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

Meera Power Ltd has a bank loan with an amortised cost carrying amount of ₹10,00,00,000. The bank and Meera agree to substantially modify the terms. The fair value of the new liability at the modification date is ₹9,50,00,000. Meera pays the bank fees of ₹10,00,000 in connection with the modification. Which statement is correct under Ind AS 109?

The gain is ₹40,00,000. A substantial modification is an extinguishment, so fees are part of the gain or loss. The gain is 10 crore carrying amount less 9.5 crore new liability less ₹10 lakh fees. Amortising fees applies only to non-extinguishment modifications.

  1. AGain on extinguishment of ₹60,00,000, because the fees are added to the gain
  2. BGain on extinguishment of ₹50,00,000, with the fees adjusting the carrying amount of the new liability
  3. CGain of ₹40,00,000 recognised in profit or loss, with the fees included in the gain or loss on extinguishmentCorrect
  4. DNo gain or loss, with the fees amortised over the remaining term

Explanation

A substantial modification is accounted for as extinguishment of the original liability and recognition of a new one. Any costs or fees incurred are recognised as part of the gain or loss on the extinguishment. Gain = 10,00,00,000 − 9,50,00,000 − 10,00,000 = ₹40,00,000. Capitalising the fees would apply only if the modification were not an extinguishment, and adding them to the gain has the wrong sign.

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