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

Nirmal Pharma Ltd renegotiates a loan with its bank. The modification is not substantial, so it is not accounted for as an extinguishment. Nirmal incurs legal and processing fees of Rs 3 lakh on the modification. How should these 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 liability. Immediate recognition in profit or loss applies only when the modification is accounted for as an extinguishment, which is not the case here.

  1. ARecognised immediately in profit or loss as part of a gain or loss on extinguishment
  2. BAdjusted against the carrying amount of the liability and amortised over the remaining term of the modified liabilityCorrect
  3. CCapitalised as an intangible asset and amortised
  4. DCharged directly to retained earnings

Explanation

Where 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 recognition in profit or loss applies only when the modification is treated as an extinguishment, which is the key distractor here.

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