A Ltd. issued redeemable preference shares to a Holding Company – Z Ltd. The terms of the instrument have been summarized below. Account for this in…

Applying the guidance in Ind AS 109, a ‘financial asset' shall be recorded at its fair value upon initial recognition. Fair value is normally the transaction price. However, sometimes certain type of instruments may be exchanged at off market terms (ie, different from market terms for a similar instrument if exchanged between market participants). For example, a long-term loan or receivable that carries no interest while similar instruments if exchanged between market participants carry interest, then fair value for such loan receivable will be lower from its transaction price owing to the loss of interest that the holder bears. In such cases where part of the consideration given or received is for something other than the financial instrument, an entity shall measure the fair value of the financial instrument. In the above case, since A Ltd has issued preference shares to its Holding Company Z Ltd, the relationship between the parties indicates that the difference in transaction price and fair value is akin to investment made by Z Ltd. in its subsidiary. Following is the table summarising the computations on initial recognition: Market rate of interest 12% Present value factor 0.56743 Present value 56,742,686 Loan component 56,742,686 Investment in subsidiary 43,257,314 Subsequently, such preference shares shall be carried at amortised cost at each reporting date. The computation of amortised cost at each reporting date has been done as follows: Year Date Opening Asset Days Interest @ 12% Closing balance 1-Apr-20X1 56,742,686 1 31-Mar-20X2 56,742,686 365 6,809,122 63,551,808 2 31-Mar-20X3 63,551,808 365 7,626,217 71,178,025 3 31-Mar-20X4 71,178,025 365 8,541,363 79,719,388 4 31-Mar-20X5 79,719,388 365 9,566,327 89,285,715 5 31-Mar-20X6 89,285,715 365 10,714,285 100,000,000 Journal Entries to be done at every reporting date Particulars Amount Amount Date of transaction Investment - Equity portion Dr. 43,257,314 Loan receivable Dr. 56,742,686 To Bank 100,000,000 Interest income - March 31, 20X2 Loan receivable Dr. 6,809,122 To Interest income 6,809,122 Interest income - March 31, 20X3 Loan receivable Dr. 7,626,217 To Interest income 7,626,217 Interest income - March 31, 20X4 Loan receivable Dr. 8,541,363 To Interest income 8,541,363 Interest income - March 31, 20X5 Loan receivable Dr. 9,566,327 To Interest income 9,566,327 Interest income - March 31, 20X6 Loan receivable Dr. 10,714,285 To Interest income 10,714,285 Settlement of transaction Bank Dr. 100,000,000 To Loan receivable 100,000,000