On 1 January 20X0, XYZ Ltd. issues 10-year bonds for 10,00,000, bearing interest at 10% (payable annually on 31st December each year). The bonds are…

On 1 January 20X5, the discounted present value of the remaining cash flows of the original financial liability is 10,00,000. On this date, XYZ Ltd. will compute the present value of: cash flows under the new terms – i.e.15,00,000 payable on 31 December 20Y1 and - 50,000 payable for each of the 7 years ending 31 December 20Y1.fees paid by the borrower to the lender – i.e.1,00,000, using the original effective interest rate of 10% The total of these amounts to 11,13,158 (Refer Working Note). This differs from the discounted present value of the remaining cash flows of the original financial liability by 11.32% i.e. by more than 10%. Hence, extinguishment accounting applies. The next step is to estimate the fair value of the modified liability. This is determined as the present value of the future cash flows (interest and principal), using an interest rate of 11% (the market rate at which XYZ Ltd. could issue new bonds with similar terms). The estimated fair value on this basis is 958,097 (Refer Working Note). A gain or loss on modification is then determined as: Gain (loss) = carrying value of existing liability - fair value of modified liability - fees and costs incurred i.e.10,00,000 -9,58,097 -1,00,000 = Loss of 58,097 Working Note: Amount Discounting factor @ 10% Present value Discounting factor @ 11% Present value 15,00,000 0.513158 7,69,737 0.481658 7,22,487 1,00,000 1,00,000 50,000 for 7 years 4.868419 2,43,421 4.712196 2,35,610 11,13,158 9,58,097 PV of original cash flows @ original EIR (10,00,000) Difference 1,13,158 Difference % 11.32%