CA Final · Financial Reporting · Recognition and Derecognition of Financial Instruments

Arvind Chemicals Ltd owes Rs 80,00,000 (carrying amount) to Punjab Bank. It issues equity shares to the bank to settle part of the liability, and the part of the liability extinguished is Rs 30,00,000. Following the standard's requirement, the consideration is allocated between the part extinguished and the remaining liability. Which statement is correct about the remaining Rs 50,00,000 liability?

The consideration allocated to the remaining liability forms part of the assessment of whether its terms have been substantially modified. If they have, the entity accounts for it as extinguishment of the original liability and recognition of a new liability, whether or not the debtor is in financial difficulty.

1. AIt is never reassessed, because only the extinguished part is relevant
2. BThe consideration allocated to the remaining liability forms part of the assessment of whether its terms have been substantially modified, and if so the modification is accounted for as extinguishment of the original liability and recognition of a new liabilityCorrect
3. CIt is automatically treated as extinguished because equity was issued
4. DIt is accounted for as a new liability only if the debtor is in financial difficulty