Ind as 109 : doubt regarding transaction cost
This query is : Resolved
06 November 2017
Appendix B5.4.2 of IND AS 109 Financial Instruements says :
Fees that are integral part of the effective interest rate of a financial instrument include:
a. Origination fees received by the entity relating to the creation or acquisition of a financial asset. Such fees may include compensation for activities such as evaluating the borrower’s financial condition, evaluating and recording guarantees, collateral and other security arrangements, negotiating the terms of the instrument, preparing and processing documents and closing the transaction. These fees are an integral part of generating an involvement with the resulting financial instrument.
b. Commitment fees received by the entity to originate a loan when the loan commitment is not measured in accordance with paragraph 4.2.1(a) and it is probable that the entity will enter into a specific lending arrangement. These fees are regarded as compensation for an ongoing involvement with the acquisition of a financial instrument. If the commitment expires without the entity making the loan, the fee is recognized as revenue on expiry.
c. Origination fees paid on issuing financial liabilities measured at amortized cost. These fees are an integral part of generating an involvement with a financial liability. An entity distinguishes fees and costs that are an integral part of the effective interest rate for the financial liability from origination fees and transaction costs relating to the right to provide services, such as investment management services.
Query:
'Upfront fees' and 'Structuring and advisory fees' on borrowing of term-loan from bank has been treated as transaction cost by my client. I want to know under which of the above three points does the cost fall into because:
Note: The company has treated the financial liability to be measured at amortized cost as per IND AS 109.
a above talks Origantion fees received
b above talks about commitment fees received
c Origantaion fees paid on issuing financial liabilities
Any help will be helpful and much appreciated.
Fees that are integral part of the effective interest rate of a financial instrument include:
a. Origination fees received by the entity relating to the creation or acquisition of a financial asset. Such fees may include compensation for activities such as evaluating the borrower’s financial condition, evaluating and recording guarantees, collateral and other security arrangements, negotiating the terms of the instrument, preparing and processing documents and closing the transaction. These fees are an integral part of generating an involvement with the resulting financial instrument.
b. Commitment fees received by the entity to originate a loan when the loan commitment is not measured in accordance with paragraph 4.2.1(a) and it is probable that the entity will enter into a specific lending arrangement. These fees are regarded as compensation for an ongoing involvement with the acquisition of a financial instrument. If the commitment expires without the entity making the loan, the fee is recognized as revenue on expiry.
c. Origination fees paid on issuing financial liabilities measured at amortized cost. These fees are an integral part of generating an involvement with a financial liability. An entity distinguishes fees and costs that are an integral part of the effective interest rate for the financial liability from origination fees and transaction costs relating to the right to provide services, such as investment management services.
Query:
'Upfront fees' and 'Structuring and advisory fees' on borrowing of term-loan from bank has been treated as transaction cost by my client. I want to know under which of the above three points does the cost fall into because:
Note: The company has treated the financial liability to be measured at amortized cost as per IND AS 109.
a above talks Origantion fees received
b above talks about commitment fees received
c Origantaion fees paid on issuing financial liabilities
Any help will be helpful and much appreciated.
06 November 2017
Upfront fee paid is part of point c as this is the fee incurred for creation of financial liability.
06 November 2017
Sir, What about structuring and advisory fees? it is paid on account of structuring the loan and draw-down limits
06 November 2017
This fee is paid to whom ?
07 November 2017
To the bank. It is in the nature of Processing fees.
07 November 2017
Then it will also form part of the upfront fee only.
07 November 2017
Thanks for the help :)
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