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CMA Final · Corporate Financial Reporting · Accounting of Financial Instruments

Bharat Textiles Ltd renegotiated a loan with its lender. The loan has a carrying amount of Rs 50 lakh. Bharat issued equity shares to the lender in full settlement, and the fair value of those shares at the date of extinguishment is reliably measured at Rs 42 lakh. How should Bharat account for the difference under Ind AS 109 Appendix D?

Bharat recognises a gain of Rs 8 lakh in profit or loss. The shares are measured at their fair value of Rs 42 lakh, and the difference from the Rs 50 lakh carrying amount of the liability is taken to profit or loss, not to equity.

  1. ARecognise a gain of Rs 8 lakh in profit or lossCorrect
  2. BRecognise a gain of Rs 8 lakh directly in other equity (reserves)
  3. CRecognise equity at Rs 50 lakh with no gain or loss
  4. DRecognise a loss of Rs 8 lakh in profit or loss

Explanation

Equity instruments issued to extinguish a liability are measured at their fair value (Rs 42 lakh) when it can be reliably measured. The difference between the carrying amount (Rs 50 lakh) and the consideration paid (Rs 42 lakh) is Rs 8 lakh, recognised in profit or loss. Taking equity at Rs 50 lakh ignores the fair value rule, and taking the gain to reserves bypasses profit or loss.

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