It is quite general practice to provide concessional loans and/ or to provide goods of an entity to its own employees. These are generally treated at their normal transaction values and no fair values comparison is being taken into account.
Now, after the introduction of Ind-As/IFRS in India, these kind of transactions will be re-evaluated and need to be accounted differently and hence management of these entities need to re-engineer its internal structures to capture such changes and account them correctly in the books of accounts.
Employees are being compensated by giving them salary, bonus or let’s say short term benefits and post employment benefits etc. However it’s very common to provide some kind of concessions by giving loans to the employees either at below the market rates or structure the repayment of the loan in such a manner which eventually benefit to the employee overall.
After the applicability of Ind-As-109-“Financial Instruments” which talks about to do fair valuation of all the instruments at its initial recognition as per the methodology defined under Ind-As-113 - “Fair Value Measurement”, such loans given to the employees will be covered under financial instruments so let’s discuss first about the accounting treatment in the books of accounts-
1. If the repayment of the loan which is to be recovered from the employee is not as we usually take from the banks (i.e. principal and interest will be repaid gradually and equal monthly installment are being fixed) then entity need to make a working as per the normal EMI method and compare it with the structure which is being followed by the entity to provide extra benefit to its employee (i.e. entity structures loans given to employees in such a way so that principal to be repaid back first and then interest will be started which gives benefit to the employee for not having interest on interest),
2. Interest rates on loan given which has agreed with the employee will then be compared with the fair market rate (as defined under Ind-As 113) available for such loans (if employee could have borrowed such loan from bank etc) and difference will be calculated,
3. All such difference between the fair value of the loan will be treated as EMPLOYEE COST and will then be spread over the term of the loan accordingly and rout it through profit/loss account,
4. Loan given to employee will then be treated as per the fair valued interest rate and accordingly interest income will be booked for the entity and at the same time the entity will be debiting for point 3 also as mentioned above (employee benefits)
5. The present value of the loans will be used while calculating these differences.
Now, let’s talk about another scenario where an entity provide goods to its employee/ or former employee on some discount or free basis then the accounting implications can be summarized as below –
1. Since Ind-As-19 “employee benefits” measures on cost basis hence the entity needs to charge the difference of cost of goods sold to the employee (not the fair market value) and the amount paid by the employee as “Employee short term benefits” cost,
2. In case the amount paid by the employee is greater than cost of goods sold then additional revenue will be booked accordingly,
3. If these kinds of benefits given to current employees then it will be treated as short term benefit and if these are related to the former employee then the same will considered as post employment benefits.
There would be striking change in the perspective of how employee loans will be shown in the financial statements and accordingly structuring would be done to provide such benefits.
These are based on the interpretation of relevant accounting standards and wherever there is nothing directly available from these standard, a best practices of industries has been used to explain its accounting treatments. This should not be treated any kind of advise as the situation/ results might be different once actual facts are being considered.
The author can also be reached at anujagarwalsin@gmail.com
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