The former value comes from the amount payable at the maturity of the debt. Example 3. Click here to extend your session to continue reading our licensed content, if not, you will be automatically logged off. Such a liability is rather a financial liability (debt) in nature, but it is not unusual for entities to present such liabilities as trade payables even though they are liabilities to a financial institution. It also promises them a coupon payment based on a 5% rate. Example: modification of a financial liability that does not result in a derecognition. That same guidance is silent on other changes in cash flows. In the extinguishment of debt, a company terminates a debt instrument. In the same manner, the carrying amount of debt is the amount that is payable at the maturity date. On December 31, 2021, the bank agreed to settle the note and unpaid interest of 750,000 for 2021 for 4,100,000 cash payable on January 31, 2022. If an issuer of a debt instrument repurchases that instrument, the debt is extinguished even if the issuer is a market maker in that instrument or intends to resell it in the near term (IFRS 9.B3.3.2). Date: Account: Debit: Credit: 12/31. After 5 years, which is halfway to maturity, Company ABC would like to repurchase the bond for $510,000. You can set the default content filter to expand search across territories. At maturity, bondholders are paid the face value of the bond. Therefore, there is a loss on the extinguishment of debt when the repurchase price is greater than the net carrying amount. For full functionality of this site it is necessary to enable JavaScript. carrying amount over the repurchase price is a gain from extinguishment, whereas the excess of the . For gains, the journal entry for the extinguishment of debt will involve the following treatment. Therefore, Loss on Extinguishment of Debt is -$5000. The debtor pays the creditor and is relieved of its obligation for the liability. A nonrecurring item refers to an entry that is infrequent or unusual . Interest of 5% is to be paid each year on 31 December and the principal of the loan should be repaid on 31 December 20X5. IFRScommunity.com is an independent website and it is not affiliated with, endorsed by, or in any other way associated with the IFRS Foundation. Debt extinguishment happens when the debt issuer recalls the securities before the maturity date. Gains and losses from extinguishment of debt shall be accumulated and, if material, categorized as an extraordinary item, net of associated income tax effect. However, if you would like to discuss any of the points raised, please speak to your usual Grant Thornton contact oryour local member firm. This is the consequence of applying IFRS 9, according to which the liability should be restated to its revised future cash flows discounted by the original EIR. For example, when the net carrying amount of the debt and the settlement or repurchase price differ.
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