III. IFRIC clarifies accounting for debt for equity swaps

Background

On 26 November 2009 the International Financial Reporting Interpretations Committee (IFRIC) issued IFRIC Interpretation 19 Extinguishing Financial Liabilities with Equity Instruments

("the Interpretation"). The Interpretation addresses divergent accounting by entities issuing equity instruments in order to extinguish all or part of a financial liability (often referred to as "debt for equity swaps").

Background and scope

A borrower may enter into an agreement with a lender to issue equity instruments to the lender in order to extinguish a financial liability owed to the lender. This is particularly common when the borrower is in financial difficulty. The IFRIC noted that there was diversity in practice in accounting for these transactions. Some measure the equity instruments issued at the carrying amount of the financial liability derecognised and do not recognise any gain or loss on extinguishment of the liability in profit or loss. Others recognise the equity instruments at the fair value of either the liability extinguished or of the equity instruments issued, and recognise any difference between this amount and the carrying amount of the liability in profit or loss. The Interpretation eliminates this diversity.