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

Gomti Engineering Ltd has a bank loan whose terms are modified. The modification is NOT a substantial modification, so the original liability is not extinguished. The company incurs Rs 90,000 as legal fees connected with the modification. The remaining term of the modified loan is 3 years. How should the fees be treated?

The fees adjust the carrying amount of the liability and are amortised over the remaining term of the modified liability. Immediate recognition in profit or loss applies only when the modification is accounted for as an extinguishment, which is not the situation here.

  1. ARecognise Rs 90,000 immediately in profit or loss as a loss on extinguishment
  2. BAdjust the carrying amount of the liability and amortise the fees over the remaining term of the modified liabilityCorrect
  3. CCapitalise the fees as an intangible asset and amortise over 3 years
  4. DRecognise Rs 90,000 in other comprehensive income

Explanation

If the modification is not accounted for as an extinguishment, any costs or fees incurred adjust the carrying amount of the liability and are amortised over the remaining term of the modified liability. Option A applies only when the modification is treated as an extinguishment, which is not the case here.

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