1.28     Query

Treatment of loan instalments repayment before due date along with the interest.

1. A public sector undertaking, registered under the Companies Act, 1956, was sanctioned a loan of Rs. one crore by the Ministry of Works and Housing (now Ministry of Urban Development) in March 1984. This loan was withdrawn by the corporation on 4^th April, 1984, although the cheque was dated 31.3.1984. Further, the terms and conditions of the loan had a penalty clause for non-payment of instalments which commence from the 1^st anniversary of the date of withdrawal of loan. The interest is also to be paid along with the repayment of instalments. Keeping this in view, both interest payments and instalments become due on 4^th April, yet these are being paid on 31^st March of every year so as to avoid any penalty. In the books of account, the corporation has been debiting the instalments to loan account in the same financial year whereas the interest paid is being shown on the assets side as interest paid in advance and simultaneously a liability for interest accrued but not due is created under the current liabilities. This practice was followed since 1984 till the last audit by Government Auditors when they expressed their view that the accounting treatment of interest paid in respect of the transaction lacks justification and results in over statement of current liabilities as well as current assets.

2. Keeping all the above facts in view, the opinion of the Expert Advisory Committee has been sought as to how the payment of instalment is to be shown in the balance sheet and how the interest accrued but not due/ interest paid in advance are to be reflected in the balance sheet? Further, it may also be advised if there is any other way by which the above transaction can be reflected in balance sheet prepared as on 31^st March.

                                                                     Opinion                                         October 7, 1988

1. The Committee is of the opinion that in respect of the repayment of instalments before due date, no separate disclosure is required in the balance sheet once the amount paid has been debited to the loan account.

2. With regard to payment of interest before due date, the Committee notes that interest is the cost of availing the facility of finance made available by one entity to another and is computed with reference to time for which the facility is utilised. In the present case, interest payment falls due on 4^th April though the entire amount due is paid on 31^st March, the date on which the balance sheet is prepared. Since the corporation has availed of the benefit of loan till 31^st March, interest can be considered to have been paid in advance in respect of 4 days only. Thus, in the opinion of the Committee, interest accrued and paid up to 31^st March, even though not due, should not be considered the liability of the company and correspondingly the current asset should not be shown. The interest paid for the 4 days in respect of which the company is still to get the benefit can only be considered an advance and shown, under the head ‘Loans and Advances’ under sub-head “Advances recoverable in cash or in kind or for the value to be received”.

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