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

Ganga Steels Ltd. has a term loan with a carrying amount of Rs 10 crore. The bank and the company agree to modify the terms, and the modification is assessed as substantial. The company pays a restructuring fee of Rs 15 lakh to the bank. The new liability is recognised at fair value. How should the fee be treated?

The fee is included in the gain or loss on extinguishment of the original liability. Because the substantial modification is treated as extinguishment and recognition of a new liability, costs or fees are part of that gain or loss, not amortised over the new term.

  1. AIncluded in the gain or loss on extinguishment of the original liabilityCorrect
  2. BDeducted from the carrying amount of the new liability and amortised over its remaining term
  3. CCapitalised as an intangible asset and amortised
  4. DDeferred and recognised in profit or loss when the loan is repaid

Explanation

A substantial modification is accounted for as extinguishment of the original liability and recognition of a new one. Costs or fees incurred in that case are recognised as part of the gain or loss on extinguishment. Amortising the fee over the remaining term applies only when the modification is not an extinguishment.

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