Query No. 46
Subject: Accounting treatment of additional interest payable after repayment of loan amount.1
A. Facts of the
Case
1. A company is
engaged in manufacture of 100% wood-free particle board made from sugarcane
residue, i.e., bagasse. 2. As per the
querist, the term lending institutions have sanctioned the company a
restructuring package. The brief details of the package are as follows: (a) Waiver of
compound interest and liquidated damages upto April (b) Reduction in
interest rate on all loans
to 12.5% p.a.,w.e.f. April 1, 2000. (c) Refixation
of term loan repayment schedule. 3. As per the
querist, while sanctioning this package, the term lending institutions have put
up the following pre-condition, on account of loss
“Interest loss upto
the terminal date
of loan due
to reduction in interest rate would be treated as deferred
interest carrying zero coupon rate of interest and will be repayable in two
equal annual instalments after repayment of entire term loan.” According to the
querist, in this
case, interest loss
has been further discounted @ 12.5% to convert it into
its present value. 4. The querist
has further informed that
one term lending institution has used the following clause instead of
the above clause: “In addition to the restructuring package mentioned in
paragraph 2 5. As per the
querist, the above additional interest also represents the loss of interest on
account of reduction in interest rate over the period of the loan. In this
particular case, differential interest portion has not been further discounted
@ 12.5% as done by the other term lending institutions. 6. The querist
has suggested the following three options for accounting for the additional
interest: (a) Consider additional
interest/deferred interest as
deferred revenue expenditure by debiting the entire amount to deferred
revenue expenditure account
and crediting to
deferred/ additional interest account and write off over the period of
the loan.
(b) Debit interest
loss of that
year only to
the profit and
loss account by crediting
to deferred interest/additional interest account.
(c) Debit
interest on actual payment basis. 7. The querist
has informed that
the term lending
institutions will recognise
deferred interest/additional interest as their income on receipt basis only.
B. Query
8. The querist
has sought the opinion of the Expert Advisory Committee C. Points
considered by the Committee
9. The
Committee observes that the query has been raised in respect of accounting treatment
in the books
of the borrower
company. The Committee has,
therefore, not touched upon the accounting treatment to be followed by the term
lending institutions. The Committee has also not touched upon
the issue as
to the manner
of computation of
additional interest and the accounting treatment of waiver of compound
interest and liquidated damages, since these issues have not been raised by the
querist. 10. The Committee
notes that one
of the fundamental
accounting assumptions that underlies the preparation and presentation
of financial statements is ‘accrual’.
Accounting Standard (AS)
1, ‘Disclosure of Accounting Policies’, issued by the
Institute of Chartered Accountants of India, describes ‘accrual’ in paragraph
10 as below: “c. Accrual Revenues and costs
are accrued, that
is, recognised as
they are earned or
incurred (and not
as money is
received or paid)
and recorded in the
financial statements of
the periods to
which they relate. ....” 11. The Committee
notes from the facts of the case that the term lending institutions have
reduced the interest rate to 12.5% p.a. and for the interest loss due to
reduction in the interest rate, additional interest is payable by the company
after repayment of the entire loan amount. The Committee
the partial payment of interest till the repayment of the
loan amount. The Committee is further
of the view
that this additional
interest is, in substance, an expense incurred over the
tenure of the loan and it is only the payment of this interest that has been
deferred till repayment of the principal
amount. The Committee
is, accordingly, of
the view that
the liability on account of the additional interest accrues over the
duration of the loan even though it is payable after repayment of the principal
amount. D. Opinion
12. On the basis of
the above, the Committee is of the opinion that the additional interest payable
after repayment of the loan amount should be accrued over the tenure of the
loan and debited to the respective profit and loss accounts and credited to the
accrued liability account.
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