On 1 April, 20X3, Makers Ltd. raised a long-term loan from foreign investors. The investors subscribed for 6 million Foreign Currency (FCY) loan…

CA Final · Financial Reporting · MTP · November 2026
On 1 April, 20X3, Makers Ltd. raised a long-term loan from foreign investors. The investors subscribed for 6 million Foreign Currency (FCY) loan notes at par. Makers Ltd. incurred incremental issue costs of FCY 2,00,000. Interest of FCY 6,00,000 is payable annually on 31 March, starting from 31st March, 20X4. The loan is repayable in FCY on 31 March, 20X9 at a premium and the effective annual interest rate implicit in the loan is 12%. The appropriate measurement basis for this loan is amortised cost. Relevant exchange rates are as follows: 1 April, 20X3 - FCY 1 = ₹ 2.50. 31 March, 20X4 - FCY 1 = ₹ 2.75. Average rate for the year ended 31 Match, 20X4 - FCY 1 = ₹ 2.42. The functional currency of the group is Indian Rupee. What would be the appropriate accounting treatment for the Foreign Currency loan in the books of Makers Ltd. for the FY 20X3-20X4? Calculate the initial measurement amount for the loan, finance cost for the year, closing balance and exchange gain/loss.

Suggested Answer and Working Notes:

(b) Initial carrying amount of loan in books Loan amount received = 60,00,000 FCY Less: Incremental issue costs = (2,00,000) FCY = 58,00,000 FCY Ind AS 21 "The Effect of Changes in Foreign Exchange Rates" states that foreign currency transactions are initially recorded at the rate of exchange in force when the transaction was first recognized. Loan to be converted in ₹ = 58,00,000 FCY x ₹ 2.50/FCY = ₹ 1,45,00,000 Therefore, the loan would initially be recorded at ₹ 1,45,00,000 Calculation of amortized cost of loan (in FCY) at the year end: Period Opening Financial Liability (FCY) A Interest at 12% (FCY) B Cash Flow (FCY) C Closing Financial Liability (FCY) A+B-C 20X3-20X4 58,00,000 6,96,000 6,00,000 58,96,000 The finance cost in FCY is 6,96,000 The finance cost would be recorded at an average rate for the period since it accrues over a period of time. Hence, the finance cost for financial year 20X3-20X4 is ₹ 16,84,320 (ie. 6,96,000 FCY x 2.42 / FCY) The actual payment of interest would be recorded at 6,00,000 FCY x 2.75 = ₹ 16,50,000 The loan balance is a monetary item so it is translated at the rate of exchange at the reporting date. So, the closing loan balance in ₹ is 58,96,000 FCY x 2.75 / FCY = ₹ 1,62,14,000 The exchange differences that are created by this treatment are recognized in profit or loss. In this case, the exchange difference is ₹ 16,79,680 [ie 1,62,14,000 - (1,45,00,000 + 16,84,320 - 16,50,000)]

Topics: Ind AS 21

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