ACCA Strategic Professional · Strategic Business Reporting (International) · Financial instruments
Delta Ltd has a loan with a carrying amount of $20.0m. It exchanges it with the same lender for a new loan with substantially different terms. The present value of the new cash flows discounted at the original effective rate is $17.0m, a difference of more than 10% from the old loan. The fair value of the new loan is $18.5m, and Delta pays fees of $0.3m to the lender. What gain on extinguishment does Delta recognise in profit or loss?
Delta recognises a gain of $1.2m. The terms are substantially different, so the old $20.0m loan is derecognised and the new loan is recorded at fair value of $18.5m, giving $1.5m, and the $0.3m fees paid to the lender reduce the gain.
- A$3.0m
- B$1.2mCorrect
- C$1.5m
- D$1.8m
Explanation
The 10% test is met, so the old liability is extinguished and the new one recognised at fair value of $18.5m. Gain = 20.0 − 18.5 = 1.5, less fees paid to the lender of 0.3, giving $1.2m. $1.5m ignores the fees; $3.0m wrongly uses the present value of $17.0m instead of fair value.
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