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CA Final · Financial Reporting · Financial Instruments: Scope and Definitions

Arjun Infra Ltd owes Bharat Finance Ltd, an unrelated lender, Rs 10 crore. Under a renegotiation, Arjun issues equity shares to Bharat to extinguish the liability. Consider three cases: (1) Bharat is also an existing shareholder of Arjun and acts in that capacity; (2) the original loan terms already provided for conversion into equity shares; (3) Bharat is unrelated, is not a shareholder, and the conversion was not in the original terms. In how many of these cases does Appendix D of Ind AS 109 (Extinguishing Financial Liabilities with Equity Instruments) apply?

Appendix D applies only to case 3. It does not apply where the creditor acts as an existing shareholder, or where settlement in equity follows the original terms of the liability. Only the renegotiated conversion with an unrelated non-shareholder creditor falls within it.

  1. AOnly case 3Correct
  2. BCases 2 and 3
  3. CCases 1 and 3
  4. DAll three cases

Explanation

Appendix D excludes transactions where the creditor is an existing shareholder acting as such (case 1) and where extinguishment by issuing equity is under the original terms of the liability (case 2). Only case 3, a renegotiation with an unrelated non-shareholder creditor, is covered. Options including case 1 or 2 ignore these exclusions.

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