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CMA Final · Corporate Financial Reporting · Accounting of Financial Instruments

Sagar Textiles Ltd owes a bank a term loan with a carrying amount of Rs 50 lakh. Under a renegotiation, it issues equity shares to the bank to extinguish the whole loan. The fair value of the shares issued on the date of extinguishment is reliably measurable at Rs 42 lakh. How should the entity account for the difference?

A gain of Rs 8 lakh goes to profit or loss. The shares are measured at their fair value of Rs 42 lakh, and the difference from the Rs 50 lakh carrying amount of the extinguished liability is recognised in profit or loss, not in equity.

  1. ARecognise a gain of Rs 8 lakh in profit or lossCorrect
  2. BRecognise a gain of Rs 8 lakh directly in other equity (securities premium)
  3. CRecord the shares at Rs 50 lakh, the carrying amount, with no gain or loss
  4. DRecognise a loss of Rs 8 lakh in profit or loss

Explanation

Equity instruments issued to extinguish a liability are consideration paid and are measured at their fair value of Rs 42 lakh. The difference between the carrying amount (Rs 50 lakh) and the consideration (Rs 42 lakh) is Rs 8 lakh, recognised in profit or loss. Taking it to equity or recording shares at the carrying amount is contrary to the Appendix.

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