Skip to content

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

Sagar Chemicals Ltd owes ₹10 crore to a lender. It issues equity shares with a fair value of ₹4 crore to extinguish part of this liability, and the remaining liability is renegotiated at the same time. In applying Ind AS 109 to the part-extinguishment with equity instruments, which statement is correct?

Consideration must be allocated between the extinguished part and the remaining liability. The amount allocated to the remainder feeds into the test for substantial modification. If the remainder is substantially modified, the original liability is extinguished in full and a new liability is recognised.

  1. AConsideration is allocated between the part extinguished and the remaining liability, and if the remaining liability has been substantially modified, the whole is treated as extinguishment of the original liability and recognition of a new oneCorrect
  2. BThe entire equity issue is credited to equity and no gain or loss can arise on any part of the liability
  3. CThe remaining liability is never assessed for modification, as only the extinguished part matters
  4. DThe shares are measured at carrying amount of the liability extinguished, and any difference is ignored

Explanation

When only part of a liability is extinguished, the consideration is allocated between the part extinguished and the part remaining. The consideration allocated to the remaining liability forms part of the assessment of whether its terms are substantially modified. If they are, the modification is accounted for as extinguishment of the original liability and recognition of a new liability. Other options ignore the allocation and the assessment of the remaining liability.

Did you get it right without looking?

One question tells you little. A timed set on Recognition and Derecognition of Financial Instruments shows your real accuracy, how long you take and where you lose marks.

Practise Recognition and Derecognition of Financial InstrumentsFree diagnostic mock

More Recognition and Derecognition of Financial Instruments questions