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

Sagar Textiles Ltd owes Rs 80 lakh to a lender on a term loan. The lender agrees to accept 5 lakh equity shares of Sagar Textiles (face value Rs 10) in full settlement. The shares are quoted and their fair value on the settlement date is Rs 14 per share. How should Sagar Textiles measure the equity instruments on initial recognition under Ind AS 109 (Appendix D)?

The shares should be measured at Rs 70 lakh, being 5 lakh shares at a fair value of Rs 14 each. Ind AS 109 Appendix D requires equity instruments issued to extinguish a liability to be measured at their fair value unless that value cannot be reliably measured.

  1. AAt Rs 50 lakh, the face value of the shares issued
  2. BAt Rs 70 lakh, the fair value of the shares issuedCorrect
  3. CAt Rs 80 lakh, the carrying amount of the liability extinguished
  4. DAt Rs 10 lakh, the difference between the liability and the fair value

Explanation

Appendix D says equity instruments issued to a creditor are measured at their fair value unless it cannot be reliably measured. Fair value = 5,00,000 x Rs 14 = Rs 70 lakh. Shares are quoted, so fair value is reliable. Using carrying amount of Rs 80 lakh is wrong because that applies only when share fair value cannot be reliably measured.

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