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

Sunrise Textiles Ltd owes Bharat Finance Ltd a term loan carried at Rs 50 lakh. Following renegotiation, Sunrise issues equity shares to Bharat Finance to extinguish the entire loan. Under Ind AS 109 (Appendix D on extinguishing financial liabilities with equity instruments), how is the issue of the equity shares viewed?

The issue of equity shares to the creditor is treated as consideration paid in accordance with the derecognition paragraph of Ind AS 109. Hence the liability, or the extinguished part, is removed from the balance sheet when it is extinguished, and the shares are accounted as settlement of that liability.

  1. AAs consideration paid to extinguish the financial liabilityCorrect
  2. BAs a capital contribution that does not affect the liability
  3. CAs a modification that leaves the liability on the balance sheet
  4. DAs a hedge of the loan's interest rate risk

Explanation

Appendix D states that issuing equity instruments to a creditor to extinguish all or part of a financial liability is consideration paid under the derecognition requirements. The liability is removed only when extinguished. Treating it as a capital contribution ignores that the shares settle the debt.

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