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

Under IFRS, a debtor and its lender exchange an existing loan for a new loan with substantially different terms. The debtor most likely accounts for this exchange by:

The debtor derecognises the original liability and recognises a new liability at fair value. A substantial modification of terms is treated as an extinguishment, with the difference between the carrying amount and the new fair value reported in profit or loss.

  1. Aderecognising the original liability and recognising a new liability at fair valueCorrect
  2. Bcontinuing the original liability and amortising the fee over the new term
  3. Coffsetting the two loans and disclosing only the net amount

Explanation

A substantial modification of terms is treated as extinguishment of the original liability and recognition of a new one at fair value, with any difference recognised in profit or loss. Continuing the old liability applies only when terms are not substantially different.

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