Interest Free Loan to Employees: Accounting treatment as per International Financial Reporting Standards (IFRS)

Many local and multi-national companies provide loans to its employees without charging any interest. Providing interest free loans to employees can be a valuable benefit, offering financial assistance without the burden of interest. To ensure true and fair view of financial reporting, it is important to recognize and measure interest free loans to employees as per applicable International Financial Reporting Standards (IFRS).

Relevant IFRS for accounting of interest free loans are following:

As per Paragraph 4.1 of IFRS 9: Financial Instruments, loan facilities provided to anyone meets the definition of financial instruments and loan to employees is financial assets for entity. As per paragraph 5.1.1 of IFRS 9: Financial Instruments, financial assets should be initially measured at fair value plus transaction cost. ?

As interest free loan is connected to employee benefits, it is required to consider whether this employee benefit is under the scope of either IFRS 2: Share Based Payments or IAS 19: Employees Benefits. As this employee benefit is not connected with any kind of share-based transactions, this employee benefit is out of scope of IFRS 2: Share Based Payment. So, this kind of employee benefit is under the scope of IAS 19: Employees Benefits. ?

Now, we will analyze IFRS implication of interest free loans to employees with giving an example:

Example:

On 1 January 2020, a commercial bank provided a loan to its employee amounting to BDT 36,00,000 @ 0% per annum and loan will be repayable with 36 monthly equal installments (BDT 1,00,000 / per month) over the next three years. The market interest rate on similar loan is 9%. How should commercial bank recognize and measure this loan initially and subsequently?

Initial recognition and measurement of interest free loans to employees

Interest free loans to employees should be initially recognized as financial asset and measured at fair value. As the loan is not made on market terms, its fair value at initial recognition is not equal to loan amount (nominal value) of BDT 36,00,00 due to effect of time value of money. So, fair value of the loan is present value of all the future cash flows. To calculate the present value, the market interest rate @ 9% will be used as discount rate. So, present value of the loan is amounting to BDT 31,44,680.

There is difference between disbursed loan amount (nominal value) and fair value of the loan amounting to BDT (36,00,000-31,44,680) = BDT 4,55,320. Then, how do this difference is recognized in the financial statements of the commercial bank? This difference is considered as employee benefits as per paragraph 5 of IAS 19: Employee Benefits.

So, accounting treatment will be as followed for the aforementioned example:

Subsequent measurement of interest free loans to employees

When interest income is accrued in 1st month:

When installment is paid by employees:

Tax Implication

The tax implication should be considered for the above transactions as per tax law of respective jurisdiction.