Loans repayable based on free cash flows

[Wynand Brits]

Does someone have guidance for a loan payable when the terms state that the loan can only be repaid from free cash flows? The loan bears interest at a market-related rate. Should I not look at the estimated cash flows and perform a fair value assessment on the loan to compare it with the carrying amount? Will the loan be classified as fair value through profit and loss?

[Ketan Marwah]

Hi,

A financial liability in general is measured at amortized cost however under specific circumstances it is measured or designated at FVTPL. Refer the link below to acquire more understanding of the cases where that is applicable and apply to your case holistically by evaluating other related circumstances. A general response is that, No you should measure it at amortized cost.

https://ifrscommunity.com/knowledge-bas ... d-at-fvtpl

[Wynand Brits]

Hi. Thanks for the reference. And the measurement of the loan at amortised cost, should I not look at the estimated cash flows to estimate the carrying amount of the loan?

[Ketan Marwah]

Hi,

Why would you do that unless you are planning to trade your liability together with some assets (combined) OR you embed a derivative atop your liability which together with your liability you would designate at fair value? I am just trying to follow your thought process better. You have some amortization related preconditions in the loan agreement but that alone should not tilt the measurement basis from amortized cost to fair value.

[JakobLavrod]

Interesting loan structure, would love to learn more about it!
Assume sufficient free-cash flow, how is the loan paid back, is it based on all existing free cash flow, or is it for example an annuity but the payment is caped by free-cash flow?

[Ketan Marwah]

Hi Jakob,

Fast forwarding the conversation a bit , would your assessment about measurement be any different in either of the two scenarios that you mentioned when sufficient free cash flow is available?
I would still measure it on amortized cost as the pattern of amortization in my view would not influence the core classification or measurement basis unless the business model unfolds some other economic interests.

[JakobLavrod]

Good question, I have much less experience with loan payable, but the point is rather that if you construct an instrument based on paying out free cash flow, at least on the holders side, this instrument would run though FVPL, while if there are fixed payments and there is only a slight chance that the cap kicks in, on the holders side it might then qualify at amortized cost.

[Ketan Marwah]

Hi,

Yeah on the lender side I would agree that the two tests (business model + cash flow characteristics) would determine the measurement basis but on the borrower side unless specific measurement cases apply or a designation is justified at FVTPL, the loan measurement would be done at amortized cost.
So basis the fact pattern presented, I don’t see anything special for the borrower being shared besides an innovative amortization schedule.