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

Godavari Steels Ltd settles part of its bank loan by issuing equity shares to the bank. The remaining loan is renegotiated at the same time with changed terms. The finance head asks how to treat the remaining liability under Ind AS 109 and Appendix D. Which approach is correct?

Godavari should allocate the consideration between the part extinguished and the remaining loan, then include the consideration allocated to the remaining loan in the assessment of substantial modification. If the remaining loan is substantially modified, the original liability is extinguished and a new liability is recognised.

  1. ATreat the remaining liability as unchanged, because the equity issue relates only to the part settled
  2. BAllocate the consideration between the part extinguished and the remaining liability, and include the consideration allocated to the remaining liability in assessing whether its terms are substantially modifiedCorrect
  3. CAssess substantial modification of the remaining liability only by reference to the fair value of the shares issued
  4. DDerecognise the whole loan automatically, because part of it was settled with equity

Explanation

Where only part of a liability is extinguished, consideration is allocated between the part extinguished and the remainder. The consideration allocated to the remaining liability forms part of the assessment of whether its terms are substantially modified. If it is substantially modified, the original liability is extinguished and a new liability is recognised. The other options either skip the assessment, use the wrong basis, or apply an automatic rule that the standard does not contain.

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