IFRIC 19 STATES that the De-Recognition of ‘financial liabilities‘ takes place when it is extinguished i.e. when the obligation specified in the contract is discharged or canceled or expired.
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IFRIC 19 Effective Date
An entity shall apply this Interpretation (IFRIC) for annual periods beginning on or after 1 July 2010.
Earlier application is ‘PERMITTED’.
If an entity applies this Interpretation (IFRIC) for a period beginning before 1 July 2010, it shall disclose that fact.
IFRIC 19 – Background and Scope
It sets out how a borrower that ISSUES ‘Equity Instruments’ to extinguish all or part of Financial Liability should account for the transaction.
‘Terms of liability’ Might be RE-NEGOTIATED such that the lender (the creditor) accepts Equity Instruments as payment instead of cash.
Following transactions are ‘Scoped-Out‘ of IFRIC 19:
- Transactions with the creditor in its capacity as an existing shareholder (e.g ‘Right Issue’);
- Lender and borrower are controlled by the same party or parties before and after the transaction; AND
- Issue of equity shares to extinguish debt is in accordance with original terms of financial liability (e.g ‘Convertible Debt‘).
IFRIC 19 – Issues Addressed
| Issues | Consensus |
|---|---|
| 1. Are Equity Instruments issued to extinguish financial liability i.e. ‘Consideration Paid’? | Issue of Equity Instruments is ‘Consideration Paid’ to extinguish all or part of financial liability. This leads to the de-recognition of the liability. |
| 2. How should an entity initially Measure the Equity Instruments issued? | [If the fair value (FV) of the Equity Instrument issued is RELIABLY Measured]; – Equity Instruments issued should be initially Measured at the fair value (FV) of the issued Equity Instruments. [If the fair value (FV) of the Equity Instrument issued is NOT reliably Measured]; – Equity Instruments issued can be Measured at the fair value (FV) of the liability extinguished. |
| 3. How should the entity account for any difference between the carrying amount of the liability and the Equity Instruments issued? | Difference between the carrying amount of liability extinguished and consideration paid should be RECOGNIZED in P&L. ‘Separate line item‘ or disclosure in the notes is required. |
1. Part Extinguishment – Additional Concerns
If only part of the financial liability is extinguished, an entity is required to assess whether some of the consideration paid relates to a ‘Modification‘.
If the ‘consideration paid relates to Modification of terms of remaining liability‘, the entity ALLOCATES the ‘Consideration Paid‘ between:
- Part of the liability extinguished; AND
- Part of the liability that remains outstanding.
and APPLY the ‘Modification of Financial Liability‘ rules.
Synopsis
IFRIC 19 addresses 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).
Chartered Accountant – ICAP
Bachelor of Accounting (Honours) – AeU, Malaysia