Page 30 - Banking Fiannce March 2018

ARTICLE

While this method is playing a crucial role as per the account only Balance Sheet and Profit & Loss account for
Companies Act it also permits to change the depreciation deciding the repayment capacity of the borrower to the
method from one to another by the borrower. By changing Term Loan. Surprisingly in both these statements, there is
the method from Straight line to WDV his book profit will no entry called as "Repayment of Term Loan Installments".
be boosted up and if he wants to reduce the profit for tax, Then the question should arise then how he is repaying the
then he will change from WDV to Straight line in bumper term loan installments.
years of profit.
If we dissect further, it will be crystal clear that
In Straight line to WDV excess depreciation provided is "Depreciation" is nothing but the repayment of Term Loan
added back to profit and vice versa in the other method it Installments in disguise. Now let us see through a simple
reduces the profit. Either way the banker should be careful example how this can be manipulated in taking away the
while dealing with the Depreciation not only during the time profit from the system. Let us assume a Term Loan with
of processing but also during subsequent years during the repayment period of 5 years and at aa 20% margin is
tenure of the term loan. sanctioned for Rs.5 lakhs which includes the margin. Now
the composition of the balance sheet at the end of various
We should also probe a question normally we take into years is described as below.

Year 0 TL FA
Bank's Term Loan Rs. 4,00,000 Fixed Assets Rs. 5,00,000
Promoters Margin Rs. 1,00,000
Year 1 TL FA
Bank's Term Loan Rs. 3,20,000 Fixed Assets Rs.4,00,000
Promoters Margin Rs. 80,000
Profit Rs. 1,20,000
To Depreciation Rs. 1,00,000 By Depreciation Rs.1,00,000
Surplus in P&L Rs. 20,000
Year 2 TL FA
Bank's Term Loan Rs. 2,40,000 Fixed Assets Rs.3,00,000
Promoters Margin Rs. 60,000

Profit Rs. 1,60,000
To Depreciation Rs. 1,00,000 By Depreciation Rs.1,00,000
Accumulated Surplus in P&L Rs. 80,000
Year 3 TL FA
Bank's Term Loan Rs. 1,60,000 Fixed Assets Rs.2,00,000
Promoters Margin Rs. 40,000
Profit Rs. 1,60,000
To Depreciation Rs. 1,00,000 By Depreciation Rs. 1,00,000
Accumulated Surplus in P&L Rs. 1,40,000
Year 4 TL FA
Bank's Term Loan Rs. 80,000 Fixed Assets Rs. 1,00,000
Promoters Margin Rs.20,000

30 | 2018 | MARCH | BANKING FINANCE