Skip to content

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

Meera Textiles Ltd owes Rs 50 lakh to a lender on a term loan. The lender agrees to accept 4 lakh equity shares of Meera Textiles in full settlement. The shares have a reliably measurable fair value of Rs 11 per share at the settlement date. Under the Appendix on Extinguishing Financial Liabilities with Equity Instruments, how should Meera Textiles initially measure the equity instruments issued?

The shares are measured at Rs 44 lakh, which is 4 lakh shares at Rs 11 fair value each. Equity instruments issued to extinguish a liability are initially measured at their fair value when it can be reliably measured, not at the liability's carrying amount.

  1. AAt Rs 44 lakh, the fair value of the equity instruments issuedCorrect
  2. BAt Rs 50 lakh, the carrying amount of the liability extinguished
  3. CAt their face value, irrespective of fair value
  4. DAt Rs 6 lakh, being the difference between the liability and the shares

Explanation

Equity instruments issued to a creditor are measured at their fair value unless that fair value cannot be reliably measured. Here 4,00,000 x Rs 11 = Rs 44 lakh. Using the Rs 50 lakh carrying amount is wrong because that is allowed only when the share fair value is not reliably measurable.

Did you get it right without looking?

One question tells you little. A timed set on Financial Instruments: Equity and Financial Liabilities shows your real accuracy, how long you take and where you lose marks.

Practise Financial Instruments: Equity and Financial LiabilitiesFree diagnostic mock

More Financial Instruments: Equity and Financial Liabilities questions