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What is the Accounting Treatment of Interest Free loan from Directors under Accounting Standards ?
If the loan is given for short term, then it ll be booked as current liability
If its for Long term, more than one year, then there is very different treatment for it, as provided in IAS39.
The loan shall be booked on discounted value, the rate of interest for discounting shall be the rate applicable for similar loans in the market,
The difference of discounted value and the actual value shall be booked in Profit and loss imediately as interest income, Accountig Entry;
Dr - Long term loan - B/s
Cr - Interest Income on Initial acqusition of loan - P&L
Every year, till maturity, interst shall be charged on the discounted value, such interest shall be added in the Carrying value of the loan, The Entry shall be as under
Dr - Interest Expense - P&L
Cr- Long term loan - B/S
At the end of the loan period, the value of discounted loan ll be equal to the origional loan amount.
The initial interest income booked shall be set off gradually by the interest expense booked in the subsequent periods.
Deferred tax shall also arise at the time of acqusition of the loan.
Long term loan A/c Dr.
Interest on loan A/c
Interest Expense A/c Dr.
Long term loan A/c
the treatment should be as usual for normal loan, but since it is a related party transaction, it must be disclosed in the financial statements of the company per IAS24 Related Party Transacations
Discount them to present value
Such interest free loans by directors should be treated as salary advances. In my opinion this should be treated as a fringe benefit.
As a director is a related party according to the accounting standard IAS24, which requires discolsure of transactions between related parties. The loan is a transaction between the director and the company in question hence it required to disclose this in the finacial statements of the company.
I may have not properly understood but here is the scenario
If a loan is advanced to to the company by the director: Dr Loans Account (either short term or long term Liabilites ) depending on the nature of loan then CR Accounts payables account
In case the loan is given to Director by the company:DR Loan advances and CR salaries(Director's fees) if it's to be recovered from his remuneration.When making recoveries make appropriate postings as well.
Generally, there is an account known as Director's Loan Account. If the director lends money to the company (generally directors take loan from company in which case there are certain tax implications on the company), the loan account is in credit; that is you debit bank account and credit the 'dirctors loan account'. the director can draw some or all of the money out any time. there are no tax implications on the company in the tax return.
A director’s loan is when you take money from your company that isn’t a salary, dividend or expense repayment and you’ve taken more than you’ve put in. You and your company may have to pay tax on the loan.
You must keep a record of any money you borrow from or pay into the company - this record is usually known as a ‘director’s loan account’.
Your personal and your company’s tax responsibilities depend on whether the director’s loan account is:
Your company can also set up director’s loan accounts for other shareholders or close family members (technically called ‘participators’).
The IFRIC was asked to consider the accounting treatment of employee share loan plans underIFRS2 Share-based Payment. Under many such plans, employee share purchases are facilitated by means of a loan from the issuer with recourse only to the shares. The IFRIC was asked whether the loan should be considered part of the potential share-based payment, with the entire arrangement treated as an option, or whether the loan should be accounted for separately as a financial asset.
Case- (1) Loan to Entity bears no interest, but Loan agreement includes date for repayment. As the contractual obligation to deliver cash exists the transaction is to be recorded as financial liability. As required under IAS 39 it is initially recognised at the present value of future payments discounted at a market rate of interest for a similar debt instrument. Difference between the cash paid and present value on initial recognition shall be recognised as an addition to Equity. In subsequent periods, interest will be recognised on the loan in the income statement using the effective interest method.
Case- (2) Director provides loan to the Entity that bears no interest, but the Loan agreement specifies Loan is repayable on-demand. A loan to an entity that is due on-demand is a financial instrument. It is recognised at the actual amount.
Case- (3) Loan by the Director agreed to be paid at the discretion of the Entity. It does not pass the test of liability and is to be recorded as equity at face value. This is not subsequently re-measured.
an interest free loan from director(s) should be booked at it present value and the difference between present value and loan amount should be booked as interest expense over the term of loan.
