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PQR Ltd. prepays an old loan to Bank A (incurring a prepayment premium and writing off unamortised processing fees of the old loan) and takes a fresh loan from Bank B (paying new processing fees). Under Ind AS 109, the prepayment premium + the unamortised processing fees of the OLD loan are:
ARecognised as part of the GAIN OR LOSS on extinguishment of the old loan in P&L; the new processing fees are netted against the new loan's carrying amount and amortised via EIR
BCapitalised as transaction costs of the NEW loan and amortised over its EIR
CExpensed straight-line over the remaining term of the new loan
DSet off against the new loan's stated principal at initial recognition
Answer & Solution
Correct answer: A. Recognised as part of the GAIN OR LOSS on extinguishment of the old loan in P&L; the new processing fees are netted against the new loan's carrying amount and amortised via EIR
Para 3.3.3 — when a financial liability is extinguished (here, the old loan is prepaid), all costs/fees incurred are part of the gain/loss on extinguishment in P&L. The new loan's processing fees are the new loan's incremental transaction costs — netted against its initial carrying amount and amortised through the new EIR. Don't co-mingle old-loan write-offs with the new loan's measurement.
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