The AASB has issued Interpretation 19 dealing with how a debtor would account for the extinguishment of a liability through the issue of equity instruments.  This might be particularly relevant to entities that might have liquidity issues and be unable to settle liabilities using cash as a result of current economic hardship.

The Interpretation states that the issue of equity should be treated as the consideration paid to extinguish the liability.  The equity instruments issued should be recognised at their fair value unless fair value cannot be measured reliably in which case they shall be measured at the fair value of the liability extinguished.

Both parties to the contract should be in agreement as to whether a partial or full settlement has occurred.

For partial extinguishment, the issuing entity should assess whether some of the consideration paid relates to a modification of the terms of the liability that remain outstanding.  Where this is the case, the entity shall allocate the consideration paid between the part of the liability extinguished and that part that remains payable.  Entities should consider whether any modification is so significant as to represent the complete extinguishment of the original liability and the recognition of a new liability (see AASB139.40 in this regard).

Any difference between the values of the financial liability deemed extinguished and the value of consideration paid is recognised in the profit or loss. 

The interpretation does not apply in situations where the issuing of equity to settle debt is in accordance with the original terms of the contract or when the parties are controlled by the same party or parties before and after the transaction.

The interpretation is applicable to annual reporting periods beginning on or after 1 July 2010 but is available for early adoption.  The requirements of the interpretation must be applied retrospectively.