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

Tara Engineering Ltd, as an Ind AS entity, owes a lender a financial liability of Rs 200 lakh. It issues equity shares to extinguish only part of it, Rs 80 lakh of the liability, with the consideration allocated to that part being Rs 70 lakh. Following allocation, the consideration allocated to the remaining liability results in a substantial modification of its terms. Which accounting follows under Ind AS 109 and its Appendix D on extinguishing financial liabilities with equity instruments?

Because the remaining liability has been substantially modified, the modification is accounted for as extinguishment of the original liability and recognition of a new liability under paragraph 3.3.2 of Ind AS 109. Leaving the remainder unchanged is incorrect once the substantial modification test is met.

1. AOnly the Rs 80 lakh part is derecognised, and the remaining liability continues unchanged regardless of the modification
2. BThe entire original liability is treated as extinguished and a new liability is recognised for the remaining part, because a substantial modification is accounted for as extinguishmentCorrect
3. CThe equity issue is ignored until the whole liability is settled
4. DThe remaining liability is amortised over its term with all differences adjusted in carrying amount, with no profit or loss