Entities may enter into loan agreements to receive resources (funding) on terms that are not market-related. This includes loans with flexible repayment terms, loans that allow for payment holidays, or loans with below-market interest rates. These loans are referred to as concessionary loans.
Concessionary loans are entered into for a number of social or economic reasons, or to achieve a particular policy objective. For example, when an international agency grants a loan to a municipality to build clinics in a rural area that falls within its boundaries, or when the Independent Development Corporation grants loans to improve infrastructure development or maintenance.
A waiver of debt owing by an entity is not the same as receiving a concessionary loan. It is important to make this distinction as an entity considers the below-market conditions upfront instead of subsequently or on derecognition.
A concessionary loan is analysed into component parts
When an entity enters into a concessionary loan, it needs to analyse the loan into its component parts on initial recognition. Each component of the concessionary loan is accounted for separately.
A concessionary loan is recognised when an entity becomes a party to the contractual provisions of the instrument. Financial liabilities are initially measured at fair value, which is usually their transaction price. The entity assesses if the transaction price of the loan represents its fair value.
| Fair value versus transaction price | How to determine the transaction price and fair value of the loan |
| Fair value of the loan |
The fair value of the loan is determined based on a quoted price, if an active market exists. In the absence of an active market, a valuation technique is applied to determine the present value of the contractual cash flows, discounted using a market related rate of interest for a similar debt instrument with a similar, terms, currency and maturity. |
| Transaction price | Loan proceeds (funds received from borrower). |
If the transaction price does not represent the fair value of the loan, the off-market portion of the loan is calculated as follows:
How to account for each loan component
The off-market portion
The off-market portion of the loan is accounted for as either a contribution from owners, or as non-exchange revenue using GRAP 23 on Revenue from Non-exchange Transactions (Taxes and Transfers).
The off-market portion of the loan is a contribution from owners if it comprises a contribution by external parties in their capacity as owners to establish, maintain or increase an interest in the net financial position of the entity.
If the off-market portion does not comprise a contribution from owners, the principles in GRAP 23 are applied to assess whether the off-market portion constitutes a liability based on any stipulations imposed, or whether it should immediately be recognised as non-exchange revenue.
The loan component
The loan component of the concessionary loan is accounted for as a financial liability using GRAP 104 (2019) on Financial Instruments. For subsequent measurement, the loan component is classified at amortised cost unless it qualifies to be measured at fair value through surplus or deficit, or when it relates to a financial liability that arises because a financial asset does not qualify for derecognition. If classified at amortised cost, the loan component is initially measured at fair value minus any transaction costs directly attributable to the financial liability.
Amortised cost is the amount at which the loan payable is initially recognised, adjusted for principal repayments and cumulative amortisation, using the effective interest rate. If the concessionary loan is received in trenches at a fixed rate, the original effective interest rate may be used, or the entity may elect to use the rate at each draw down. This is an accounting policy choice that needs to be explained in the financial statements.
Resources: For more information on how the requirements of GRAP 104 (2019) apply to concessionary loan payables, access the Fact-sheet-5-Concessionary-loans-payable on the ASB website.
Disclaimer
The article has been prepared by the Secretariat of the ASB for information purposes only. It has not been reviewed, approved, or otherwise acted on by the Board.