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CA Final · Financial Reporting · Financial Instruments: Equity and Financial Liabilities

Kaveri Infra Ltd, an unlisted company, settles a bank loan of ₹2 crore (carrying amount) by issuing equity shares to the bank. The fair value of the shares cannot be reliably measured. The fair value of the loan extinguished, determined using a market discount rate, is ₹1.85 crore. What is the correct accounting under Ind AS 109 (Appendix D)?

Equity is measured at ₹1.85 crore, the fair value of the liability extinguished, because the shares' own fair value cannot be reliably measured. The ₹15 lakh difference from the ₹2 crore carrying amount is a gain recognised in profit or loss.

  1. AMeasure the equity at ₹1.85 crore, reflecting the fair value of the liability extinguished, and recognise a gain of ₹15 lakh in profit or lossCorrect
  2. BMeasure the equity at ₹2 crore and recognise no gain or loss
  3. CMeasure the equity at face value and adjust the difference in securities premium
  4. DMeasure the equity at ₹1.85 crore and recognise the ₹15 lakh difference directly in other equity

Explanation

If the fair value of the equity instruments cannot be reliably measured, they are measured to reflect the fair value of the financial liability extinguished, here ₹1.85 crore. The difference from the carrying amount of ₹2 crore is ₹15 lakh and is a gain in profit or loss. Using the carrying amount of ₹2 crore ignores the fair value of the liability.

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