Accounting treatment for staff loan

[Nobin]

Dear All

I would be grateful if I could have help in the following Accounting problem. My company gives loan to its staffs for purchase of cars ( staff loans). How should I account the loan and under which IAS. By the way am not so sure wether we should calculate the fair value of the loan by discounting the loan to its present value and the adjustment for the fair value be posted directly to p/l. Please advice . thks

[ciapk]

AG 79 IAS-39, Short-term receivables and payables with no stated interest rate may be measured at the original invoice amount if the effect of discounting is immaterial.

AG 84 Cash flows relating to short-term receivables are not discounted if the effect of discounting is immaterial

Loans to staff for more than one year where interest rate is stated should be discounted.

[awaisaftab]

This problem has both legal and accounting aspects.

[Nobin]

The staff loans are material and are for 7 years repayment with and company's interest rate at 6% which is below the bank rates. Example
Co X gives loans to 4 of its staffs say for USD 1 million at the co rate of 6% over 7 years. How should I account the loan and should I use a discount rate to discount the oustanding amt to report the oustanding balance to their Present value and which discounting rate to use. And the how should I account for the difference between the PV amount and the face value of the loan- is it expense directly to p/l or should I create a Revaluation reserve to account the difference there. And for subsequent years how should I account the loan. Awaisaftab pls advice

[kamranACA]

A similar problem has already been answered at this forum. Plz check out previous threads.


Regards,

[ciapk]

Dear

IFRSs are not supposed to be applied on immaterial items. I am of the view that if loans given to employees in aggregate do not make up a material figure then you should state them at cost (carrying amount) with a disclosure that fair valuation under IAS 39 has not been done due to immaterial amounts.

However, if you feel like doing so t every cost, following accounting enteries will be passed

At the time of disbursement of loan

First entry

....Loan account (debit)
.........Cash/bank account (credit)

(at actual disbursement amount)

Secodn entry

....Finance cost (debit)
..........Loan account (credit)

(this entry will be made for the fair value effect over 6.67 years (Rs 3000 per yer) period discounted at 10 percent that is assumed to be open market rate)


At the end of first reporting period

......Loan account (debit)
.............Other operating income (credit)

This entry will be passed at each reporting period to proportionately reverse the fair value loss booked above (in second entry) over the entire period of loans i.e. 6.67 years approxmately.
This entry will bring the complete balance of Loan account back over the entire period.

When recovery is made

......Cash/bank account (debit)
..............Loan account (credit)

Sometimes loan recoveries are adjusted against Salaries Payable accounts and not settled in cash. In such situation last entry may be modified accordingly.


If you know how the figures will arrive at, let me know. This will require a bit of calculation of fair value and preparation of an amortization schedule.

I hope you can do it at your own.

Regards,



KAMRAN.

Contributed by Sir KamranACA