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

Himalaya Foods Ltd. renegotiates a loan whose terms are not substantially modified. The carrying amount of the liability just before modification is Rs 8,00,000, and the company pays Rs 20,000 as legal fees for the modification. The remaining term of the modified liability is 4 years. Ignoring interest effect and assuming straight-line amortisation for simplicity, what is the correct accounting for the fees?

The fees adjust the carrying amount of the liability and are amortised over the remaining four-year term, about Rs 5,000 a year. This is because the modification is not an extinguishment, so fees are not recognised immediately as a gain or loss.

  1. AExpense Rs 20,000 immediately in profit or loss as loss on extinguishment
  2. BAdjust the carrying amount of the liability by Rs 20,000 and amortise it over the remaining 4 years, Rs 5,000 a yearCorrect
  3. CCapitalise Rs 20,000 as a separate asset and amortise it over 4 years
  4. DRecognise Rs 20,000 in other comprehensive income

Explanation

When a modification is not accounted for as an extinguishment, costs or fees adjust the carrying amount of the liability and are amortised over the remaining term of the modified liability. Rs 20,000 / 4 = Rs 5,000 a year. Immediate expensing applies only on extinguishment.

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