Home › CA Final › financialreporting › fainstrumentclassification › A loan pays an INVERSE FLOATING interest rate (t…
A loan pays an INVERSE FLOATING interest rate (the rate moves opposite to market interest rates). Under Ind AS 109's SPPI test, this loan:
APASSES SPPI — a floating rate of any form is consistent with a lending arrangement
BBifurcates — the floor portion is SPPI; the inverse leg is an embedded derivative
CPASSES SPPI only if the inverse rate is positive in nominal terms
DFAILS SPPI — the inverse rate produces returns inconsistent with compensation for time value of money on the principal outstanding
Answer & Solution
Correct answer: D. FAILS SPPI — the inverse rate produces returns inconsistent with compensation for time value of money on the principal outstanding
Para B4.1.10 — an INVERSE floating rate breaks the link between the contractual return and the time value of money. When market rates rise, the lender earns LESS — the opposite of what a basic lending arrangement provides. SPPI fails. The loan is therefore at FVTPL (cannot be at amortised cost or FVOCI).
Related questions
Under Ind AS 109, a debt instrument with a HOLDER-PUT or ISSUER-PREPAY option meets the SPA financial institution holds assets to meet LIQUIDITY needs in a stress-case scenario. ThAn entity holds short-term investments to fund a future capital expenditure. Sales are INFUnder Ind AS 109, the FAIR VALUE OPTION (designating a financial asset at FVTPL at initialA perpetual instrument can be called by the issuer at any time at par + accrued interest. A bond is CONVERTIBLE into a fixed number of equity instruments of the issuer. Under Ind AA bond's principal and interest payments are LINKED TO AN UNLEVERAGED INFLATION INDEX in tUnder Ind AS 109, a financial asset can be subsequently measured at AMORTISED COST only wh