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CA Final · Financial Reporting · Financial Instruments: Scope and Definitions

Orion Steels Ltd owes Rs 80 lakh to supplier Bharat Alloys Pvt Ltd. The parties renegotiate and Orion will issue equity shares to Bharat to extinguish the liability. Which situation is excluded from Appendix D (Extinguishing Financial Liabilities with Equity Instruments) of Ind AS 109?

Appendix D does not apply when the creditor is a direct or indirect shareholder and is acting in its capacity as an existing shareholder. Mere shareholding is insufficient, and partial extinguishment or an unrelated lender creditor remains within the Appendix.

  1. ABharat is an unrelated creditor acting purely as a lender
  2. BBharat is a shareholder of Orion but the issue arises from a pure commercial renegotiation of the debt, with no shareholder capacity involved
  3. CBharat is also a direct existing shareholder of Orion and is acting in its capacity as such shareholderCorrect
  4. DOnly part of the liability is extinguished by the issue of equity

Explanation

Appendix D para 3(a) excludes cases where the creditor is also a direct or indirect shareholder and is acting in its capacity as an existing shareholder. Being a shareholder alone is not enough; the capacity is the test, so the second option is not excluded. Appendix D also covers extinguishing all or part of the liability, so the partial settlement option is within scope.

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