Measuring Equity Issued and Recognising Gain or Loss (Ind AS 109 Appendix D)

Understand Measuring Equity Issued and Recognising Gain or Loss

Key rules to remember

Measurement of equity issued

Equity credited = Fair value of equity instruments issued (if not reliably measurable: fair value of liability extinguished)

Measure at the date the liability is extinguished, which is the date the shares are issued.

Gain or loss on extinguishment

Gain / (Loss) = Carrying amount of liability extinguished − Fair value of equity issued

Positive means gain, negative means loss. Recognise in profit or loss and disclose as a separate line.

Partial settlement

Consideration allocated to part extinguished + Consideration allocated to remaining liability = Total equity issued at fair value

Allocate only if part of the consideration relates to modification of the remaining liability. Otherwise all of it relates to the part extinguished.

Journal entry

Dr Financial liability (carrying amount); Cr Share capital (face value); Cr Securities premium (balance of fair value); Cr / Dr Profit or loss (gain / loss)

Carrying amount is the amortised cost on the settlement date, including accrued interest.

How to solve Measuring Equity Issued and Recognising Gain or Loss questions

1. 1Confirm the scope. Check that shares are issued to a creditor to extinguish a financial liability, wholly or partly, and that it is not under the original conversion terms or a transaction with a shareholder acting as shareholder.
2. 2Find the carrying amount of the liability on the settlement date. Bring the amortised cost up to date, including accrued interest and unamortised transaction costs.
3. 3Measure the equity issued at the fair value of the shares on the date of extinguishment. Fair value of shares = number of shares × fair value per share. Use the liability's fair value only if share value is not reliably measurable.
4. 4If only part is settled, decide whether any consideration relates to modifying the remaining liability. If yes, allocate. If no, treat all consideration as relating to the part extinguished.
5. 5Compute gain or loss = carrying amount of the part extinguished − fair value of the consideration allocated to it.
6. 6Split the equity credit into share capital (number of shares × face value) and securities premium (the balance).
7. 7Write the journal entry and check that debits equal credits, then state the profit or loss effect and disclose it separately.

Quickest way: Three-line swap check

Common mistakes in Measuring Equity Issued and Recognising Gain or Loss

• Measuring the shares at face value or at the liability amount.

  Students follow the old habit of issuing shares against a debt at the amount owed, or at par.

  Fix: Always start with the fair value of the shares on the settlement date. Use the liability's fair value only when share fair value cannot be measured reliably.

• Taking the difference directly to equity or retained earnings.

  Students think a swap with a lender is a capital transaction and avoid a P&L effect.

  Fix: The difference between the carrying amount and the fair value of equity issued goes to profit or loss under Appendix D. Say so clearly in the answer.

• Using the principal instead of the carrying amount.

  The question states the loan amount, and students forget accrued interest or unamortised costs.

  Fix: Compute the amortised cost at the settlement date first. Then compare it with the fair value of shares.

• Using the share price on the agreement date rather than the issue date.

  Questions give several dates and students pick the first one.

  Fix: The liability is extinguished when the shares are issued. Use the fair value on that date unless the question says otherwise.

• Ignoring the remaining liability in a partial settlement.

  Students book the whole equity value against the part settled, even when the terms of the rest were changed.

  Fix: Ask if any consideration relates to modifying the rest. If so, allocate it, and account for the remaining liability under the modification rules of Ind AS 109.

• Putting the full fair value into share capital.

  Students forget that share capital carries face value only.

  Fix: Credit share capital at face value times the number of shares and the rest to securities premium.

Worked examples