Discharge of liability for fresh issue of equity
During 2007 an entity issued 100 million bonds due to be repaid in 2017. By 2013 the entity is in some financial difficulty and reaches an agreement with the holders of the bonds whereby they will accept equity shares in the entity in full and final settlement of all amounts due under the bonds. On the date the agreement concludes, the carrying amount of the bonds is 99 million and the fair value of the equity shares issued is 60 million.
In this situation the entity would measure the equity instruments issued at their fair value of 60 million and recognise a profit on extinguishment of 39 million [99 million – 60 million].