Zebra Limited is considering to grant an interest free loan of 25,00,000 to its wholly owned Indian subsidiary company, Camel Limited. No…

Ind AS 109 requires that a financial assets and liabilities are recognized on initial recognition at its fair value, as adjusted for the transaction cost. In accordance with Ind AS 113, the fair value of a financial liability with a demand feature (e.g., a demand deposit) is not less than the amount payable on demand, discounted from the first date that the amount could be required to be paid. Using the guidance, the interest-free loan will be accounted for as below in various scenarios: Option 1: Since the loan is repayable on demand, it has fair value equal to cash consideration given i.e.25,00,000. The parent and subsidiary recognize financial asset and liability, respectively, at the amount of loan given. Going forward, no interest is accrued on the loan. Upon repayment, both the parent and the subsidiary reverse the entries made at origination. Option 2: The loan is repayable in single bullet payment after 4 years. Both parent and subsidiary recognize financial asset and liability, respectively, at fair value on initial recognition. The difference between the loan amount and its fair value is treated as an equity contribution to the subsidiary. This represents a further investment by the parent in the subsidiary. Accounting in the books of Zebra Ltd. (Parent) Particulars Dr. (₹) Cr. (₹) On the date of loan Loan to Camel Ltd. (Subsidiary) (25,00,000 x 0.636) Dr. 15,90,000 Deemed Investment (Capital Contribution) in Camel Ltd. Dr. 9,10,000 To Bank 25,00,000 (Being the loan given to Camel Ltd. and recognised at fair value) Accrual of Interest income Loan to Camel Ltd. Dr. 1,90,800 To Interest income (Profit and Loss Account) 1,90,800 (Being interest income accrued) – Year 1 Loan to Camel Ltd. Dr. 2,13,696 To Interest income (Profit and Loss Account) 2,13,696 (Being interest income accrued) – Year 2 Loan to Camel Ltd. Dr. 2,39,340 To Interest income (Profit and Loss Account) 2,39,340 (Being interest income accrued) – Year 3 Loan to Camel Ltd. Dr. 2,66,164 To Interest income (Profit and Loss Account) 2,66,164 (Being interest income accrued) – Year 4 On repayment of loan Bank Dr. 25,00,000 To Loan to Camel Ltd. (Subsidiary) 25,00,000 Accounting in the books of Camel Ltd. (Subsidiary) Particulars Amount On the date of loan Bank Dr. 25,00,000 To Loan from Zebra Ltd. (Parent) 15,90,000 To Equity (Deemed Capital Contribution from Zebra Ltd.) 9,10,000 (Being the loan given to Camel Ltd. and recognised at fair value) Accrual of Interest Interest expense (Profit and Loss Account) Dr. 1,90,800 To Loan from Zebra Ltd. 1,90,800 (Being interest expense recognised) – Year 1 Interest expense (Profit and Loss Account) Dr. 2,13,696 To Loan from Zebra Ltd. 2,13,696 (Being interest expense recognised) – Year 2 Interest expense (Profit and Loss Account) Dr. 2,39,340 To Loan from Zebra Ltd. 2,39,340 (Being interest expense recognised) – Year 3 Interest expense (Profit and Loss Account) Dr. 2,66,164 To Loan from Zebra Ltd. 2,66,164 (Being interest expense recognised) – Year 4 On repayment of loan Loan from Zebra Ltd. (Payable) Dr. 25,00,000 To Bank 25,00,000 Working Notes: 1. Computation of Present value of loan Rate 12% Amount of Loan 25,00,000 Year of Loan 4 Present Value (25,00,000 x 0.636) 15,90,000 2. Computation of interest for Year 1 Present Value at the beginning of the year 15,90,000 Rate 12% Interest for 1st year 1,90,800 Closing value at the end of year 1 17,80,800 3. Computation of interest for Year 2 Present Value at the beginning of the year 17,80,800 Rate 12% Interest for 2nd year 2,13,696 Closing value at the end of year 2 19,94,496 4. Computation of interest for Year 3 Present Value at the beginning of the year 19,94,496 Rate 12% Interest for 3rd year 2,39,340 Closing value at the end of year 3 22,33,836 5. Computation of interest for Year 4 Present Value at the beginning of the year 22,33,836 Rate 12% Interest for 4th year 2,66,164* Closing value at the end of year 4 25,00,000 *Difference of 1,896 (i.e. 2,68,060 - 2,66,164) is due to approximation. Option 3: The loan will be repaid as and when Camel Ltd. has funds to repay the loan amount. Generally, a loan, which is repayable when funds are available, can't be stated to be repayable on demand. Rather, the entities need to estimate repayment date and determine its measurement accordingly. If the loan is expected to be repaid in four years, its measurement will be the same as in option 2. In the Consolidated Financial Statements (CFS), the loan and interest income/expense will get knocked-off as intra-group transaction in all three scenarios. Hence the above accounting will not have any impact in the CFS. In case, Camel Limited grants interest free loan to Zebra Limited, i.e. the loan is given by the subsidiary to the parent company, the difference between fair value of the loan on initial recognition and its nominal value will be treated as dividend distribution by subsidiary and dividend income by the parent.