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

Rao Pharma Ltd has a financial liability of Rs 50 lakh to a supplier, Vijay Chemicals Ltd. Both are unrelated, and Vijay is not a shareholder of Rao. On renegotiation, Rao issues equity shares to Vijay to extinguish the liability. Which of the following situations would be excluded from the Appendix D requirements on extinguishing financial liabilities with equity instruments?

The Appendix D requirements are excluded where extinguishing the liability through equity shares follows the original terms of that liability. A fresh renegotiation with an unrelated creditor, even part-settled in cash, remains within the Appendix, because the equity issue was not originally contracted.

  1. AVijay is an unrelated creditor and the equity issue is a newly negotiated settlement
  2. BThe liability is settled partly in equity shares and partly in cash
  3. CSettlement by issuing equity shares was provided for in the original terms of the liabilityCorrect
  4. DThe equity instruments issued are partly valued by reference to fair value of the liability extinguished

Explanation

Appendix D does not apply where extinguishing the liability by issuing equity shares is in accordance with the original terms of the financial liability. A renegotiated settlement with an unrelated creditor (option 1) or a partial settlement (option 2) remains within it. Valuation basis (option 4) does not affect scope.

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