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

Narmada Infra Ltd exchanges an existing loan from a lender for a new loan with substantially different terms. The old loan has a carrying amount of Rs 200 lakh. The new loan has a fair value of Rs 185 lakh at initial recognition. Narmada pays Rs 4 lakh as fees to the lender in connection with the exchange. What is the amount recognised in profit or loss on the exchange?

The profit or loss shows a gain of Rs 11 lakh. The exchange is an extinguishment, so the gain is the old carrying amount of Rs 200 lakh less the new liability's fair value of Rs 185 lakh, which is Rs 15 lakh. The Rs 4 lakh fees are included in that gain or loss.

  1. AGain of Rs 15 lakh, with fees amortised over the new loan's term
  2. BGain of Rs 11 lakhCorrect
  3. CGain of Rs 19 lakh
  4. DLoss of Rs 4 lakh

Explanation

Substantially different terms mean extinguishment of the old liability and recognition of a new one at fair value. Gain before fees = 200 - 185 = Rs 15 lakh. Fees on an extinguishment form part of the gain or loss, so net gain = 15 - 4 = Rs 11 lakh. Amortising the fees would be correct only for a non-extinguishment.

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