IFRIC D25, extinguishing financial liabilities with equity instruments

Comments from ACCA to the European Commission, September 2009.

ACCA (the Association of Chartered Certified Accountants) is pleased to have this opportunity to comment on the draft interpretation (“D25”) on the above subject. D25 was considered by ACCA's Financial Reporting Committee and I am writing to give you their views. 

We understand that there is some diversity in practice in the accounting for modifications in the terms of a financial liability, which is renegotiated such that equity instruments are issued to the creditor to fully, or partially, extinguish that financial liability. D25 does help to clarify a number of issues in the regard of such debt for equity swaps and we broadly agree with those proposals. 

Issuing equity instruments to a creditor is always a substantial modification of the terms of the financial liability 

We agree that this will result in the financial liability being extinguished and that the equity instruments issued should be treated as consideration paid to extinguish that financial liability. 

How should an entity initially measure the equity instruments issued to extinguish a financial liability? 

We agree that equity instruments issued in a debt for equity swap should be measured at either the fair value of the financial liability extinguished or the fair value of the equity instruments issued, whichever is more reliable. This seems a reasonable approach, and fairly practicable in terms of preferring the ‘more reliable' value. 

We would however note that that the current wording (paragraph 5 of D25) could be construed as giving entities an option to choose a particular measurement basis. Given that equity is defined as the residual of net assets, it should be made clear that the equity instruments should be measured as the FV of the financial liability extinguished, unless it cannot be measured reliably – in which case the equity instruments should be measured at their fair value. 

How should an entity account for any difference between the carrying amount of the financial liability extinguished and the initial measurement amount of the equity instruments issued? 

We agree that any gain or loss resulting from the transaction shall be presented as a separate line item in either the statement of comprehensive income or the separate income statement (if presented) or the notes.