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

Meridian Textiles Ltd owes Bharat Finance Ltd a term loan with a carrying amount of Rs 50 lakh. Following renegotiation, Meridian issues equity shares to Bharat Finance to extinguish the whole loan. Under Appendix D of Ind AS 109, how should Meridian regard the issue of its equity instruments?

The issue of equity instruments to the creditor is treated as consideration paid under paragraph 3.3.3 of Ind AS 109. The liability, or the part extinguished, is removed from the balance sheet only when it is extinguished as per paragraph 3.3.1.

  1. AAs consideration paid under paragraph 3.3.3 of Ind AS 109 for extinguishing the liabilityCorrect
  2. BAs a modification that leaves the liability on the balance sheet until repaid in cash
  3. CAs a non-monetary grant that is recognised directly in equity at the loan's carrying amount only
  4. DAs a contingent settlement that is disclosed but not recognised until the shares are listed

Explanation

Appendix D, paragraph 5 states that issuing an entity's equity instruments to a creditor to extinguish all or part of a financial liability is consideration paid under paragraph 3.3.3 of Ind AS 109. The liability is removed only when it is extinguished under paragraph 3.3.1. Keeping the liability until cash repayment is wrong because the equity issue itself is consideration paid.

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