Accounting treatment of waiver off of interest on the loan from Directors
Entity A, which prepares its financial statements as per Ind AS obtained a loan from one of its directors during the year 2015-16 which is still outstanding as at the end of year 2018-19. The loan is not related to a qualifying asset and is repayable on demand. In previous years, the interest was charged and paid to the directors. However, in respect of interest on the loan for the year, 2018-19, a waiver was obtained from the director without amendment of the loan agreement.
(It is assumed that that the director is not a shareholder and is not compensated through remuneration for the interest waived.)
Paragraph 15 of Ind AS 1, Presentation of Financial Statements, states as follows:
“Financial statements shall present a true and fair view of the financial position, financial performance and cash flows of an entity. Presentation of true and fair view requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the Framework. The application of Ind ASs, with additional disclosure when necessary, is presumed to result in financial statements that present a true and fair view.”
As per the facts of the case, Entity A is contractually required to pay interest on the loan obtained by it from a director but the same is waived by the director. As per paragraph 15 of Ind AS 1 stated above, presentation of true and fair view requires the faithful representation of the effects of transactions, other events and conditions. To achieve fair presentation, it is appropriate that Entity A recognises its contractual obligation for payment of interest as well as the waiver thereof by recognising interest as an expense and the waiver thereof as an item of income. The matter may also require disclosure as part of related party disclosures.
Applicability of IND-AS on LLP if Pvt. Co. Ltd. was converted into LLP
As at the end of its financial year 2017-18, Company A Limited had a wholly owned subsidiary, Company B Private Limited. Company A was covered in phase I of the Ind AS applicability and accordingly had prepared its first Ind AS financial statements for the year ended March 31, 2017 and thereafter for year ended March 31, 2018. Company B Private Limited being a subsidiary of Company A Limited had also prepared its financial statements for the aforesaid financial years as per Ind ASs even though it did not on its own meet the net worth criterion for applicability of Ind ASs. During the financial year 2018-19, Company A Limited undertook a restructuring exercise, pursuant to which it transferred its shareholding in Company B Private Limited to its promoters who are individuals and therefore not required to comply with Ind ASs. Subsequent to the transfer, the promoters converted Company B Private Limited from a company to a Limited Liability Partnership (LLP), Entity B LLP following the due process of law.
Whether the LLP needs to continue to prepare its financial statements under Ind AS from the financial year 2018-19 and onwards?
Response: The Companies (Indian Accounting Standards) Rules, 2015 (‘the Rules’) have been issued by the Central Government pursuant to powers conferred on it by section 133 read with section 469 of the Companies Act, 2013 (‘the Act’). Subject to certain exceptions, the Rules require a company falling in any of classes of companies specified in this behalf in the Rules to follow Indian Accounting Standards (that are part of the Rules) in preparation of its financial statements under section 129 of the Act.
A limited liability partnership is governed by the provisions of the Limited Liability Partnership Act, 2008 and the Rules made thereunder.
Once a company gets converted from a company into a limited liability partnership, the Companies Act 2013 and the Rules framed thereunder cease to apply to it. As a limited liability partnership, it is instead governed by the provisions of the Limited Liability Partnership Act 2008 and the Rules framed thereunder. Consequently, in the given case, upon conversion of Company B Private Limited into an LLP, Ind ASs cease to apply to it.
Whether, the foreign exchange differences relating to the lease liability recognised by the company are covered by the exemption provided by paragraph D13AA of Ind AS 101 or whether the same should be expensed off immediately as they arise?
Paragraph D13AA of Ind AS 101, First-time Adoption of Indian Accounting Standards, states the following:
“A first-time adopter may continue the policy adopted for accounting for exchange differences arising from translation of long-term foreign currency monetary items recognised in the financial statements for the period ending immediately before the beginning of the first Ind AS financial reporting period as per the previous GAAP.”
Further, paragraph 18 of Ind AS 101 specifically states that an “entity shall not apply the exemptions contained in Appendices C-D by analogy to other items.”
The exemption provided by paragraph D13AA of Ind AS 101 is available only in respect of “long-term foreign currency monetary items recognised in the financial statements for the period ending immediately before the beginning of the first Ind AS financial reporting period as per the previous GAAP.” The way paragraph D13AA is worded, the exemption is not available in respect of a lease liability recognised by a lessee as a result of application of Ind AS 116 since this liability was not “recognised in the financial statements for the period ending immediately before the beginning of the first Ind AS financial reporting period as per the previous GAAP.
Paragraph 18 of Ind AS 101 specifically states that an “entity shall not apply the exemptions contained in Appendices C-D by analogy to other items.”
In accordance with the above, foreign exchange differences relating to the lease liability recognised by the company should be expensed off immediately as they arise.
Whether the foreign exchange difference is required to be presented separately from other fair value changes in statement of profit and loss?
P Limited, with INR as its functional currency, holds an investment in debentures denominated in a foreign currency. The investment is not designated as a hedging instrument in a cash flow hedge of an exposure to changes in foreign currency rates. The investment is measured at fair value through profit or loss in the financial statements of P Limited in accordance with Ind AS 109, Financial Instruments. The change in fair value of the investment during a period measured in terms of INR also includes the effect of the change in foreign exchange rate during the period (i.e., foreign exchange difference).
Response:
Paragraph 5.7.1 of Ind AS 109 requires a gain or loss on a financial asset that is measured at fair value to be recognised in profit or loss – though there are some exceptions to this general requirement, these are not applicable in the case under discussion.
In the case of a financial asset denominated in a foreign currency and measured at fair value through profit or loss, the fair value is first determined in the relevant foreign currency and it is then translated into the functional currency in accordance with the requirements of Ind AS 21, The Effects of Changes in Foreign Exchange Rates. Thus, change in fair value of such a financial asset during a period arises due to two factors: change in fair value expressed in terms of foreign currency and change in exchange rate.
Ind AS 109 does not contain any requirement for separation of change in fair value of a foreign-currency denominated financial asset measured at fair value through profit or loss into the aforesaid two constituent parts.
An entity shall disclose:
- the amount of exchange differences recognised in profit or loss except for those arising on financial instruments measured at fair value through profit or loss in accordance with Ind AS 109; [Emphasis added]
Thus, paragraph 52 of Ind AS 21 specifically excludes financial instruments measured at fair value through profit or loss from its requirement of disclosure of the amount of exchange differences recognised in profit or loss.
In view of the above, in the given case, P Limited is not required to present change in fair value of the investment in debentures on account of change in relevant foreign exchange rate separately from other changes in the fair value of the investment.