Posts tagged Indian GAAP
IFRS on Effective Interest Rate
Effective Interest Rate
Effective Interest Rate (EIR) is a new concept to the existing Indian GAAP.
TheEffective Interest Rate (EIR) method is a method of calculating the amortized cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period.
TheEffective Interest Rate (EIR)use in the allocation process is the rate that exactly discounts estimated future cash flows (receipts or payments) to the net carrying amount of the financial instrument through the expected life of this instrument.
EIR calculation is not the same as for Yield to Maturity (YTM). YTM is nothing but the Internal Rate of Return (IRR) of the bond. But Effective Interest Rate (EIR) may also include some non-interest components such as loan origination charges, processing fees as part of the effective rate.
Under IFRS income from Loans and receivables has to be recognized through application of effective interest rate.
An illustration given below gives better clarity for calculation of Effective Interest Rate (EIR).
Given Data:
| Nominal value (payable in 5 years’ time) | INR 1,250 |
| Loan origination fee (inflow) | INR 40 |
| Transaction costs (directly related to loan origination, outflow) | INR (90) |
| Net transaction costs (40-90) | INR (50) |
| Fair value (net of transaction costs and fees) (1250+50) | INR 1,300 |
| Coupon Rate | 4.70% |
Calculation of INTERNAL RATE OF RETURN based on above data:
| Year 0 | -1300 |
| Year 1 (1250*4.7%) | 59 |
| Year 2 (1250*4.7%) | 59 |
| Year 3 (1250*4.7%) | 59 |
| Year 4 (1250*4.7%) | 59 |
| Year 5 1250 + (1250*4.7%) | 1309 |
Thus IRR will work out to 3.83%
Thus companies has to maintain Coupon rate as well as EIR which will practically for each transaction will be a major task and will add significantly load on IT systems.
Author: CA Shalini Tibe, IFRS Consultant
Accounting and Business are Interrelated in IFRS
There is a feeling that IFRS – rather than business strategy – might actually be driving changes to corporate behavior. In some cases, it may help companies do things better – such as revisit their derivatives strategies – in other cases, it could be changing the way companies work just to get the desired accounting outcome.
IFRS is a principle based model as compared to rule based I GAAP. IFRS requires extensive use of fair valuations for measurement of assets and liabilities. The objective of IFRS is to set the Balance Sheet right, and hence a significant volatility may come in Profit & Loss statement.
There are three principles laid down in IFRS More >
