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

On 1 April 20X1, Sagar Pharma Ltd received a ₹10 crore loan from the Government at 3% p.a., with interest paid annually and principal repayable at the end of 3 years. The market rate for a similar loan is 9% p.a. The loan is a financial liability measured under Ind AS 109 at fair value initially. Discount factors at 9% for years 1, 2 and 3 are 0.9174, 0.8417 and 0.7722 respectively. What is the benefit of the below-market rate of interest to be treated as a government grant?

The grant benefit is ₹151.86 lakh. The loan is initially measured at fair value, the present value of the cash flows at 9%, which is ₹848.14 lakh. The benefit of the below-market rate is the difference between the ₹1,000 lakh received and this fair value.

  1. A₹60.00 lakh
  2. B₹151.86 lakhCorrect
  3. C₹180.00 lakh
  4. D₹848.14 lakh

Explanation

Fair value of the loan = interest ₹30 lakh x (0.9174 + 0.8417 + 0.7722 = 2.5313) = ₹75.94 lakh, plus principal ₹1,000 lakh x 0.7722 = ₹772.20 lakh, total ₹848.14 lakh. The benefit is the difference between proceeds of ₹1,000 lakh and this initial carrying amount, which is ₹151.86 lakh. ₹180 lakh is the undiscounted interest saving (6% x ₹1,000 lakh x 3), which ignores time value, while ₹848.14 lakh is the fair value itself, not the benefit.

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