04-08-2008, 05:08 PM
Dear Kamran
It is evident that the financial liability should be recorded at fair value on initial recognition. The question to consider is how to determine the fair value when there are no repayment terms? These loans pose a challenge in determining their fair values at initial recognition as it is not possible to estimate the future cashflows where there is no repayment date.
There is a tendency that such loans are given for a long period of time and in essence form part of the equity, therefore, should be measured at their transaction prices and thereby treat them as capital. However, this view cannot be supported by IAS 39 because there is a contractual obligation to repay these loans, which makes them liabilities. All liabilities need to be initially measured at fair value.
In my view, Just as the case for zero interest loans, where we determine the fair value using the market intrest rate for similar loans, Management shall establish the best estimate of the repayment date in order to determine the fair values on initial recognition, and accordingly the loan should be recognized at fair value.
Regards,
It is evident that the financial liability should be recorded at fair value on initial recognition. The question to consider is how to determine the fair value when there are no repayment terms? These loans pose a challenge in determining their fair values at initial recognition as it is not possible to estimate the future cashflows where there is no repayment date.
There is a tendency that such loans are given for a long period of time and in essence form part of the equity, therefore, should be measured at their transaction prices and thereby treat them as capital. However, this view cannot be supported by IAS 39 because there is a contractual obligation to repay these loans, which makes them liabilities. All liabilities need to be initially measured at fair value.
In my view, Just as the case for zero interest loans, where we determine the fair value using the market intrest rate for similar loans, Management shall establish the best estimate of the repayment date in order to determine the fair values on initial recognition, and accordingly the loan should be recognized at fair value.
Regards,
