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CMA Final · Corporate Financial Reporting · Accounting of Financial Instruments

Zenith Textiles Ltd owes a bank a loan with a carrying amount of Rs 50 lakh. The bank agrees to accept 4 lakh equity shares of Zenith in full settlement. On the date the liability is extinguished, the shares have a reliably measurable fair value of Rs 11 per share. How should Zenith account for the extinguishment under Ind AS 109 (Appendix D)?

Zenith records the equity shares at their fair value of Rs 44 lakh (4 lakh shares x Rs 11) and recognises the Rs 6 lakh difference from the Rs 50 lakh carrying amount as a gain in profit or loss, since the difference goes to profit or loss.

  1. AGain of Rs 6 lakh in profit or loss; equity recorded at Rs 44 lakhCorrect
  2. BGain of Rs 6 lakh credited directly to securities premium; equity recorded at Rs 44 lakh
  3. CNo gain or loss; equity recorded at Rs 50 lakh
  4. DLoss of Rs 6 lakh in profit or loss; equity recorded at Rs 44 lakh

Explanation

Equity instruments issued are measured at their fair value: 4,00,000 x Rs 11 = Rs 44 lakh. The difference between the carrying amount (Rs 50 lakh) and the consideration paid (Rs 44 lakh) is Rs 6 lakh, recognised in profit or loss as a gain. Recording equity at Rs 50 lakh ignores that fair value is the measurement basis when it is reliably measurable.

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