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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 50,00,000. The loan terms are substantially modified, so the modification is accounted for as an extinguishment. The new liability is recognised at its fair value of Rs 46,00,000. Kaveri pays Rs 1,00,000 to the lender as a modification fee. What gain on extinguishment does Kaveri recognise in profit or loss?

The gain is Rs 3,00,000. Because the modification is treated as an extinguishment, the fee is recognised as part of the gain or loss rather than adjusting the new liability. The gain is the old carrying amount of Rs 50,00,000 less new fair value of Rs 46,00,000 less the Rs 1,00,000 fee.

  1. ARs 4,00,000, with the fee added to the new liability
  2. BRs 5,00,000, treating the fee as an additional gain
  3. CNil, because gains on modification are deferred
  4. DRs 3,00,000, with the fee included in the gain or lossCorrect

Explanation

If a modification is accounted for as an extinguishment, any costs or fees are recognised as part of the gain or loss on extinguishment. Gain = 50,00,000 - 46,00,000 - 1,00,000 = Rs 3,00,000. Rs 4,00,000 wrongly ignores the fee by adjusting the new liability. Rs 5,00,000 adds the fee instead of deducting it.

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