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Aspire took out a foreign currency loan of 5 million dinars at a fixed interest rate of 8% on 1 May 2013. The interest is paid at the end of each year. The loan will be repaid after two years on 30 April 2015. The interest rate is the current market rate for similar two-year fixed interest loans.
Aspire requires advice on how to account for the loan and interest in the financial statements for the year ended 30 April 2014.
I need guidance here , i did some other questions in which they treated all loans(not foreign curreny loans) on amortised cost basis , but here they have not done it
so how is that ??? is there any rule like foreign curreny loan cant be calculated on amortised cost????
It’s clearly not possible to treat on an amortised cost basis because we don’t know the exchange rates going into the future.
The loan on the statement of financial position should be translated at closing rate whereas the interest expense should be translated at actual rate but average rate is acceptable as an approximation
The loan will be recorded initially as $1million (5 million dinars @5)
Interest for the year will be 8% x 50 million @ 5.6 average rate (Dr SoPorL, Cr Loan)
Interest paid will be 8% x 50 million @ 6 actual rate (Dr Loan, Cr Cash)
and the loan itself will be translated at the year end at closing rate
You’ll see that the interest charge and the interest paid are two different amounts. The difference is an exchange gain where we charged $71.5 to SoPorL but settled that by a payment of only $66.7
In addition, there is an exchange gain on the face value of the loan, so good news all round for Aspire!
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