Amortised Cost and Effective Interest Rate IFRS 9

[IFRS2020]

Have a query about the carrying value of a loan, which is classified and measured at amortised cost under IFRS 9.

Suppose there is a loan on which a borrower pays the origination fee to the lender, and it is already determined that the origination fee is an integral part of the effective interest rate and is treated as an adjustment to the effective interest rate. There is also a drawing period during which the borrower can draw down the loan anytime.

So, if, on day 1, the borrower has not drawn down the loan but has paid the origination fee, it causes the loan to become negative on the lender books (Dr = Cash and Cr = Origination fee, which is part of the loan carrying amount). This looks odd as to how the asset can be negative. Any comments/views on how to resolve this issue would be appreciated. Thanks.

[Leo]

Unfortunately, that's often the case for on demand loans.
In practice, for this type of loan, no need to bother to calculate the effective interest rates including the fees, you can spread the fees over time on a straight line basis leaving the principal of the loan accounted in a separate line, but presented altogether in the annual report.

[Marek Muc]

Can you provide details on the terms of this fee? Also, could you clarify the reason for paying it even though the loan was not actually taken out?

[Leo]

Marek, I think a revolving credit facility, where the borrowing entity can withdraw and reimburse any time, on demand, could be an example of those debt instruments. The entity pays a fee to the banks on setting up the loan.

[Marek Muc]

such fees aren't part of the effective interest rate
https://ifrscommunity.com/knowledge-bas ... tion-costs

[IFRS2020]

Can you provide details on the terms of this fee? Also, could you clarify the reason for paying it even though the loan was not actually taken out?

The loan is expected to be drawn later in the drawing period, but the origination fee is paid upfront, which is part of the loan's carrying value. In effect, it is a deferred income reported as a negative balance, but the expectation is it should be a positive carrying value as this is a financial asset.

[JakobLavrod]

Hi!
I agree that at the initial state, the loan is really a liability, and will swap around to an asset when the lender has fulfilled their obligation to disbursed the loan. I would say that this faithfully represent the financials of the situation, the lender was paid for a future service, so there is a liability. However, as time moves along to the disbursement point, it will gradually turn around and become positive before the dissbursement point

[IFRS2020]

Thank you all for your helpful responses.