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

Konark Engineering Ltd has a loan from a bank with a carrying amount of Rs 80 lakh. Konark issues equity shares to the bank to extinguish the entire loan. Because Konark's shares are unlisted and thinly traded, their fair value cannot be reliably measured. The fair value of the loan extinguished is determined as Rs 74 lakh. What is the initial measurement of the equity instruments issued?

The equity is measured at Rs 74 lakh. When the fair value of the equity instruments issued cannot be reliably measured, they are measured to reflect the fair value of the financial liability extinguished, not its carrying amount. The Rs 6 lakh difference is a gain in profit or loss.

  1. ARs 80 lakh, the carrying amount of the loan
  2. BRs 74 lakh, reflecting the fair value of the liability extinguishedCorrect
  3. CFace value of the shares issued
  4. DZero, as the fair value of the shares is not reliable

Explanation

Where the fair value of the equity cannot be reliably measured, the equity instruments are measured to reflect the fair value of the financial liability extinguished, here Rs 74 lakh. The Rs 6 lakh difference from the carrying amount goes to profit or loss. Option A is wrong because the carrying amount is not the measurement basis.

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