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IFRIC

IFRIC 19 addresses the accounting for extinguishing financial liabilities with equity instruments. It states that equity instruments issued to extinguish all or part of a financial liability should be recognized as consideration paid, resulting in full or partial derecognition of the liability. The equity instruments should be measured at fair value, or if not reliably determinable, at the fair value of the liability extinguished. Any difference between the carrying amount of the liability and consideration paid should be recognized in profit or loss. If only part of a liability is extinguished, the consideration paid must be allocated between the liability extinguished and any remaining liability.

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37 views2 pages

IFRIC

IFRIC 19 addresses the accounting for extinguishing financial liabilities with equity instruments. It states that equity instruments issued to extinguish all or part of a financial liability should be recognized as consideration paid, resulting in full or partial derecognition of the liability. The equity instruments should be measured at fair value, or if not reliably determinable, at the fair value of the liability extinguished. Any difference between the carrying amount of the liability and consideration paid should be recognized in profit or loss. If only part of a liability is extinguished, the consideration paid must be allocated between the liability extinguished and any remaining liability.

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Stephanie Joy Nogollos
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IFRIC 19 — EXTINGUISHING FINANCIAL LIABILITIES WITH EQUITY INSTRUMENTS

1. If a debtor issues equity instruments to a creditor to extinguish all or part of a financial liability, those
equity instruments are 'consideration paid'. Accordingly, the debtor should de-recognize the financial
liability fully or partly.

2. The debtor should measure the equity instruments issued to the creditor at fair value, unless fair value
is not reliably determinable, in which case the equity instruments issued are measured at the fair value
of the liability extinguished.

3. If only part of a liability is extinguished, the debtor must determine whether any part of the consideration
paid relates to modification of the terms of the remaining liability. If it does, the debtor must allocate the
fair value of the consideration paid between the liability extinguished and the liability retained.

4. The debtor recognizes in profit or loss the difference between the carrying amount of the financial
liability (or part) extinguished and the measurement of the equity instruments issued.

5. When only part of the liability is extinguished, the debtor must determine whether the terms of the
remaining debt have been substantially modified (taking into account any portion of the consideration
paid that was allocated to the remaining debt). If there has been a substantial modification, the debtor
should account for an extinguishment of the old remaining liability and the recognition of a new liability.

IFRIC 19 addresses only the accounting by the entity that issues equity instruments in order to settle, in full or
in part, a financial liability. It does not address the accounting by the creditor (lender).

The following situations are explicitly excluded from the scope of IFRIC 19:

 the creditor is also a direct or indirect shareholder and is acting in its capacity as direct or indirect
shareholder;
 the creditor and the entity are controlled by the same party or parties before and after the transaction,
and the substance of the transaction includes an equity distribution from, or contribution to, the entity;
 or extinguishing the financial liability by issuing equity shares is in accordance with the original terms of
the financial liability.

EXAMPLES

IFRIC 19 must be applied in annual periods beginning on or after 1 July 2010. Earlier application is permitted.
It must be applied retrospectively from the beginning of the earliest comparative period presented.

Entity B issues equity instruments with a fair value of CU90 million to Lender X as extinguishment of the whole
of its financial liability to Lender X.

The amortized cost carrying amount of the financial liability on the date of extinguishment is CU100 million.

The following entries would be recorded.

Dr Financial liability CU100 million


Cr Profit or loss CU10 million
Cr Equity CU90 million
To record derecognition of the financial liability, recognition of the equity instruments issued at fair value at the
date of issue and recognition of the difference in profit or loss.

Entity C issues equity instruments with a fair value of CU35 million to Lender Y as extinguishment of a portion
of financial liability to Lender Y. The total financial liability has an amortized cost carrying amount of CU100
million. The portion extinguished has a carrying amount of CU40 million. The issue of equity instruments does
not modify in any way the terms of the obligation relating to the portion of the liability which remains
outstanding, whose carrying amount is CU60 million (i.e. CU100 million – CU40 million).

The following entries would be recorded.

Dr Financial liability 40
Cr Profit or loss 5
Cr Equity 35

To record derecognition of the portion of the financial liability that is extinguished, recognition of the equity
instruments issued at fair value at the date of extinguishment of that portion and recognition of the difference in
profit or loss. There is no modification to the remaining portion of the liability of CU60 million; therefore, this
portion of the liability is not adjusted or derecognized.

SOURCES:
https://www.iasplus.com/en/standards/ifric/ifric19
https://library.croneri.co.uk/cch_uk/gaap-ve/e8-4-3

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