Many UAE businesses provide interest-free loans to shareholders, subsidiaries, or other related parties and record them at the amount advanced. However, this may not comply with IFRS 9 – Financial Instruments.
The Common Mistake
Recording an interest-free loan at its transaction value without assessing its fair value on initial recognition.
What IFRS 9 Requires
For an interest-free loan with a fixed repayment term, the loan should generally be recognised initially at fair value, determined by discounting the future cash flows using a market rate of interest.
The difference between the transaction price and fair value should be accounted for based on the substance of the transaction (e.g., an equity contribution or distribution, where appropriate).
Key Takeaways
- Assess whether the related party loan should be measured at fair value on initial recognition.
- Apply the Effective Interest Method for subsequent measurement.
- Ensure appropriate disclosures under IAS 24 – Related Party Disclosures.
- Do not assume all interest-free related party loans can be recorded at face value.