IND AS Implementation- Practical Approach

One of the mandatory exceptions in IND AS 101 First time adoption and its disclosure.

Treatment in IND AS of government loan (interest rate is lower than the market interest rate) received in IGAAP and was accounted as equity in IGAAP and Financial statement disclosure.

A first-time adopter shall classify government loans received as a financial liability or an equity instrument in accordance with IND AS 32 Financial Instruments: Presentation.

A first-time adopter shall apply the requirements in IND AS 109, Financial Instruments, and IND AS 20, Accounting for Government Grants and Disclosure of Government Assistance, prospectively to government loans existing at the date of transition to IND AS and shall not recognize the corresponding benefit of the government loan at a below-market rate of interest as a government grant.

The above treatment can be understood in the followings steps:-

Step 1. Classification of Government loan

Terms of the government loan will be analyzed and classification would be finalized based on IND AS 109 Financial Instrument.

A government loan which interest rate is lower than the market interest rate would be considered as a financial liability as this loan terms would contain contractual cash outflow after a specified period.

Therefore government loans would be reclassified from equity to financial liability on IND AS transition date.

Step 2. Initial measurement of Government loan

After identifying Government loan as a financial liability, on the date of transition of IND AS (i.e. third balance sheet date), the financial liability would be recognized at a value equal to the carrying value of government loan in IGAAP.

Step 3. Subsequent measurement of Government loan

For subsequent measurement, the company needs to calculate the Effective Interest rate considering the remaining period of the government loan and recognize interest expense in the statement of profit and loss in the remaining period of the government loan and this would be de-recognized as per IND AS 109 upon repayment of the loan.

Note:-There is another treatment also permitted by IND AS 101 which is the entity may apply the requirements in Ind AS 109 and Ind AS 20 retrospectively to any government loan originated before the date of transition to Ind AS, provided that the information needed to do so had been obtained at the time of initially accounting for that loan.

Financial Statement disclosure

In the first-time IND AS adoption financials, disclosure would be given in the note of First time adoption of IND AS stating the treatment followed by the company, whether it is prospectively or retrospectively in the heading mandatory exceptions.