Accounting for Loans Receivable with Below-Market Interest Rates

✦ Loans issued at below-market interest rates must be accounted for by separating the loan and the embedded concession (e.g., subsidy, discount, or grant).

✦ Under ASC 310 and ASC 835-30, loans receivable are recorded at their present value using a market-based rate, with the difference recognized as a loss or contra-revenue.

✦ The resulting discount is amortized over the loan term to interest income, aligning effective yield with market conditions.

✦ Proper measurement ensures transparent recognition of interest income and initial economic impact.

1. What Are Below-Market Loans?

✦ These are loans made to borrowers at interest rates lower than prevailing market rates.

✦ Common examples include:

 • Government loans to stimulate development

 • Employee loans for relocation or tuition assistance

 • Related-party financing in corporate groups

✦ The concession reflects an economic subsidy or incentive.

2. Initial Measurement at Present Value

✦ Loans must be initially recognized at present value of expected future cash flows, discounted using a market rate of interest.

✦ The difference between the face value and the present value is recorded as:

 • Deferred cost or contra-revenue (if business-related), or

 • Expense or loss (if the loan is economically subsidized)

3. Journal Entry — Loan Issued at Below-Market Rate

Example:

• Face value = $100,000

• Stated interest rate = 1 %

• Market rate = 6 %

• PV of loan = $80,000

Entry at loan issuance:

debit Loans Receivable – $100,000

 credit Cash – $100,000

Adjustment to reflect below-market terms:

debit Expense (or Deferred Cost) – $20,000

 credit Loan Discount (Contra-Asset) – $20,000

4. Interest Income Recognition

✦ Interest income is recognized using the effective interest method, based on the market rate used at initial recognition.

✦ The discount is amortized into income over the loan term.

Entry (monthly or annually):

debit Loan Discount – $X

 credit Interest Income – $X

5. Disclosure Requirements

✦ Disclose:

 • Terms of loans with non-market interest rates

 • Method used to determine fair value or discount rate

 • Nature of concession (government, related party, employee)

 • Impact on earnings and financial position

✦ Separate disclosure if material or affecting decision-usefulness of financial statements.

6. Impairment Considerations

✦ Assess loans for credit impairment under ASC 326 (CECL model):

 • Use lifetime expected credit losses

 • Allowance may be required even if the loan is performing

✦ Impairment recognized separately from initial concession treatment.

7. IFRS Comparison (IFRS 9)

Topic	US GAAP (ASC 310, 835, 326)	IFRS 9
Initial measurement	Present value using market rate	Same
Recognition of discount	Immediate as expense/deferred	Immediate adjustment to FV
Interest income	Effective interest method	Same
Impairment model	CECL (lifetime ECL)	3-stage ECL model

8. Common Errors

✦ Recording loan at face value rather than present value

✦ Using stated rate instead of market rate for discounting

✦ Failing to amortize discount over loan term to interest income

✦ Misclassifying concession impact (e.g., as goodwill or capitalized cost)

✦ Ignoring disclosure or impairment requirements for long-term receivables