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CA Final · Financial Reporting · Ind AS 20 Accounting for Government Grants and Disclosure of Government Assistance

On 1 April 20X1, Bharat Engineering Ltd received a Rs 10,00,000 government loan to fund working capital in a backward district. The loan carries 2% interest payable annually and is repayable at par at the end of 3 years. The market rate for a comparable loan is 8%. Present value factors at 8% are: year 1 0.9259, year 2 0.8573, year 3 0.7938. Applying Ind AS 20 with Ind AS 109, what is the benefit of the below-market rate loan to be treated as a government grant?

The benefit is Rs 1,54,660. The loan is first measured at fair value, discounting interest and principal at the 8% market rate, giving Rs 8,45,340. The grant is the difference between the Rs 10,00,000 proceeds and this initial carrying amount.

  1. ARs 1,54,660Correct
  2. BRs 8,45,340
  3. CRs 1,80,000
  4. DRs 10,00,000

Explanation

Annual interest is Rs 20,000. Its PV is 20,000 x (0.9259+0.8573+0.7938) = 20,000 x 2.5770 = Rs 51,540. PV of principal is 10,00,000 x 0.7938 = Rs 7,93,800. Initial fair value of the loan is Rs 8,45,340, so the grant is 10,00,000 - 8,45,340 = Rs 1,54,660. Rs 1,80,000 is the undiscounted interest saving (6% x 10,00,000 x 3), which ignores time value.

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