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CFA Level I · CFA Level I Exam · Topics in Long-Term Liabilities and Equity

Under IFRS, a company repurchases its own outstanding bonds in the open market for less than their carrying amount. The company will most likely report the difference as:

The difference is most likely reported as a gain in profit or loss on extinguishment. Derecognizing a liability requires recognizing the difference between its carrying amount and the amount paid in earnings, and a repurchase below carrying amount gives a gain, not an equity adjustment.

  1. Aa gain in profit or loss on extinguishment of debtCorrect
  2. Ban increase in additional paid-in capital
  3. Ca reduction in the cost of the new debt issued

Explanation

When a liability is derecognized, the difference between its carrying amount and the consideration paid is recognized in profit or loss. Repurchasing below carrying amount produces a gain. It is not an equity transaction, because the counterparty is a creditor, not an owner.

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