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

Using the facts of Sagar Textiles Ltd (liability carrying amount Rs 80 lakh, extinguished by issue of shares with fair value Rs 70 lakh), how is the Rs 10 lakh difference treated?

The Rs 10 lakh difference is a gain recognised in profit or loss. The equity issued is consideration paid to extinguish the liability, so the gap between the carrying amount of Rs 80 lakh and the equity measured at Rs 70 lakh goes to profit or loss.

  1. ARecognised in profit or loss as the difference between the carrying amount of the liability extinguished and the initial measurement of the equity instrumentsCorrect
  2. BCredited to securities premium account
  3. CAdjusted against the cost of the lender's investment
  4. DDeferred and amortised over the remaining original loan term

Explanation

Issue of equity is consideration paid under paragraph 3.3.3 of Ind AS 109, so the liability is derecognised and the difference between its carrying amount (Rs 80 lakh) and the equity measured at Rs 70 lakh is a gain of Rs 10 lakh in profit or loss. Crediting securities premium is wrong because only the fair value of shares goes to equity.

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