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

Meghna Steels Ltd owes ₹1,000 lakh (carrying amount) to a lender. Under a renegotiation, it issues equity shares with a reliably measured fair value of ₹600 lakh to extinguish part of the liability, and the lender agrees that ₹400 lakh of the carrying amount continues as a revised liability. The portion of the carrying amount that the shares are issued to settle is ₹700 lakh, and the remaining ₹300 lakh is not extinguished. Which statement is correct per Ind AS 109 (Appendix D)?

Meghna derecognises only the extinguished ₹700 lakh, records equity at the ₹600 lakh fair value of the shares, and recognises a ₹100 lakh gain in profit or loss. The remaining ₹300 lakh continues as a financial liability.

  1. ARemove ₹700 lakh from the balance sheet, recognise equity of ₹600 lakh and a gain of ₹100 lakh in profit or loss; ₹300 lakh remains as a liabilityCorrect
  2. BRemove ₹1,000 lakh, recognise equity of ₹600 lakh and a gain of ₹400 lakh
  3. CRemove ₹600 lakh, recognise equity of ₹600 lakh and no gain or loss; ₹400 lakh remains
  4. DRemove ₹700 lakh, recognise equity of ₹700 lakh and no gain or loss

Explanation

Only the part of the liability that is extinguished is removed from the balance sheet, which is ₹700 lakh. The shares are measured at fair value of ₹600 lakh, so the difference of ₹100 lakh is a gain in profit or loss. The remaining ₹300 lakh stays as a liability; removing ₹1,000 lakh would ignore that the rest is not extinguished.

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