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CMA Final · Corporate Financial Reporting · Accounting of Financial Instruments

Orchid Foods Ltd has a loan from a lender with a carrying amount of Rs 1,20,00,000. The lender agrees to take equity shares in full settlement for the whole loan. The fair value of the shares issued cannot be reliably measured, but the fair value of the financial liability extinguished is Rs 1,05,00,000. What gain is recognised in profit or loss?

Equity is measured at the fair value of the liability extinguished, Rs 1,05,00,000, because the share fair value is not reliably measurable. The Rs 15,00,000 difference from the Rs 1,20,00,000 carrying amount is recognised as a gain in profit or loss.

  1. ANil, as the shares are recorded at Rs 1,20,00,000
  2. BGain of Rs 15,00,000, with equity recorded at Rs 1,05,00,000Correct
  3. CGain of Rs 15,00,000, with equity recorded at Rs 1,20,00,000
  4. DLoss of Rs 15,00,000, with equity recorded at Rs 1,05,00,000

Explanation

When the fair value of the equity cannot be reliably measured, the equity instruments are measured to reflect the fair value of the liability extinguished, i.e. Rs 1,05,00,000. The difference from the carrying amount, Rs 15,00,000, is a gain in profit or loss.

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