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December 2018 – Question 1 – Notes number 4
A ten year 30m loan with no interest and has a repayable at par value of 34m.
This should be categorized under amortized and finance cost must be accured and calculated based on effective interest rate however this is interest free as mentioned in the question.
That means why do we need to accrue when it’s interest free ? or what is the purpose of accruing interest when the loan is interest free ?
This is assumed FR knowledge of financial instruments. “No interest” means no annual interest. If the repayment is more than the principal there is effectively an interest element ($4m over 10 years). IFRS 9 requires this to be recognised each year using the effective interest rate method. (Clearly it would not show a true and fair view for SoPL to take a “hit” of $4m expense when the loan is repaid in 10 years’ time – when the company has had the benefit of the loan finance for 10 years.)
does it mean that finance cost must be calculated and accrued each year so this finance cost is shown each year for 10 years(depending on the term of the loan) whenever the repayment is larger than the principal ?
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