: 6
Joined: 24 Sep 2021, 17:08

Re: when take a below-market loan partially, how the discount is calculated

Post by Rustam »

1) The difference is material
2) The loan will be repaid according to the repayment schedule
DJP
Trusted Expert
Posts: 116
Joined: 26 Jun 2020, 15:57

Re: when take a below-market loan partially, how the discount is calculated

Post by DJP »

Then in my opinion you should determine what the market rate is at inception of the contract (signing date), and recognise a discount (assuming that the contract rate is below the market rate) every time you withdraw from the credit facility.
Rustam
Posts: 6
Joined: 24 Sep 2021, 17:08

Re: when take a below-market loan partially, how the discount is calculated

Post by Rustam »

But, there is a problem. In order to calculate the discount every time how should I divide repayment cash flow. Because the repayment schedule is single for the whole contract.
DJP
Trusted Expert
Posts: 116
Joined: 26 Jun 2020, 15:57

Re: when take a below-market loan partially, how the discount is calculated

Post by DJP »

What do you mean by "the repayment schedule is single for the whole contract"? Do you mean that the repayments of each individual withdrawal will be made at the same time?
Rustam
Posts: 6
Joined: 24 Sep 2021, 17:08

Re: when take a below-market loan partially, how the discount is calculated

Post by Rustam »

For example, a loan contract is signed for 10 million dollars and will be repaid on fixed dates within 5 years by 500 000 dollars quarterly. It doesn’t matter when 10 million will be withdrawn, at one time or partially several times, that is, the schedule will not change.
In our case, we can’t withdraw all 10 million at one time. We withdraw today 2 million, a month later another 3 million, etc.
In my opinion there are two ways of calculating and recognizing the discount.
1. To calculate once, when signed the contract and recognize pro rata every time when part of the loan is withdrawn.
2. To calculate and recognize the discount every time when part of the loan is withdrawn. In this case I need define cash outflows every time. It is impossible to define cash outflows every time.
Maybe, there are more options?
DJP
Trusted Expert
Posts: 116
Joined: 26 Jun 2020, 15:57

Re: when take a below-market loan partially, how the discount is calculated

Post by DJP »

Your option 1 is not possible because you cannot recognise a discount for a financial asset you have not recognised yet.

You will have to recognise the discount for each withdrawal. Why do you say it is impossible to define cash flows every time? You know how much it is being paid every quarter and at maturity. Yes, it is a lot of work because you will have to allocate that quarterly 500k payment to each outstanding withdrawal, but it is doable.

I would rather try to find arguments to defend that the rate is the applicable rate for the transaction (unless we are talking about a zero market rate).
Rustam
Posts: 6
Joined: 24 Sep 2021, 17:08

Re: when take a below-market loan partially, how the discount is calculated

Post by Rustam »

Thank you!
Post Reply