Benefit of a below-market loan

Learning objectives

• Calculate the benefit of a government loan at a below-market rate of interest (proceeds received less the initial carrying amount of the loan) and account for it as a grant.L2, L3
• Justify and defend in a professional file (L4) the treatment adopted for the "Benefit of a below-market government loan" concept, distinguishing the IFRS requirement, the case data, the teaching assumption and judgement.L4

Normative references

• IAS 20 §10AGovernment loan at a below-market rate of interest: the loan is recognised and measured in accordance with IFRS 9; the benefit, measured as the difference between the initial carrying amount of the loan determined under IFRS 9 and the proceeds received, is accounted for as a grant under IAS 20; the entity considers the conditions and obligations that have been, or must be, met when identifying the costs the benefit is intended to compensate.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

4 questions

• A government loan is granted at an interest rate below the market rate. How does IAS 20 treat the benefit this gives to the borrower?L2
• A public body grants Valmeyer an interest-free loan of {loan_proceeds}, repayable in one instalment in {periods} years. Case assumption: the market rate for a comparable loan is {market_rate}% a year. Calculate the initial value of the loan by discounting the final repayment, then the benefit of the loan. Round to the euro.L3
• Garnier receives a government loan of {loan_proceeds} at a below-market rate. Measured under IFRS 9 at initial recognition, the loan is worth {initial_loan_value}. Case convention: the benefit is treated as a grant and presented as deferred income, linked to the costs that the loan finances. Record the initial entry.L3
• Maurelle obtains EUR 2,000,000 from a public fund at a rate set by law that is well below what a bank would grant it. The finance director proposes to record the loan at 2,000,000 and to identify no benefit, on the grounds that the rate is statutory and not negotiated. In four to six sentences, justify the treatment you would adopt at initial recognition.L4