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CA Final · Financial Reporting · Financial Instruments: Equity and Financial Liabilities

Pranav Infra Ltd owes Rs 1 crore to a bank. Under renegotiation, it issues shares with a reliably measured fair value of Rs 60 lakh to extinguish Rs 70 lakh (carrying amount) of the liability. The remaining Rs 30 lakh stays outstanding on revised terms. Ignoring costs and tax, what is the accounting outcome?

The liability falls by Rs 70 lakh, equity rises by Rs 60 lakh at fair value, and Rs 10 lakh is recognised as a gain in profit or loss. The remaining Rs 30 lakh stays as a liability, since only the extinguished part is derecognised.

  1. ALiability reduced by Rs 100 lakh with equity at Rs 60 lakh
  2. BLiability reduced by Rs 70 lakh, equity increased by Rs 60 lakh, gain of Rs 10 lakh in profit or lossCorrect
  3. CLiability reduced by Rs 60 lakh, equity increased by Rs 60 lakh, no gain
  4. DLiability reduced by Rs 70 lakh, equity increased by Rs 70 lakh, no gain

Explanation

Part of the liability extinguished is removed (Rs 70 lakh). Shares are consideration paid, measured at fair value Rs 60 lakh. The difference Rs 10 lakh is a gain in profit or loss. Option with equity at Rs 70 lakh wrongly uses carrying amount despite reliable fair value.

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