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

Tulsi Foods Ltd renegotiates a payable and issues equity shares to the creditor. The finance head states that the issue of equity shares is not 'consideration paid' and so the liability cannot be removed until cash is paid. Which response is correct as per Ind AS 109 (Appendix D)?

The finance head is wrong. Under Appendix D to Ind AS 109, issuing equity instruments to a creditor to extinguish a financial liability is consideration paid. The liability, or the relevant part, is removed from the balance sheet only when it is actually extinguished.

  1. AThe statement is wrong; issuing equity instruments to a creditor is consideration paid, and the liability is removed only when it is extinguishedCorrect
  2. BThe statement is correct; only cash or other financial assets count as consideration paid
  3. CThe statement is wrong; the liability is removed as soon as renegotiation talks begin
  4. DThe statement is correct; the liability is reclassified to equity without extinguishment

Explanation

Appendix D states that issuing an entity's equity instruments to a creditor to extinguish all or part of a financial liability is consideration paid. The liability or part is removed from the balance sheet when, and only when, it is extinguished. Starting negotiations does not extinguish the liability.

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