Waiver of debts (creditors) consider as derecognition of financial liability?

Question

1. The Company is a dormant company, all the expenses incurred by the Company is paid by the Directors. There is no interest charge by the Directors and there is no fixed terms of repayments.  Under IFRS for SME, how should we compute the present value of the amount owing Directors. What should be the double entries to take up the NPV in the Company's book.

2. If the Directors waived the amount, is this consider as derecognition of financial liability? What is the double entries to take up the amount waived?

Answer 1

1. Why do you need NPV for accounting purposes? Are you referring to fair value?

If company expenses are paid personally by the directors, then the company has a current liability to pay back the directors at cost and with any interest if applicable.

Dr. Expense A/C
Cr. Payable to Directors A/C

2. Yes.

Dr.Payable to Directors A/C
Cr.Other income

Comments

Thank you for your answer JaneM.

We need to present value the amount due to Directors since the Directors are financing the Company.  Under IFRS for SME - Para 11.13 "If the arrangement constitutes a financing transaction, the entity
shall measure the financial asset or financial liability at the present value of the
future payments discounted at a market rate of interest for a similar debt
instrument as determined at initial recognition".

Since the Company is dormant, the repayment years is undetermined. The only way the Directors can get back the money is when the Company's dispose off their properties.  However, the Company has no intention to dispose its properties in the near future.
Hence, we have present value the amount due to Director at zero value. The double entries is as follows:

DR: Amount due To Directors
CR: Other Income - Gain on derecognition of financial liability

Would appreciate if you can give us your comment.