Key Takeaways
- Two standards, one instrument: IFRS 9 measures, unwinds and impairs the loan; IAS 19 takes the extracted below-market element and determines when it is expensed.
- The rate that fair values the loan is the market rate of interest a third-party lender would charge that employee — their credit risk, that term, that security. It is not the IAS 19 discount rate used for gratuity or EOSB, which comes off high-quality bond yields for a different purpose and would understate the benefit.
- Two profit and loss items have to be determined, and they sit in different places. The employee benefit expense belongs in the operating result alongside salaries; the interest income sits below it in finance or other income. IAS 1 prohibits netting them, and netting is what hides the arrangement.
- Fair valuing the loan is an actuarial exercise, not a single discounting. Acceleration on resignation, death waivers and forgiveness features make the cash flows uncertain, so they have to be projected with decrements. The IAS 19 benefit cannot be derived without that IFRS 9 fair value, which also fixes the effective interest rate for every subsequent year — so a valuation report has to cover both legs.
- The entries disclose the remuneration; they do not measure a cash cost. Where the benefit is conditional, the annual expense and the interest income are equal and net profit is unaffected in every year.
- Tax is a separate question. The perquisite is computed at a prescribed rate rather than a market rate of interest, so it will not equal the accounting benefit.
A company lends an employee ₹10,00,000, interest-free, repayable in three years. Cash goes out, a receivable goes on, and in three years the cash comes back. Nothing hits the income statement and nothing needs valuing.
That treatment is incorrect. The employee loan accounting treatment required by the standards puts the loan on the balance sheet at less than ₹10,00,000, recognises an employee benefit expense, and recognises interest income the employer never receives in cash. Vehicle loans, housing advances, relocation loans, festival advances and concessional loans to senior staff all fall within it.
Table of Contents
- Employee loan accounting: two standards, one instrument
- The four steps
- Worked example
- What a valuation report should contain
- Journal entries
- Complications
- Tax and company law
- FAQs
1. Employee loan accounting: two standards, one instrument
An interest-free staff loan is two things combined, which is why accounting for it under a single standard does not work.
IFRS 9 governs the loan. Paragraph B5.1.1 requires initial recognition at fair value — the present value of future cash receipts discounted at the market rate for a similar instrument with a similar credit rating — and addresses the excess: “Any additional amount lent is an expense or a reduction of income unless it qualifies for recognition as some other type of asset.”
IAS 19 governs the benefit. For a staff loan, the substance of that excess is consideration for employee services.
IFRS 9 measures, unwinds and impairs the loan. IAS 19 receives the extracted day-one difference and determines when it is expensed.
A zero-interest loan still meets the “solely payments of principal and interest” test, so a held-to-collect staff loan is measured at amortised cost rather than at fair value through profit or loss. The FAQs set out the classification in full.
This post is written in IAS 19 and IFRS 9 terms. Ind AS 19 and Ind AS 109 are converged with them and share the same paragraph numbering, so Indian preparers can read across without adjustment. The worked example is in rupees.
Conditional and unconditional benefits
Where the concessional rate survives the employee’s departure, the benefit is unconditional: no future service is being purchased, and IFRS 9 alone determines both amount and timing, with the excess expensed immediately. This is uncommon, because most employers want the balance recovered or the concession withdrawn when someone leaves.
Where the benefit is forfeited, or the loan accelerates, on leaving, it is conditional. The employer is purchasing future service, and IAS 19 does the substantive work: it is what allows the excess to qualify as “some other type of asset” in B5.1.1’s terms, and it sets the period over which the resulting prepaid benefit is released. Most staff loan agreements carry such a clause, so this post works entirely through the conditional case.
A loan is not an EOSB advance
Employers with Gulf operations often record advances against accrued End of Service Benefits alongside staff loans. They are a different transaction. A true loan is a financial asset with a contractual right of recovery; an advance against EOSB may instead be a partial settlement of the IAS 19 obligation, but only where the employee’s underlying entitlement is actually extinguished. The distinction and the decision framework are set out in EOSB advance payment accounting under IAS 19.
The boundary is unresolved
In March 2023 the IFRS Interpretations Committee considered a submission on Homes and Home Loans Provided to Employees — a below-market home loan repaid by salary deduction, immediately due if the employee leaves — asking whether it gives rise to a prepaid employee benefit under IAS 19 or a financial asset under IFRS 9. In September 2023 the Committee declined to add a project, on the grounds that the matters were not widespread and not material to those affected. The decision contains no technical analysis and does not answer the question, so a position taken here should be documented.
2. The four steps
- Fair value the loan — discount the contractual repayments at the market rate of interest for a comparable loan to that borrower.
- Isolate the difference — cash advanced less fair value. That is the employee benefit, carried as a prepaid asset.
- Unwind the discount — the loan accretes from fair value back to face value, and each year’s accretion is interest income.
- Release the prepaid benefit — as service is rendered across the period the employee must serve.
Step one carries most of the judgement. The rate is IFRS 9’s market rate of interest for a similar instrument: what a third-party lender would charge that employee, on those terms and that security. It is not the IAS 19 discount rate, which applies to defined benefit obligations and is derived from high-quality bond yields for a different measurement objective (how to set the discount rate for an actuarial valuation). Using the actuarial rate here understates the benefit, and it is a frequent error.
3. Worked example
An employer lends ₹10,00,000, interest-free, repayable in a single sum at the end of year three. The balance falls due immediately if the employee resigns, so the benefit is conditional on three years’ service. The market rate for a comparable loan is 9%.
Fair value = ₹10,00,000 ÷ 1.09³ = ₹7,72,183.48. The day-one difference is ₹2,27,816.52, and that is the employee benefit.
That single discounting assumes the employee serves all three years. Because the loan accelerates on resignation, the repayment date is not certain, and a rigorous fair value has to reflect the probability of early exit — see the FAQs. The arithmetic here is kept deliberately simple to show the mechanics.
The loan is initially recognised at that fair value and subsequently measured at amortised cost, accreting to face value by the repayment date. The gap between face value and carrying amount is the prepaid benefit still to be released, and it closes as the loan accretes:
| Face value (₹) | Carrying amount (₹) | Gap (₹) | Movement in gap = interest income (₹) |
|
|---|---|---|---|---|
| Outset | 10,00,000.00 | 7,72,183.48 | 2,27,816.52 | — |
| End of year 1 | 10,00,000.00 | 8,41,679.99 | 1,58,320.01 | 69,496.51 |
| End of year 2 | 10,00,000.00 | 9,17,431.19 | 82,568.81 | 75,751.20 |
| End of year 3 | 10,00,000.00 | 10,00,000.00 | 0.00 | 82,568.81 |
| Total | 2,27,816.52 |
Profit and loss impact
The benefit is released as service is rendered, so the expense each year is the movement in the gap — the same figure as the interest income, because the gap closes only as the loan accretes:
| Year | Employee benefit expense IAS 19 (₹) |
Interest income IFRS 9 (₹) |
Net effect on profit (₹) |
|---|---|---|---|
| 1 | 69,496.51 | 69,496.51 | nil |
| 2 | 75,751.20 | 75,751.20 | nil |
| 3 | 82,568.81 | 82,568.81 | nil |
| Total | 2,27,816.52 | 2,27,816.52 | nil |
The two columns are not two views of one item. The expense sits in the operating result alongside salaries and wages; the income sits in finance or other income. IAS 1 paragraph 32 prohibits offsetting them, so the same ₹69,496.51 appears twice, under two labels, and nowhere as a single net figure.
Balance sheet
Net assets do not move either. The prepaid benefit runs down exactly as the receivable accretes:
| Loan receivable (₹) | Prepaid benefit (₹) | Total assets (₹) | |
|---|---|---|---|
| Day 1 | 7,72,183.48 | 2,27,816.52 | 10,00,000.00 |
| End of year 1 | 8,41,679.99 | 1,58,320.01 | 10,00,000.00 |
| End of year 2 | 9,17,431.19 | 82,568.81 | 10,00,000.00 |
| End of year 3 | 10,00,000.00 | — | 10,00,000.00 |
It is worth being clear about what day one does and does not represent. The employer pays out ₹10,00,000 and receives a loan worth only ₹7,72,183.48, but it has not given up ₹2,27,816.52 of value: it has also acquired the right to three years of service, and the prepaid benefit is that right. Two assets totalling ₹10,00,000 replace ₹10,00,000 of cash, and nothing is written off.
This is where the conditional and unconditional cases diverge: with no service purchased there is no prepaid asset, the ₹2,27,816.52 is expensed at once, and net assets do fall to ₹7,72,183.48 before recovering.
What the entries show, and what they cost
Both figures are products of the discounting. The interest income in particular has no payer — the employee repays ₹10,00,000 and no interest is ever received.
The purpose of the gross-up is disclosure. It puts ₹2,27,816.52 into employee benefits expense, where a reader can see that staff were paid something beyond salary, rather than leaving a ₹10,00,000 receivable that looks like ordinary lending. What it does not do is measure a cash cost.
The real cost is the return the employer did not earn. The same ₹10,00,000 on deposit at 9% would have grown to ₹12,95,029 over three years; here it comes back as ₹10,00,000. That ₹2,95,029 shortfall — ₹2,27,816.52 in present value, the day-one figure again — appears nowhere in the accounts, because financial statements record the transaction entered into and not the alternative forgone.
4. What a valuation report should contain
The two legs cannot be separated. The IAS 19 benefit does not exist until the loan has been fair-valued under IFRS 9, and the entity needs the amortisation schedule for the receivable in any case. A report that gives only the employee benefit figure leaves the preparer unable to post the entries.
The fair value calculation is itself an actuarial exercise
The worked example discounts one certain cash flow, which is the simplest possible case. In practice the terms that make a loan conditional also make its cash flows uncertain: if the balance falls due on resignation the repayment date depends on when the employee leaves, and if it is waived on death or disability some of it may never be received. Fair value has to be the present value of expected cash flows, projected with decrements rather than discounted as a single contractual amount — which is why the IFRS 9 leg, not only the IAS 19 leg, needs actuarial input on anything beyond one short loan.
Assumptions required
| Assumption | Why it is needed | Where it comes from |
|---|---|---|
| Market rate of interest at inception | Discounts the expected cash flows to the day-one fair value, and becomes the effective interest rate that drives interest income for the rest of the term | Entity input. A credit judgement, taken from comparable lending to that borrower |
| Attrition / withdrawal | Determines when acceleration on resignation is triggered, and therefore when repayment is expected | Entity’s own experience, consistent with its other employee benefit valuations |
| Mortality | Only where the balance is waived on death in service | Published table appropriate to the population |
The demographic assumptions should be the same ones used in the entity’s gratuity, leave or end of service valuations. Using a different attrition rate for staff loans than for the defined benefit obligation is difficult to defend, and auditors look for the inconsistency.
This list is not exhaustive. Further assumptions follow from the terms of the particular loan — a disability trigger brings in morbidity, repayment as a percentage of salary brings in salary growth, and a population that habitually settles ahead of term brings in early settlement.
Alongside the assumptions, the report needs the loan’s own specifics, which are read off the agreement rather than assumed: the amount advanced and any interest actually charged, the repayment schedule, the acceleration and waiver conditions, and the period of service the employee must complete to keep the benefit. These determine the cash flows being projected and the period over which the benefit is released, so a report built without sight of the agreement is guesswork.
Deliverables
A usable report sets out the fair value at inception and the day-one benefit; the interest income by year, with opening and closing carrying amounts for the receivable; the benefit release by year, with the closing prepaid balance; and the assumptions, with the basis for each.
When the rate is re-struck
Under amortised cost the carrying amount runs off the original effective interest rate and is never re-rated for market movements. A new rate is struck only on a fresh advance — so across a portfolio the rate varies by vintage — or on modification or rollover, which confers a new benefit. Revising the estimate of cash flows is different: if the expected repayment date shifts because attrition is running higher than assumed, IFRS 9 paragraph B5.4.6 requires the carrying amount to be recomputed at the original effective interest rate, with the adjustment through profit or loss. The estimate moves; the rate does not.
Any fair value struck after inception uses the rate prevailing at that date. The IAS 19 benefit is unaffected either way — it is measured once, at inception, and is not remeasured.
5. Journal entries
The entries corresponding to the figures above.
On advance
Cash is replaced by two assets: the loan at fair value and the prepaid benefit.
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Loan receivable | 7,72,183.48 | |
| Prepaid employee benefit | 2,27,816.52 | |
| Cash | 10,00,000.00 |
Each year
Two entries: the loan accretes, and an equal amount of the prepaid benefit is consumed. No cash moves.
| Year | Account | Debit (₹) | Credit (₹) |
|---|---|---|---|
| 1 | Loan receivable | 69,496.51 | |
| Interest income | 69,496.51 | ||
| Employee benefit expense | 69,496.51 | ||
| Prepaid employee benefit | 69,496.51 | ||
| 2 | Loan receivable | 75,751.20 | |
| Interest income | 75,751.20 | ||
| Employee benefit expense | 75,751.20 | ||
| Prepaid employee benefit | 75,751.20 | ||
| 3 | Loan receivable | 82,568.81 | |
| Interest income | 82,568.81 | ||
| Employee benefit expense | 82,568.81 | ||
| Prepaid employee benefit | 82,568.81 |
On repayment
One asset replaces another.
| Account | Debit (₹) | Credit (₹) |
|---|---|---|
| Cash | 10,00,000.00 | |
| Loan receivable | 10,00,000.00 |
The annual debits are additions to the same receivable opened on advance, taking it from ₹7,72,183.48 to ₹10,00,000. They are non-cash: the employee pays no interest, and the debit reverses the day-one write-down as repayment approaches. Without them the receivable would still stand at ₹7,72,183.48 when ₹10,00,000 was repaid, producing a gain on repayment.
Two points on the prepaid balance. It is an asset, not a liability, since the money is owed to the employer — IAS 19 paragraph 11(a) contemplates recognising an excess payment as a prepaid expense. And it is not past service cost, which is confined to plan amendments and curtailments of a defined benefit plan (paragraph 102).
The benefit is released as the gap closes, because what the employee consumes each period is the use of the money still outstanding. Neither standard prescribes the pattern, and an alternative is available — see the FAQs.
6. Complications
Early exit or early repayment
Both cut the arrangement short, and both clear the remaining prepaid balance immediately — there is no further service to release it against. Take a settlement of the full ₹10,00,000 at the end of year two, when the carrying amount is ₹9,17,431.19: the employer books an ₹82,568.81 derecognition gain and releases the remaining ₹82,568.81 of prepaid benefit. The employee had two years of free financing rather than three, so the benefit actually conferred was smaller than the ₹2,27,816.52 originally recognised.
Waiver provisions
Any contractual provision to write off the balance changes the expected cash flows, so it reduces fair value and increases the day-one difference.
| Trigger | Effect on measurement | Treatment |
|---|---|---|
| Waived on death in service | Probability-weight the expected forgiveness using mortality assumptions and discount it. Fair value falls, day-one benefit rises | A death-in-service benefit; consider alongside other death cover. This is the point at which the exercise becomes actuarial |
| Waived on survival or continued service | The arrangement is not lending. Contractual cash flows are contingent on employment, so it also fails the SPPI test | Deferred remuneration: the whole principal, not just the interest element, is expensed over the service period |
| Simply hard to recover once the employee leaves | No contractual change; this is credit risk | IFRS 9 expected credit loss |
The middle row is the one most often mishandled. The common error is carrying the amount as a receivable that never moves and writing it off in one lump at the end, when the substance was remuneration from the outset.
Impairment
The expected credit loss model applies as to any receivable. This is where a genuine cash loss enters: if principal is not recovered, the employer is out of pocket in a way the interest-free element never was. Mechanics as in ECL on trade receivables under IFRS 9, applied to a longer instrument.
Amortising loans
The same ₹10,00,000 at 9%, repaid in three equal principal instalments, gives a fair value of ₹8,43,764.89 and a day-one benefit of ₹1,56,235.11 — 31% lower, because the average balance outstanding is lower.
Rollover
Extending or refinancing an interest-free loan confers a fresh benefit and requires re-measurement. Advances repeatedly rolled over are long-term loans in substance.
7. Tax and company law
Concessional staff loans raise a further set of questions that sit alongside the accounting rather than within it: how the benefit is taxed as a perquisite in the employee’s hands, what restrictions apply to lending to directors, and what has to be disclosed as a related party transaction.
None of these affects the measurement above. The tax figure in particular will not agree with the accounting benefit, because it is computed at a prescribed rate rather than at a market rate of interest, and the two serve different purposes. In India the perquisite rules changed with effect from 1 April 2026, a change that has not yet worked its way through most published commentary.
These are substantial enough to warrant their own treatment, and we will cover them in a separate post. We will cross-refer from here once it is published.
FAQs
Scope and classification
Is an employee loan accounted for under IAS 19 or IFRS 9?
Both. IFRS 9 governs the loan — fair value on initial recognition, amortised cost thereafter, and impairment. IAS 19 governs only the day-one difference between cash advanced and fair value, and when it is expensed.
Is the loan classified at amortised cost, FVOCI or FVTPL?
Amortised cost, in almost every case. Classification turns on two tests, and a staff loan passes both. The business model is hold to collect — the employer lends in order to be repaid, not to trade or sell. And the cash flows are solely payments of principal and interest: a contractual rate of zero is still principal and interest, so charging nothing does not fail the test, and the acceleration-on-resignation clause is a prepayment feature that IFRS 9 paragraph B4.1.11(b) accepts where prepayment is at substantially unpaid principal plus accrued interest.
FVOCI would require a business model of holding to collect and sell, which does not describe staff lending. FVTPL would require SPPI to fail, or a voluntary designation under the fair value option. The one realistic route to FVTPL is a loan contractually forgiven if the employee stays, where the cash flows are contingent on employment rather than solely principal and interest — though in practice you rarely get that far, because such an arrangement is deferred remuneration and the whole principal goes through IAS 19 over the service period instead.
Choosing the rate
Is fair valuing the loan just a present value calculation?
Only in the simplest case, and the effects run in both directions: earlier repayment raises fair value, while forgiveness lowers it, so the benefit moves either way. For a single loan to one employee a simple present value with a documented assumption about the expected term is usually proportionate. For a portfolio, decrements need modelling rather than assuming. Section 4 sets out the assumptions involved.
Should the rate reflect what the employer could have earned on the money?
No, although the instinct is understandable, because that return is the employer’s real cost. It is not what the standard measures. IFRS 9 paragraph B5.1.1 calls for the market rate on a similar instrument “with a similar credit rating” — the credit rating of the party you hold a claim on, which is the employee. IFRS 13 reinforces the point by making fair value a market-based measurement rather than an entity-specific one.
Two employers lending identical amounts to identical employees must reach the same fair value, whether one would otherwise have held government bonds and the other equities. The two questions are different and the post keeps them apart. What the asset is worth, and therefore what has been transferred to the employee, is measured at the market rate of interest for a comparable loan to that employee. What the arrangement cost the employer is the return forgone, illustrated by the deposit comparison in section 3, and it never enters the measurement.
Recognition and profit impact
Must the benefit be released in line with the interest income?
No. Neither standard prescribes the pattern. Releasing it as the gap closes, as above, ties the expense to the loan’s own amortisation on the reasoning that what the employee consumes each period is the use of the money still outstanding; the expense then matches the interest income exactly.
The alternative is straight-line over the service period — ₹75,938.84 a year here — on the reasoning that IAS 19 attributes benefits to periods of service, and service is rendered evenly rather than on a curve matching a loan’s amortisation. It no longer matches the interest income, so a small net amount appears in profit each year, negative early and positive later, coming to nil over the term. Either is acceptable: choose one, document why, and apply it consistently.
If the loan is repaid in full, does it show up as a net cost?
No. ₹10,00,000 goes out and ₹10,00,000 comes back, so cumulative profit is nil, and where the benefit is conditional the annual expense and interest income are equal so profit is unaffected in every year. The purpose of the entries is to disclose the remuneration. The real loss is the return the employer did not earn, which does not appear in the accounts.
Employee loan accounting in practice
Is an interest-free employee loan taxable in India?
Yes, as a perquisite in the employee’s hands, above a threshold, and computed at a prescribed rate rather than the market rate of interest used for the accounting. The two figures will not agree. The rules changed with effect from 1 April 2026, and we will cover them in a separate post.
Does this apply to small advances such as festival loans?
In principle yes, though materiality governs in practice. Short-dated advances repaid within months carry a negligible day-one difference. The exception is advances repeatedly rolled over.
Sources
- IFRS 9 paragraphs B5.1.1 and B4.1.11(b); IAS 19 paragraphs 11(a) and 102; IAS 1 paragraph 32; IAS 24
- IFRS Interpretations Committee, Homes and Home Loans Provided to Employees — IFRIC Updates March 2023 and September 2023
- IFRS 13 Fair Value Measurement
Related resources
- EOSB Advance Payment Accounting Under IAS 19
- How to Calculate ECL on Trade Receivables Under IFRS 9
- How to Set the Discount Rate for an Actuarial Valuation
- New Gratuity Rules in India 2025
Questions About Employee Loan Accounting Treatment?
Measurement is straightforward until a loan carries a death waiver, a disability trigger, or a forgiveness feature applied across a workforce. If you are reviewing a staff loan portfolio ahead of a period close, or supporting your choice of market rate to auditors, get in touch with our team. We work on IAS 19 and Ind AS 19 employee benefit measurement across India and the GCC.