Application of Extinguishment Accounting in Case of Modification in Terms of Financial Liability
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- By Taxmann
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- Last Updated on 31 August, 2024
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VG Limited an automobile company has raised fund through issuance of bonds. The company raised the bond worth Rs 10,00,000 which were redeemable at the the end of fifth year from the date of issuance. Further, the company shall pay interest at the rate of 10% per annum on the aforesaid bond which is equivalent to the market rate of interest on such bonds.
After two years of issuance of bond the company faced challenges in satisfying the terms of loan and hence requested the bond holder to extend the period of modification and lower the rate of interest. The bondholders agreed to the modification requested by the company. Under the new terms the redemption period is extended by 2 more years and the rate of interest is reduced to 7.5%. However, the redemption amount is changed and the company shall now at the time of redemption pay Rs 15,00,000. The company also incurred regulatory fees amounting to Rs 1,00,000 in modifying the terms of liability.
The company is in dilemma regarding the application of extinguishment accounting in the given case of modification of financial liability. To understand the appropriate accounting of modification in the extant case.
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