Skip to content

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

Under the Appendix on extinguishing financial liabilities with equity instruments, which statement is correct about the entity's issue of its equity instruments to a creditor?

Issuing equity to a creditor is consideration paid, and the entity removes the financial liability or part of it from its balance sheet when, and only when, it is extinguished. The Appendix covers the debtor's accounting, not the creditor's.

  1. AIt is not consideration paid, so the liability remains on the balance sheet
  2. BIt is consideration paid, and the liability is removed only when it is extinguishedCorrect
  3. CIt is consideration paid, but the liability is removed on the date negotiations begin
  4. DIt is outside the debtor's accounting and addressed only for the creditor

Explanation

The issue of equity instruments to a creditor is consideration paid, and a financial liability (or part) is removed from the balance sheet when, and only when, it is extinguished. The Appendix does not address the creditor's accounting, so that option is wrong.

Did you get it right without looking?

One question tells you little. A timed set on Financial Instruments: Equity and Financial Liabilities shows your real accuracy, how long you take and where you lose marks.

Practise Financial Instruments: Equity and Financial LiabilitiesFree diagnostic mock

More Financial Instruments: Equity and Financial Liabilities questions