Government housing subsidies paid on behalf of borrowers

In several housing programmes in the region a public housing fund pays part of the profit or instalment on mortgages for eligible citizens, directly to the lender. The lender's statements can present this in materially different ways: as interest income on the loan (with part of the instalment receivable from the fund), or as government grant income under IAS 20 alongside lower interest income. The answer affects reported net interest margin, the EIR of the loans, ECL (the fund's credit risk differs from the borrower's), and what happens if the subsidy stops. The analysis turns on whose obligation the subsidised amount is and who the government intends to benefit; IFRS gives no specific guidance for this structure, so professional judgment is required and the views should be documented.

Under the loan contract, is the borrower obliged to pay the full contractual rate, with the fund paying part of it on the borrower's behalf, or is the borrower's contractual rate itself the reduced rate? If the fund does not pay, can the lender claim the shortfall from the borrower? Is the subsidy agreement between the fund and the borrower, or between the fund and the lender, and does it impose conditions on the lender (lending volumes, pricing caps, eligibility checks)? Is the subsidised rate plus the borrower's rate a market rate for the loan? Who bears the risk of the programme being discontinued or the borrower losing eligibility? How are amounts due from the fund tracked, aged and assessed for ECL?

1. Read the loan contract and the subsidy agreement together and identify who is the obligor for each part of the instalment and who the subsidy is intended to benefit.
2. View A (subsidy on behalf of the borrower): where the borrower owes the full contractual rate and the fund pays part of it as a benefit to the borrower, the whole amount is interest income on the loan under IFRS 9, computed at the EIR on the full contractual cash flows; the subsidised portion due from the fund is a receivable that is part of the loan's cash flows, settled by a third party.
3. Under View A, assess ECL considering both payers: the fund's portion carries government credit risk, and if the borrower remains liable for any unpaid subsidy, the loan's cash flows are protected by both.
4. View B (grant to the lender): where the borrower's contractual rate is the reduced rate, and the fund pays the lender under a separate agreement in return for the lender's compliance with programme conditions (for example lending to eligible borrowers at capped rates), the payments are government assistance to the lender and fall under IAS 20; recognise them when there is reasonable assurance that the lender will comply with the conditions and that the payments will be received, and in profit or loss systematically over the periods in which the related reduced interest is recognised.
5. Under View B, measure the loan on its own contractual terms; if its rate is below market, consider the fair value at initial recognition and whether the grant and the loan should be assessed together as one arrangement.
6. Apply the chosen analysis consistently to programmes with the same features, and document the facts that support it.
7. Where neither view clearly fits, select an accounting policy under IAS 8 that gives relevant and reliable information, and disclose it.

View A: the loan's EIR is computed on total contractual cash flows (borrower and fund portions); the receivable from the fund is part of the loan's gross carrying amount or a separately tracked component of it, with ECL reflecting the payer of each portion. View B: interest income at the EIR on the borrower's reduced contractual cash flows; grant income recognised on a systematic basis matching the periods of reduced interest, presented either as a separate line or other income, or deducted from a related expense where IAS 20 allows; amounts due from the fund are receivables subject to ECL. Under either view, a change in the subsidy (programme ended, borrower no longer eligible) changes expected cash flows: under View A it may be a modification or a credit event depending on whether the borrower must pay the difference; under View B future grant income simply stops.

Disclose: (1) the nature of the housing subsidy programmes and the accounting policy applied, including the significant judgment on whether subsidies are interest income or government grants; (2) the amounts of subsidy-related interest income or grant income recognised; (3) amounts receivable from the housing fund, their ageing and credit quality; (4) under IAS 20, unfulfilled conditions and other contingencies attached to government assistance; (5) concentration of income and receivables on the public housing fund and related party disclosures if the fund and the company are under common government control.

• Choosing a presentation for its effect on net interest margin rather than on the contract terms
• recognising subsidy amounts when cash is received rather than as they accrue
• treating amounts due from the fund as risk-free with no ECL assessment or ageing
• applying View A to some programmes and View B to similar ones without a reason
• ignoring the effect on expected cash flows when borrowers lose eligibility
• failing to disclose the judgment