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Accounting treatment of loans and borrowings

Issue paper presented at the EPSAS Working Group meeting Luxembourg, 7-8 May 2018

Status report and

preliminary matters for discussion

Contents

Introduction Accounting and reporting guidance Government practices in the EU Matters for discussion

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Introduction

Objectives of the issue paper

? Prepare the future discussion on accounting for loans and borrowings with the EPSAS stakeholders.

? This presentation addresses preliminary matters for discussion. ? Topics currently addressed in the paper:

- Main categories of loans and borrowings. - Accounting and reporting guidance available or under development. - Country analysis. - Main difficulties in practice. - Matters for discussion to achieve sound, efficient and harmonised

accounting for loans and borrowings by Member States.

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Introduction

Background of the issue

? Governments at all levels often incur large amounts of borrowings to fund their activities. These represent a very significant portion of liabilities in the balance sheet.

? They may also provide loans as financial support to certain categories of economic operators, including in times of financial distress, and not always at normal market conditions (concessionary loans).

? 2013 Staff Working Document from the Commission to the Council and the European Parliament and PwC 2014 study.

- Diversity in accounting practices by Member States: use of nominal amounts vs amortised cost method, etc.

- Difficulties to determine fair value in the public sector context.

- Complexity and extent of disclosures.

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Accounting and reporting guidance

IPSAS (loans) (current guidance) (1/3)

? Financial instruments standards IPSAS 28 (presentation), IPSAS 29 (recognition and measurement) and IPSAS 30 (disclosures).

? Loans are financial assets (may be included in categories in red below).

Categories of financial assets Description, examples

At fair value through profit or Derivatives or designated at

loss (FVTPL)

inception

Loans and receivables

Fixed or determinable amounts

Held to maturity (HTM) debt If intention and ability to

instruments

hold to maturity (e.g. bonds)

Available for sale (AFS) debt Residual category instruments

Measurement Fair value (FV) with changes in FV through P/L Amortised cost

Amortised cost

Fair value with changes in FV in equity. Impact P/L upon impairment or sale

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Accounting and reporting guidance

IPSAS (loans) (current guidance) (2/3)

? Special guidance on concessionary loans (at below market rates).

At inception Dr Loan (at fair value - NPV using the prevailing market interest rate) Dr Financial expense (day one loss) To Cr Cash

Over the period of the loan Dr Loan (gradually reconstitute nominal amount at maturity date) To Cr Financial income (unwinding of the discount - financial income reflecting normal market conditions)

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Accounting and reporting guidance

IPSAS (loans) (current guidance) (3/3)

? Impairment test (incurred credit loss model) if objective evidence of impairment (e.g. decline in expected cash flows)

- Financial assets measured at amortised cost

Impairment loss: difference between the asset's carrying amount and the present value of expected future cash flows discounted at the financial instrument's original effective interest rate.

- Financial assets measured at fair value

The cumulative loss that had been recognised directly in equity should be removed from equity and recognised in profit and loss for the period.

Impairment loss: difference between the acquisition cost (net of any principal amount and amortisation) and current fair value, i.e. recoverable amount calculated as the present value of expected future cash flows discounted at the current market rate of interest for a similar financial asset.

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Accounting and reporting guidance

IPSAS (borrowings) (current guidance)

? Borrowings are financial liabilities (included in categories in red below).

Categories of financial assets Description, examples

At fair value through profit or Derivatives or designated at

loss (FVTPL)

inception

Other financial liabilities

Not entered into for trading purposes

Measurement

Fair value with changes in FV through P/L Amortised cost

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