a government provides loans at a below market rate of interest to fund the purchase 611076

Government loan with below-market interest rate

A government provides loans at a below-market rate of interest to fund the purchase of manufacturing equipment.

Entity S”s date of transition to IFRSs is 1 January 2012.

In 2010 Entity S received a loan of CU100,000 at a below-market rate of interest from the government. Under previous GAAP, Entity S accounted for the loan as equity and the carrying amount was CU100,000 at the date of transition. The amount repayable at 1 January 2015 will be CU103,030. No other payment is required under the terms of the loan and there are no future performance conditions attached to it. The information needed to measure the fair value of the loan was not obtained at the time it was initially accounted for.

The loan meets the definition of a financial liability in accordance with IAS 32. Entity S therefore reclassifies it as a liability. It also uses the previous GAAP carrying amount of the loan at the date of transition as the carrying amount of the loan in the opening IFRS statement of financial position, reclassifying it from equity to liability. It calculates the effective interest rate starting 1 January 2012 at 10%. The opening balance of CU100,000 will accrete to CU103,030 at 31 December 2014 and interest of CU1,000, CU1,010 and CU1,020 will be charged as an interest expense in each of the three years ended 31 December 2012, 2013 and 2014.