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

Kaveri Textiles Ltd has a loan with a carrying amount of Rs 80 lakh. It issues 5,00,000 equity shares with a reliably measurable fair value of Rs 14 each to the lender to extinguish the entire loan. Which accounting outcome follows from the principles in Ind AS 109 Appendix D?

The loan is removed, equity is recorded at the shares' fair value of Rs 70 lakh, and the Rs 10 lakh difference from the Rs 80 lakh carrying amount is a gain in profit or loss. Equity issued is consideration paid and is measured at fair value.

  1. ADerecognise the loan, recognise equity of Rs 70 lakh, and recognise a gain of Rs 10 lakh in profit or lossCorrect
  2. BDerecognise the loan, recognise equity of Rs 80 lakh, and recognise no gain or loss
  3. CDerecognise the loan, recognise equity of Rs 70 lakh, and credit the Rs 10 lakh difference directly to reserves
  4. DRetain the loan until the shares are listed, and recognise equity of Rs 70 lakh

Explanation

The shares are consideration paid under paragraph 3.3.3 of Ind AS 109, measured at fair value: 5,00,000 x Rs 14 = Rs 70 lakh. The difference between the carrying amount Rs 80 lakh and Rs 70 lakh is Rs 10 lakh gain in profit or loss. Recording equity at Rs 80 lakh ignores the fair value rule.

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