Loan Extended to Employees at Concessional Rate is Recorded at Fair Value | Ind AS 109

Para 5.1.1 of Ind AS 109, Financial Instruments, states that except for trade receivables within the scope of paragraph 5.1.3, at initial recognition, an entity shall measure a financial asset or financial liability at its fair value plus or minus, in the case of a financial asset or financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability.

However, if the fair value of the financial asset or financial liability at initial recognition differs from the transaction price, an entity shall apply paragraph B5.1.2A which requires if an entity determines that the fair value at initial recognition differs from the transaction price, the entity shall account for that instrument on that date at the measurement required by para 5.1.1, adjusted to defer the difference between the fair value at initial recognition and the transaction price. After initial recognition, the entity shall recognize that deferred difference as a gain or loss only to the extent that it arises from a change in a factor (including time) that market participants would take into account when pricing the asset or liability.

This story discusses a case study where a company has extended a concessional loan to its employees resulting in financial asset which is required to be measured as per principles stated in Ind AS 109. This story also sheds light on the measurement aspect as well as the accounting aspect of concessional employee loans as per Ind AS 109.

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