Facts of the case
A company was engaged in manufacturing of 100% wood-free particle board made from sugarcane residue, i.e., bagasse.
As per the company, term lending institutions had sanctioned the company a restructuring package. The brief details of the package were as follows:
(a) Waiver of compound interest and liquidated damages upto April 1, 2000.
(b) Reduction in interest rate on all loans to 12.5% p.a., w.e.f. April 1, 2000.
(c) Refixation of term loan repayment schedule.
According to the company, while sanctioning this package, the term lending institutions had put up the following pre-condition, on account of loss of interest:
“In addition to the restructuring package mentioned in paragraph above, the company would pay additional interest amounting to Rs. 15.3 million in two equal annual installments after repayment of the
entire loan.”
As per the company, the above additional interest also represented the loss of interest on account of
reduction in interest rate over the period of the loan.
The company approached the Expert Advisory Committee (EAC) to determine the accounting treatment
of additional interest payable after the repayment of principal amount.
EAC (Expert Advisory Committee) Opinion
The EAC noted that one of the fundamental accounting assumptions that underlies the preparation and presentation of financial statements is ‘accrual’, described in paragraph 10 of Accounting Standard (AS) 1,
‘Disclosure of Accounting Policies’, issued by the ICAI.
The EAC was of the view that though the restructuring package offered by the institutions had reduced the interest rate, however the difference between the original interest rate and the reduced interest rate was payable after repayment of the loan amount by way of additional interest. The EAC elucidated that the restructuring package had only deferred the partial payment of interest till the repayment of the loan
amount.
The EAC was further of the view that this additional interest was, in substance, an expense incurred over
the tenure of the loan and it was only the payment of this interest that had been deferred till repayment of the principal amount. The EAC was, accordingly, of the view that the liability on account of the additional interest accrued over the duration of the loan, even though it was payable after repayment of the principal amount.
Based on the above, the EAC opined that the additional interest payable after repayment of the loan
amount should be accrued over the tenure of the loan and debited to the respective profit and loss
accounts and credited to the accrued liability account.
