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Star Ltd. advances ₹15 lakhs as housing loan to an employee at 6% interest (market rate 10%), repayable in 5 equal annual instalments. The accountant recorded the loan at face value ₹15 L and interest at 6% (₹90,000 first year). Under Ind AS 109 + Ind AS 19:
ALoan at fair value ₹13.55 L; ₹1.45 L credited to share premium reserve
BLoan at ₹15 L; ₹1.45 L charged immediately to employee benefit expense
CLoan at ₹15 L; interest at 6% (₹90 K) is correct because contractual terms govern
DLoan recorded at FAIR VALUE (PV at market 10%) ≈ ₹13.55 L; differential ₹1.45 L recognised as PREPAID EMPLOYEE COST (amortised over loan term); interest income recognised at EIR 10% (₹1.35 L in year 1)
Answer & Solution
Correct answer: D. Loan recorded at FAIR VALUE (PV at market 10%) ≈ ₹13.55 L; differential ₹1.45 L recognised as PREPAID EMPLOYEE COST (amortised over loan term); interest income recognised at EIR 10% (₹1.35 L in year 1)
Case Study 1 in the chapter — below-market loans to employees are FAIR-VALUED at the market rate (10%). The fair-value differential is the deemed employee benefit (prepaid employee cost), amortised over the loan term per Ind AS 19. Interest income on the loan is recognised at EIR (market rate 10%), NOT the contractual 6%. Despite no specific performance condition tied to the loan, the employment relationship itself constitutes ongoing consideration.
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