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Under Ind AS 109's SPPI test, "interest" in a basic lending arrangement typically reflects:
AEquity-like risk and reward of ownership, including dividend-linked returns
BTime value of money + credit risk + other basic lending risks/costs (e.g., liquidity, administrative) + a profit margin
CAn inflation-only adjustment to the principal amount
DA fixed market rate (e.g., MIBOR) without any additional components
Answer & Solution
Correct answer: B. Time value of money + credit risk + other basic lending risks/costs (e.g., liquidity, administrative) + a profit margin
Para B4.1.7A — interest in a basic lending arrangement is consideration for the time value of money, credit risk, and may include other basic lending risks (liquidity), holding costs, and a profit margin. Components beyond this (equity-link, leverage, performance-link) take the cash flows outside SPPI and disqualify amortised-cost / FVOCI classification.
Related questions
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