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.
Table of Contents
Derecognition of Financial Liabilities
As per IFRS 9, the difference between the carrying amount of a Financial Liability extinguished or transferred to a 3rd party and the consideration paid is recognized in P&L.
IFRIC 19
1. 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. a 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 (such as convertible debt).
2. 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 of the equity instrument issued is RELIABLY measured]; – Equity instruments issued must be initially measured at the fair value of the issued equity instruments. [If the fair value of the equity instrument issued is NOT reliably measured]. – Equity instruments issued can be measured at the fair value 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 must be recognized in P&L. Separate line item or disclosure in the notes is required. |
3. 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 of the terms of the outstanding liability.
If some of 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 accordingly.
Synopsis
IFRIC 19 [Extinguishing Financial Liabilities with Equity Instruments] a concept presented by IFRS 9 PUBLISHED in July 2014 specifies how an entity should classify and measure ‘Financial Assets, financial liabilities, and some contracts to buy or sell non-financial items‘ and it replaced IAS 39.
Chartered Accountant (Institute of Chartered Accountants of Pakistan)
Bachelor of Accounting Honours (Asia e University, Malaysia)