Enquiry:

A company has got rescheduled its bank loan where the bank has agreed to waive off accrued markup subject to fulfillment of all the terms and conditions of the new agreement. The new loan is repayable up till 2021.

Your suggestion is required in respect of following:
1) Can company reverse the full amount of its accrued markup liability to income?
2) Can company reverse accrued markup proportionately to the extent repayment is made in each year?
3) Whether this income would require provision for tax?

If above is not suggested:
1) Can company revise its accrued markup liability to fair value by using company’s average borrowing rate by taking the difference in P&L as income?
2) Whether this notional income would require provision for tax?
3) If company take accrued markup liability at fair value, should company also amortize this difference over number of years of agreement by debiting P&L and crediting liability.

Opinion:

The Committee considered your enquiry and would like to draw your attention to following paragraphs of IAS 39 ‘Financial Instrument: Recognition and Measurement’ (Volume 2009) which are self-explanatory:

40   An exchange between an existing borrower and lender of debt instruments with substantially different terms shall be accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability. Similarly, a substantial modification of the terms of an existing financial liability or a part of it (whether or not attributable to the financial difficulty of the debtor) shall be accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability.

AG62   For the purpose of paragraph 40, the terms are substantially different if the discounted present value of the cash flows under the new terms, including any fees paid net of any fees received and discounted using the original effective interest rate, is at least 10 per cent different from the discounted present value of the remaining cash flows of the original financial liability. If an exchange of debt instruments or modification of terms is accounted for as an extinguishment, any costs or fees incurred are recognised as part of the gain or loss on the extinguishment. If the exchange or modification is not accounted for as an extinguishment, any costs or fees incurred adjust the carrying amount of the liability and are amortised over the remaining term of the modified liability.

Keeping in view of above, if the terms are substantially different, the modification of terms will be accounted for as an extinguishment. If the difference between discounted present value of the cash flows under the new terms old and new terms is more than ten percent the difference will be recognized in profit & loss account.

With regard to tax implication, the Committee is of the view that if tax benefit has been taken earlier on interest expense, the reversal of accrued markup would require the provision for tax.

(November 10, 2015)