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

Kaveri Power Ltd has a loan from Sundaram Bank with a carrying amount of Rs 80 lakh. It issues 4 lakh equity shares to the bank in full settlement. The shares are traded actively and their fair value at the settlement date is Rs 18 per share. Fair value is reliably measurable. What amount is the equity recognised at initially, and what is the gain or loss in profit or loss?

Equity is recognised at the fair value of the shares issued, which is 4 lakh shares times Rs 18, or Rs 72 lakh. The difference from the Rs 80 lakh carrying amount of the loan is a Rs 8 lakh gain in profit or loss.

  1. AEquity Rs 72 lakh; gain Rs 8 lakhCorrect
  2. BEquity Rs 80 lakh; gain nil
  3. CEquity Rs 72 lakh; loss Rs 8 lakh
  4. DEquity Rs 40 lakh; gain Rs 40 lakh

Explanation

Appendix D, paragraph 6 requires the equity instruments to be measured at their fair value when it can be reliably measured. Fair value = 4,00,000 x Rs 18 = Rs 72 lakh. The difference from the carrying amount of Rs 80 lakh is a gain of Rs 8 lakh in profit or loss. Using the carrying amount of Rs 80 lakh ignores the fair value requirement.

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