Extinguishment of a financial liability

Learning objectives

• Determine that a financial liability is extinguished (obligation discharged, cancelled or expired) and calculate the gain or loss as the difference between the carrying amount and the consideration paid.L1, L2, L3
• Record the journal entries for the extinguishment of a financial liability and measure their effect on the financial position, profit or loss and other comprehensive income.L1, L2, L3

Normative references

• IFRS 9 §3.3.1A financial liability (or a part of it) is removed from the statement of financial position when, and only when, it is extinguished, that is, when the obligation is discharged, cancelled or expires.
• IFRS 9 §3.3.3The difference between the carrying amount of a financial liability (or part of it) extinguished or transferred to another party and the consideration paid, including any non-cash assets transferred or liabilities assumed, is recognised in profit or loss. The treatment of costs and fees on an exchange or modification is set out in para. B3.3.6A (included in the gain or loss on extinguishment; otherwise, an adjustment to the carrying amount amortised over the remaining term). Para. 2.1(b)(ii) makes the lessee's lease liabilities subject to paras. 3.3.1 and 3.3.3 (Annual Improvements Volume 11, annual periods beginning on or after 1 January 2026).
• IFRS 9 §B3.3.6AIf an exchange of debt instruments or a modification of terms is accounted for as an extinguishment, any costs or fees incurred are recognised as part of the gain or loss on the extinguishment; otherwise, they adjust the carrying amount of the liability and are amortised over the remaining term of the modified liability.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

5 questions

• In which case is a financial liability removed from the statement of financial position under IFRS 9?L1
• Kappa SA repays a loan early; its carrying amount is {carrying_amount}. It pays the lender {consideration_paid} to extinguish the debt. Calculate the gain on extinguishment to be recognised in profit or loss (give it as a positive amount).L2
• Lambda SA issued a bond whose total carrying amount is {carrying_amount_total}. It buys back {share_repurchased} of it on the market for {consideration_paid} in cash, which extinguishes that part of the liability. Record the buy-back entry.L3
• Nu SA's debt to a bank has a carrying amount of {carrying_amount_old}. The parties modify the terms and Nu concludes that the new terms are substantially different. The fair value of the new liability is {fair_value_new}; Nu pays the bank fees of {fees_paid} in cash on the occasion of the modification. Record the entry for the modification.L4
• Fiora SA renegotiates with its bank a borrowing with a carrying amount of 2,000,000 and incurs 40,000 of legal costs and fees. Case data: the 10 per cent test concludes that the new terms are not substantially different; the modification is therefore not accounted for as an extinguishment. How are the 40,000 treated?L3