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

Kaveri Industries Ltd has a term loan with a carrying amount of Rs 100 lakh. The lender and Kaveri agree to a modification that is substantially different in terms. Kaveri pays a fee of Rs 2 lakh to the lender, and the fair value of the new liability is Rs 96 lakh. Under Ind AS 109, the modification is accounted for as an extinguishment. What is the gain or loss recognised in profit or loss on extinguishment, including the fee?

The gain is Rs 2 lakh. The old liability of Rs 100 lakh is derecognised and the new one is recognised at Rs 96 lakh, a gain of Rs 4 lakh, and the Rs 2 lakh fee is included in the gain or loss on extinguishment, reducing it to Rs 2 lakh.

  1. AGain of Rs 4 lakh
  2. BGain of Rs 2 lakhCorrect
  3. CLoss of Rs 2 lakh
  4. DGain of Rs 6 lakh

Explanation

On extinguishment the old liability of Rs 100 lakh is replaced by a new liability at fair value Rs 96 lakh, giving a gain of Rs 4 lakh. Costs or fees incurred are recognised as part of the gain or loss on extinguishment, so the Rs 2 lakh fee reduces the gain to Rs 2 lakh. Gain of Rs 4 lakh ignores the fee. Gain of Rs 6 lakh adds the fee instead of deducting it.

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