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

Kaveri Engineering Ltd has a term loan with a carrying amount of Rs 50,00,000. It renegotiates the interest rate and repayment schedule with the bank. The entity concludes that the modified terms are not substantially different, so there is no extinguishment. It pays the bank a modification fee of Rs 1,00,000. How does the entity account for the fee?

The fee adjusts the carrying amount of the liability, reducing it to Rs 49,00,000, and is then amortised over the remaining term of the modified loan. Immediate expensing applies only when the modification is accounted for as an extinguishment of the original liability.

  1. AExpense the Rs 1,00,000 immediately in profit or loss
  2. BAdjust the liability's carrying amount to Rs 49,00,000 and amortise the fee over the remaining termCorrect
  3. CIncrease the carrying amount of the liability to Rs 51,00,000
  4. DRecognise the fee as a separate asset and keep the liability at Rs 50,00,000

Explanation

When a modification is not accounted for as an extinguishment, any costs or fees adjust the carrying amount of the liability. They are amortised over the remaining term of the modified liability. The liability becomes 50,00,000 - 1,00,000 = 49,00,000. Immediate expensing applies only if the modification is treated as an extinguishment.

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