AASB 9 FINANCIAL INSTRUMENTS Q&A SERIES
There has been an increase in entities obtaining relief from their obligations under loan agreements. Whilst the relief can take many different forms, here we illustrate how a borrower accounts for a deferral of loan repayments.
Company B has a loan from a bank with the following key terms as at their 30 June 2021 reporting date:
In response to financial difficulties suffered during the COVID-19 pandemic, Company B secures a loan repayment deferral from its bank as at 30 June 2021.
The terms of the deferral:
How would Company B account for the loan repayment deferral?
The carrying amount of the loan is calculated by discounting the cash flows under the new terms at the original effective interest rate of 6%. This amounts to $1,000,0002. Monthly interest continues to accrue at 6% p.a.
The carrying amount does not change because interest continues to accrue on the loan over the deferral period and Company D makes up for these missed payments through higher repayments over the term of the loan3.
AASB 9 requires an entity to account for a substantial modification of the terms of a financial liability as an extinguishment of the original financial liability and the recognition of a new financial liability. [AASB 220.127.116.11]
The terms are substantially different if the discounted present value of the cash flows under the new terms discounted using the original effective interest rate, is at least 10 per cent different from the discounted present value of the remaining cash flows of the original financial liability [AASB 9.B3.3.6].
Where the terms of the loan are not substantially different, then the amortised cost of the liability is recalculated, and the resulting gains or losses are recognised in profit or loss. [AASB 9.B5.4.6]