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

Narmada Agro Ltd owes Rs 60 lakh (carrying amount) to a supplier-lender. It settles Rs 20 lakh of the liability by issuing 1 lakh equity shares with a fair value of Rs 17 per share, and pays the rest later in cash as originally agreed. Which statement is correct under Appendix D of Ind AS 109?

Only the Rs 20 lakh part of the liability is removed. Equity is recognised at the shares' fair value of Rs 17 lakh, and the Rs 3 lakh difference is a gain in profit or loss. The remaining Rs 40 lakh stays as a liability.

  1. AThe whole Rs 60 lakh is derecognised and a gain of Rs 3 lakh arises
  2. BOnly the Rs 20 lakh part is removed; equity is recorded at Rs 17 lakh and a gain of Rs 3 lakh is recognised in profit or lossCorrect
  3. COnly the Rs 20 lakh part is removed; equity is recorded at Rs 20 lakh and no gain arises
  4. DThe liability is derecognised only when the full Rs 60 lakh is settled, so no gain arises now

Explanation

Appendix D covers extinguishing all or part of a liability; paragraph 5 permits removing a part when extinguished. Equity is measured at fair value of shares: 1,00,000 x 17 = Rs 17 lakh (paragraph 6). The difference with Rs 20 lakh extinguished is a Rs 3 lakh gain. Derecognising all Rs 60 lakh is wrong because only a part was settled.

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