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

Narmada Power Ltd renegotiates a bank loan. The terms are modified, but the modification is not substantial, so the original liability is not extinguished. Narmada pays Rs 60,000 in fees to the bank, and 3 years remain on the modified loan. How should the fees be treated under Ind AS 109?

The fees adjust the carrying amount of the liability and are amortised over the remaining term of the modified loan. Because the modification is not substantial, there is no extinguishment, so no immediate loss is recognised. Immediate expensing applies only where the modification is accounted for as an extinguishment.

  1. ARecognised immediately in profit or loss as a loss on extinguishment
  2. BAdded to the cost of the asset financed by the loan
  3. CAdjusted against the carrying amount of the liability and amortised over the remaining term of the modified liabilityCorrect
  4. DRecognised in other comprehensive income and recycled on repayment

Explanation

When an exchange or modification is not accounted for as an extinguishment, any costs or fees adjust the carrying amount of the liability and are amortised over the remaining term of the modified liability. Immediate expensing applies only if the modification is treated as an extinguishment. OCI and asset-cost treatments have no basis in the standard for these fees.

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