Wheel Co. Limited borrowed - 500,000,000 from a bank on 1 January 20X1. The original terms of the loan were as follows: Interest rate: 11%Repayment…

On the date of initial recognition, the effective interest rate of the loan shall be computed keeping in view the contractual cash flows and upfront processing fee paid. The following table shows the amortisation of loan based on effective interest rate: Date Cash flows (principal) Cash flows (interest and fee) Amortised cost (opening + interest - cash flows) Interest @ EIR (11.50%) 1-Jan-20X1 (500,000,000) 5,870,096 494,129,904 31-Dec-20X1 100,000,000 55,000,000 395,954,843 56,824,939 31-Dec-20X2 100,000,000 44,000,000 297,489,650 45,534,807 31-Dec-20X3 100,000,000 33,000,000 198,700,959 34,211,310 31-Dec-20X4 100,000,000 22,000,000 99,551,570 22,850,610 31-Dec-20X5 100,000,000 11,000,000 (0) 11,448,430 a. 1 January 20X1 – Particulars (₹) (₹) Bank A/c Dr. 494,129,904 To Loan from bank A/c 494,129,904 (Being loan recorded at its fair value less transaction costs on the initial recognition date) b. 31 December 20X1 – Particulars (₹) (₹) Loan from bank A/c Dr. 98,175,061 Interest expense (profit and loss) Dr. 56,824,939 To Bank A/c 155,000,000 (Being first instalment of loan and payment of interest accounted for as an adjustment to the amortised cost of loan) c. 31 December 20X2 – Before Wheel Co. Limited approached the bank – Particulars (₹) (₹) Interest expense (profit and loss) Dr. 45,534,807 To Loan from bank A/c 1,534,807 To Bank A/c 44,000,000 (Being loan payment of interest recorded by the Company before it approached the Bank for deferment of principal) Upon receiving the new terms of the loan, Wheel Co. Limited, re-computed the carrying value of the loan by discounting the new cash flows with the original effective interest rate and comparing the same with the current carrying value of the loan. As per requirements of Ind AS 109, any change of more than 10% shall be considered a substantial modification, resulting in fresh accounting for the new loan: Date Cash flows (principal) Interest outflow @ 15% Discount factor PV of cash flows 31-Dec-20X2 (400,000,000) 31-Dec-20X3 40,000,000 60,000,000 0.8969 89,686,099 31-Dec-20X4 40,000,000 54,000,000 0.8044 75,609,805 31-Dec-20X5 40,000,000 48,000,000 0.7214 63,483,092 31-Dec-20X6 40,000,000 42,000,000 0.6470 53,053,542 31-Dec-20X7 40,000,000 36,000,000 0.5803 44,100,068 31-Dec-20X8 40,000,000 30,000,000 0.5204 36,429,133 31-Dec-20X9 40,000,000 24,000,000 0.4667 29,871,422 31-Dec-20Y0 40,000,000 18,000,000 0.4186 24,278,903 31-Dec-20Y1 40,000,000 12,000,000 0.3754 19,522,235 31-Dec-20Y3 40,000,000 6,000,000 0.3367 15,488,493 PV of new contractual cash flows discounted at 11.50% 451,522,791 Carrying amount of loan 397,489,650 Difference 54,033,141 Percentage of carrying amount 13.59% Note: Calculation done above is on full decimal, though in the table discount factor is limited to 4 decimals. Considering a more than 10% change in PV of cash flows compared to the carrying value of the loan, the existing loan shall be considered to have been extinguished and the new loan shall be accounted for as a separate financial liability. The accounting entries for the same are included below: d. 31 December 20X2 – accounting for extinguishment Particulars (₹) (₹) Loan from bank (old) A/c Dr. 397,489,650 Loss on modification of loan (profit and loss) Dr. 2,510,350 To Loan from bank (new) A/c 400,000,000 (Being new loan accounted for at its principal amount in absence of any transaction costs directly related to such loan and correspondingly a de-recognition of existing loan) e. 31 December 20X3 Particulars (₹) (₹) Loan from bank A/c Dr. 40,000,000 Interest expense (profit and loss) Dr. 60,000,000 To Bank A/c 100,000,000 (Being first instalment of the new loan and payment of interest accounted for as an adjustment to the amortised cost of loan)