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CA Final · Financial Reporting · Financial Instruments: Equity and Financial Liabilities

Ganga Pharma Ltd renegotiates a Rs 90 lakh loan with its lender. The lender accepts 3,00,000 shares (fair value Rs 20 each, reliably measurable) in full settlement and also waives accrued fees of nil. The company's CFO proposes: (i) record equity at Rs 90 lakh, (ii) show no gain or loss, since the lender is a related financial party. Which statement is correct under Ind AS 109 Appendix D?

Equity is recorded at the shares' fair value of Rs 60 lakh, and the Rs 30 lakh excess of the Rs 90 lakh liability over that value is a gain in profit or loss. The CFO's carrying-amount approach is wrong because fair value is reliably measurable.

  1. AThe proposal is correct because the carrying amount of the liability determines equity
  2. BEquity is Rs 60 lakh, and the Rs 30 lakh difference is a gain in profit or lossCorrect
  3. CEquity is Rs 60 lakh, and the Rs 30 lakh difference is a loss in profit or loss
  4. DEquity is Rs 90 lakh, and Rs 30 lakh is recognised as a capital reserve

Explanation

Fair value of shares = 3,00,000 x Rs 20 = Rs 60 lakh, reliably measurable, so it is used. Carrying amount Rs 90 lakh minus Rs 60 lakh gives a Rs 30 lakh gain in profit or loss. A loss would arise only if the shares were worth more than the liability.

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