Q60 RTone Plc Flashcards
If a new loan is agreed between a borrower and a lender, or the two parties agree revised terms for an existing loan, the financial reporting treatment depends on whether the original liability should be derecognised and a new liability recognised, or whether the original liability should be treated as modified.
A new liability should be recognised if the new terms are substantially different from the old terms.
The terms are substantially different if the present value of the cash flows under the new terms, including any fees payable/receivable, discounted at the original effective interest rate, is 10% or more different from the present value of the remaining cash flows under the original terms. There is said to be an ‘extinguishment’ of the old liability.
In these circumstances: the difference between the carrying amount extinguished and the consideration paid should be* recognised in profit or loss; and
the fees payable/receivable should be recognised as part of that gain or loss.
*
If the difference between the two present values is below this cut-off point, there is said to be a modification of the terms.
In these circumstances: the existing liability is not derecognised; and
* its carrying amount is adjusted by the fees payable/receivable and amortised over the remaining term of the modified liability.
The carrying amount of the existing loan at 30 September 20X3 is £5,892k
