Extinguishing Financial Liabilities with Equity
Sunday, August 9, 2009
IFRIC Draft Interpretation D25 Extinguishing Financial Liabilities with Equity Instruments is published by the International Accounting Standards Board (IASB) for comment only. Comments on the draft Interpretation should be sent in writing so as to be received by 5 October 2009. Respondents are asked to send their comments electronically to the IASB Website (www.iasb.org) using the ‘Open to Comments’ page with a copy emailed to ifric@iasb.org.
Background
A debtor and creditor may renegotiate the terms of a financial liability with the result that the liability is fully or partially extinguished by the debtor issuing equity instruments to the creditor. These transactions are sometimes referred to as ‘debt for equity swaps’. The IFRIC has received requests for guidance on the accounting for such transactions.
Scope
The [draft] Interpretation addresses only the accounting by an entity that renegotiates the terms of a financial liability and issues equity instruments to the creditor to extinguish the liability fully or partially. It does not address the accounting by the creditor.
Issues
This [draft] Interpretation addresses the following issues:
Background
A debtor and creditor may renegotiate the terms of a financial liability with the result that the liability is fully or partially extinguished by the debtor issuing equity instruments to the creditor. These transactions are sometimes referred to as ‘debt for equity swaps’. The IFRIC has received requests for guidance on the accounting for such transactions.
Scope
The [draft] Interpretation addresses only the accounting by an entity that renegotiates the terms of a financial liability and issues equity instruments to the creditor to extinguish the liability fully or partially. It does not address the accounting by the creditor.
Issues
This [draft] Interpretation addresses the following issues:
- Are an entity’s equity instruments ‘consideration paid’ in accordance with IAS 39 paragraph 41?
- How should an entity initially measure the equity instruments issued to extinguish a financial liability?
- How should an entity account for any difference between the carrying amount of the financial liability extinguished and the initial measurement amount of the equity instruments issued?
Consensus
- The issue of an entity’s equity instruments to a creditor to extinguish all or part of a financial liability is consideration paid in accordance with IAS 39 paragraph 41. An entity shall remove a financial liability (or part of a financial liability) from its statement of financial position when it is extinguished in accordance with IAS 39 paragraph 39.
- An entity shall initially measure equity instruments issued to a creditor to extinguish all or part of a financial liability at the fair value of the equity instruments issued or the fair value of the liability extinguished, whichever is more reliably determinable.
- An entity shall recognise in profit or loss the difference between the carrying amount of the financial liability (or part of the financial liability) extinguished and the initial measurement amount of the equity instruments issued in accordance with IAS 39 paragraph 41.
- If only part of the financial liability is extinguished by the issue of equity instruments, the entity also assesses the terms of the financial liability that remains outstanding to determine whether they are substantially different from those of the original financial liability. If the terms of the financial liability that remains outstanding are substantially different from those of the original financial liability, the entity shall account for the modification as the extinguishment of the original financial liability and the recognition of a new financial liability in accordance with IAS 39 paragraph 40.
- An entity shall disclose a gain or loss recognised in accordance with paragraph 6 or 7 as a separate line item in the statement of comprehensive income and the separate income statement (if presented) or in the notes.
posted @ 12:23 PM,
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