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CA Final · Financial Reporting · Financial Instruments: Scope and Definitions

Vistara Agro Ltd owes Rs 80 lakh to its lender, Bharat Bank. Under a renegotiation, Vistara issues equity shares to Bharat Bank to extinguish the whole liability. Consider three separate situations: (i) Bharat Bank is also an existing shareholder of Vistara and is acting in that capacity; (ii) the original loan terms already provided for conversion into equity shares, and conversion occurs per those terms; (iii) Bharat Bank is an unrelated creditor with no shareholding, and the conversion was newly negotiated. In how many of these situations is Appendix D (Extinguishing Financial Liabilities with Equity Instruments) excluded from application?

Appendix D is excluded in situations (i) and (ii) only. It does not apply when the creditor acts as an existing shareholder or when extinguishment by shares follows the original terms. A newly negotiated conversion with an unrelated creditor, situation (iii), falls within Appendix D.

  1. ANone of the three situations
  2. BOnly situation (iii)
  3. CSituations (i) and (ii) onlyCorrect
  4. DAll three situations

Explanation

Appendix D does not apply where the creditor is a shareholder acting in that capacity (para 3(a)) or where extinguishment by issuing shares is under the original terms (para 3(c)). Situation (iii) is a newly negotiated settlement with an unrelated creditor, so Appendix D applies. Hence (i) and (ii) only are excluded.

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