LIVE GST Certification Course by CA Arun Chhajer. Register Now!!

Loan processing fees

04 July 2012

When a loan is taken for a Capital project, what should be the treatment for the processing fees paid for the same. Whether it should be Capitalised, amortised over the tenure of loan or expenses out in P&L in the same year.

What will be the treatment if the disbursed amount is less than the sanctioned amount.

Reply
Follow
Share

2 Replies

CA Sachin Rastogi (Audit/IFRS Manager) (338 Points)
Replied 05 July 2012

Ronak I am not sure about the treatment of loan processing fee under Indian GAAP. However, under IFRS the loan processing fee forms part of the transaction cost which is considered further in the computation of Effective Interest rate.

Effective interest rate is calculated using the transaction costs and interest rate of the loan. It is the rate at which the present value of future cash outflows of loan including interest payments equals the present value of cash inflow which is after deducting the transaction cost. In financial management terms it is also called as internal rate of return. Once, the EIR is calculated the interest cost on the loan is booked using the EIR rate the not the interest rate to which the loan is subject to. This accounting treatment will ensure that effective interest cost which is booked in the income statement would include a portion of interest on loan along with the amortisation of transaction cost.

Any unamortised transaction cost in the balance sheet will be shown as a deduction from total loans under liabilities. Unamortised transaction cost is not shown as an asset in the balance sheet.

If the project is in construction stage then such cost can qualify as borrowing cost and can be capitalised to the project.

Shortfall of disbursed amount against the sanction amount will not alter the above accounting treatment as the undrawn facility can be considered further in computation of EIR rate.

Thanks

gauravtonk (CA - DM Audit) (25 Points)
Replied 30 July 2012

Hi Ronak,

As the loan taken for Capital Project, Interest amount should be capitalized as per AS-16 Borrowing Cost.

As per para 6 of AS-16, Borrowing Cost that are directly attributable to the acqisition, construction and production of a qualifying assets should be capitalized as part of the cost of the assets. The amount of borrowing costs eligible for capitalization should be deteremined in accordance with this statement. Other borrowing costs should be recognised as an expense in the period in which they are incurrent.

Regards

CA. Gaurav Tonk