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

Kaveri Textiles Ltd has a term loan with a carrying amount of Rs 500 lakh. The bank agrees to modify the terms, and the modification is assessed as NOT substantial. Kaveri pays Rs 5 lakh as modification fees to the bank. Ignoring any change in the effective interest rate computation beyond the fee, what is the carrying amount of the liability immediately after the modification?

The carrying amount becomes Rs 495 lakh. Because the modification is not substantial, it is not an extinguishment, so the Rs 5 lakh fee adjusts the liability's carrying amount and is amortised over the remaining term. It is not expensed immediately or shown as a separate asset.

  1. ARs 505 lakh
  2. BRs 500 lakh, with Rs 5 lakh charged to profit or loss immediately
  3. CRs 495 lakhCorrect
  4. DRs 500 lakh, with Rs 5 lakh recognised as a separate asset

Explanation

If a modification is not accounted for as an extinguishment, costs or fees adjust the carrying amount of the liability and are amortised over the remaining term. Fees paid reduce the carrying amount: 500 - 5 = Rs 495 lakh. Expensing the fee immediately is the treatment for an extinguishment, which does not apply here.

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