Upfront Fee adjustment in IGAAP & IND AS

We will discuss about the accounting treatment of upfront fee/loan processing fee paid.

IGAAP:

Accounting standard 16 : Borrowing costs

Borrowing costs are interest and other costs incurred by an enterprise in connection with the borrowing of funds/amount.

Borrowing costs may include: 

(a) interest and commitment charges on bank borrowings and other short-term and long-term borrowings; 

(b) amortization of discounts or premiums relating to borrowings; 

(c) amortization of ancillary costs incurred in connection with the arrangement of borrowings; 

(d) finance charges in respect of assets acquired under finance leases or under other similar arrangements; and 

(e) exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs


Upfront fee/processing fee are  recognized as an expense in the period in which they are incurred.

However, to the extent that funds are borrowed specifically for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalization on that asset should be determined as the actual borrowing costs incurred on that borrowing during the period less any income on the temporary investment of those borrowings.


Q: When we will do it ?

At the time of signing the loan agreement.



Ind AS

Standard: Ind AS 23 Borrowing costs


Borrowing costs are interest and other costs that an entity incurs in connection with the borrowing of funds. 

Borrowing costs may include: 

(a) interest expense calculated using the effective interest method as described in Ind AS 109, Financial Instruments; 

(b) finance charges in respect of finance leases recognised in accordance with Ind AS 116, Leases; and

(c) exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. 


Upfront fee shall be capitalized if the funds are specifically borrowed for the purpose of obtaining a qualifying asset.

If not, then upfront fee shall be expensed to P&l over the loan term using effective interest rate.

Calculation of effective interest rate (EIR) is important.

It considers the present value of the amounts to be repaid over the period (i.e Principal & Interest)


let us take an example:


Loan 1,00,000     Interest @10% per year  Repayment in 5 years equal installments

Upfront fee = 20,000


Now In Ind AS, 

Amount received = 100000-20000 = 80,000

Repayment schedule

Year 1: 20,000 + Interest 10,000 = 30,000
Year 2: 20,000 + Interest 8,000 = 28,000
Year 3: 20,000 + Interest 6,000 = 26,000
Year 4: 20,000 + Interest 4,000 = 24,000
Year 5: 20,000 + Interest 2,000 = 22,000

Now at what rate the present value of all the repayment at Year 0 will be equal to 80,000 that is the rate which will be used as EIR.

It can be calculated using GOAL seek formulae.










Comments

  1. Satya ManojJuly 27, 2021 at 12:49 AM

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