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

Vihaan Infra Ltd issues unlisted equity shares to a lender to extinguish a debt of carrying amount Rs 1 crore. Despite reasonable efforts, the fair value of the shares cannot be reliably measured. The fair value of the liability extinguished is determined as Rs 94 lakh. What is the correct initial measurement of the equity instruments?

When the fair value of the shares cannot be reliably measured, they are measured to reflect the fair value of the liability extinguished, here Rs 94 lakh. The Rs 6 lakh excess of carrying amount over this is a gain in profit or loss.

  1. ARs 1 crore, being the carrying amount of the liability
  2. BRs 94 lakh, reflecting the fair value of the liability extinguishedCorrect
  3. CNil, because the shares' value is unknown
  4. DRs 6 lakh, being the difference to be recognised in equity

Explanation

Appendix D, paragraph 7 says that if the fair value of the equity instruments cannot be reliably measured, they are measured to reflect the fair value of the financial liability extinguished. That is Rs 94 lakh, and the Rs 6 lakh difference from the carrying amount goes to profit or loss. Choosing Rs 1 crore uses carrying amount instead of fair value of the liability.

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