32 FINANCIAL REPORTING

Fixed factory production overhead =` 1,00,00,000;

Fixed factory selling overhead = ` 50,00,000;
Variable factory selling overhead = ` 150 per unit.
Calculate the value of inventory per unit in accordance with Ind AS 2. What will be the
treatment of fixed manufacturing overhead?
(RTP NOV. 2020)

QUESTION 62 (MIXED WITH IND AS 16)

(i) A retailer company imported goods at a cost of ` 1,30,000 including ` 20,000 non-
refundable import duties and ` 10,000 refundable purchase taxes. The risks and
rewards of ownership of the imported goods were transferred to the retailer company
upon collection of the goods from the harbour warehouse. The retailer company was
required to pay for the goods upon collection. The retailer company incurred ` 5,000
to transport the goods to its retail outlet and a further ` 2,000 in delivering the goods
to its customer. Further selling costs of ` 3,000 were incurred in selling the goods.
State whether delivery charges and selling expenses will form part of the cost of
inventory. If not, then why? Also calculate the cost of inventory.
(ii) Company A incurred ` 20,000 as cost for restoring the site on which the item of PPE
was located. This item was used for manufacturing of goods and the requirement for
restoring will arise due to manufacturing of goods.
What will the treatment of this ` 20,000 in the books of Company A? Analyse on the
basis of the provisions of relevant Ind AS.
(RTP NOV. 2022)

QUESTION 63

In a manufacturing process of Saturn Limited, one by-product BP emerges besides two main
products MP1 and MP2 and scrap. Details of cost of production process for financial year
2020-2021 are here under:
Item Amount (`) Output (Units) Closing Stock 31.3.2021
Raw Material 6,00,000 MP1- 20,000 1,000
Wages 3,60,000 MP2- 16,000 400
Fixed Overhead 2,60,000 BP- 8,000

Variable Overhead 2,00,000

Average Market Price of MP1 and MP2 is ` 45.00 per unit and ` 37.50 per unit respectively.
Average Market Price of by-product BP is ` 10 per unit. All the units of by-product BP sold
after incurring separate processing charges of ` 32,000 and packing charges of ` 8,000. `
 IND AS-2: VALUATION OF INVENTORIES 33

20,000 was realised from sale of scrap.

Calculate the value of closing stock of MP1 and MP2 as on 31.3.2021. Allocate Joint Cost
based on the relative sales value of each product.
(CA FINAL DEC. 2021 EXAM) (5 Marks)
SOLUTION :

(1) Calculation of NRV of By-product BP

`
Selling price of by-product 8,000 units x 10 per unit 80,000
Less: Separate processing charges of
by-product BP (32,000)
Packing charges (8,000)

Net realizable value of by-product BP 40,000

(2) Calculation of cost of conversion for allocation between joint products MP1 and
MP2
`
Raw material 6,00,000

Wages 3,60,000

Fixed overhead 2,60,000

Variable overhead 2,00,000

14,20,000

Less: NRV of by-product BP (See calculation 1) 40,000

Sale value of scrap 20,000 (60,000)

Joint cost to be allocated between MP1 and MP2 13,60,000

(3) Determination of “basis for allocation” and allocation of joint cost to MP1 and MP2
MP1 MP2
Output in units (a) 20,000 16,000
Sales price per unit (b) ` 45.00 ` 37.50
Sales value (a x b) 9,00,000 6,00,000
Ratio of allocation 3 2
Joint cost of ` 13,60,000 allocated in the ratio of 3:2 (c) ` 8,16,000 ` 5,44,000
Cost per unit [c/a] ` 40.80 ` 34.00
 34 FINANCIAL REPORTING

(4) Determination of value of closing stock of MP1 and MP2

Particulars MP1 MP2
Closing stock in units 1,000 units 400 units
Cost per unit ` 40.80 ` 34.00
Value of closing stock ` 40,800 ` 13,600

QUESTION 64
Summer solutions Limited is engaged in the manufacturing of customized gifts for its cor-
porate customers. On 1st December 2022, the company received an order from Rain Limit-
ed for the supply of 15,000 customized corporate gifts. On 4th December 2022, to meet
the order, Summer Solutions Limited purchased 20,000 kg of certain material at ` 110 per
kg. The purchase price includes GST of ` 10 per kg in respect of which full GST credit is
admissible. Freight incurred amounted to ` 1,00,000.
During January 2023 the company incurred the following expenses to design the corporate
gift for Rain Limited:
 Fee to external designer ` 20,000
 Labour ` 8,000
After checking the sample of gift, the management of Rain Limited did not approve the
design of gift and suggested some modifications. Consequently, the production team of
Summer Solutions Limited made modifications to bring the inventories as per the conditions
specified in the order.
Following cost were incurred during testing phase:
 Materials ` 45,000
 Labour ` 20,000
 Depreciation of plant used during testing phase = ` 7,000
Some of the materials used during testing phase was scrapped and sold for ` 5,000
During February 2023, Summer Solutions Limited incurred the following additional costs in
the manufacturing of customized corporate gifts:
 Consumable stores ` 1,25,000
 Labour ` 1,42,000
 Depreciation of plant used in manufacturing of customized corporate gifts: ` 38,000
On 15th March, 2023 the customized gifts were ready for delivery. There was no ab-
normal loss during the manufacturing process.
You are required to compute the cost of customized gifts. Your answer should be supported
by appropriate reasons and calculations wherever necessary
(CA FINAL MAY 2023 EXAM)
 IND AS 16: PROPERTY, PLANT & EQUIPMENT 49

 Shop fixtures and fittings in its retail outlets.

How many classes of property, plant and equipment must the entity disclose?
(RTP MAY 2021)

QUESTION 28
Heaven Ltd. had purchased a machinery on 1.4.2X01 for ` 30,00,000, which is reflected in
its books at written down value of ` 17,50,000 on 1.4.2X06. The company has estimated
an upward revaluation of 10% on 1.4.2X06 to arrive at the fair value of the asset. Heaven
Ltd. availed the option given by Ind AS of transferring some of the surplus as the asset
is used by an enterprise.
On 1.4.2X08, the machinery was revalued downward by 15% and the company also re-
estimated the machinery‛s remaining life to be 8 years. On 31.3.2X10 the machinery was
sold for ` 9,35,000. The company charges depreciation on straight line method.
Prepare machinery account in the books of Heaven Ltd. over its useful life to record the
above transactions.
(RTP NOV 2021)

QUESTION 29
Flywing Airways Ltd.is a company which manufactures aircraft parts and engines and sells
them to large multinational companies like Boeing and Airbus Industries.
On 1 April 20X1, the company began the construction of a new production line in its aircraft
parts manufacturing shed.
Costs relating to the production line are as follows:

Details Amount
`‛000
Costs of the basic materials (list price ` 12.5 million less a 20% trade 10,000
discount)
Recoverable goods and services taxes incurred not included in the 1,000
purchase cost
Employment cost of the construction staff for the three months to 30 1,200
June 20X1
Other overheads directly related to the construction 900

Payments to external advisors relating to the construction 500

Expected dismantling and restoration cost 2,000
 50 FINANCIAL REPORTING

Additional Information
The construction staff was engaged in the production, line which took two months to make
ready for use and was bought into use on 31 May, 20X1.
The other overheads were incurred in the two months period ended on 31 may 20X1. They
include an abnormal cost of ` 3,00,000 caused by a Major electrical fault.
The production line is expected to have a useful economic like of eight years. At the end of
that time Flywing Airways Ltd is legally required to dismantle the plant in a specified manner
and restore its location to an acceptable standard. The amount of `2 million mentioned above
is the amount that is expected to be incurred at the end of the useful life of the production
line. The appropriate rate to use in any discounting calculations is 5% the present value of
` 1 payable in eight years at a discount rate of 5% is approximately Re.0.68.
Four years after being brought into use, the production line will require a major overhaul
to ensure that it generates economic benefits for the second half of its useful life. The
estimated cost of the overhaul, at current prices, is ` 3 million.
The Company computes its depreciation charge on a monthly basis.
No impairment of the plant had occurred by31 March, 20X2.
Analyze the accounting implications of cost related to production line to be recognized in
the balance sheet and profit & loss for the year ended march X2.
(MTP MAY 2020)

QUESTION 30 (VERY GOOD QUESTION)

Entity X has a warehouse which is closer to factory of Entity Y and vice versa. The factories
are located in the same vicinity. Entity X and Entity Y agree to exchange their warehouses.
The carrying value of warehouse of Entity X is ` 1,00,000 and its fair value is ` 1,25,000.
It exchanges its warehouse with that of Entity Y, the fair value of which is ` 1,20,000. It
also receives cash amounting to ` 5,000. How should Entity X account for the exchange of
warehouses?
(RTP NOV. 2020)

QUESTION 31
An entity has the following items of property, plant and equipment:
• Property A — a vacant plot of land on which it intends to construct its new administration
headquarters;
• Property B — a plot of land that it operates as a landfill site;
• Property C — a plot of land on which its existing administration headquarters are
built;
• Property D — a plot of land on which its direct sales office is built;
 IND AS 16: PROPERTY, PLANT & EQUIPMENT 51

• Properties E1–E10 — ten separate retail outlets and the land on which they are built;
• Equipment A — computer systems at its headquarters and direct sales office that are
integrated with the point of sale computer systems in the retail outlets;
• Equipment B — point of sale computer systems in each of its retail outlets;
• Furniture and fittings in its administrative headquarters and its sales office;
• Shop fixtures and fittings in its retail outlets.
How many classes of property, plant and equipment must the entity disclose?
(RTP MAY 2021)

QUESTION 32
On 1st January, 20X1 an entity purchased an item of equipment for ` 600,000, including
` 50,000 refundable purchase taxes. The purchase price was funded by raising a loan of `
605,000. In addition, the entity has to pay ` 5,000 in loan raising fees to the Bank. The loan
is secured against the equipment.
In January 20X1 the entity incurred costs of ` 20,000 in transporting the equipment
to the entity‛s site and ` 100,000 in installing the equipment at the site. At the end of
the equipment‛s 10-year useful life the entity is required to dismantle the equipment and
restore the building housing the equipment. The present value of the cost of dismantling
the equipment and restoring the building is estimated to be ` 100,000.
In January 20X1 the entity‛s engineer incurred the following costs in modifying the
equipment so that it can produce the products manufactured by the entity:
• Materials – ` 55,000
• Labour – ` 65,000
• Depreciation of plant and equipment used to perform the modifications – ` 15,000
In January 20X1, the entity‛s production staff were trained in how to operate the new item
of equipment. Training costs included:
• Cost of an expert external instructor – ` 7,000
• Labour – ` 3,000
In February 20X1 the entity‛s production team tested the equipment and the engineering
team made further modifications necessary to get the equipment to function as intended
by management. The following costs were incurred in the testing phase:
• Materials, net of ` 3,000 recovered from the sale of the scrapped output – ` 21,000
• Labour – ` 16,000
The equipment was ready for use on 1st March, 20X1. However, because of low initial order
levels the entity incurred a loss of ` 23,000 on operating the equipment during March.
 52 FINANCIAL REPORTING

Thereafter the equipment operated profitably.

What is the cost of the equipment at initial recognition?
(RTP MAY 2022)

QUESTION 33
(CALCULATION OF COST PPE INCLUDING INTEREST)
Kapil Ltd. purchased machinery from Parveen Ltd. on 30.09.2001. The price was `370.44
lakhs after charging 8% sales tax and giving a trade discount of 2% on the quoted price.
Transport charges were 0.25% on the quoted price and installation charges 1% on the
quoted price.
A loan of `300 lakhs was taken on the trial from the bank on which interest at 15% per
annum was to be paid. Expenditure incurred on the trial run was materials `35,000, wages
`25,000 and overheads `15,000.
The machinery was ready for use on 1.12.2001, but it was actually put to use only on 1.5.2002.
Find out the cost of the machine and suggest the accounting treatment for the expenses
incurred in the interval between the dates 1.12.2001 to 1.05.2002. the entire loan amount
remained unpaid on 1.5.2002.

SOLUTION :

Particulars Computations ` in lakhs

Quoted price (370.44/108*100)*100/98 3,50.000
Less: discount 2% 2% of 3,50.000 7.000
Net price 3,43.000
Add: sales tax 8% 8% of 3,43.000 27.440
Add: Transportation 0.25% on quoted price of 3,50.000 0.875
Add: installation 1.00% of quoted price of 3,50.000 3.500
Add: trial run expense Material+ wages+ OH=0.35+0.25+0.15 0.750

Add: Borrowing cost 300*15%*2/12(30.9.2001 to 7.500

1.12.2001)
Total cost of asset 383.065

 Capitalization of Borrowing costs should cease when substantially all the activities necessary to
prepare the qualifying asset for its intended use are complete. In the above case, this period ends
on 1-12-2001 when the asset was ready for use.
 Other Borrowing costs (i.e, not capitalized under IND AS 23) should be written off as an expense
 IND AS 16: PROPERTY, PLANT & EQUIPMENT 53

in the profit and loss account. Hence the interest for the period 1.12.2001 and 1.5.2002 on `300
lakhs, amounting to `18.75 lakhs should be expensed off.

QUESTION 34
PQR Limited acquired a building for its administrative purposes and presented the same as
Property, Plant and Equipment (PPE) in the financial year 2019-2020. During the financial
year 2020-2021, it relocated the office to a new building and leased the said building to a
third party. Following the change in the usage of the building, PQR Limited reclassified it
from PPE to Investment Property in the Financial Year 2020 -2021. Should PQR Limited
account for the change as a change in accounting policy? Examine.
(5 Marks)
(CA FINAL DEC. 2021 EXAM)
SOLUTION :
Requirement of Ind AS 8:
Paragraph 16(a) of Ind AS 8 provides that the application of an accounting policy for trans-
actions, other events or conditions that differ in substance from those previously occur-
ring are not changes in accounting policies
Definition of PPE as per relevant Ind AS:
As per Ind AS 16, ‘property, plant and equipment‛ are tangible items that:
(a) are held for use in the production or supply of goods or services, for rental to others,
or for administrative purposes; and
(b) are expected to be used during more than one period.
Definition of Investment Property as per relevant Ind AS: As per Ind AS 40, ‘investment
property‛ is property (land or a building—or part of a building—or both) held (by the owner
or by the lessee as a right-of-use asset) to earn rentals or for capital appreciation or both,
rather than for:
(a) use in the production or supply of goods or services or for administrative purposes; or
(b) sale in the ordinary course of business.
Analysis and decision making:
As per the above definitions, whether a building is an item of property, plant and equipment
(PPE) or an investment property for an entity depends on the purpose for which it is held
by the entity. It is thus possible that due to a change in the purpose for which it is held,
a building that was previously classified as an item of property, plant and equipment may
warrant reclassification as an investment property, or vice versa. Whether a building is PPE
or investment property is determined by applying the definitions of these terms from the
perspective of that entity.
 54 FINANCIAL REPORTING

Thus, the classification of a building as an item of property, plant and equipment or as an

investment property is not a matter of an accounting policy choice. Accordingly, a change in
classification of a building from property, plant and equipment to investment property due
to change in the purpose for which it is held by the entity is not a change in an accounting
policy.

QUESTION 35
On 1st May 2022, Sanskar Limited purchased ` 42,00,000 worth of land for construction
of a new warehouse for stocking new products. The land purchased had an old temporary
structure which was to be demolished for the purpose of construction of warehouse. The
salvaged material from the demolition was to be sold as scrap. The company started the
construction work of the warehouse on 1st June, 2022. Following costs were incurred by
the company with regard to purchase of land and construction of warehouse:

Particulars Amount (`)

Legal fees for purchase contract of land and recording ownership 1,50,000
Architect and consultant‛s fee 2,70,000
Cost of demolishing existing structure on the purchased land 1,35,000
Site preparation charges for the warehouse 1,00,000
Purchase of Cement and other materials for the construction (including 15,00,000
GST of ` 1,00,000 and GST credit is 50% of the payment)
Employment costs of the construction workers 8,00,000
General overhead costs allocated to the construction work 30,000 per month
Overhead costs incurred directly on the construction of warehouse 35,000 per month
Income received from land used as temporary parking during construction 80,000
phase

Additional information:
 Receipt of ` 35,000 being proceeds from sale of salvaged and scrapped materials from
demolition of existing structure
 Materials costing ` 40,000 was wasted and further ` 1,20,000 was spent to rectify the
wrong design work.
 The employment costs are for 10 months i.e. from 1st June 2022 till 31st March 2023.
 The construction of factory was completed on 28th February, 2023 (which is consid-
ered as substantial period of time as per Ind AS-23)
 The use of warehouse commenced on 1st March, 2023.
 The overall useful life of factory building was estimated at 25 years from the date
of completion; however, it is estimated that the roof of the warehouse will need to be
 IND AS 16: PROPERTY, PLANT & EQUIPMENT 55

replaced 15 years after the date of completion and that the cost of replacing the roof
at current prices would be 25% of the total cost of the building.
 At the end of the 25-year period, Sanskar Limited is legally bound to demolish the
factory and restore the site to its original condition. The directors of the company es-
timate that the cost of demolition in 25 years‛ time (based on prices prevailing at that
time) will be ` 80,00,000. An annual risk adjusted discount rate which is appropriate
to this project is 10% per annum. The present value of ` 1 payable in 25 years‛ time at
an annual discount rate of 10% per annum is ` 0.092.
 Sanskar Limited raised a loan of ` 60 lakhs @ 10% per annum rate of interest on 1st
June, 2022. The building of warehouse meets the definition of a qualifying asset in
accordance with Ind As-23 Borrowing Costs. Sanskar Limited received an investment
income of ` 25,000 on the temporary investment of the proceeds.
 Assume that cost of demolition of old structure is directly attributable to the cost
of land.
 The company follows straight line method of depreciation.
You are required to compute:
i. Cost of construction of the warehouse
ii. Depreciation charge for the year ended 31st March, 2023
iii. Carrying value of Warehouse to be taken to Balance Sheet of the Company on 31st
March, 2023.
You should explain your treatment of all the amounts referred to in this question as part
of your answer.
(CA FINAL MAY 2023 EXAM)
 78 FINANCIAL REPORTING

QUESTION 42
ABC Ltd. has taken a loan of USD 20,000 on 1st April, 20X1 for constructing a plant (qualifying
asset) at an interest rate of 5% per annum payable on annual basis.
On 1st April, 20X1, the exchange rate between the currencies i.e. USD vs Rupees was ` 45
per USD. The exchange rate on the reporting date i.e. 31st March, 20X2 is ` 48 per USD.
The corresponding amount could have been borrowed by ABC Ltd. from State Bank of India
in local currency at an interest rate of 11% per annum as on 1st April, 20X1.
Compute the total borrowing cost to be capitalized for the construction of plant by ABC
Ltd. for the period ending 31st March, 20X2. Also explain the accounting treatment of
exchange loss incurred in the due process
(MTP APRIL 2022)

QUESTION 43
X Ltd. commenced the construction of a plant (qualifying asset) on 1st September, 20X1,
estimated to cost ` 10 crores. For this purpose, X has not raised any specific borrowings,
rather it intends to use general borrowings, which have a weighted average cost of 11%.
Total borrowing costs incurred during the period, viz., 1st September, 20X1 to 31st March,
20X2 were ` 0.5 crore.
The other relevant details are as follows: (` in crore)

Month Cost of construction Cash outflows (paid in advance

Accrued at the start of each month)
September 1.50 3.00
October 0.50 1.70
November 1.50 2.50
December 0.50 -
January 1.80 1.00
February 0.70 -
March 3.00 1.50

Based on the above information, discuss the treatment of borrowing cost as per cash
outflow basis and accrual basis and also suggest the appropriate amount of interest that
should be capitalised to the cost of the plant in the financial statements for the year ended
31st March, 20X2?
(RTP MAY 2022)
 IND AS 23: BORROWING COST 79

QUESTION 44
Zera Limited obtained a term loan of ` 1,080 lakh for complete renovation and moderniza-
tion of its factory on 1st April, 2021. Plant and Machinery was acquired under the modern-
ization scheme and installation was completed on 30th April, 2022. An expenditure of ` 910
lacs was incurred on installation of Plant and Machinery and the balance loan was used for
working capital purposes. Management of Zera Limited considers the 12 months period as
substantial period of time to get the asset ready for its intended use.
The company has paid total interest of ` 94.40 lacs during financial year 2021-2022 on the
above loan.
Discuss the treatment in the books of account of Zera Limited of interest paid of ` 94.40
lakh during the financial year 2021-2022.

Will your answer be different, if the whole process of renovation and modernization gets
completed by 31st December, 2021?
(7 Marks)
(CA FINAL MAY 2022 EXAM)
SOLUTION :
Treatment procedure:
As per Ind AS 23, borrowing costs that are directly attributable to the acquisition, con-
struction or production of a qualifying asset form part of the cost of that asset. Other
borrowing costs are recognised as an expense.
Where, a qualifying asset is an asset that necessarily takes a substantial period of time to
get ready for its intended use or sale.
Applicability to the given case:
Accordingly, the treatment of interest of ` 94.40 lakh occurred during the year 2021-2022
would be as follows:
(i) When construction of asset completed on 30th April, 2022
The treatment for total borrowing cost of ` 94.40 lakh will be as follows:

Purpose Nature Interest to be Interest to be

capitalised charged to profit and
loss account

` in lakh ` in lakh

Modernisation Qualifying asset [94.40 x

and renovation of plant (910/1,080)]
 80 FINANCIAL REPORTING

and machinery = 79.54

Working Capital Not a qualifying as- [94.40 x
set (170/1,080)] = 14.86
79.54 14.86

(ii) When construction of assets is completed by 31st December, 2021

When the process of renovation gets completed in less than 12 months, the plant and
machinery will not be considered as a qualifying asset until and unless the entity specif-
ically considers that the asset took substantial period for completing its construction.
Accordingly, the whole of interest will be charged off to Profit and Loss account.
108 FINANCIAL REPORTING

QUESTION 44

PQR Ltd. is the company which has performed will in the past but one of its major assets
an item of equipment, Suffered a significant and unexpected deterioration in performance.
Management expects to use the machine for a further four years after 31st March 2020,
but at a reduced level. The equipment will be scrapped after four years. The financial
accountant for PQR Limited has produced a set of cash flow projections for the equipment
for the next four years, ranging from optimistic to pessimistic. CFO thought that the
projection were too conservative, and he intended to use the highest figures each year.
These were as follows:

`
Year ended 31 March 2021 2,76,000
Year ended 31 March 2022 1,92,000
Year ended 31 March 2023 1,20,000
Year ended 31 March 2024 1,14,000

The above cash inflows should be assumed to occur on the last day of each financial year.
The pre-tax discount rate is 9% The machine could have been sold at 31 March 2020 for `
6,00,000 and related selling expenses in this regard could have been ` 96,000. The machine
was revalued previously, and at 31 March 2020 an amount of ` 36,000 was held in revaluation
surplus in respect of the asset The carrying value of the asset at 31 March 2020 was `
6,60,000 The Indian government has indicated that it may compensate the company for any
loss in value of the assets up to its recoverable amount.
(MTP OCTOBER 2020)

QUESTION 45

On 1st April, 20X1, Sun Ltd. has acquired 100% shares of Earth Ltd. for ` 30 lakh. Sun Ltd.
has 3 cash-generating units A, B and C with fair value of ` 12 lakh, ` 8 lakh and ` 4 lakh
respectively. The company recognizes goodwill of ` 6 lakh that relates to CGU ‘C‛ only.
During the financial year 20X2-20X3, the CFO of the company has a view that there is
no requirement of any impairment testing for any CGU since their recoverable amount
is comparatively higher than the carrying amount and believes there is no indicator of
impairment.
Analyse whether the view adopted by the CFO of Sun Ltd. is in compliance with the Ind AS.
If not, advise the correct treatment in accordance with relevant Ind AS.
(MTP APRIL 2022)
 IND AS-36: IMPAIRMENT OF ASSETS 109

SOLUTION :
Para 9 of Ind AS 36 ‘Impairment of Assets‛ states that an entity shall assess at the end
of each reporting period whether there is any indication that an asset may be impaired. If
any such indication exists, the entity shall estimate the recoverable amount of the asset.
Further, paragraph 10(b) of Ind AS 36 states that irrespective of whether there is any
indication of impairment, an entity shall also test goodwill acquired in a business combination
for impairment annually.
Sun Ltd. has not tested any CGU on account of not having any indication of impairment is
partially correct i.e. in respect of CGU A and B but not for CGU C. Hence, the treatment
made by the Company is not in accordance with Ind AS 36.
Impairment testing in respect of CGU A and B are not required s ince there are no
indications of impairment. However, Sun Ltd shall test CGU C irrespective of any indication
of impairment annually as the goodwill acquired on business combination is fully allocated
to CGU ‘C‛.

QUESTION 46

Elia limited is a manufacturing company which deals in to manufacturing of cold drinks and
beverages. It is having various plants across India. There is a Machinery A in the Baroda
plant which is used for the purpose of bottling. There is one more machinery which is
Machinery B clubbed with Machinery A. Machinery A can individually have an output and also
sold independently in the open market. Machinery B cannot be sold in isolation and without
clubbing with Machine A it cannot produce output as well. The Company considers this group
of assets as a Cash Generating Unit and an Inventory amounting to ` 2 Lakh and Goodwill
amounting to ` 1.50 Lakhs is included in such CGU.
Machinery A was purchased on 1st April 2013 for ` 10 Lakhs and residual value is ` 50
thousands. Machinery B was purchased on 1st April, 2015 for ` 5 Lakhs with no residual
value. The useful life of both Machine A and B is 10 years. The Company expects following
cash flows in the next 5 years pertaining to Machinery A. The incremental borrowing rate
of the company is 10%.

Year Cash Flows from Machinery A

1 1,50,000
2 1,00,000
3 1,00,000
4 1,50,000
5 1,00,000 (excluding Residual Value)
Total 6,00,000
 110 FINANCIAL REPORTING

On 31st March, 2018, the professional valuers have estimated that the current market value
of Machinery A is ` 7 lakhs. The valuation fee was ` 1 lakh. There is a need to dismantle the
machinery before delivering it to the buyer. Dismantling cost is ` 1.50 lakhs. Specialised
packaging cost would be ` 25 thousand and legal fees would be ` 75 thousand.
The Inventory has been valued in accordance with Ind AS 2. The recoverable value of CGU
is ` 10 Lakh as on 31st March, 2018. In the next year, the company has done the assessment
of recoverability of the CGU and found that the value of such CGU is ` 11 Lakhs ie on 31st
March, 2019. The Recoverable value of Machine A is ` 4,50,000 and combined Machine A
and B is ` 7,60,000 as on 31st March, 2019.
Required:
a) Compute the impairment loss on CGU and carrying value of each asset after charging
impairment loss for the year ending 31st March, 2018 by providing all the relevant
working notes to arrive at such calculation.
b) Compute the prospective depreciation for the year 2018-2019 on the above assets.
c) Compute the carrying value of CGU as at 31st March, 2019.
(RTP MAY 2019)

QUESTION 47

East Ltd. (East) owns a machine used in the manufacture of steering wheels, which are sold
directly to major car manufacturers.
• The machine was purchased on 1st April, 20X1 at a cost of ` 500 000 through a vendor
financing arrangement on which interest is being charged at the rate of 10 per cent
per annum.
• During the year ended 31st March, 20X3, East sold 10 000 steering wheels at a selling
price of ` 190 per wheel.
• The most recent financial budget approved by East‛s management, covering the period
1st April, 20X3 – 31st March, 20X8, including that the company expects to sell each
steering wheel for ` 200 during 20X3-X4, the price rising in later years in line with a
forecast inflation of 3 per cent per annum.
• During the year ended 31st March, 20X4, East expects to sell 10 000 steering wheels.
The number is forecast to increase by 5 per cent each year until 31st March, 20X8.
• East estimates that each steering wheel costs ` 160 to manufacture, which includes
`110 variable costs, ` 30 share of fixed overheads and ` 20 transport costs.
• Costs are expected to rise by 1 per cent during 20X4-X5, and then by 2 per cent per
annum until 31st March, 20X8.
• During 20X5-X6, the machine will be subject to regular maintenance costing ` 50,000.
• In 20X3-X4, East expects to invest in new technology costing ` 100 000. This technology
will reduce the variable costs of manufacturing each steering wheel from ` 110 to `100
 IND AS-36: IMPAIRMENT OF ASSETS 111

and the share of fixed overheads from ` 30 to ` 15 (subject to the availability of

technology, which is still under development).
• East is depreciating the machine using the straight line method over the machine‛s
10 year estimated useful life. The current estimate (based on similar assets that
have reached the end of their useful lives) of the disposal proceeds from selling the
machine is ` 80 000 net of disposal costs. East expects to dispose of the machine at
the end of March, 20X8.
• East has determined a pre-tax discount rate of 8 per cent, which reflects the market‛s
assessment of the time value of money and the risks associated with this asset.
Assume a tax rate of 30%. What is the value in use of the machine in accordance with Ind
AS 36?
(RTP NOV. 2019)
QUESTION 48

PQR Ltd. is the company which has performed well in the past but one of its major assets,
an item of equipment, suffered a significant and unexpected deterioration in performance.
Management expects to use the machine for a further four years after 31 st March 20X6,
but at a reduced level. The equipment will be scrapped after four years. The financial
accountant for PQR Ltd. has produced a set of cash-flow projections for the equipment
for the next four years, ranging from optimistic to pessimistic. CFO thought that the
projections were too conservative, and he intended to use the highest figures each year.
These were as follows:

` ʼ000
Year ended 31st March 20X7 276
Year ended 31st March 20X8 192
Year ended 31st March 20X9 120
Year ended 31st March 20Y0 114

The above cash inflows should be assumed to occur on the last day of each financial year.
The pre-tax discount rate is 9%. The machine could have been sold at 31st March 20X6
for ` 6,00,000 and related selling expenses in this regard could have been ` 96,000. The
machine had been re valued previously, and at 31st March 20X6 an amount of ` 36,000 was
held in revaluation surplus in respect of the asset. The carrying value of the asset at 31st
March 20X6 was ` 660,000. The Indian government has indicated that it may compensate
the company for any loss in value of the assets up to its recoverable amount.
Calculate impairment loss, if any and revised depreciation of asset. Also suggest how
Impairment loss, if any would be set off and how compensation from government be
accounted for?
(RTP MAY 2020)
 112 FINANCIAL REPORTING

QUESTION 49 (MIXED WITH IND AS 38)

One of the senior engineers at XYZ has been working on a process to improve manufacturing
efficiency and, consequently, reduce manufacturing costs. This is a major project and has
the full support of XYZʼs board of directors. The senior engineer believes that the cost
reductions will exceed the project costs within twenty four months of their implementation.
Regulatory testing and health and safety approval was obtained on 1 June 20X5. This removed
uncertainties concerning the project, which was finally completed on 20 April 20X6. Costs
of ` 18,00,000, incurred during the year till 31st March 20X6, have been recognized as
an intangible asset. An offer of ` 7,80,000 for the new developed technology has been
received by potential buyer but it has been rejected by XYZ. Utkarsh believes that the
project will be a major success and has the potential to save the company ` 12,00,000 in
perpetuity. Director of research at XYZ, Neha, who is a qualified electronic engineer, is
seriously concerned about the long term prospects of the new process and she is of the
opinion that competitors would have developed new technology at some time which would
require to replace the new process within four years. She estimates that the present value
of future cost savings will be ` 9,60,000 over this period. After that, she thinks that there
is no certainty about its future. What would be the appropriate accounting treatment of
aforesaid issue?
(RTP MAY 2020)

QUESTION 50 (MIXED WITH FOREIGN CURRENCY)

The UK entity with a sterling functional currency has a property located in US, which
was acquired at a cost of US$ 1.8 million when the exchange rate was ₤1 = US$ 1.60. The
property is carried at cost. At the balance sheet date, the recoverable amount of the
property (as a result of an impairment review) amounted to US$ 1.62 million, when the
exchange rate ₤1 = US$ 1.80. Compute the amount which is to be reported in Profit & Loss
of UK entity as a result of impairment, if any. Ignore depreciation. Also analyse the total
impairment loss on account of change in value due to impairment component and exchange
component.
(RTP NOV. 2020)

QUESTION 51

On 31 March 20X1, Vision Ltd acquired 80% of the equity shares of Mission Ltd for ` 190
million. The fair values of the net assets of Mission Ltd that were included in the consolidated
statement of financial position of Vision Ltd at 31 March 20X1 were ` 200 million. It is the
Group‛s policy to value the non-controlling interest in subsidiaries at the date of acquisition
at its proportionate share of the fair value of the subsidiaries‛ identifiable net assets.
On 31 March 20X4, Vision Ltd carried out its annual review of the goodwill on consolidation
of Mission Ltd and found evidence of impairment. No impairment had been evident when
 IND AS-36: IMPAIRMENT OF ASSETS 113

the reviews were carried out at 31 March 20X2 and 31 March 20X3. The review involved
allocating the assets of Mission Ltd into three cash- generating units and computing the
value in use of each unit. The carrying values of the individual units before any impairment
adjustments are given below:

Unit A Unit B Unit C

` in million ` in million ` in million
Intangible assets 30 10 -
Property, Plant and Equipment 80 50 60
Current Assets 60 30 40
Total 170 90 100
Value in use of unit 180 66 104

It was not possible to meaningfully allocate the goodwill on consolidation to the individual
cash generating units but all the other net assets of Mission Ltd are allocated in the table
shown above.
The intangible assets of Mission Ltd have no ascertainable market value but all the current
assets have a market value that is at least equal to their carrying value. The value in use of
Mission Ltd as a single cash-generating unit on 31 March 20X4 is ` 350 million.
Discuss and compute the accounting treatment of impairment of goodwill as per Ind AS 36?
RTP MAY 2021)

QUESTION 52

A Limited purchased an asset of ` 200 lakh on 1st April 2017. It has useful life of 4 years
with no residual value. Recoverable amount of the asset is as follows:

As on Recoverable amount
31st March 2018 ` 120 lakh
31st March 2019 ` 80 lakh
31st March 2020 ` 56 lakh

Calculate the amount of impairment loss or its reversal, if any,

• On 31st March 2018;
• On 31st March 2019;
• On 31st March 2020.
Depreciation is provided on SLM basis under the cost method.
(6 Marks)
(CA FINAL JULY 2021 EXAM)
 114 FINANCIAL REPORTING

S0LUTION :
As on 31st March, 2018

Carrying amount of the asset (opening balance) ` 200 lakh

Depreciation (` 200 lakh / 4 years) (` 50 lakh)
Carrying amount of the asset (closing balance) ` 150 lakh
Recoverable amount (given) ` 120 lakh
Difference ` 30 lakh

Therefore, an impairment loss of ` 30 lakh should be recognised as on 31st March, 2018.

Depreciation for subsequent years should be charged on the carrying amount of the asset
(after providing for impairment loss), i.e., ` 120 lakh.
As on 31st March, 2019

Carrying amount of the asset (opening balance) ` 120 lakh

Depreciation (` 120 lakh / 3 years) (` 40 lakh)
Carrying amount of the asset (closing balance) ` 80 lakh
Recoverable amount (Given) ` 80 lakh
Difference NIL

Therefore, no impairment loss should be recognised as on 31 st March, 2019.

As on 31st March, 2020

Carrying amount of the asset (opening balance) ` 80 lakh

Depreciation (` 80 lakh / 2 years) (` 40 lakh)
Carrying amount of the asset (closing balance) ` 40 lakh
Recoverable amount (given) ` 56 lakh
Difference (` 16 lakh)

Since, the recoverable amount of the asset exceeds the carrying amount of the asset by
` 16 lakh, impairment loss recognised earlier should be reversed. However, reversal of an
impairment loss should not exceed the carrying amount that would have been determined
(net of amortization or depreciation) had no impairment loss been recognised for the asset
in prior years.
Carrying amount as on 31st March, 2020 had no impairment loss being recognised would
have been ` 50 lakh [ie. ` 200 lakh – (200 lakh / 4 x 3)]. Therefore, the reversal of an im-
pairment loss of ` 10 lakh (` 50 lakh - ` 40 lakh) should be done as on 31st March, 2020.
 IND AS-36: IMPAIRMENT OF ASSETS 115

QUESTOIN 53

Violet Limited is a beverages manufacturing company having various plants across India.
There is Machinery A in the Surat plant which is used for the purpose of bottling. There
is one more machinery which is Machinery B clubbed with Machinery A. Machinery A can
individually have an output and also be sold independently in the open market. Machinery B
cannot be sold in isolation and without clubbing with Machinery A it cannot produce output
as well. The company considers this group of assets as a Cash Generating Unit and an In-
ventory amounting to ` 1.65 lakhs and Goodwill amounting to ` 1.50 lakhs is included in such
CGU.
Machinery A was purchased on 1st April 2016 for ` 12 lakhs and residual value is ` 60 thou-
sand. Machinery B was purchased on 1st April, 2018 for ` 5 lakhs with no residual value. The
useful life of both Machinery A and B is 10 years. The company expects following cash flows
in the next 5 years pertaining to Machinery A. The incremental borrowing rate of company
is 10% p.a.

Year Cash Flows from Machinery A

1 2,00,000
2 1,50,000
3 1,00,000
4 1,50,000
5 1,00,000 (Excluding Residual Value)
Total 7,00,000

On 31st March, 2021, the professional valuers have estimated that the current market
value of machinery A is ` 8.5 lakhs. There is a need to dismantle the machinery before de-
livering it to the buyer. Dismantling cost is ` 1.60 lakhs. Specialized packaging cost would
be ` 30,000 and legal fees would be ` 68,000.
The inventory has been valued in accordance with Ind AS 2. The recoverable value of CGU
is ` 10 lakhs as on 31st March, 2021. In the next year, the company has done the assess-
ment of recoverability of the CGU and found that the value of such CGU is ` 11 lakhs i.e.
on 31st March, 2022. The recoverable value of Machinery A is ` 5,50,000 and combined for
Machinery A and Machinery B is ` 8,00,000 as on 31st March, 2022.
You are required to:
(i) Compute the impairment loss on CGU and carrying value of each asset after charging
impairment loss for the year ending 31st March, 2021 by providing all the relevant
working notes to arrive at such calculation.
(ii) Compute the carrying value after considering prospective depreciation for the year
2021-2022 on the above assets.
 116 FINANCIAL REPORTING

(iii) Compute the carrying value of CGU as at 31st March, 2022.

(Note: Present value factor of ` 1 should be taken upto 4 decimals for the purpose of
calculation)
(8 Marks)
(CA FINAL NOV 2022 EXAM)
SOLUTION :
(i) Computation of impairment loss and carrying value of each of the asset in CGU
after impairment loss
(a) Calculation of carrying value of Machinery A and B before impairment

Machinery A
Cost (A) ` 12,00,000
Residual value ` 60,000
Useful life 10 years
Useful life already elapsed 5 years
Yearly depreciation (B) ` 1,14,000
WDV as at 31st March 2021 [A- (B x 5)] ` 6,30,000
Machinery B
Cost (C) ` 5,00,000
Residual value -
Useful life 10 years
Useful life already elapsed 3 years
Yearly depreciation (D) ` 50,000
WDV as at 31st March 2021 [C- (D x 3)] ` 3,50,000

(b) Calculation of Value-in-use of Machinery A

Period Cash Flows (`) PVF@10% PV

1 2,00,000 0.9091 1,81,820
2 1,50,000 0.8264 1,23,960
3 1,00,000 0.7513 75,130
4 1,50,000 0.6830 1,02,450
5 1,00,000 0.6209 62,090
5 60,000 0.6209 37,254
Value in use 5,82,704
IND AS-36: IMPAIRMENT OF ASSETS 117

(c) Calculation of Fair Value less cost of disposal of Machinery A

`
Fair Value 8,50,000
Less: Dismantling cost (1,60,000)
Packaging cost (30,000)
Legal Fees (68,000)
Fair value less cost of disposal 5,92,000

(d) Calculation of Impairment loss on Machinery A

`
Carrying Value 6,30,000
Less: Recoverable Value ie higher of Value-in-use (` 5,82,704)
and Fair value less cost of disposal (` 5,92,000) (5,92,000)
Impairment Loss 38,000

(e) Calculation of Impairment loss of CGU

1. First goodwill will be impaired fully and then the remaining impairment loss
of CGU will be allocated to Machinery A and Machinery B.
2. After deduction of value of goodwill ` 1,50,000 from total impairment loss
of CGU of ` 2,95,000, remaining impairment loss would be ` 1,45,000. If
we allocate remaining impairment loss to Machinery A and B on pro- rata
basis, it will come to ` 93,214 on Machinery A. However, the impairment
loss of Machinery A cannot exceed ` 38,000 since its recoverable value is `
5,92,000. Hence, impairment loss to CGU will be as follows:

Carrying value Impairmen Carrying value af-

before impairment t loss ter impairment
loss loss
` ` `
Machinery A 6,30,000 38,000 5,92,000
Machinery B 3,50,000 1,07,000* 2,43,000
Inventory 1,65,000 - 1,65,000
Goodwill 1,50,000 1,50,000 -
Total 12,95,000 2,95,000 10,00,000
 118 FINANCIAL REPORTING

(ii) Carrying value after adjustment of depreciation of 2021-2022

`
Machinery A [5,92,000 – {(5,92,000 - 60,000)/5}] 4,85,600
Machinery B [2,43,000 – (2,43,000/7)] 2,08,286
Inventory 1,65,000
Goodwill -
Total 8,58,886

(c) Calculation of carrying value of CGU as on 31st March 2022

The revised value of CGU is ` 11 lakh. However, impaired goodwill cannot be
reversed. Further, the individual assets cannot be increased above the lower of
recoverable value or carrying value as if the assets were never impaired.
Accordingly, the carrying value as on 31st March 2022 assuming that the
impairment loss had never incurred, will be:

Carrying Value Recoverable Val- Final CV as at

ue 31st March
2022
Machinery A [12,00,000 - 5,50,000 5,16,000
(1,14,000 x
6)] 5,16,000
Machinery B [5,00,000 – (8,00,000 – 2,50,000
(50,000x4)] 5,50,000)
3,00,000 2,50,000
Inventory 1,65,000* 1,65,000* 1,65,000*
Goodwill - - -
Total 9,81,000 9,65,000 9,31,000

Hence, the impairment loss to be reversed will be limited to ` 72,114 only (`

9,31,000 – ` 8,58,886).
*Note: The question required valuation of CGU at the year-end 31st March 2022,
for which value of inventory was required. In the absence of the value of inventory
for the year ended 31st March 2022, it is assumed that the value of inventory
for the year ended 31st March 2022 is same as it was for the year ended 31 st
March, 2021.
 IND AS-38: INTANGIBLE ASSETS 137

In this case, ` 5,30,000 (salary cost of ` 1,50,000, program design cost of ` 3,00,000 and
coding and technical feasibility cost of ` 80,000) would be recorded as expense in Profit
and Loss since it belongs to research phase.
Cost incurred from the point of technical feasibility are capitalised as software costs. But
the conference cost of ` 60,000 would be expensed off.
In this situation, direct cost after establishment of technical feasibility of ` 3,00,000 and
testing cost of ` 90,000 will be capitalised.
The cost of software capitalised is = ` (3,00,000 + 90,000) = ` 3,90,000.

QUESTION 41

One of the senior engineers at XYZ has been working on a process to improve manufacturing
efficiency and, consequently, reduce manufacturing costs. This is a major project and
has the full support of XYZʼs board of directors. The senior engineer believes that
the cost reductions will exceed the project costs within twenty four months of their
implementation. Regulatory testing and health and safety approval was obtained on 1 June
20X5. This removed uncertainties concerning the project, which was finally completed on
20 April 20X6. Costs of ` 18,00,000, incurred during the year till 31st March 20X6, have
been recognized as an intangible asset. An offer of ` 7,80,000 for the new developed
technology has been received by potential buyer but it has been rejected by XYZ. Utkarsh
believes that the project will be a major success and has the potential to save the company
` 12,00,000 in perpetuity. Director of research at XYZ, Neha, who is a qualified electronic
engineer, is seriously concerned about the long term prospects of the new process and
she is of the opinion that competitors would have developed new technology at some time
which would require to replace the new process within four years. She estimates that
the present value of future cost savings will be ` 9,60,000 over this period. After that,
she thinks that there is no certainty about its future. What would be the appropriate
accounting treatment of aforesaid issue?‛
(RTP MAY 2020)

QUESTION 42

ABC Pvt. Ltd., recruited a player. As per the terms of the contract, the player is prohibited
from playing for any other entity for coming 5 years and have to in the employment with the
company and cannot leave the entity without mutual agreement. The price the entity paid
to acquire this right is derived from the skills and fame of the said player. The entity uses
and develops the player through participation in matches. State whether the cost incurred
to obtain the right regarding the player can be recognised as an intangible asset as per Ind
AS 38?
(RTP NOV. 2020)
138 FINANCIAL REPORTING

SOLUTION :
As per Ind AS 38, for an item to be recognised as an intangible asset, it must meet the
definition of an intangible asset, i.e., identifiability, control over a resource and existence
of future economic benefits and also recognition criteria.
With regard to establishment of control, paragraph 13 of Ind AS 38 states that an entity
controls an asset if the entity has the power to obtain the future economic benefits flowing
from the underlying resource and to restrict the access of others to those benefits. The
capacity of an entity to control the future economic benefits from an intangible asset would
normally stem from legal rights that are enforceable in a court of law. In the absence of
legal rights, it is more difficult to demonstrate control. However, legal enforceability of a
right is not a necessary condition for control because an entity may be able to control the
future economic benefits in some other way.
Further, paragraph 15 of Ind AS 38 provides that an entity may have a team of skilled
staff and may be able to identify incremental staff skills leading to future economic
benefits from training. The entity may also expect that the staff will continue to make their
skills available to the entity. However, an entity usually has insufficient control over the
expected future economic benefits arising from a team of skilled staff and from training
for these items to meet the definition of an intangible asset. For a similar reason, specific
management or technical talent is unlikely to meet the definition of an intangible asset,
unless it is protected by legal rights to use it and to obtain the future economic benefits
expected from it, and it also meets the other parts of the definition.
Since the right in the instant case is contractual, identifiability criterion is satisfied. Based
on the facts provided in the given case, the player is prohibited from playing in other teams
by the terms of the contract which legally binds the player to stay with ABC Ltd for 5
years.
Accordingly, in the given case, the company would be able to demonstrate control. Future
economic benefits are expected to arise from use of the player in matches. Further, cost
of obtaining rights is also reliably measurable. Hence, it can recognise the costs incurred to
obtain the right regarding the player as an intangible asset. However, careful assessment
of relevant facts and circumstances of each case is required to be made.

QUESTION 43

PQR Ltd. is a gaming developer company. Few years back, it developed a new game called
‘Cloud9‛. This game sold over 10,00,000 copies around the world and was extremely profitable.
Due to its popularity, PQR Ltd. released a new game in the ‘Cloud9‛ series every year. The
games continue to be the bestseller. Based on Management‛s expectations, estimates of
cash flow projections for the ‘cloud9 videogame series‛ over the next five years have been
prepared. Based on these projections, PQR Ltd. believes that cloud9 series brand should
be recognised at INR 20,00,000 in its financial statement. PQR Ltd. has also paid INR
 IND AS-38: INTANGIBLE ASSETS 139

10,00,000 to MNC Ltd. to acquire rights of another video game series called the ‘Headspace‛
videogame series. The said series have huge demand in the market.
Discuss the accounting treatment of the above in the financial statements of PQR Ltd.
(RTP MAY 2021)
SOLUTION :
In order to determine the accounting treatment of ‘cloud9 videogame series‛ and ‘Headspace‛,
definition of asset and intangible asset given in Ind AS 38 may be noted:
“An asset is a resource:
(a) controlled by an entity as a result of past events; and
(b) from which future economic benefits are expected to flow to the entity.”
“An intangible asset is an identifiable non-monetary asset without physical substance.”
In accordance with the above, for recognising an intangible asset, an entity must be able to
demonstrate that the item satisfies the criteria of identifiability, control and existence of
future economic benefits.
In order to determine whether ‘cloud9 videogame series‛ meet the aforesaid conditions,
following provisions of Ind AS 38 regarding Internally Generated Intangible Assets may
be noted:
As per paragraph 63 and 64 of Ind AS 38, internally generated brands, mastheads, publishing
titles, customer lists and items similar in substance should not be recognised as intangible
assets. Expenditure on such items cannot be distinguished from the cost of developing the
business as a whole. Therefore, such items are not recognised as intangible assets.
Accordingly, though the cash flow projections suggest that the cloud9 brand will lead to
future economic benefits, yet the asset has been internally generated; therefore, the
Cloud9 brand cannot be recognised as intangible asset in the financial statements.
In order to determine whether ‘Headspace‛ meet the aforesaid conditions, following
provisions of Ind AS 38 regarding ‘Separately acquired Intangible Assets‛ should be
analysed.
As per paragraphs 25 and 26 of Ind AS 38, normally, the price an entity pays to acquire
separately an intangible asset will reflect expectations about the probability that the
expected future economic benefits embodied in the asset will flow to the entity. In other
words, the entity expects there to be an inflow of economic benefits, even if there is
uncertainty about the timing or the amount of the inflow. Therefore, the probability
recognition criterion in paragraph 21(a) is always considered to be satisfied for separately
acquired intangible assets. In addition, the cost of a separately acquired intangible asset
can usually be measured reliably. This is particularly so when the purchase consideration is
in the form of cash or other monetary assets.
140 FINANCIAL REPORTING

The Headspace game has been purchased for INR 10,00,000 and it is expected to generate
future economic benefits to the entity. Since Headspace game is a separately acquired asset
and the future benefits are expected to flow to the entity, therefore, an intangible asset
should be recognised in respect of the ‘Headspace‛ asset at its cost of INR 10,00,000. After
initial recognition, either cost model or revaluation model can be used to measure headspace
intangible asset as per guidance given in paragraphs 74-87 of Ind AS 38. In accordance
with this, Headspace intangible asset should be carried at its cost/revalued amount (as the
case may be) less any accumulated amortisation and any accumulated impairment losses.

QUESTION 44

D Ltd. a leading publishing house, purchased copyright of a book from its author for
publishing the same. As per the terms of the contract, if D Ltd. chooses to make the
payment upfront then, copyright consideration of ` 80,00,000 is to be paid (which is in line
with general practice in such arrangements). However, the contract also provided that, in
case D Ltd. chooses to pay the consideration after 2 years, then it will be required to pay
` 1,00,00,000. At what value should the intangible asset be recognised as per Ind AS 38?
(RTP MAY 2022)
SOLUTION :
As per paragraph 32 of Ind AS 38, “If payment for an intangible asset is deferred beyond
normal credit terms, its cost is the cash price equivalent. The difference between this
amount and the total payments is recognized as interest expense over the period of credit
unless it is capitalized in accordance with Ind AS 23, Borrowing Costs.”
In the given case, if the payment for an intangible asset i.e. copyright is deferred beyond
normal credit terms, the cash price equivalent ` 80,00,000 should be considered as its cost
and the intangible asset will be recorded initially at this value.
The difference of ` 20,00,000 between cash price equivalent (i.e. ` 80,00,000) and the
total payment (i.e. ` 1,00,00,000) should be recognised as interest expense over the period
of credit (i.e. 2 years in this case), unless it is eligible for capitalisation in accordance with
Ind AS 23, Borrowing Costs.

QUESTION 45

An entity has an intangible asset in the form of a product protected by patented technology
which is expected to be a source of net cash inflows for at least 15 years. It has been
recognised in the books on initial date at ` 12,00,000. The entity has a commitment from
a third party to purchase that patent in five years for 60 per cent of the fair value of
the patent at the date it was acquired, and the entity intends to sell the patent in five
years. Company is amortising the asset in 15 years considering its residual value to be Zero.
Annual amortization charged to Profit and Loss is ` 80,000. State, whether the accounting
treatment done by the Company is in accordance with Ind AS 38? If not, then calculate the
 IND AS-38: INTANGIBLE ASSETS 141

annual amortization of the intangible asset and also the amount at which it will be reflected
in the balance sheet.
(RTP NOV. 2022)
SOLUTION :
For determination of amortisation of the intangible asset, which has finite useful life, two
elements need to be determined: useful life and residual value.
Useful life is defined as:
(a) the period over which an asset is expected to be available for use by an entity; or
(b) the number of production or similar units expected to be obtained from the asset by
an entity.
In the instant case, since the entity expects that the asset will be available for use by it
for the period of 5 years and thereafter it will be transferred, the useful life of the asset
is 5 years.
For residual value, paragraphs 100-102 of Ind AS 38 states that the residual value of an
intangible asset with a finite useful life shall be assumed to be zero unless:
(a) there is a commitment by a third party to purchase the asset at the end of its useful
life; or
(b) there is an active market (as defined in Ind AS 113) for the asset and:
(i) residual value can be determined by reference to that market; and
(ii) it is probable that such a market will exist at the end of the asset‛s useful life.
The depreciable amount of an asset with a finite useful life is determined after deducting
its residual value. A residual value other than zero implies that an entity expects to dispose
of the intangible asset before the end of its economic life.
An estimate of an asset‛s residual value is based on the amount recoverable from disposal
using prices prevailing at the date of the estimate for the sale of a similar asset that has
reached the end of its useful life and has operated under conditions similar to those in
which the asset will be used.
On application of above paragraphs, the depreciable amount of the patent will be determined
after deducting the residual value, which is 60 % of its fair value at the date of its
acquisition. Accordingly, the patent will be amortised over its useful life of 5 years, with a
residual value equal to 60% of its fair value at the date of its acquisition. The patent will
also be reviewed for impairment in accordance with Ind AS 36. Therefore, the accounting
policy of amortising the asset over a period of 15 years considering its residual value of
Zero is not in accordance with Ind AS 38.
142 FINANCIAL REPORTING

Computation of correct amount of residual value and annual amortization:

Cost of Intangible asset 12,00,000

Residual value (60% of ` 12,00,000) 7,20,000
Depreciable value of intangible asset (12,00,000 – 7,20,000) 4,80,000
Useful life 5 years
Annual amortisation (4,80,000 / 5) ` 96,000 p.a.
156 FINANCIAL REPORTING

The estimated rent per month per square feet for the period is expected to be in the range
of `50 – `60. And it is further expected to grow at the rate of 10 percent per annum for
each of 3 years. The weighted discount rate used is 12% to 13%.
Assume that the fair value of properties based on discounted cash flow method is measured
at `10.50 crores. The treatment of fair value of properties is to be given in the financials
as per the requirements of Indian accounting standards
What would be the treatment of Building A and Building B in the balance sheet of Shaurya
Limited? Provide detailed disclosures and computations in line with relevant Indian accounting
standards. Treat it as if you are preparing a separate note or schedule, of the given assets
in the balance sheet.
(RTP Nov. 2020)

QUESTION 35

X Ltd owned a land property whose future use was not determined as at 31 March 20X1.
How should the property be classified in the books of X Ltd as at 31 March 20X1?
During June 20X1, X Ltd commenced construction of office building on it for own use.
Presuming that the construction of the office building will still be in progress as at 31
March 20X2

(a) How should the land property be classified by X Ltd in its financial statements as at
31 March 20X2?
(b) Will there be a change in the carrying amount of the property resulting from any
change in use of the investment property?
(c) Whether the change in classification to, or from, investment properties is a change
in accounting policy to be accounted for in accordance with Ind AS 8, Accounting
Policies, Changes in Accounting Estimates and Errors?
(d) Would your answer to (a) above be different if there were to be a management
intention to commence construction of an office building for own use; however, no
construction activity was planned by 31 March 20X2?
(RTP May 2021)

QUESTION 36

On 1st April, 20X1, an entity purchased an office block (building) for ` 50,00,000 and paid
a non refundable property transfer tax and direct legal cost of ` 2,50,000 and ` 50,000
respectively while acquiring the building.
During 20X1, the entity redeveloped the building into two-story building. Expenditures on
re development were:
 IND AS 40: INVESTMENT PROPERTY 157

• ` 1,00,000 on Building plan approval;

• ` 10,00,000 on construction costs (including ` 60,000 refundable purchase taxes); and
• ` 40,000 was due to abnormal wastage of material and labour.
When the re-development of the building was completed on 1st October, 20X1, the entity
rents out Ground Floor of the building to its subsidiary under an operating lease in return
for rental payment. The subsidiary uses the building as a retail outlet for its products. The
entity kept first floor for its own administration and maintenance staff usage. Equal value
can be attributed to each floor.
How will the entity account for all the above mentioned expenses in the books of account
as on 1st October, 20X1?
Also, discuss how the above building will be shown in the consolidated financial statements
of the entity as a group and in its separate financial statements as per relevant Ind AS.
(MTP April 2022)

QUESTION 37

An entity owns a two-storey building. Floor 1 is rented out to independent third parties
under operating leases. Floor 2 is occupied by the entity‛s administration and maintenance
staff. The entity can measure reliably the fair value of each floor of the building without
undue cost or effort. How the same will be classified / presented in the balance sheet as
per relevant Ind AS. What will be the accounting treatment as per relevant Ind AS on
initial and subsequent date?
(RTP NOV. 2022)
SOLUTION :
Investment property is property (land or a building—or part of a building—or both) held
(by the owner or by the lessee as a right-of-use asset) to earn rentals or for capital
appreciation or both, rather than for:
a) use in the production or supply of goods or services or for administrative purposes; or
b) sale in the ordinary course of business.
Property mentioned in (a) above would be covered under Ind AS 16 ‘Property, Plant and
Equipment‛.
On applying the above provisions, Floor 1 of the building is classified as an item of investment
property by the entity (lessor) because it is held to earn rentals. Ind AS 40 is applicable
in this case. An investment property should be measured initially at its cost. After initial
recognition, an entity shall measure all of its investment properties in accordance with Ind
AS 16‛s requirements for cost model. However, entities are required to measure the fair
value of investment property, for the purpose of disclosure even though they are required
to follow the cost model.
 158 FINANCIAL REPORTING

Floor 2 of the building will be classified as property, plant and equipment because it is
held by administrative staff i.e. it is held for use for administrative purposes. Ind AS
16 is applicable in this case. An item of property, plant and equipment that qualifies for
recognition as an asset should be initially measured at its cost. After recognition, an entity
shall choose either the cost model or the revaluation model as its accounting policy and shall
apply that policy to an entire class of property, plant and equipment.

QUESTION 38

F Ltd. owned a land property whose future use was not determined as at 31st March, 2021.
How should the property be classified in the books of F Ltd. as at 31st March, 2021?
During June 2021, F Ltd. commenced construction of office building on it for own use. Pre-
suming that the construction of the office building is still in progress as at 31st March,
2022.
(i) How should the land property be classified by F Ltd. in its financial statements as at
31st March, 2022?
(ii) Will there be a change in the carrying amount of the property resulting from any
change in use of the investment property?
(iii) Whether the change in classification to, or from, investment properties is a change in
accounting policy to be accounted for in accordance with Ind AS 8, Accounting Poli-
cies, Changes in Accounting Estimates and Errors?
(iv) Would your answer to (i) above be different if there were to be a management inten-
tion to commence construction of an office building for own use; however, no construc-
tion activity was planned by 31st March, 2022?
(CA FINAL MAY 2022 EXAM) (5 Marks)
SOLUTION :
Treatment for the year ended 31.03.2021:
As per paragraph 8(b) of Ind AS 40, any land held for currently undetermined future use,
should be classified as an investment property. Hence the land property should be classified
by F Ltd. as an investment property in the financial statements as at 31st March, 2021.
Treatment for the year ended 31.03.2022:
I. Since F Ltd. has commenced construction of office building on it for own use, the
property should be reclassified from investment property to owner occupied as at 31st
March, 2022.
II. As per para 59 of the standard, transfers between investment property, owner occu-
pied and inventories do not change the carrying amount of the property transferred
and they do not change the cost of the property for measurement or disclosure pur-
poses.
 IND AS 40: INVESTMENT PROPERTY 159

III. No, the change in classification to or from investment properties is due to change in
use of the property. No retrospective application is required, and prior period‛s finan-
cial statements need not be restated.
IV. As per para 57 of the Standard, an entity can change the classification of any prop-
erty to and from an investment property when and only when there is a change in use.
A change in use occurs when the property meets or ceases to meet the definition of
investment property and there is evidence of the change in use. Mere management‛s
intention for use of the property does not provide evidence of a change in use.
Since F Ltd. has no plans to commence construction of the office building during 2021-
2022, the property should continue to be classified as an investment property by F
Ltd. in its financial statements as at 31st March, 2022.
 IND AS 105: NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS 169

Building 4,000 3,700

Debtors 1,700 2,100
Inventory 1,400 800
Creditors (600) (500)
Loans (4,000) (3,700)
Net 5,500 5,200

The fair value of the manufacturing unit as on December 31, 2017 is ` 4,000 lakh and as
on July 31, 2018 is ` 3,700 lakh. The cost to sell is ` 200 lakh on both these dates. The
disposal group is not sold at, the period end i.e., December 31, 2018. The fair value as on
31st December, 2018 is lower than the carrying value of the disposal group as on that date.
Required:
i) Assess whether the manufacturing unit can be classified as held for sale and reasons
thereof. If yes, then at which date?
ii) The measurement of the manufacturing unit as on the date of classification as held
for sale.
iii) The measurement of the manufacturing unit as at the end of the year.
(CA-FNAL EXAM NOV. 2019)

QUESTION 14

On February 28, 20X1, Entity X is committed to the following plans:

(a) To sell a property after completion of certain renovations to increase its value prior
to selling it. The renovations are expected to be completed within a short span of time
i.e., 2 months.
(b) To sell a commercial building to a buyer after the occupant vacates the building.
The time required for vacating the building is usual and customary for sale of such
commercial property. The entity considers the sale to be highly probable.
Can the above-mentioned property and commercial building be classified as non- current
assets held for sale at the reporting date i.e. 31st March, 20X1?
(RTP NOV. 2021)
SOLUTION :
Ind AS 105 provides guidance on classification of a non-current asset held for sale in
paragraph 7 which states that, the asset (or disposal group) must be available for immediate
sale in its present condition subject only to terms that are usual and customary for sales of
such assets (or disposal groups) and its sale must be highly probable.
170 FINANCIAL REPORTING

(a) In respect of Entity X‛s plan to sell property which is being renovated and such
renovation is incomplete as at the reporting date. Although, the renovations are
expected to be completed within 2 months from the reporting date i.e., March 31,
20X1, the property cannot be classified as held for sale at the reporting date as it is
not available for sale immediately in its present condition.
(b) In case of Entity X‛s plan to sell commercial building, it intends to transfer the
commercial building to a buyer after the occupant vacates the building and the time
required for vacating such building is usual and customary for sale of such non- current
asset. Accordingly, the criterion of the asset being available for immediate sale would
be met and hence, the commercial building can be classified as held for sale at the
reporting date

QUESTION 15

X Ltd. acquires B Ltd. exclusively with a view to sale and it meets the criteria to be classified
as discontinued operation as per Ind AS 105. Further, following information is available
about B Ltd.:
Fair value of total assets excluding liabilities on acquisition – ` 360 Costs to sell as on
acquisition and on reporting date – ` 10
Fair value of liabilities on acquisition and reporting date – ` 80
Fair value of total assets excluding liabilities on the reporting date – ` 340
How discontinued operation pertaining to B Ltd. should be measured in consolidated financial
statements of X Ltd. on acquisition date and reporting date?
(RTP MAY 2022)
SOLUTION :
Ind AS 105 defines a disposal group as a group of assets to be disposed of, by sale or
otherwise, together as a group in a single transaction, and liabilities directly associated
with those assets that will be transferred in the transaction. The group includes goodwill
acquired in a business combination if the group is a cash-generating unit to which goodwill
has been allocated in accordance with the requirements of paragraphs 80 –87 of Ind AS 36,
Impairment of Assets, or if it is an operation within such a cash- generating unit.
In the given case, B Ltd. is acquired exclusively with a view to sell and meets the criteria to
be classified as discontinued operation.
The discontinued operation would be measured in accordance with paragraphs 15 and 16 of
Ind AS 105
As per para 15, an entity shall measure a non-current asset (or disposal group) classified as
held for sale at the lower of its carrying amount and fair value less costs to sell.
 IND AS 105: NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS 171

As per para 16, if a newly acquired asset (or disposal group) meets the criteria to be
classified as held for sale (see paragraph 11), applying paragraph 15 will result in the asset
(or disposal group) being measured on initial recognition at the lower of its carrying amount
had it not been so classified (for example, cost) and fair value less costs to sell. Hence,
if the asset (or disposal group) is acquired as part of a business combination, it shall be
measured at fair value less costs to sell.
Therefore, on acquisition date, in line with paragraph 16, X Ltd. will measure B Ltd. as a
disposal group at fair value less costs to sell which will be calculated as Fair value of total
assets excluding liabilities on acquisition – Costs to sell = ` 360 – ` 10 = ` 350.
Fair value of liabilities on acquisition = ` 80.
At the reporting date, in line with paragraph 15, X Ltd. will remeasure the disposal group at
the lower of its cost and fair value less costs to sell which will be calculated as:
Fair value of total assets excluding liabilities on subsequent reporting date – Costs to sell
= ` 340 – ` 10 = ` 330
Fair value of liabilities on reporting date = ` 80.
At the reporting date, X Ltd. shall present these assets and liabilities separately from
other assets and liabilities in its consolidated financial statements.
In the statement of profit and loss, X Ltd. shall recognise loss on subsequent measurement
(of net assets at fair value) of B Ltd. which equals to ` 20 (` 270 – ` 250).

QUESTION 16

Company A has financial year ending 31st March, 20X0. On 1st June, 20X0, the Company
has classified its Division B as held for sale in accordance with Ind AS 105. How property,
plant and equipment (PPE) for which the company has adopted cost model shall be measured
immediately before the classification as held for sale on 1st June, 20X0?
(RTP NOV. 2022)
SOLUTION :
Paragraph 18 of Ind AS 105 provides that immediately before the initial classification of
the asset (or disposal group) as held for sale, the carrying amounts of the asset (or all the
assets and liabilities in the group) shall be measured in accordance with applicable Ind AS.
In the instant case, Company A should measure the property, plant and equipment (for which
it has adopted cost model), in accordance with Ind AS 16, Property, Plant and Equipment.
Hence, depreciation should be provided upto 31st May, 20X0.
 172 FINANCIAL REPORTING

QUESTION 17

Black Ltd. is a manufacturing company. The following balances as at 31st March, 2021 are
from the audited Financial Statements and as at 30th September, 2021 & 31st March,
2022 are provided by the accountant of Black Ltd:

Asset / (Liability) Carrying Amount as at (` in lakh)

31.3.2021 30.9.2021 31.3.2022
Attributed goodwill 2,560 2,560
Intangible assets 12,680 11,080
Financial assets measured at Fair Val- 4,310 5,260 7,310
ue through Other Comprehensive Income
(FVTOCI)
Property, plant & equipment 16,820 18,670
Deferred tax assets 3,120 3,120 2,970
Current assets: inventory, receivables, cash 8,640 7,040 4,860
& cash equivalents
Current liabilities (11,110) (13,230) (16,190)
Non-current liabilities: Provisions (3,670) (4,610) (4,610)
Total 33,350 29,890 (5,660)

Black Ltd. decided to sell the business on 30th September, 2021. The business meets the
condition of disposal group classified as held for sale on that date in accordance with Ind
AS 105. However, it does not meet the conditions to be classified as discontinued opera-
tions in accordance with Ind AS 105. Black Ltd. proposed to sell the disposal group at `
26,000 lakh. The costs to sell is estimated at ` 200 lakh.
As at 31st March, 2022, there has been no change to the plan to sell the disposal group and
Black Ltd. still expects to sell it within one year of initial classification. The disposal group
has not been trading well and its fair value less costs to sell has fallen to ` 19,738 lakh.
You are asked to calculate the value of all assets / liabilities within the disposal group as at
30th September, 2021 and 31st March, 2022 in accordance with Ind AS 105.
(8 Marks)
(CA FINAL MAY 2022 EXAM)
SOLUTION :
(i) As at 30thSeptember, 2021
The disposal group should be measured at ` 25,800 lakh (` 26,000 lakh - ` 200 lakh).
The impairment write down of ` 4,090 lakh (` 29,890 lakh – ` 25,800 lakh) should be
recorded within profit from continuing operations.
 IND AS 105: NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS 173

The impairment of ` 4,090 should be allocated to the carrying values of the appropri-
ate non-current assets.

Asset / (liability) Carrying Impairment Revised

value as at carrying
30th Sep- value
tember, as per Ind
2021 AS 105
Attributed goodwill 2,560 (2,560) -
Intangible assets 11,080 (570)* 10,510
Financial asset measured at fair val-
ue through other comprehensive in-
come
5,260 - 5,260
Property, plant & equipment
18,670 (960)** 17,710
Deferred tax asset 3,120 - 3,120
Current assets – inventory, receiv-
ables and cash balances

7,040 - 7,040
Current liabilities (13,230) - (13,230)
Non-current liabilities –
provisions (4,610) - (4,610)
Total 29,890 (4,090) 25,800

*[(4,090 – 2,560) x {11,080/(11,080 + 18,670)}]

**[(4,090 – 2,560) x {18,670/(11,080 + 18,670)}]
The impairment loss is allocated first to goodwill and then pro-rata to the other as-
sets of the disposal group within Ind AS 105 measurement scope. Following assets
are not in the measurement scope of this standard- financial asset measured at other
comprehensive income, the deferred tax asset or the current assets. In addition, the
impairment allocation can only be made against assets and is not allocated to liabilities.
(ii) As on 31st March, 2022
All the assets and liabilities, outside the scope of measurement under Ind AS 105, are
remeasured in accordance with the relevant standards. The assets that are remea-
sured in this case under the relevant standards are the financial asset measured at
fair value through other comprehensive income (Ind AS 109), the deferred tax asset
(Ind AS 12), the current assets and liabilities (various standards) and the non-current
174 FINANCIAL REPORTING

liabilities (Ind AS 37).

Asset / (liability) Carrying Change Impairment Revised

amount as on in value carrying
30th Septem- to 31st value as
ber, 2021 March, per
2022 Ind AS
105
Attributed goodwill - - - -
Intangible assets 10,510 - (1,051)* 9,459
Financial asset mea-
sured at fair value
through other com-
prehensive income
5,260 2,050 - 7,310
Property, plant &
equipment 17,710 - (1,771)** 15,939
Deferred tax asset 3,120 (150) - 2,970
Current assets – inventory,
receivables and cash bal-
ances
7,040 (2,180) - 4,860
Current liabilities (13,230) (2,960) - (16,190)
Non-current liabilities –
provisions (4,610) - - (4,610)
Total 25,800 (3,240) (2822) 19,738

*[2,822 x {10,510 /(10,510 + 17,710)}]

**[2,822 x {17,710 /(10,510 + 17,710)}]

QUESTION 18

Venus limited had purchased on 1st April 2020, a PPE kits manufacturing plant for ` 12.00
lakhs. The useful life of the plant is 8 years. The deprecation is provided on straight line
method. On 30th September 2022, Venus Limited temporarily discontinues the production
at the said plant due to decline in the demand for PPE kits. However, the plant is maintained
in a workable condition and it can be used in future whenever the demand picks up.
The accountant of Venus Limited decided to treat the plant as held for sale under Ind AS
105 until the demand picks up. She, thus measures the plant at lower of carrying amount
and fair value less cost to sell. She also stopped charging the depreciation for the rest of
 IND AS 105: NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS 175

period as the plant was held for sale. The fair value less cost to sell the said plant on 30th
September, 2022 and 31st March, 2023 was ` 6.75 lakhs and ` 6.00 lakhs respectively.
She performed the following working to determine the carrying amount of the plant on ini-
tial classification as held for sale:

Particulars ` in Lakhs
Purchase price of the plant: 12.00
Less: Accumulated depreciation for 2.5 years
(` 12.00 lakhs/8 years X 2.5 years) 3.75
8.25
Fair value less cost to sales as on 30th September 2022 6.75
The carrying amount is lower of ` 8.25 lakhs and ` 6.75 lakhs 6.75

Balance Sheet extracts as at 31st March 2023

Particulars ` in Lakhs
Assets
Current Assets
Other Current Assets
Assets classified as held for sale 6.00

Discuss whether the above accounting treatment made by the accountant is as per applica-
ble Ind AS. If not, what should be the correct treatment. Provide balance sheet extract as
at 31st March 2023 together with the computation of the carrying value of PPE as at 31st
March, 2023.
(CA FINAL MAY 2023 EXAM)
 IND AS116: LEASES ACCOUNTING 251

QUESTION 50

The Company has entered into a lease agreement for its retail store as on 1st April, 20X1
for a period of 10 years. A lease rental of ` 56,000 per annum is payable in arrears. The
Company recognized a lease liability of ` 3,51,613 at inception using an incremental borrowing
rate of 9.5% p.a. as at 1st April 20X1. As per the terms of lease agreement, the lease rental
shall be adjusted every 2 years to give effect of inflation. Inflation cost index as notified
by the Income tax department shall be used to derive the lease payments. Inflation cost
index was 280 for financial year 20X1-20X2 and 301 for financial year 20X3-20X4. The
current incremental borrowing rate is 8% p.a.
Show the Journal entry at the beginning of year 3, to account for change in lease.
(RTP NOV. 2021)
QUESTION 51

Case I
Scenario 1: The ‘last mile‛ is a dedicated cable that connects Entity Y‛s network with the
end customer‛s device. The use of this cable is at the discretion of the customer. Entity
Y decides the location of end points and has right to replace the lines (dedicated cable),
however it is not practical to replace the lines, since replacement would require additional
costs to be incurred without any corresponding benefit. Whether the arrangement would
be within the scope of Ind AS 116?
Scenario 2: If it is practical for the Entity Y to replace the lines and Entity Y would
benefit from this replacement, would the answer be different?
Case II
Customer X enters into a 10-year contract with a utility company, Entity Y, for the right
to use three specified, physically distinct fibers within a larger cable connecting Mumbai to
Delhi. Customer makes the decisions about the use of the fibers by connecting each end of
the fibers to its electronic equipment. Entity Y owns extra fibers but can substitute those
for Customer‛s fibers only for reasons of repairs, maintenance or malfunction. The useful
life of the fiber is 15 years. Whether this arrangement is covered under Ind AS 116?
Case III
Customer X enters into a 10-year contract with Entity Y for the right to use a specified
amount of capacity within a cable connecting Mumbai to Delhi. The specified amount is
equivalent to Customer X having the use of the full capacity of three fiber strands within the
cable (the cable contains multiple fibers with similar capacities). Entity Y makes decisions
about the transmission of data (i.e., Entity Y lights the fibers, makes decisions about which
fibers are used to transmit Customer‛s traffic). The useful life of the fiber is 15 years.
Whether this arrangement is covered under Ind AS 116?
(RTP MAY 2022)
 252 FINANCIAL REPORTING

QUESTION 52 (MANUFACTURE/DEALER) (VVI)

A company manufactures specialised machinery. The company offers customers the choice
of either buying or leasing the machinery. A customer chooses to lease the machinery.
Details of the arrangement are as follows:
(i) The lease commences on 1st April, 20X1 and lasts for three years.
(ii) The lessee is required to make three annual rentals payable in arrears of ` 57,500.
(iii) The leased machinery is returned to the lessor at the end of the lease.
(iv) The fair value of the machinery is ` 1,50,000, which is equivalent to the selling price
of the machinery
(v) The machinery cost ` 1,00,000 to manufacture. The lessor incurred costs of `
2,500 to negotiate and arrange the lease.
(vi) The expected useful life of the machinery is 3 years. The machinery has an expected
residual value of ` 10,000 at the end of year three. The estimated residual value does
not change over the term of the lease.
(vii) The interest rate implicit in the lease is 10.19%. The lessor classifies the lease as a
finance lease.
How should the Lessor account for the same in its books of accounts? Pass necessary
journal entries.
(RTP NOV 2022)
SOLUTION :
The cost to the lessor for providing the machinery on lease consists of the book value of the
machinery (` 1,00,000), plus the initial direct costs associated with entering into the lease
(` 2,500), less the future income expected from disposing of the machinery at the end of
the lease (the present value of the unguaranteed residual value of ` 10,000 discounted @
10.19%, being ` 7,470). This gives a cost of sale of ` 95,030.
The lessor records the following entries at the commencement of the lease:

` `
Lease receivable Dr. 1,50,000
Cost of sales Dr. 95,030
To Inventory 1,00,000
To Revenue 1,42,530
To Creditors/Cash 2,500
 IND AS116: LEASES ACCOUNTING 253

The sales profit recognised by the lessor at the commencement of the lease is therefore
` 47,500 (` 1,42,530 - ` 95,030). This is equal to the fair value of the machinery of `
1,50,000, less the book value of the machinery (` 1,00,000) and the initial direct costs of
entering into the lease (` 2,500). Revenue is equal to the lease receivable (` 1,50,000), less
the present value of the unguaranteed residual value (` 7,470).

Year Lease Lease Interest Decrease Lease

receivable at payments Income (10.19% In lease receivable at
the beginning (`) per annum) (`) receivable the end of
of year (`) (b) (c) (`) (d)=(b)- year (`)
(a) (c) (e)=(a)-(d)
1 1,50,000 57,500 15,285 42,215 1,07,785
2 1,07,785 57,500 10,983 46,517 61,268
3 61,268 57,500 6,232* 51,268 10,000

*Difference is due to approximation

The lessor will record the following entries:

` `
Year 1 Cash/Bank Dr. 57,500
To Lease receivable 42,215
To Interest income 15,285
Year 2 Cash/Bank Dr. 57,500
To Lease receivable 46,517
To Interest income 10,983
Year 3 Cash/Bank Dr. 57,500
To Lease receivable 51,268
To Interest income 6,232

At the end of the three-year lease term, the leased machinery will be returned to the
lessor, who will record the following entries:

` `
Inventory Dr. 10,000
To Lease receivable 10,000
254 FINANCIAL REPORTING

QUESTION 53

The Company has entered into a lease agreement for its retail store as on 1 st April,
20X1 for a period of 10 years. A lease rental of ` 56,000 per annum is payable in arrears.
The Company recognized a lease liability of ` 3,51,613 at inception using an incremental
borrowing rate of 9.5% p.a. as at 1st April 20X1. As per the terms of lease agreement,
the lease rental shall be adjusted every 2 years to give effect of inflation. Inflation cost
index as notified by the Income tax department shall be used to derive the lease payments.
Inflation cost index was 280 for financial year 20X1-20X2 and 301 for financial year 20X3-
20X4. The current incremental borrowing rate is 8% p.a.
Show the Journal entry at the beginning of year 3, to account for change in lease.
(MTP SEP 2022)

QUESTION 54

• Jakob Ltd. entered into a contract for lease of machinery with Jason Ltd. on 1.1.2018.
The initial term of the lease is 6 years with a renewal option of further 2 years.
• The annual payments for initial term and renewal term are ` 2,80,000 and ` 3,50,000
respectively.
• The annual lease payment will increase based on the annual increase in the CPI at the
end of the preceding year. For example, the payment due on 1.1.2019 will be based on
the CPI available at 31.12.2018.
• Jakob Ltd.‛s incremental borrowing rate at the lease inception date and as at 1.1.2021
is 8% and 10% respectively and the CPI at lease commencement date and as at 1.1.2021
is 250 and 260 respectively.
• At the lease commencement date, Jakob Ltd. did not think that it will be a viable op-
tion to renew the lease but in the first quarter of 2021, Jakob Ltd. made some major
changes in the retail store which increases its economic life by five years.
• Jakob Ltd. determined that it would only recover the cost of the improvements if it
exercises the renewal option, creating a significant economic incentive to extend.
Jakob Ltd. asked your opinion whether remeasurement of lease is required in the first
quarter of 2021.
(10 Marks)
(CA FINAL DEC. 2021 EXAM)
 IND AS116: LEASES ACCOUNTING 255

SOLUTION :
Since in the first quarter of 2021, Jakob Ltd. is reasonably certain that it will exercise its
renewal option, it is required to re-measure the lease in the first quarter of 2021.
The following table summarizes information pertinent to the lease re-measurement:

Re-measured lease term 5 years (3 years remaining in

the initial term plus 2 years
in the
renewal period)
Jakob Ltd.‛s incremental borrowing rate on the 10%
re-measurement date
CPI available on the re-measurement date 260
Right-of-use asset immediately before the re-mea- ` 6,99,019 (Refer note 2)
surement
Lease liability immediately before the re-measurement ` 7,79,417 (Refer note 2)

Procedure to re-measure the lease liability:

To re-measure the lease liability, Jakob Ltd. would first calculate the present value of the
future lease payments for the new lease term (using the updated discount rate of 10%).
Since the initial lease payments were based on a CPI of 250, the CPI has increased by 4%
[{(260-250)/250} x 100]. As a result, Jakob Ltd. would increase the future lease payments
by 4%.
Computation of present value of the future lease payments based on an updated CPI
of 260:

Year Total
4 5 6 7 8
Lease payment 2,91,200 2,91,200 2,91,200 3,64,000 3,64,000 16,01,600
Discount @ 10% 1 0.909 0.826 0.751 0.683
Present value 2,91,200 2,64,701 2,40,531 2,73,364 2,48,612 13,18,408

Calculation of the adjustment to the lease liability on re-measurement by comparing

the recalculated and original lease liability balances on the re- measurement date:

Revised lease liability 13,18,408

Original lease liability (7,79,417)
Adjustment to the lease liability on re-measurement 5,38,991
256 FINANCIAL REPORTING

Based on above calculations, it is clear that re-measurement of lease is required and ac-
cordingly adjustment to lease liability and ROU asset is required in the first quarter of
2021.
Journal entry to adjust the lease liability

ROU Asset Dr. 5,38,991

To Lease liability 5,38,991
(Being lease liability and ROU asset adjusted on ac-
count of re-measurement)

Working Notes:
1. Calculation of ROU asset before the date of re-measurement

Year be- Lease Payment Present value fac- Present value of lease
ginning (A) tor @ 8% (B) payments (A x B = C)

1 2,80,000 1.000 2,80,000

2 2,80,000 0.926 2,59,280
3 2,80,000 0.857 2,39,960
4 2,80,000 0.794 2,22,320
5 2,80,000 0.735 2,05,800
6 2,80,000 0.681 1,90,680
Lease liability as at the commencement date 13,98,040

Or
(2,80,000 x Sum of PV (4.993) @ 8% for 5 years = 13,98,040)
2. Calculation of Lease Liability and ROU asset at each year end
Year Lease Liability ROU asset
Initial value Lease pay- Interest Closing bal- Initial Value Depreciation for Closing bal-
ments expense ance 6 years ance
@ 8%
a b c = (a-b) x d = a-b+c
8%
1 13,98,040 2,80,000 89,443 12,07,483 13,98,040 2,33,007 11,65,033
2 12,07,483 2,80,000 74,199 10,01,682 11,65,033 2,33,007 9,32,026
3 10,01,682 2,80,000 57,735 7,79,417 9,32,026 2,33,007 6,99,019
4 7,79,417 6,99,019
 IND AS116: LEASES ACCOUNTING 257

As per the information given in the third bullet point at page 10, it is inferred that
annual lease payments are due at the beginning of the year. Hence, it can be inferred
that the annual lease payment of 2021 had been paid on 1.1.2021. Accordingly lease
liability considered for the purpose of remeasurement would be of 5th, 6th, 7th and
8th year only
i.e. for 4 years. However, since remeasurement has been decided in the first quarter
of 2021, ROU asset balance before remeasurement will be after depreciation of 3
years i.e. till 2020.
Based on the above contention, following alternative solution is also possible:
Since in the first quarter of 2021, Jakob Ltd. is reasonably certain that it will exercise
its renewal option, it is required to re-measure the lease in the first quarter of 2021.
The following table summarizes information pertinent to the lease re-measurement:

Re-measured lease term 4 years (2 years remaining in

the initial term plus 2 years
in the
renewal period)
Jakob Ltd.‛s incremental borrowing rate on the 10%
re-measurement date
CPI available on the re-measurement date 260
Right-of-use asset immediately before the re-mea- ` 6,99,019 (Refer note 2)
surement
Lease liability immediately before the re-measure- ` 5,39,370 (Refer note 2)
ment

Procedure to re-measure the lease liability:

To re-measure the lease liability, Jakob Ltd. would first calculate the present value of
the future lease payments for the new lease term (using the updated discount rate of
10%).
Since the initial lease payments were based on a CPI of 250, the CPI has increased by
4% [{(260-250)/250} x 100]. As a result, Jakob Ltd. would increase the future lease
payments by 4%.
Computation of present value of the future lease payments based on an updated
CPI of 260:

Year Total
5 6 7 8
Lease payment 2,91,200 2,91,200 3,64,000 3,64,000 13,10,400
258 FINANCIAL REPORTING

Discount @ 10% 1 0.909 0.826 0.751

Present value 2,91,200 2,64,701 3,00,664 2,73,764 11,30,329

Calculation of the adjustment to the lease liability on re-measurement by compar-

ing the recalculated and original lease liability balances on the re- measurement
date:

Revised lease liability 11,30,329

Original lease liability (5,39,370)
Adjustment to the lease liability on re-measurement 5,90,959
Based on above calculations, it is clear that re-measurement of lease is required and
accordingly adjustment to lease liability and ROU asset is required in the first quarter
of 2022.
Journal entry to adjust the lease liability

ROU Asset Dr. 5,90,959

To Lease liability 5,90,959
(Being lease liability and ROU asset adjusted on account of re-measurement)

Working Notes:
1. Calculation of ROU asset before the date of re-measurement
Year Lease Payment Present value factor Present value of lease
begin- (A) @ 8% (B) payments (A x B = C)
ning
1 2,80,000 1.000 2,80,000
2 2,80,000 0.926 2,59,280
3 2,80,000 0.857 2,39,960
4 2,80,000 0.794 2,22,320
5 2,80,000 0.735 2,05,800
6 2,80,000 0.681 1,90,680
Lease liability as at commencement date 1 3,98,040
Or
(2,80,000 x sum of PV (4.993) @ 8% for 5 years = 13,98,040)
 IND AS116: LEASES ACCOUNTING 259

2. Calculation of Lease Liability and ROU asset at each year end

Year Lease Liability ROU asset
Initial value Lease pay- Interest Closing bal- Initial Value Depreciation Closing
ments expense ance for 6 years balance
@ 8%
a b c = (a-b) x d = a-b+c
8%
1 13,98,040 2,80,000 89,443 12,07,483 13,98,040 2,33,007 11,65,033
2 12,07,483 2,80,000 74,199 10,01,682 11,65,033 2,33,007 9,32,026
3 10,01,682 2,80,000 57,735 7,79,417 9,32,026 2,33,007 6,99,019
4 7,79,417 2,80,000 39,953 5,39,370 6,99,019
5 5,39,370

QUESTION 55

Ted entered into a lease contract with lessor to lease 2,000 sqm of retail space for 5 years.
The rentals are payable monthly in advance. The lease commenced on 1st April 2019. In the
year 2020, as a direct consequence of Covid 19 pandemic, Ted has negotiated with the les-
sor which may results in the following situations:
• Lessor agrees a rent concession under which the monthly rent will be reduced by 30%
per month for the 12 months commencing 1st October 2020.
• Ted is granted a rent concession by the lessor whereby the lease payments for the
period October 2020 to December 2020 are deferred. Three months are added to the
end of the lease term at same monthly rent.
• Lessor offers to reduce monthly rent by 50% for the months October 2020 to March
2021 on the condition that its space is reduced from 2,000 sq m to 1,500 sq m.
Analyze the given situations in the light of Ind AS 116 and comment on whether rent con-
cession/deferral is eligible for practical expedient?
(4 Marks)
(CA FINAL JULY 2021 EXAM)
SOLUTION :
Applicability of practical expedient:
The practical expedient applies only to rent concessions occurring as a direct consequence
of the covid-19 pandemic.
As a practical expedient, a lessee may elect not to assess a rent concession as a lease mod-
ification only if all of the following conditions are met:
260 FINANCIAL REPORTING

(a) the change in lease payments results in revised consideration for the lease that is
substantially the same as, or less than, the consideration for the lease immediately
preceding the change;
(b) any reduction in lease payments affects only payments originally due on or before the
30th June, 2021; and
(c) there is no substantive change to other terms and conditions of the contract
Analysis:
Based on above guidance, answer to the given situations with the lessor would be as follows:
• Lessor agrees a rent concession under which the monthly rent will be reduced by 30%
per month for the 12 months commencing 1st October 2020:
The rent deferral does not satisfy the criteria to apply the practical expedient be-
cause out of the listed eligibility criteria given in Ind AS 116, rent concession reduces
lease payments starting from October, 2020 and reduction will continue till Septem-
ber, 2021 which is beyond 30th June 2021. Therefore, Ted is not permitted to apply
the practical expedient.
• Ted is granted a rent concession by the lessor whereby the lease payments for the
period October 2020 to December 2020 are deferred. Three months are added to the
end of the lease term at same monthly rent:
(a) condition is met since revised consideration in the lease is substantially the same
as the original
(b) condition is met since the rent concession only reduces lease payments originally
due in 2020 – i.e. before 30th June 2021.
(c) condition is met since the lessee assesses that three-month extension at the end
of the lease term is with substantially the same lease payments. Hence, it would
not constitute a substantive change.
Since, the rent concession is a direct consequence of COVID-19 and all three condi-
tions are met, rent concession is eligible for application of practical expedient in this
case.
• Lessor offers to reduce monthly rent by 50% for the months October 2020 to March
2021 on the condition that its space is reduced from 2,000 sqm to 1,500 sqm:
The rent concession does not satisfy the criteria to apply the practical expedient be-
cause out of the listed eligibility criteria given in Ind AS 116, there is a substantive
change to the terms and conditions of the lease as there is a change in the scope of
lease by reducing the space from 2,000 sqm to 1,500 sqm. Therefore, Ted is not per-
mitted to apply the practical expedient.
 IND AS116: LEASES ACCOUNTING 261

QUESTION 56

Lessee enters into a 10 years lease for 6000 square metres of office space. The annual
lease payments are ` 1,00,000 payable at the end of each year. The interest rate implic-
it in the lease cannot be readily determined. Lessee‛s incremental borrowing rate at the
commencement date is 8% p.a. At the beginning of the 6th year, lessee and lessor agree to
amend the original lease to reduce the space to only 3,000 square metres of the original
space starting from the first quarter of year 6. The annual fixed lease payments (from year
6 to year 10) are ` 60,000. Lessee‛s incremental borrowing rate at-the beginning of year 6
is 6% p.a.
You are required to analyse the effect of the said modification and give journal entries for
the same in the books of Lessee.
Note: Give your calculation by adopting the present value factor as:

Year 1 2 3 4 5 6 7 8 9 10
8% 0.9259 0.8573 0.7938 0.7350 0.6806 0.6302 0.5835 0.5403 0.5002 0.4632
6% 0.9434 0.8900 0.8396 0.7921 0.7473 0.7050 0.6651 0.6274 0.5919 0.5584

(CA FINAL NOV 2022 EXAM) (8 Marks)

SOLUTION :
In the books of Lessee
Calculation of ROU asset and lease liability before modification:
(in `)

Lease Liability ROU asset

Initial value Lease pay- Interest Closing Initial Depreciation Closing
Year ments expense balance Value balance
@ 8%
a b c=ax d = a-b e F g
8% +c
1 6,71,000 1,00,000 53,680 6,24,680 6,71,000 67,100 6,03,900
(Refer W.N.)
2 6,24,680 1,00,000 49,974 5,74,654 6,03,900 67,100 5,36,800
3 5,74,654 1,00,000 45,972 5,20,626 5,36,800 67,100 4,69,700
4 5,20,626 1,00,000 41,650 4,62,276 4,69,700 67,100 4,02,600
5 4,62,276 1,00,000 36,982 3,99,258 4,02,600 67,100 3,35,500
6 3,99,258 3,35,500
262 FINANCIAL REPORTING

At the effective date of the modification (at the beginning of Year 6), Lessee remeasures
the lease liability based on:
(a) A five-year remaining lease term,
(b) Annual payments of ` 60,000 and
(c) Lessee‛s incremental borrowing rate of 6% p.a.

Year Lease Payment(A) Present value fac- Present value of lease

tor @ 6% (B) payments (A x B = C)
6 60,000 0.9434 56,604
7 60,000 0.8900 53,400
8 60,000 0.8396 50,376
9 60,000 0.7921 47,526
10 60,000 0.7473 44,838
Total 2,52,744

Alternative manner of above calculation:

Annual lease payments x Sum of PVF from year 6th year to 10th year @ 6% discount rate
= ` 60,000 x 4.2124 = ` 2,52,744
Lessee determines the proportionate decrease in the carrying amount of the ROU Asset
on the basis of the remaining ROU Asset (i.e., 3,000 square metres corresponding to 50%
of the original ROU Asset).
50% of the pre-modification ROU Asset (` 3,35,500) is ` 1,67,750.
50% of the pre-modification lease liability (` 3,99,258) is ` 1,99,629.
Consequently, lessee reduces the carrying amount of the ROU Asset by ` 1,67,750 and
the carrying amount of the lease liability by ` 1,99,629 and recognises the difference be-
tween the decrease in the lease liability and the decrease in the ROU Asset (` 1,99,629 – `
1,67,750 = ` 31,879) as a gain in profit or loss account at the effective date of the modifi-
cation (at the beginning of Year 6).
Journal Entry

Particulars Debit (`) Credit (`)

Lease Liability Dr. 1,99,629
To ROU Asset 1,67,750
To Profit & Loss 31,879
 IND AS116: LEASES ACCOUNTING 263

Lessee recognises the difference between the reduced 50% lease liability of ` 1,99,629
and the modified lease liability of ` 2,52,744 (which equals ` 53,115) as an adjustment to
the ROU Asset reflecting the change in the consideration paid for the lease and the revised
discount rate.
Journal Entry

Particulars Debit (`) Credit (`)

ROU Asset 53,115
Dr.
To Lease Liability 53,115

Working Note:
Calculation of Initial value of ROU asset and lease liability:

Year Lease Payment(A) Present value Present value of lease

factor @ 8% (B) payments (A x B = C)
1 1,00,000 0.9259 92,590
2 1,00,000 0.8573 85,730
3 1,00,000 0.7938 79,380
4 1,00,000 0.7350 73,500
5 1,00,000 0.6806 68,060
6 1,00,000 0.6302 63,020
7 1,00,000 0.5835 58,350
8 1,00,000 0.5403 54,030
9 1,00,000 0.5002 50,020
10 1,00,000 0.4632 46,320
6,71,000

Alternative manner of above calculation:

Annual lease payments x Sum of PVF from year 1 to 10 @ 8% discount rate
= ` 1,00,000 x 6.71 = ` 6,71,000
Note: It is assumed that even after modification, annual lease payment will continue to be
made at the end of the year as mentioned under the original terms of the lease.
264 FINANCIAL REPORTING

QUESTION 57

TCO Limited is a telecom operator. Laying of cables across the world is a requirement to
enable the entity to run its business. Cables are also laid under the sea and contracts are
entered into for the same. By virtue of laws of the countries through which the cable pass-
es, the entity is required to restore the sea bed at the end of the contract period. Discuss
the nature of obligation that TCO Limited has in such a case.
(CA FINAL MAY 2023 EXAM)
 IND AS 19: EMPLOYEES BENEFITS 313

SELF PRACTICE QUETIONS

QUESTION 36

ABL Ltd. operates a defined retirement benefits plan on behalf of current and former
employees. ABL Ltd. receives advice from actuaries regarding contribution levels and
overall liabilities of the plan to pay benefits. On 1st April, 20X1, the actuaries advised that
the present value of the defined benefit obligation was ` 60,000. On the same date, the
fair value of the assets of the defined benefit plan was ` 52,000. On 1st April, 20X1, the
annual market yield on high quality corporate bonds was 5%. During the year ended 31st
March 20X2, ABL Ltd. made contributions of ` 7,000 into the plan and the plan paid out
benefits of ` 4200 to retired members. Assume that both these payments were made on
31st March 20X2. The actuaries advised that the current service cost for the year ended
31st March 20X2 was ` 6,200. On 28th February, 20X2, the rules of the plan were amended
with retrospective effect. These amendments meant that the present value of the defined
benefit obligation was increased by ` 1500 from that date. During the year ended 31st
March, 20X2, ABL Ltd. was in negotiation with employee representatives regarding planned
redundancies. The negotiations were completed shortly before the year end and redundancy
packages were agreed. The impact of these redundancies was to reduce the present value
of the defined benefit obligation by ` 8000. Before 31st March, 20X2, ABL Ltd. made
payments of ` 7500 to the employees affected by the redundancies in compensation for
the curtailment of their benefits. These payments were made out of the assets of the
retirement benefits plan. On 31st March, 20X2, the actuaries advised that the present
value of the defined benefit obligation was ` 68,000. On the same date, the fair value of
the assets of the defined benefit plan were ` 56,000.
(RTP NOV. 2019)
SOLUTION
(All numbers in `‛000 unless otherwise stated)
On 31st March 20X2, ABL Ltd. will report a net pension liability in the statement of finan-
cial position. The amount of the liability will be ` 12,000 (68,000 – 56,000).
For the year ended 31st March 20X2, ABL Ltd. will report the current service cost as an
operating cost in the statement of profit or loss. The amount reported will be ` 6,200. The
same treatment applies to the past service cost of ` 1,500.
For the year ended 31st March 20X2, ABL Ltd. will report a finance cost in profit or loss
based on the net pension liability at the start of the year of ` 8,000 (60,000 – 52,000). The
amount of the finance cost will be ` 400 (8,000 x 5%).
The redundancy programme represents the partial settlement of the curtailment of a de-
fined benefit obligation. The gain on settlement of ` 500 (8,000 – 7,500) will be reported in
the statement of profit or loss.
314 FINANCIAL REPORTING

Other movements in the net pension liability will be reported as remeasurement gains or
losses in other comprehensive income.
For the year ended 31st March 20X2, the remeasurement loss will be ` 3,400 (refer W.N.).
Working Note:
Calculation of remeasurement gain or loss: ` ‘000

Liability at the start of the year (60,000 – 52,000) 8,000

Current service cost 6,200
Past service cost 1,500
Net finance cost 400
Gain on settlement (500)
Contributions to plan (7,000)
Remeasurement loss (balancing figure) 3,400
Liability at the end of the year (68,000 – 56,000) 12,000

QUESTION 37

On 1 April 20X1, the fair value of the assets of XYZ Ltdʼs defined benefit plan were valued
at ` 20,40,000 and the present value of the defined obligation was ` 21,25,000. On 31st
March,20X2 the plan received contributions from XYZ Ltd amounting to ` 4,25,000 and
paid out benefits of ` 2,55,000. The current service cost for the financial year ending 31
March 20X2 is ` 5,10,000. An interest rate of 5% is to be applied to the plan assets and
obligations. The fair value of the planʼs assets at 31 March 20X2 was ` 23,80,000, and the
present value of the defined benefit obligation was ` 27,20,000. Provide a reconciliation from
the opening balance to the closing balance for Plan assets and Defined benefit obligation.
Also show how much amount should be recognised in the statement of profit and loss, other
comprehensive income and balance sheet?
(RTP MAY 2020)
SOLUTION :

Reconciliation of Plan assets and Defined benefit obligation

Plan Assets Defined benefit

` obligation
`
Fair value/present value as at 1st April 20X1 20,40,000 21,25,000
Interest @ 5% 1,02,000 1,06,250
Current service cost 5,10,000
 IND AS 19: EMPLOYEES BENEFITS 315

Contributions received 4,25,000 -

Benefits paid (2,55,000) (2,55,000)
Return on gain (assets) (balancing figure) 68,000 -
Actuarial Loss (balancing figure) - 2,33,750
Closing balance as at March 31,20X2 23,80,000 27,20,000

In the Statement of Profit and loss, the following will be recognised:

`
Current service cost 5,10,000
Net interest on net defined liability (` 1,06,250 – ` 1,02,000) 4,250
Defined benefit re-measurements recognised in Other Comprehensive Income:
`
Current service cost 5,10,000
Net interest on net defined liability (` 1,06,250 – ` 1,02,000) 4,250
In the Balance sheet, the following will be recognised :
`
Net defined liability (` 27,20,000 – ` 23,80,000) 3,40,000

QUESTION 38

At 1 April, 20X0, the fair value of the Plan Assets was ` 10,00,000. The Plan paid benefits of
` 1,90,000 and received contributions of ` 4,90,000 on 30 September, 20X0. The company
computes the Fair Value of Plan Assets to be ` 15,00,000 as on 31 March, 20X1 and the
Present Value of the Defined Benefit Obligation to amount to ` 14,79,200 on the same date.
Actuarial losses on defined benefit obligation were ` 6,000.
Compounding happens half-yearly. The normal interest rate for 6 months period is 10% per
annum, while the effective interest rate for 12 months period is based on the following
data:
At 1 April, 20X0, the company made the following estimates based on market prices at that
date:
Particulars %
Interest and Dividend Income, after tax payable by the fund 9.25
Add: Realized and Unrealized Gains on Plan Assets (after tax) 2.00
Less: Administration Costs (1.00)
Expected Rate of Return 10.25
316 FINANCIAL REPORTING

Determine actual return and expected return on plan asset. Also compute amount to be
recognized in ‘Other Comprehensive Income‛ in this case.
(RTP MAY 2021)
SOLUTION :

Computation of Expected Return on Plan Assets

Particulars `
Return on ` 10,00,000 for 20X0-20X1 at 10.25% = ` 10,00,000 x 10.25% 1,02,500
Add: Return on ` 3,00,000 for 6 months at 10% Normal Rate = [3,00,000
(Inflow ` 4,90,000 less Payments ` 1,90,000) x 10% x 6/12] 15,000
Expected Return on Plan Assets 1,17,500

Computation of Actual Return on Plan Assets

Particulars `
Fair Value of Plan Assets at the year-end – 31 March 20X1 15,00,000
Less: Fair Value of Plan Assets at the beginning – 1 April 20X0 (10,00,000)
Less: Contributions received during the year 20X0-20X1 (4,90,000)
Add: Benefits paid during the year 20X0-20X1 1,90,000
Actual Return on Plan Assets 2,00,000

Computation of Net Actuarial Gain

Particulars `
Actual Return on Plan Assets 2,00,000
Less: Expected Return on Plan Assets (1,17,500)
Actuarial Gain on Plan Assets 82,500
Less: Actuarial Loss on Defined Benefit Obligation (given) (6,000)
Net Actuarial Gain to be recognized in ‘Other Comprehensive
Income‛ 76,500

QUESTION 39

On 1st April, 2021, the fair value of the assets of Raj Ltd.‛s defined benefit plan were val-
ued at ` 20,40,000 and the present value of the defined obligation was ` 21,25,000. On 31st
March, 2022, the plan received contributions from Raj Ltd. amounting to ` 4,75,000 and
paid out benefits of ` 2,65,000. The current service cost for the financial year ending 31st
March, 2022 is ` 5,10,000. An interest rate of 5% per annum is to be applied to the plan as-
sets and obligations. The fair value of the plan assets at 31st March, 2022 was ` 23,90,000,
and the present value of the defined benefit obligation was ` 27,20,000.
 IND AS 19: EMPLOYEES BENEFITS 317

Provide a reconciliation from the opening balance to the closing balance for Plan assets and
Defined benefit obligation. Also show how much amount should be recognized in the state-
ment of profit and loss, other comprehensive income and balance sheet?
(7 Marks)
(CA FINAL MAY 2022 EXAM)
SOLUTION :
Reconciliation of Plan assets and Defined benefit obligation
Plan Assets Defined benefit
obligation
` `
Fair value/present value as at 1st April, 2021 20,40,000 21,25,000
Interest @ 5% 1,02,000 1,06,250
Current service cost 5,10,000
Contributions received 4,75,000 -
Benefits paid (2,65,000) (2,65,000)
Return on gain (assets) (balancing figure) 38,000 -
Actuarial Loss (balancing figure) - 2,43,750
Closing balance as at 31st March, 2022 23,90,000 27,20,000
In the Statement of Profit and Loss, followings will be recognised:
`
Current service cost 5,10,000
Net interest on net defined liability (` 1,06,250 – ` 1,02,000) 4,250
In Other Comprehensive Income, following Defined Benefits re-measurements will be
recognised:
`
Loss on defined benefit obligation (2,43,750)
Gain on plan assets 38,000
(2,05,750)
In the Balance Sheet, following Net Defined Liability will be recognised:
`
Net defined liability (` 27,20,000 – ` 23,90,000) 3,30,000
318 FINANCIAL REPORTING
 INDIAN ACCOUNTING STANDARD 37 319

INDIAN ACCOUNTING STANDARD 37

QUESTION 1

X Shipping Ltd. is required by law to overhaul its shipping fleet once n every 3 years. The
company‛s finance team was of the view that recognizing the cost only when paid would
prevent matching of revenue earned all the time with certain costs of large amounts which
are incurred occasional. Thereby, it has formulated an accounting policy of providing in its
books of account for the future costs of maintenance ( overhauls, annual inspection etc.)
by calculating a rate per hours sailed on sea and accumulating a provision over time. The
provision is adjusted when the expenditure is actually incurred. Is the accounting policy of
X Shipping Ltd. correct?

SOLUTION :
A provision is made for a present obligation arising out of a past event. Overhauling does
not arise out of past event. Even a legal requirement to overhaul does not make the cost of
overhaul a liability, because no obligation exists to overhaul the ships independently of the
company‛s future actions – the company could avoid the future expenditure by its future
actions for example by selling the ships. So there is no present obligation.
As per the standard, financial statements deal with the financial position of an entity at
the end of its reporting period and not its possible position in the future. Therefore, no
provision is recognized for costs that need to be incurred to operate in the future. The
only liabilities recognized in an entity‛s balance sheet are those that exist at the end of the
reporting period.
Therefore, the accounting policy of X Shipping Ltd. is not correct. The company should
adopt the component approach in Ind AS 16 , Property, Plant and Equipment, for accounting
for the refurbishment costs.

 An obligation always involves another party to whom the obligation is owed. It is not
necessary, however, to know the identity of the party to whom the obligation is owed.
 A management or board decision does not give rise to a constructive obligation at the
end of the reporting period unless the decision has been communicated before the end
of the reporting period to those affected by it in a sufficiently specific manner to
raise a valid expectation in them that the entity will discharge its responsibilities.
 An event that does not give rise to an obligation immediately may do so at a later date,
because of changes in the law or because an act ( for example, a sufficiently specific
public statement) by the entity gives rise to a constructive obligation.
332 FINANCIAL REPORTING

SOLUTION :
(a) For a provision to be recognized, Para 14 of Ind AS 37 requires that:
a) an entity has a present obligation (legal or constructive) as a result of a past
event;
b) it is probable that an outflow of resources embodying economic benefits will
required to settle the obligation, and
c) a reliable estimate can be made of the amount of the obligation.
Here, the manufacturer has a present legal obligation. The obligation event is the sale
of the product with a warranty.
Ind AS 37 outlines that the future sacrifice of economic benefits is probable when it is
more likely than less likely that the future sacrifice of economic benefits will required.
The probability that settlement will be required will be determined by considering the
class of obligation (warranties) as a whole. In accordance with para 24 of Ind AS 37,
it is more likely than less likely that a future sacrifice of economic benefits will be
required to settle the class of obligations as a whole.
If a reliable estimate can be made the provision can be measured reliably. Past data
can provide reliable measures, even if the data is not firm specific but rather industry
based. Ind AS 37 notes that only in extremely rare cases, a reliable measure of a
provision cannot be obtained. Difficulty in estimating the amount of a provision under
conditions of significant uncertainty does not justify non-recognition of the provision.
Here, the manufacturer should recognize a provision based on the best estimate of
the consideration required to settle the present obligation as at the reporting date.
(b) The expected value of cost of repairs in accordance with Ind AS 37 is:
(80% x nil) + (15% x ` 20,00,000) + (5% x ` 50,00,000) = 3,00,000 + 2,50,000
= 5,50,000

QUESTION 26

A manufacturer gives warranties to the purchasers of its goods. Under the terms of
the warranty, the manufacturer undertakes to make good, by repair or replacement,
manufacturing defects that become apparent within three years from the date of sale to
the purchasers.
On 30 April 20X1, a manufacturing defect was detected in the goods manufactured by the
entity between 1 March 20X1 and 30 April 20X1.
At 31 March 20X1 (the entity‛s reporting date), the entity held approximately one week‛s
sales in inventories.
The entity‛s financial statements for the year ended 31 March 20X1 have not yet been
finalised.
 INDIAN ACCOUNTING STANDARD 37 333

Three separate categories of goods require separate consideration:

Category 1—defective goods sold on or before 31 March 20X1
Category 2—defective goods held on 31 March 20X1
Category 3—defective goods manufactured in 20X1-20X2
State the accounting treatment of the above categories in accordance with relevant Ind
AS.
(RTP MAY 2021)
SOLUTION :
Category 1—defective goods sold on or before 31 March 20X1
If customer has the option to purchase warranty separately, the warranty is a distinct
service because the entity promises to provide the service to the customer in addition to
the product that has the functionality described in the contract. In that case, entity shall
account for the promised warranty as a performance obligation and allocate a portion of
the transaction price to that performance obligation.
If a customer does not have the option to purchase a warranty separately, an entity shall
account for the warranty in accordance with Ind AS 37, Provisions, Contingent Liabilities
and Contingent Assets, unless it provides the customer with a service in addition to the
assurance that the product complies with agreed-upon specifications. If that is the case,
then, the promised service is a performance obligation. Entity shall allocate the transaction
price to the product and the service.
If an entity promises both an assurance-type warranty and a service-type warranty but
cannot reasonably account for them separately, the entity shall account for both of the
warranties together as a single performance obligation.
A law that requires an entity to pay compensation if its products cause harm or damage
does not give rise to a performance obligation. The entity shall account for such obligations
in accordance with Ind AS 37.
Category 2—defective goods held on 31 March 20X1
At 31 March 20X1, the entity did not have a present obligation to make good the unsold
defective goods that it held in inventories. Accordingly, at 31 March 20X1 the entity should
not recognise a provision in respect of the defective inventories.
For this category, the detection of the manufacturing defect in April 20X1 is an adjusting
event after the end of the reporting period as per Ind AS 10, Events after the End of the
Reporting Period. It provides evidence of a manufacturing defect in inventories held at 31
March 20X1.
Category 3—defective goods manufactured in 20X1-20X2
At 31 March 20X1 the entity did not have a present obligation to make good any defective
334 FINANCIAL REPORTING

goods that it might manufacture in the future. Accordingly, at 31 March 20X1 the entity
should not recognise a provision in respect of the defective goods manufactured in 20X1-
20X2.
For this category, the detection of the manufacturing defect in April 20X1 is a non-
adjusting event after the end of the reporting period as per Ind AS 10, Events After the
End of the Reporting Period.

QUESTION 27

XYZ Ltd. offers a six-month warranty on its small to medium sized equipment, which can
be put to use by the customer with no installation support. The warranty comes with the
equipment and the customer cannot purchase it separately. This equipment is typ ically
sold at a gross margin of 40%. XYZ Ltd. has made a provision of ` 30,000 during the year
ended 31st March, 20X2, which is approximately 1% of its gross margin on the sale of
these equipment. Based on past experience, it is expected that 1% of equipment sold have
been returned as faulty within the warranty period. Faulty equipment returned to XYZ
Ltd. during the warranty period are scrapped and the sale value is fully refunded to the
customer.
Assuming that sales occurred evenly during the year, how should XYZ Ltd. evaluate whether
any additional warranty provision is required on equipment sold in the past as at 31st March,
20X2? Had the warranty period been 2 years instead of six months, what additional criteria
would XYZ Ltd. need to consider?
(RTP MAY 2022)
SOLUTION :
Calculation of additional warranty provisions:
Warranty claim covers 1% of gross margin, whereas customers are refunded the full selling
price. As the goods are scrapped it is assumed XYZ Ltd has no potential for re - imbursement
from its supplier regarding the faulty goods.
A calculation of warranty provision is set out below:
1% of annual gross margin is ` 30,000 therefore 100% of annual gross margin must be
` 30,00,000. Since gross margin is 40%, sales should be ` 75,00,000. As provide in the
question that the sales are evenly spread during the year and given the six month warranty,
half of the sales occurred in the second half of the year is still covered within the warranty
period as follows.
 INDIAN ACCOUNTING STANDARD 37 335

% age Annual Product under Percentage Warranty

sales warranty at expected to provision
31st March, 20X2 be returned

` ` ` `
Gross margin 40% 30,00,000
Selling price 100% 75,00,000 37,50,000 1% 37,500

The warranty provision should therefore be increased by ` 7,500 (` 37,500 – ` 30,000). As

the provision is expected to be used in the next 6 months no discounting is required.
If the warranty period is 2 years:
Since the outstanding period of warranties is 6 months (i.e. less than a year), no discounting
is required. However, if a longer warranty period is to be given, the entity will have to
take into account the effect of the time value of money. The amount of provision shall
be the present value of the expenditures expected to be required to settle the warranty
obligation. (Refer Para 45 of Ind AS 37)
The discount rate shall be a pre-tax rate that reflects current market assessments of the
time value of money and the risks specific to the liability. The discount rate shall not reflect
risks for which future cash flow estimates have been adjusted. (Refer Para 47 of Ind AS
37)

% age Annual sales Product under Percentage Warranty

warranty at expected to provision
31st March, 20X2 be returned
` ` ` `
Gross margin 40% 30,00,000
Selling price 100% 75,00,000 75,00,000 1% 75,000

The warranty provision should therefore be increased by ` 45,000 (` 75,000 – ` 30,000).

Further discounting of provision would be required.

QUESTION 28 (VVI)

HVCL manufactures heavy equipment for construction industry. An order for supply of 90
equipment was received from ABIL. The unit price of the equipment was agreed at ` 190
lakhs each. 64 equipment was supplied during the year 20X1-20X2 and balance quantity
remaining to be supplied as on 31.3.20X2. HVCL has 5 equipment in its inventory as on
31.3.20X2. HVCL considered that the contract was an onerous contract and therefore, the
net realisable value of inventory has been taken as value of inventory as on 31.3.20X2.
336 FINANCIAL REPORTING

The management of HVCL contends that costs incurred towards administrative overheads,
finance charges, R & D expenses, sales overhead, head quarter expenditure etc., are
considered as period cost and hence not considered for creation of provision. Hence, the
same have not been included in the computation of unavoidable cost.
The management of HVCL has submitted the details of costs that have been considered for
creation of provision towards onerous contract:
o Material cost - includes cost of material procured, cost of freight & insurance incurred
for material procurement and handling, loading and unloading charges incurred.
o Labour cost/ Factory Overheads - includes salaries and other expenses of direct
production department, and also expenses allocated from indirect departments to
direct department.
o Material Overheads - Includes salaries and other expenses (including expenses
allocated from other departments) booked under departments linked with materials
like purchases, stores and quality control.
Accordingly, provision has been made considering the above costs only. The value of provision
created for 21 remaining equipment to be produced is as per the working shown below:

Particulars Value (` in lakh)

(i) Cost of production (which includes material cost, labour cost/ 199.00
factory overhead and material overhead)
(ii) Selling price (190.00)
(iii) Differential cost per equipment 9.00
(iv) Differential cost of ` 9 Lakh per equipment for 21 equipment 189.00

Whether the company‛s accounting treatment of cost for creation of provision towards
onerous contracts is in line with the provisions of Ind AS 37?
(RTP NOV. 2022)
 INDIAN ACCOUNTING STANDARD 21 9

20X7 at a premium and the effective annual interest rate implicit in the loan is 12%. The
appropriate measurement basis for this loan is amortised cost. Relevant exchange rates
are as follows:
- 1st April, 20X1 - FCY 1 = ` 2.50.
- 31st March, 20X2 – FCY 1 = ` 2.75.
- Average rate for the year ended 31st Match, 20X2 – FCY 1 = ` 2.42. The functional
currency of the group is Indian Rupee.
What would be the appropriate accounting treatment for the foreign currency loan in the
books of Makers Ltd. for the FY 20X1-20X2? Calculate the initial measurement amount
for the loan, finance cost for the year, closing balance and exchange gain / loss.
(RTP MAY 2020)

QUESTION 15

PQR Holdings Limited is based in London and has Pound sterling (“GBP”) as its functional
and presentation currency. On 1st April, 20X1, PQR Holdings Limited incorporated PQR
India Limited as its wholly owned subsidiary in India. PQR India will be engaged in trading
of items purchased from PQR Holdings. The shares of PQR India, having a face value of
` 10 each amounting to total of ` 500 crore, were issued to PQR Holdings in GBP on 1st
April, 20X1.
PQR India has adopted Ind AS with effect from its incorporation. In accordance with Ind
AS, management of PQR India has concluded that its functional currency is Indian Rupee
(“INR”). Following is the summarized trial balance of PQR India as on 31st March, 20X2,
being the reporting date of PQR India and PQR Holdings:
(Note: All amounts in the below mentioned trial balance are ` in crore)

S. No. Particulars Debit Credit

Balances Balances
1. Share capital - 500.0
2. Securities premium reserve on issue of equity shares - 150.0
3. Retained earnings - 110.0
4. Long-term borrowings - 30.0
5. Deferred tax liability - 10.0
6. Income tax payable - 25.0
7. Import duty payable - 5.0
8. Employee benefits payable 7.5
9. Sundry trade payables - 2.5
 10 FINANCIAL REPORTING

10. Property, plant and equipment (net of depreciation) 550.0 -

11. Computer software (net of amortisation) 70.0 -
12. Inventories purchased on 15th March, 20X2 200.0
(there is no indicator of impairment)
13. Cash and bank balance 5.0 -
14. Sundry trade receivables 17.0 -
15. Allowance for doubtful trade receivables - 2.0
Total 842.0 842.0

Additional information relating to property, plant and equipment, and computer software:

Line item Date of acquisition

Property, plant and equipment 30th April, 20X1
Computer software 5th May, 20X1

PQR India has adopted the following accounting policy in relation to shareholders‛ funds
to translate equity:

Share capital To be translated using historical exchange rate

Securities premium To be translated using historical exchange rate
Retained earnings To be translated using average exchange rate

Since the presentation currency of PQR Holdings is GBP, PQR India is required to translate
its trial balance from INR to GBP. Following table provides relevant foreign exchange
rates:

Closing spot rate as on 1st April, 20X1 1 INR = 0.0123 GBP

Closing spot rate as on 30th April, 20X1 1 INR = 0.0120 GBP
Closing spot rate as on 5th May, 20X1 1 INR = 0.0119 GBP
Closing spot rate on 15th March, 20X2 1 INR = 0.0108 GBP
Closing spot rate as on 31st March, 20X2 1 INR = 0.0109 GBP
Average exchange rate for the year ended 31st March, 20X2 1 INR = 0.0116 GBP

As the accountant of PQR India, you are required to do the following for its separate
financial statements:
Explain the principle of monetary and non-monetary items. Based on this principle,
bifurcate the line items of the trial balance into monetary and non-monetary items.
Translate the trial balance of PQR India from INR to GBP.
(MTP NOVEMBER 2021)
 INDIAN ACCOUNTING STANDARD 21 11

SOLUTION :
a) Monetary items are units of currency held and assets and liabilities to be received or
paid in a fixed or determinable number of units of currency. Para 15 of Ind AS 21 states
that the essential feature of a monetary item is a right to receive (or an obligation
to deliver) a fixed or determinable number of units of currency. Similarly, a contract
to receive (or deliver) a variable number of the entity‛s own equity instruments or a
variable amount of assets in which the fair value to be received (or delivered) equals a
fixed or determinable number of units of currency is a monetary item.
Conversely, the essential feature of a non-monetary item is the absence of a right
to receive (or an obligation to deliver) a fixed or determinable number of units of
currency.
On the basis of above principles, the line items of trial balance should be bifurcated
as follows:

Particulars Monetary item / Non-

monetary item
Share Capital Non-monetary item
Securities Premium reserve on issue of equity shares Non-monetary item
Retained earnings Non-monetary item
Long-term borrowings Monetary item
Deferred tax liability Non-monetary item
Income tax payable Monetary item
Import duty payable Monetary item
Employee benefits payable Monetary item
Sundry trade payables Monetary item
Property, plant and equipment (net of depreciation) Non-monetary item
Computer software (net of amortization) Non-monetary item
Inventories purchased (there is no indicator of impairment) Non-monetary item
Cash and bank balance Monetary item
Sundry trade receivables Monetary item
Allowance for doubtful trade receivables Monetary item

As per para 38 of Ind AS 21, an entity may present its financial statements in any
currency (or currencies). If the presentation currency differs from the entity‛s
functional currency, it translates its results and financial position into the presentation
currency. For example, when a group contains individual entities with different
 12 FINANCIAL REPORTING

functional currencies, the results and financial position of each entity are expressed
in a common currency so that consolidated financial statements may be presented
(b) Translation of the balances for the purpose of consolidation

Particulars INR in Rate Amount

crore (GBP) in GBP
Property, plant and equipment (net of depreciation) 550.0 0.0109 5.995
Computer software (net of amortization) 70.0 0.0109 0.763
Inventories 200.0 0.0109 2.18
Cash and bank balance 5.0 0.0109 0.0545
Sundry trade receivables net of allowance for
doubtful
trade receivables (17.0-2.0) 15.0 0.0109 0.1635
Total Assets 840.0 9.156
Share Capital 500.0 0.0123 6.15
Securities Premium reserve 150.0 0.0123 1.845
Retained earnings 110.0 0.0116 1.276
Long-term borrowings 30.0 0.0109 0.327
Deferred tax liability 10.0 0.0109 0.109
Income tax payable 25.0 0.0109 0.2725
Import duty payable 5.0 0.0109 0.0545
Employee benefits payable 7.5 0.0109 0.08175
Sundry trade payables 2.5 0.0109 0.02725
Foreign Currency Translation reserve recognised (0.987)
in OCI (balancing figure)
Total Equity and liabilities 840.0 9.156

QUESTION 16

Supplier, A Ltd., enters into a contract with a customer, B Ltd., on 1st January, 2018 to
deliver goods in exchange for total consideration of USD 50 million and receives an upfront
payment of USD 20 million on this date. The functional currency of the supplier is INR.
The goods are delivered and revenue is recognised on 31st March, 2018. USD 30 million is
received on 1st April, 2018 in full and final settlement of the purchase consideration.
State the date of transaction for advance consideration and recognition of revenue. Also
 INDIAN ACCOUNTING STANDARD 21 13

state the amount of revenue in INR to be recognized on the date of recognition of revenue.
The exchange rates on 1st January, 2018 and 31st March, 2018 are ` 72 per USD and ` 75
per USD respectively.
(RTP MAY 2019)
SOLUTION :
This is the case of Revenue recognised at a single point in time with multiple payments. As
per the guidance given in Appendix B to Ind AS 21:
A Ltd. will recognise a non-monetary contract liability amounting ` 1,440 million, by translating
USD 20 million at the exchange rate on 1st January, 2018 ie ` 72 per USD.
A Ltd. will recognise revenue at 31st March, 2018 (that is, the date on which it transfers
the goods to the customer).
A Ltd. determines that the date of the transaction for the revenue relating to the advance
consideration of USD 20 million is 1st January, 2018. Applying paragraph 22 of Ind AS 21,
A Ltd. determines that the date of the transaction for the remainder of the revenue as
31st March, 2018.
On 31st March, 2018, A Ltd. will:
• derecognise the non-monetary contract liability of USD 20 million and recognise USD
20 million of revenue using the exchange rate as at 1st January, 2018 ie ` 72 per USD;
and
• recognise revenue and a receivable for the remaining USD 30 million, using the exchange
rate on 31st March, 2018 ie ` 75 per USD.
• The receivable of USD 30 million is a monetary item, so it should be translated using
the closing rate until the receivable is settled.

QUESTION 17

Global Limited, an Indian company acquired on 30th September, 20X1 70% of the share
capital of Mark Limited, an entity registered as company in Germany. The functional currency
of Global Limited is Rupees and its financial year end is 31st March, 20X2.
(i) The fair value of the net assets of Mark Limited was 23 million EURO and the purchase
consideration paid is 17.5 million EURO on 30th September, 20X1.
The exchange rates as at 30th September, 20X1 was ` 82 / EURO and at 31st March,
20X2 was ` 84 / EURO.
What is the value at which the goodwill has to be recognised in the financial statements
of Global Limited as on 31st March, 20X2?
(ii) Mark Limited sold goods costing 2.4 million EURO to Global Limited for 4.2 million
EURO during the year ended 31st March, 20X2. The exchange rate on the date of
 14 FINANCIAL REPORTING

purchase by Global Limited was ` 83 / EURO and on 31st March, 20X2 was ` 84 / EURO.
The entire goods purchased from Mark Limited are unsold as on 31st March, 20X2.
Determine the unrealised profit to be eliminated in the preparation of consolidated
financial statements.
(RTP NOV. 2019)
SOLUTION :
(i) Para 47 of Ind AS 21 requires that goodwill arose on business combination shall be
expressed in the functional currency of the foreign operation and shall be translated
at the closing rate in accordance with paragraphs 39 and 42. In this case the amount
of goodwill will be as follows:

Net identifiable asset Dr. 23 million

Goodwill (bal.fig.) Dr. 1.4 million
To Bank 17.5 million
To NCI (23 × 30%) 6.9 million

Thus, goodwill on reporting date would be 1.4 million EURO x ` 84

= ` 117.6 million
(ii)

Particulars EURO in million

Sale price of Inventory 4.20
Unrealised Profit [a] 1.80

Exchange rate as on date of purchase of Inventory [b] ` 83 / Euro

Unrealized profit to be eliminated [a x b] ` 149.40 million
As per para 39 of Ind AS 21 “income and expenses for each statement of profit and
loss presented (ie including comparatives) shall be translated at exchange rates at the
dates of the transactions”.
In the given case, purchase of inventory is an expense item shown in the statement
profit and loss account. Hence, the exchange rate on the date of purchase of inventory
is taken for calculation of unrealized profit which is to be eliminated on the event of
consolidation.

QUESTION 18

Parent P acquired 90 percent of subsidiary s some years ago. P now sells its entire investment
in S for `1,500 lakh. The net assets of s are 1,000 and the NCI in is ` 100 lakhs. The
cumulative exchange differences that have arisen during P,s ownership are gains of ` 200
 INDIAN ACCOUNTING STANDARD 21 15

lakhs, resulting in P.s foreign currency translation reserve in respect of S having a credit
balance of ` 180 lakhs, while the cumulative amount of exchange differences that have
been attributed to the NCI is `20 lakhs
Calculate P‛s gain on disposal.

QUESTION 19

InfoTech Global Ltd. has a functional currency of USD and needs translate its financial
statements into the functional and presentation currency of InfoTech Inc. (L$)
The following is the statement of financial position of InfoTech Global Ltd. prior to
translation:
USD L$
Property, plant and equipment 50,000
Receivables 9,35,000
Total assets 9,85,000
Issued capital 50,000 30,055
Opening retained earnings 28,000 15,274
Profit for the year 20,000
Accounts payable 8,40,000
Accrued liabilities 47,000
Total equity and liabilities 9,85,000
Requited:
Translate the statement of financial position of InfoTech Global Ltd. into L$ ready for
consolidation by InfoTech Inc.(Share capital and opening retained earnings have been pre-
populated.)
Prepare a working of the cumulative balance of the foreign currency translation reserve.
Additional information:
Relevant exchange rates are:
Rate at beginning of the year L$ 1 = USD.22
Average rate for the year L$ 1 = USD 1. 175
Rate at end of the year L$ = USD 1.13
 16 FINANCIAL REPORTING

QUESTION 20

Hari Ltd. purchased an equipment for 10,200 CAD from Canada supplier on credit basis on
31st January, 2020. Hari Ltd.‛s functional currency is INR. The fair value of the equipment
determined on 31st March, 2020 is 12,100 CAD. The payment to overseas supplier done on
31st March 2021 and the fair value of the equipment remains unchanged for the year ended
on 31st March, 2021.
The exchange rates are as follow:
• On the date of transaction - 1 CAD = INR 57.68
• On 31st March, 2020 - 1 CAD = INR 62.12
• On 31st March 2021 -1 CAD = INR 69.24
Prepare the journal entries for the year ended on 31st March, 2020 and 31st March, 2021
according to lnd AS 21. Tax rate is 25%. Hari Ltd. follows revaluation model as per Ind AS
16 in respect of Property Plant & Equipment.
(5 Marks)
(CA FINAL DEC. 2021 EXAM)
SOLUTION :
Journal Entries
Purchase of an equipment on credit basis on 30th January 2020:

` `
Equipment A/c (10,200 CAD x ` 57.68) Dr. 5,88,336
To Creditors – Equipment A/c 5,88,336
(Being initial transaction recorded at exchange rate on the date
of transaction)

Exchange difference arising on translating monetary item on 31 st March 2020:

` `
Profit & Loss A/c [(10,200 CAD x ` 62.12) – (10,200 CAD x ` 45,288
57.68)] Dr.
To Creditors – Equipment A/c 45,288
(Being loss on exchange difference recognised)
Equipment A/c Dr. 1,09,592
To Revaluation Surplus (OCI) 1,09,592
(Being equipment revalued to 12,100 CAD [` 57.68 x (12,100 CAD
– 10,200 CAD)])
 INDIAN ACCOUNTING STANDARD 21 17

Equipment A/c Dr. 53,724

To Revaluation Surplus (OCI) 53,724
(Being equipment measured at the exchange rate on 31.3.2020
[12,100 CAD x (` 62.12 - ` 57.68)]
Revaluation Surplus (OCI) [(1,09,592 + 53,724) x 25%]Dr. 40,829
To Deferred Tax Liability 40,829
(Being DTL created @ 25% of the total OCI amount)

Exchange difference arising on translating monetary item and settlement of creditors

on 31st March 2021:

` `
Creditors - Equipment A/c (10,200 CAD x ` 62.12) Dr. 6,33,624
Profit & loss A/c [(10,200 CAD x (` 69.24 -` 62.12)] Dr. 72,624
To Bank A/c 7,06,248
(Being final settlement of creditors done)
Equipment A/c [(12,100 CAD x (` 69.24 - ` 62.12)] Dr. 86,152
To Revaluation Surplus (OCI) 86,152
(Being equipment revalued)
Revaluation Surplus (OCI) (86,152 x 25%) Dr. 21,538
To Deferred Tax Liability 21,538
(Being DTL created @ 25% of the total OCI amount)

QUESTION 21

SB Limited is engaged in the business of producing extracts from the natural plants for
pharmaceuticals and Ayurvedic companies. It has a wholly owned subsidiary, UB Limited
which is engaged in the business of pharmaceuticals. UB Limited purchases the pharmaceu-
ticals extracts from its parent company. The demand of UB Limited is very high and hence
to cater its shortfall, UB Limited also purchases the pharmaceutical extracts from other
companies. Purchases are made at the competitive prices.
SB Limited sold pharmaceutical extracts to UB Limited for Euro 10 lakhs on 1st February,
2021. The cost of these extracts was ` 770 lakh in the books of SB Limited at the time of
sale. At the year-end, i.e. 31st March 2021, all these pharmaceutical extracts were lying as
closing stock and payable with UB Limited.
Euro is the functional currency of UB Limited while Indian-Rupee is the functional currency
 18 FINANCIAL REPORTING

of SB Limited.
Following additional information is available:
Exchange rate on 1st February 2021 1 Euro = ` 85
Exchange rate on 31st March 2021 1 Euro = ` 88
Provide the accounting treatment of the above in the books of SB Limited and UB Limited.
Also show its impact on consolidated financial statements. Support your answer by journal
entries, wherever necessary. Assume NRV to be higher than the cost.
(5 Marks)
(CA FINAL JULY 2021 EXAM)
SOLUTION :
Accounting treatment in the books of SB Ltd (Functional Currency INR)
SB Ltd will recognize sales of ` 850 lakh (10 lacs Euro x ` 85)
Profit on sale of inventory = 850 lakh – 770 lakh = ` 80 lakh.
On balance sheet date receivable from UB Ltd. will be translated at closing rate i.e. 1 Euro
= ` 88. Therefore, unrealised forex gain will be recorded in standalone profit and loss of `
30 lakh [i.e. (` 88 - ` 85) x 10 lakh Euro].
Journal Entries

Date (` in (` in
lakh) lakh)
1.2.2021 UB Ltd. A/c Dr. 850
To Sales 850
(Being revenue recorded on initial recognition)
31.3.2021 UB Ltd. A/c Dr. 30
To Foreign exchange difference (unre-
alised) 30
(Being foreign exchange difference recorded at
year end)

Accounting treatment in the books of UB Ltd (Functional currency EURO)

Date in Euros in Euros

1.2.2021 Purchase account Dr. 10 lakh
To SB limited 10 lakh
 INDIAN ACCOUNTING STANDARD 21 19

(Being purchased recorded at the date of trans-

action)

UB Ltd will recognize inventory on 1st February, 2021 of Euro 10 lakh which will also be its
closing stock at year end
Accounting treatment in the consolidated financial statements
Receivable and payable in respect of abovementioned sale / purchase between SB Ltd and
UB Ltd will get eliminated
The closing stock of UB Ltd will be recorded at lower of cost or NRV.
Since the question ask to assume that NRV is higher than cost, inventory will be measured
at cost only. Therefore, no write off is required.
The amount of closing stock of ` 850 lakh include two components–
• Cost of inventory for ` 770 lakh ; and
• Profit element of ` 80 lakh; and
At the time of consolidation, the second element amounting to ` 80 lakh will be eliminated
from the closing stock.

(` in lakh) (` in lakh)
Consolidated P&L A/c. Dr. 80
To Inventory 80
(Being profit element of intragroup transaction
eliminated)

QUESTION 22

GEM Ltd., an Indian company acquired 75% of the share capital of VEW Ltd. on 30th Sep-
tember, 2020, an entity registered as company in USA. The functional currency of GEM
Ltd. is Rupees and its financial year end on 31st March, 2021. The functional currency of
VEW Ltd. is USD.
(i) On 30th September, 2020, the fair value of the Net Assets of VEW Ltd. was USD 10
million and the purchase consideration paid was USD 7.8 million. The exchange rate as
at 30th September, 2020 was ` 71.5 per USD and at 31st March, 2021 was ` 73.5 per
USD.
(ii) VEW Ltd. sold goods costing USD 1.9 million to GEM Ltd. for USD 3.1 million during the
year ended 31st March, 2021. The exchange rate on the date of purchase by GEM Ltd.
was ` 70.5 per USD and on 31st March, 2021 was ` 73.5 per USD. 50% of the goods
purchased by GEM Ltd. from VEW Ltd. were unsold as at 31st March, 2021.
 20 FINANCIAL REPORTING

For (i) determine the value at which the Goodwill should be recognized in the financial
statements of GEM Ltd. as at 31st March, 2021.
For (ii) determine the unrealized profit to be eliminated in the preparation of consolidated
financial statements of GEM Ltd. for the year ending on 31st March, 2021.
(6 Marks)
(CA FINAL MAY 2022 EXAM)
SOLUTION :
(i) Para 47 of Ind AS 21 requires that goodwill arose on business combination shall be
expressed in the functional currency of the foreign operation and shall be translated
at the closing rate in accordance with paragraphs 39 and 42.
When NCI is measured at proportionate share of net assets, the amount of good-
will will be as follows:

Net identifiable asset Dr. USD 10 million

Goodwill (bal. fig.) Dr. USD 0.30 million
To Bank (Purchase consideration) USD 7.80 million
To NCI (10 x 25%) USD 2.50 million

= USD 0.30 million x ` 73.50 = ` 22.05 million

Alternatively, when NCI is measured at fair value, the amount of goodwill will be
as follows:

Net identifiable asset Dr. USD 10 million

Goodwill (bal. fig.) Dr. USD 0.40 million
To Bank (Purchase consideration) USD 7.80 million
To NCI (10 x 25%) USD 2.60 million

Thus, goodwill on reporting date in the books of GEM Ltd. would be

= USD 0.40 million x ` 73.50 = ` 29.40 million
(ii) Calculation of unrealised profit

Particulars USD in million

Sale price of inventory 3.10
Cost of inventory 1.90
Profit earned by VEW Ltd. 1.20
Unrealised profit (1.20 x 50%) [a] 0.60
INDIAN ACCOUNTING STANDARD 21 21

Exchange rate as on date of purchase of inventory [b] ` 70.50 / USD Unrealized profit
to be eliminated [a x b] = USD 0.60 million x ` 70.50 = ` 42.30 million.
As per para 39 of Ind AS 21, income and expenses for each statement of profit and
loss presented (ie including comparatives) shall be translated at exchange rates at the
dates of the transactions.
In the given case, purchase of inventory is an expense item shown in the statement
profit and loss. Hence, the exchange rate on the date of purchase of inventory is tak-
en for calculation of unrealized profit which is to be eliminated while preparation of
consolidated financial statements.
 IND AS 12: INCOME TAXES 47

QUESTION 29

QA Ltd. Is in the process of computation of the deferred taxes as per applicable Ind AS
and wants guidance on the tax treatment for the following:
QA Ltd. does not have taxable income as per the applicable tax laws, but pays Minimum
alternate Tax‛(MAT) based on its books profits The tax paid under MAT can be carried
forward for the next 10 years and as per the Company projections submitted to its bankers,
it is in a position to get credit for the some by the end of eighth year. The Company is
recognising the MAT credit as a current asset under IGAAP. The amount of MAT credit as
on 31st March, 2016 is ` 8.5 crores and as on 31st March,2017 is ` 9.75 crores;
The Company measures its head office property using the revaluation model. The Property is
revalued every year as on 31st March. On 31st March 2016 the carrying value of the property
(after revaluation) was ` 40 crores whereas its tax base was ` 22 crores. During the Year
ended 31St March, 2017, the Company charged depreciation in its statement of profit and
Loss of ` 2 crores and claimed a tax deduction for tax depreciation of ` 1.25 crores. On 31st
March, 2017 the property was revalued to ` 45 crores. AS per the tax laws, the revaluation
of Property, Plant & Equipment does not affect taxable income at the time of revolution.
The Company has no other temporary differences other than those indicated above. The
Company wants you to compute the deferred tax liability as on 31st March,2017 and the
charge/credit to the Statement of Profit and Loss and/or Other Comprehensive income for
the same Consider the tax rate at 20%
MTP MARCH 2019)

QUESTION 30

The entity has an identifiable asset ASSOTA with a carrying amount of ` 10,00,000. Its
recoverable amount is ` 6,50,000. The tax base of ASSOTA is ` 8,00,000 and the tax
rate is 30%. Impairment losses are not tax deductible. Entity expects to continue to earn
profits in future.
For the identifiable asset ASSOTA, what would be the impact on the deferred tax asset/
liability at the end of the period?
(RTP MAY 2021)
SOLUTION :
As per Ind AS 36, the revised carrying amount of asset ASSOTA would be `6,50,000.
The tax base of asset ASSOTA is given as `8,00,000.
Carrying base of asset = `6,50,000
Tax base of asset = `8,00,000
Since tax base is greater than carrying base of asset, so deferred tax asset would be
 48 FINANCIAL REPORTING

created on the temporary difference of `1,50,000 (`8,00,000 – `6,50,000) at the given

tax rate of 30%.
Hence, Deferred tax asset for the asset ASSOTA would be `1,50,000 x 30% = `45,000.

QUESTION 31

Following is the summarized statement of profit and loss of EARTH Limited as per Ind AS
for the year ended 31st March 20X1:
Particulars ` in Crore
Revenue from operations 1,160.00
Other income 56.00
Total Income (A) 1,216.00
Purchase of stock-in-trade 40.00
Changes in inventories of stock-in-trade 6.00
Employee benefits expense 116.00
Finance costs 130.00
Depreciation and amortization expense 30.00
Other expenses 300.00
Total Expenses (B) 622.00
Profit Before Tax (A-B) 594.00
Current tax 165.40
Deferred tax 1.50
Tax Expenses 166.90
Profit after Tax 427.10

Additional information:
• Corporate income tax rate applicable to EARTH Limited is 30%.
• Other income includes long-term capital gains of ` 10 crore which are taxable at the
rate of 10%.
• Other expenses include the following items which are not deductible for income tax
purposes:

Item ` in Crore
Penalties 1.00
Impairment of goodwill 44.00
Corporate Social Responsibility expense 6.00
 IND AS 12: INCOME TAXES 49

• Other expenses include research and development (R & D) expenditure of ` 8 crore in

respect of which a 200% weighted deduction is available under income tax laws.
• Other income includes dividends of ` 4 crore, which is exempt from tax.
• Profit before tax of ` 594 crore includes (i) agriculture income of ` 55 crore which
is exempt from tax; and (ii) profit of ` 60 crore earned in the USA on which EARTH
Limited is required to pay tax at the rate of 20%.
• Depreciation as per income tax laws is ` 25.0 crore.
During review of the financial statements of EARTH Limited, the CFO multiplied profit
before tax by the income tax rate and arrived at ` 178.2 crore as the tax expense (`
594 crore x 30% = ` 178.2 crore). However, actual income tax expense appearing in the
summarized statement of profit and loss is ` 166.9 crore.
The CFO has sought your help in reconciling the difference between the two tax expense
amounts. Prepare a reconciliation containing the disclosure as required under the relevant
Ind AS.
(RTP NOV 2022)
SOLUTION :
Reconciliation of income tax expense and current tax as per accounting profit for the
year ended 31st March, 20X1

Particulars ` in crore
Accounting profit 594.00
Tax at the applicable tax rate of 30% 178.20
Tax effect of expenses that are not deductible in determining
taxable profits:
Penalties (1.00 x 30%) 0.30
Impairment of goodwill (44.00 x 30%) 13.20
Corporate social responsibility expense (6.00 x 30%) 1.80 15.30
Tax effect of expenses that are deductible in determining
taxable profits:
Research and development expenses (8.00 x 30%) (2.40)
Tax effect of income that are exempted in determining taxable
profits:
Dividend income (Exempt) (4.00 x 30%) 1.20
Agriculture income (Exempt) (55.00 x 30%) 16.50 (17.70)
 50 FINANCIAL REPORTING

Tax effect of income on which different tax rates are used for
determining taxable profits:
Differential income tax on long term capital gain [10.00 x (30% 2.00
- 10%)]
Foreign income in USA [60.00 x (30%-20%)] 6.00 (8.00)
Income tax expense (Current) reported in the Statement of
Profit and Loss for the current year 165.40

Reconciliation of deferred tax:

Particulars ` in crore
Deferred tax in relation to depreciation and amortization [(30 – 25) x
30%] 1.50
Tax expense (deferred) reported in the Statement of Profit or Loss for
the current year 1.50

QUESTION 32

PC Ltd. got incorporated on 1st April, 2020. As on 31.3.2021, the following temporary dif-
ferences exist:
(i) Taxable temporary differences relating to accelerated depreciation of ` 1,24,000.
These are expected to reverse equally over next 4 years.
(ii) Deductible temporary difference relating to preliminary expenses of ` 80,000 ex-
pected to reverse equally over next 5 years.
It is expected that PC Ltd. will continue to make losses for next 5 years. Tax rate is 20%.
Losses can be carried forward but not backwards.
Discuss the treatment of deferred tax as on 31st March, 2021 as per relevant Ind AS.
(5 Marks)
(CA FINAL DEC. 2021 EXAM)
 IND AS 12: INCOME TAXES 51

SOLUTION :
The year-wise anticipated reversal of temporary differences is as under:

Particulars Y e a r Y e a r Y e a r Y e a r Y e a r
ending ending ending ending ending
on 31st on 31st on 31st on 31st on 31st
March, March, March, March, March,
2022 2023 2024 2025 2026
Reversal of taxable tem-
porary difference relat-
ing to accelerated depre-
ciation over next 4 years
(` 1,24,000 / 4) 31,000 31,000 31,000 31,000 Nil
Reversal of deductible
temporary difference re-
lating to preliminary ex-
penses over next 5 years
(` 80,000 / 5) 16,000 16,000 16,000 16,000 16,000

Recognition of deferred tax liability:

PC Ltd. will recognise a deferred tax liability of ` 24,800 on taxable temporary difference
relating to accelerated depreciation of ` 1,24,000 @ 20%.
Recognition of deferred tax asset:
However, it will limit and recognise a deferred tax asset on reversal of deductible tempo-
rary difference relating to preliminary expenses reversing up to year ending 31st March,
2025 amounting to ` 12,800 (` 64,000 @ 20%).
Reversal of deferred tax asset:
No deferred tax asset shall be recognized for the reversal of deductible temporary dif-
ference for the year ending on 31st March, 2026 as there are no taxable temporary dif-
ferences. Further, the future estimation is also a loss. However, if there are tax planning
opportunities that could be identified for the year ending on 31st March, 2026, deferred
tax asset on the remainder of ` 16,000 (` 80,000 – ` 64,000) of deductible temporary dif-
ference could be recognised at the 20% tax rate.
 52 FINANCIAL REPORTING

QUESTOIN 33

Following is the summarized Statement of Profit and Loss of New Age Ltd. as per Ind AS
for the year ended 31.3.2022:
Particulars ` in lakhs
Revenue from operations 1,450.00
Other income 70.00
(A) Total income 1,520.00
Purchase of stock in trade 50.00
Changes in inventories of stock in trade 20.00
Employee benefit expenses 145.00
Finance costs 180.00
Other expenses 375.00
(B) Total expenses 770.00
(C) Profit before tax (A - B) 750.00
(D) Current tax expense 211.65
(E) Profit after tax (C - D) 538.35

Additional information:
(1) Consider that Income tax rate applicable to New Age Ltd. in India is 30%.
(2) ‘Other expenses‛ include the following expenses which are not deductible for income
tax purposes:
(i) Penalties ` 1.50 lakh
(ii) Donations ` 55.00 lakhs
(iii) Impairment of goodwill ` 7.00 lakhs
(3) ‘Other expenses‛ also include expenditure on Scientific Research amounting to ` 10
lakhs in respect of which a 150% weighted deduction is available under income tax
laws.
(4) ‘Other income‛ includes:
(i) Dividends of ` 5 lakhs, which is exempt from tax.
(ii) Long term capital gains of ` 12 lakhs which are taxable at the rate of 10%.
(5) ‘Profit before tax of ` 750 lakhs‛ includes:
(i) Agriculture income of ` 65 lakhs which is exempt from tax; and
(ii) Profit of ` 75 lakhs earned in USA on which New Age Ltd. has paid tax at the
rate of 20%.
 IND AS 12: INCOME TAXES 53

During review of financial statements of New Age Ltd., the CFO multiplied profit be-
fore tax by the income tax rate and arrived at ` 225 lakhs as the tax expenses. How-
ever, the actual income tax expenses appearing in the summarized Statement of Profit
and Loss is ` 211.65 lakhs.
You are required to help the CFO of the company in reconciling the difference be-
tween the tax expense amount.
(6 Marks)
(CA FINAL NOV 2022 EXAM)
SOLUTION :
Reconciliation of income tax expense and current tax as per accounting profit for the
year ended 31st March 2022

Particulars ` in lakhs
Accounting profit 750.00
Tax at the applicable tax rate of 30% 225.00
Tax effect of expenses that are not deductible in determining
taxable profits:
Penalties (1.5 x 30%) 0.45
Impairment of goodwill (7 x 30%) 2.10
Donations (55 x 30%) 16.50 19.05
Tax effect of expenses that are deductible in determining tax-
able profits:
Expenditure on scientific research (10.00 x 50% x 30%) (1.50)
Tax effect of income that are exempted in determining taxable
profits:
Dividend income (Exempt) (5.00 x 30%) 1.50
Agriculture income (Exempt) (65.00 x 30%) 19.50 (21.00)
Tax effect of income on which different tax rates are used for
determining taxable profits:
Differential income tax on long term capital gain [12.00 x (30% 2.40
- 10%)]
Foreign income in USA [75.00 x (30% - 20%)] 7.50 (9.90)
Income tax expense (Current) reported in the Statement of
Profit and Loss for the current year 211.65
 IND AS-24 RELATED PARTY DISCLOSURES 65

QUESTION 23

Mr. Atul is an independent director of a company X Ltd. He plays a vital role in the Management
of X Ltd. and contributes in major decision making process of the organisation. X Ltd. pays
sitting fee of ` 2,00,000 to him for every Board of Directors‛ (BOD) meeting he attends.
Throughout the year, X Ltd. had 5 such meetings which was attended by Mr. Atul
Similarly, a non-executive director, Mr. Naveen also attended 5 BOC meetings and charged `
1,50,000 per meeting. The Accountant of X Ltd. believes that they being not the employees
of the organisation, their fee should not be disclosed as per related party transaction in
accordance with Ind AS 24.
Examine whether the sitting fee paid to independent director and non-executive director
is required to be disclosed in the financial statements prepared as per Ind AS?

QUESTION 24

Mr. X, is the financial controller of ABC Ltd., a listed entity which prepares consolidated
financial statements in accordance with Ind AS. Mr. X has recently produced the final
draft of the financial statements of ABC Ltd. for the year ended 31st March, 20X2 to the
managing director Mr. Y for approval. Mr. Y, who is not an accountant, had raised following
query from Mr. X after going through the draft financial statements:
One of the notes to the financial statements gives details of purchases made by ABC Ltd.
from PQR Ltd. during the period 20X1-20X2. Mr. Y owns 100% of the shares in PQR Ltd.
However, he feels that there is no requirement for any disclosure to be made in ABC Ltd.‛s
financial statements since the transaction is carried out on normal commercial terms and
is totally insignificant to ABC Ltd., as it represents less than 1% of ABC Ltd.‛s purchases.
Provide answers to the query raised by the Managing Director Mr. Y as per Ind AS.

QUESTION 25

Uttar Pradesh State Government holds 60% shares in PQR Limited and 55% shares in ABC
Limited. PQR Limited has two subsidiaries namely P Limited and Q Limited. ABC Limited
has two subsidiaries namely A Limited and B Limited. Mr. KM is one of the Key management
personnel in PQR Limited.

(a) Determine the entity to whom exemption from disclosure of related party transactions
is to be given. Also examine the transactions and with whom such exemption applies.
(b) What are the disclosure requirements for the entity which has availed the exemption?
(RTP NOV. 2019)
 66 FINANCIAL REPORTING

QUESTION 26

S Ltd., a wholly owned subsidiary of P Ltd is the sole distributor of electricity to consumers
in a specified geographical area. A manufacturing facility of P Ltd is located in the said
geographical area and, accordingly, P Ltd is also a consumer of electricity supplied by S Ltd.
The electricity tariffs for the geographical area are determined by an independent rate-
setting authority and are applicable to all consumers of S Ltd, including P Ltd. Whether the
above transaction is required to be disclosed as a related party transaction as per Ind AS
24, Related Party Disclosures in the financial statements of S Ltd.?

QUESTION 27

Mr. X owns 95% of entity A and is its director. He is also beneficiary of a trust that owns
100% of entity B, of which he is a director.
Whether entities A and B are related parties?
Would the situation be different if:
(a) Mr. X resigned as a director of entity A, but retained his 95% holding?
(b) Mr. X resigned as a director of entities A and B and transferred the 95% holding in
entity A to the trust?
(RTP NOV. 2020)

QUESTION 28

Entity A owns 30% of the share capital of entity B and has the ability to exercise significant
influence over it.
Entity B holds the following investments:
• 70% of the share capital of its subsidiary, entity C; and
• 30% of the share capital of entity D, with the ability to exercise significant influence.
Entity A transacts with entities C and D. Should entity A disclose these transactions as
related party transactions in its separate financial statements? Also explain the disclosure
of such transactions in the financial statements of C and D as related party transaction.
(RTP MAY 2022)
SOLUTION :
Entity A should disclose its transactions with entity C in entity A‛s separate financial
statements. Entity C is a related party of entity A, because entity C is the subsidiary of
entity A‛s associate, entity B.
Entity A‛s management is not required to disclose entity A‛s transactions with entity D in
its financial statements. Entity D is not a related party of entity A, because entity A has no
 IND AS-24 RELATED PARTY DISCLOSURES 67

ability to exercise control or significant influence over entity D.

Entity C is required to disclose its transactions with entity A in its financial statements,
because entity A is a related partly.
Entity D is not required to disclose transactions with entity A, because they are not related
parties.
 IND AS-33 : EARNING PER SHARE 83

at par, the holder on maturity can elect to exchange their convertible debentures for
10 crores ordinary shares in the company. On 1st April, 20X1, the prevailing market
interest rate for four-year convertible debentures which had no right of conversion
was 8%. Using an annual discount rate of 8%, the present value of ` 1 payable in four
years is 0.74 and the cumulative present value of ` 1 payable at the end of years one
to four is 3.31.
In the year ended 31st March, 20X3, CAB Limited declared an ordinary dividend of 0.10 paise
per share and a dividend of 0.05 paise per share on the irredeemable preference shares.
Compute the following:

 the finance cost of convertible debentures and its closing balance as on 31st March,
20X3 to be presented in the consolidated financial statements.
 the basic and diluted earnings per share for the year ended 31st March, 20X3. Assume
that income tax is applicable to CAB Limited and its subsidiaries at 25%.
(RTP MAY 2020)

QUESTION 40

Sohan has been recently hired in Zio Life Limited. Since he is facing difficulty in computation
of EPS as per Ind AS 33, guide him by discussing the steps for the calculation of Basic EPS
and Diluted EPS along with the necessary computations for EPS of Year 1.
The following basic facts relate to Company Zio Life Limited.
• Net profit for Year 1 is ` 46,00,000.
• The number of ordinary shares outstanding on 1st April Year 1 is 30,00,000.
The following facts are also relevant for Year 1.
• On 1st April, Zio Life Limited issues 20,00,000 three-year term convertible bonds for
` 1 each.
• Zio Life Limited has an option to settle the principal amount in ordinary shares (every
10 bonds are convertible into one ordinary share) or cash on settlement date.
• The principal amount of the bonds is classified as an equity instrument and the interest
is classified as a financial liability.
• The interest expense relating to the liability component of the bonds is ` 1,800.
• The interest expense is tax-deductible. The applicable income tax rate is 40%.
(MTP OCTOBER 2021)
 84 FINANCIAL REPORTING

QUESTION 41

The following information is available relating to Space India Limited for the Financial Year
20X1-20X2.

Net profit attributable to equity shareholders ` 90,000

Number of equity shares outstanding 16,000
Average fair value of one equity share during the year ` 90

Potential Ordinary Shares:

Options 900 options with exercise price of ` 75

Convertible Preference Shares 7,500 shares entitled to a cumulative dividend of
` 9 per share. Each preference share is convertible
into 2 equity shares.
10% Convertible Debentures of ` 10,00,000 and each debenture is convertible
` 100 each into 4 equity shares

Tax rate 25%

You are required to compute Basic and Diluted EPS of the company for the financial year
20X1-20X2.
(MTP MARCH 2022)

QUESTION 42

An entity issues 2,000 convertible bonds at the beginning of Year 1. The bonds have a
three-year term, and are issued at par with a face value of ` 1,000 per bond, giving total
proceeds of ` 2,000,000. Interest is payable annually in arrears at a nominal annual interest
rate of 6 per cent. Each bond is convertible at any time up to maturity into 250 ordinary
shares. The entity has an option to settle the principal amount of the convertible bonds in
ordinary shares or in cash.
When the bonds are issued, the prevailing market interest rate for similar debt without a
conversion option is 9 per cent. At the issue date, the market price of one ordinary share
is ` 3. Income tax is ignored.
Calculate basic and diluted EPS when

Profit attributable to ordinary equity holders of the parent entity Year 1 ` 1,000,000
Ordinary shares outstanding 1,200,000
Convertible bonds outstanding 2,000
(RTP MAY 2019)
 IND AS-33 : EARNING PER SHARE 85

QUESTION 43

Following information pertains to an entity for the year ending 31 st March 20X1:

Net profit for the year ` 12,00,000

Weighted average number of equity shares outstanding during the 5,00,000 shares
year
Average market price per share during the year ` 20
Weighted average number of shares under option during the year 1,00,000 shares
Exercise price per share under option during the year ` 15

Calculate basic and diluted earnings per share.

(RTP NOV. 2021)

QUESTION 44

Company S is a subsidiary of Company P. Following facts are in respect of Company S:

• Company S has 10,000 ordinary shares and 1,000 options outstanding, of which Company
P owns 9,000 shares and 500 options, respectively.
• The options have an exercise price of ` 40.
• The average market price of Company S‛s ordinary share was ` 50 in 20X1.
• In 20X1, Company S‛s profit was ` 30,000. Following facts are in respect of Company P:
• Company P has 5,000 ordinary shares outstanding.
• In 20X1, Company P‛s profit (excluding any distributed and undistributed earnings of
subsidiaries) was ` 7,000.
• The options outstanding are dilutive at P‛s level.
Determine the diluted EPS of Company P for the year 20X1. Ignore income tax.
(RTP NOV. 2022)
SOLUTION :
To determine the diluted EPS of Company P, the diluted EPS of Company S has to be
calculated first.
Calculation of Company S‛s diluted EPS:
Company S‛s earnings for the period ` 30,000
Weighted average ordinary shares 10,000
Incremental shares (refer W.N.) 200
Company S‛s diluted EPS ` 30,000 / (10,000 + 200)
` 2.94
 86 FINANCIAL REPORTING

Calculation of Company P‛s diluted EPS:

Company P‛s earning for the period ` 7,000
Company P‛s share of Company S‛s earning attributable to
ordinary shares ` 26,460
[(9,000 /10,000) x (2.94 x 10,000)]
Company P‛s share of Company S‛s earning attributable to options ` 294
[(500 /1,000) x (2.94 x 200)]
Company P‛s weighted average ordinary shares outstanding 5,000
Company P‛s diluted EPS = (7,000 + 26,460 + 294) / 5,000 ` 6.75
Working Note:
Computation of Incremental shares related to weighted average options outstanding:
All options are dilutive because their exercise price is below the average market price of
Company S‛s ordinary shares for the period.
The incremental shares are calculated as follows:
Shares issued on assumed exercise of options 1,000
Less: Shares that would be issued at average market Price
[(40 x 1,000)/50] (800)
Incremental shares 200

QUESTOIN 45

From the following information you are asked to calculate (a) Basic and Diluted EPS of Duck
Ltd. and (b) Diluted EPS of Swan Ltd.:

Duck Ltd. Swan Ltd.

Amount Amount
(`) (`)
Income/(Loss) from Continuing Operations 2,52,000 (1,80,000)
Income/(Loss) from Discontinued Operations (4,20,000) 3,25,920
Net Income/(Loss) (1,68,000) 1,45,920
Weighted Average Number of Shares outstanding 80,000 96,000
Incremental common shares outstanding relating to stock 16,000 25,600
options

(CA FINAL DEC. 2021 EXAM)

 IND AS-33 : EARNING PER SHARE 87

SOLUTION :
(a) For Duck Ltd.
I Calculation of Basic EPS
Basic EPS = Profit for the year / Weighted average number of shares outstanding
Basic EPS (Continued Operations) = Profit from continued operations /
Weighted average number of shares outstanding
= ` 2,52,000 / 80,000 = ` 3.15
Basic Loss per share (Discontinued operations) = Loss from discontinued
operations / Weighted average number of shares outstanding
= (` 4,20,000)/80,000=(` 5.25)
Overall Basic Loss per share = (` 1,68,000) / 80,000 = (` 2.10) (i)
II Calculation of Diluted EPS
Diluted EPS = Profit for the year / Adjusted weighted average number of
shares outstanding
EPS (Continued Operations) = Profit from continued operations / Adjusted
weighted average number of shares outstanding
= ` 2,52,000 / 96,000 = ` 2.625
Loss per share (Discontinued operations) = Loss from discontinued operations/
Adjusted weighted average number of shares outstanding
= (` 4,20,000) / 96,000 = (` 4.375)
Overall Diluted Loss per share = (` 1,68,000) / 96,000 = (` 1.75) (ii)
Reporting Status:
The income from continuing operations is the control number, there is a dilution in basic
EPS for income from continuing operations (reduction of EPS from ` 3.15 to ` 2.625).
Therefore, even though there is an anti-dilution [Loss per share reduced from ` 2.10 (i) to
` 1.75 (ii) above], diluted loss per share of ` 1.75 is reported.
(b) For Swan Ltd.
Treatment of potential shares:
In case of loss from continuing operations, the potential shares are excluded since in-
cluding those shares would result into anti-dilution effect on the control number (loss
from continuing operations).
Therefore, the diluted EPS will be calculated as under:
Diluted EPS = Profit for the year / Adjusted weighted average number of
shares outstanding
 88 FINANCIAL REPORTING

Overall Profit = Loss from continuing operations + Gain from discontinued

operations
= (` 1,80,000) + ` 3,25,920 = ` 1,45,920
Weighted average number of shares outstanding = 96,000
Diluted EPS = ` 1,45,920 / 96,000 = ` 1.52
Reporting Status:
The dilutive effect of the potential common shares on EPS for income from discontin-
ued operations and net income would not be reported because of the loss from continu-
ing operations.

QUESTION 46

GOLD Ltd., a manufacturing company, prepares its financial statements on 31st March every
year. On 1st April, 2021, it had issued (a) 10,00,000 ordinary shares and (b) 6% convertible
bonds amounting to ` 1,00,000, the terms of conversion being 120 ordinary shares for every
` 100. On 30th June, 2021, ` 50,000 bonds converted to ordinary shares. The profit for the
year ended 31st March, 2022 is ` 2,50,000. The applicable tax rate is 25%.
Calculate basic and diluted EPS. Ignore the need to split the convertible bonds into liability
and equity element.
(4 Marks)
(CA FINAL MAY 2022 EXAM)
SOLUTION :

Number of shares Profit (`)

Profit 2,50,000
Outstanding ordinary shares 10,00,000
New shares on conversion (weighted average)
[(9/12 x ` 50,000 / 100 x 120)] 45,000
Figures for basic EPS 10,45,000 2,50,000
Basic EPS is (` 2,50,000 / 10,45,000 shares)
= ` 0.239 per share
Dilution adjustments
Unconverted shares (` 50,000 / 100 x 120) 60,000
Interest (` 50,000 x 6% x 0.75 net of tax) 2,250
Converted shares pre conversion adjustment (3/12 15,000
x ` 50,000 / 100 x 120)
 IND AS-33 : EARNING PER SHARE 89

Interest: [3/12 x ` 50,000 x 6% x 0.75 net of tax] 562.50

Diluted EPS is (` 2,52,812.50 / 11,20,000 11,20,000 2,52,812.50
shares) = ` 0.226 per share

QUESTION 47

Jackson Limited is engaged in manufacturing and trading activities. It is in the process

of preparation of consolidated financial statements of the group for the year ended on
31st March 2022. During the year 2021-2022, the company made a profit (after tax) of `
2,10,00,000 of which ` 10,00,000 is attributable to Non-Controlling Interest (NCI). The
long-term finance of the company comprises the following:
(A) 10 crore equity shares of ` 1 each at the beginning of the year and the company has
further issued 2,50,00,000 shares on 1st October 2021 at full market value.
(B) 40 lakh irredeemable preference shares of ` 10 each. These shares were in issue for
the whole of the year ended 31st March 2022. The payment of dividend on these pref-
erence shares is discretionary.
(C) ` 9 crore of 6% convertible debentures issued on 1st April, 2020 and repayable on
31st March, 2025 at par. Interest is payable annually. As an alternative to repayment
at par, the holder on maturity can elect to exchange their convertible debentures for
5 crore ordinary shares in the company. On 1st April, 2021* the prevailing market in-
terest rate for 5 yearly convertible debentures which had no right of conversion was
8%. Using an annual discount rate of 8%, the present value of ` 1 payable in five years
is 0.68 and the cumulative present value of ` 1 payable at the end of years one to five
is 3.99.
In the year ended 31st March, 2022 Jackson Limited declared a dividend of ` 0.10 per
share on the irredeemable preference shares.
You are required to:
(i) Compute the finance cost of convertible debentures and its closing balance as on 31st
March, 2022 to be presented in the consolidated financial statements.
(ii) Compute the basic and diluted earnings per share for the year ended 31st March,
2022. Assume that applicable income tax rate is 30% for Jackson Limited and its sub-
sidiaries.
(8 Marks)
(CA FINAL NOV 2022 EXAM)
 90 FINANCIAL REPORTING

SOLUTION :
(i) Calculation of the liability and equity components on 6% Convertible debentures:
Present value of principal payable at the end of 5th year (` 90,000 thousand x 0.68)
= ` 61,200 thousand
Present value of interest payable annually for 5 years (` 90,000 thousand x 6% x 3.99)
= ` 21,546 thousand
Total liability component = ` 82,746 thousand
Therefore, equity component = ` 90,000 thousand – ` 82,746 thousand
= ` 7,254 thousand
Calculation of finance cost and closing balance of 6% convertible debentures

Year Opening bal- Finance cost Interest paid @ Closing balance

ance @ 8% 6% ` in ‛000
` in ‛000 ` in ‛000 ` in ‛000
a b = a x 8% c d = a + b - c
31.3.2021 82,746 6,620 5,400 83,966
31.3.2022 83,966 6,717 5,400 85,283

Finance cost of convertible debentures for the year ended 31.3.2022 is ` 6,717 thou-
sand and closing balance as on 31.3.2022 is ` 85,283 thousand.
(ii) (a) Calculation of Basic EPS
` in ‛000

Profit for the year attributable to parent company 20,000

Less: Dividend on preference shares (4,000 thousand x ` 0.10) (400)
Profit attributable to equity shareholders 19,600

Weighted average number of shares = 10,00,00,000 + {2,50,00,000 x (6/12*)}

= 11,25,00,000 shares or 1,12,500 thousand shares
Basic EPS = ` 19,600 thousand / 1,12,500 thousand shares
= ` 0.174
 IND AS-33 : EARNING PER SHARE 91

(b) Calculation of Diluted EPS

` in ‛000

Profit for the year 20,000

Less: Dividend on preference shares (4,000 x 0.10) (400)
19,600
Add : Finance cost (as given in the above table) 6,717
Less : Tax @30% (2,015.10) 4,701.90
24,301.90

Weighted average number of shares = 10,00,00,000 + {2,50,00,000 x (6/12)*} +

5,00,00,000
= 16,25,00,000 shares or 1,62,500 thousand shares
Diluted EPS = ` 24,301.90 thousand / 1,62,500 thousand shares = ` 0.150

TEST YOUR KNOWLEDGE

QUESTION 1

ABC 1 January 20X1 Shares in issue 1,000,000

31 March 20X1 (a) Rights issue 1 for 5 at 90 paise
(b) Fair value of shares Re 1 (cum-rights price)
Calculate the number of shares of use in the EPS calculation for the calendar year.

QUESTION 2

1 January Shares in issue 1,000,000

5% Convertible bonds ` 100,000
(terms of conversion 120 ordinary shares for ` 100)
31 March Holders of ` 25,000 bonds converted to ordinary shares.
Profit for the year ended 31 December ` 200,000
Tax rate 30%
Calculate basic and diluted EPS. Ignore the need to split the convertible bonds into liability
and equity elements.
 IND AS-108 OPERATING SEGMENT 111

only be concerned about the returns from overall business. They would like to aggregate
the Segment 1 and Segment 2 for reporting under Operating Segment‛
Required:
Whether it is appropriate to aggregate Segments 1 and 2 with reference to Ind AS 108
‘Operating Segments‛? and
Discuss, in the above context, whether disclosure of segment information is relevant to an
investor‛s appraisal of financial statements?

QUESTION 22

An entity has branches in different parts of the country - catering to different customers
and selling local made products (a product of one region is not sold in any other region). No
region or product contributes more than 5% to total revenue of the entity.
Discuss how many segments are reportable?

QUESTION 23

GH Ltd. has four distinct operating segments. The management of GH is concerned as it

is unsure on how common costs be reasonably allocated to different operating segments.
They intend to allocate management charges, interest costs of internal funding, cost of
management of properties and pension costs.
Whether such costs need to conform to the accounting policies as used to prepare the
financial statements?

QUESTION 24

X Ltd. has identified 4 operating segments for which revenue data is given below:

External Sale (`) Internal Sale (`) Total (`)

Segment A 30,00,000 Nil 30,00,000
Segment B 6,50,000 Nil 6,50,000
Segment C 8,50,000 1,00,000 9,50,000
Segment D 5,00,000 49,00,000 54,00,000
Total Sales 50,00,000 50,00,000 1,00,00,000

Additional information:
Segment C is a new business unit management expect this segment to make a significant
contribution to external revenue in coming years.
Which of the segments would be reportable under the criteria identified Ind AS 108?
(MTP OCTOBER 2019)
 112 FINANCIAL REPORTING

SOLUTION :
Threshold amount is ` 10,00,000 (` 1,00,00,000 x 10%).
Segment A exceeds the quantitative threshold (` 30,00,000 > ` 10,00,000) and hence
reportable segment.
Segment D exceeds the quantitative threshold (` 54,00,000 > ` 10,00,000) and hence
reportable segment.
Segment B & C do not meet the quantitative threshold amount and may not be classified as
reportable segment.
However, the total external revenue generated by these two segments A & D represent only
70% (` 35,00,000 / 50,00,000 x 100) of the entity‛s total external revenue. If the total
external revenue reported by operating segments constitutes less than 75% of the entity
total external revenue, additional operating segments should be identified as reportable
segments until at least 75% of the revenue is included in reportable segments.
In case of X Ltd., it is given that Segment C is a new business unit and management expect
this segment to make a significant contribution to external revenue in coming years. In
accordance with the requirement of Ind AS 108, X Ltd. designates this start-up segment
C as a reportable segment, making the total external revenue attributable to reportable
segments 87% (` 43,50,000 / 50,00,000 x 100) of total entity revenues.

QUESTION 25

An entity uses the weighted average cost formula to assign costs to inventories and cost of
goods sold for financial reporting purposes, but the reports provided to the chief operating
decision maker use the First-In, First-Out (FIFO) method for evaluating the performance
of segment operations. Which cost formula should be used for Ind AS 108 disclosure
purposes?
(RTP MAY 2019)
SOLUTION :
The entity should use First-In, First-Out (FIFO) method for its Ind AS 108 disclosures,
even though it uses the weighted average cost formula for measuring inventories for
inclusion in its financial statements. Where chief operating decision maker uses only one
measure of segment asset, same measure should be used to report segment information.
Accordingly, in the given case, the method used in preparing the financial information for
the chief operating decision maker should be used for reporting under Ind AS 108.
However, reconciliation between the segment results and results as per financial statements
needs to be given by the entity in its segment report.
 IND AS-108 OPERATING SEGMENT 113

QUESTION 26

ABC Limited has 5 operating segments namely A, B, C, D and E. The profit/ loss of respective
segments for the year ended March 31, 20X1 are as follows:

Segment Profit/(Loss) (` in crore)

A 780
B 1,500
C (2,300)
D (4,500)
E 6,000
Total 1,480

Based on the quantitative thresholds, which of the above segments A to E would be

considered as reportable segments for the year ending March 31, 20X1?
(RTP MAY 2020)
SOLUTION :
With regard to quantitative thresholds to determine reportable segment relevant in context
of instant case, paragraph 13(b) of Ind AS 108 may be noted which provides as follows:
“The absolute amount of its reported profit or loss is 10 per cent or more of the greater, in
absolute amount, of (i) the combined reported profit of all operating segments that did not
report a loss and (ii) the combined reported loss of all operating segments that reported a
loss.”
In compliance with Ind AS 108, the segment profit/loss of respective segment will be
compared with the greater of the following:
(i) All segments in profit, i.e., A, B and E – Total profit ` 8,280 crores.
(ii) All segments in loss, i.e., C and D – Total loss ` 6,800 crores. Greater of the above –
` 8,280 crores.
Based on the above, reportable segments will be determined as follows:

Segment Profit/(Loss) (` in crore) As absolute % of Reportable

` 8,280 crore segment

A 780 9% No
B 1,500 18% Yes
C (2,300) 28% Yes
D (4,500) 54% Yes
 114 FINANCIAL REPORTING

E 6,000 72% Yes

Total 1,480

Hence B, C, D, E are reportable segments.

QUESTION 27

U Limited is operating in paint industry. Its business segments comprise paints (wall paints,
lead paints, zinc paints, aluminium paints etc.), and others (consisting of primer, varnish,
thinner and related products). Certain information for financial year 2020-2021 is given
below:
` in lakh

Segments External Rev- GST Other operating Result Assets Liabilities

enue (Inc. income
GST)
Paints 10,000 250 2000 500 2500 1500
Other 3,500 150 750 200 1500 500

Additional Information:
(i) Unallocated income (Net of expenses) is ` 1,50,00,000.
(ii) Interest and bank charges is ` 1,00,00,000.
(iii) Income tax expenses is ` 1,00,00,000 (Current tax ` 97,50,000 and deferred tax `
2,50,000)
(iv) Unallocated investments are ` 5,00,00,000 and other assets are ` 5,00,00,000.
(v) Unallocated liabilities, reserve and surplus and share capital are ` 10,00,00,000, `
15,00,00,000 and ` 5,00,00,000 respectively.
(vi) Depreciation amounts for paints and others are ` 50,00,000 and ` 15,00,000 respec-
tively.
(vii) Capital expenditure for paints and others are ` 2,50,00,000 and ` 1,00,00,000 respec-
tively.
(viii) Revenue from outside India is ` 31,00,00,000 and segment assets outside India is `
5,00,00,000.
Based on the above information, how U Limited would disclose information about reportable
segment revenue, profit or loss, assets and liabilities and others for financial year 2020-
2021. Ignore corresponding figures for the previous year.
(8 Marks)
(CA FINAL JULY 2021 EXAM)
 IND AS-108 OPERATING SEGMENT 115

SOLUTION :
Segment information
(A) Information about operating segment
(1) the company‛s operating segments comprise:
Paints: consisting of wall paints, lead paints, zinc paints, aluminum paints etc.
Others: consisting of primer, varnish, thinner and related products.
(2) Segment revenues, results and other information:
(` in lakh)

Revenue Paints Others Total

1. External Revenue (gross) 10,000 3,500 13,500
GST (250) (150) (400)
Total Revenue (net) 9,750 3,350 13,100
Other operating Income 2,000 750 2,750
Total Revenue 11,750 4,100 15,850
2. Results
Segment results 500 200 700
Unallocated income (net of unallocated 150
expenses)
Profit from operation before interest, 850
taxation and exceptional items
Interest and bank charges (100)
Profit before exceptional items 750
Exceptional items Nil
Profit before taxation Income Taxes 750
-Current taxes (97.5)
-Deferred taxes (2.5)
Profit after taxation 650
3. Other Information
(a) Assets
Segment Assets 2,500 1,500 4,000
Investments 500
Unallocated assets 500
116 FINANCIAL REPORTING

Total Assets 5,000

(b) Liabilities/Shareholder‛s funds
Segment liabilities 1,500 500 2,000
Unallocated liabilities 1,000
Share capital 500
Reserves and surplus 1,500
Total liabilities / shareholder‛s 5,000
funds
(c) Others
Capital Expenditure (250) (100)
Depreciation (50) (15)

Geographical Information (` in lakh)

India Outside India Total
Revenue 12,750 3,100 15,850
Segment assets 4,500 500 5,000
Capital expenditure (250 + 100) 350 350

QUESTION 28

Pharmaceuticals Limited has 5 operating segments namely K, L, M, N and O. The profit/ loss
of respective segments for the year ended 31st March, 2022 are as follows:

Segment Profit / (Loss) (` in crore)

K 1,560
L 3,000
M (4,600)
N (9,000)
O 12,000
Total 2,960

Based on the quantitative thresholds, you are required to determine that which of the
above segments would be considered as reportable segments for the year ending 31st
March, 2022.
(CA FINAL NOV 2022 EXAM) (5 Marks)
 IND AS-108 OPERATING SEGMENT 117

SOLUTION :
With regard to quantitative thresholds to determine reportable segment relevant in con-
text of instant case, paragraph 13(b) of Ind AS 108 ‘Operating Segments‛ may be noted
which provides as follows:
“The absolute amount of its reported profit or loss is 10 per cent or more of the greater, in
absolute amount, of (i) the combined reported profit of all operating segments that did not
report a loss and (ii) the combined reported loss of all operating segments that reported a
loss.”
In compliance with Ind AS 108, the segment profit/loss of respective segment will be com-
pared with the greater of the following:
(i) All segments in profit, i.e., K, L and O – Total profit ` 16,560 crores.
(ii) All segments in loss, i.e., M and N – Total loss ` 13,600 crores. Greater of the above – `
16,560 crores.
Based on the above, reportable segments will be determined as follows :

Segment Profit/(Loss) (` in % age of ` 16,560 crore* Reportable segment

crore)
K 1,560 9.42% No
L 3,000 18.12% Yes
M (4,600) 27.78% Yes
N (9,000) 54.35% Yes
O 12,000 72.46% Yes
Total 2,960

Hence, L, M, N, O are reportable segments.

 118 FINANCIAL REPORTING

QUESTION 29

A Limited operates in coating industry. Its business segments comprise Coating (consisting
of decorative, automotive, industrial paints and related activities) and Other (consisting of
chemicals, polymers and related activities).
Certain information for Financial Year 2022-2023 is given below:

All amounts in ` Lakhs

Segments External GST Other oper- Result Assets Liabilities
Revenue ating income
(including
GST)
Coating 1,20,000 3,000 24,000 6,000 30,000 18,000
Others 42,000 1,800 9,000 2,400 18,000 6,000

Additional Information:
i. Unallocated income net of expenses is ` 18,00,00,000
ii. Interest and bank charges is ` 12,00,00,000
iii. Income tax expenses is ` 12,00,0000 (current tax ` 11,70,00,000 and deferred tax `
30,00,000)
iv. Unallocated Investments are ` 60,00,00,000 and other assets are ` 60,00,00,000.
v. Unallocated liabilities, Reserve & Surplus and Share Capital are ` 1,20,00,00,000, `
1,80,00,00,000 & ` 60,00,00,000 respectively.
vi. Depreciation amounts for coating & others are ` 6,00,00,000 and ` 1,80,00,000 re-
spectively.
vii. Capital expenditure for coating & others are ` 30,00,00,000 and ` 12,00,00,000 re-
spectively.
viii. Revenue from outside India is ` 3,72,00,00,000 and segment asset outside India `
60,00,00,000.
Based on the above information. How A Limited would disclose information about reportable
segment, revenue, profit or loss, assets and liabilities for financial year 2022- 2023. Ignore
corresponding figures for the previous year. Give figures in ` lakhs.
(CA FINAL MAY 2023 EXAM)
 INDIAN ACCOUNTING STANDARD 20 131

SOLUTION :

The income of ` 60,000 should be recognised over the three year period to compensate
for the related costs.

Calculation of Grant Income and Deferred Income:

C Labour Grant Deferred

Cost Income Income

` ` `

1 1,30,000 21,667 60,000 x (130/360) 18,333 (40,000 – 21,667)

2 1,10,000 18,333 60,000 x (110/360) 10,000 (50,000 – 21,667 –

18,333)
3 1,20,000 20,000 60,000 x (120/360) - (60,000 – 21,667 –
18,333
– 20,000)

3,60,000 60,000

Therefore, Grant income to be recognised in Profit & Loss for years 1, 2 and 3 are ` 21,667,
` 18,333 and ` 20,000 respectively.

Amount of grant that has not yet been credited to profit & loss i.e; deferred income is
to be reflected in the balance sheet. Hence, deferred income balance as at year end 1, 2
and 3 are ` 18,333, ` 10,000 and Nil respectively.

QUESTION 30

Entity A is awarded a government grant of ` 60,000 receivable over three years (`40,000
in year 1 and ` 10,000 in each of years 2 and 3), contingent on creating 10 new jobs and
maintaining them for three years. The employees are recruited at a total cost of ` 30,000,
and the wage bill for the first year is ` 1,00,000, rising by `10,000 in each of the subsequent
years. Calculate the grant income and deferred income to be accounted for in the books for
year 1, 2 and 3.
(MTP 8 NOVEMBER 2021)

QUESTION 31

M Limited had constructed another factory few years ago with the assistance of yet
another government grant, ‘Innovative Product‛. The grant is non-repayable and, following
the construction of the factory, cannot be clawed back by the government. There are
no further conditions attached to the grant that the Company is required to satisfy.
132 FINANCIAL REPORTING

The grant received has been treated as deferred income and is being credited to the
income statement over the same period as the factory is being depreciated. Following an
adverse change in the demand of the product the factory manufactures, during the year
at the reporting date, the directors have concluded that the factory‛s carrying value is
no longer recoverable in full and that a write down for impairment is required. The write
down is more than covered by the amortized deferred income balance related to the
grant.
Discuss, in the context of Ind AS framework and Ind AS 20, the impairment of the
factory for which ‘Innovative Product‛ government grant, has been received. Would your
SOLUTION : be different, if there are further conditions attached to grant beyond
construction of factory?
(MTP MARCH 2022)
SOLUTION :
Accounting treatment for Government Grant:
Government grants, related to assets, including non-monetary grants at fair value should
be presented in the Balance Sheet either by setting up the grant as deferred income or by
deducting the grant in arriving at the asset‛s carrying amount. (Para 24 of Ind AS 20)
Government grants should be recognised as income over the periods in which the entity
recognises as expenses the related costs that they are intended to compensate, on a
systematic basis. The outcome should be same in the Profit and Loss account statement
regardless of whether grants are netted or deferred.
In case the grant had been offset against the acquisition cost of the factory and net
carrying value is less than the recoverable amount, there would be no need for an impairment
write-down. The Profit and Loss account would be charged with annual depreciation on the
net acquisition cost.
Government grant relating to ‘Innovative Product‛:
To match the same result for the grant ‘Innovative Product‛ which has been shown as
deferred income and the factory is initially recorded at its cost, it is reasonable to release
an amount of deferred income to the Profit and Loss account to compensate for the
impairment write-down.
Treatment in case of further conditions attached:
If there are further conditions attached to the grant beyond construction of the factory,
it may not be appropriate to release an amount of the deferred income to compensate for
the impairment write down. An entity would need to assess those further conditions to
determine the amou nt, if any, of deferred income to release.
 INDIAN ACCOUNTING STANDARD 20 133

QUESTION 32

A Ltd. has been conducting its business activities in backward areas of the country and due
to higher operating costs in such regions, it has collectively incurred huge losses in previous
years. As per a scheme of government announced in March 20X1, the company will be
partially compensated for the losses incurred by it to the extent of ` 10,00,00,000, which
will be received in October 20X1. The compensation being paid by the government meets
the definition of government grant as per Ind AS 20. Assume that no other conditions are
to be fulfilled by the company to receive the compensation.
When should the grant be recognised in statement of profit and loss? Discuss in light of
relevant Ind AS.
(RTP NOV. 2021)
SOLUTION :
Paragraph 7 of Ind AS 20 states that, Government grants, including non-monetary grants
at fair value, shall not be recognised until there is reasonable assurance that:
(a) the entity will comply with the conditions attaching to them; and
(b) the grants will be received.
Further, paragraphs 20 and 22 of Ind AS 20 state as follows:
“A government grant that becomes receivable as compensation for expenses or losses
already incurred or for the purpose of giving immediate financial support to the entity
with no future related costs shall be recognised in profit or loss of the period in which it
becomes receivable”.
“A government grant may become receivable by an entity as compensation for expenses
or losses incurred in a previous period. Such a grant is recognised in profit or loss of the
period in which it becomes receivable, with disclosure to ensure that its effect is clearly
understood.”
In accordance with the above, in the given case, as at March 20 X1, A Ltd. is entitled to
receive government grant in the form of compensation for losses already incurred by it in
the previous years. Therefore, even though the compensation will be received in the month
of October 20X1, A Ltd. should recognise the compensation receivable by it as a government
grant in the profit or loss for the period in which it became receivable, i.e., for the financial
year 20X0-20X1 with disclosure to ensure that its effect is clearly understood.

QUESTION 33

A Limited is engaged in the manufacturing of certain specialized chemicals. During the

manufacturing process, certain wastewater is produced which is released by A Limited in
the nearby river. To reduce pollution of the rivers, the state government has introduced a
scheme with the following salient features:
134 FINANCIAL REPORTING

• If a manufacturer installs certain pre-approved wastewater treatment plant, the

government will provide an interest free loan equal to 50% of the cost of the plant;
• Such loan will be repayable to the government in 5 years from the date of disbursal;
• The manufacturer availing the benefit of this scheme must treat the wastewater of
its factory using the specified plant before releasing it to the river. If this condition
is violated, the entire loan shall become immediately repayable to the government
along with a penalty of ` 10 lakh.
Cost of the wastewater treatment plant to be installed to avail the benefit of the scheme
is ` 50 lakh. A Limited decided to utilise this scheme because, if it were to obtain the
similar loan from a bank, it would be available at a market interest rate of 12% per annum.
Accordingly, A Limited applied for and obtained the government loan of ` 25 lakh on 1st
April, 20X1. A Limited purchased and installed the plant such that it became ready for use
on the same date.
A Limited has an accounting policy of recognising government grant in relation to depreciable
assets in the proportion of depreciation expense. It has determined that the plant will be
depreciated over a period of 5 years using straight-line method. In the month of March,
20X3, government officials conducted a surprise audit, and it was found that A Limited was
not using the wastewater treatment plant as prescribed. Accordingly, on 31st March, 20X3,
the government ordered A Limited to repay the entire loan along with penalty. A Limited
repaid the loan with interest and penalty as per the order on 31st March, 20X3.
Measure the amount of government grant as on 1st April, 20X1. Determine the nature of
the government grant and its accounting treatment (principally) for the year ended 31st
March, 20X2. Also determine the impact on profit or loss if any, on account of revocation
of government grant as on 31st March, 20X3.
(RTP MAY 2022)

QUESTION 34

To encourage entities to expand their operations in a specified development zone, the

government provides interest-free loans to fund the purchase of manufacturing equipment.
In accordance with the development scheme, an entity receives an interest -free loan of
` 5,00,000 from the government for a period of three years. The market rate of interest
for similar loans for 3 years is 5% per year.
There are no future performance conditions attached to the interest -free loan.
Discuss how to account for the above loan. Pass necessary journal entries in the entity‛s
books of accounts from year 1 to year 3, as per relevant Ind AS.
(RTP NOV 2022)
 INDIAN ACCOUNTING STANDARD 20 135

QUESTION 35

Government of India provides loans to MSMEs at a below-market rate of interest to fund

the set-up of a new manufacturing facility. Sukshma Limited‛s date of transition to Ind AS
is 1st April 2020.
In financial year 2014-2015, the Company had received a loan of ` 2.0 crore at a below
- market rate of interest from the government. Under Indian GAAP, the Company had
accounted for the loan as equity and the carrying amount was ` 2.0 crore at the date of
transition. The amount repayable on 31st March 2024 will be ` 2.50 crore.
The Company has been advised to recognize the difference of ` 0.50 crores in equity by
correspondingly increasing the value of various assets under property, plant & equipment
by an equivalent amount on proportionate basis. Further, on 31st March 2024 when the loan
has to be repaid, ` 2.50 crore should be presented as a deduction from property, plant &
equipment.
Discuss the above treatment and share your views as per applicable Ind AS.
(6 Marks)
(CA FINAL JULY 2021 EXAM)
SOLUTION :
Requirement as per Ind AS:
A first-time adopter shall classify all government loans received as a financial liability or
an equity instrument in accordance with Ind AS 32. A first-time adopter shall apply the
requirements in Ind AS 109 and Ind AS 20, prospectively to government loans existing at
the date of transition to Ind AS and shall not recognise the corresponding benefit of the
government loan at a below-market rate of interest as a government grant.
Treatment to be done:
Consequently, if a first-time adopter did not, under its previous GAAP, recognise and mea-
sure a government loan at a below-market rate of interest on a basis consistent with Ind
AS requirements, it shall use its previous GAAP carrying amount of the loan at the date
of transition to Ind AS as the carrying amount of the loan in the opening Ind AS Balance
Sheet. An entity shall apply Ind AS 109 to the measurement of such loans after the date
of transition to Ind AS.
In the instant case, the loan meets the definition of a financial liability in accordance with
Ind AS 32. Company therefore reclassifies it from equity to liability. It also uses the pre-
vious GAAP carrying amount of the loan at the date of transition as the carrying amount of
the loan in the opening Ind AS balance sheet.
It calculates the annual effective interest rate (EIR) starting 1st April 2020 as below: EIR
= Amount / Principal(1/t) i.e. 2.50/2(1/4) i.e. 5.74%. approx.
 136 FINANCIAL REPORTING

At this rate, ` 2 crore will accrete to ` 2.50 crore as at 31st March 2024.
During the next 4 years, the interest expense charged to statement of profit and loss shall
be:

Year ended Opening amor- Interest expense for Closing amortised

tised cost the year (`) @ 5.74% cost
(`) p.a. approx. (`)
31st March 2021 2,00,00,000 11,48,000 2,11,48,000
31st March 2022 2,11,48,000 12,13,895 2,23,61,895
31st March 2023 2,23,61,895 12,83,573 2,36,45,468
31st March 2024 2,36,45,468 13,54,532 2,50,00,000

An entity may apply the requirements in Ind AS 109 and Ind AS 20 retrospectively to any
government loan originated before the date of transition to Ind AS, provided that the
information needed to do so had been obtained at the time of initially accounting for that
loan.
The accounting treatment is to be done as per above guidance and the advice which the
company has been provided is not in line with the requirements of Ind AS 101 .

QUESTION 36

Shagun Ltd. received two different grants from State Government as per details below:
(i) A cash grant of ` 24 lakh was received on 31st March, 2020 towards the skill develop-
ment of employees over a period of 18 months, starting from 1st April, 2020. Actual
costs of the skill development program in financial year 2020 -2021 was ` 30 lakh and
in financial year 2021-2022 was ` 20 lakh.
State, how this grant should be accounted for in the books of account in financial year
2019-2020, 2020-2021 & 2021-2022?
(ii) A grant of ` 10 lakh receivable over three years (` 5 lakh in financial year 2019-2020,
` 2 lakh in financial year 2020-2021 and ` 3 lakh in financial year 2021-2022), contin-
gent on developing 5 gardens and maintaining them for three years. The gardens are
developed in financial year 2019-2020 at a total cost of ` 6 lakh, and the maintenance
cost for financial year 2019-2020 is ` 12 lakh, for financial year 2020-2021 is ` 15 lakh
and for financial year 2021-2022 is ` 17 lakh.
Calculate the grant income and deferred income to be accounted for in the books for
financial years 2019-2020, 2020-2021 & 2021-2022.
(8 Marks)
(CA FINAL MAY 2022 EXAM)
 INDIAN ACCOUNTING STANDARD 20 137

SOLUTION :
(i) At 31st March, 2020 the grant would be recognised as a liability and presented in the
balance sheet as a split between current and non-current amounts.
` 16 lakh [(12 months / 18 month) x 24 lakh] is current and would be recognised in prof-
it and loss for the year ended 31st March, 2021. The balance amount of ` 8 lakh will
be shown as non-current.
At the end of the year 2020-2021, there would be a current balance of ` 8 lakh (being
the non-current balance at the end of year 2019-2020 reclassified as current) in the
balance sheet. This would be recognised as profit in the statement of profit and loss
for the year ended on 2021-2022.
Balance Sheet (extracts) as at

31st 31st 31st

March,2020 March,2021 March,2022
Current liabilities
Deferred income 16 lakh 8 lakh -
Non-current liabilities
Deferred income 8 lakh - -

Statement of Profit and Loss (extracts) for the year ended

31st March, 31st March,

2021 2022
Method 1 (As per para 29 of Ind AS 20)
Other Income - Government grant received 16 lakh 8 lakh
Training costs (30 lakh) (20 lakh)
Method 2 (Alternative) (As per para 29 of Ind
AS 20)
Training costs (30 lakh – 16 lakh) 14 lakh
Training costs (20 lakh – 8 lakh) 12 lakh

(ii) The income of ` 10 lakh should be recognised over the three-year period to compen-
sate for the related costs. Since the receipt of grant is depending on fulfilling the con-
tract, it is assumed that on initial date certainty to fulfil the conditions by the entity
could not be established. Hence, the grant is recognised in the books on receipt basis.
Calculation of Grant Income and Deferred Income: (` in lakh)
138 FINANCIAL REPORTING

Year Maintenance Grant Income Grant re- Deferred Income

Cost ceived
during the
year
a b = [(10/50) x c d
a]
2019-2020 18 3.6 5 (5 – 3.6)1.4
2020-2021 15 3.0 2 [(5 + 2) – (3.6 +
3.0)] 0.4
2021-2022 17 3.4 3 [(5 + 2 + 3) –
(3.6+
3.0 + 3.4)] –
50 10.0

Therefore, Grant income to be recognised in Profit & Loss for years 2019 -2020,
2020-2021 and 2021-2022 will be ` 3.6 lakh, ` 3.0 lakh and ` 3.4 lakh respectively.
Amount of grant that has not yet been credited to profit & loss i.e. deferred income
will be reflected in the balance sheet. Hence, deferred income balance as at year end
2019-2020, 2020-2021 and 2021-2022 will be ` 1.4 lakh, ` 0.4 lakh and Nil respective-
ly.
146 FINANCIAL REPORTING

SOLUTION :
Paragraph 5 of Ind AS 41, Agriculture defines agricultural activity and biological
transformation as follows:
“Agricultural activity is the management by an entity of the biological transformation and
harvest of biological assets for sale or for conversion into agricultural produce or into
additional biological assets.”
“Biological transformation comprises the processes of growth, degeneration, production,
and procreation that cause qualitative or quantitative changes in a biological asset.”
Contract 1:
As per contract 1, during the 3 years of the contract, ABC Ltd. only harvests apples from
the apple orchards whereas biological transformation is managed by the owners of the apple
orchards (i.e. the lessor). Since ABC Ltd. is not involved in the biological transformation
of the apple orchards and is only harvesting biological assets , it cannot be said to be
an agricultural activity as per Ind AS 41. Hence, ABC Ltd. is not engaged in agricultural
activity as per Ind AS 41.
Contract 2:
As per contract 2, ABC Ltd. obtains the apple orchards and is actively involved in the raising
of apple trees in order to ensure that the apples are as per its requirements. Since, it is
actively managing the biological transformation and harvest of biological asset, Hence, ABC
Ltd. is engaged in agricultural activity as per Ind AS 41.

QUESTION 13

Sewa Dairy Limited prepares financial statements on 31st March each year. On 1st April
2020 the Company carried out the following transactions:
• Purchased a land for ` 60 lakh.
• Purchased 200 dairy cows (Average age at 1st April 2020 - 2 years) for ` 20 lakh. Re-
ceived a non-refundable grant of ` 10 lakh towards the acquisition of the cows.
During the year ending 31st March 2021, the Company on its dairy cows incurred ` 8.50 lakh
to maintain their condition (food and protection) and ` 4.60 lakh as breeding fee to a local
farmer.
On 1st October 2020,120 calves were born. There were no other changes in the number
of animals during the year ended 31st March 2021. Sewa Dairy Limited had 3,200 litres of
unsold milk in inventory as on 31st March 2021. The milk was sold on 1st and 2nd April• 2021
at market prices.
The information regarding fair values is as follows:
 IND AS-41 AGRICULTURE 147

Items Fair values less cost to sell (All values in `)

1st April 1st October 31st March
2020 2020 2021
Land 60 Lakhs 70 Lakhs 80 Lakhs
New born calves (per calf) 2,000 2,300 2,500
6 months old calves (per calf) 2.,200 2;500 2,800
2 years old cow (per cow) 10,000 10,250 10,500
3 years old cow (per cow) 10,500 10,800 11,000
Milk per litre 25 27 30

Prepare extracts from the Balance Sheet (assuming land under cost method) and State-
ment of Profit and Loss that would be reflected in the financial statements of Sewa Dairy
Limited for the year ended 31st March 2021. Discuss the relevant Ind AS in support of
your workings.
(9 Marks)
(CA FINAL JULY 2021 EXAM)
SOLUTION :
Extract from the Statement of Profit and Loss of Sewa Diary Limited
for the period ended on 31st March, 2021

WN Amount
Income
Change in fair value of purchased dairy cow WN 2 2,00,000
Government Grant WN 3 10,00,000
Change in the fair value of newly born calves WN 4 3,36,000
Fair Value of Milk WN 5 96,000
Total Income (A) 16,32,000
Expenses
Maintenance Costs WN 2 8,50,000
Breeding Fee WN 2 4,60,000
Total Expense (B) (13,10,000)
Net Income (A-B) 3,22,000
 148 FINANCIAL REPORTING

Extracts from Balance Sheet of Sewa Diary Limited

As at 31st March, 2021
`
Property, Plant and Equipment:
Land WN 1 60,00,000
Biological assets other than bearer plants:
Dairy Cow WN 2 22,00,000
Calves WN 4 3,36,000 25,36,000
Inventory:
Milk WN 5 96,000

Working Notes:
1. Land: The purchase of the land is not covered by Ind AS 41. The relevant standard
which would apply to this transaction is Ind AS 16. Under this standard, the land would
initially be recorded at cost and depreciated over its useful economic life, which is
usually considered to be infinite. Hence, no depreciation would be appropriate. Under
Cost Model, no recognition would be made for post-acquisition changes in the value of
land.
2. Dairy Cows: Under the ‘fair value model‛ laid down in Ind AS 41 the mature cows would
be recognised in the Balance Sheet at 31st March, 2021 at the fair value of 200 x `
11,000 = ` 22,00,000.
Increase in price change 200 x (10,500 - 10,000) = 1,00,000
Increase in physical change 200 x (11,000 – 10,500) = 1,00,000
The total difference between the fair value of matured herd and its initial cost (`
22,00,000 – ` 20,00,000 = a gain of ` 2,00,000) would be recognised in the profit and
loss along with the maintenance cost and breeding fee of ` 8,50,000 and ` 4,60,000
respectively.
3. Grant: Grant relating to agricultural activity is not subject to the normal requirement
of Ind AS 20. Under Ind AS 41 such grants are credited to income as soon as they are
unconditionally receivable rather than being recognised over the useful economic life
of the herd. Therefore, ` 10,00,000 would be credited to income of the company.
4. Calves: They are a biological asset and the fair value model is applied. The breeding
fee is charged to income and an asset of 120 x ` 2,800 = ` 3,36,000 recognised in the
Balance sheet and credited to Profit and loss.
5. Milk: This is agricultural produce and initially recognised on the same basis as biologi-
cal assets. Thus, the milk would be valued at 3,200 x ` 30 = ` 96,000. This is regarded
as ‘cost‛ for the future application of Ind AS 2 to the unsold milk .
 IND AS-41 AGRICULTURE 149

QUESTION 14

A herd of 15, 4 year old cows valued at ` 500 thousands per cow were held in ‘M Dairy Farm‛
as at 1st April 2021. The following transactions took place on 1st October, 2021:
(A) One cow aged 4.5 years was purchased for ` 520 thousands.
(B) One calf was born.
No cow was sold or disposed off during the year.
The per cow/calf fair value less cost to sell was as follows:
` in thousands

4 year old cow on 1st April 2021 500

New born calf on 1st October 2021 400
4.5 year old cow on 1st October 2021 520
New born calf on 31st March, 2022 410
0.5 year old calf on 31st March, 2022 440
4 year old cow on 31st March, 2022 516
4.5 year old cow on 31st March, 2022 540
5 year old cow on 31st March, 2022 560
You are required to:
(i) Calculate change in fair value less costs to sell showing:
(a) The portion attributable to physical changes
(b) The portion attributable to price changes.
(ii) Calculate the carrying cost of the herd as on 31st March, 2022.
(iii) Prepare an extract of the livestock account for the year ended 31st March, 2022.
(6 Marks)
(CA FINAL NOV 2022 EXAM)
SOLUTION :
(i) Change in fair value less costs to sell, due to physical change and price change:
` in thousand

Fair value less costs to sell of herd at 1st April 2021 (15 × 7500
500)
Purchase on 1st October 2021 (1 x 520) 520
(a) Increase in fair value less costs to sell due to price
change:
150 FINANCIAL REPORTING

15 cows x (516 – 500) 240

1 cows x (540 – 520) 20
1 calf x (410 – 400) 10 270
(b) Increase in fair value less costs to sell due to physical
change:
15 cows x (560 – 516) 660
1 cows x (560 – 540) 20
1 calf x (440 – 410) 30
1 calf x 400 (Gain on initial recognition) 400 1,110
9,400

(ii) Calculation of carrying cost of herd as on 31st March 2022 i.e.

Fair value less costs to sell of herd at 31st March 2022
16 × 560 8,960
1 × 440 440 9,400
(iii) Extract of Livestock Account for the year 31st March 2022

Particulars Amount Particulars Amount

(` in 000) (` in 000)
To Opening Stock 7500 By Closing Balance 9,400
To Purchases (1x520) 520
To Increase in fair value (Price 270
Changes)
To Increase in fair value (Phys-
ical Changes) 1,110
Total 9,400 Total 9,400

QUESTION 15

ABC Limited is into dairy farm. Cows are milked on a daily basis. After milking, milk is imme-
diately kept in cold storage. The milk is sold to retail distributors on a weekly basis.
On 1st April 2022 ABC Ltd. had 500 cows which were all 3 years old. During the financial
year 2022-23, some of the cows became sick and on 30th September 2022, 20 cows died.
On 1st October 2022, ABC Limited purchased 20 replacement cows from the market for `
63,000 each. These 20 cows were all 1 year old when they were purchased.
 IND AS-41 AGRICULTURE 151

On 31st March 2023 ABC Ltd. had 1000 litres of milk in cold storage which had not been
sold to retail distributors. The market price of milk as at 31st March 2023 was ` 60 per
litre. While selling the milk to distributors, ABC Limited incurs selling costs of ` 3 per litre.
These amounts did not change during March 2023 and are not expected to change during
April 2023.
Information relating to fair value and costs to sell is given below:

Date Fair value of a dairy cow aged Cost to

sell a cow
1 year 1.5 year 3 years 4 years
01.04.2022 60,000 66,000 81,000 75,000 3,000
01.10.2022 63,000 69,000 84,000 78,000 3,000
31.03.2023 64,500 70,500 87,000 79,500 3,300

You can assume that fair value of 3.5 year old cow as on 30th September 2022 is ` 81,000.
Provide necessary journal entries in the books of account with respect to cows for above
events & transactions in the financial statement of ABC Limited as at (i) 30th September
2022; (ii) 1st October 2022 and (iii) 31st March 2023. Also determine the value of milk
inventory as at 31st March 2023.
(CA FINAL MAY 2023 EXAM)

QUESTION 16

ABC Ltd grows vines, harvests the grapes and produces wine. Which of these activities are
in the scope of Ind AS 41?

SOLUTION :
The grape vines are bearer plants that continually generate crops of grapes which are
covered by Ind AS 16, Property, Plant and Equipment.
When the entity harvests the grapes, their biological transformation ceases and they
become agricultural produce covered by Ind AS 41, Agriculture.
Wine involves a lengthy maturation period. This process is similar to the conversion of raw
materials to a finished product rather than biological transformation hence treated as
inventory in accordance with Ind AS 2, Inventories.

QUESTION 17

As at 31st March, 20X1, a plantation consists of 100 Pines trees that were planted 10
years earlier. The tree takes 30 years to mature, and will ultimately be processed into
building material for houses or furniture. The enterprise‛s weighted average cost of
capital is 6% p.a.
152 FINANCIAL REPORTING

Only mature trees have established fair values by reference to a quoted price in an
active market. The fair value (inclusive of current transport costs to get 100 logs to
market) for a mature tree of the same grade as in the plantation is:
As at 31st March, 20X1: 171
As at 31st March, 20X2: 165
Assume that there would be immaterial cash flow between now and point of harvest. The
present value factor of ` 1 @ 6% for
19th year = 0.331 20th year = 0.312
State the value of such plantation as on 31st March, 20X1 and 20X2 and the gain or loss to
be recognised as per Ind AS.

SOLUTION :
As at 31st March, 20X1, the mature plantation would have been valued at 17,100 (171 x
100). As at 31st March, 20X2, the mature plantation would have been valued at 16,500
(165 x 100).
Assuming immaterial cash flow between now and the point of harvest, the fair value (and
therefore the amount reported as an asset on the statement of financial position) of the
plantation is estimated as follows:
As at 31st March, 20X1: 17,100 x 0.312 = 5,335.20.
As at 31st March, 20X2: 16,500 x 0.331 = 5,461.50.
Gain or loss
The difference in fair value of the plantation between the two year end dates is 126.30
(5,461.50 – 5,335.20), which will be reported as a gain in the statement or profit or loss
(regardless of the fact that it has not yet been realised).

QUESTION 18

Arun Ltd. is an entity engaged in plantation and farming on a large scale and diversified
across India. On 1st April, 2018, the company has received a government grant for ` 20
lakh subject to a condition that it will continue to engage in plantation of eucalypts tree
for a coming period of five years.
The management has a reasonable assurance that the entity will comply with condition
of engaging in the plantation of eucalyptus trees for specified period of five years and
accordingly it recognizes proportionate grant for ` 4 lakh in Statement of Profit and
Loss as income following the principles laid down under Ind AS 20
Accounting for Government Grants and Disclosure of Government Assistance.
 IND AS-41 AGRICULTURE 153

Required:
Evaluate whether the above accounting treatment made by the management is in
compliance with the applicable Ind AS. If not, advise the correct treatment.
(CA-FINAL EXAM NOV2019)

SOLUTION :
Arun Ltd. is engaged in plantation and farming on a large scale. This implies that it has
agriculture business. Hence, Ind AS 41 will be applicable.
Further, the government grant has been given subject to a condition that it will continue
to engage in plantation of eucalyptus tree for a coming period of five years. This implies
that it is conditional grant.
In the absence of the measurement base of biological asset, it is assumed that “ Arun
Ltd measures its Biological Asset at fair value less cost to sell”

(i) As per Ind AS 41, the government grant should be recognised in profit or loss when,
and only when, the conditions attaching to the government grant are met ie continuous
plantation of eucalyptus tree for coming period of 5 years. In this case the grant shall
not be recognised in profit or loss until the five years have passed. The entity has
recognised the grant in profit and loss on proportionate basis, which is incorrect.
(ii) However, if the terms of the grant allow of it to be retained according to the time
elapsed, the entity recognises that part in profit or loss as time passes. Accordingly,
the entity can recognise the proportionate grate for 4 lakh in the statement of profit
and Loss based on the terms of the grant.
164 FINANCIAL REPORTING

QUESTION 20 (HOLDING SUBSIDIARY SHARES)

A parent grants 200 share options to each of 100 employees of its subsidiary, conditional
upon the completion of two years‛ service with the subsidiary. The fair value of the share
options on grant date is ` 30 each. At grant date, the subsidiary estimates that 80 percent
of the employees will complete the two-year service period. This estimate does not change
during the vesting period. At the end of the vesting period, 81 employees complete the
required two years of service. The parent does not require the subsidiary to pay for the
shares needed to settle the grant of share options.
Pass the necessary journal entries for giving effect to the above arrangement.
(RTP MAY 2019)
SOLUTION :
As required by paragraph B53 of the Ind AS 102, over the two-year vesting period,
the subsidiary measures the services received from the employees in accordance, the
requirements applicable to equity-settled share-based payment transactions as given in
paragraph 43B. Thus, the subsidiary measures the services received from the employees
on the basis of the fair value of the share options at grant date. An increase in equity
is recognised as a contribution from the parent in the separate or individual financial
statements of the subsidiary.
The journal entries recorded by the subsidiary for each of the two years are as follows:

Year 1 ` `
Remuneration expense Dr. 2,40,000
(200 x 100 employees x ` 30 x 80% x ½)
To Equity (Contribution from the parent) 2,40,000
Year 2
Remuneration expense Dr. 2,46,000
[(200 x 81 employees x ` 30) – 2,40,000]
To Equity (Contribution from the parent) 2,46,000

QUESTION 21 (HOLDING SUBSIDIARY SHARES)

Company P is a holding company for company B. A group share-based payment is being

organized in which Parent issues its own equity shares to the employees of company B. The
details are as below –

Number of Employees of Company B 100

Grant date fair value of share ` 87
 IND AS 102: SHARE BASED PAYMENT 165

Number of shares granted to each employee 25

Vesting conditions Immediately
Face value per share ` 10

Pass the journal entries in the books of company P & company B.

(RTP MAY 2021)
SOLUTION :
Journal Entries
Books of Company P

Particulars Debit (`) Credit (`)

Investment in Company B Dr. 2,17,500
To Equity Share Capital A/c (2,500 shares x ` 10) 25,000
To Securities Premium A/c (2,500 shares x ` 77) 1,92,500
(Being allotment of 25 shares each to 100 employees of B at
fair value of ` 87 per share)

Books of Company B

Particulars Debit (`) Credit (`)

Employee Benefit Expense A/c Dr. 2,17,500
To Capital Contribution from Parent P 2,17,500
(Being issue of shares by Parent to Employees pursuant to
Group Share-based Payment Plan)

QUESTION 22

New Age Technology Limited has entered into following Share Based payment transactions:
(i) On 1st April, 20X1, New Age Technology Limited decided to grant share options to its
employees. The scheme was approved by the employees on 30 th June, 20X1. New Age
Technology Limited determined the fair value of the share options to be the value of
the equity shares on 1st April, 20X1.
(ii) On 1st April, 20X1, New Age Technology Limited entered into a contract to purchase IT
equipment from Bombay Software Limited and agreed that the contract will be settled
by issuing equity instruments of New Age Technology Limited. New Age Technology
Limited received the IT equipment on 30th July, 20X1. The share-based payment
transaction was measured based on the fair value of the equity instruments as on 1st
April, 20X1.
166 FINANCIAL REPORTING

(iii) On 1st April, 20X1, New Age Technology Limited decided to grant the share options to
its employees. The scheme was approved by the employees on 30th June, 20X1.
The issue of the share options was however subject to the same being approved by the
shareholders in a general meeting. The scheme was approved in the general meeting held on
30th September, 20X1. The fair value of the equity instruments for measuring the share-
based payment transaction was taken on 30th September, 20X1.
Identify the grant date and measurement date in all the 3 cases of Share based payment
transactions entered into by New Age Technology Limited, supported by appropriate
rationale for the determination?
(RTP MAY 2022)
SOLUTION :
Ind AS 102 defines grant date and measurement dates as follows:
(a) Grant date: The date at which the entity and another party (including an employee) agree
to a share-based payment arrangement, being when the entity and the counterparty
have a shared understanding of the terms and conditions of the arrangement. At grant
date the entity confers on the counterparty the right to cash, other assets, or equity
instruments of the entity, provided the specified vesting conditions, if any, are met.
If that agreement is subject to an approval process (for example, by shareholders),
grant date is the date when that approval is obtained.
(b) Measurement date: The date at which the fair value of the equity instruments granted is
measured for the purposes of this Ind AS. For transactions with employees and others
providing similar services, the measurement date is grant date. For transactions with
parties other than employees (and those providing similar services), the measurement
date is the date the entity obtains the goods or the counterparty renders service.
Applying the above definitions in the given scenarios following would be the conclusion based
on the assumption that the approvals have been received prospectively:

Scenario Grant date Measurement Base for grant Base for

date date measurement
date
(i) 30th June, 20X1 30th June, 20X1 The date on which For employees,
the scheme was the measurement
approved by the date is grant date
employees
 IND AS 102: SHARE BASED PAYMENT 167

(ii) 1st April, 20X1 30th July, 20X1 The date when The date when
the entity and the entity obtains
the counterparty the goods from
entered a contract the counterparty
and agreed for
settlement by
equity instruments
(iii) 30th September, 30th The date when the For employees,
20X1 September, approval b y the measurement
20X1 shareholders was date is grant date
obtained

QUESTION 23

The following particulars in respect of stock options granted by a company are available:

No. of Employees covered 400 Nominal Value per share ` 100

No. of options per Employee 60 Exercise price per share ` 125
Shares offered were put in three groups. Group 1 was for 20% of shares offered with
vesting period one-year. Group II was for 40% of shares offered with vesting period two-
years. Group III was for 40% of shares offered with vesting period three-years. Fair value
of option per share on grant date was ` 10 for Group I, ` 12.50 for Group II and ` 14 for
Group III.

Position on 1st Year Position on 2nd Year Position on 3rd Year

- No. of employees left - Employees left = 35 - Employees left = 28
= 40
- Estimate of employees - Estimate of employees - Employees exercising
to leave in Year 2 = 36 to leave in Year 3 = 30 Options in Group III =
- Estimate of employees - Employees exercising 295
to leave in Year 3 = 34 Options in Group II =
319
- Employees exercising
Options in Group I =
350

Options not exercised immediately on vesting, were forfeited. Compute expenses to

recognise in each year and show important accounts in the books of the company.
(RTP NOV 2022)
168 FINANCIAL REPORTING

QUESTION 24

An entity issued 100 shares each to its 1,000 employees subject to service condition of
next 2 years. Grant date fair value of the share is INR 195 each. There is an expectation
97% of the total 1,000 employees will remain in service at end of 1st year. However, at the
end of 2nd year the expected employees to remain is service would be 91% out to the total
1,000 employees. Calculate expense for the year 1 & 2?

QUESTION 25

An entity issued 50 shares each to its 170 employees subject to service Conditions of next
2 Years. The settlement is to be made in cash. Grant date fair value of the share is INR
85 each, however, the fair value as at end of Year, 2nd year were INR 80 & 90 respectively.
Calculate expense for years 1 and 2?

QUESTION 26

Company p is a holding company for company B.A Group share- based payment is being
organized in which parent issues its own equity-shares for the employees of company B. the
details are as below-

No. of employees of company B 100

Grant date fair value of share INR 87
No. of shares to each employee granted 25
Vesting conditions Immediately

Pass the journal entry in the books of company p & company B?

QUESTION 27

Plastic manufacturing company “X” enters into an agreement with company “Y” to purchase
100kg of fiber which will be settled in cash at an amount equal to 10 Shares of X. However,
X can settle the contract at any time by paying an amount of amount of current share
price less market of fiber .there is no intention of taking delivery of such fiber .How the
transaction would be evaluated under Ind As 102?

QUESTION 28

Entity X acquired entity Y in a business combination as per Ind AS 103. There is an existing
share-based plan in Y with a vesting condition for condition for 3 years in which 2 years
have already lapsed at the date of such business acquisition. Entity X agrees to replace the
existing award for the employees of combined entity. The details are as below_
 IND AS 102: SHARE BASED PAYMENT 169

Acquisition date fair value of share-based payment plan INR 300

No. of years to vest to vest after acquisition 1 year
Fair Value of award which replaces existing plan INR 400

Calculate the share-based payment values as per Ind As 102?

QUESTION 29

An entity p issues share- based payment plan to its employees based on the below details

No. of employees 100

Fair value at grant date INR 25
Market condition Share price to reach at INR 30
Service condition To remain in service until market
condition is fulfilled
Expected completion of market 4 years
condition

Define expenses related to such-based payment plan in each year subject to the below
scenarios-
a) Market condition if fulfilled in year 3,or
b) Market condition is fulfilled in year 5.

QUESTION 30

Entity X grants 10 shares each to its 1000 employees on the conditions as mentioned below-
- To remain in service & entity‛s profit after tax (PAT) shall reach to INR 100 Million.
- It is expected that PAT should reach opt INR 100 million by end of 3 years.
- Fair value at grant date is INR 100.
- Employees expected for vesting right by 1st year 97% then it revises to 95% by 2nd
year and finally to 93% by 3rd year.
Calculate expenses for next 3 years in respect of share-based payment?

QUESTION 31

At 1 January 20X1, Ambani limited grants its CEO an option to take either cash amount
equivalent to 990 shares or 800 the minimum service requirement is 2 years. There is a
condition to keep the shares for 3 years if shares are opted.
170 FINANCIAL REPORTING

Fair values of the shares INR

Share alternative fair value (with restrictions) 212
Grant date fair value on 1 January, 20X0 213
Fair value on 31 December,20X0 220
Fair value on 31 Decemver,20X1 232

The key management exercises his cash at the end of 20X2. Pass journal entries.

QUESTION 32

MINDA issued 11,000 share appreciation rights (SARs) that vest immediately to its
employees on 1 April 20X0. The SARs will be settled in cash. Using an option pricing model
at that date it is estimated that the fair value of a SAR is INR 100. SAR can be exercised
any time until 31 March 20X3. It is expected that out of the total employees, 94% at the
end of period on 31 March 20X1, 91% at the end of next year will exercise the option. Finally
when these were vested. I.e. at the end of the 3rd year, only 85% of the total employees
exercised the option.

Fair value of SAR INR

31-Mar-20X1 132
31-Mar-20X2 139
31-Mar-20X3 141

QUESTION 33

Georgy Ltd. gave its key management an option to take either 810 equity shares or cash
amount equivalent to 650 equity shares on 1st April, 2020. The minimum service require-
ment is 2 years. If shares are opted then they are to be kept for at least 4 years.

Fair value of the shares `

Fair value for share alternative (with restrictions) 460
Grant date fair value on 1st April, 2020 480
Fair value on 31st March, 2021 530
Fair value on 31st March, 2022 560

Pass the necessary Journal Entries for the years ended 31st March, 2021 & 2022 if the key
management exercises the cash option at the end of 2022.
(6 Marks)
(CA FINAL DEC. 2021 EXAM)
 IND AS 102: SHARE BASED PAYMENT 171

SOLUTION :

1st April, 31st March, 31st

2020 2021 March,
2022
Equity alternative (810 x 460) 3,72,600
Cash alternative (650 x 480) 3,12,000
Equity option (3,72,600 – 3,12,000) 60,600
Cash Option (cumulative) (using period [(650 x 530) x [650 x 560]
end fair value) 1/2] 1,72,250 3,64,000
Equity Option (cumulative) 30,300 60,600
Expense for the period
Equity option 30,300 30,300
Cash Option 1,72,250 1,91,750
Total 2,02,250 2,22,050

Journal Entries

31st March, 2021

Employee benefits expenses Dr. 2,02,250
To Share based payment reserve (equity) 30,300
To Share based payment liability 1,72,250
(Recognition of Equity option and cash settlement option)
31st March, 2022
Employee benefits expenses Dr. 2,22,050
To Share based payment reserve (equity) 30,300
To Share based payment liability 1,91,750
(Recognition of Equity option and cash settlement option)
Share based payment liability Dr. 3,64,000
To Bank/ Cash 3,64,000
(Settlement in cash)
172 FINANCIAL REPORTING

QUESTION 34

Voya Limited issued 1,000 share options to each of its 200 employees for an exercise price
of ` 10. The employees are required to stay in employment for next 3 years. The fair value
of the option is estimated at ` 18.
90% of the employees are expected to vest the option.
The Company faced severe crisis during the 2nd year and it was decided to cancel the
scheme with immediate effect. The market price of the share at the date of cancellation
was ` 15.
The following information is available:
• Fair value of the option at the date of cancellation is ` 12.
• The company paid compensation to the employees at the rate of ` 13.50. There were
only 190 employees in the employment at that time.
You are required to show how cancellation will be recorded in the books of the Company as
per relevant Ind AS.
(5 Marks)
(CA FINAL JULY 2021 EXAM)
SOLUTION :
(A) Calculation of employee compensation expense

Year 1 Year 2
Expected employees to remain 180 190
in the employment during the
vesting period
Fair value of option 18 18
Number of options 1,000 1,000
Total 32,40,000 34,20,000
Expense weightage 1/3 2/3 Balance 2/3rd in
full, as it is can-
celled
Expense for the year 10,80,000 23,40,000 Remaining amount
since cancelled

(B) Cancellation compensation to be charged in the year 2

Cancellation compensation
Number of employees (A) 190
Amount agreed to pay (B) 13.50
 IND AS 102: SHARE BASED PAYMENT 173

Number of options/ employee (C) 1,000

Compensation amount (A x B x C) 25,65,000
Less: Amount to be deducted from Equity
Number of employees (D) 190
Fair value of option (at the date of cancellation) (E) 12
Number of options / employee (F) 1,000
Amount to be deducted from Equity (D x E x F) (22,80,000)
Balance transferred to Profit and Loss 2,85,000

QUESTION 35

On 1st April, 2019, Sun Ltd. issued share-based option to one of its key managerial person-
nel (employee) which can be exercised either in cash or equity and it has following features:
Option I
No. of cash settled shares 70,000
Service condition 3 years
Option II
No. of equity settled shares of face value of ` 100 each 80,000
Conditions:
Service 3 years
Restriction to sell 2 years
Fair Values
Share alternative fair value (with restriction) ` 125
Fair value at grant date ` 136
Fair value on 31st March, 2020 ` 141
Fair value on 31st March, 2021 ` 143
Fair value on 31st March, 2022 ` 146
You are required to pass the journal entries if the key managerial employee exercises cash
option at the end of 31st March, 2022 and also if he exercises equity option at the end of
31st March, 2022.
(6 Marks)
(CA FINAL NOV 2022 EXAM)
174 FINANCIAL REPORTING

SOLUTION :

1st April 31st 31st 31st March

2019 March March 2022
(`) 2020 2021 (`)
(`) (`)
Equity alternative (80,000 x 1,00,00,000
125)
Cash alternative (70,000 x 95,20,000
136)
Equity option (1,00,00,000 – 4,80,000
95,20,000)
Cash option (cumulative) (70,000 x (70,000 x (70,000 x
(using period end fair value 141 x 1/3) 143 x 2/3) 146 x 3/3)
32,90,000 66,73,333 1,02,20,000
Equity option (cumulative) (4,80,000 x (4,80,000 x (4,80,000 x
1/3) 2/3) 3/3)
1,60,000 3,20,000 4,80,000

Expense for
the period
Equity 1,60,000 (3,20,000 – 1,60,000) (4,80,000 – 3,20,000)
option 1,60,000 1,60,000
Cash Option 32,90,000 (66,73,333 – 32,90,000) (1,02,20,000 – 66,73,333)
33,83,333 35,46,667

Total 34,50,000 35,43,333 37,06,667

Journal Entries

(i) If Cash alternative is chosen: ` `

Share based payment liability Dr. 1,02,20,000
To Bank/ Cash 1,02,20,000
(Settlement in cash)
Share based payment reserve (equity)* Dr. 4,80,000
To Retained earnings 4,80,000
 IND AS 102: SHARE BASED PAYMENT 175

(Being transfer of equity from one account to another

one)
(ii) If Equity alternative is chosen:
Share based payment liability Dr. 1,02,20,000
To Share based payment reserve (equity) 1,02,20,000
(Being transfer of liability account to equity)
Share based payment reserve (equity) Dr. 1,07,00,000
To Capital 80,00,000
To Securities Premium 27,00,000
(Being settlement made in equity)
Alternative entries under equity settlement:
(iii) If Equity alternative is chosen:
Share based payment liability Dr. 1,02,20,000
To Share Capital 80,00,000
To Securities Premium 22,20,000
(Being settlement made in equity)
Share based payment reserve (equity)* Dr. 4,80,000
To Retained earnings 4,80,000
(Being transfer of equity from one account to another
one)

*The equity component recognized (` 4,80,000) shall remain within equity.

 92 FINANCIAL REPORTING

QUESTION 152

X Ltd. issues ` 1.5 crore convertible bonds on 1st April, 2018. The bonds have a life of 8
years and a face value of ` 10 each and offer interest @ 5.5% p.a. payable at the end of
each financial year.
Bonds are issued at their face value and each bond can be converted into one ordinary share
of X Ltd. at any time in the next eight years.
Companies of a similar risk profile have recently issued debt with similar terms, without the
option for conversion, at a rate of 7% p.a.
You are required to:
(i) Provide the journal entries from financial year 2018-2019 to financial year 2021-2022;
(ii) Calculate the interest expenses across all eight years of the life of the convertible
bonds;
(iii) Give the accounting entries if the holders of the bonds elect to convert the bonds to
ordinary shares at the end of the fourth year (after receiving interest for the fourth
year).
(14 Marks)
(CA FINAL JULY 2021 EXAM)
SOLUTION :
(i) Journal Entries

Dr. (`) Cr. (`)

1st April, 2018
Bank A/c Dr. 1,50,00,000
To Convertible bonds A/c (liability) (Refer W.N.) 1,36,56,075
To Convertible bonds A/c (equity) (Refer W.N.) 13,43,925
(Being recognition of convertible bonds at the date
of issuance into liability and equity components)
31st March, 2019
Interest expense A/c Dr. 9,55,925
To Bank A/c 8,25,000
To Convertible bonds A/c (liability) 1,30,925
(Being interest expense recorded at market rate of
7% and actual interest paid @ 5.5%)
31st March, 2020
 PAST EXAMINATION QUESTIONS 93

Interest expense A/c Dr. 9,65,090

To Bank A/c 8,25,000
To Convertible bonds A/c (liability) 1,40,090
(Being interest expense recorded at market rate of
7% and actual interest paid @ 5.5%)
31st March, 2021
Interest expense A/c Dr. 9,74,896
To Bank A/c 8,25,000
To Convertible bonds A/c (liability) 1,49,896
(Being interest expense recorded at market rate of
7% and actual interest paid @ 5.5%)
31st March, 2022
Interest expense A/c Dr. 9,85,389
To Bank A/c 8,25,000
To Convertible bonds A/c (liability) 1,60,389
(Being interest expense recorded at market rate of
7% and actual interest paid @ 5.5%)

(ii) Table showing computation of interest expense at market rate and actual interest
outflow @ 5.5%

Year Date Opening Actual Interest Increase Closing

bond liability interest expense in liability bond liability
outflow @ @ 7%
5.5%
a b =1.5 cr c = a x 7% d = c-b e = a+d
x 5.5%
0 1st April, 2018 1,36,56,075
1 31st March, 2019 1,36,56,075 8,25,000 9,55,925 1,30,925 1,37,87,000
2 31st March, 2020 1,37,87,000 8,25,000 9,65,090 1,40,090 1,39,27,090
3 31st March, 2021 1,39,27,090 8,25,000 9,74,896 1,49,896 1,40,76,986
4 31st March, 2022 1,40,76,986 8,25,000 9,85,389 1,60,389 1,42,37,375
5 31st March, 2023 1,42,37,375 8,25,000 9,96,616 1,71,616 1,44,08,991
6 31st March, 2024 1,44,08,991 8,25,000 10,08,629 1,83,629 1,45,92,620
7 31st March, 2025 1,45,92,620 8,25,000 10,21,483 1,96,483 1,47,89,103
8 31st March, 2026 1,47,89,103 8,25,000 10,35,897* 2,10,897 1,50,00,000
 94 FINANCIAL REPORTING

*Difference of ` 660 (10,35,897 -10,35,237) is due to rounding off

(iii) When holders of the bonds elect to convert the bonds to ordinary shares at the
end of the fourth year (after receiving their interest payments), the entries
would be:

Dr. (`) Cr. (`)

31st March, 2022
Convertible bonds A/c (liability) Dr. 1,42,37,375
Convertible bonds A/c (equity) Dr. 13,43,925
To Ordinary share capital A/c 1,55,81,300
(Being bonds converted into ordinary shares of X
Ltd.)

Working Note:
Computation of equity and liability component of convertible bond at 7% market rate

`
Present value of principal to be received at the end of eight year dis-
counted at 7% (1,50,00,000 x 0.582) 87,30,000
Annuity of annual interest discounted at 7% for 8 years (1,50,00,000 x
5.5% x 5.971) 49,26,075
Total present value (a) 1,36,56,075
Equity component (balancing figure) (a-b) 13,43,925
Total proceeds received from issuance of convertible bonds (b) 1,50,00,000

QUESTION 153

X Ltd. has made a borrowing from RGD Bank for ` 20,000 at a fixed interest of 12% per
annum. Loan processing fees were paid additionally amounting to ` 1,000 and the loan is pay-
able in 4 half-yearly installments of ` 5,000 each.
Details are as follows:

Particulars Details
Loan amount ` 20,000
Date of loan (Starting Date) 1st April, 2020
Date of loan (Finishing Date) 31st March, 2022
Description of repayment Repayment of loan starts from 30th September, 2020
(To be paid on half yearly basis)
 PAST EXAMINATION QUESTIONS 95

Installment amount ` 5,000

Interest rate 12% per annum
Interest charge Interest to be charged and paid quarterly
Upfront fees ` 1,000

Compute the interest to be charged to the statement of profit & loss every quarter over
the period of loan. The effective interest rate is 16.60% per annum.
(5 Marks)
(CA FINAL JULY 2021 EXAM)
SOLUTION :
The loan taken by X Ltd. shall be measured at amortised cost as follows:
Initial measurement = At transaction price less processing fee ie. ` 19,000 (20,000 – 1,000)
Subsequent measurement = Interest to be accrued using effective rate of interest as
follows:

Quar- Opening Interest @ Cash flows Closing bal-

ter balance (A) 16.60% (B)=[(A) x (C) = [Refer column of ance
16.60%/4] (A) + (B) -
D of W.N.]
(C)
1 19,000.00 789.00 600.00 19,189.00
2 19,189.00 796.00 5,600.00 14,385.00
3 14,385.00 597.00 450.00 14,532.00
4 14,532.00 603.00 5,450.00 9,685.00
5 9,685.00 402.00 300.00 9,787.00
6 9,787.00 406.00 5,300.00 4,893.00
7 4,893.00 203.00 150.00 4,946.00
8 4,946.00 204.00* 5,150.00 -

* Difference is due to approximation.

 96 FINANCIAL REPORTING

Working Note:

Quar- Opening Interest @ Principal repay- Total Cash Closing bal-

ter balance 12% p.a. ment at quarter flow ance
(A) (B) = [(A) x end (E) = (A) -
(D) = (B) +
12%/4] (C) (C) (C)

1 20,000.00 600.00 - 600.00 20,000.00

2 20,000.00 600.00 5,000.00 5,600.00 15,000.00
3 15,000.00 450.00 - 450.00 15,000.00
4 15,000.00 450.00 5,000.00 5,450.00 10,000.00
5 10,000.00 300.00 - 300.00 10,000.00
6 10,000.00 300.00 5,000.00 5,300.00 5,000.00
7 5,000.00 150.00 - 150.00 5,000.00
8 5,000.00 150.00 5,000.00 5,150.00 -

QUESETION 154

KUPA Ltd. borrowed ` 95 lakh as loan from XYZ Bank on 1st April, 2018 at an interest rate
of 10% p.a. KUPA Ltd. spent ` 1,80,912 as loan processing charges. Principal amount of loan
is to be repaid in 5 equal instalments and the interest to be paid annually on accrual basis.
Effective interest rate on loan is 10.8%.
On 31st March, 2020, KUPA Ltd. faced challenges in business because of sudden change in
the technology. It approached XYZ Bank and renegotiated the terms of the loan. Interest
rate changed to 15% p.a. Principal amount of loan is to be repaid in 8 equal instalments pay-
able annually starting 31st March, 2021 and the interest is to be paid annually on accrual
basis. Before approaching bank, KUPA Ltd. made the interest payment on 31st March, 2020.
You are required to record Journal entries in the books of KUPA Ltd. till 31 st March, 2021,
after giving effect of the changes in the terms of the loan on 31st March, 2020. Workings
should form part of the SOLUTION :.

PV of ` 1 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8

10% 0.909 0.826 0.751 0.683 0.621 0.564 0.513 0.467
10.8% 0.903 0.815 0.735 0.664 0.599 0.540 0.488 0.440
15% 0.870 0.756 0.658 0.572 0.497 0.432 0.376 0.327

(12 Marks)
(CA FINAL DEC. 2021 EXAM)
 PAST EXAMINATION QUESTIONS 97

SOLUTION :
The following table shows the amortisation of loan based on effective interest rate:

Date Opening Cash flows Cash Total Interest @ Closing

Amortised (Principal) outflows cash flows EIR 10.80% Amortised
cost (Interest cost
@ 10% and
fee)

(1) (2) (3) (4) (3 + 4 = (2 x 10.80% (2- 5 +

5) = 6) 6=
7)
1st April, 2018 (95,00,000) 1,80,912 93,19,088
31st March, 2019 93,19,088 19,00,000 9,50,000 28,50,000 10,06,462 74,75,550
31st March, 2020 74,75,550 19,00,000 7,60,000 26,60,000 8,07,359 56,22,909
31st March, 2021 56,22,909 19,00,000 5,70,000 24,70,000 6,07,274 37,60,183
31st March, 2022 37,60,183 19,00,000 3,80,000 22,80,000 4,06,100 18,86,283
31st March, 2023 18,86,283 19,00,000 1,90,000 20,90,000 2,03,717*

* Difference of ` 2 (2,03,719 – 2,03,717) is due to approximation.

(i) On 1st April, 2018

Particulars Dr. (`) Cr. (`)

Bank A/c Dr. 93,19,088
To Loan from bank A/c 93,19,088
(Being loan recorded at its fair value less transaction
costs on the initial recognition date)

(ii) On 31st March, 2019

Particulars Dr. (`) Cr. (`)

Loan from bank A/c Dr. 18,43,538
Interest expense Dr. 10,06,462
To Bank A/c 28,50,000
(Being first instalment of loan and payment of inter-
est accounted for as an adjustment to the
amortised cost of loan)
 98 FINANCIAL REPORTING

(iii) On 31st March, 2020– Before KUPA Ltd. approached the bank

Particulars Dr. (`) Cr. (`)

Interest expense Dr. 8,07,359
To Loan from bank A/c To Bank A/c 47,359
(Being loan payment of interest recorded by the 7,60,000
Company before it approached the Bank for defer-
ment of principal)

Reason for treating the modification as a fresh loan:

Upon receiving the new terms of the loan, KUPA Ltd., re-computed the carrying value
of the loan by discounting the new cash flows with the original effective interest rate
and comparing the same with the current carrying value of the loan. As per require-
ments of Ind AS 109, any change of more than 10% shall be considered a substantial
modification, resulting in fresh accounting for the new loan.
The following table shows the present value (PV) of new contractual cash flows and
percentage of variation:

Date Cash flows Interest Total cash Discounting PV of cash

(principal) outflow @ outflow factor @ flows
15% 10.80%
31st March, 2020 (76,00,000)
31st March, 2021 9,50,000 11,40,000 20,90,000 0.903 18,87,270
31st March, 2022 9,50,000 9,97,500 19,47,500 0.815 15,87,213
31st March, 2023 9,50,000 8,55,000 18,05,000 0.735 13,26,675
31st March, 2024 9,50,000 7,12,500 16,62,500 0.664 11,03,900
31st March, 2025 9,50,000 5,70,000 15,20,000 0.599 9,10,480
31st March, 2026 9,50,000 4,27,500 13,77,500 0.540 7,43,850
31st March, 2027 9,50,000 2,85,000 12,35,000 0.488 6,02,680
31st March, 2028 9,50,000 1,42,500 10,92,500 0.440 4,80,700
PV of new contractual cash flows discounted @ 10.80% 86,42,768
Carrying amount of loan (93,19,088 - 18,43,538 + 47,359) (75,22,909)
Difference 11,19,859
Percentage of carrying amount 14.89%

Decision Making:
Considering a more than 10% change in PV of cash flows compared to the carrying value
 PAST EXAMINATION QUESTIONS 99

of the loan, the existing loan shall be considered to have been extinguished and the
new loan shall be accounted for as a separate financial liability.
The accounting entries for the same are included below:
On 31st March, 2020 – Accounting for extinguishment

Particulars Dr. (`) Cr. (`)

Loan from bank (old) A/c Dr. 75,22,909
Finance cost Dr. 77,091
To Loan from bank (new) A/c 76,00,000
(Being new loan accounted for at its principal amount
in absence of any transaction costs directly related to
such loan and corresponding derecognition of existing
loan)

(iv) On 31st March, 2021

Particulars Dr. (`) Cr. (`)

Loan from bank A/c Dr. 9,50,000
Interest expense Dr. 11,40,000
To Bank A/c 20,90,000
(Being first instalment of the new loan and payment
of interest accounted for as an adjustment to the
amortised cost of loan)

QUESTOIN 155

Ram Limited is a company incorporated In India. It provides ` 25,00,000 interest free loan
to its wholly owned Indian subsidiary Balram Limited. There are no transaction costs.
How should the loan be accounted for, in the light of provisions of related lnd AS, in the
books of Ram Limited, Balram Limited and Consolidated Financial Statements of the group,
considering the following scenarios:
(i) The loan is repayable on demand.
(ii) The loan is repayable after 3 years. The current market rate of interest for similar
loan is 12% p.a. for both holding and subsidiary.
(iii) The loan is repayable when Balram Limited has funds to repay the loan.
Briefly, analyse the above scenarios. Also pass Journal Entries in the books of Ram Limited
and Balram Limited in case of Scenario (i) and (ii).
Present value of ` 1 payable in 3 years‛ time at an annual discount rate of 12% is 0.7118.
(CA FINAL DEC. 2021 EXAM) (12 Marks)
100 FINANCIAL REPORTING

SOLUTION :
Requirement of Ind AS: Ind AS 109 requires that financial assets and liabilities are recog-
nized on initial recognition at its fair value, as adjusted for the transaction cost. In accor-
dance with Ind AS 113 ‘Fair Value Measurement‛, the fair value of a financial liability with
a demand feature (e.g., a demand deposit) is not less than the amount payable on demand,
discounted from the first date that the amount could be required to be paid.
Using the guidance, the loan will be accounted for as below in various scenarios:
Scenario (i)
Since the loan is repayable on demand, it has fair value equal to cash consideration given.
The parent and subsidiary recognize financial asset and liability, respectively, at the amount
of loan given. Going forward, no interest is accrued on the loan.
Upon repayment, both the parent and the subsidiary reverse the entries made at origina-
tion.
Accounting in the books of Ram Ltd. (Parent)

S. Particulars Amount Amount

No.
1. On the date of loan
Loan to Balram Ltd. (Subsidiary) Dr. 25,00,000
To Bank 25,00,000
(Being the loan is given to Balram Ltd. and recognised
at fair value)
2. At the time the Loan is received back:
Bank Dr. 25,00,000
To Loan to Balram Ltd. (Subsidiary) 25,00,000
(Being demand loan received)

Accounting in the books of Balram Ltd. (Subsidiary)

S. Particulars Amount Amount

No.
1. On the date of loan
Bank Dr. 25,00,000
To Loan from Ram Ltd. 25,00,000
(Being the loan is taken from Ram Ltd. and recognised
at fair value)
 PAST EXAMINATION QUESTIONS 101

2. On repayment of loan
Loan from Ram Ltd. Dr. 25,00,000
To Bank 25,00,000
(Being demand loan paid)

Scenario (ii)
Both parent and subsidiary recognize financial asset and liability, respectively, at fair value
on initial recognition. The difference between the loan amount and its fair value is treated
as an equity contribution to the subsidiary. This represents a further investment by the
parent in the subsidiary.
Accounting in the books of Ram Ltd. (Parent)

S. Particulars Amount Amount

No.
1. On the date of loan
Loan to Balram Ltd. (Subsidiary) Dr. 17,79,500
Deemed Investment (Capital Contribution) in Balram 7,20,500
Ltd. Dr.
To Bank 25,00,000
(Being the loan is given to Balram Ltd. and recognised
at fair value)
2. Accrual of Interest income
Loan to Balram Ltd. Dr. 2,13,540
To Interest income 2,13,540
(Being interest income accrued) – Year 1
3. Loan to Balram Ltd. Dr. 2,39,165
To Interest income 2,39,165
(Being interest income accrued) – Year 2
4. Loan to Balram Ltd. Dr. 2,67,795
To Interest income 2,67,795
(Being interest income accrued) – Year 3
5. On receipt of loan
Bank Dr. 25,00,000
To Loan to Balram Ltd. (Subsidiary) 25,00,000
(Being term loan received)
102 FINANCIAL REPORTING

Accounting in the books of Balram Ltd. (Subsidiary)

S. Particulars Amount Amount

No.
1. On the date of loan
Bank Dr. 25,00,000
To Loan from Ram Ltd. 17,79,500
To Equity (Deemed Capital Contribution from 7,20,500
Ram Ltd.)
(Being the loan is taken from Ram Ltd. and recognised
at fair value)
2. Accrual of Interest
Interest expense Dr. 2,13,540
To Loan from Ram Ltd. 2,13,540
(Being interest expense recognised) – Year 1
3. Interest expense Dr. 2,39,165
To Loan from Ram Ltd. 2,39,165
(Being interest expense recognised) – Year 2
4. Interest expense Dr. 2,67,795
To Loan from Ram Ltd. 2,67,795
(Being interest expense recognised) – Year 3
5. On repayment of loan
Loan from Ram Ltd. (Payable) Dr. 25,00,000
To Bank 25,00,000
(Being term loan paid)

Working Notes:

1. Computation of present value of loan

Rate 12%
Amount of Loan 25,00,000
Year 3
Present Value 17,79,500
2. Computation of interest for Year I
Present Value 17,79,500
 PAST EXAMINATION QUESTIONS 103

Rate 12%
Period of interest - for 1 year 1
Closing value at the end of year 1 19,93,040
Interest for 1st year 2,13,540
3. Computation of interest for Year 2
Value of loan as at the beginning of Year 2 19,93,040
Rate 12%
Period of interest - for 2nd year 1
Closing value at the end of year 2 22,32,205
Interest for 2nd year 2,39,165
4. Computation of interest for Year 3
Value of loan as at the beginning of Year 3 22,32,205
Rate 12%
Period of interest - for 3rd year 1
Closing value at the end of year 3 25,00,000
Interest for 3rd year (25,00,000 – 22,32,205) 2,67,795*

* Difference of ` 70 [(22,32,205 x 12%) – 2,67,795] is due to approximation.

Scenario (iii)
Generally, a loan, which is repayable when funds are available, can‛t be stated to be repay-
able on demand. Rather, the entities need to estimate repayment date and determine its
measurement accordingly. If the loan is expected to be repaid in three years, its measure-
ment will be the same as in scenario (ii).
In the Consolidated Financial Statements (CFS) for all three scenarios (i), (ii) and (iii)
In the Consolidated Financial Statements (CFS), the loan and interest income / expense
will get knocked-off as intra-group transaction in all the three scenarios. Hence the above
accounting will not have any impact in the CFS.

QUESTION 156

M Limited has made a security deposit whose details are given below:

Particulars Details
Date of security deposit (starting date) 1st April, 2016
Date of security deposit (finishing date) 31st March, 2021
104 FINANCIAL REPORTING

Description Lease
Total lease period 5 years
Security deposit ` 20,00,000
Present value factor at the end of the 5th year 0.6499

Determine, how above financial asset should be measured and briefly explain measurement
determined as such. Make necessary journal entries for accounting of the security deposit
in the first year and last year. Assume market rate for a deposit for similar period to be
9% p.a.
(5 Marks)
(CA FINAL DEC. 2021 EXAM)
SOLUTION :
The given security deposit is an interest free deposit redeemable at the end of lease term
for ` 20,00,000. Hence, this involves collection of contractual cash flows and shall be ac-
counted at amortised cost.
Upon initial measurement

Particulars `
Security deposit (A) 20,00,000
Present value of deposit at beginning (20,00,000 x 0.6499) (B) (12,99,800)
Prepaid lease payment at beginning (A-B) 7,00,200

Journal Entries
Year 1 - beginning

Particulars ` `
Security deposit A/c Dr. 12,99,800
Prepaid lease rent (ROU Asset) Dr. 7,00,200
To Bank A/c 20,00,000
(Recognised present value of security deposit and prepaid
lease)

Subsequently, every annual reporting year, interest income shall be accrued @ 9% per an-
num and prepaid expenses shall be amortised on straight line basis over the lease term.
 PAST EXAMINATION QUESTIONS 105

Year 1 - end

Particulars ` `
Security deposit A/c (12,99,800 x 9%) Dr. 1,16,982
To Interest income A/c 1,16,982
(Recognised interest on security deposit)
Depreciation (7,00,200 / 5 years) Dr. 1,40,040
To Prepaid lease rent (ROU Asset) 1,40,040
(Prepaid lease depreciated for the year)

Year 5- end
At the end of 5th year, the security deposit shall accrue ` 20,00,000 and prepaid lease ex-
penses shall be fully amortised (i.e. depreciated as per Ind AS 116, this prepaid lease rent
would be shown as ROU asset).
Journal entry for realisation of security deposit

Particulars ` `
Security deposit A/c (Refer W.N.) Dr. 1,65,227
To Interest income A/c 1,65,227
(Recognised interest on security deposit)
Depreciation (7,00,200 / 5 years) Dr. 1,40,040
To Prepaid lease rent (ROU Asset) 1,40,040
(Prepaid lease depreciated for the year)
Bank A/c Dr. 20,00,000
To Security deposit A/c 20,00,000
(Security deposit paid back at the end of the lease term)

Working Note:
Amortisation schedule

Year end Opening balance Interest income Closing balance

1 12,99,800 1,16,982 14,16,782
2 14,16,782 1,27,510 15,44,292
3 15,44,292 1,38,986 16,83,278
4 16,83,278 1,51,495 18,34,773
5 18,34,773 1,65,227* 20,00,000

* Difference is due to approximation.

 106 FINANCIAL REPORTING

QUESTION 157

X Ltd. issues ` 1.5 crore convertible bonds on 1st April, 2018. The bonds have a life of 8
years and a face value of ` 10 each and offer interest @ 5.5% p.a. payable at the end of
each financial year.
Bonds are issued at their face value and each bond can be converted into one ordinary share
of X Ltd. at any time in the next eight years.
Companies of a similar risk profile have recently issued debt with similar terms, without the
option for conversion, at a rate of 7% p.a.
You are required to:
(i) Provide the journal entries from financial year 2018-2019 to financial year 2021-2022;
(ii) Calculate the interest expenses across all eight years of the life of the convertible
bonds;
(iii) Give the accounting entries if the holders of the bonds elect to convert the bonds to
ordinary shares at the end of the fourth year (after receiving interest for the fourth
year).
(14 Marks)
(CA FINAL MAY 2022 EXAM)
SOLUTION :
(i) Journal Entries

Dr. (`) Cr. (`)

1st April, 2018
Bank A/c Dr. 1,50,00,000
To Convertible bonds A/c (liability) (Refer W.N.) 1,36,56,075
To Convertible bonds A/c (equity) (Refer W.N.) 13,43,925
(Being recognition of convertible bonds at the date of
issuance into liability and equity components)
31st March, 2019
Interest expense A/c Dr. 9,55,925
To Bank A/c 8,25,000
To Convertible bonds A/c (liability) 1,30,925
(Being interest expense recorded at market rate of
7% and actual interest paid @ 5.5%)
31st March, 2020
Interest expense A/c Dr. 9,65,090
To Bank A/c 8,25,000
 PAST EXAMINATION QUESTIONS 107

To Convertible bonds A/c (liability) 1,40,090

(Being interest expense recorded at market rate of
7% and actual interest paid @ 5.5%)
31st March, 2021
Interest expense A/c Dr. 9,74,896
To Bank A/c 8,25,000
To Convertible bonds A/c (liability) 1,49,896
(Being interest expense recorded at market rate of
7% and actual interest paid @ 5.5%)
31st March, 2022
Interest expense A/c Dr. 9,85,389
To Bank A/c 8,25,000
To Convertible bonds A/c (liability) 1,60,389
(Being interest expense recorded at market rate of
7% and actual interest paid @ 5.5%)

(ii) Table showing computation of interest expense at market rate and actual interest
outflow @ 5.5%

Year Date Opening Actual Interest Increase Closing

bond liability interest expense in liability bond liability
outflow @ @ 7%
5.5%
a b =1.5 cr c = a x 7% d = c-b e = a+d
x 5.5%
0 1st April, 2018 1,36,56,075
1 31st March, 2019 1,36,56,075 8,25,000 9,55,925 1,30,925 1,37,87,000
2 31st March, 2020 1,37,87,000 8,25,000 9,65,090 1,40,090 1,39,27,090
3 31st March, 2021 1,39,27,090 8,25,000 9,74,896 1,49,896 1,40,76,986
4 31st March, 2022 1,40,76,986 8,25,000 9,85,389 1,60,389 1,42,37,375
5 31st March, 2023 1,42,37,375 8,25,000 9,96,616 1,71,616 1,44,08,991
6 31st March, 2024 1,44,08,991 8,25,000 10,08,629 1,83,629 1,45,92,620
7 31st March, 2025 1,45,92,620 8,25,000 10,21,483 1,96,483 1,47,89,103
8 31st March, 2026 1,47,89,103 8,25,000 10,35,897* 2,10,897 1,50,00,000

*Difference of ` 660 (10,35,897 -10,35,237) is due to rounding off

108 FINANCIAL REPORTING

(iii) When holders of the bonds elect to convert the bonds to ordinary shares at the
end of the fourth year (after receiving their interest payments), the entries
would be:

Dr. (`) Cr. (`)

31st March, 2022
Convertible bonds A/c (liability) Dr. 1,42,37,375
Convertible bonds A/c (equity) Dr. 13,43,925
To Ordinary share capital A/c 1,55,81,300
(Being bonds converted into ordinary shares of X
Ltd.)

Working Note:
Computation of equity and liability component of convertible bond at 7% market rate

`
Present value of principal to be received at the end of eight year dis-
counted at 7% (1,50,00,000 x 0.582) 87,30,000
Annuity of annual interest discounted at 7% for 8 years (1,50,00,000 x
5.5% x 5.971) 49,26,075
Total present value (a) 1,36,56,075
Equity component (balancing figure) (a-b) 13,43,925
Total proceeds received from issuance of convertible bonds (b) 1,50,00,000

QUESTION 158

X Ltd. has made a borrowing from RGD Bank for ` 20,000 at a fixed interest of 12% per
annum. Loan processing fees were paid additionally amounting to ` 1,000 and the loan is pay-
able in 4 half-yearly installments of ` 5,000 each.
Details are as follows:

Particulars Details
Loan amount ` 20,000
Date of loan (Starting Date) 1st April, 2020
Date of loan (Finishing Date) 31st March, 2022
Description of repayment Repayment of loan starts from 30th September, 2020
(To be paid on half yearly basis)
Installment amount ` 5,000
 PAST EXAMINATION QUESTIONS 109

Interest rate 12% per annum

Interest charge Interest to be charged and paid quarterly
Upfront fees ` 1,000

Compute the interest to be charged to the statement of profit & loss every quarter over
the period of loan. The effective interest rate is 16.60% per annum.
(5 Marks)
(CA FINAL MAY 2022 EXAM)
SOLUTION :
The loan taken by X Ltd. shall be measured at amortised cost as follows:
Initial measurement = At transaction price less processing fee ie. ` 19,000 (20,000 – 1,000)
Subsequent measurement = Interest to be accrued using effective rate of interest as
follows:

Quar- Opening Interest @ Cash flows Closing bal-

ter balance (A) 16.60% (B)=[(A) x (C) = [Refer column of ance
16.60%/4] (A) + (B) -
D of W.N.]
(C)
1 19,000.00 789.00 600.00 19,189.00
2 19,189.00 796.00 5,600.00 14,385.00
3 14,385.00 597.00 450.00 14,532.00
4 14,532.00 603.00 5,450.00 9,685.00
5 9,685.00 402.00 300.00 9,787.00
6 9,787.00 406.00 5,300.00 4,893.00
7 4,893.00 203.00 150.00 4,946.00
8 4,946.00 204.00* 5,150.00 -

* Difference is due to approximation.

Working Note:

Quar- Opening Interest @ Principal repay- Total Cash Closing bal-

ter balance 12% p.a. ment at quarter flow ance
(A) (B) = [(A) x end (E) = (A) -
(D) = (B) +
12%/4] (C) (C) (C)

1 20,000.00 600.00 - 600.00 20,000.00

2 20,000.00 600.00 5,000.00 5,600.00 15,000.00
 110 FINANCIAL REPORTING

3 15,000.00 450.00 - 450.00 15,000.00

4 15,000.00 450.00 5,000.00 5,450.00 10,000.00
5 10,000.00 300.00 - 300.00 10,000.00
6 10,000.00 300.00 5,000.00 5,300.00 5,000.00
7 5,000.00 150.00 - 150.00 5,000.00
8 5,000.00 150.00 5,000.00 5,150.00 -

QUESTION 159

On 1st April, 2021, Mohan Ltd. has sold goods to Hari Ltd. at a consideration of ` 7,50,000.
The receipt of this is receivable in three equal instalments of ` 2,50,000 each over a two-
year period (receipts on 1st April, 2021; 31st March 2022 and 31st March 2023).
The company is offering a discount of 5% (i.e. ` 37,500), if payment is made in full at the
time of sale. The sale agreement reflects an implicit interest rate of 5.358% p.a.
The total consideration to be received from such sale is at ` 7,50,000 and hence, the man-
agement has recognized the revenue from sale of goods for ` 7,50,000.
You are required to analyse whether the above accounting treatment made by the accoun-
tant is in compliance of Ind AS. If not, advise the correct treatment alongwith journal
entries and extracts of Statement of Profit & Loss and Balance Sheet.
(6 Marks)
(CA FINAL NOV 2022 EXAM)
SOLUTION :
The revenue from sale of goods shall be recognised at the fair value of the consideration
received or receivable. The fair value of the consideration is determined by discounting all
future receipts using an imputed rate of interest where the receipt is deferred beyond
normal credit terms. The difference between the fair value and the nominal amount of the
consideration is recognised as interest revenue. Hence, the accounting treatment of recog-
nizing revenue of ` 7,50,000 by the accountant is not correct.
The fair value of consideration (cash price equivalent) of the sale of goods to be recognised
on the date of sale should be calculated as follows:

Period Consideration (In- Present value Present value of

stallment) factor consideration

` `
Time of sale 2,50,000 - 2,50,000
End of 1st year 2,50,000 0.949 2,37,250
 PAST EXAMINATION QUESTIONS 111

End of 2nd year 2,50,000 0.901 2,25,250

7,50,000 7,12,500

Mohan Ltd. will recognise the revenue from sale of goods and finance income as follows:

Particulars ` `
Initial recognition of sale of goods
Cash / Bank A/c Dr. 2,50,000
Trade Receivable A/c Dr. 4,62,500
To Sale A/c 7,12,500
Recognition of interest expense and receipt of second in-
stallment
Cash / Bank A/c Dr. 2,50,000
To Interest Income A/c (4,62,500 x 5.358%) 24,781
To Trade Receivable A/c 2,25,219
Recognition of interest expense and payment of final in-
stallment
Cash / Bank A/c Dr. 2,50,000
To Interest Income A/c (Balancing figure) 12,719
To Trade Receivable A/c (4,62,500 – 2,25,319) 2,37,281

Statement of Profit and Loss (Extracts) for the year ended 31st March, 2022 and
31st March, 2023

As at 31st March, As at 31st March,

2022 2023
` `
Income
Sale of Goods 7,12,500 -
Other Income (Finance income) 24,781 12,719

Balance Sheet (extracts) as at 31st March, 2022 and 31st March, 2023

As at 31st March, 2022 As at 31st March,

2023
` `
Assets
 112 FINANCIAL REPORTING

Current Assets
Financial Assets
Trade Receivables 2,37,281 XXX

QUESTION 160

On 1st April, 2021 “Fortunate Bank” has provided a loan of ` 25,00,000 to Mohan Limit-
ed for 4 years at 10% p.a. and the loan has been guaranteed by Surya Limited, which is a
holding company for Mohan Limited. Interest payments are made at the end of each year
and the principal is repaid at the end of the loan term. If Surya Limited had not issued a
guarantee, ‘Fortunate Bank‛ would have charged Mohan Limited an interest rate of 14% p.a.
Surya Limited does not charge Mohan Limited for providing the guarantee.
On 31st March 2022, there is 2% probability that Mohan Limited may default on the loan in
the next 12 months. If Mohan Limited defaults on the loan, Surya Limited does not expect
to recover any amount from Mohan Limited.
On 31st March 2023, there is 4% probability that Mohan Limited may default on the loan in
the next 12 months. If Mohan Limited defaults on the loan, Surya Limited does not expect
to recover any amount from Mohan Limited.
On 31st March 2024, there is 5% probability that Mohan Limited may default on the loan in
the next 12 months. If Mohan Limited defaults on the loan, Surya Limited does not expect
to recover any amount from Mohan Limited.
You are required to provide accounting treatment of financial guarantee as per Ind AS
109 in the books of Surya Limited on initial recognition and in subsequent periods till 31st
March, 2024.
(12 Marks)
(CA FINAL NOV 2022 EXAM)
 PAST EXAMINATION QUESTIONS 113

SOLUTION :
1st April 2021
A financial guarantee contract is initially recognised at fair value. The fair value of the
guarantee will be the present value of the difference between the net contractual cash
flows required under the loan, and the net contractual cash flows that would have been re-
quired without the guarantee.

Particulars Year 1 Year 2 Year 3 Year 4 Total

(`) (`) (`) (`) (`)
Cash flows based on inter- 3,50,000 3,50,000 3,50,000 3,50,000 14,00,000
est rate of 14% (A)
Cash flows based on inter-
est rate of 10% (B) 2,50,000 2,50,000 2,50,000 2,50,000 10,00,000
Interest on differential 1,00,000 1,00,000 1,00,000 1,00,000 4,00,000
rate
(C) = (A-B)
Discount factor @ 14% 0.877 0.769 0.675 0.592
Interest on differential
rate discounted @ 14% 87,700 76,900 67,500 59,200 2,91,300
Fair value of financial guar-
anteed contract (at incep-
tion)
2,91,300

Alternative manner of presentation for the calculation of fair value of financial guaran-
teed contract (at inception)
(i) Interest on loan @ 10% = ` 2,50,000
Present value of cash flow of loan at concessional rate with guarantee @ 14%
= ` 2,50,000 x 2.9138 + ` 25,00,000 x 0.5921
= ` 7,28,450 + ` 14,80,250 = ` 22,08,700
(ii) Interest on loan at normal rate of 14% = ` 3,50,000 Present Value of Cash flow of
loan at 14%
= ` 3,50,000 x 2.9138 + ` 25,00,000 x 0.5921
= ` 25,00,080 or ` 25,00,000
Difference (ii) – (i) = ` 25,00,000 - ` 22,08,700
Fair value of financial guaranteed contract (at inception) = ` 2,91,300
 114 FINANCIAL REPORTING

Journal Entry

Particulars Debit (`) Credit (`)

Investment in subsidiary Dr. 2,91,300
To Financial guarantee (liability) 2,91,300
(Being financial guarantee initially recorded)

31st March 2022

Subsequently at the end of the reporting period, financial guarantee is measured at the
higher of:
- the amount of loss allowance; and
- the amount initially recognised less cumulative amortization, where appropriate.
At 31st March 2022, there is 2% probability that Mohan Limited may default on the loan
in the next 12 months. If Mohan Limited defaults on the loan, Surya Limited does not ex-
pect to recover any amount from Mohan Limited. The 12-month expected credit losses are
therefore ` 50,000 (` 25,00,000 x 2%).
The initial amount recognised less amortisation is ` 2,32,082 (Refer table below). The
unwound amount is recognised as income in the books of Surya Limited, being the benefit
derived by Mohan Limited not defaulting on the loan during the period.

Year ended on Opening bal- EIR @ 14% Benefits provid- Closing balance
31st March ance (b) = (a x ed
(a) 14%) (c) (d) = (a) + (b)
-(c)
` ` `
2022 2,91,300 40,782 (1,00,000) 2,32,082
2023 2,32,082 32,491 (1,00,000) 1,64,573
2024 1,64,573 23,040 (1,00,000) 87,613
2025 87,613 12,387* (1,00,000) -

* Difference of ` 121 (` 12,387 – ` 12,266) is due to approximation.

The carrying amount of the financial guarantee liability after amortisation is therefore `
2,32,082, which is higher than the 12-month expected credit losses of ` 50,000. The liabil-
ity is therefore adjusted to ` 2,32,082 (the higher of the two amounts) as follows:

Particulars Debit (`) Credit (`)

Financial guarantee (liability) Dr. 59,218
 PAST EXAMINATION QUESTIONS 115

To Profit and loss 59,218

(Being financial guarantee subsequently adjusted)

31st March 2023

At 31st March 2023, there is 4% probability that Mohan Limited will default on the loan
in the next 12 months. If Mohan Limited defaults on the loan, Surya Limited does not ex-
pect to recover any amount from Mohan Limited. The 12-month expected credit losses are
therefore ` 1,00,000 (` 25,00,000 x 4%).
The carrying amount of the financial guarantee liability after amortisation is ` 1,64,573,
which is higher than the 12-month expected credit losses of ` 1,00,000. The liability is
therefore adjusted to ` 1,64,573 (the higher of the two amounts) as follows:

Particulars Debit (`) Credit (`)

Financial guarantee (liability) Dr. 67,509
To Profit and loss 67,509
(Being financial guarantee subsequently adjusted)

31st March 2024

At 31st March 2024, there is 5% probability that Mohan Limited will default on the loan
in the next 12 months. If Mohan Limited defaults on the loan, Surya Limited does not ex-
pect to recover any amount from Mohan Limited. The 12-month expected credit losses are
therefore ` 1,25,000 (` 25,00,000 x 5%).
The initial amount recognised less accumulated amortisation is ` 87,613, which is lower than
the 12-month expected credit losses (` 1,25,000). The liability is therefore adjusted to `
1,25,000 (the higher of the two amounts) as follows:

Particulars Debit (`) Credit (`)

Financial guarantee (liability) Dr. 39,573*
To Profit and loss (Refer Note below) 39,573*
(Being financial guarantee subsequently adjusted)

* Note: The carrying amount at the end of 31st March 2023 will be ` 1,25,000 (i.e. `
1,64,573 less 12-month expected credit losses of ` 39,573).

QUESTION 161

ENG Ltd. has developed model to measure the expected credit loss based on the lifetime
expected credit loss model. Accordingly, the company has estimated the following provi-
sioning matrix:
 116 FINANCIAL REPORTING

Current 1-30 days 31-60 days 61-90 days More than 90

past due past due past due days past due
Default Rate 0.3% 1.6% 3.6% 6.6% 10.6%

The Company has a portfolio of trade receivables of ` 6 crores as on 31st March, 2022 and
operates in only one geographical region. The customer base of the company consists of
large number of small clients and trade receivables are categorized by common risk char-
acteristics that are representative of customer‛s abilities to pay all amounts due as per the
contractual terms.
The trade receivables do not have significant financing component. The above provision ma-
trix is based on its historically observed default rate over the expected life of the trade
receivables and is adjusted for forward looking estimate.
The company has asked you to suggest whether the above system of making the provision
for the expected credit loss is in accordance with the applicable Ind AS? If yes, then de-
termine the expected credit loss for the Trade Receivables outstanding as on 31st March,
2022 on the following basis:

Current 1-30 days 31-60 61-90 More than 90

past due days past days past days past due
due due
% of Trade Re- 50% 25% 13% 8% 4%
ceivables

(5 Marks)
(CA FINAL NOV 2022 EXAM)
SOLUTION :
To determine the expected credit losses for the portfolio, ENG Ltd. should use a provision
matrix. The provision matrix will be based on its historical observed default rates over the
expected life of the trade receivables and shall be adjusted for forward-looking estimates.
At every reporting date the historical observed default rate shall be updated and changes
in the forward-looking estimates shall be analysed. In this case, it is forecast that economic
conditions will deteriorate over the next year. Therefore, as per para 5.5.15 of Ind AS 109,
the loss allowance for trade receivables shall be measured at an amount equal to lifetime
expected credit losses. On that basis, ENG Ltd. estimates the provision matrix.
The trade receivables from the large number of small customers amount to ` 6,00,00,000
and are measured using the provision matrix:
 PAST EXAMINATION QUESTIONS 117

Provisio n % Gross carrying Default Lifetime expected

age amount rate credit loss allow-
ance (Gross carrying
amount x lifetime
expected
credit loss rate)
a b C=`6 d e=cxd
crore x b
` `
Current 50% 3,00,00,000 0.3% ` 90,000
1–30 days past due 25% 1,50,00,000 1.6% ` 2,40,000
31–60 days past due 13% 78,00,000 3.6% ` 2,80,800
61–90 days past due 8% 48,00,000 6.6% ` 3,16,800
More than 90 days past due
4% 24,00,000 10.6% ` 2,54,400
6,00,00,000 ` 11,82,000

QUESTION 162

Autumn Limited has a policy of providing subsidized loans to its employees for their per-
sonal purposes. Mrs. Jama Bai, a senior HR manager in the Company, took a loan of ` 12.00
lakhs on the following terms:
 Interest rate 4% per annum
 Loan disbursement date: 1st April 2019
 The principal amount of the loan shall be recovered in 4 equal annual installments com-
mencing from 31st March 2020
 The accumulated interest computed on reducing balance at simple interest is collected
in 3 equal annual installments after collection of the principal amount
 Mrs. Jama Bai must remain in service till the principal and interest are paid
 The market rate of a comparable loan to Mrs. Jama Bai is 9% per annum
 The present value of ` 1 at 9% per annum at the end of respective years is as follows:

Year ending 31st 2020 2021 2022 2023 2024 2025 2026
March
Present Value 0.9174 0.8417 0.7722 0.7084 0.6499 0.5963 0.5470
 118 FINANCIAL REPORTING

Under the assumption that no probable future economic benefits except the return of loan
has been guaranteed by the employee, You are required to:
i. Provide the journal entries at the time of initial recognition of loan on 1st April 2019
and as at 31st March 2020; and
ii. Prepare ledger account of ‘Loan to Mrs. Jama Bai‛ from the inception of the loan till its
final payment.
(CA FINAL MAY 2023 EXAM)

QUESTION 163

Weak Limited, which is a fully owned subsidiary company of strong Limited approached
Strong Limited for an interest free loan for mitigation of its financial difficulties. Strong
Limited Provided the loan to Weak Limited on the following terms & conditions:

Nature of loan Interest Free

Amount of Loan ` 60,00,000
Date of disbursement of loan April 1, 2021
Loan period 3 years
Loan repayable by Weak Ltd. On March 31, 2024
Market rate of interest for similar loan 8% (both for holding and subsidiary) per
annum
P.V factor of ` 1 at the end of 3rd year at 0.7938
8% per annum is

Assuming that there are no transaction costs, you are required to pass necessary account-
ing entries in the books of Weak Limited for all the three years.
(CA FINAL MAY 2023 EXAM)

QUESTION 164

On 1 April 2018, 8% convertible loan with a nominal value of ` 6,00,000 was issued at par. It
is redeemable on 31 March 2022 also at par. Alternatively, it may be converted into equity
shares on the basis of 1 new share for each of 200 worth of loan.
An equivalent loan without the conversion option would have carried interest at 10% .Interest
of Ra 48,000 has already been paid and included as a finance Cost.

Year End @8% @10%

1 0.93 0.91
2 0.86 0.83
 PAST EXAMINATION QUESTIONS 119

3 0.79 0.75
4 0.73 0.68
How will the Company present the above loan notes in the financial statements for the year
ended 31 March 2019?
(MTP MARCH 2019)

QUESTION 165

QA Ltd issued 10,00,000 of 8% long term bond-A Series of ` 1 each on 1st April, 2016 the
bond tenure is 3 years. Interest in payable annually at the end of each year. The investors
expect an effective interest rate on the loan at 10% .
QA Ltd. Wants you to suggest the suitable accounting entries for the issue of these bonds
as per applicable IND AS. Consider the discounting factor 3 years, 10% discounting factor
is 0.751315 and 3 years cumulative discounting factor is 2.48685.
(i) What is the principal value of the bond at the initial recognition at the time of issue
or bond as per applicable Ind AS?
(ii) What is the present value of the interest payment to be recognized as part of the sale
price of the bond as per applicable Ind AS?
(iii) What are the proceeds of the sale of the bond to be recognized at the time of initial
recognition as per applicable Ind AS?
(iv) What is the accounting entry to be passed at the time of accounting for payment of
interest for the first year?
(MTP MARCH 2019)

QUESTION 166

On 1St April,2014 Shelter Ltd. issued 5,000 8% convertible debentures with a face value
of ` 100 each maturing on 31st March, 2019. The debentures can be converted into equity
shares of Shelter Ltd at a conversion price of ` 105 per share, interest is payable annually
in cash. At the date of issue, shelter Ltd. could have issued non-convertible debt with a 5
year term bearing a coupon interest rate of 12%. On 1St April, 2017 convertible debenture
have a fair value of ` 5,25,000. Shelter Ltd makes a tender offer to debenture holders
to repurchase the debentures for ` 5,25,000 which the holders accepted. At the date of
repurchase, Shelter Ltd. could have issued non-convertible debt with a 2 year term bearing
a coupon interest rate of 9%.
Show accounting entries in the books of Shelter Ltd. for recording of equity and liability
component:

(i) At the time of initial recognition and

(ii) At the time of repurchase of the convertible debentures.
120 FINANCIAL REPORTING

The following present values of ` 1 at 8%,9% & 12% are supplied to you:

Interest Year 1 Year 2 Year 3 Year 4 Year 5

Rate
8% 0.926 0.857 0.794 0.735 0.681
9% 0.917 0.842 0.772 0.708 0.650
12% 0.893 0.797 0.712 0.636 0.567
(MTP APRIL 2019)
(Repurchase Option)

QUESTION 167

Blueberry Ltd entered into following transaction during the year ended 31st March 20X2:
(a) Entered into a speculative interest rate option costing ` 10,000 on 1st April 20X0 to
borrow ` 6,000,000 from Exon Bank Commencing 30th June 20X2 for 6 months at
4%.The value of the option at 31st March, 20X2 was ` 15,250.
(b) Purchased 6% debentures in Fox Ltd. on 1st April, 20X1 (their issue date) for ` 150,000
as an investment. Blueberry Ltd. intends to hold the debentures, until their redemption
at a premium, in 5 years‛ time The effective rate of interest of the bond is 8%
(c) Purchased 50,000 shares in Cox Ltd. on 1st October, 20X2 for ` 3,50 each as an
investment. The share price oh 31st March, 20X2 was ` 3.75.
(d) Show the accounting treatment and relevant extracts from the financial statements
for the year ended 31st March, 20X2 of transaction related to financial instruments
Blueberry Ltd. designates financial assets at fair value through Profit or loss only
when this is unavoidable.
(MTP MAY 2020)
(Repurchase Option)
QUESTION 168

An entity purchases a debt instrument with a fair value of ` 1,000 on 15th March, 20X1 and
measures the debt instrument at fair value through comprehensive income. The instrument
has an interest rate of 5% over the contractual term of 10 years, and has a 5% effective
interest rate. At initial recognition, the entity determines that the asset is not a purchased
or original credit-impaired asset.
On 31st March 20X1 (the reporting date), the fair value of the debt instrument has decreased
to ` 950 as a result of changes in market interest rate. The entity determines that there
has not been a significant increase in credit risk since initial recognition and that ECL should
be measured at an amount equal to 12 month ECL, which amounts to ` 30.
On 1st April 20X1, the entity decides to sell the debt instrument for ` 950, which is its fair
value at that date.
 PAST EXAMINATION QUESTIONS 121

Pass journal entries for recognition, impairment and sale of debt instruments as per Ind AS
109, Entries relating to interest income are not to be provided
(MTP OCTOBER 21)

QUESTION 169

XYZ issued ` 4,80,000 4% redeemable preference shares on 1st April 20X5 at par. Interest
is paid annually in arrears, the first payment of interest amounting ` 19,200 was made
on 31st March 20X6 and it is debited directly to retained earnings by accountant. The
preference shares are redeemable for a cash amount of ` 7,20,000 on 31st March 20X8.
The effective rate of interest on the redeemable preference shares is 18% per annum. The
proceeds of the issue have been recorded within equity by accountant as this reflects the
legal nature of the shares. Board of directors intends to issue new equity shares over the
next two years to build up cash resources to redeem the preference shares.
Mukesh, Accounts manager of XYZ has been told to review the accounting of aforesaid
issue. CFO has asked from Mukesh the closing balance of preference shares at the year
end. If you were Mukesh, then how much balance you would have shown to CFO on analysis
of the stated issue. Prepare necessary adjusting journal entry in the books of account, if
required.
(RTP VIDEO MAY 2020)

QUESTION 170 (MIXED WITH FOREIGN CURRENCY IND AS21)

(BEST QUESTION)

An Indian entity, whose functional currency is rupees, purchases USD dominated bond at
its fair value of USD 1,000. The bond carries stated interest @ 4.7% p.a. on its face value.
The said interest is received at the year end. The bond has maturity period of 5 years and
is redeemable at its face value of USD 1,250. The fair value of the bond at the end of year
1 is USD 1,060. The exchange rate on the date of transaction and at the end of year 1 are
USD 1 = ` 40 and USD 1 = ` 45, respectively. The weighted average exchange rate for the
year is 1 USD = ` 42.
The entity has determined that it is holding the bond as part of an investment portfolio
whose objective is met both by holding the asset to collect contractual cash flows and
selling the asset. The purchased USD bond is to be classified under the FVTOCI category.
The bond results in effective interest rate (EIR) of 10% p.a.
Calculate gain or loss to be recognised in Profit & Loss and Other Comprehensive Income
for year 1. Also pass journal entry to recognise gain or loss on above. (Round off the figures
to nearest rupees)
(RTP VIDEO NOV. 2020)
 122 FINANCIAL REPORTING

QUESTION 171 (GOOD QUESTION ON GUARANTEE)

On 1 April 20X1, Sun Limited guarantees a `10,00,000 loan of Subsidiary – Moon Limited,
which Bank STDK has provided to Moon Limited for three years at 8%.
Interest payments are made at the end of each year and the principal is repaid at the end
of the loan term.
If Sun Limited had not issued a guarantee, Bank STDK would have charged Moon Limited an
interest rate of 11%. Sun Limited does not charge Moon Limited for providing the guarantee.
On 31 March 20X2, there is 1% probability that Moon Limited may default on the loan in
the next 12 months. If Moon Limited defaults on the loan, Sun Limited does not expect to
recover any amount from Moon Limited.
On 31 March 20X3, there is 3% probability that Moon Limited may default on the loan in
the next 12 months. If Moon Limited defaults on the loan, Sun Limited does not expect to
recover any amount from Moon Limited.
Provide the accounting treatment of financial guarantee as per Ind AS 109 in the books of
Sun Ltd., on initial recognition and in subsequent periods till 31 March 20X3.
(RTP VIDEO MAY 2021)

QUESTION 172

On 1st April, 20X1, PS Limited issued 6,000, 9% convertible debentures with a face value of
` 100 each maturing on 31st March, 20X6. The debentures are convertible into equity shares
of PS Limited at a conversion price of ` 105 per share. Interest is payable annually in cash.
At the date of issue, non-convertible debt could have been issued by the company at coupon
rate of 13%. On 1st April, 20X4, the convertible debentures have a fair value of ` 6,30,000.
PS Limited makes a tender offer to debenture-holders to repurchase the debentures for
` 6,30,000 which the debenture holders accepted. At the date of repurchase, PS Limited
could have issued non-convertible debt with a 2 year term bearing coupon interest @ 10%.
Show accounting entries in the books of PS Limited for recording of equity and liability
component:
(i) At the time of initial recognition
(ii) At the time of repurchase of the convertible debentures
(RTP VIDEO NOV. 2021)

QUESTION 173

On 1st April, 2X01, Entity X issued a 10% convertible debenture with a face value of `
1,000 maturing on 31st March, 2X11. The debenture is convertible into ordinary shares of
Entity X at a conversion price of ` 50 per share. Interest is payable yearly in cash. On 1st
April, 2X02, to induce the holder to convert the convertible debenture promptly, Entity X
 PAST EXAMINATION QUESTIONS 123

reduces the conversion price to ` 40 if the debenture is converted before 1st June, 2X02
(ie, within 60 days). The market price of Entity X‛s ordinary shares on the date the terms
are amended is ` 80 per share. How will the revised terms be accounted?
(RTP VIDEO MAY 2022)

QUESTION 174

ABC Ltd. issues 4% 1,00,000 OCPS at a face value of ` 100 per share on 1st April, 20X1 and
these are redeemable after 5 years, ie, on 31st March, 20X6. Dividend is non-cumulative.
Each preference shares entitles the holders to 10 equity shares and the preference shares
are optionally convertible by the holder at any time until maturity.
How will the preference shares be classified at initial recognition assuming that a comparable
instrument carries a market interest rate of 7%? Provide journal entries for year 1. Will
this classification be changed subsequently in case there is likelihood that OCPS will be
encashed at the end of the maturity period?
(RTP VIDEO MAY 2022)

QUESTION 175

On 1st April, 20X1 an entity granted an interest-free loan of ` 5,00,000 to an employee for
a period of three years. The market rate of interest for similar loans is 5% per year.
On 31st March, 20X3, because of financial difficulties, the employee asked to extend the
interest-free loan for further three years. The entity agreed. Under the restructured
terms, repayment will take place on 31st March, 20X7. However, the entity only expects to
receive a payment of ` 2,50,000, given the financial difficulty of the employee.
Explain the accounting treatment on initial recognition of loan and after giving effect of
the changes in the terms of the loan as per Ind AS 109. Support your answer with Journal
entries and amortised cost calculation, as on the date of initial recognition and on the date
of change in terms of loan.
(RTP VIDEO NOV. 2022)
124 FINANCIAL REPORTING
 66 FINANCIAL REPORTING

maintenance alone was required, it would have cost the customer ` 12,500 per annum.
Explain the requirements of Ind AS in relation to the XYZ Ltd.‛s supply of customized
contract and the maintenance that has been agreed to be provided to the customer.
Ignore discounting and calculate the amounts to be recognized in the financial statements
as at 31 st March, 20X2.
(MTP MARCH 2022)
SOLUTION
As per para 81 of Ind AS 115
- a customer receives a discount for purchasing a bundle of goods or services if the sum
of the stand-alone selling prices of those promised goods or services in the contract
exceeds the promised consideration in a contract.
- except when an entity has observable evidence in accordance with paragraph 82 that
the entire discount relates to only one or more, but not all, performance obligations
in a contract, the entity shall allocate a discount proportionately to all performance
obligations in the contract.
- the proportionate allocation of the discount in those circumstances is a consequence
of the entity allocating the transaction price to each performance obligation on the
basis of the relative stand-alone selling prices of the underlying distinct goods or
services.
Amount to be recognised:
In this case, there are two separately identifiable performance obligations one being sale
of the equipment and second being maintenance contract for three years.
For recognition of revenue, relative stand-alone selling price of the individual components
may be taken and the consideration allocated in proportion of relative fair values, i.e.
4,85,500: 37,500* (i.e. 12,500 x 3). Hence, the sale of equipment should be recognised at `
4,64,149 [` 5,00,000 x {4,85,500 / (4,85,500 + 37,500)}] when all other conditions for sale
of the equipment are fulfilled and the revenue from maintenance services of ` 35,851 [`
5,00,000 x {37,500 / (4,85,500 + 37,500)}] should be the service revenue recognised over
a period of three years as per its stage of completion.

QUESTION 105

A contractor enters into a contract with a customer to build an asset for ` 1,00,000, with
a performance bonus of ` 50,000 that will be paid based on the timing of completion. The
amount of the performance bonus decreases by 10% per week for every week beyond the
agreed-upon completion date. The contract requirements are similar to those of contracts
that the contractor has performed previously, and management believes that such experience
is predictive for this contract. The contractor concludes that the expected value method is
most predictive in this case.
 IND AS 115: REVENUE FORM CONTRACTS WITH CUSTOMERS 67

The contractor estimates that there is a 60% probability that the contract will be completed
by the agreed-upon completion date, a 30% probability that it will be completed one week
late, and a 10% probability that it will be completed two weeks late.
(MTP APRIL 2022)
SOLUTION
The transaction price should include management‛s estimate of the amount of consideration
to which the entity will be entitled for the work performed.

Probability-weighted Consideration
` 1,50,000 (fixed fee plus full performance bonus) x 60% ` 90,000
` 1,45,000 (fixed fee plus 90% of performance bonus) x 30% ` 43,500
` 1,40,000 (fixed fee plus 80% of performance bonus) x 10% ` 14,000
Total probability-weighted consideration ` 1,47,500

Based on the probability-weighted estimate, the total transaction price is ` 1,47,500. The
contractor have to update its estimate at each reporting date.

QUESTION 106

An entity enters into a contract for the sale of Product A for ` 1,000, As part of the
contract, the entity gives the customer a 40%. discount voucher for any future purchases
up to ` 1,000 in next 30 days. The entity intends to offer a 10% discount on all sales during
the next 30 days. as part of a seasonal promotion. The 10% discount on all used in addition
to the 40% discount voucher.
The entity believes there is 80% likelihood that a customer will redeem the voucher and on
an average, a customer will purchase ` 500 of additional products:
Determine how many performance obligations does the entity have and their stand-alone
selling price and allocated transaction price?
(MTP MAY 2020)

QUESTION 107

KK Ltd. runs a departmental store which awards 10 points for every purchase of ` 500
which can be discounted by the customers for further shopping with the same merchant.
Each point is redeemable on any future purchases of KK Ltd.‛s products within 3 years .
Value of each point is ` 0.50. During the accounting period 2017-2018, the entity awarded
1,00,00,000 points to various customers of which 18,00,000 points remained undiscounted
(to be redeemed till 31st March, 2020). The management expects only 80% of the remaining
will be discounted in future.
 68 FINANCIAL REPORTING

The Company has approached your firm with the following queries and has asked you to
suggest the accounting treatment (Journal Entries) under the applicable Ind AS for these
award points:

(a) How should the recognition be done for the sale of goods worth ` 10,00,000 on a
particular day?
(b) How should the redemption transaction be recorded in the year 2017-2018?
The Company has requested you to present the sale of goods and redemption as
independent transaction. Total sales of the entity is ` 5,000 lakhs.
(c) How much of the deferred revenue should be recognised at the year-end (2017-
2018) because of the estimation that only 80% of the outstanding points will be
redeemed?
(d) In the next year 2018-2019, 60% of the outstanding points were discounted Balance
40% of the outstanding points of 2017-2018 still remained outstanding. How much
of the deferred revenue should the merchant recognize in the year 2018-2019 and
what will be the amount of balance deferred revenue?
(e) How much revenue will the merchant recognized in the year 2019-2020, if 3,00,000
points are redeemed in the year 2019-2020?

(RTP MAY 2019)

QUESTION 108

An entity G Ltd. enters into a contract with a customer P Ltd. for the sale of a machinery
for `20,00,000. P Ltd. intends to use the said machinery to start a food processing unit.
The food processing industry is highly competitive and P Ltd. has very little experience in
the said industry.
P Ltd. pays a non-refundable deposit of `1,00,000 at inception of the contract and enters
into a long-term financing agreement with G Ltd. for the remaining 95 per cent of the
agreed consideration which it intends to pay primarily from income derived from its food
processing unit as it lacks any other major source of income. The financing arrangement
is provided on a non-recourse basis, which means that if P Ltd. defaults then G Ltd. can
repossess the machinery but cannot seek further compensation from P Ltd., even if the full
value of the amount owed is not recovered from the machinery. The cost of the machinery
for G Ltd. is ` 12,00,000. P Ltd. obtains control of the machinery at contract inception.
When should G Ltd. recognise revenue from sale of machinery to P Ltd. in accordance with
Ind AS 115?
(RTP NOV. 2019)
 IND AS 115: REVENUE FORM CONTRACTS WITH CUSTOMERS 69

QUESTION 109

(a) Entity I sells a piece of machinery to the customer for ` 2 million, payable in 90
days. Entity I is aware at contract inception that the customer might not pay the full
contract price. Entity I estimates that the customer will pay at least ` 1.75 million,
which is sufficient to cover entity I‛s cost of sales (` 1.5 million) and which entity I
is willing to accept because it wants to grow its presence in this market. Entity I has
granted similar price concessions in comparable contracts.
Entity I concludes that it is highly probable that it will collect ` 1.75 million, and such
amount is not constrained under the variable consideration guidance.
What is the transaction price in this arrangement?
(b) On 1 January 20x8, entity J enters into a one-year contract with a customer to deliver
water treatment chemicals. The contract stipulates that the price per container will
be adjusted retroactively once the customer reaches certain sales volume, defined, as
follows:

Price per container Cumulative sales volume

` 100 1 - 1,000,000 containers
` 90 1,000,001 - 3,000,000 containers
` 85 3,000,001 containers and above

Volume is determined based on sales during the calendar year. There are no minimum
purchase requirements. Entity J estimates that the total sales volume for the year will
be 2.8 million containers, based on its experience with similar contracts and forecasted
sales to the customer.
Entity J sells 700,000 containers to the customer during the first quarter ended 31
March 20X8 for a contract price of ` 100 per container.
How should entity J determine the transaction price?
(c) Entity K sells electric razors to retailers for C 50 per unit. A rebate coupon is included
inside the electric razor package that can be redeemed by the end consumers for C 10
per unit.
Entity K estimates that 20% to 25% of eligible rebates will be redeemed, based on
its experience with similar programmes and rebate redemption rates available in the
market for similar programmes. Entity K concludes that the transaction price should
incorporate an assumption of 25% rebate redemption, as this is the amount for which
it is highly probable that a significant reversal of cumulative revenue will not occur if
estimates of the rebates change.
How should entity K determine the transaction price?
 70 FINANCIAL REPORTING

(d) A manufacturer enters into a contract to sell goods to a retailer for ` 1,000. The
manufacturer also offers price protection, whereby it will reimburse the retailer for
any difference between the sale price and the lowest price offered to any customer
during the following six months. This clause is consistent with other price protection
clauses offered in the past, and the manufacturer believes that it has experience
which is predictive for this contract.
Management expects that it will offer a price decrease of 5% during the price
protection period. Management concludes that it is highly probable that a significant
reversal of cumulative revenue will not occur if estimates change.
How should the manufacturer determine the transaction price?
(RTP MAY 2020)
SOLUTION
(a) Entity I is likely to provide a price concession and accept an amount less than ` 2
million in exchange for the machinery. The consideration is therefore variable. The
transaction price in this arrangement is ` 1.75 million, as this is the amount which entity
I expects to receive after providing the concession and it is not constrained under
the variable consideration guidance. Entity I can also conclude that the collectability
threshold is met for ` 1.75 million and therefore contract exists.
(b) The transaction price is ` 90 per container based on entity J‛s estimate of total
sales volume for the year, since the estimated cumulative sales volume of 2.8 million
containers would result in a price per container of ` 90. Entity J concludes that based
on a transaction price of ` 90 per container, it is highly probable that a significant
reversal in the amount of cumulative revenue recognised will not occur when the
uncertainty is resolved. Revenue is therefore recognised at a selling price of ` 90 per
container as each container is sold. Entity J will recognise a liability for cash received
in excess of the transaction price for the first 1 million containers sold at ` 100 per
container (that is, ` 10 per container) until the cumulative sales volume is reached for
the next pricing tier and the price is retroactively reduced.
For the quarter ended 31st March, 20X8, entity J recognizes revenue of ` 63 million
(700,000 containers x ` 90) and a liability of ` 7 million [700,000 containers x (` 100
- ` 90)].
Entity J will update its estimate of the total sales volume at each reporting date until
the uncertainty is resolved.
(c) Entity K records sales to the retailer at a transaction price of ` 47.50 (` 50 less 25%
of ` 10). The difference between the per unit cash selling price to the retailers and
the transaction price is recorded as a liability for cash consideration expected to
be paid to the end customer. Entity K will update its estimate of the rebate and the
transaction price at each reporting date if estimates of redemption rates change.
 IND AS 115: REVENUE FORM CONTRACTS WITH CUSTOMERS 71

(d) The transaction price is ` 950, because the expected reimbursement is ` 50. The
expected payment to the retailer is reflected in the transaction price at contract
inception, as that is the amount of consideration to which the manufacturer expects to
be entitled after the price protection. The manufacturer will recognise a liability for
the difference between the invoice price and the transaction price, as this represents
the cash that it expects to refund to the retailer. The manufacturer will update its
estimate of expected reimbursement at each reporting date until the uncertainty is
resolved.

QUESTION 110

A contractor enters into a contract with a customer to build an asset for ` 1,00,000, with
a performance bonus of ` 50,000 that will be paid based on the timing of completion. The
amount of the performance bonus decreases by 10% per week for every week beyond the
agreed-upon completion date. The contract requirements are similar to those of contracts
that the contractor has performed previously, and management believes that such experience
is predictive for this contract. The contractor concludes that the expected value method is
most predictive in this case.
The contractor estimates that there is a 60% probability that the contract will be completed
by the agreed-upon completion date, a 30% probability that it will be completed one week
late, and a 10% probability that it will be completed two weeks late.
Determine the transaction price.
(RTP NOV. 2020)
SOLUTION
The transaction price should include management‛s estimate of the amount of consideration
to which the entity will be entitled for the work performed.

Probability-weighted Consideration
`1,50,000(fixed fee plus full performance bonus) x 60% `90,000
`1,45,000 (fixed fee plus 90% of performance bonus) x 30% `43,500
`1,40,000 (fixed fee plus 80% of performance bonus) x 10% `14,000
Total probability-weighted consideration `1,47,500

The total transaction price is ` 1,47,500, based on the probability-weighted estimate. The
contractor will update its estimate at each reporting date.

QUESTION 111

A property sale contract includes the following:

(a) Common areas
(b) Construction services and building material
 72 FINANCIAL REPORTING

(c) Property management services

(d) Golf membership
(e) Car park
(f) Land entitlement
Analyse whether the above items can be considered as separate performance obligations as
per the requirements of Ind AS 115?
(RTP MAY 2021)
SOLUTION
Each performance obligation is required to be accounted for separately.
Based on the above guidance, the following table discusses whether the common goods and
services in property sale contract should be considered as separate performance obligation
or not:
Goods/Service Whether a separate Reason
Performance obligation
(PO) or not
Common areas Unlikely to b e Common areas are unlikely to be a
separate PO separate performance obligation
because the interests received in
common areas are typically undivided
interests that are not separable from
the property itself.
However, if the common areas were
sold separately by the developer, then
they could be considered as a separate
performance obligation provided that
it is distinct in the context of the
contract.
Construction services Unlikely to be separate Construction services and building
and building material PO materials can meet the first criterion
as they are items that can be used
in conjunction with other readily
available goods or services.
However, the developer would be
considered to be providing a significant
integration service as it is bringing
together all the separate elements to
deliver a complete building.
 IND AS 115: REVENUE FORM CONTRACTS WITH CUSTOMERS 73

Property management Likely to be separate Property management services and

services and Golf PO golf membership are likely to be
membership separate performance obligations as
they may be used in isolation or with
the property already acquired, i.e.,
management services can be used with
the property. These types of services
are not significantly customised,
integrated with, or dependent on
the property. This is because there
is no change in their function with
or without the property. Also, a
property management service could
be undertaken by a third party.
Car park and Land Analysis required Items such as car parks and land
entitlement entitlements generally meet the
first criterion – i.e., capable of being
distinct – as the buyer benefits from
them on their own.
Whether the second criterion
is met depends on the facts and
circumstances. For example, if the
land entitlement can be sold separately
or pledged as security as a separate
item, it may indicate that it is not
highly dependent on, or integrated
with, other rights received in the
contract. In an apartment scenario,
the customer can receive an undivided
interest in the land on which the
apartment block sits. This type of
right is generally considered as highly
inter-related with the apartment
itself.*

* However, if title to the land is transferred to the buyer separately – for example in a
single party development – then the separately identifiable criterion may be met.
PS: Other facts and circumstances of each contract should also be carefully examined to
determine performance obligations.
 74 FINANCIAL REPORTING

QUESTION 112

A Ltd. owns 20 resorts across India. Every customer who stays in any of the resorts owned
by A Ltd. is entitled to get points on the basis of total amount paid by him. Under this
scheme, 1 point is granted for every ` 100 spent for stay in the resort. As per the past
experience of A Ltd., the likelihood of exercise of the points is 100% and the standalone
price of each such point is ` 5. Customer X spends ` 10,000 in one of the resorts of A Ltd.
What is the accounting treatment for the points granted by A Ltd.?
(RTP NOV. 2022)
SOLUTION
Paragraph B40 of Ind AS 115, inter alia, states that, “if in a contract, an entity grants
a customer the option to acquire additional goods or services, that option gives rise to a
separate performance obligation only if the option provides a material right to the customer
that it would not receive without entering into that contract”.
Further, paragraph B41 states that if a customer has the option to acquire an additional
good or service at a price that would reflect the stand-alone selling price for that good or
service, that option does not provide the customer with a material right even if the option
can be exercised only by entering into a previous contract. In those cases, the entity has
made a marketing offer that it shall account for in accordance with this Standard only
when the customer exercises the option to purchase the additional goods or services.
In the given case, the customer does get a material right by way of a discount of ` 500
for every 100 points that he would not receive without the previous stay in that resort.
Thus, the customer in effect pays the entity in advance for future goods and the entity
recognises revenue when the goods are transferred.
According to paragraph B42, paragraph 74 requires an entity to allocate the transaction price
to performance obligations on a relative stand-alone selling price basis. If the standalone
selling price for a customer‛s option to acquire additional goods or services is not directly
observable, an entity shall estimate it on the basis of percentage discount the customer
may obtain upon exercising the option and the likelihood of the option getting exercised.
In accordance with above, an entity shall account for award credit as a separate performance
obligation of the sales transactions in which they are initially granted. The value of the
consideration the entity expects to be entitled in respect of the initial sale shall be allocated
between the award credits and the other components of the sale.
In the current case, the standalone selling price of the 100 points is ` 500. A Ltd. should
allocate the fair value of the consideration (i.e. ` 10,000) between the points and the other
components of the sale as ` 476 (500/10,500 x 10,000) and ` 9,524 (10,000/10,500 x
10,000) respectively in proportion of their standalone selling price. Since A Ltd. supplies
the awards itself (i.e. it acts as a principal), it should recognise ` 476 as revenue when
points are redeemed.
 IND AS 115: REVENUE FORM CONTRACTS WITH CUSTOMERS 75

QUESTION 113

A Ltd. is a company which is in the business of manufacturing engineering machines and

providing after sales services. The company entered into a contract with Mr. Anik to supply
and install a machine, namely ‘model pi‛ on 1st April 20X1 and to service this machine on 30th
September 20X1 and 1st April 20X2. The cost of manufacturing the machine to A Ltd. was
` 1,60,000.
It is possible for a customer to purchase both the machine ‘model pi‛ and the maintenance
services separately. Mr. Anik is contractually obliged to pay A Ltd ` 4,00,000 on 1st April,
20X2.
The prevailing rate for one-year credit granted to trade customers in the industry is 5
percent per six-month period.
As per the experience, the servicing of the machine ‘model pi‛ sold to Mr. Anik is expected
to cost A Ltd. ` 30,000 to perform the first service and ` 50,000 to perform the second
service. Assume actual costs equal expected costs. When A Ltd. provides machine services
to customers in a separate transaction it earns a margin of 50% on cost. On 1 st April, 20X1,
the cash selling price of the machine ‘model pi‛ sold to Mr. Anik is ` 2,51,927.
The promised supply of machine ‘model pi‛ and maintenance service obligations are
satisfactorily carried out in time by the company.
You are required to:
(i) Segregate the components of the transaction that A Ltd. shall apply to the revenue
recognition criteria separately as per Ind AS 115;
(ii) Calculate the amount of revenue which A Ltd. must allocate to each component of the
transaction;
(iii) Prepare journal entries to record the information set out above in the books of accounts
of A Ltd. for the years ended 31st March•20X2 and 31st March 20X3; and
(iv) Draft an extract showing how revenue could be presented and disclosed in the financial
statements of A Ltd. for the year ended 31st March 20X2 and 31st March 20X3.
(MTP SEP. 2022)
SOLUTION
On 1st April, 20X1, entity A entered into a single transaction with three identifiable
separate components:
1. Sale of a good (i.e. engineering machine);
2. Rendering of services (i.e. engineering machine maintenance services on 30th
September, 20X1 and 1st April, 20X2); and
3. Providing finance (i.e. sale of engineering machine and rendering of services on extended
period credit).
76 FINANCIAL REPORTING

(i) Calculation and allocation of revenue to each component of the transaction

Date Opening Finance Goods Services Payment Closing

balance income received balance
1st April, 20X1 – – 2,51,927 – – 2,51,927
30th September, 2,51,927 12,596 – 45,000 – 3,09,523
20X1 (Note
1)
31st March 20X2 3,09,523 15,477 – – – 3,25,000
(Note
2)
1st April, 20X2 3,25,000 – – 75,000 (4,00,000)

Notes:
1. Calculation of finance income as on 30th September, 20X1
= 5% x 2,51,927 = ` 12,596
2. Calculation of finance income as on 31st March, 20X2
= 5% x 3,09,523 = ` 15,477
(ii) Journal Entries

Date Particulars Dr. (`) Cr. (`)

1st April, Mr. Anik Dr. 2,51,927
20X1
To Revenue - sale of goods (Profit or 2,51,927
loss A/c)
(Being revenue recognised from the sale
of the machine on credit)
Cost of goods sold (Profit or loss) Dr. 1,60,000
To Inventories 1,60,000
(Being cost of goods sold recognised)
30th Mr. Anik Dr. 12,596
September
20X1 To Finance Income (Profit or loss) 12,596
(Being finance income recognised)
Mr. Anik Dr. 45,000
To Revenue- rendering of services 45,000
(Profit or loss)
IND AS 115: REVENUE FORM CONTRACTS WITH CUSTOMERS 77

(Being revenue from the rendering of

maintenance services recognised)
Cost of services (Profit or loss) Dr. 30,000
To Cash/Bank or payables 30,000
(Being the cost of performing
maintenance services recognised)
31st March Mr. Anik Dr. 15,477
20X2 To Finance Income (Profit or loss) 15,477
(Being finance income recognised)
1st April, Mr. Anik Dr. 75,000
20X2
To Revenue - rendering of services 75,000
(Profit or loss)
(Being revenue from the rendering of
maintenance services recognised)
Cost of services (Profit or loss) Dr. 50,000
To Cash/Bank or payables 50,000
(Being the cost of performing
maintenance services recognised)
Cash/Bank Dr. 4,00,000
To Mr. Anik 4,00,000
(Being the receipt of cash from the
customer recognised)

(iii) Extract of Notes to the financial statements for the year ended 31 st March,
20X2 and 31st March, 20X3
Note on Revenue

20X2-20X3 20X1-20X2
` `
Sale of goods – 2,51,927
Rendering of machine - maintenance services 75,000 45,000
Finance income – 28,073
75,000 3,25,000
 78 FINANCIAL REPORTING

QUESTION 114

An entity has a fixed fee contract for ` 22,00,000 to develop a product that meets spec-
ified performance criteria. Estimated cost to complete the contract is ` 20,00,000. The
entity will transfer control of the product over five years and the entity uses the cost- to-
cost input method to measure progress on the contract. An incentive award is available if
the product meets the following weight criteria:

Weight (Kg) Award % of Fixed Fee Incentive Fee (`)

951 or greater 0% Nil
701 - 950 10% 2,20,000
700 or less 25% 5,50,000

The entity has extensive experience creating products that meet the specific performance
criteria. Based on its experience, the entity has identified five engineering alternatives that
will achieve the 10% incentive and two that will achieve the 25% incentive. In this case, the
entity determined that it has 90% confidence that it will achieve the 10% incentive and 10%
confidence that it will achieve 25% incentive. Based on this analysis, the entity believes 10%
to be the most likely amount when estimating the transaction price. Therefore, the entity
includes only the 10% award in the transaction price when calculating revenue because the
entity has concluded it is probable that a significant reversal in the amount of cumulative
revenue recognised will not occur when the uncertainty associated with the variable con-
sideration is subsequently resolved due to its 90% confidence in achieving the 10% award.
The entity reassesses its production status quarterly to determine whether it is on track
to meet the criteria for the incentive award. At the end of the year four, it becomes ap-
parent that this contract will fully achieve the weight-based criteria. Therefore, the entity
revises its estimate of variable consideration to include the entire 25% incentive fee in the
year four because, at this point, it is probable that a significant reversal in the amount of
cumulative revenue recognised will not occur when including the entire variable consider-
ation in the transaction price. Analyse the impact of changes in variable consideration when
cost incurred is as follows:

Year `
1 1,20,000
2 3,70,000
3 8,20,000
4 5,70,000
5 1,20,000

Calculate yearly Revenue, Operating Profit and Margin (%). For simplification purposes, cal-
 IND AS 115: REVENUE FORM CONTRACTS WITH CUSTOMERS 79

culate revenue for the year independently based on costs incurred during the year divided
by total expected costs, with the assumption that total expected costs do not change.
(10 Marks)
(CA FINAL DEC. 2021 EXAM)
SOLUTION :
Table showing Yearly Revenue, Operating Profit and Margin (%)

Fixed consideration A 22,00,000

Estimated costs to com- B 20,00,000
plete
Year 1 Year 2 Year 3 Year 4 Year 5
Total estimated variable C 2,20,000 2,20,000 2,20,000 5,50,000 5,50,000
consideration
Fixed revenue D=A x H/B 1,32,000 4,07,000 9,02,000 6,27,000 1,32,000
Variable revenue E=C x H/B 13,200 40,700 90,200 1,56,750 33,000
Cumulative revenue ad- F (see below)
justment — — — 2,16,150 —
Total revenue G=D+E+F 1,45,200 4,47,700 9,92,200 9,99,900 1,65,000
Costs H 1,20,000 3,70,000 8,20,000 5,70,000 1,20,000
Operating profit I=G–H 25,200 77,700 1,72,200 4,29,900 45,000
Margin (rounded off) J=I/G 17.36% 17.36% 17.36% 42.99% 27.27%

In practice, under the cost-to-cost measure of progress, total revenue for each period is
determined by multiplying the total transaction price (fixed and variable) by the ratio of
cumulative cost incurred to total estimated costs to complete, less revenue recognized to
date.

Calculation of cumulative catch-up adjustment:

Updated variable consideration L 5,50,000
Cumulative costs through Year 4 M 18,80,000
Estimated costs to complete N 20,00,000
Percent complete in Year 4: (rounded off) O=M/N 94%
Cumulative variable revenue through Year 4: P 3,00,850
Cumulative catch-up adjustment F=[(LxO)– P] 2,16,150
 80 FINANCIAL REPORTING

QUESTION 115

GTM Limited has provided the following 4 independent scenarios. You are advised to re-
spond to the queries mentioned at the end of each scenario. Support your answer with the
relevant extracts of the applicable Ind AS.
Scenario 1
GTM Limited enters into a contract with a customer to sell product G, T and M in exchange
for ` 1,90,000. GTM Limited will satisfy the performance obligations for each of the prod-
uct at different points in time. GTM Limited regularly sells product G separately and there-
fore the stand-alone selling price is directly observable. The stand- alone selling prices of
product T and M are not directly observable.
Because the stand-alone selling prices for Product T and M are not directly observable, the
Company has to estimate them. To estimate the stand-alone selling prices, the Company
uses the adjusted market assessment approach for product T and the expected cost plus
a margin approach for product M. In making these estimates, the Company maximizes the
use of observable inputs.
The entity estimated the stand -alone selling prices as follows:

Product Stand-alone selling

price (`)
Product G 90,000
Product T 44,000
Product M 66,000
Total 2,00,000
Determine the transaction price allocated to each Product.
Scenario 2
GTM Limited regularly sells Products G, T and M individually. The standalone selling prices
are as under:

Product Stand-alone selling

price (`)
Product G 90,000
Product T 44,000
Product M 66,000
Total 2,00,000
In addition, the Company regularly sells Products T and M together for ` 1,00,000.
The Company enters into a contract with another customer to sell Products G, T and M in
exchange for ` 1,90,000. GTM Limited will satisfy the performance obligations for each of
 IND AS 115: REVENUE FORM CONTRACTS WITH CUSTOMERS 81

the products at different points in time; or Product T and M at same point in time.
Determine the allocation of transaction price to Product T and M.
Scenario 3
GTM Limited enters into a contract with a customer to sell products G, T and M as de-
scribed in scenario 2. The contract also includes a promise to transfer product ‘Hope‛. Total
consideration in the contract is ` 2,40,000. The stand-alone selling price for product ‘Hope‛
is highly variable because the company sells Product ‘Hope‛ to different customers for a
broad range of amounts (` 40,000 to ` 65,000).
Determine the selling price of Products G, T, M and Hope using the residual approach.
Scenario 4
The same facts as in scenario 3 applies to scenario 4 except that the transaction price is `
2,25,000 instead of ` 2,40,000.
Discuss how the transaction price should be allocated.
(12 Marks)
(CA FINAL JULY 2021 EXAM)
SOLUTION :
Scenario 1
The customer receives a discount for purchasing the bundle of goods because the sum of
the stand-alone selling prices (` 2,00,000) exceeds the promised consideration (` 1,90,000).
The entity considers that there is no observable evidence about the performance obligation
to which the entire discount belongs. The discount is allocated proportionately across Prod-
ucts G, T and M. The discount, and therefore the transaction price, is allocated as follows:

Product Allocated transaction price

`
Product G 85,500 (` 90,000 ÷ ` 2,00,000 × ` 1,90,000)
Product T 41,800 (` 44,000 ÷ ` 2,00,000 × ` 1,90,000)
Product M 62,700 (` 66,000 ÷ ` 2,00,000 × ` 1,90,000)
Total 1,90,000

Scenario 2
The contract includes a discount of ` 10,000 on the overall transaction, which would be allo-
cated proportionately to all three performance obligations when allocating the transaction
price using the relative stand-alone selling price method.
However, because the entity regularly sells Products T and M together for ` 1,00,000 and
Product G for ` 90,000, it has evidence that the entire discount of ` 10,000 should be al-
 82 FINANCIAL REPORTING

located to the promises to transfer Products T and M in accordance with paragraph 82 of

Ind AS 115.
If the entity transfers control of Products T and M at the same point in time, then the
entity could, as a practical matter, account for the transfer of those products as a sin-
gle performance obligation. That is, the entity could allocate ` 90,000 of the transaction
prices to the single performance obligation of G and recognise revenue of ` 1,00,000 when
Products T and M simultaneously transfer to the customer.
If the contract requires the entity to transfer control of Products T and M at different
points in time, then the allocated amount of ` 1,00,000 is individually allocated to the prom-
ises to transfer Product T (stand-alone selling price of ` 44,000) and Product M (stand-
alone selling price of ` 66,000) as follows:

Product Allocated transaction price

`
Product T 40,000 (` 44,000 ÷ ` 1,10,000 total stand-alone selling price ×
` 1,00,000)
Product M (` 66,000 ÷ ` 1,10,000 total stand-alone selling price ×
60,000 ` 1,00,000)
Total 1,00,000

Scenario 3
Before estimating the stand-alone selling price of Product Hope using the residual approach,
the entity determines whether any discount should be allocated to the other performance
obligations in the contract.
As in Scenario 2, because the entity regularly sells Products T and M together for ` 1,00,000
and Product G for ` 90,000, it has observable evidence that ` 1,90,000 should be allocated
to those three products and ` 10,000 discount should be allocated to the promises to trans-
fer Products T and M in accordance with paragraph 82 of Ind AS 115.
Using the residual approach, the entity estimates the stand-alone selling price of Product
Hope to be ` 50,000 as follows:

Product Stand-alone selling price Method

`
Product G 90,000 Directly observable
Products T and M 1,00,000 Directly observable with discount
Product Hope 50,000 Residual approach
Total 2,40,000
 IND AS 115: REVENUE FORM CONTRACTS WITH CUSTOMERS 83

The entity observes that the resulting ` 50,000 allocated to Product Hope is within the
range of its observable selling prices (` 40,000 to ` 65,000).
Scenario 4
The same facts as in Scenario 3 apply to Scenario 4 except the transaction price is `
2,25,000 instead of ` 2,40,000. Consequently, the application of the residual approach
would result in a stand-alone selling price of ` 35,000 for Product Hope (` 2,25,000 trans-
action price less ` 1,90,000 allocated to Products G, T and M).
The entity concludes that ` 35,000 would not faithfully depict the amount of consideration
to which the entity expects to be entitled in exchange for satisfying its performance obli-
gation to transfer Product Hope, because ` 35,000 does not approximate the stand- alone
selling price of Product Hope, which ranges from ` 40,000 to ` 65,000.
Consequently, the entity reviews its observable data, including sales and margin reports, to
estimate the stand-alone selling price of Product Hope using another suitable method. The
entity allocates the transaction price of ` 2,25,000 to Products G, T, M and Hope using the
relative stand-alone selling prices of those products in accordance with paragraphs 73–80
of Ind AS 115.

QUESTION 116

ANANDAM Ltd. enters into a contract with a customer on 1st April, 2019 for sale of a
machine and spare parts. The manufacturing lead time for the machine and spare parts is
3 years.
On completion of manufacturing, ANANDAM Ltd. demonstrates that the machine and spare
parts meet the agreed-upon specifications in the contract. The promises to transfer the
machine and spare parts are distinct and result in two performance obligations each of
which will be satisfied at a point in time.
On 31st March, 2022, the customer pays for the machine and spare parts, but only takes
the physical possession of the machine. Although the customer inspects and accepts the
spare parts, the customer requests that the spare parts be stored at ANANDAM Ltd.‛s
warehouse because of its close proximity to the customer‛s factory.
The customer has legal title to the spare parts and the parts can be identified as belonging
to the customer. ANANDAM Ltd. stores the spare parts in a separate section of its ware-
house and the parts are ready for immediate shipment at the customer‛s request. ANAN-
DAM Ltd. expects to hold the spare parts for one to three years and does not have the
authority to use the spare parts or direct them to another customer.
Determine how the revenue will be recognized by ANANDAM Ltd. for the different per-
formance obligations as per Ind AS 115?
(6 Marks)
(CA FINAL MAY 2022 EXAM)
 84 FINANCIAL REPORTING

SOLUTION :
INDENTIFIACTION OF OBLIGATIONS:
ANANDAM Ltd. has made sale of two goods – machine and space parts, whose control is
transferred at a point in time. Additionally, company agrees to hold the spare parts for the
customer for a period of 1-3 years, which is a separate performance obligation. Therefore,
total transaction price shall be allocated amongst 3 performance obligations viz
(i) Sale of machinery
(ii) Sale of spare parts
(iii) Custodial services for storing spare parts.
RECOGNITION OF REVENUE:
Recognition of revenue for each of the three performance obligations shall occur as follows:
(i) Sale of machinery: Machine has been sold to the customer and physical possession as
well as legal title passed to the customer on 31 st March, 2022. Accordingly, revenue
for sale of machinery shall be recognised on 31 st March, 2022.
(ii) Sale of spare parts: The customer has made payment for the spare parts and legal
title has been passed to specifically identified goods, but such spares continue to be
physically held by the entity. In this regard, the company shall evaluate if revenue can
be recognized on bill-and-hold basis if all below criteria are met:

(a) The reason for the bill-and-hold ar- The customer has specifically requested
rangement must be substantive (for the entity to store goods in their ware-
example, the customer has request- house, owing to proximity to customer‛s
ed the arrangement); factory.
(b) The product must be identified sepa- The spare parts have been specifically
rately as belonging to the customer; identified and inspected by the custom-
er.
(c) The product currently must be ready The spares are identified and segregat-
for physical transfer to the custom- ed, therefore, ready for delivery any
er; and time.
(d) The entity cannot have the ability to Spares have been segregated and cannot
use the product or to direct it to an- be redirected to any other customer.
other customer

Therefore, all the above conditions of bill-and-hold are met and hence, company can
recognize revenue for sale of spare parts on 31st March, 2022.
(iii) Custodial services: Such services shall be given for a period of 1 to 3 years from 31st
March, 2022. Where services are given uniformly and customer receives & consumes
benefits simultaneously, revenue for such service shall be recognized on a straight-line
basis over a period of time.
 IND AS 115: REVENUE FORM CONTRACTS WITH CUSTOMERS 85

QUESTION 117

Card Ltd. is engaged in the business of manufacturing of car locks and nut bolts.
Car Locks: Typically, a contract is entered into for sale of car locks and consideration is
received in the event of delivery of goods to the customer place. The cost of each car lock
is ` 1,500 and the selling price is ` 1,800. The terms of the contract entitles the customer
to return any unused car locks within 30 days and receive a full refund. The Company es-
timates that the costs of recovering the car lock will be immaterial and expects that the
returned car locks can be resold at a profit. The Company has sold a total of 20,000 car
locks during the month ended 31st March, 2022. From past experience, Card Ltd. expects
that 4% of the car locks will be returned in the financial year 2022 - 2023.
Nut Bolts: On 1st April, 2021, Card Ltd. enters into a one year contract with a customer to
deliver nut bolts. The contract stipulates that the price per piece will be adjusted retro-
spectively once the customer reaches certain sales volume, defined, as follows:

Price per piece Cumulative sales volume

` 200 1 – 50,000
` 190 50,001 – 1,00,000
` 180 1,00,001 & above

Volume is determined based on sales during the financial year. There are no minimum pur-
chase requirements. Card Ltd. estimates that the total sales volume for the year will be
90,000 based on its experience with similar contracts and forecasted sales to the custom-
er.
Card Ltd. sells 24,000 pieces to the customer during the first quarter of the financial year
2021-2022 for a contract price of ` 200 per piece.
You are required to:
(i) Analyze the terms of the revenue contracts with customers for sale of car locks as
per Ind AS 115. Determine the amount of revenue, refund liability and the asset to be
recognized by Card Ltd. for the said contracts of car locks.
(ii) Determine the transaction price, revenue and liability, if any, for nut bolts as per Ind
AS 115 at the end of first quarter of the financial year 2021-2022.
(8 Marks)
(CA FINAL MAY 2022 EXAM)
SOLUTION :
Analysis:
(i) (a) Nature of consideration received:
Card Ltd. applies the requirements in Ind AS 115 to the portfolio of 20,000 car
 86 FINANCIAL REPORTING

locks because it reasonably expects that the effects on the financial statements
from applying the requirements to the portfolio would not differ materially from
applying the requirements to the individual contracts within the portfolio. Since
the contract allows a customer to return the products, the consideration received
from the customer is variable.
(b) Probability of significant reversal of cumulative revenue:
Card Ltd. considers on constraining estimates of variable consideration to determine
whether the estimated amount of variable consideration of ` 3,45,60,000 (`
1,800 x 19,200 car locks not expected to be returned) can be included in the
transaction price. Card Ltd. determines that although the returns are outside
the entity‛s influence, it has significant experience in estimating returns for this
product and customer c lass. In addition, the uncertainty will be resolved within a
short time frame ie the 30 -day return period. Thus, Card Ltd. concludes that it
is highly probable that a significant reversal in the cumulative amount of revenue
recognised (i.e. ` 3,45,60,000) will not occur as the uncertainty will be resolved
(i.e. over the return period).
Card Ltd. estimates that the costs of recovering the products will be immaterial
and expects that the returned products can be resold at a profit.
Upon transfer of control of the 20,000 car locks, Card Ltd. does not recognise
revenue for 800 car locks that it expects to be returned. Consequently, it
recognises the following:
(a) revenue of ` 3,45,60,000 (` 1,800 x 19,200 products not expected to be
returned);
(b) a refund liability of ` 14,40,000 (` 1,800 refund x 800 products expected to
be returned); and
(c) an asset of ` 12,00,000 (` 1,500 x 800 products for its right to recover
products from customers on settling the refund liability).
(ii) (a) Transaction Price: The transaction price will be based on Card Ltd.‛s estimate of
total sales volume for the year. Since Card Ltd. estimates cumulative sales volume
of 90,000 nut bolts during the year, transaction price per nut bolt will be ` 190.
Card Ltd. will update its estimate of the total sales volume at each reporting date
until the uncertainty is resolved.
(b) Determination of Revenue: Card Ltd. concludes that based on a transaction price
of ` 190 per nut bolt, it is highly probable that a significant reversal in the amount
of cumulative revenue recognised will not occur when the uncertainty is resolved.
Revenue is therefore recognised at a selling price of ` 190 per nut bolt as each
nut bolt is sold. Accordingly, for the first quarter of the financial year 2021-
2022, Card Ltd. recognizes revenue of ` 45,60,000 (24,000 nut bolts x ` 190).
 IND AS 115: REVENUE FORM CONTRACTS WITH CUSTOMERS 87

(c) Determination of Liability: Card Ltd. will recognise a liability for cash received
in excess of the transaction price for the first 50,000 nut bolts sold at ` 200 per
nut bolt (that is, ` 10 per nut bolt) until the cumulative sales volume is reached
for the next pricing tier and the price is retroactively reduced. Accordingly, for
the first quarter of the financial year 2021 -2022, Card Ltd. recognizes liability
of ` 2,40,000 (24,000 nut bolts x (` 200 – ` 190).

QUESTION 118

A Ltd. is in the business of infrastructure and has two divisions. The brief details of its
business and underlying project details are as follows:
Project 1: Ludhiana - Chandigarh Expressway Toll Project
The Company has commenced the construction of the project in the current year. The brief
details of the Concession Agreement are given below:
• Total expenses incurred ` 100 crore as on 31st March, 2022.
• Under IGAAP, the company has recorded such expenses as intangible assets in the
books of account. Total expenses estimated to be incurred on the project are ` 200
crore;
• Fair value of the construction service is ` 220 crore;
• Total cash flow guaranteed by the government under the concession agreement is `
350 crore;
• Finance revenue over the period of operation phase is ` 30 crore;
• Other income relates to the services provided during the operation phase.
Project 2: Bengaluru - Chennai Expressway Toll Project
The Company has also entered into another Concession Agreement with Government of
Karnataka in the current year. The said concession agreement is Toll Based Project and the
Company needs to collect the toll from the users of the expressway. The construction cost
for the said project will be ` 150 crore. The fair value of such construction cost is approxi-
mately ` 200 crore. Under IGAAP, the company has recorded the expenses incurred on the
said project as an intangible asset.
You are required to answer the following:
(i) What would be the classification of Ludhiana - Chandigarh Expressway Toll Project as
per applicable Ind AS? Give brief reasoning.
(ii) What would be the classification of Bengaluru – Chennai Expressway Toll Project as
per applicable Ind AS? Give brief reasoning.
(iii) What should be the accounting entries for the preparation of financial statements as
per relevant Ind AS for the above 2 projects?
 88 FINANCIAL REPORTING

(10 Marks)
(CA FINAL NOV. 2022 EXAM)
SOLUTION :
(i) Project 1 : Ludhiana - Chandigarh Expressway Toll Project
Here the operator has a contractual right to receive cash from the grantor. The
grantor has little, if any, discretion to avoid payment, usually because the agreement
is enforceable by law. The operator has an unconditional right to receive cash if the
grantor contractually guarantees to pay the operator. Hence, the operator recognizes
a financial asset to the extent it has a contractual right to receive cash.
(ii) Project 2 : Bengaluru - Chennai Expressway Toll Project
Here the operator has a contractual right to charge users of the public services. A
right to charge users of the public service is not an unconditional right to receive cash
because the amounts are contingent on the extent that the public uses the service.
Therefore, the operator shall recognise an intangible asset to the extent it receives a
right (a license) to charge users of the public service.
(iii) Accounting Entries for preparation of financial statements
Ludhiana-Chandigarh Expressway Toll Project
Journal Entries

Particulars Dr. Cr.

(` in (` in
crore) crore)
During construction:
1 Financial asset A/c Dr. 220
To Construction revenue 220
(To recognise revenue relating to construction services, to
be settled in cash)
2 Cost of construction (profit or loss) Dr. 200
To Bank A/c (As and when incurred) 200
(To recognise costs relating to construction services)
During the operation phase:
3 Financial asset Dr. 30
To Finance revenue (As and when received or due to 30
receive)
(To recognise interest income under the financial asset
model)
 IND AS 115: REVENUE FORM CONTRACTS WITH CUSTOMERS 89

4 Financial asset Dr. 100

To Revenue [(350-220) – 30] 100
(To recognise revenue relating to the operation phase)
5 Bank A/c Dr. 350
To Financial asset 350
(To recognise cash received from the grantor)

Bengaluru-Chennai Expressway Toll Project

Journal Entries

Particulars Dr. Cr.

(` in crore) (` in crore)
During construction:
1 Cost of construction (profit or loss) Dr. 150
To Bank A/c (As and when incurred) 150
(To recognise costs relating to construction ser-
vices)
2 Intangible asset Dr. 200
To Revenue 200
(To recognise revenue relating to construction ser-
vices provided for non-cash consideration)
During the operation phase:
3 Amortisation expense Dr. 200
To Intangible asset (accumulated am- 200
ortisation)
(To recognise amortisation expense relating to the
operation phase over the period of operation)
4 Bank A/c Dr. ?
To Revenue ?
(To recognise revenue relating to the operation
phase)

Note: Amount in entry 4 is kept blank as no information in this regard is given in the
question.
 90 FINANCIAL REPORTING

QUESTION 119

An entity enters into a contract for the sale of Product A for ` 10,000. As part of the
contract, the entity gives the customer a 40% discount voucher for any future purchases
upto ` 8,000 in the next 30 days. The entity intends to offer a 10% discount on all sales
during the next 30 days as a part of seasonal promotion. The 10% discount cannot be used
in addition to the 40% discount voucher.
The entity believes that there is 75% likelihood that a customer will redeem the voucher
and, on an average, a customer will purchase ` 5,000 of additional products.
You are required to determine how many performance obligations does the entity have with
their stand-alone selling price and allocated transaction price?
(CA FINAL NOV. 2022 EXAM) (4 Marks)
SOLUTION :
Since all customers will receive a 10% discount on purchases during the next 30 days, the
only additional discount that provides the customer with a material right is the incremental
discount of 30% on the products purchased. The entity accounts for the promise to provide
the incremental discount as a separate performance obligation in the contract for the sale
of Product A.
The entity believes there is 75% likelihood that a customer will redeem the voucher and
on an average a customer will purchase ` 5,000 of additional products. Consequently, the
entity‛s estimated stand-alone selling price of the discount voucher is ` 1,125 (` 5,000 av-
erage purchase price of additional products x 30% incremental discount x 75% likelihood of
exercising the option). The stand-alone selling prices of Product A and the discount voucher
and the resulting allocation of ` 10,000 transaction price are as follows:

Performance obligations Stand-alone selling price

Product A ` 10,000
Discount voucher ` 1,125
Total ` 11,125

Performance obligations Allocated trans-

action price (to
nearest `)
Product A [(` 10,000 ÷ ` 11,125) × ` 10,000] ` 8,989
Discount voucher [(` 1,125 ÷ ` 11,125) × ` 10,000] ` 1,011
Total ` 10,000

The entity allocates ` 8,989 to Product A and recognises revenue for Product A when
control is transferred. The entity allocates ` 1,011 to the discount voucher and recognises
 IND AS 115: REVENUE FORM CONTRACTS WITH CUSTOMERS 91

revenue for the voucher when the customer redeems it for goods or services or when it
expires.

QUESTION 120

On 1st April 2021, Z Limited enters into a contract to construct a manufacturing facility
for Mint Limited at a fixed consideration of ` 30. 00 lakhs. Z Limited can earn an incen-
tive of ` 3.75 lakhs if the construction is completed within 24 months. Z Limited expects
the costs to be ` 16.50 lakhs. At the inception of the contract, Z Limited determines that
the contract contains single performance obligation satisfied over time. Z Limited also
concludes that it is highly probable that a significant reversal in the amount of cumulative
revenue recognized will occur as the completion of the manufacturing facility is highly sus-
ceptible to factors outside of the Company‛s influence, due to exceptionally high rainfall in
the region.
At 31st March, 2022, Z limited has satisfied 65% of its performance obligation on the basis
of costs incurred to date and concludes that the variable consideration is still constrained
due to uncertain weather conditions.
However, on 15th April 2022, the contract is modified. The fixed consideration is enhanced
by ` 2.25 lakhs and the expected costs increases by ` 1.20 lakhs. The contract period is
also extended by 6 months. Z Limited now concludeds that it is highly probable that the
incentive award will be achieved. The contract remains a single performance obligation.
Compute, as per applicable Ind AS :
(i) For Financial Year 2022-23, revenue from the contract, contract costs & resultant
profit,
(ii) Additional revenue (catch up adjustment) as on the date of modification of the con-
tract i.e. 15th April 2022.
(CA FINAL MAY 2023 EXAM)
QUESTION 121

On 1st January 2023, Z Limited enters into an agreement with a college for renovation of
building including installation of new air conditioners at a transaction price of ` 40.00 lakhs.
The expected cost of air conditioners is ` 12.00 lakhs. The other expected cost is ` 20.00
lakhs. Z limited purchases the air conditioners and they are delivered to the site before
31st March 2023. Z Limited uses an input method based on cost to measure progress to-
wards completion to the contract, Z Limited has incurred actual other costs (excluding the
air conditioners) of ` 4.00 Lakhs by 31st March, 2023.
Determine the revenue to be recognized as per applicable Ind AS for the year ended 31st
March 2023 if performance obligation is met over a period of time.
(CA FINAL MAY 2023 EXAM)
 IND AS 103: BUSINESS COMBINATION 69

ADDITIONAL QUESTIONS TO BE DISCUSSED

QUESTION NO 81

The balance sheet of Professional Ltd. and Dynamic Ltd. as of 31 March 2012 is given below:

Assets Professional Ltd Dynamic Ltd

Non-Current Assets:
Property plant and equipment 300 500
Investments 400 100
Current assets:
Inventories 250 150
Financial assets
Trade receivable 450 300
Cash and cash equivalents 200 100
Others 400 230
Total 2 000 1 380
Equity and Liabilities
Equity
Share capital- Equity shares of rs. 100 each 500 400
Reserve and surplus 810 225
Non-Current liabilities:
Long term borrowings 250 200
Long term provisions 50 70
Deferred tax 40 35
Current Liabilities:
Short term borrowings 100 150
Trade payable 250 300
Total 2 000 1 380
 70 FINANCIAL REPORTING

Other Information

1. Professional Ltd. acquired 70% of Dynamic Ltd on 1 April 2012 by issuing its own
shares in the ratio of 1 share of Professional Ltd for every 2 shares of Dynamic Ltd.
The fair value of the share of Professional Ltd was ` 40 per share.
2. The fair value exercise resulted in the following : (all nos in Lakh)
a. PPE fair value on 1st April 2012 was ` 350 lakhs
b. Professional Ltd aslo agreed to pay an additional payment that is higher of 35
lakh and 25% of any excess of Dynamic Ltd in the first year after acquisition
over its profit in the preceding 12 months. This additional amount will be due
after 2 years. Dynamic Ltd. has earned ` 10 lakh profit in the preceding year and
expects to earn another ` 20 lakh.
c. In additional to above, Professional Ltd also had agreed to pay one of the founder
shareholder a payment of ` 20 lakh provided he stays with the Company for two
year after the acquisition.
d. Dynamic Ltd had certain equity settled share based payment award (original
award) which got replaced by the new awards issued by Professional Ltd. As per
the original term the vesting period was 4 years and as of the acquisition date
the employees of Dynamic Ltd have already served 2 years of service. As per the
replaced wards the vesting period has been reduced to one year ( one year from
the acquisition date). The fair value of the award on the acquisition date was as
follows:
i. Original award ` 5 Lakh
ii. Replacement award ` 8 lakh.
e. Dynamic Ltd had a lawsuit pending with a customer who had made a claim of ` 50
lakh. Management reliably estimated the fair value of the liability to be ` 5 lakh.
f. The applicable tax rate for both entities is 30%.

You are required to prepare opening consolidated balance sheet of Professional Ltd as on
1st April 2012. Assume 10% discount rate.
(MTP APRIL 2019)

QUESTION 82

1. Scenario 1: New information on the fair value of an acquired loan

Bank F acquires Bank E in a business combination in October, 20X1. The loan by
Bank E to Borrower B is recognised at its provisionally determined fair value. In
December 20X1, F receives Borrower B‛s financial statements for the year ended
 IND AS 103: BUSINESS COMBINATION 71

30th September, 20X1, which indicate significant decrease in Borrower B‛s income
from operations. Basis this, the fair value of the loan to B at the acquisition date
is determined to be less than the amount recognised earlier on a provisional basis.
2. Decrease in fair value of acquired loan resulting from an event occurring during
the measurement period
Bank F acquires Bank E in a business combination in October, 20X1. The loan by
Bank E to Borrower B is recognised at its provisionally determined fair value. In
December 20X1, F receives information that Borrower B has lost its major customer
earlier that month and this is expected to have a significant negative effect on B‛s
operations.
Comment on the treatment done by Bank F.

SOLUTION :
Scenario 1: The new information obtained by F subsequent to the acquisition relates to
facts and circumstances that existed at the acquisition date. Accordingly, an adjustment
(i.e., decrease) to in the provisional amount should be recognised for loan to B with a
corresponding increase in goodwill.
Scenario 2: Basis this, the fair value of the loan to B will be less than the amount
recognised earlier at the acquisition date. The new information resulting in the change in
the estimated fair value of the loan to B does not relate to facts and circumstances that
existed at the acquisition date, but rather is due to a new event i.e., the loss of a major
customer subsequent to the acquisition date. Therefore, based on the new information,
F should determine and recognise an allowance for loss on the loan in accordance with
Ind AS 109, Financial Instruments: Recognition and Measurement, with a corresponding
charge to profit or loss; goodwill is not adjusted.

QUESTION 83

H Ltd. acquired equity shares of S Ltd., a listed company, in two tranches as mentioned in
the below table:

Date Equity stake purchased Remarks

1st November, 20X6 15% The shares were purchased based

1st January, 20X7 45% on the quoted price on the stock
exchange on the relevant dates.

Both the above-mentioned companies have Rupees as their functional currency.

Consequently, H Ltd. acquired control over S Ltd. on 1st January, 20X7. Following is the
Balance Sheet of S Ltd. as on that date:
72 FINANCIAL REPORTING

Particulars Carrying value Fair value

(` in crore) (` in crore)
ASSETS:
Non-current assets
Property, plant and equipment 40.0 90.0
Intangible assets 20.0 30.0
Financial assets
- Investments 100.0 350.0
Current assets
Inventories
Financial assets
- Trade receivables 20.0 20.0
- Cash held in functional currency 20.0 20.0

Other current assets 4.0 4.5

Non-current asset held for sale 4.0 4.5
TOTAL ASSETS 208
EQUITY AND LIABILITIES:
Equity
(a) Share capital (face value ` 100) 12.0 50.4
(b) Other equity 141.0 Not applicable
Non-current liabilities
(a) Financial liabilities
- Borrowings 20.0 20.0
Current liabilities
(a) Financial liabilities
- Trade payables 28.0 28.0
(b) Provision for warranties 3.0 3.0
(c) Current tax liabilities 4.0 4.0
TOTAL EQUITY AND LIABILITIES 208.0
 IND AS 103: BUSINESS COMBINATION 73

Other information:
Property, plant and equipment in the above Balance Sheet include leasehold motor vehicles
having carrying value of ` 1 crore and fair value of ` 1.2 crore. The date of inception of the
lease was 1st April, 20X0. On the inception of the lease, S Ltd. had correctly classified
the lease as a finance lease. However, if facts and circumstances as on 1st April, 20X7 are
considered, the lease would be classified as an operating lease.
Following is the statement of contingent liabilities of S Ltd. as on 1st January, 20X7:

Particulars Fair value Remarks

(` in crore)
Law suit filed by a customer 0.5 It is not probable that an outflow
for a claim of of resources embodying economic
` 2 crore benefits will be required to settle the
claim.
Any amount which would be paid
in respect of law suit will be tax
deductible.
Income tax demand of 2.0 It is not probable that an outflow
` 7 crore raised by tax of resources embodying economic
authorities; S Ltd. has challenged benefits will be required to settle the
the demand in the court. claim.

In relation to the above-mentioned contingent liabilities, S Ltd. has given an indemnification

undertaking to H Ltd. up to a maximum of ` 1 crore.
` 1 crore represents the acquisition date fair value of the indemnification undertaking.
Any amount which would be received in respect of the above undertaking shall not be taxable.
The tax bases of the assets and liabilities of S Ltd. is equal to their respective carrying
values being recognised in its Balance Sheet.
Carrying value of non-current asset held for sale of ` 4 crore represents its fair value less
cost to sell in accordance with the relevant Ind AS.
In consideration of the additional stake purchased by H Ltd. on 1st January, 20X7, it has
issued to the selling shareholders of S Ltd. 1 equity share of H Ltd. for every 2 shares held
in S Ltd. Fair value of equity shares of H Ltd. as on 1st January, 20X7 is ` 10,000 per share.
On 1st January, 20X7, H Ltd. has paid ` 50 crore in cash to the selling shareholders of S
Ltd. Additionally, on 31st March, 20X9, H Ltd. will pay ` 30 crore to the selling shareholders
of S Ltd. if return on equity of S Ltd. for the year ended 31st March, 20X9 is more than
25% per annum. H Ltd. has estimated the fair value of this obligation as on 1st January,
 74 FINANCIAL REPORTING

20X7 and 31st March, 20X7 as ` 22 crore and ` 23 crore respectively. The change in fair
value of the obligation is attributable to the change in facts and circumstances after the
acquisition date.
Quoted price of equity shares of S Ltd. as on various dates is as follows:
As on November, 20X6 ` 350 per share
As on 1st January, 20X7 ` 395 per share
As on 31st March, 20X7 ` 420 per share
On 31st May, 20X7, H Ltd. learned that certain customer relationships existing as on 1st
January, 20X7, which met the recognition criteria of an intangible asset as on that date,
were not considered during the accounting of business combination for the year ended 31st
March, 20X7. The fair value of such customer relationships as on 1st January, 20X7 was
` 3.5 crore (assume that there are no temporary differences associated with customer
relations; consequently, there is no impact of income taxes on customer relations).
On 31st May, 20X7 itself, H Ltd. further learned that due to additional customer relationships
being developed during the period 1st January, 20X7 to 31st March, 20X7, the fair value of
such customer relationships has increased to ` 4 crore as on 31st March, 20X7.
On 31st December, 20X7, H Ltd. has established that it has obtained all the information
necessary for the accounting of the business combination and that more information is not
obtainable.
H Ltd. and S Ltd. are not related parties and follow Ind AS for financial reporting. Income
tax rate applicable is 30%.
You are required to provide your detailed responses to the following, along with reasoning
and computation notes:

(a) What should be the goodwill or bargain purchase gain to be recognised by H Ltd. in its
financial statements for the year ended 31st March, 20X7. For this purpose, measure
non- controlling interest using proportionate share of the fair value of the identifiable
net assets of S Ltd.
(b) Will the amount of non-controlling interest, goodwill, or bargain purchase gain so
recognised in (a) above change subsequent to 31st March, 20X7? If yes, provide
relevant journal entries.
(c) What should be the accounting treatment of the contingent consideration as on 31st
March, 20X7?
(MTP MARCH 2019)
 IND AS 103: BUSINESS COMBINATION 75

QUESTION 84

On 1st April, 20X1, Company A acquired 5% of the equity share capital of Company B for
1,00,000. A accounts for its investment in B at Fair Value through OCI (FVOCI) under Ind
AS 109, Financial Instruments: Recognition and Measurement. At 31st March, 20X2, A
carried its investment in B at fair value and reported an unrealised gain of ` 5,000 in other
comprehensive income, which was presented as a separate component of equity. On 1st
April, 20X2, A obtains control of B by acquiring the remaining 95 percent of B.
Comment on the treatment to be done based on the facts given in the question.

SOLUTION :
At the acquisition date A recognises the gain of ` 5,000 in OCI as the gain or loss is not
allowed to be recycled to income statement as per the requirement of Ind AS 109. A‛s
investment in B would be at fair value and therefore does not require remeasurement as a
result of the business combination. The fair value of the 5 percent investment (1,05,000)
plus the fair value of the consideration for the 95 percent newly acquired interest is
included in the acquisition accounting.

QUESTION 85

Entity A and entity B provide construction services in India. Entity A is owned by a group
of individuals, none of whom has control and does not have a collective control agreement.
Entity B is owned by a single individual, Mr. Ram. The owners of entities A and B have
decided to combine their businesses. The consideration will be settled in shares of entity B.
Entity B issues new shares, amounting to 40% of its issued share capital, to its controlling
shareholder, Mr. Ram. Mr. Ram then transfers the shares to the owners of entity A in
exchange for their interest in entity A. At this point Mr. Ram controls both entities A and
B, owning 100% of entity A and 71.42% of entity B. Mr. Ram had a controlling interest in
both entity A and entity B before and after the contribution. Is the combination of entities
A and B a combination of entities under common control?

SOLUTION :
No. This is not a business combination of entities under common control. Mr. Ram‛s control
of both entities before the business combination was transitory. The substance of the
transaction is that entity B has obtained control of entity A. Entity B accounts for this
transaction as a business combination under Ind AS 103 using acquisition accounting.

QUESTION 86

On 1 April 20X1, Alpha Ltd. acquires 80 percent of the equity interest of Beta Pvt. Ltd. in
exchange for cash of ` 300. Due to legal compulsion, Beta Pvt. Ltd. had to dispose of their
investments by a specified date. Therefore, they did not have sufficient time to market
 76 FINANCIAL REPORTING

Beta Pvt. Ltd. to multiple potential buyers. The management of Alpha Ltd. initially measures
the separately recognizable identifiable assets acquired and the liabilities assumed as of
the acquisition date in accordance with the requirement of Ind AS 103. The identifiable
assets are measured at ` 500 and the liabilities assumed are measured at ` 100. Alpha Ltd.
engages on independent consultant, who determined that the fair value of 20 per cent non-
controlling interest in Beta Pvt. Ltd. is ` 84.
Alpha Ltd. reviewed the procedures it used to identify and measure the assets acquired
and liabilities assumed and to measure the fair value of both the non controlling interest
in Beta Pvt. Ltd. and the consideration transferred. After the review, it decided that the
procedures and resulting measures were appropriate.
Calculate the gain or loss on acquisition of Beta Pvt. Ltd. and also show the journal entries
for accounting of its acquisition. Also calculate the value of the non-controlling interest in
Beta Pvt. Ltd. on the basis of proportionate interest method, if alternatively applied?

SOLUTION :
The amount of Beta Pvt. Ltd. identifiable net assets [` 400, calculated as ` 500 - ` 100)
exceeds the fair value of the consideration transferred plus the fair value of the non
controlling interest in Beta Pvt. Ltd. [` 384 calculated as 300 + 84]. Alpha Ltd. measures
the gain on its purchase of the 80 per cent interest as follows:

` in lakh
Amount of the identifiable net assets acquired (` 500 - ` 100) 400
Less: Fair value of the consideration transferred for Alpha
Ltd. 300
80 per cent interest in Beta Pvt. Ltd.
Add: Fair value of non controlling interest in Beta Pvt. Ltd. 84 (384)
Gain on bargain purchase of 80 per cent interest 16

Journal Entry

` in lakh
Amount of the identifiable net assets acquired (` 500 - ` 100) 400
Less: Fair value of the consideration transferred for Alpha 300
Ltd.
80 per cent interest in Beta Pvt. Ltd.
Add: Fair value of non controlling interest in Beta Pvt. Ltd. 84 (384)
Gain on bargain purchase of 80 per cent interest 16
 IND AS 103: BUSINESS COMBINATION 77

If the acquirer chose to measure the non controlling interest in Beta Pvt. Ltd. on the basis
of its proportionate interest in the identifiable net assets of the acquire, the recognized
amount of the non controlling interest would be ` 80 (` 400 x 0.20). The gain on the bargain
purchase then would be ` 20 (` 400- (` 300 + ` 80)

QUESTION 87

ABC Ltd. prepares consolidated financial statements upto 31st March each year. On 1st July
20X1, ABC Ltd. acquired 75% of the equity shares of JKL Ltd. and gained control of JKL
Ltd. the issued shares of JKL Ltd. is 1,20,00,000 equity shares. Details of the purchase
consideration are as follows:

- On 1st July, 20X1, ABC Ltd. issued two shares for every three shares acquired in JKL
Ltd. On 1st July, 20X1, the market value of an equity share in ABC Ltd. was ` 6.50 and
the market value of an equity share in JKL Ltd. was ` 6.
- On 30th June, 20X2, ABC Ltd. will make a cash payment of ` 71,50,000 to the former
shareholders of JKL Ltd. who sold their shares to ABC Ltd. on 1st July, 20X1. On 1st
July, 20X1, ABC Ltd. would have to pay interest at an annual rate of 10% on borrowings.

- On 30th June, 20X3, ABC Ltd. may make a cash payment of ` 3,00,00,000 to the
former shareholders of JKL Ltd. who sold their shares to ABC Ltd. on 1st July, 20X1.
This payment is contingent upon the revenues of ABC Ltd. growing by 15% over the
two-year period from 1st July, 20X1 to 30th June, 20X3. On 1st July, 20X1, the fair
value of this contingent consideration was ` 2,50,00,000. On 31st March, 20X2, the
fair value of the contingent consideration was ` 2,20,00,000.
- On 1st July, 20X1, the carrying values of the identifiable net assets of JKL Ltd. in
the books of that company was ` 6,00,00,000. On 1st July, 20X1, the fair values of
these net assets was ` 7,00,00,000. The rate of deferred tax to apply to temporary
differences is 20%.

During the nine months ended on 31st March, 20X2, JKL Ltd. had a poorer than expected
operating performance. Therefore, on 31st March, 20X2 it was necessary for ABC Ltd. to
recognise an impairment of the goodwill arising on acquisition of JKL Ltd., amounting to 10%
of its total computed value.
Compute the impairment of goodwill in the consolidated financial statements of ABC Ltd.
under both the methods permitted by Ind AS 103 for the initial computation of the non-
controlling interest in JKL Ltd. at the acquisition date.
 78 FINANCIAL REPORTING

QUESTION 88

Company X is engaged in the business of exploration & development of Oil & Gas Blocks.
Company X currently holds participating interest (PI) in below mentioned producing Block
as follows:

Block Name Company X Company Y Company Z Total

AWM/01 30% 60% 10% 100%

For the above Block, Company X, Y & Z has entered into unincorporated Joint Venture.
Company Y is the Operator of the Block AWM/01. Company X & Company Z are the Joint
Operators. Company Y incurs all the expenditure on behalf of Joint Venture and raise cash
call to Company X & Company Z at each month end in respect of their share of expenditure
incurred in Joint Venture. All the manpower and requisite facilities / machineries owned by
the Joint venture and thereby owned by all the Joint Operators.
For past few months, due to liquidity issues, Company Z defaulted in payment of cash
calls to operators. Therefore, company Y (Operator) has issued notice to company Z for
withdrawal of their participating right from on 01.04.20X1. However, company Z has filed
the appeal with arbitrator on 30.04.20X1.
Financial performance of company Z has not been improved in subsequent months and
therefore company Z has decided to withdraw participating interest rights from Block
AWM/01 and entered into sale agreement with Company X & Company Y. As per the terms
of the agreement, dated 31.5.20X1, Company X will receive 33.33% share & Company Y will
receive 66.67% share of PI rights owned by Company Z.
Company X is required to pay ` 1 Lacs against 33.33 share of PI rights owned by Company Z.
After signing of sale agreement, Operator (company Y) approach government of India for
modification in PSC (Production Sharing Contract) i.e. removal of Company Z from PSC of
AWM/01 and government has approved this transaction on 30.6.20X1. Government approval
for the modification in PSC is essential given the industry in which the joint operators
operate.
Balance sheet of Company X & Company Z are as follows:

Company X Company Z
Particulars 31.5.20X1 30.6.20X1 31.5.20X1 30.6.20X1
` ` ` `
Assets

Non-Current Assets
 IND AS 103: BUSINESS COMBINATION 79

Property, Plant & Equipment 5,00,000 10,00,000 1,50,000 3,00,000

Right of Use Asset 1,00,000 2,00,000 10,000 20,000

Development CWIP 50,000 1,00,000 50,000 1,00,000

Financial Assets

Loan receivable 25,000 50,000 25,000 50,000

Total Non-Current Assets 6,75,000 13,50,000 2,35,000 4,70,000

Current assets

Inventories 1,00,000 2,00,000 15,000 30,000

Financial Assets

Trade receivables 1,50,000 3,00,000 50,000 1,00,000

Cash and cash equivalents 2,00,000 4,00,000 1,00,000 2,00,000

Other Current Assets 2,25,000 50,000 25,000 50,000

Total Current Assets 6,75,000 9,50,000 1,90,000 3,80,000

Total Assets 13,50,000 23,00,000 4,25,000 8,50,000

Equity and Liabilities

Equity

Equity share capital 3,00,000 3,00,000 1,00,000 1,00,000

Other equity 2,00,000 3,00,000 75,000 2,50,000

Total Equity 5,00,000 6,00,000 1,75,000 3,50,000

Liabilities

Non-Current Liabilities

Provisions 4,00,000 8,00,000 1,00,000 2,00,000

Other Liabilities 1,50,000 3,00,000 50,000 1,00,000

Total Non-Current 5,50,000 11,00,000 1,50,000 3,00,000

Liabilities
Current Liabilities

Financial Liabilities

Trade Payables 3,00,000 6,00,000 1,00,000 2,00,000

 80 FINANCIAL REPORTING

Total Current Liabilities 3,00,000 6,00,000 1,00,000 2,00,000

Total Liabilities 13,50,000 23,00,000 4,25,000 8,50,000

Additional Information:

1. Fair Value of PPE & Development CWIP owned by Company Z as per Market participant
approach is ` 5,00,000 & ` 2,00,000 respectively.
2. Fair Value of all the other assets and liabilities acquired are assumed to be at their
carrying values (except cash & cash equivalent). Cash and cash equivalents of Company
Z are not to be acquired by Company X as per the terms of agreement.
3. Tax rate is assumed to be 30%.
4. As per Ind AS 28, all the joint operators are joint ventures whereby each parties that
have joint control of the arrangement have rights to the net assets of the arrangement
and therefore every operator records their share of assets and liabilities in their
books.
You need to determine the following:
1. Whether the above acquisition falls under business or asset acquisition as defined
under business combination standard Ind AS 103?
2. Determine the acquisition date in the above transaction?
3. Prepare Journal entries for the above-mentioned transaction?
4. Draft the Balance Sheet for Company X based on your analysis in Part 1 above as at
acquisition date.
(RTP NOV 2021)
QUESTION 89

How should contingent consideration payable in relation to a business combination be

accounted for on initial recognition and at the subsequent measurement as per Ind AS in
the following cases:
(i) On 1 April 2016, A Ltd. acquires 100% interest in B Ltd. As per the terms of agreement
the purchase consideration is payable in the following 2 tranches:
a. an immediate issuance of 10 lakhs shares of A Ltd. having face value of INR 10
per share;
b. a further issuance of 2 lakhs shares after one year if the profit before interest
and tax of B Ltd. for the first year following acquisition exceeds INR 1 crore.
i. The fair value of the shares of A Ltd. on the date of acquisition is INR
20 per share. Further, the management has estimated that on the date of
acquisition, the fair value of contingent consideration is `25 lakhs.
 IND AS 103: BUSINESS COMBINATION 81

ii. During the year ended 31 March 2017, the profit before interest and tax of
B Ltd. exceeded `1 crore. As on 31 March 2017, the fair value of shares of
A Ltd. is `25 per share.
(ii) Continuing with the fact pattern in (a) above except for:
a. The number of shares to be issued after one year is not fixed.
b. Rather, A Ltd. agreed to issue variable number of shares having a fair value equal
to `40 lakhs after one year, if the profit before interest and tax for the first
year following acquisition exceeds `1 crore. A Ltd. issued shares with `40 lakhs
after a year.
(RTP MAY 2019)

QUESTION 90 (MIXED WITH IND AS 21)

Monsoon Limited acquired, on 30 September, 20X2, 70% of the share capital of Mark
Limited, an entity registered as company in Germany. The functional currency of Monsoon
Limited is Indian Rupee and its financial year ends on 31 March, 20X3.
The fair value of the net assets of Mark Limited was 23 million EURO and the purchase
consideration paid is 17.5 million EURO on 30 September, 20X2.
The exchange rates as on 30 September, 20X2 was ` 82 per EURO and at 31 March, 20X3
was ` 84 per EURO.
On acquisition of Mark limited, what is the value at which the goodwill / capital reserve has
to be recognized in the financial statements of Monsoon Limited as on 31 March 20X3?
(RTP MAY 2021)

QUESTION 91

Bima Ltd. acquired 65% of shares on 1 June, 20X1 in Nafa Ltd. which is engaged in production
of components of machinery. Nafa Ltd. has 1,00,000 equity shares of ` 10 each. The quoted
market price of shares of Nafa Ltd. was ` 12 on the date of acquisition. The fair value of
Nafa Ltd.‛s identifiable net assets as on 1 June, 20X1 was ` 80,00,000.
Bima Ltd. wired ` 50,00,000 in cash and issued 50,000 equity shares as purchase consideration
on the date of acquisition. The quoted market price of shares of Bima Ltd. on the date of
issue was ` 25 per share.
Bima Ltd. also agrees to pay additional consideration of ` 15,00,000, if the cumulative
profit earned by Nafa Ltd. exceeds ` 1 crore over the next three years. On the date of
acquisition, Nafa Ltd. assessed and determined that it is considered probable that the extra
consideration will be paid. The fair value of this consideration on the date of acquisition is
` 9,80,000. Nafa Ltd. incurred ` 1,50,000 in relation to the acquisition. It measures Non-
controlling interest at fair value.
 82 FINANCIAL REPORTING

How will the acquisition of Nafa Ltd. be accounted by Bima Ltd., under Ind AS 103? Prepare
detailed workings and pass the necessary journal entry.
(RTP MAY 2021)

QUESTION 92

Entity A acquires entity B. Entity A agrees with the former shareholders of entity B to pay
` 900, with an additional payment of ` 500 if the subsequent earnings of entity B reach a
specified target in three years. The former shareholders also become employees. On the
acquisition date, the fair value of the net assets of entity B amount to ` 850, and the fair
value of additional payment is estimated at ` 200. At the acquisition date, the outflow of
additional payment is not probable.
Over the next three years, the cumulative earnings of entity B (before considering the
effects of the additional payments) amount to ` 1,050. At the end of year three, entity A
pays ` 500 as the conditions were met.
State the impact on the financial position and results of classifying the payments as
remuneration and contingent consideration.
(RTP MAY 2022)
SOLUTION
The impact on the financial position and results of classifying the payments as remuneration
and contingent consideration is tabulated as follows:

Additional Payment is classified as

Remuneration Contingent
consideration
Consideration 900 900
Fair value of additional payment 0 200
Total consideration 900 1,100
Fair value of net assets (850) (850)
Goodwill at acquisition date 50 250
Subsequent changes in additional payment 0 0
Total Goodwill 50 250
Cumulative earnings (before considering 1,050 1,050
additional payment)
Impact of additional payment (500) (300)
Reported results across three years 550 750
 IND AS 103: BUSINESS COMBINATION 83

QUESETION 93

Sun Limited and Moon Limited amalgamated from 1st April, 2021. A new company Sunmoon
Limited with shares of ` 10 each was formed to take over the businesses of the existing
companies.
Summarised Balance Sheet as on 31st March, 2021

Particulars Note No. Sun Limited Moon Limited

(`) (`)
ASSETS
Non-current assets
Property, plant and equipment 1,70,00,000 1,50,00,000
Financial assets
Investment 21,00,000 11,00,000
Current assets
Inventory 25,00,000 55,00,000
Financial assets
Trade receivables 36,00,000 80,00,000
Cash and cash equivalent 9,00,000 8,00,000
Total 2,61,00,000 3,04,00,000
EQUITY AND LIABILITIES
Equity
Equity share capital (FV ` 10 each) 1,20,00,000 1,40,00,000
Other equity 1 61,00,000 54,00,000
Liabilities
Non-current liabilities
Financial liabilities
Borrowings (12% Debentures) 60,00,000 80,00,000
Current liabilities
Financial liabilities
Trade payables 20,00,000 30,00,000
Total 2,61,00,000 3,04,00,000
 84 FINANCIAL REPORTING

Notes to Accounts:

Sun Limited Moon Limited

` `
Other equity
General reserve 30,00,000 40,00,000
Profit & Loss 20,00,000 10,00,000
Investment allowance reserve 10,00,000 2,00,000
Export profit reserve 1,00,000 2,00,000
61,00,000 54,00,000

Sunmoon Limited issued requisite number of shares to discharge the claims of the equity
shareholders of the transferor companies. Also, the new debentures were issued in ex-
change of the old series of both the companies.
Compute purchase consideration and advice discharge thereof by preparing a note and
draft the Balance Sheet of Sunmoon Limited assuming that Sun Limited and Moon Limited
are not under common control and management of larger entity out of Sun Limited and Moon
Limited will take over the control of the entity Sunmoon Limited.
The fair value of net assets as at 31st March, 2021 of Sun Limited and Moon Limited are
as follows:

Assets Sun Limited Moon Limited

` `
Property, Plant and Equipment 1,90,00,000 1,70,00,000
Inventory 26,00,000 58,00,000
Fair value of the Business 2,20,00,000 2,80,00,000

(14 Marks)
(CA FINAL DEC. 2021 EXAM)
SOLUTION :
1. Determination of larger entity out of Sun Ltd. and Moon Ltd.
The management of a larger entity (out of Sun Limited and Moon Limited) will take the
control of the Sunmoon Ltd. Since, here Sun Ltd. and Moon Ltd. are not under common
control and hence accounting prescribed under Ind AS 103 for business combination
will be applied. As per the accounting guidance provided in Ind AS 103, sometimes the
legal acquirer may not be the accounting acquirer. In the given scenario although Sun-
moon Ltd. is issuing the shares but management of a larger entity out of Sun Ltd. and
Moon Ltd. will have control of Sunmoon Ltd.
 IND AS 103: BUSINESS COMBINATION 85

This can be determined by the following table: (`)

Sun Ltd. Moon Ltd.

Fair Value A 2,20,00,000 2,80,00,000
Value per share B 10 10
Number of shares A/B = C 22,00,000 28,00,000
Total number of shares in Sun-
moon Ltd. will be 50,00,000
shares (22,00,000 + 28,00,000)
Thus, % held by each company [(C/50,00,000) x 44% 56%
in Sunmoon Ltd. 100]

Note: It is a case of Reverse Acquisition. Since post-merger, Moon Ltd. is bigger in

size which is a clear indicator that Moon Ltd. will have control of Sunmoon Ltd. and will
be considered as an accounting acquirer. Accordingly, Moon Ltd.‛s assets and liabilities
will be recorded at historical cost in the merged financial statements.
2. Computation of Purchase Consideration and the manner in which it will be dis-
charged
Number of shares to be issued by Moon Ltd. to Sun Ltd. to maintain the same percent-
age i.e. 56%
Since 14,00,000 shares of Moon Ltd. (given in the balance sheet) represent 56%, the
total number of shares would be 25,00,000 shares (14,00,000 shares / 56%).
This implies Moon Ltd. would need to issue 11,00,000 shares (25,00,000 – 14,00,000)
to Sun Ltd.
Purchase Consideration = 11,00,000 shares x ` 20 per share (ie. 2,80,00,000 / 14,00,000
shares) = ` 2,20,00,000.
3. Balance Sheet of Sunmoon Ltd. as on 1.4.2021

ASSETS Note Amount `

No.
Non-Current assets
Property, Plant and Equipment 3,40,00,000
(1,90,00,000 + 1,50,00,000)
Goodwill (Refer Working Note) 18,00,000
Financial assets
Investment (21,00,000 + 11,00,000) 32,00,000
Current assets
 86 FINANCIAL REPORTING

Inventory (26,00,000 + 55,00,000) 81,00,000

Financial assets
Trade receivables (36,00,000 + 80,00,000) 1,16,00,000
Cash and Cash equivalent (9,00,000 + 8,00,000)
17,00,000
6,04,00,000
EQUITY AND LIABILITIES
Equity
Equity share capital (of face value of ` 10 each) 1 2,50,00,000
Other equity 2 1,64,00,000
Liabilities
Non-current liabilities
Financial liabilities
Borrowings (12% Debentures) 3 1,40,00,000
(60,00,000 + 80,00,000)
Current liabilities
Financial liabilities
Trade payables (20,00,000 + 30,00,000) 50,00,000
6,04,00,000

Notes to Accounts

(`) (`)
1. Share Capital
25,00,000 Equity Shares of ` 10 each (14,00,000 2,50,00,000
to Moon Ltd. and 11,00,000 as computed above,
to Sun Ltd.)
2. Other Equity
General reserve of Moon Ltd. 40,00,000
Profit and loss of Moon Ltd. 10,00,000
Export profit reserve of Moon Ltd. 2,00,000
Investment allowance reserve of Moon Ltd. 2,00,000
Security premium (11,00,000 shares x ` 10) 1,10,00,000 1,64,00,000
3. Long Term Borrowings
12% Debentures 1,40,00,000
 IND AS 103: BUSINESS COMBINATION 87

Working Note:
Computation of Goodwill

Assets: `
Property, plant and equipment 1,90,00,000
Investment 21,00,000
Inventory 26,00,000
Trade receivables 36,00,000
Cash & cash equivalent 9,00,000
Total assets 2,82,00,000
Less: Liabilities:
Borrowings (12% Debentures) (60,00,000)
Trade payables (20,00,000)
Net assets A 2,02,00,000
Purchase consideration B 2,20,00,000
Goodwill (B-A) 18,00,000

QUESTION 94

As part of its business expansion strategy, UG Limited is in process of setting up a health

care intermediates business. The process is at very initial stage. Towards this, UG Limited
acquired on 1st April 2020, 100% ordinary shares of AG Limited. AG Limited manufactures
health care intermediates.
The purchase consideration of AG Limited was by way of a share exchange valued at ` 1,750
lakh. The fair value of AG Limited‛s net assets was ` 750 lakh, but this fair value does not
include:
• A patent owned by AG Limited for an established successful intermediate drug that
has a remaining life of 10 years. A consultant has estimated the value of this patent
at ` 500 lakh. However, the outcome of clinical trials for the same is awaited. If the
trials are successful, the value of the drug would fetch estimated ` 750 lakh.
• AG Limited has developed and patented a new vaccine which has been approved for
clinical use. The cost of developing the vaccine was ` 600 lakh. Based on an early as-
sessment of its sales success; its market value has been estimated at ` 1,000 lakh by
a valuer.
UG Limited has requested you to suggest the accounting treatment of the above transac-
tion under applicable Ind AS.
(CA FINAL JULY 2021 EXAM) (5 Marks)
 88 FINANCIAL REPORTING

SOLUTION :
Recognition Principle as per Ind AS:
As per para 13 of Ind AS 103 ‘Business Combinations‛, the acquirer‛s application of the
recognition principle and conditions may result in recognising some assets and liabilities
that the acquiree had not previously recognised as assets and liabilities in its financial
statements. This may be the case when the asset is developed by the entity internally and
charged the related costs to expense.
Accounting Treatment:
Based on the above, the company can recognise following Intangible assets while determin-
ing Goodwill / Bargain Purchase for the transaction:
(i) Patent owned by AG Limited: The patent owned will be recognised at fair value by UG
Limited even though it was not recognised by AG Limited in its financial statements.
The patent will be amortised over the remaining useful life of the asset i.e. 10
years. Since the company is awaiting the outcome of the trials, the value of the patent
cannot be estimated at ` 750 lakh and the extra ` 250 lakh should only be disclosed as
a Contingent Asset and not recognised.
(ii) Patent internally developed by AG Limited: As per para 18 of Ind AS 103 ‘Business
Combinations‛, the acquirer shall measure the identifiable assets acquired and the lia-
bilities assumed at their acquisition date fair values. Since the patent developed has
been approved for clinical use, it is an identifiable asset, hence the same will be mea-
sured at fair value i.e. ` 1,000 lakh on the acquisition date.
Hence the revised working would be as follows:

`
Fair value of net assets of AG Limited 750 lakh
Add: Patent (500 lakh + 1,000 lakh) 1,500 lakh
2,250 lakh
Purchase consideration (1,750 lakh)
Gain on bargain purchase 500 lakh
 IND AS 103: BUSINESS COMBINATION 89

QUESTION 95

The draft Balance Sheet of JAY Ltd. and KAY Ltd. as at 31st March 2021 is given below:

PARTICULARS JAY Limited KAY Limited

(` in lakh) (` in lakh)
ASSETS
NON-CURRENT ASSETS
Property, Plant & Equipment 400 500
Investments 450 120
CURRENT ASSETS
Inventories 180 130
Financial Assets
- Trade Receivables 520 270
- Cash & Cash Equivalents 260 145
- Others 350 175
TOTAL 2,160 1,340
EQUITY AND LIABILITIES
EQUITY
Share Capital
JAY Limited: Equity Shares of ` 10 each 600
KAY Limited: Equity Shares of ` 100 each 450
OTHER EQUITY 725 210
NON-CURRENT LIABILITIES
Financial Liabilities
- Long Term Borrowings 350 250
Long Term Provisions 70 80
Deferred Tax 40 20
CURRENT LIABILITIES
Financial Liabilities
- Short Term Borrowings 125 145
- Trade Payables 250 185
TOTAL 2,160 1,340
 90 FINANCIAL REPORTING

Other information:
a. JAY Ltd. acquired 75% shares of KAY Ltd. on 1st April, 2021 by issuing its own shares
in the ratio of 2 shares of JAY Ltd. for every 3 shares of KAY Ltd. The fair value of
the shares of JAY Ltd. was ` 50 per share.
b. The fair value exercise resulted in the following:
i. Fair value of Property, Plant & Equipment of KAY Ltd. on 1st April, 2021 was ` 425
lakh;
ii. JAY Ltd. also agreed to pay an additional payment as consideration that is higher
of ` 45 lakh and 30% of any excess profits in the first year, after acquisition, over
its profits in the preceding 12 months made by KAY Ltd. This additional amount
will be due after 3 years. KAY Ltd. has earned ` 15 lakh profit in the preceding
year and expects to earn another ` 20 lakh;
iii. In addition to the above, JAY Ltd. also had agreed to pay one of the founder
shareholder a payment of ` 22 lakh provided he stays with the Company for 3
years after acquisition;
iv. KAY Ltd. had certain equity settled share based payment award (original award)
which got replaced by the new awards issued by JAY Ltd. As per the original
terms, the vesting period was 5 years and as of the acquisition date the employees
of KAY Ltd. have already served 2 years of service. As per the replaced awards,
the vesting period has been reduced to 1 year (1 year from the acquisition date).
The fair value of the award on the acquisition date was as follows:
• Original award - ` 6 lakh
• Replacement award - ` 9 lakh
v. KAY Ltd. had a lawsuit pending with a customer who made a claim of ` 70 lakh.
Management reliably estimated the fair value of the liability to be ` 7.5 lakh;
vi. The applicable tax rate for both entities is 30%.
You are required to prepare consolidated balance sheet of JAY Ltd. as on 1st April, 2021.
Assume 10% per annum discount rate. Management notes and working notes should form
part of your answer.
(15 Marks)
(CA FINAL MAY 2022 EXAM)
 IND AS 103: BUSINESS COMBINATION 91

SOLUTION :
Consolidated Balance Sheet of JAY Ltd. as on 1st April, 2021 (` in lakh)

Amount
Assets
Non-Current Assets:
Property, plant and equipment 825.00
Financial assets
Investment 570.00
Current assets:
Inventories 310.00
Financial assets
Trade receivables 790.00
Cash and cash equivalents 405.00
Others 525.00
Total 3,425.00
Equity and Liabilities
Equity
Share capital - Equity shares of ` 10 each 622.50
Other Equity 1,120.38
Non-controlling Interest 150.56
Non-Current liabilities:
Financial Liabilities
Long term borrowings 600.00
Long term provisions 183.81
Deferred tax 35.25
Current Liabilities:
Financial Liabilities
Short term borrowings 270.00
Trade payables 435.00
Provision for Lawsuit damages 7.50
Total 3,425.00
 92 FINANCIAL REPORTING

Management Notes:
a. As per Ind AS 103, the acquirer is required to record the assets and liabilities ac-
quired at their respective fair value. Accordingly, the PPE of KAY Ltd. will be recorded
at ` 425 lakh.
b. The value of replacement award is allocated between consideration transferred and
post combination expense. The portion attributable to purchase consideration is de-
termined based on the fair value of the replacement award for the service rendered
till the date of the acquisition. Accordingly, ` 2.4 lakh (6 x 2/5) is considered as a part
of purchase consideration and is credited to JAY Ltd . equity as this will be settled
in its own equity. The balance of ` 6.60 lakh (` 9 lakh – ` 2.4 lakh) will be recorded as
compensation expense in the post combination financial statements over the remaining
life, which is 1 year in this scenario.
c. There is a difference between contingent consideration and deferred consideration.
In the given case ` 45 lakh is the minimum payment to be paid after 3 years and ac-
cordingly will be considered as deferred consideration. The other element is if compa-
ny meet certain target, then they will get 30% of that or ` 45 lakh whichever is higher.
In the given case, the minimum what is expected to be paid has been considered and
the fair value of the contingent consideration has been considered as zero. The impact
of time value on deferred consideration has been given @ 10%.
d. The additional consideration of ` 22 lakh to be paid to the founder shareholder is con-
tingent to him/her continuing in employment and hence this will be considered as em-
ployee compensation and will be recorded as post combination expenses in the income
statement of JAY Ltd.
Working Notes:
1. Computation for Purchase consideration

Particulars Amount (`)

Share capital of KAY Ltd. 4,50,00,000
Number of shares 4,50,000
Shares to be issued 3:2 3,00,000
Fair value ` per share 50
` in lakh
PC (3,00,000 x 75% x ` 50 per share) (A) 112.50
Deferred consideration after discounting ` 45 lakh for
3 years @ 10% (P.V. Factor 0.7513) (B) 33.81
 IND AS 103: BUSINESS COMBINATION 93

Replacement award market-based measure of the ac-

quiree award (6) x ratio of the portion of the vesting
period completed (2) / greater of the total vesting
period (3) or the original vesting period (5) of the ac-
quiree award ie (6 x 2/5) (C)
2.40
PC in lakh (A+B+C) 148.71

2. Allocation of Purchase price

Particulars Book value Fair value FV adjust-

(A) (B) ment
(A-B)
Property, plant and equipment 500.00 425.00 (75.00)
Investment 120.00 120.00
Inventories 130.00 130.00
Financial assets:
Trade receivables 270.00 270.00
Cash and cash equivalents 145.00 145.00
Others 175.00 175.00
1,340.00 1,265.00 (75.00)
Less: Long term borrowings (250.00) (250.00)
Long term provisions (80.00) (80.00)
Deferred tax (20.00) (20.00)
Short term borrowings (145.00) (145.00)
Trade payables (185.00) (185.00)
Contingent liability - (7.50) (7.50)
Net assets (X) 660.00 577.50 (82.50)
Deferred tax asset on FV adjustment
(82.50 x 30%) (Y) 24.75
Net assets (X+Y) 602.25
Non-controlling interest (602.50 x 25%)
rounded off 150.56
Purchase consideration (PC) 148.71
Capital Reserve (Net assets –
NCI – PC) 302.98
 94 FINANCIAL REPORTING

3. Computation of consolidated amounts of consolidated financial statements

(` in lakh)

JAY Ltd. KAY Ltd. PPA Total

(pre- acquisi- Allocation
tion)
Assets
Non-current assets:
Property, plant and equip- 400.00 500.00 (75.00) 825.00
ment
Investment 450.00 120.00 570.00
Current assets:
Inventories 180.00 130.00 310.00
Financial assets:
Trade receivables 520.00 270.00 790.00
Cash and cash equivalents 260.00 145.00 405.00
Others 350.00 175.00 - 525.00
Total 2,160.00 1,340.00 (75.00) 3,425.00
Equity and Liabilities
Equity
Share capital - Equity shares of 600.00
` 10 each
Shares allotted to KAY Ltd. 22.50 622.50
(W.N.1) (3,00,000 x 75% x ` 10
per share)
Other Equity 725.00 1,120.38
Replacement a w a r d 2.40
(W.N.1)
Security Premium (W.N.1) 90.00
(3,00,000 shares x 75% x ` 40)
Capital Reserve (W.N.2) 302.98
Non-controlling interest (W.N.2) - 150.56 150.56
Non-current liabilities:
Financial liabilities
Long term borrowings 350.00 250.00 600.00
 IND AS 103: BUSINESS COMBINATION 95

Long term provisions (W.N.1) 70.00 80.00 33.81 183.81

Deferred tax (W.N.2) 40.00 20.00 (24.75) 35.25
Current liabilities:
Financial liabilities Short term 125.00 145.00 270.00
borrowings
Trade payable 250.00 185.00 435.00
Liability for lawsuit damages - - 7.50 7.50
Total 2,160.00 680.00 585.00 3,425.00

QUESTION 96

The draft balance sheets of Swan Limited and Duck Limited as at 31st March 2023 is as
under:

Amount in ` Lakhs
Particulars Swan Limited Duck Limited
Assets
Non-Current Assets
Property, Plant and Equipment 800 1,000
Investments 900 240
Current Assets
Inventories 360 260
Financial Assets
- Trade Receivables 1,040 540
- Cash & Cash Equivalents 520 290
Other Current Assets 700 350
Total 4,320 2,680

Swan Lim- Duck Limited

ited
Equity and Liabilities
Equity
Share Capital
- Swan Limited : Equity Shares of ` 10/- each 1,200 —
- Duck Limited : Equity Shares of ` 100/ - each — 900
 96 FINANCIAL REPORTING

Other Equity 1,450 420

Non-Current Liabilities
Financial Liabilities
- Long Term Borrowings 700 500
Long Term Provisions 140 200
Deferred Tax 80 —
Current Liabilities
Financial Liabilities
- Short Term Borrowings 250 290
- Short Term Borrowings 500 370
Total 4,320 2,680

On 1st April 2023, Swan Limited acquired 80% equity shares of Duck Limited. Swan Limited
agreed to pay to each shareholder of Duck Limited, ` 20/- per equity share in cash and to
issue five equity shares of ` 10/- each of Swan Limited in lieu of every six shares held by
the shareholder Duck Limited. The fair value of the shares of Swan Limited was ` 100/- per
share as on the date of acquisition.
Swan Limited also agreed to pay an additional consideration being higher of ` 90 lakhs and
30% of any excess profits in the first year, after acquisition, over Duck Limited‛s Profit
in the preceding 12 months (financial year 2022-23) made by Duck Limited. The additional
amount will be due in 3 years post the date of acquisition. Duck Limited had earned ` 30
lakhs profit in the preceding year and expects to earn ` 40 lakhs in financial year 2023-24.
The fair value exercise resulted in the following:
i. Fair value of Property, Plant and Equipment and Investments of Duck Limited on 1st
April 2023 was ` 1200 lakhs and ` 300 lakhs respectively.
ii. Duck Limited owns a popular brand name that meets the recognition criteria for In-
tangible Assets under Ind AS 103 ‘Business Combinations‛. Independent valuers have
attributed a fair Value of ` 250 lakhs for the brand. However, the brand does not have
any cost for tax purposes and no tax deductions are available for the same.
iii. Following is the statement of Contingent Liabilities of Duck Limited as on 1st April
2023:
 IND AS 103: BUSINESS COMBINATION 97

Particulars Fair Value Remarks

(`/ Lakhs)
Law suit filed by a customer for a 5 It is not Probable that
claim of ` 20 lakhs an outflow of resources
embodying economic benefits
will be required to settle the
claim. Any amount which would
be paid in respect of law suit
will be tax deductible.
Income tax demand of ` 70 lakhs 20 It is not probable that
raised by tax authorities. Duck an outflow of resources
Limited has challenged the demand embodying economic benefits
in the High Court will be required to settle the
claim.

iv. Duck Limited had certain equity settled share based payment awards (original award)
which were replaced by the new awards issued by Swan Limited. As per the terms of
original awards, the vesting period was 5 years and as of the acquisition date the em-
ployees of Duck Limited had already served 2 years of service. As per the new awards,
the vesting period has been reduced to 1 year (1 year from the acquisition date). The
fair value of the award on acquisition date was as follows:
Original Awards: ` 12 lakhs
New Awards: ` 18 lakhs.
v. Further, Swan Limited has also agreed to pay one of the founder shareholder of Duck
Limited a sum of ` 15 lakhs provided he stays with the Company for two years after
the acquisition.
vi. The acquisition cost of Swan Limited for Duck Limited was ` 26 lakhs.
vii. The applicable tax rate for both the companies is 30%
viii. Assume 10% per annum discount rate.
ix. Also, assume, unless stated otherwise, all items have a fair value and tax base equal to
their carrying amounts at the acquisition date.
You are required to prepare opening Consolidated Balance Sheet of Swan Limited as on 1st
April 2023. Working Notes should form part of your answer.
(CA FINAL MAY 2023 EXAM)
178 FINANCIAL REPORTING

QUESTION 12

Gamma Limited, a parent company, is engaged in manufacturing and retail activities. The
group holds investments in different entities as follows:

 Gamma Limited holds 100% Investment in G Limited and D Limited;

 G Limited and D Limited hold 60% and 40% in GD Limited respectively;
 Delta Limited is a 100% subsidiary of GD Limited
Firstly, Gamma Limited wants you to suggest whether GD Limited can avail the exemption
from the preparation and presentation of consolidated financial statements as per
applicable Ind AS?
Secondly, if all other facts remain the same as above except that G Limited and D Limited
are both owned by an Individual (say, Mr. X) instead of Gamma Limited, then explain
whether GD Limited can avail the exemption from the preparation and presentation of
consolidated financial statements.
(RTP MAY 2020)

QUESTION 13

On 1st April 20X1, A Limited acquired 80% of the share capital of S Limited. On acquisition
date the share capital and reserves of S Ltd. stood at ` 5,00,000 and ` 1,25,000 respectively.
A Limited paid initial cash consideration of ` 10,00,000. Additionally, A Limited issued
2,00,000 equity shares with a nominal value of ` 1 per share at current market value of `
1.80 per share.
It was also agreed that A Limited would pay a further sum of ` 5,00,000 after three years.
A Limited‛s cost of capital is 10%. The appropriate discount factor for ` 1 @ 10% receivable
at the end of
1st year: 0.91
2nd year: 0.83
3rd year: 0.75
The shares and deferred consideration have not yet been recorded by A limited.
Below are the Balance Sheet of A Limited and S Limited as at 31st March, 20X3:
A Limited (` 000) S Limited (` 000)
Non-current assets:
Property, plant & equipment 5,500 1,500
Investment in S Limited at
1,000 100
cost
Current assets: 550 200
 IND AS 110: CONSOLIDATED FINANCIAL STATEMENTS 179

Inventory 400 50
Receivables 200 1,850
Cash 7,650 500
Equity: 2,000 300
Share capital 1,400 800
Retained earnings 3,400 400
Non-current liabilities 3,000 650
Current liabilities 1,250 1,850
7,650

Further information:
(i) On the date of acquisition the fair values of S Limited‛s plant exceeded its book value
by ` 2,00,000. The plant had a remaining useful life of five years at this date;
(ii) The consolidated goodwill has been impaired by ` 2,58,000; and
(iii) The A Limited Group, values the non-controlling interest using the fair value method.
At the date of acquisition, the fair value of the 20% non-controlling interest was `
3,80,000.
You are required to prepare Consolidated Balance Sheet of A Limited as at 31st March,
20X3. (Notes to Account on Consolidated Balance Sheet is not required).
(MTP OCTOBER 2021 & MARCH 2022)

QUESTION 14 (MIXED WITH IND AS 28)

Angel Ltd. has adopted Ind AS with a transition date of 1st April, 2017. Prior to Ind
AS adoption, it followed Accounting Standards notified under Companies (Accounting
Standards) Rules, 2006 (hereinafter referred to as “IGAAP”).
It has made investments in equity shares of Pharma Ltd., a listed company engaged in the
business of pharmaceuticals. The shareholding pattern of Pharma Ltd. is given below:
Shareholders (refer Note 1) Percentage shareholding as
on 1st April, 2017
Angel Ltd. 21%
Little Angel Ltd. (refer Note 2) 24%
Wealth Master Mutual Fund (refer Note 3) 3%
Individual public shareholders (refer Note 4) 52%

Notes:
(1) None of the shareholders have entered into any shareholders‛ agreement.
(2) Little Angel Ltd. is a subsidiary of Angel Ltd. (under Ind AS) in which Angel Ltd. holds
51% voting power.
180 FINANCIAL REPORTING

(3) Wealth Master Mutual Fund is not related party of either Little Angel Ltd. or Pharma
Ltd.
(4) Individual public shareholders represent 17,455 individuals. None of the individual
shareholders hold more than 1% of voting power in Pharma Ltd.
All commercial decisions of Pharma Ltd. are taken by its directors who are appointed by
a simple majority vote of the shareholders in the annual general meetings (“AGM ”). The
following table shows the voting pattern of past AGMs of Pharma Ltd.:

Shareholders AGM for the financial year:

2013-14 2014-15 2015-16
Angel Ltd. Attended and voted Attended and voted Attended and voted
in favour of all the in favour of all the in favour of all the res-
resolutions resolutions olutions
Little Angel Ltd. Attended and voted Attended and voted Attended and voted as
as per directions of as per directions of per directions of Angel
Angel Ltd. Angel Ltd Ltd
Wealth Master Attended and voted Attended and voted Attended and voted in
Mutual Fund in favour of all the in favour of all the favour of all the reso-
resolutions except resolutions except lutions except for t h e
for the reappoint- for the reappoint- reappointment of the
ment of the retiring ment of the r e t i r - retiring directors
directors ing directors
Individuals 7% of the individual 8% of the individual 6% of the individual
shareholders attend- shareholders at- shareholders attended
ed the AGM. All the tended the AGM. the AGM. All the i n -
individual sharehold- All the individual dividual shareholders
ers voted in favour shareholders voted voted in favour
of all the resolutions, in favour of all the of all the resolutions,
except that 50% of resolutions, except except that 50% of the
the individual Share- that 50% of the in- individual Shareholders
holders voted against dividual Sharehold- voted against the reso-
the resolution to ap- ers voted against lution to appoint the
point the retiring di- the resolution to retiring directors.
rectors. appoint the retiring
directors.

Pharma Ltd. has obtained substantial long term borrowings from a bank. The loan is payable
in 20 years from 1st April, 2017. As per the terms of the borrowing, following actions by
Pharma Ltd. will require prior approval of the bank:
 IND AS 110: CONSOLIDATED FINANCIAL STATEMENTS 181

• Payment of dividends to the shareholders in cash or kind;

• Buyback of its own equity shares;
• Issue of bonus equity shares;
• Amalgamation of Pharma Ltd. with any other entity; and
• Obtaining additional loans from any entity.
Recently, the Board of Directors of Pharma Ltd. proposed a dividend of ` 5 per share.
However, when the CFO of Pharma Ltd. approached the bank for obtaining their approval,
the bank rejected the proposal citing concerns over the short-term cash liquidity of
Pharma Ltd. Having learned about the developments, the Directors of Angel Ltd. along
with the Directors of Little Angel Ltd. approached the bank with a request to re-consider
its decision. The Directors of Angel Ltd. and Little Angel Ltd. urged the bank to approve
a reduced dividend of at least ` 2 per share. However, the bank categorically refused to
approve any payout of dividend.
Under IGAAP, Angel Ltd. has classified Pharma Ltd. as its associate. As the CFO of Angel
Ltd., you are required to comment on the correct classification of Pharma Ltd. on transition
to Ind AS.
(RTP MAY 2019)

QUESTION 15

Gamma Limited, a parent company, is engaged in manufacturing and retail activities. The
group holds investments in different entities as follows:
• Gamma Limited holds 100% Investment in G Limited and D Limited;
• G Limited and D Limited hold 60% and 40% in GD Limited respectively;
• Delta Limited is a 100% subsidiary of GD Limited
Firstly, Gamma Limited wants you to suggest whether GD Limited can avail the exemption
from the preparation and presentation of consolidated financial statements as per applicable
Ind AS?
Secondly, if all other facts remain the same as above except that G Limited and D Limited
are both owned by an Individual (say, Mr. X) instead of Gamma Limited, then explain whether
GD Limited can avail the exemption from the preparation and presentation of consolidated
financial statements.
(RTP MAY 2020)
182 FINANCIAL REPORTING

QUESTION 16

Solar Limited has an 80% interest in its subsidiary, Mars Limited. Solar Limited holds a
direct interest of 25% in Venus Limited. Mars Limited also holds a 30% interest in Venus
Limited. The decisions concerning relevant activities of Venus Limited require a simple
majority of votes. How should Solar Limited account for its investment in Venus Limited in
its consolidated financial statements?
(RTP NOV. 2021)
SOLUTION :

In the present case, Solar Limited controls Mars Limited (since it holds 80% of its voting
rights). Consequently, it also controls the voting rights associated with 30% equity interest
held by Mars Limited in Venus Limited. Solar Limited also has 25% direct equity interest
and related voting power in Venus Limited. Thus, Solar Limited controls 55% (30% + 25%)
voting power of Venus Limited. As the decisions concerning relevant activities of Venus
Limited require a simple majority of votes. Solar Limited controls Venus Limited and should
therefore consolidate it in accordance with Ind AS 110.

Although, Solar Limited controls Venus Limited, its entitlement to the subsidiary‛s economic
benefits is determined on the basis of its actual ownership interest. For the purposes of
the consolidated financial statements, Solar Limited‛s share in Venus Limited is determined
as 49% [25% + (80% × 30%)]. As a result, 51% of profit or loss, other comprehensive income
and net assets of Venus Limited shall be attributed to the non-controlling interests in
the consolidated financial statements (this comprises 6% attributable to holders of non-
controlling interests in Mars Limited [reflecting 20% interest of non-controlling shareholders
of Mars Limited in 30% of Venus Limited] and 45% to holders of non-controlling interests
in Venus Limited).

QUESTION 17

PP Ltd., a non-investment entity, is the parent of Praja Ltd. within the meaning of Ind AS
110 ‘Consolidated Financial Statements‛. The investment in Praja Ltd. was carried in the
separate financial statements of PP Ltd. at fair value with changes in fair value recognised
in the other comprehensive income. On 1st April, 20X2, PP Ltd. qualifies as one that is an
investment entity. Carrying amount of the investment on 1st April, 20X2 was ` 8,00,000.
The fair value of its investment in Praja Ltd was ` 10,00,000 on that date. PP Ltd had
recognised in OCI an amount of ` 1,00,000 as a previous fair value increase related to the
investment in Praja Ltd.
How would PP Ltd account for the investment in Praja Ltd on the date of change of its
classification/status as an investment entity, in its separate financial statements?
(RTP NOV. 2021)
 IND AS 110: CONSOLIDATED FINANCIAL STATEMENTS 183

SOLUTION :
(i) On the date of change, ie, 1st April, 20X2, PP Ltd (the parent) becoming an investment
entity, its investment in Praja Ltd (the subsidiary) shall be at fair value through profit
and loss in accordance with Ind AS 109. Accordingly, the new carrying amount will be
` 10,00,000.
(ii) The difference between the new carrying amount and the carrying amount of the
investment on the date of change will be recognised in the profit and loss. Hence, PP
Ltd will recognise an amount of ` 2,00,000 (` 10,00,000 – ` 8,00,000) in profit and loss
as gain.
(iii) Any fair value adjustments previously recognised in OCI in respect of subsidiary ie
Praja Ltd. shall be treated as if the investment entity had disposed off the subsidiary
at the date of change in status, ie, amounts shall be reclassified from OCI to the profit
and loss on the date of change of status. Therefore, ` 1,00,000 shall be reclassified
from OCI to the profit and loss.

Particulars ` `
Carrying amount of investment in Praja Ltd [as per (i) 10,00,000
above]
Amounts recognised in profit and loss relating to
investment in Praja Ltd
As per (ii) above As per (iii) 2,00,000
1,00,000 3,00,000

QUESTION 18

Given below are the balance sheets of a group of companies comprising LX Limited, MX
Limited and NX Limited as on 31st March 2021:
` in lakh

Particulars LX Limited MX Limited NX Limited

Assets
Non-current Assets
Property, Plant and Equipment 1,500 1,600 1,400
Investment
17.0 lakh share in MX Limited 2,620 - -
9.6 lakh shares in NX Limited - 1,350 -
184 FINANCIAL REPORTING

Current Assets
Inventories 1,230 730 1,180
Financial Assets
Trade Receivables 1,415 270 620
Bills Receivables 650 60 -
Cash in hand and at Bank 1,085 90 150
8,500 4,100 3,350
Equity and Liabilities
Shareholders‛ Equity
Share Capital (` 100 per share) 3,400 2,000 1,600
Other Equity
Reserves 1,150 810 580
Retained earnings 1,030 600 310
Current Liabilities
Financial Liabilities
Trade Payables 2,920 690 805
Bills Payable - -
MX Limited 55
8,500 4,100 3,350

LX Limited holds 85% shares in MX Limited, which were acquired on 1st April 2020 and MX
Limited holds 60% shares in NX Limited, which were acquired on 30th September 2020.
The following balances stood in the books of MX Limited and NX Limited as on 1st April
2020:
MX Limited NX Limited
` in lakh ` in lakh
Reserves 760 520
Retained earnings 480 150
The business activities of NX Limited are not seasonal in nature.
The parent company has adopted an accounting policy to measure non-controlling interest at
fair value applying Ind AS 103. The fair value is to be determined at quoted market price.
The given market price of MX Limited is ` 120 per share and NX Limited is ` 125 per share.
 IND AS 110: CONSOLIDATED FINANCIAL STATEMENTS 185

Prepare the consolidated Balance Sheet as on 31st March 2021 of the group of companies
LX Limited, MX Limited and NX Limited.
(16 Marks)
(CA FINAL JULY 2021 EXAM)
SOLUTION :
Consolidated Balance Sheet of the Group as at 31st March, 2021

Particulars Note No. ` in lakh

ASSETS
Non-current assets
Property, plant and equipment 1 4,500.00
Current assets
(a) Inventories 2 3,140.00
(b) Financial assets
Trade receivables 3 2,305.00
Bills receivables 4 655.00
Cash and cash equivalents 5 1,325.00
Total assets 11,925.00
EQUITY & LIABILITIES
Equity attributable to owners of parent
Share Capital 3,400.00
Other Equity 6 2,893.10
Non-controlling interests (W.N.4) 1,216.90
LIABILITIES
Non-current liabilities Nil
Current liabilities 7 4,415.00
(a) Financial Liabilities
Trade payables
Total equity and liabilities 11,925.00

Notes to Accounts

1. Property Plant & Equipment

LX Ltd. 1,500
186 FINANCIAL REPORTING

MX Ltd. 1,600
NX Ltd. 1,400 4,500
2. Inventories
LX Ltd. 1,230
MX Ltd. 730
NX Ltd. 1,180 3,140
3. Trade Receivables
LX Ltd. 1,415
MX Ltd. 270
NX Ltd. 620 2,305
4. Bills Receivables
LX Ltd. 650
MX Ltd. (60-55) 5 655
5. Cash & Cash equivalents
LX Ltd. 1,085
MX Ltd. 90
NX Ltd. 150 1,325
6. Other Equity
Reserve (W.N.5) 1,207.80
Retained earnings (W.N.5) Capital Reserve 1,172.80
(W.N.3) 512.50 2,893.10
7. Trade Payables
LX Ltd. 2,920
MX Ltd. 690
NX Ltd. 805 4,415

Working Notes:
1. Analysis of Reserves and Surplus (` in lakh)

MX Ltd. NX Ltd.
Reserves as on 1.4.2020 760 520
Increase during the year 2020-2021 (580 - 520) 60
Increase for the half year till 30.9.2020 30
 IND AS 110: CONSOLIDATED FINANCIAL STATEMENTS 187

Balance on acquisition date (A) 760 550

Total balance as on 31.3.2021 810 580
Post-acquisition balance 50 30
Retained Earnings as on 1.4.2020 480 150
Increase during the year 2020-2021 (310 - 150) 160
Increase for the half year till 30.9.2020 — 80
Balance on acquisition date (B) 480 230
Total balance as on 31.3.2021 600 310
Post-acquisition balance 120 80
Total balance on the acquisition date (A+B) 1,240 780

2. Calculation of Effective Interest of LX Ltd. in NX Ltd.

Acquisition by LX Ltd. in MX Ltd. = 85%
Acquisition by MX Ltd. in NX Ltd. = 60%
Acquisition by Group in NX Ltd. (85% x 60%) = 51%
Non-controlling Interest = 49%
3. Calculation of Goodwill / Capital Reserve on the acquisition

MX Ltd. NX Ltd.
Investment or consideration 2,620.00 (1,350 x 85%)
1,147.50
Add: NCI at Fair value
[(2,000 / 100) x 120 x 15%] 360.00
[(1,600 / 100) x 125 x 49%] - 980.00
2,980.00 2,127.50
Less: Identifiable net assets (Share Capi-
tal + Increase in the Reserves and Surplus (2,000+760+480) (1,600+550+230)
till acquisition date)
(3,240.00) (2,380.00)
Capital Reserve 260.00 252.50
Total Capital Reserve (260 + 252.50) 512.50
 188 FINANCIAL REPORTING

4. Calculation of Non-controlling Interest

MX Ltd. NX Ltd.
At Fair Value (See Note 3) 360.00 980.00
Add: Post Acquisition Reserves (50 x 15%) 7.50 (30 x 49%) 14.70
(W.N.1)
Add: Post Acquisition Retained (120 x 15%) 18.00 (80 x 49%) 39.20
Earnings (W.N.1)
Less: NCI share of investment in (1,350 x 15%) -
NX Ltd. (202.50)*
183.00 1,033.90
Total (183.00 + 1,033.90) 1,216.90

*Note: The non-controlling interest in MX Ltd. will take its proportion in NX Ltd.
Therefore, they have to bear their proportion in the investment by MX Ltd. (in NX
Ltd.) also.
5. Calculation of Consolidated Other Equity

Reserves Retained Earnings

LX Ltd. 1,150.00 1,030.00
Add: Share in MX Ltd. (50 x 85%) 42.50 (120 x 85%) 102.00
Add: Share in NX Ltd. (30 x 51%) 15.30 (80 x 51%) 40.80
1,207.80 1,172.80

QUESTION 19

From the following data, determine in each case:

(i) Non-controlling interest at the date of acquisition (using proportionate share method)
and at the date of consolidation.
(ii) Goodwill or gain on bargain purchase.
(iii) Amount of Holding Company‛s share of profit in the Consolidated Balance Sheet assum-
ing Holding Company‛s own retained earnings to be ` 4,00,000 in each basis.
 IND AS 110: CONSOLIDATED FINANCIAL STATEMENTS 189

Case Subsidiary % of Cost Date of Acquisition Consolidation Date

Company Shares 1.4.2020 31.3.2021
Owned
Share Retained Share Retained
Capital Earnings Capital Earnings
(A) (B) (C) (D)
Case 1 P 90% 2,80,000 2,00,000 1,00,000 2,00,000 1,40,000
Case 2 Q 85% 2,08,000 2,00,000 60,000 2,00,000 40,000
Case 3 R 80% 1,12,000 1,00,000 40,000 1,00,000 40,000
Case 4 S 100% 2,00,000 1,00,000 80,000 1,00,000 1,12,000

The Company has adopted an accounting policy to measure non-controlling interest at NCI‛s
proportionate share of the acquiree‛s Identifiable Net Assets. It may be assumed that the
fair value of acquiree‛s net identifiable assets is equal to their book values.
(5 Marks)
(CA FINAL DEC. 2021 EXAM)
SOLUTION :
Non-controlling Interest = the equity in a subsidiary not attributable, directly or indirectly,
to a parent. Equity is the residual interest in the assets of an entity after deducting all its
liabilities i.e. in this given case Share Capital + Balance in Statement of Profit & Loss (As-
suming it to be the net aggregate value of identifiable assets in accordance with Ind AS)
(1) Calculation of amount of NCI at the date of acquisition and consolidation

% of shares Non-controlling interest Non-controlling interest

owned by NCI as at the date of acqui- as at the date of consol-
sition idation

[E] [E] x [A + B] [E] x [C + D]

Case 1 [100-90] 10% 30,000 34,000
Case 2 [100-85] 15% 39,000 36,000
Case 3 [100-80] 20% 28,000 28,000
Case 4 [100-100] Nil Nil Nil
190 FINANCIAL REPORTING

(2) Calculation of Goodwill or Gain on bargain purchase

Case Consideration Non- con- Net Identifi- Goodwill Gain on

trolling able bargain
interest assets purchase

[G] [H] [A] + [B] = [G]+[H] - [I]-[G]-

[I] [I] [H]
Case 1 2,80,000 30,000 3,00,000 10,000 Nil
Case 2 2,08,000 39,000 2,60,000 Nil 13,000
Case 3 1,12,000 28,000 1,40,000 Nil Nil
Case 4 2,00,000 Nil 1,80,000 20,000 Nil

(3) In each case the following amount (shown in column No. O) shall be added or de-
ducted from the balance of holding company‛s retained earnings of ` 4,00,000:

Case % Retained Retained Retained Amount to be

Share earnings earnings as earnings added / (de-
Holding as on on consoli- post- acquisi- ducted) from
1.4.2020 dation date tion holding‛s
31.3.2021
retained
earnings

[K] [L] [M] [N] = [M] - [O] = [K] x

[L] [N]
Case 1 90% 1,00,000 1,40,000 40,000 36,000
Case 2 85% 60,000 40,000 (20,000) (17,000)
Case 3 80% 40,000 40,000 Nil Nil
Case 4 100% 80,000 1,12,000 32,000 32,000

QUESTION 20

RST Ltd. prepares consolidated financial statements as at 31st March each year. On 1st
July, 2021, RST Ltd. acquired 75% of the equity shares of DHF Ltd. and gained control of
DHF Ltd. The issued shares of DHF Ltd. are 1,20,00,000 equity shares. Details of the pur-
chase consideration are as follows:
On 1st July 2021, RST Ltd. issued two shares for every three shares acquired in DHF Ltd.
 IND AS 110: CONSOLIDATED FINANCIAL STATEMENTS 191

On 1st July 2021, the market value of an equity share in RST Ltd. was ` 6.50 and the market
value of an equity share in DHF Ltd. was ` 5.50.
On 30th June 2022, RST Ltd. will make cash payment of ` 71,50,000 to the former share-
holders of DHF Ltd. who sold their shares to RST Ltd. on 1st July 2021. On 1st July, 2021,
RST Ltd. would have to pay interest at an annual rate of 10% on borrowings.
On 30th June 2023, RST Ltd. may make a cash payment of ` 3,00,00,000 to the former
shareholders of DHF Ltd. who sold their shares to RST Ltd. on 1st July 2021. This payment
is contingent upon the revenues of RST Ltd. growing by 15% over the two-year period from
1st July, 2021 to 30th June, 2023. On 1st July 2021, the fair value of this contingent con-
sideration was ` 2,50,00,000. On 31st March 2022, the fair value of the contingent consid-
eration was ` 2,20,00,000.
On 1st July 2021, the carrying values of the identifiable net assets of DHF Ltd. in the books
of that company was ` 6,00,00,000. On 1st July 2021, the fair values of these net assets
was ` 7,00,00,000. The rate of deferred tax to apply to temporary differences is 20%.
During the nine months ended on 31st March 2022, DHF Ltd. had a poorer than expected
operating performance. Therefore, on 31st March, 2022 it was necessary for RST Ltd. to
recognize an impairment of the goodwill arising on acquisition of DHF Ltd. amounting to
12.50% of its total computed value.
Compute the impairment of goodwill in the consolidated financial statements of RST Ltd.
under the methods permitted by Ind AS 103 for the initial computation of the non- con-
trolling interest in DHF Ltd. at the acquisition date.
(5 Marks)
(CA FINAL MAY 2022 EXAM)
SOLUTION :
Computation of goodwill impairment

NCI at NCI at pro-

fair portionate
value share of net
assets
` in 000 ` in 000
Cost of investment
Share exchange (12,000 x 75% x 2/3 x ` 6.50) 39,000 39,000
Deferred consideration (7,150 / 1.10) 6,500 6,500
Contingent consideration 25,000 25,000
Total Purchase Consideration (a) 70,500 70,500
192 FINANCIAL REPORTING

Non-controlling interest on the date of acquisition:

(b)
Fair value – 3,000 x ` 5.50 16,500
% of net assets – 68,000 (Refer W.N.) x 25% 17,000
Net assets on the acquisition date (Refer W.N.)(c) (68,000) (68,000)
Goodwill on acquisition (a+b-c) 19,000 19,500
Impairment @ 12.50% 2,375.00 2,437.50

Working Note:

Net assets on the acquisition date ` in 000

Fair value at the acquisition date 70,000
Deferred tax on fair value adjustments [20% x (70,000 – 60,000)] (2,000)
68,000

QUESTION 21

Given below are the balance sheets of a group of companies comprising X Ltd., Y Ltd. and Z
Ltd. as on 31st March, 2022:
(` in Lakhs)

X Ltd. Y Ltd. Z Ltd.

Assets
- - - -
Property, plant and equipment 1,120 1,260 1,050
Investment:
112 lakh shares in Y Ltd. 1,190
84 lakh shares in Z Ltd. 980
Current assets
Inventories 770 245 175
Financial assets:
Trade receivables 910 350 770
Bills receivables 252 - 105
Cash in hand and at bank 798 140 140
5,040 2,975 2,240
 IND AS 110: CONSOLIDATED FINANCIAL STATEMENTS 193

Equity and Liabilities

Shareholder‛s equity
Share capital (` 10 per share) 2,100 1,400 1,120
Other equity:
Reserves 630 350 280
Retained earnings 560 175 210
Current liabilities
Financial liabilities:
Trade payables 1,645 805 630
Bills payable
X Ltd. - 245 -
Y Ltd. 105 - -
5,040 2,975 2,240

The following additional information is available:

(i) X Ltd. holds 80% shares in Y Ltd. and Y Ltd. holds 75% shares in Z Ltd. Their holdings
were acquired on 30th September, 2021.
(ii) The business activities of all the companies are not seasonal in nature and therefore,
it can be assumed that profits are earned evenly throughout the year.
(iii) On 1st April 2021, the following balances stood in the books of Y Ltd. and Z Ltd.
(` in lakhs)

Y Limited Z Limited
Reserve 280 210
Retained earnings 70 105

(iv) ` 35 lakhs included in the inventory figure of Y Ltd. is inventory which has been
purchased from Z Ltd. at cost plus 25%.
(v) The parent company has adopted an accounting policy to measure non-controlling inter-
est at fair value (quoted market price) applying Ind AS 103. Assume that market price
of the shares of Y Ltd. and Z Ltd. are the same as their respective face values.
(vi) Y Ltd. purchased goods from Z Ltd. after acquiring the shares of Z Ltd.
You are required to prepare consolidated balance sheet, as at 31st March 2022, of the
group of companies X Limited, Y Limited and Z Limited.
(CA FINAL NOV. 2022 EXAM) (15 Marks)
194 FINANCIAL REPORTING

SOLUTION :
Consolidated Balance Sheet of the Group as on 31st March, 2022

Particulars Note No. ` in lakh

ASSETS
Non-current assets
(a) Property, Plant and Equipment 1 3,430.00
Current Assets
(a) Inventories 2 1,183.00
(b) Financial assets
(i) Trade receivables 3 2,142.00
(ii) Cash and Cash equivalents 4 1,078.00
Total assets 7,833.00
EQUITY & LIABILITIES
Equity attributable to owners of parent
(a) Share Capital 2,100.00
(b) Other Equity 5 1,966.30
Non-controlling interests (W.N.4) 581.70
Total equity 4,648.00
LIABILITIES
Non-current liabilities Nil
Current liabilities
(a) Financial Liabilities
(i) Trade payables 6 3,185.00
Total liabilities 3,185.00
Total Equity and Liabilities 7,833.00

Notes to Accounts

1. Property, Plant & Equipment

X Ltd. 1,120.00
Y Ltd. 1,260.00
Z Ltd. 1,050.00 3,430.00
2. Inventories
 IND AS 110: CONSOLIDATED FINANCIAL STATEMENTS 195

X Ltd. 770.00
Y Ltd. (245 – 7) 238.00
Z Ltd. 175.00 1,183.00
3. Trade Receivables
X Ltd. 910.00
Y Ltd. 350.00
Z Ltd. 770.00
(A) 2,030.00
Bills Receivables
X Ltd. (252 – 245) 7.00
Z Ltd. 105.00
(B) 112.00
Total Trade Receivables (A+B) 2,142.00
4. Cash & Cash equivalents
X Ltd. 798.00
Y Ltd. 140.00
Z Ltd. 140.00 1,078.00
5. Other Equity
Reserve (W.N.5) 679.00
Retained Earnings (W.N.5) 629.30
Capital Reserve (W.N.3) 658.00 1,966.30
6. Trade Payables
X Ltd. 1,645.00
Y Ltd. 805.00
Z Ltd. 630.00
(A) 3,080.00
Bills payable
X Ltd. 105.00
Y Ltd. (245 - 245) -
(B) 105.00
Total Trade Payables (A+B) 3,185.00
196 FINANCIAL REPORTING

*Note: Bills Payable of X Ltd. is not reflecting as Bills Receivable of Y Ltd. This may happen
since Y Ltd. may have discounted/endorsed the same to the bank/third party.
Working Notes:
1. Analysis of Reserves and Surplus
(` in lakh)

Y Ltd. Z Ltd.
Reserves as on 31.3.2021 280.00 210.00
Increase during the year 2021-2022 70.00 70.00
Increase for the half year till 30.9.2021 35.00 35.00
Balance as on 30.9.2021 (A) 315.00 245.00
Total balance as on 31.3.2022 350.00 280.00
Post-acquisition balance of Reserves 35.00 35.00
Retained Earnings as on 31.3.2021 70.00 105.00
Increase during the year 2021-2022 105.00 105.00
Increase for the half year till 30.9.2021 52.50 52.50
Balance as on 30.09.2021 (B) 122.50 157.50
Total balance as on 31.3.2022 175.00 210.00
Post-acquisition balance of RE 52.50 52.50
Less: Unrealised Gain on inventories [(35
÷ 125) x 25] - (7.00)
Post-acquisition balance of RE for CFS 52.50 45.50
Total balance on the acquisition date 437.50 402.50
ie.30.9.2021 (A+B)

2. Calculation of Effective Interest of X Ltd. in Z Ltd.

Acquisition by X Ltd. in Y Ltd. = 80%
Non-controlling Interest of Y Ltd. = 20%
Acquisition by Y Ltd. in Z Ltd. = 75%
Acquisition by Group in Z Ltd. (80% x 75) = 60%
Non-controlling Interest of Z Ltd = 40%
 IND AS 110: CONSOLIDATED FINANCIAL STATEMENTS 197

3. Calculation of Goodwill / Capital Reserve on acquisition of subsidiaries

` in lakhs

Y Ltd. Z Ltd.
Investment or consideration 1,190.00 (980 x 80%)
784.00
Add: NCI at Fair value
(1,400 x 20%) 280.00
(1,120 x 40%) - 448.00
1,470.00 1,232.00
Less: Identifiable net assets (Share Capital (1,400+437.50) (1,120+402.50)
+ Increase in the Reserves and Surplus till
acquisition date)
(1,837.50) (1,522.50)
Capital Reserve 367.50 290.50
Total Capital Reserve (367.50 + 290.50) 658.00

4. Calculation of Non-controlling Interest

` in lakhs

Y Ltd. Z Ltd.
At Fair Value (See Note 3) 280.00 448.00
Add: Post Acquisition Reserves (See (35 x 20%) 7.00 (35 x 40%)
Note 1) 14.00
Add: Post-acquisition retained earn- (52.50 x 20%) 10.50 (45.50 x 40%)
ings (See Note 1) 18.20
Less: NCI share of investment in Z (980 x 20%) (196.00)* -
Ltd.
101.50 480.20
Total (101.50 + 480.20) 581.70

*Note: The non-controlling interest in Y Ltd. will take its proportion in Z Ltd. So,
they have to bear their proportion in the investment by Y Ltd. (in Z Ltd.) also.
198 FINANCIAL REPORTING

5. Calculation of Consolidated Other Equity

` in lakhs

Reserves Retained Earnings

X Ltd. 630.00 560.00
Add: Share in Y Ltd. (35 x 80%) 28.00 (52.50 x 80%) 42.00
Add: Share in Z Ltd. (35 x 60%) 21.00 (45.50 x 60%) 27.30
679.00 629.30

In the above solution, it is assumed that profits of Z Ltd. has been earned evenly
throughout the year irrespective of post-acquisition sale of goods to Y Ltd.
Alternatively, profit on sale of goods to Y Ltd. is deducted from total profit of Z Ltd. be-
fore distribution of total profit of Z Ltd. into pre-acquisition and post-acquisition. In such
a case, the solution will be as follows:
Consolidated Balance Sheet of the Group as on 31st March, 2022

Particulars Note No. ` in lakh

ASSETS
Non-current assets
(a) Property, plant and equipment 1 3,430.00
Current assets
(c) Inventory 2 1,183.00
(d) Financial assets
(i) Trade receivable 3 2,142.00
(ii) Cash and cash equivalents 4 1,078.00
Total assets 7,833.00
EQUITY & LIABILITIES
Equity attributable to owners of parent
Share Capital 2,100.00
Other Equity 5 1,964.90
Non-controlling interests (W.N.4) 583.10
Total equity 4,648.00
LIABILITIES
Non-current liabilities Nil
Current liabilities
 IND AS 110: CONSOLIDATED FINANCIAL STATEMENTS 199

(b) Financial Liabilities

(i) Trade payables 6 3,185.00
Total liabilities 3,185.00
Total equity and liabilities 7,833.00

Notes to Accounts
(` in lakh)

1. Property, plant & equipment

X Ltd. 1,120.00
Y Ltd. 1,260.00
Z Ltd. 1,050.00 3,430.00
2. Inventories
X Ltd. 770.00
Y Ltd. (245 – 7) 238.00
Z Ltd. 175.00 1,183.00
3. Trade receivable
X Ltd. 910.00
Y Ltd. 350.00
Z Ltd. 770.00
(A) 2,030.00
Bills receivable
X Ltd. (252 – 245) 7.00
Z Ltd. 105.00
(B) 112.00
Total Trade Receivables (A+B) 2,142.00
4. Cash & cash equivalents
X Ltd. 798.00
Y Ltd. 140.00
Z Ltd. 140.00 1,078.00
5. Other equity
Reserve (W.N.5) 679.00
Retained Earnings (W.N.5) 631.40
Capital Reserve (W.N.3) 654.50 1,964.90
6. Trade payable
200 FINANCIAL REPORTING

X Ltd. 1,645.00
Y Ltd. 805.00
Z Ltd. 630.00
(A) 3,080.00
Bills payable
X Ltd. 105.00
Y Ltd. (245 - 245) -
(B) 105.00
Total of Trade payable (A+B) 3,185.00

*Note: Bills Payable of X Ltd. is not reflecting as Bills Receivable of Y Ltd. This may happen
since Y Ltd. may have discounted / endorsed the same to the bank/third party.
Working Notes:
1. Analysis of Reserves and Surplus
(` in lakh)

Y Ltd. Z Ltd.
Reserves as on 31.3.2021 280.00 210.00
Increase during the year 2021-2022 70.00 70.00
Increase for the half year till 30.9.2021 35.00 35.00
Balance as on 30.9.2021 (A) 315.00 245.00
Total balance as on 31.3.2022 350.00 280
Post-acquisition balance of Reserves 35.00 35.00
Retained Earnings as on 31.3.2021 70.00 105.00
Increase during the year 2021-2022 for Y 105.00
Ltd.
Increase during the year
2021-22 for Z Ltd. 105.00
Less: Unrealised gain
[(35/125)x25] (7.00)
Profit of the year earned 98
evenly for Z Ltd. 98.00
Increase for the half year till 30.9.2021 52.50 49.00
Balance as on 30.9.2021 (B) 122.50 154.00
 IND AS 110: CONSOLIDATED FINANCIAL STATEMENTS 201

Total balance as on 31.3.2022 (175.00) (210.00)

Post-acquisition balance 52.50 56.00
Less: Unrealised gain on inventories [(35/125) - (7.00)
x25]
Post-acquisition balance for CFS 52.50 49.00
Total balance on the acquisition date ie. 437.50 399.00
30.9.2021 (A+B)

2. Calculation of Effective Interest of X Ltd. in Z Ltd.

Acquisition by X Ltd. in Y Ltd. = 80%
Non-controlling Interest of Y Ltd. = 20%
Acquisition by Y Ltd. in Z Ltd. = 75%
Acquisition by Group in Z Ltd. (80% x 75%) = 60%
Non-controlling Interest of Z Ltd = 40%
3. Calculation of Goodwill / Capital Reserve on the acquisition
(` in lakhs)

Y Ltd. Z Ltd.
Investment or consideration 1,190 (980 x 80%) 784
Add: NCI at Fair value
(1,400 x 20%) 280
(1,120 x 40%) - 448
1,470 1,232
Less: Identifiable net assets (Share Cap- (1,400+437.50) (1,120+399)
ital + Increase in the Reserves and Sur-
plus till acquisition date)
(1,837.50) (1,519.00)
Capital Reserve 367.50 287.00
Total Capital Reserve (367.50 + 287.00) 654.50

4. Calculation of Non-controlling Interest

(` in lakhs)

Y Ltd. Z Ltd.
At Fair Value (See Note 3) 280.00 448.00
 202 FINANCIAL REPORTING

Add: Post-acquisition Reserves (See (35 x 40%)

Note 1) (35 x 20%) 7.00 14.00
Add: Post-acquisition Retained Earnings (49.00 x 40%)
(See Note 1) (52.50 x 20%) 10.50 19.60
Less: NCI share of investment in Z Ltd. (980 x 20%) -
(196.00)*
101.50 481.60
Total (101.50 + 481.60) 583.10

*Note: The non-controlling interest in Y Ltd. will take its proportion in Z Ltd. So, they
have to bear their proportion in the investment by Y Ltd. (in Z Ltd.) also.
5. Calculation of Consolidated Other Equity
(` in lakhs)

Reserves Retained Earnings

X Ltd. 630.00 560.00
Add: Share in Y Ltd. (35 x 80%) 28.00 (52.50 x 80%) 42.00
Add: Share in Z Ltd. (35 x 60%) 21.00 (49.00 x 60%) 29.40
679.00 631.40

QUESTION 22

On 1st April 2021, P Limited acquired 100% interest in S Limited for ` 75,00 lakhs when the
fair value of the net assets of S Limited was ` 60.00 lakhs. Goodwill of ` 15.00 lakhs arose
on consolidation On 31st March, 2023, P Limited disposed off 80% interest in S Limited
for ` 114. 00 lakhs. As on the date of disposal, the carrying value of the net assets of the
S Limited excluding goodwill was ` 1,20,00,000/- The fair value of the remaining interest
is ` 28,50,000/-
You are required to:
i. Calculate the gain loss on sale of disposal and
ii. Pass necessary Journal entries on disposal of 80% interest in S Limited in P Limited‛s
separate and consolidated financial statements as on 31st March, 2023.
(CA FINAL MAY 2023 EXAM)
 IND AS 28: INVESTMENT IN ASSOCIATES & JOINT VENTURES 223

At the date of acquisition, the book value of XYZ Ltd.‛s net assets was ` 90,00,000 and
their fair value was ` 1,10,00,000. Investor Ltd. has determined that the difference of
` 20,00,000 pertains to an item of property, plant and equipment (PPE) which has remaining
useful life of 10 years.
During the year, XYZ Ltd. made a profit of ` 8,00,000. XYZ Ltd. paid a dividend of
` 12,00,000 on 31st March, 2020. XYZ Ltd. also holds a long-term investment in equity
securities. Under Ind AS, investment is classified as at FVTOCI in accordance with Ind
AS 109 and XYZ Ltd. recognized an increase in value of investment by ` 2,00,000 in OCI
during the year. Ignore deferred tax implications, if any.
Calculate the closing balance of Investor Ltd.‛s investment in XYZ Ltd. as at 31st March,
2020 as per the relevant Ind AS.
(RTP NOV 2020)

QUESTION 29

An entity P (parent) has two wholly-owned subsidiaries - X and Y, each of which has an
ownership interest in an ‘associate‛, entity Z. Subsidiary X is a venture capital organisation.
Neither of the investments held in associate Z by subsidiaries X and Y is held for trading.
Subsidiary X and Y account for their investment in associate Z at fair value through profit
or loss in accordance with Ind AS 109 and using the equity method in accordance with Ind
AS 28 respectively.
How should P account for the investment in associate Z in the following scenarios:
Scenario 1: Where both investments in the associate result in significant influence on a
stand-alone basis - Subsidiary X and Y ownership interest in associate Z is 25% and 20%
respectively.
Scenario 2: When neither of the investments in the associate results in significant influence
on a stand-alone basis, but do provide the parent with significant influence on a combined
basis - Subsidiary X and Y ownership interest in associate Z is 10% each.
Scenario 3: When one of the investments in the associate results in significant influence on
a stand-alone basis and the other investment in the associate does not result in significant
influence on a stand-alone basis - Subsidiary X and Y ownership interest in associate Z is
30% and 10% respectively.
Assume there is significant influence if the entity has 20% or more voting rights.
(RTP MAY 2020)

QUESTION 30

On 1st April 2021, Honey Limited acquired 40% interest in another entity, Smart Limit-
ed. Honey Limited determines that it is able to exercise significant influence over Smart
Ltd. Honey Limited has paid total consideration of ` 95,00,000 for acquiring the interest
224 FINANCIAL REPORTING

in Smart Ltd. On the date of acquisition, the book value of Smart Ltd.‛s net assets was `
1,80,00,000 and their fair value was ` 2,20,00,000. Honey Ltd. has determined that the
difference of ` 40,00,000 pertains to an item of property, plant and equipment which has
remaining useful life of 10 years.
During the year 2021-2022, Smart Ltd. made a profit of ` 16,00,000. Smart Limited paid a
dividend of ` 24,00,000 on 31st March, 2022. Smart Limited also holds a long-term invest-
ment in equity securities. Under Ind AS, investment is classified as at FVTOCI in accor-
dance with Ind AS 109 and Smart Ltd. recognized an increase in value of investment by `
4,00,000 in OCI during the year. Ignore deferred tax implications, if any.
You are required to ascertain the closing balance of Honey Limited‛ s investments in Smart
Limited as at 31st March, 2022 as per the relevant Ind AS. (Use equity method)
(5 Marks)
(CA FINAL NOV 2022 EXAM)
SOLUTION :
Calculation of Honey Ltd.‛s investment in Smart Ltd. under equity method:
` `
Cost of investment
Share in book value of net assets of Smart Limited (40% x 72,00,000
1,80,00,000)
Share in fair valuation of net assets of Smart Limited (40%
of (2,20,00,000-1,80,00,000) 16,00,000
Goodwill on Investment in Smart Limited (95,00,000-
72,00,000-16,00,000) (Balancing Figure) 7,00,000 95,00,000
Profit during the year
Share in the profit reported by Smart Ltd. (40% of 6,40,000
` 16,00,000)
Adjustment to reflect effect of fair valuation [40% of (`
40,00,000/10 years)] (1,60,000)
Share of profit in Smart Ltd. recognised in income by Honey 4,80,000
Ltd.
Long term equity investment
FVTOCI gain recognised in OCI (40% of ` 4,00,000) 1,60,000
Dividend received by Honey Ltd. during the year [40% of `
24,00,000] (9,60,000)
Closing balance of Honey Ltd.‛s investment in Smart Ltd. 91,80,000
 INDIAN ACCOUNTING STANDARD 1 17

(iii) Can the security deposit of` 5 Crore made by the Company with the customers be
presented as current ?
(iv) Can the security deposit of ` 2Crore taken by the Company from contractors be
presented as non-current ?

QUESTION 23

Is offsetting permitted under the following circumstances?

(a) Expenses incurred by a holding company on behalf of subsidiary, which is reimbursed
by the subsidiary - whether in the separate books of the holding company, the
expenditure and related reimbursement of expenses can be offset?
(b) Whether profit on sale of an asset against loss on sale of another asset can be
offset?
(c) When services are rendered in a transaction with an entity and services are received
from the same entity in two different arrangements, can the receivable and payable
be offset?
(RTP NOV 2021)

SOLUTION :

1. (a) As per paragraph 33 of Ind AS 1, offsetting is permitted only when the offsetting
reflects the substance of the transaction.
In this case, the agreement/arrangement, if any, between the holding and subsidiary
company needs to be considered. If the arrangement is to reimburse the cost
incurred by the holding company on behalf of the subsidiary company, the same may
be presented net. It should be ensured that the substance of the arrangement is
that the payments are actually in the nature of reimbursement.
(b) Paragraph 35 of Ind AS 1 requires an entity to present on a net basis gains and losses
arising from a group of similar transactions. Accordingly, gains or losses arising on
disposal of various items of property, plant and equipment shall be presented on
net basis. However, gains or losses should be presented separately if they are
material.
(c) Ind AS 1 prescribes that assets and liabilities, and income and expenses should be
reported separately, unless offsetting reflects the substance of the transaction.
In addition to this, as per paragraph 42 of Ind AS 32, a financial asset and a financial
liability should be offset if the entity has legally enforceable right to set off and
the entity intends either to settle on net basis or to realise the asset and settle
the liability simultaneously.
In accordance with the above, the receivable and payable should be offset against
each other and net amount is presented in the balance sheet if the entity has a legal
 18 FINANCIAL REPORTING

right to set off and the entity intends to do so. Otherwise, the receivable and payable
should be reported separately

QUESTION 24

Following are the Financial Statements of Abraham Ltd.:

Balance Sheet

Particulars Note As at 31 March, 2020

No. (` in lakh)
EQUITY AND LIABILITIES:
Shareholders‛ funds
Share capital (shares of ` 10 each) 1,000
Reserves and surplus 1 2,400
Non-current liabilities
Long term borrowings 2 5,700
Deferred tax liabilities 3 400
Current liabilities
Trade payables 300
Short-term provisions 300
Other current liabilities 4 200
Total 10,300
ASSETS
Non-current assets
Property, plant and equipment 5,000
Deferred tax assets 3 700
Current assets
Inventories 1,500
Trade receivables 5 1,100
Cash and bank balances 2,000
Total 10,300
 INDIAN ACCOUNTING STANDARD 1 19

Statement of Profit & Loss

Particulars Note No. Year ended 31 March 2020

(` in lakh)
Revenue from operations 6,000
Expenses:
Employee benefit expense 1,200
Operating costs 3,199
Depreciation 450
Total expenses 4,849
Profit before tax 1,151
Tax expense 201
Profit after tax 950

Notes to Accounts:
Note 1: Reserves and surplus (` in lakh)

Capital reserve 500

Surplus from P & L
Opening balance 550
Additions 950 1,500
Reserve for foreseeable loss 400
Total 2,400

Note 2: Long-term borrowings

Term loan from bank 5,700

Total 5,700

Note 3: Deferred tax

Deferred tax asset 700

Deferred tax liability 400
Total 300
 20 FINANCIAL REPORTING

Note 4: Other current liabilities

Unclaimed dividends 10
Billing in advance 150
Other current liabilities 40
Total 200

Note 5: Trade Receivables

Considered good (outstanding within 6 months) 1,065

Considered doubtful (due from past 1 year) 40
Provision for doubtful debts (5)
Total 1,100

Additional information:
Share capital comprises of 100 lakh shares of ` 10 each.
Term Loan from bank for ` 5,700 lakh also includes interest accrued and due of ` 700 lakh
as on the reporting date.
Reserve for foreseeable loss is created against a service contract due within 6 months.
Inventory should be valued at cost ` 1,500 lakh, NRV as on date is ` 1,200 lakh.
A dividend of 10% was declared by the Board of directors of the company.
Accrued Interest income of ` 300 lakh is not booked in the books of the company.
Deferred taxes related to taxes on income are levied by the same governing tax laws.
Identify and report the errors and misstatements in the above extracts and prepare
corrected Balance Sheet and Statement of Profit & Loss and where required the relevant
notes to the accounts with explanations thereof.
(MTP OCTOBER 2020)

QUESTION 25

A holding company [being the entity under consideration] gives a loan / intercorporate
deposit to a subsidiary that is recoverable on demand, at a rate of interest at 10%.
Should such loan be disclosed as a current/non-current asset in the books of the holding
company?
How relevant would the commercial reality of the transaction be in comparison to the legal
terms of the transaction?
 INDIAN ACCOUNTING STANDARD 1 21

How this loan / inter-corporate deposit that is repayable on demand would be classified in
the books of the subsidiary?
(MTP OCTOBER 2021)
SOLUTION :
(a) Paragraph 66 (c) of Ind AS 1 provides that an asset shall be classified as current
when an entity expects to realise the asset within a period of twelve months after the
reporting period. To determine the expectation of the entity, the commercial reality
of the transaction should also be considered. If the loans have been given with an
understanding that these loans would not be called for repayment even though a clause
may have been added that these are recoverable on demand, it should be classified as
a non-current asset.
(b) Paragraph 69(c) of Ind AS 1 provides that a liability should be classified as current
if the liability is due to be settled within twelve months after the reporting period.
Since the loan/inter- corporate deposit would become due immediately as and when
demanded and presuming that the entity does not have an unconditional right to defer
settlement of the liability for at least twelve months after the reporting period, it
should be classified as current liability.

QUESTION 26

(i) B Ltd. produces aircrafts. The length of time between first purchasing raw materials
to make the aircrafts and the date the company completes the production and
delivery is 9 months. The company receives payment for the aircrafts 7 months after
the delivery.
What is the length of operating cycle?
How should it treat its inventory and debtors?
(ii) On 1st April, 20X3, Charming Ltd issued 1,00,000 ` 10 bonds for ` 10,00,000. On 1st
April, each year, interest at the fixed rate of 8% per year is payable on outstanding
capital amount of the bonds (i.e. the first payment will be made on 1st April, 20X4).
On 1st April each year (i.e. from 1st April, 20X4), Charming Ltd has a contractual
obligation to redeem 10,000 of the bonds at ` 10 per bond. In its statement of
financial position at 31st March, 20X4. How should this be presented in the financial
statements?
(MTP MARCH 2022)
 22 FINANCIAL REPORTING

SOLUTION :
(a) (i) (a) Calculation of operating cycle

Month
Period of manufacturing the aircraft 9
Credit period for settlement of delivery amount 7
16

Hence, the length of the operating cycle will be 16 month.

(b) Since the inventory and debtors will be realised within normal operating cycle,
i.e., 16 months, both the inventory as well as debtors should be classified as
current.
(ii) Charming Ltd must present ` 80,000 accrued interest and ` 1,00,000 current
portion of the non-current bond (i.e. the portion repayable on 1st April, 20X4) as
current liabilities. The ` 9,00,000 due later than 12 months after the end of the
reporting period shall be presented as a non-current liability.

QUESTION 27

Deepak started a new company Softbharti Pvt. Ltd. with Iktara Ltd. wherein investment of
55% is done by Iktara Ltd. and rest by Deepak. Voting powers are to be given as per the
proportionate share of capital contribution. The new company formed was the subsidiary
of Iktara Ltd. with two directors, and Deepak eventually becomes one of the directors
of company. A consultant was hired and he charged ` 30,000 for the incorporation of
company and to do other necessary statuary registrations. ` 30,000 is to be charged as an
expense in the books after incorporation of company. The company, Softbharti Pvt. Ltd.
was incorporated on 1st April 2019.
The financials of Iktara Ltd. are prepared as per Ind AS.
An accountant who was hired at the time of company‛s incorporation, has prepared the
draft financials of Softbharti Pvt. Ltd. for the year ending 31st March, 2020 as follows:
Statement of Profit and Loss

Particulars Amount (`)

Revenue from operations 10,00,000
Other Income 1,00,000
Total Revenue (a) 11,00,000
Expenses:
Purchase of stock in trade 5,00,000
 INDIAN ACCOUNTING STANDARD 1 23

(Increase)/Decrease in stock in trade (50,000)

Employee benefits expense 1,75,000
Depreciation 30,000
Other expenses 90,000
Total Expenses (b) 7,45,000
Profit before tax (c) = (a)-(b) 3,55,000
Current tax 1,06,500
Deferred tax 6,000
Total tax expense (d) 1,12,500
Profit for the year (e) = (c) – (d) 2,42,500

Balance Sheet

Particulars Amount (`)

EQUITY AND LIABILITIES
(1) Shareholders‛ Funds
(a) Share Capital 1,00,000
(b) Reserves & Surplus 2,27,500
(2) Non-Current Liabilities
(a) Long Term Provisions 25,000
(b) Deferred tax liabilities 6,000
(3) Current Liabilities
(a) Trade Payables 11,000
(b) Other Current Liabilities 45,000
(c) Short Term Provisions 1,06,500
TOTAL 5,21,000
ASSETS
(1) Non Current Assets
(a) Property, plant and equipment (net) 1,00,000
(b) Long-term Loans and Advances 40,000
(c) Other Non Current Assets 50,000
(2) Current Assets
(a) Current Investment 30,000
 24 FINANCIAL REPORTING

(b) Inventories 80,000

(c) Trade Receivables 55,000
(d) Cash and Bank Balances 1,15,000
(e) Other Current Assets 51,000
TOTAL 5,21,000

Additional information of Softbharti Pvt Ltd.:

i. Deferred tax liability of ` 6,000 is created due to following temporary difference:
Difference in depreciation amount as per Income tax and Accounting profit
ii. There is only one property, plant and equipment in the company, whose closing balance
as at 31st March, 2020 is as follows:

Asset description As per Books As per Income tax

Property, plant and equipment ` 1,00,000 ` 80,000

iii. Pre incorporation expenses are deductible on straight line basis over the period of
five years as per Income tax. However, the same are immediately expensed off in the
books.
iv. Current tax is calculated at 30% on PBT - ` 3,55,000 without doing any adjustments
related to Income tax. The correct current tax after doing necessary adjustments of
allowances / disallowances related to Income tax comes to ` 1,25,700.
v. After the reporting period, the directors have recommended dividend of ` 15,000
for the year ending 31st March, 2020 which has been deducted from reserves and
surplus. Dividend payable of ` 15,000 has been grouped under ‘other current liabilities‛
alongwith other financial liabilities.
vi. There are ‘Government statuary dues‛ amounting to ` 15,000 which are grouped under
‘other current liabilities‛.
vii. The capital advances amounting to ` 50,000 are grouped under ‘Other non-current
assets‛.
viii. Other current assets of ` 51,000 comprise Interest receivable from trade receivables.
ix. Current investment of ` 30,000 is in shares of a company which was done with the
purpose of trading; current investment has been carried at cost in the financial
statements. The fair value of current investment in this case is ` 50,000 as at 31st
March, 2020.
x. Actuarial gain on employee benefit measurements of ` 1,000 has been omitted in the
financials of Softbharti private limited for the year ending 31 st March, 2020.
The financial statements for financial year 2019-2020 have not been yet approved.
 INDIAN ACCOUNTING STANDARD 1 25

You are required to ascertain that whether the financial statements of Softbharti Pvt.
Ltd. are correctly presented as per the applicable financial reporting framework. If
not, prepare the revised financial statements of Softbharti Pvt. Ltd. after the careful
analysis of mentioned facts and information.
(RTP NOV. 2020)
QUESTION 28

An entity has the following trial balance line items. How should these items be classified,
i.e., current or non-current as per Ind AS 1?
(a) Receivables (viz., receivable under a contract of sale of goods in which an entity deals)
(b) Advance to suppliers
(c) Income tax receivables [other than deferred tax]
(d) Insurance spares
(RTP MAY 2021)
SOLUTION :
(a) As per paragraph 66(a) of Ind AS 1, an entity shall classify an asset as current when
it expects to realise the asset, or intends to sell or consume it, in its normal operating
cycle.
Paragraph 68 provides the guidance that current assets include assets (such as
inventories and trade receivables) that are sold, consumed or realised as part of the
normal operating cycle even when they are not expected to be realised within twelve
months after the reporting period.
In accordance with above, the receivables that are considered a part of the normal
operating cycle will be classified as current asset.
If the operating cycle exceeds twelve months, then additional disclosure as required
by paragraph 61 of Ind AS 1 is required to be given in the notes.
(b) As discussed in point (a) above, advances to suppliers for goods and services would be
classified in accordance with normal operating cycle if it is given in relation to the goods
or services in which the entity normally deals. If the advances are considered a part
the normal operating cycle, it would be classified as a current asset. If the operating
cycle exceeds twelve months, then additional disclosure as required by paragraph 61
of Ind AS 1 is required to be given in the notes.
(c) Classification of income tax receivables [other than deferred tax] will be driven by
paragraph 66 (c) of Ind AS 1, i.e., based on the expectation of the entity to realise
the asset. If the receivable is expected to be realised within twelve months after the
reporting period, then it will be classified as current asset else non-current asset.
 26 FINANCIAL REPORTING

(d) Para 8 of Ind AS 16 states that items such as spare parts, stand-by equipment and
servicing equipment are recognised in accordance with this Ind AS when they meet
the definition of property, plant and equipment. Otherwise, such items are classified
as inventory.
Accordingly, the insurance spares that are treated as an item of property, plant and
equipment would normally be classified as non-current asset whereas insurance spares that
are treated as inventory will be classified as current asset if the entity expects to consume
it in its normal operating cycle.

QUESTION 29

Is offsetting permitted under the following circumstances?

(a) Expenses incurred by a holding company on behalf of subsidiary, which is reimbursed by
the subsidiary - whether in the separate books of the holding company, the expenditure
and related reimbursement of expenses can be offset?
(b) Whether profit on sale of an asset against loss on sale of another asset can be offset?
(c) When services are rendered in a transaction with an entity and services are received
from the same entity in two different arrangements, can the receivable and payable
be offset?
(RTP NOV. 2021)
SOLUTION :
(a) As per paragraph 33 of Ind AS 1, offsetting is permitted only when the offsetting
reflects the substance of the transaction.
In this case, the agreement/arrangement, if any, between the holding and subsidiary
company needs to be considered. If the arrangement is to reimburse the cost incurred
by the holding company on behalf of the subsidiary company, the same may be presented
net. It should be ensured that the substance of the arrangement is that the payments
are actually in the nature of reimbursement.
(b) Paragraph 35 of Ind AS 1 requires an entity to present on a net basis gains and losses
arising from a group of similar transactions. Accordingly, gains or losses arising on
disposal of various items of property, plant and equipment shall be presented on net
basis. However, gains or losses should be presented separately if they are material.
(c) Ind AS 1 prescribes that assets and liabilities, and income and expenses should be
reported separately, unless offsetting reflects the substance of the transaction . In
addition to this, as per paragraph 42 of Ind AS 32, a financial asset and a financial
liability should be offset if the entity has legally enforceable right to set off and
the entity intends either to settle on net basis or to realise the asset and settle the
liability simultaneously.
 INDIAN ACCOUNTING STANDARD 1 27

In accordance with the above, the receivable and payable should be offset against each
other and net amount is presented in the balance sheet if the entity has a legal right to
set off and the entity intends to do so. Otherwise, the receivable and payable should be
reported separately.

QUESTION 30

An entity manufactures passenger vehicles. The time between purchasing of underlying raw
materials to manufacture the passenger vehicles and the date the entity completes the
production and delivers to its customers is 11 months. Customers settle the dues after a
period of 8 months from the date of sale.
(a) Will the inventory and the trade receivables be current in nature?
(b) Assuming that the production time was say 15 months and the time lag between the
date of sale and collection from customers is 13 months, will the SOLUTION : be
different?
(RTP MAY 2022)
SOLUTION :
Inventory and debtors need to be classified in accordance with the requirement of paragraph
66(a) of Ind AS 1, which provides that an asset shall be classified as current if an entity
expects to realise the same or intends to sell or consume it in its normal operating cycle.
(a) In this case, time lag between the purchase of inventory and its realisation into cash is
19 months [11 months + 8 months]. Both inventory and the debtors would be classified
as current if the entity expects to realise these assets in its normal operating cycle.
(b) No, the SOLUTION : will be the same as the classification of debtors and inventory
depends on the expectation of the entity to realise the same in the normal operating
cycle. In this case, time lag between the purchase of inventory and its realisation
into cash is 28 months [15 months + 13 months]. Both inventory and debtors would
be classified as current if the entity expects to realise these assets in the normal
operating cycle.
Additional information as required by paragraph 61 of Ind AS 1 will be required to be made
by the entity, which provides “Whichever method of presentation is adopted, an entity shall
disclose the amount expected to be recovered or settled after more than twelve months
for each asset and liability line item that combines amounts expected to be recovered or
settled:
(a) No more than twelve months after the reporting period, and
(b) More than twelve months after the reporting period.”
 28 FINANCIAL REPORTING

QUESTION 31 (AP

PLICABILITY OF IND AS)

Fresh Vegetables Limited (FVL) was incorporated on 2nd April, 20X1 under the provisions
of the Companies Act, 2013 to carry on the wholesale trading business in vegetables. As
per the audited accounts of the financial year ended 31 st March, 20X7 approved in its
annual general meeting held on 31st August, 20X7 its net worth, for the first time since
incorporation, exceeded ` 250 crore. The financial statements since inception till financial
year ended 31st March, 20X6 were prepared in accordance with the Companies (Accounting
Standards) Rules 2006. It has been advised that henceforth it should prepare its financial
statements in accordance with the Companies (Indian Accounting Standards) Rules, 2015.
The following additional information is provided by the Company:
— FVL has in the financial year 20X2-20X3 entered into a 60:40 partnership with
Logistics Limited and incorporated a partnership firm ‘Vegetable Logistics Associates‛
(VLA) to carry on the logistics business of vegetables from farm to market.
— FVL also has an associate company Social Welfare Limited (SWL) that was incorporated
in July, 20X5 as a charitable organization and registered under section 8 of the
Companies Act, 2013. Social Welfare Limited has been the associate company of FVL
since its incorporation.
Examine the applicability of Ind AS on VLA & SWL.
(RTP MAY 2022)
QUESTION 32

As per the statutory requirements, exceptional items are required to be disclosed whereas
Ind AS 1 requires separate disclosures of material items and how these are to be presented in
the financial statements. Does that imply that ‘exceptional‛ means ‘material‛? Give examples.
How should these be presented in the financial statements?
(RTP NOV 2022)

QUESTION 33

(1) An entity manufactures passenger vehicles. The time between purchasing of underlying
raw materials to manufacture the passenger vehicles and the date the entity completes
the production and delivers to its customers is 11 months. Customers settle the dues
after a period of 8 months from the date of sale.
(a) Will the inventory and the trade receivables be current in nature?
(b) Assuming that the production time was say 15 months and the time lag between
the date of sale and collection from customers is 13 months, will the
 INDIAN ACCOUNTING STANDARD 1 29

SOLUTION : be different?
(2) In December 2XX1 an entity entered into a loan agreement with a bank. The loan is
repayable in three equal annual instalments starting from December 2XX5. One of the
loan covenants is that an amount equivalent to the loan amount should be contributed
by promoters byMarch 24 2XX2, failing which the loan becomes payable on demand. As
on March 24, 2XX2, the entity has not been able to get the promoter‛s contribution.
On March 25, 2XX2, the entity approached the bank and obtained a grace period upto
June 30, 2XX2 to get the promoter‛s contribution.
The bank cannot demand immediate repayment during the grace period. The annual
reporting period of the entity ends on March 31, 2XX2.
(a) As on March 31, 2XX2, how should the entity classify the loan?
(b) Assume that in anticipation that it may not be able to get the promoter‛s
contribution by due date, in February 2XX2, the entity approached the bank and
got the compliance date extended upto June 30, 2XX2 for getting promoter‛s
contribution. In this case will the loan classification as on March 31, 2XX2 be
different from (a) above?
SOLUTION :

1. Inventory and debtors need to be classified in accordance with the requirement of Ind
AS 1, which provides that an asset shall be classified as current if an entity expects
to realise the same, or intends to sell or consume it in its normal operating cycle.
(a) In this case, time lag between the purchase of inventory and its realisation into
cash is 19 months [11 months + 8 months]. Both inventory and the debtors would
be classified as current if the entity expects to realise these assets in its normal
operating cycle.
(b) No, the SOLUTION : will be the same as the classification of debtors and
inventory depends on the expectation of the entity to realise the same in
the normal operating cycle. In this case, time lag between the purchase of
inventory and its realisation into cash is 28 months [15 months + 13 months].
Both inventory and debtors would be classified as current if the entity expects
to realise these assets in the normal operating cycle.
2. (a) Ind AS 1, inter alia, provides, “An entity classifies the liability as non-current if
the lender agreed by the end of the reporting period to provide a period of grace
ending at least twelve months after the reporting period, within which the entity
can rectify the breach and during which the lender cannot demand immediate
repayment.” In the present case, following the default, grace period within which
an entity can rectify the breach is less than twelve months after the reporting
period. Hence as on March 31, 2XX2, the loan will be classified as current.
(b) Ind AS 1 deals with classification of liability as current or non-current in case
of breach of a loan covenant and does not deal with the classification in case of
 30 FINANCIAL REPORTING

expectation of breach. In this case, whether actual breach has taken place or not
is to be assessed on June 30, 2XX2, i.e., after the reporting date. Consequently,
in the absence of actual breach of the loan covenant as on March 31, 2XX2, the
loan will retain its classification as non-current.

QUESTION 34

In November 2021, an Ind AS compliant Company entered into a loan agreement with a bank.
The loan is repayable in 6 equal annual installments starting from November 2026. One of
the loan covenants is that an amount equivalent to the loan amount should be contributed by
the promoters of the Company by 4th March, 2022, failing which the loan becomes payable
on demand.
As on 4th March, 2022, the Company has not been able to get the promoter‛s contribution.
On 5th March, 2022, the Company approached the Bank and immediately obtained a grace
period up to 30th June, 2022 to get the promoter‛s contribution.
The bank cannot demand immediate repayment during the grace period.
The annual reporting period of the Company ends on 31st March, 2022. You are required to
respond to the following:
(i) As at 31st March, 2022, how should the Company classify the loan?
(ii) Assume that it may not be able to get the promoter‛s contribution by the due date, the
Company approached the Bank in January 2022 and got the compliance date extended
up to 30th June, 2022 for getting promoter‛s contribution. Will the loan classification
as at 31st March, 2022 be different from (i) above?
(5 Marks)
(CA FINAL MAY 2022 EXAM)
SOLUTION :
(a) Paragraph 75 of Ind AS 1, inter alia, provides that an entity classifies the liability as
non-current if the lender agreed by the end of the reporting period to provide a peri-
od of grace ending at least twelve months after the reporting period, within which the
entity can rectify the breach and during which the lender cannot demand immediate
repayment.
In the present case, following the default, grace period within which an entity can
rectify the breach is less than twelve months after the reporting period. Hence as on
31st March, 2022, the loan will be classified as current.
(b) Ind AS 1 deals with classification of liability as current or non-current in case of
breach of a loan covenant and does not deal with the classification in case of expecta-
tion of breach. In this case, whether actual breach has taken place or not is to be as-
 INDIAN ACCOUNTING STANDARD 1 31

sessed on 30th June, 2022, i.e., after the reporting date. Consequently, in the absence
of actual breach of the loan covenant as on 31 st March, 2022, the loan will retain its
classification as non-current.

QUESTION 35

Charm Limited (the ‘Company‛) is a manufacturing company, which is into manufacturing of

wires and cables and has assessed its operating cycle to be 15 months. The Company has
some trade receivables which are receivable within a period of 12 months from the report-
ing date i.e. 31st March 2021.
With respect to the following transactions, which took place during the financial year 2020-
2021, give your opinion based on relevant Ind AS:
• The Company has received a contract of ` 10 crore on 31st March 2021. The terms of
the contract require the Company to make a security deposit of 20% of the contract
value with the customer. The Company made a security deposit of ` 2 crore on 31st
March 2021. This contract will be completed in about 14 months. 70% of the deposit
will be refunded immediately and the balance 30% of the deposit will be refunded af-
ter 3 months from the completion of the contract. The Company wants to present the
security deposit of ` 2 crore as non-current. Is the management‛s decision correct?
• The Company has some trade receivables that are due after 14 months from the date
of the balance sheet; the management of the Company expects to receive the amount
within the period of the operating cycle. Despite the fact that these are receivables
in 14 months, the management would like to present these as current. Is the manage-
ment‛s decision correct?
• In the normal course of business, the Company has given 2 contracts and received a
total security deposit of ` 4 crore. ` 3 crore is received from X Limited and ` 1 crore
is received from Y Limited on 31st March 2021. These are repayable on completion
of the contract. However, if the contract is cancelled within the contract term of 18
months, then the deposit becomes payable immediately. The Company is positive about
the contract with X Limited but is in doubt about the contract received from Y Limit-
ed. The Company wants to present the amount of ` 3 crore as non-current and ` 1 crore
as current in the balance sheet. Is the management‛s decision correct?
• The Company is planning to replace a machinery. It has given an advance of ` 1 crore
for purchase of new machinery which will be delivered in 6 months from the date of
the balance sheet. It has sold the old machinery for ` 0.5 crore, the payment of which
is due in 10 months from the date of the balance sheet. The Company wants to present
both these amounts as current since they will be settled within twelve months from
the end of the reporting period. Is the management‛s decision correct?
(CA FINAL JULY 2021 EXAM) (4 Marks)
 32 FINANCIAL REPORTING

SOLUTION :
Operating cycle of Charm Limited = 15 months
(i) The security deposit made by the Company with the customers be classified as current
assets to the extent of 70% (` 2 crore x 70% = ` 1.40 crore) as it will be refunded
immediately on completion of 14 months of contract i.e. within the operating cycle of
15 months.
However, 30% of the security deposit will be refunded after 3 months of completion
of the contract (14+3 = 17 months) i.e. after 2 months of operating cycle (Operating
cycle of the Company is 15 months). Hence, it will be classified as non-current. There-
fore, management‛s decision is not correct. (Refer Para 66 of Ind AS 1)
(ii) Yes, the Company‛s decision of presenting the trade receivables as Current Assets is
correct despite the fact that these are receivables in 14 months‛ time since the op-
erating cycle of the company is 15 months and any event arising due to trade will be
considered as current if its settlement is within the tenure of operating cycle. Addi-
tionally, the Company also need to disclose amounts that are receivable within a period
of 12 months and after 12 months from the reporting date. (Refer Para 60 and 61 of
Ind AS 1)
(iii) Paragraph 69(d) of Ind AS 1 states that an entity shall classify a liability as current
when it does not have an unconditional right to defer settlement of the liability for at
least twelve months after the reporting period.
Although it is expected that X Limited will fulfil the contract and the deposit will not
be refunded, but in case of cancellation within the contract term, refund of security
deposit is a condition that is not within the control of the entity. Hence, Charm Lim-
ited does not have an unconditional right to defer settlement of the liability for at
least twelve months after the reporting period. Accordingly, the deposit will have to
be classified as current liability in case of both X and Y Limited.
(iv) Yes, the management decision to classify the payment of ` 0.5 crore as a current asset
is correct since the payment will be realised in less than twelve months from the end
of the reporting period.
Capital advances are advances given for procurement of Property, Plant and Equip-
ment etc. Typically, companies do not expect to realize them in cash. Rather, over the
period, these get converted into non-current assets. Hence, capital advances should
be treated as other non-current assets irrespective of when the Property, Plant and
Equipment is expected to be received.
Under Ind AS Schedule III, Capital Advances are not to be classified under Capital
Work in Progress since they are specifically to be disclosed under other non-current
assets.
 INDIAN ACCOUNTING STANDARD 1 33

Accordingly, advance of ` 1 crore given for purchase of machinery is ‘Capital advance‛

which will be classified as non-current as it relates to acquisition of non-current item
i.e., machinery. Hence, management decision to classify it as current is incorrect.

QUESTION 36

X Limited has a loan facility from a bank which is to be repaid within a period of six months
from the end of the reporting period. Before the end of the reporting period, X Limited
and the bank enters into an arrangement as per which the existing outstanding loan will,
unconditionally, roll into the new facility which will expire after a period of 3 years.
i. How should the loan be classified in the balance sheet of X Limited as at the reporting
date ? Give reasons.
ii. Will the answer be different if the new facility is agreed upon after the end of the
reporting period ? Why ? What will the answer?
iii. Will the answer to (i) be different if the new facility is not yet tied up with the existing
bank, but X Limited has the potential to refinance the obligation. Give reasons.
(CA FINAL MAY 2023 EXAM)
 INDIAN ACCOUNTING STANDARD 34 41

(iii) The company has a practice of declaring bonus of 10% of its annual operating profits
every year. It has a history of doing so.
(RTP NOV 2022)

QUESTION 15

Pharma Ltd. manufactures surgical items. Pharma Ltd. has shown a net profit of `
50,00,000 for the second quarter of 2020-2021.
Following adjustments are made while computing the net profit:
(i) Bad debts of ` 2,60,000 incurred during the quarter. 40% of the bad debts have been
deferred to the next quarter.
(ii) Additional depreciation of ` 5,20,000 resulting from the change in the method of de-
preciation.
(iii) Exceptional loss of ` 8,16,000 incurred during the second quarter. 60% of exceptional
loss has been deferred to next quarter.
(iv) ` 4,70,000 expenditure on account of sales expenses pertaining to the second quarter
is deferred on the argument that the third quarter will have more sales, therefore,
third quarter should be debited by higher expenditure. The expenditures are uniform
throughout all quarters.
Analyse and ascertain the correct net profit to be shown in the interim financial results of
the second quarter to be presented to the Board of Directors as per Ind AS 34.
(4 Marks)
(CA FINAL DEC. 2021 EXAM)
SOLUTION :
The quarterly net profit has not been correctly stated. As per Ind AS 34, Interim Financial
Reporting, the quarterly net profit should be adjusted and restated as follows:
(i) The treatment of bad debts is not correct as the expenses incurred during an interim
reporting period should be recognised in the same period. Accordingly, ` 1,04,000 (`
2,60,000 x 40%) should be deducted from ` 50,00,000 in the second quarter itself.
(ii) Recognising additional depreciation of ` 5,20,000 in the same quarter is correct and is
in tune with Ind AS 34.
(iii) Treatment of exceptional loss is not as per the principles of Ind AS 34, as the entire
amount of ` 8,16,000 incurred during the second quarter should be recognized in the
same quarter. Hence ` 4,89,600 (ie. ` 8,16,000 x 60%) which was deferred for next
quarter should be deducted from the profits of second quarter only.
(iv) (a) As per Ind AS 34 the income and expense should be recognised when they are
earned and incurred respectively. As per para 39 of Ind AS 34, the costs should
 42 FINANCIAL REPORTING

be anticipated or deferred only when it is appropriate to anticipate or defer that

type of cost at the end of the financial year; and
(b) Costs are incurred unevenly during the financial year of an enterprise.
Therefore, the treatment done relating to deferment of ` 4,70,000 is not correct as
expenditures are uniform throughout all quarters.
Thus, considering the above, the correct net profits to be shown in Interim Financial
Report of the second quarter shall be

`
Net Profit of second quarter 50,00,000
Adjustments
Less: Bad debts wrongly deferred to third quarter 1,04,000
Exceptional loss wrongly deferred to third quarter 4,89,600
Sales expenses wrongly deferred to third quarter 4,70,000 (10,63,600)
Revised Profit 39,36,400

QUESTION 16

Heavy Limited has a plant with normal capacity to produce 90,000 units of a product per
annum and expected fixed production overhead for the year is ` 18,00,000. There are no
quarterly / seasonal variations.
Hence, normal expected production of each quarter is uniform. The actual production of
the year is 87,000 units. The production details of each quarter are as under:
Quarter I: 20,000 units
Quarter II: 24,000 units
Quarter III: 23,500 units
Quarter IV: 19,500 units
Calculate the allocation of fixed production overhead for all the four quarters. Will the
quarterly results affect annual result?
Give your answer as per Ind AS 34 read with Ind AS 2.
(5 Marks)
(CA FINAL JULY 2021 EXAM)
SOLUTION :
Since it is considered that there is no quarterly / seasonal variation, then normal expected
production for each quarter is 22,500 units (90,000 units / 4 quarters) and fixed produc-
tion overheads for the quarter are ` 4,50,000 (` 18,00,000 / 4 quarters).
 INDIAN ACCOUNTING STANDARD 34 43

Fixed production overhead to be allocated per unit of production in every quarter will be
` 20 per unit.
(Fixed overheads / Normal production i.e. ` 4,50,000 / 22,500 units

Particulars Quarters
I II III IV
Actual fixed production overheads on year 4,50,000 9,00,000 13,50,000 18,00,000
to date basis (`)
Actual production (Units) 20,000 24,000 23,500 19,500
Actual production year to date basis (Units) 20,000 44,000 67,500 87,000
Fixed overheads to be absorbed on year to 4,00,000 8,80,000 13,50,000 17,40,000
date basis (`)
Under recovery year to date (`) 50,000 20,000 NIL 60,000

Quarter I:
Unallocated fixed production overheads ` 50,000 (i.e. ` 4,50,000 – ` 4,00,000) to be charged
as expense as per Ind AS 2 and consequently as per Ind AS 34 .
Quarter II:
Since production increased in second quarter by 1,500 units (24,000 – 22,500) i.e. more
than the normal expected production, hence ` 30,000 (1,500 units x ` 20 per unit) will be
reversed by way of a credit to the statement of profit and loss of the 2 nd quarter and
debit to cost of production / inventory cost.
Quarter III:
Earlier, ` 50,000 was not allocated to production / inventory cost in the 1 st quarter. Out
of it, ` 30,000 was reversed in the 2nd quarter. To allocate entire ` 13,50,000 till third
quarter to the production, as per Ind AS 34, remaining ` 20,000 (` 50,000 – ` 30,000) will
be reversed by way of a credit to the statement of profit and loss of the 3 rd quarter and
debit to the cost of production / inventory cost.
Quarter IV:
Unallocated fixed production overheads ` 60,000 {i.e. ` 4,50,000 – (` 20 x 19,500)} in the
4th quarter will be expensed off as per the principles of Ind AS 2 and Ind AS 34 by way
of a charge to the statement of profit and loss.
For the year:
The cumulative result of all the quarters would also result in unallocated overheads of `
60,000, thus, meeting the requirements of Ind AS 34 that the quarterly results should not
affect the measurement of the annual result.
 44 FINANCIAL REPORTING

TEST YOUR KNOWLEDGE

QUESTION 1

Company A expects to earn ` 15,000 pre-tax profit each quarter and has a corporate tax
slab of 20 percent on the first ` 20,000 of annual earnings and 40 per cent on all additional
earnings. Actual earnings match expectations. Calculate the amount of income tax to be
shown in each quarter.

SOLUTION :
The following table shows the amount of income tax expense that is reported in each
quarter:

Expected total Income = 15,000 x 4 = ` 60,000

Expected Tax as per slabs = 20,000 x 20% + 40,000 x 40% = ` 20,000
Average annual Income tax rate = 20,000/ 60,000 x 100 = 33.33%
Amt (`)
Q1 Q3 Q3 Q4
Profit before tax 15,000 15,000 15,000 15,000
Tax expense 5,000 5,000 5,000 5,000
 INDIAN ACCOUNTING STANDARD 7 69

Additional information:

(i) Trade receivables and Trade payables include amounts relating to credit sale and
credit purchase only.
(ii) Foreign exchange loss represents increment in liability of a long-term borrowing
due to exchange rate fluctuation between acquisition date and balance sheet date.
(RTP NOV 2021)
QUESTION 20 (V.V.IMP)

A Ltd. whose functional currency is Indian Rupee, had a balance of cash and cash equivalents
of ` 2,00,000 but there are no trade receivables or trade payables balances as on 1st April,
20X1 During the year 20X1-20X2, the entity entered into the following foreign currency
transactions.
• A Ltd. purchased goods for resale from Europe for $2,00,000 when the exchange rate
was €1=` 50. This balance is still unpaid at 31st March 20X2 when the exchange rate
is €1= ` 45 An exchange gain on retranslation of the trade payable of ` 5,00,000 is
recorded in profit or loss.
• A Ltd sold the good to an American client for $ 150,000 when the exchange rate was
$1= ` 40 This amount was settled when the exchange rate was $1 ` 42. further exchange
gain regarding the trade regarding is recoded in the statements of profit or loss.
• At Ltd. also borrowed $ 1,00,000 under a long-term agreement when the exchange rate
was $1=`-50 and immediately converted is to ` 50,00,000. The loan was retranslated at
31st March, 20X2 @ ` 45, with a further exchange gain recorded in the statement of
profit of loss.
• A Ltd, therefore records a cumulative exchange gain of ` 18,00,000 (10,00,000+3,00,000+
5,00,000) in arriving at its profit for the year.
• In addition. At Ltd. records a gross profit of ` 10,00,000 (`s 60,00,000- ` 50,00,000)
on the sale of the goods.
• Ignore taxation.
How cash flows arising from the above transactions would be reported in the statement of
cash flows of A Ltd. under indirect method?
(MTP OCTOBER 2019)

QUESTION 21

Z Ltd. has no foreign currency cash flow for the year 2017. It holds some deposit in a
bank in the USA. The balances as on 31.12.2017 and 31.12.2018 were US$ 100,000 and
US$ 102,000 respectively. The exchange rate on December 31, 2017 was US$1 = ` 45.
The same on 31.12.2018 was US$1 = ` 50. The increase in the balance was on account of
 70 FINANCIAL REPORTING

interest credited on 31.12.2018. Thus, the deposit was reported at ` 45,00,000 in the
balance sheet as on December 31, 2017. It was reported at ` 51,00,000 in the balance sheet
as on 31.12.2018. How these transactions should be presented in cash flow for the year
ended 31.12.2018 as per Ind AS 7?
(RTP MAY 2019)
SOLUTION :
The profit and loss account was credited by ` 1,00,000 (US$ 2000 × ` 50) towards interest
income. It was credited by the exchange difference of US$ 100,000 × (` 50 - `45) that
is, ` 500,000. In preparing the cash flow statement, ` 500,000, the exchange difference,
should be deducted from the ‘net profit before taxes, and extraordinary item‛. However,
in order to reconcile the opening balance of the cash and cash equivalents with its closing
balance, the exchange difference ` 500,000, should be added to the opening balance in note
to cash flow statement.
Cash flows arising from transactions in a foreign currency shall be recorded in Z Ltd.‛ s
functional currency by applying to the foreign currency amount the exchange rate between
the functional currency and the foreign currency at the date of the cash flow.

QUESTION 22

What will be the classification for following items in the statement of cash flows of both
(i) Banks / Financial institutions and (ii) Other Entities?

S. Particulars
No.
1. Interest received on loans and advances given
2. Interest paid on deposits and other borrowings
3. Interest and dividend received on investments in subsidiaries, associates and in
other entities
4. Dividend paid on preference and equity shares, including tax on dividend paid on
preference and equity shares by other entities
5. Finance charges paid by lessee under finance lease
6. Payment towards reduction of outstanding finance lease liability
7. Interest paid to vendor for acquiring fixed asset under deferred payment basis
8. Principal sum payment under deferred payment basis for acquisition of fixed
assets
9 Penal interest received from customers for late payments
 INDIAN ACCOUNTING STANDARD 7 71

10. Penal interest paid to suppliers for late payments

11. Interest paid on delayed tax payments
12. Interest received on tax refunds

(RTP NOV. 2022)

SOLUTION :
The following are the classification of various activities in the Statement of Cash Flows:

S. Particulars Classification for reporting cash flows

No.
Banks / financial Other entities
institutions
1. Interest received on loans and Operating Investing activities
advances given Activities
2. Interest paid on deposits and Operating Financing activities
other borrowings Activities
3. Interest and dividend received Investing Investing activities
on investments in subsidiaries, activities
associates and in other entities
4. Dividend paid on preference and Financing Financing activities
equity shares, including tax on activities
dividend paid on preference and
equity shares by other entities
5. Finance charges paid by Financing Financing activities
lessee under finance lease activities
6. Payment towards reduction of Financing Financing activities
outstanding finance lease liability activities
7. Interest paid to vendor for Financing Financing activities
acquiring fixed asset under activities
deferred payment basis
8. Principal sum payment under Investing Investing activities
deferred payment basis for activities
acquisition of fixed assets
9. Penal interest received from Operating Operating Activities
customers for late payments Activities
 72 FINANCIAL REPORTING

10. Penal interest paid to Operating Operating Activities

suppliers for late payments Activities
11. Interest paid on delayed tax Operating Operating Activities
payments Activities
12. Interest received on tax Operating Operating Activities
refunds Activities

QUESTION 23

In the year 2020-2021, one land was sold for ` 5 crore and another land purchased for
` 3 crore by XYZ Limited. Company reported Cash Flow on a Net Basis in Cash Flow State-
ment i.e. ` 2 crore in Investing Activity as Cash receipt from Sale of Land. Advise whether
treatment given as above is correct or not as per the provisions of Ind AS 7.
Also, calculate the cash from operations by indirect method from the following information:
Operating Statement of XYZ Limited for the year ended 31st March, 2021
Particulars `
Sales 20,00,000
Less: Cost of goods sold (14,00,000)
Administration & selling overheads (2,20,000)
Depreciation (28,000)
Interest paid (12,000)
Loss on sale of asset (8,000)
Profit before tax 3,32,000
Less: Tax (1,20,000)
Profit after tax 2,12,000

Balance Sheet as on 31st March

2021 (`) 2020 (`)
Assets
Non-current assets
Property, plant and equipment 3,00,000 2,60,000
Investment 48,000 40,000
Current assets
Inventories 48,000 52,000
Trade receivables 40,000 28,000
Cash and cash equivalents 24,000 20,000
 INDIAN ACCOUNTING STANDARD 7 73

Total 4,60,000 4,00,000

Equity and liabilities
Shareholders‛ funds 2,40,000 2,00,000
Non-current Liabilities 1,32,000 1,40,000
Current liabilities
Trade payables 48,000 32,000
Expenses payables 40,000 28,000
Total 4,60,000 4,00,000

(6 Marks)
(CA FINAL DEC. 2021 EXAM)
SOLUTION :
(i) Correct treatment of cash flow:
If nothing is specifically mentioned, then as per Ind AS 7, the cash flows will be pre-
sented on gross basis. Gross basis means the receipts would be shown separately and
the payments will be shown separately.
Accordingly, in the year 2020-2021, while presenting the information, entity will show
separately cash outflow from investing activity of ` 3 crore for purchase of land and
cash inflow from investing activity of ` 5 crore from sale of land.
(ii) Cash flow from Operations by Indirect Method

`
Profit After Tax 2,12,000
Add back / (Less): Depreciation 28,000
Interest paid 12,000
Loss on sale of an asset 8,000
2,60,000
Adjustments for changes in inventory and operating receivables and pay-
ables
Decrease in inventory 4,000
Increase in trade receivables (12,000)
Increase in trade payables 16,000
Increase in expenses payables 12,000
Net cash generated from operating activity 2,80,000
74 FINANCIAL REPORTING
 INDIAN ACCOUNTING STANDARD 7 69

Additional information:

(i) Trade receivables and Trade payables include amounts relating to credit sale and
credit purchase only.
(ii) Foreign exchange loss represents increment in liability of a long-term borrowing
due to exchange rate fluctuation between acquisition date and balance sheet date.
(RTP NOV 2021)
QUESTION 20 (V.V.IMP)

A Ltd. whose functional currency is Indian Rupee, had a balance of cash and cash equivalents
of ` 2,00,000 but there are no trade receivables or trade payables balances as on 1st April,
20X1 During the year 20X1-20X2, the entity entered into the following foreign currency
transactions.
• A Ltd. purchased goods for resale from Europe for $2,00,000 when the exchange rate
was €1=` 50. This balance is still unpaid at 31st March 20X2 when the exchange rate
is €1= ` 45 An exchange gain on retranslation of the trade payable of ` 5,00,000 is
recorded in profit or loss.
• A Ltd sold the good to an American client for $ 150,000 when the exchange rate was
$1= ` 40 This amount was settled when the exchange rate was $1 ` 42. further exchange
gain regarding the trade regarding is recoded in the statements of profit or loss.
• At Ltd. also borrowed $ 1,00,000 under a long-term agreement when the exchange rate
was $1=`-50 and immediately converted is to ` 50,00,000. The loan was retranslated at
31st March, 20X2 @ ` 45, with a further exchange gain recorded in the statement of
profit of loss.
• A Ltd, therefore records a cumulative exchange gain of ` 18,00,000 (10,00,000+3,00,000+
5,00,000) in arriving at its profit for the year.
• In addition. At Ltd. records a gross profit of ` 10,00,000 (`s 60,00,000- ` 50,00,000)
on the sale of the goods.
• Ignore taxation.
How cash flows arising from the above transactions would be reported in the statement of
cash flows of A Ltd. under indirect method?
(MTP OCTOBER 2019)

QUESTION 21

Z Ltd. has no foreign currency cash flow for the year 2017. It holds some deposit in a
bank in the USA. The balances as on 31.12.2017 and 31.12.2018 were US$ 100,000 and
US$ 102,000 respectively. The exchange rate on December 31, 2017 was US$1 = ` 45.
The same on 31.12.2018 was US$1 = ` 50. The increase in the balance was on account of
 70 FINANCIAL REPORTING

interest credited on 31.12.2018. Thus, the deposit was reported at ` 45,00,000 in the
balance sheet as on December 31, 2017. It was reported at ` 51,00,000 in the balance sheet
as on 31.12.2018. How these transactions should be presented in cash flow for the year
ended 31.12.2018 as per Ind AS 7?
(RTP MAY 2019)
SOLUTION :
The profit and loss account was credited by ` 1,00,000 (US$ 2000 × ` 50) towards interest
income. It was credited by the exchange difference of US$ 100,000 × (` 50 - `45) that
is, ` 500,000. In preparing the cash flow statement, ` 500,000, the exchange difference,
should be deducted from the ‘net profit before taxes, and extraordinary item‛. However,
in order to reconcile the opening balance of the cash and cash equivalents with its closing
balance, the exchange difference ` 500,000, should be added to the opening balance in note
to cash flow statement.
Cash flows arising from transactions in a foreign currency shall be recorded in Z Ltd.‛ s
functional currency by applying to the foreign currency amount the exchange rate between
the functional currency and the foreign currency at the date of the cash flow.

QUESTION 22

What will be the classification for following items in the statement of cash flows of both
(i) Banks / Financial institutions and (ii) Other Entities?

S. Particulars
No.
1. Interest received on loans and advances given
2. Interest paid on deposits and other borrowings
3. Interest and dividend received on investments in subsidiaries, associates and in
other entities
4. Dividend paid on preference and equity shares, including tax on dividend paid on
preference and equity shares by other entities
5. Finance charges paid by lessee under finance lease
6. Payment towards reduction of outstanding finance lease liability
7. Interest paid to vendor for acquiring fixed asset under deferred payment basis
8. Principal sum payment under deferred payment basis for acquisition of fixed
assets
9 Penal interest received from customers for late payments
 INDIAN ACCOUNTING STANDARD 7 71

10. Penal interest paid to suppliers for late payments

11. Interest paid on delayed tax payments
12. Interest received on tax refunds

(RTP NOV. 2022)

SOLUTION :
The following are the classification of various activities in the Statement of Cash Flows:

S. Particulars Classification for reporting cash flows

No.
Banks / financial Other entities
institutions
1. Interest received on loans and Operating Investing activities
advances given Activities
2. Interest paid on deposits and Operating Financing activities
other borrowings Activities
3. Interest and dividend received Investing Investing activities
on investments in subsidiaries, activities
associates and in other entities
4. Dividend paid on preference and Financing Financing activities
equity shares, including tax on activities
dividend paid on preference and
equity shares by other entities
5. Finance charges paid by Financing Financing activities
lessee under finance lease activities
6. Payment towards reduction of Financing Financing activities
outstanding finance lease liability activities
7. Interest paid to vendor for Financing Financing activities
acquiring fixed asset under activities
deferred payment basis
8. Principal sum payment under Investing Investing activities
deferred payment basis for activities
acquisition of fixed assets
9. Penal interest received from Operating Operating Activities
customers for late payments Activities
 72 FINANCIAL REPORTING

10. Penal interest paid to Operating Operating Activities

suppliers for late payments Activities
11. Interest paid on delayed tax Operating Operating Activities
payments Activities
12. Interest received on tax Operating Operating Activities
refunds Activities

QUESTION 23

In the year 2020-2021, one land was sold for ` 5 crore and another land purchased for
` 3 crore by XYZ Limited. Company reported Cash Flow on a Net Basis in Cash Flow State-
ment i.e. ` 2 crore in Investing Activity as Cash receipt from Sale of Land. Advise whether
treatment given as above is correct or not as per the provisions of Ind AS 7.
Also, calculate the cash from operations by indirect method from the following information:
Operating Statement of XYZ Limited for the year ended 31st March, 2021
Particulars `
Sales 20,00,000
Less: Cost of goods sold (14,00,000)
Administration & selling overheads (2,20,000)
Depreciation (28,000)
Interest paid (12,000)
Loss on sale of asset (8,000)
Profit before tax 3,32,000
Less: Tax (1,20,000)
Profit after tax 2,12,000

Balance Sheet as on 31st March

2021 (`) 2020 (`)
Assets
Non-current assets
Property, plant and equipment 3,00,000 2,60,000
Investment 48,000 40,000
Current assets
Inventories 48,000 52,000
Trade receivables 40,000 28,000
Cash and cash equivalents 24,000 20,000
 INDIAN ACCOUNTING STANDARD 7 73

Total 4,60,000 4,00,000

Equity and liabilities
Shareholders‛ funds 2,40,000 2,00,000
Non-current Liabilities 1,32,000 1,40,000
Current liabilities
Trade payables 48,000 32,000
Expenses payables 40,000 28,000
Total 4,60,000 4,00,000

(6 Marks)
(CA FINAL DEC. 2021 EXAM)
SOLUTION :
(i) Correct treatment of cash flow:
If nothing is specifically mentioned, then as per Ind AS 7, the cash flows will be pre-
sented on gross basis. Gross basis means the receipts would be shown separately and
the payments will be shown separately.
Accordingly, in the year 2020-2021, while presenting the information, entity will show
separately cash outflow from investing activity of ` 3 crore for purchase of land and
cash inflow from investing activity of ` 5 crore from sale of land.
(ii) Cash flow from Operations by Indirect Method

`
Profit After Tax 2,12,000
Add back / (Less): Depreciation 28,000
Interest paid 12,000
Loss on sale of an asset 8,000
2,60,000
Adjustments for changes in inventory and operating receivables and pay-
ables
Decrease in inventory 4,000
Increase in trade receivables (12,000)
Increase in trade payables 16,000
Increase in expenses payables 12,000
Net cash generated from operating activity 2,80,000
74 FINANCIAL REPORTING
 INDIAN ACCOUNTING STANDARD 8 91

What are the considerations in determining whether a change in depreciation methodology

is appropriate, and how should this change be accounted for? Given the risk of charging
lower depreciation per annum and the possibility that the asset will be depreciated over a
period longer than it would otherwise be (under SLM basis), what other safeguards do you
suggest, in order to ensure compliance with relevant standards in Ind AS and its framework?
(MTP NOVEMBER 2021)
SOLUTION :
Paragraphs 60 and 61 of Ind AS 16, Property, Plant and Equipment, state that the depreciation
method used shall reflect the pattern in which the asset‛s future economic benefits are
expected to be consumed by the entity.
The depreciation method applied to an asset shall be reviewed at least at each financial
year-end and, if there has been a significant change in the expected pattern of consumption
of the future economic benefits embodied in the asset, the method shall be changed to
reflect the changed pattern.
Accounting procedure:
Such a change is accounted for as a change in an accounting estimate in accordance with
Ind AS 8.
Depreciation is a function of several factors, with extent of usage and efflux of time
being its primary determinants. The hours-in-use method relates the amount of periodic
depreciation charge only to one of the above two factors, namely, the extent of usage as
reflected by the number of hours. This method may therefore be said to be appropriate as
per para 62 of Ind AS 16.
Determination of depreciation method involves an accounting estimate; depreciation method
is not a matter of an accounting policy. Accordingly, as per Ind AS 8 and Ind AS 16, a
change in depreciation method shall be accounted for as a change in accounting estimate,
i.e; prospectively.
However, given the possibility that the asset will be depreciated over a period longer than
it would be under SLM basis, the company will need to assess if there are any impairment
triggers and carry out impairment testing as required under Ind AS 36.

QUESTION 22

ABC Ltd. changed its method adopted for inventory valuation in the year 2018-2019. Prior
to the change, inventory was valued using the first in first out method (FIFO). However, it
was felt that in order to match current practice and to make the financial statements more
relevant and reliable, a weighted average valuation model would be more appropriate.
The effect of the change in the method of valuation of inventory was as follows:
• 31st March, 2017 - Increase of ` 10 million
 92 FINANCIAL REPORTING

• 31st March, 2018 - Increase of ` 15 million

• 31st March, 2019 - Increase of ` 20 million
Profit or loss under the FIFO valuation model are as follows:

2018-2019 2017-2018
Revenue 324 296
Cost of goods sold (173) (164)
Gross profit 151 132
Expenses (83) (74)
Profit 68 58

Retained earnings at 31st March, 2017 were ` 423 million

Present the change in accounting policy in the profit or loss and produce an extract of the
statement of changes in equity in accordance with Ind AS 8.
(RTP MAY 2019)
SOLUTION :
Profit or loss under weighted average valuation method is as follows:

2018-2019 2017-2018
(Restated)
Revenue 324 296
Cost of goods sold (168) (159)
Gross profit 156 137
Expenses (83) (74)
Profit 73 63

Statement of changes in Equity (extract)

Retained earnings Retained earnings

(Original)
At 1st April, 2017 423 423
Change in inventory valuation policy 10 -
At 1st April, 2017 (Restated) 433 -
Profit for the year 2017-2018 63 58
At 31st March, 2018 496 481
Profit for the 2018-2019 73 68
At 31st March, 2019 569 549
 INDIAN ACCOUNTING STANDARD 8 93

QUESTION 23

In 20X3-20X4, after the entity‛s 31 March 20X3 annual financial statements were approved
for issue, a latent defect in the composition of a new product manufactured by the entity
was discovered (that is, a defect that could not be discovered by reasonable or customary
inspection). As a result of the latent defect the entity incurred `100,000 in unanticipated
costs for fulfilling its warranty obligation in respect of sales made before 31 March 20X3.
An additional `20,000 was incurred to rectify the latent defect in products sold during
20X3-20X4 before the defect was detected and the production process rectified, `5,000
of which relates to items of inventory at 31 March 20X3. The defective inventory was
reported at cost ` 15,000 in the 20X2-20X3 financial statements when its selling price
less costs to complete and sell was estimated at `18,000. The accounting estimates made
in preparing the 31 March 20X3 financial statements were appropriately made using all
reliable information that the entity could reasonably be expected to have been obtained
and taken into account in the preparation and presentation of those financial statements.
Analyse the above situation in accordance with relevant Ind AS.
(RTP MAY 2021)

QUESTION 24

Orange Ltd. is going to prepare its annual financial statements for the year ending 31st
March, 2022, in the process it discovered that a provision for constructive obligation for
payment of bonus to selected employees in the corporate office (material in amount) which
was required to be recognized in the annual financial statements for the year ended 31st
March, 2020 was not recognized due to oversight of facts. The bonus was paid during the
financial year ended 31st March, 2021 and was recognized as an expense in the annual finan-
cial statements for the said year.
As a finance manager of the company, you are required to analyse whether the situation
relating to constructive obligation for payment of bonus is an error requiring retrospective
restatement of comparatives considering that the amount is material.
(5 Marks)
(CA FINAL NOV 2022 EXAM)
SOLUTION :
As per paragraph 41 of Ind AS 8, errors can arise in respect of the recognition, measure-
ment, presentation or disclosure of elements of financial statements. Financial statements
do not comply with Ind AS if they contain either material errors or immateri al errors made
intentionally to achieve a particular presentation of an entity‛s financial position, financial
performance or cash flows. Potential current period errors discovered in that period are
corrected before the financial statements are approved for issue. However, material er-
rors are sometimes not discovered until a subsequent period, and these prior period errors
 94 FINANCIAL REPORTING

are corrected in the comparative information presented in the financial statements for
that subsequent period.
As per paragraph 40A of Ind AS 1, an entity shall present a third balance sheet as at the
beginning of the preceding period in addition to the minimum comparative financial state-
ments if, inter alia, it makes a retrospective restatement of items in its financial state-
ments and the retrospective restatement has a material effect on the information in the
balance sheet at the beginning of the preceding period.
In the given case, expenses for the year ended 31st March, 2020 and liabilities as at 31st
March, 2020 were understated because of non-recognition of bonus expense and related
provision. Expenses for the year ended 31 st March, 2021, on the other hand,
were overstated to the same extent because of recognition of the aforesaid bonus as ex-
pense for the year. To correct the above errors in the annual financial statements for the
year ended 31st March, 2022, the entity should:
(a) restate the comparative amounts (i.e., those for the year ended 31 st March, 2021) in
the statement of profit and loss; and
(b) present a third balance sheet as at the beginning of the preceding period (i.e., as at
1st April, 2020) wherein it should recognise the provision for bonus and restate the
retained earnings.
 104 FINANCIAL REPORTING

QUESTION 17

Whether the fraud related to 20X1-X2 discovered after the end of the reporting period
but before the date of approval of financial statements for 20X3-X4 is an adjusting event?

SOLUTION :
In the instant case, the fraud is discovered after the end of the reporting period of 20X3-
X4 which related to F.Y 20X1-X2 since the fraud has taken place before the end of the
reporting period, the condition was existing which has been confirmed by the detection
of the same after the end of the reporting period but before the approval of financial
Therefore, it is an adjusting event.
Moreover, Ind AS 10 in paragraph 9 specifically provides that the discovery fraud or error
after the end of the reporting period, that shows that financial statements are incorrect,
is an adjusting event. Such a discovery of fraud should be accounted for in accordance with
Ind AS 8, if it meets the definition of prior period error.

QUESTION 18

X Ltd. was having investment in from of equity shares in another company as at the end
of the reporting period i.e. 31st March, 20X2 After the end of the reporting period but
before the approval of the financial statement it has been found that value of investment
was fraudulently inflated by committing a computation error. Whether such event should be
adjusted in the financial statements for the year 20X1-X2?

SOLUTION :
Since it has been detected that a fraud has been made by committing an intentional error
and as a result of the same financial statements present an incorrect picture, which has
been detected after the end of the reporting period but before the approval of the financial
statements The same is an adjusting event. Accordingly, the value of investments in the
financial statements should be adjusted for the fraudulent error in computation of value
of investments.

QUESTION 19

Discuss with reasons whether these events are in nature of adjusting or non-adjusting and
the treatment needed in light of accounting standard Ind AS 10.
(i) Moon Ltd. won an arbitration award on 25Th April, 20X1 for ` 1 crore. From the arbitration
proceeding, It was evident the Company is most likely to win the arbitration award.
The directors approved the financial statements for the year ending 31.03.20X1 on
1st May, 20X1. The management did not consider the effect of the above transaction
in Financial Year 20X0-20X1, as it was favorable to the Company and the award come
after the end of the financial year.
 IND AS 10: EVENTS AFTER THE REPORTING PERIOD 105

(ii) Zoom Ltd. has a trading business of Mobile telephones. The Company has purchased
1000 mobiles phones at ` 5,000 each on 15th March, 20X1. The manufactures of phone
had announced the release of the new version on 1st March, 20X1 but not announced
the price. Zoom Ltd. has valued inventory at cost of ` 5,000 each at the year ending
31st March, 20X1
Due to arrival of new advance version of Mobile Phone on 8Th April, 20X1 the selling
prices of the mobile stocks remaining with Company was dropped at Ra 4,000 each.
The Financial statements of the Company valued mobile phone @ ` 5,000 each and not
at the value @ ` 4,000 less expenses on sales, as the price reduction in selling price
was effected after 31.03.20X1.
(iii) There as an old due from a debtor amounting to ` 15 lakh against whom insolvency
proceedings was instituted prior to the financial year ending 31st March, 20X1. The
debtor was declared insolvent on 15th April, 20X1.
(iv) Assume that subsequent to the year and before the financial statements are approved.
Company‛s management announces that it will restructure the operation of the company
Management plants to make significant redundancies and to close a few divisions of
company‛s business; however, there is no formal plan yet. Should management recognize
a provision in the books. If the company decides subsequent to end of the accounting
year to restructure its operations?
(MTP MARCH 2021)
SOLUTION :
As per Ind AS 10, the treatment of stated issues would be as under:
(i) Adjusting event: It is an adjusting event as it is the settlement after the reporting
period of a court case that confirms that the entity had a present obligation at the end
of the reporting period. Even though winning of award is favorable to the company, it
should be accounted in its books as receivable since it is an adjusting event.
(ii) Adjusting event: The sale of inventories after the reporting period may give evidence
about their net realizable value at the end of the reporting period, hence it is an
adjusting event as per Ind AS 10. Zoom Limited should value its inventory at `
40,00,000. Hence, appropriate provision must be made for ` 15 lakh.
(iii) Adjusting event: As per Ind AS 10, the receipt of information after the reporting
period indicating that an asset was impaired at the end of the reporting period, or
that the amount of a previously recognised impairment loss for that asset needs to be
adjusted.
The bankruptcy of a customer that occurs after the reporting period usually confirms
that the customer was credit-impaired at the end of the reporting period.
 106 FINANCIAL REPORTING

(iv) Non – adjusting event:

Announcing or commencing the implementation of a major restructuring after reporting
period is a non-adjusting event as per Ind AS 10. Though this is a non-adjusting event
occurred after the reporting period, yet it would result in disclosure of the event in
the financial statements,if restructuring is material.
This would not require provision since as per Ind AS 37, decision to restructure was
not taken before or on the reporting date. Hence, it does not give rise to a constructive
obligation at the end of the reporting period to create a provision.

QUESTION 20 (IND AS 10 MIXED WITH IND AS 102)

Ryder, a public limited company is reviewing certain events which have occurred since its
year end 31st March, 20X4. The financial statements were authorized for issue on 12th May,
20X4. The following events are relevant to the financial statements for the Year ended 31st
March, 20X4.
The company granted share appreciation rights (SA`) to its employees on 1st April, 20X2
based on 10 million shares. At the date the rights are exercised, the SAR‛s provide employees
with the right to receive cash equal to the appreciation in the company‛s share price since
the grant date. The rights vested on 31st March, 20X4 and payment was made on schedule
on 1st May, 20X4.
The FV of the SAR‛s per share at 31st March, 20X3 was ` 6, at 31st March, 20X4 was ` 8 and
at 1st May, 20X4 was ` 9. The company has recognized a liability for the SAR‛s as at 31st
March, 20X2 based upon Ind AS 102 ‘Share-based Payments‛ but the liability was stated at
the same amount at 31st March, 20X4.
Discuss the accounting treatment of the above events in the financial statements of the
Ryder Group for the year ending 31st March, 20X4 taking into account the implications of
events occurring after the reporting period.
(MTP OCTOBER 2021)

QUESTION 21

Discuss with reasons whether these events are in nature of adjusting or non-adjusting and
the treatment needed in light of accounting standard Ind AS 10.
(i) Moon Ltd. won an arbitration award on 25Th April, 20X1 for ` 1 crore. From the
arbitration proceeding, It was evident that the Company is most likely to win the
arbitration award. The director approved the financial statements for the year ending
31.03.20X1. On 1st May, 20X1. The management did not consider the effect of the
above transaction in Financial the financial Year 20X0-20X1, as it was favorable to the
Company and the award come after the end of the financial year.
 IND AS 10: EVENTS AFTER THE REPORTING PERIOD 107

(ii) Zoom Ltd. has a trading business of Mobile telephones. The Company has purchased
1000 mobiles phones at ` 5,000 each on 15th March, 20X1. The manufacturers of
phone had announced the release of the new version on 1st March, 20X1 but had not
announced the price. Zoom Ltd. has valued inventory at cost ` 5,000 each at the year
ending 31st March,20X1,
Due to arrival of new advance version of Mobile phone on 8th April, 20X1 the selling
price of the mobile stocks remaining with Company was dropped at ` 4,000 each.
The financial statements of the company valued mobile phones @ 5,000 each and not
at the value @ ` 4,000 less expenses on sales, as the price reduction in selling price
was effected after 31,03,20X1.
(iii) There as an old due from a debtor amounting to ` 15 lakh against whom insolvency
proceedings was instituted prior to the financial year ending 31st March, 20X1. The
debtor was declared insolvent on 15th April, 20X1.
(iv) Assume that subsequent to the year end and before the financial statements are
approved, Company‛s management announces the it will restructure the operation
of the Company, Management plans to make significant redundancies and to close a
few divisions of Company‛s business; however, there is no formal plan yet. Should
management recognize a provision in the books, if the company decides subsequent to
end of the accounting year to restructure its operations?
(MTP NOVEMBER 2021)
SOLUTION :
As per Ind AS 10, the treatment of stated issues would be as under:
(i) Adjusting event: It is an adjusting event as it is the settlement after the reporting
period of a court case that confirms that the entity had a present obligation at the
end of the reporting period. Even though winning of award is favorable to the company,
it should be accounted in its books as receivable since it is an adjusting event.
(ii) Adjusting event: The sale of inventories after the reporting period may give evidence
about their net realizable value at the end of the reporting period, hence it is an
adjusting event as per Ind AS 10. Zoom Limited should value its inventory at ` 40,00,000.
(iii) Adjusting event: As per Ind AS 10, the receipt of information after the reporting
period indicating that an asset was impaired at the end of the reporting period, or
that the amount of a previously recognised impairment loss for that asset needs to be
adjusted.
The bankruptcy of a customer that occurs after the reporting period usually confirms
that the customer was credit-impaired at the end of the reporting period.
(iv) Non–adjusting event: Announcing or commencing the implementation of a major
restructuring after reporting period is a non-adjusting event as per Ind AS 10. Though
108 FINANCIAL REPORTING

this is a non-adjusting event occurred after the reporting period, yet it would result
in disclosure of the event in the financial statements,if restructuring is material.
This would not require provision since as per Ind AS 37, decision to restructure was
not taken before or on the reporting date. Hence, it does not give rise to a constructive
obligation at the end of the reporting period to create a provision.

QUESTION 22

XYZ Ltd. was formed to secure the tenders floated by a telecom company for publication
of telephone directories. It bagged the tender for publishing directories for Pune circle
for 5 years. It has made a profit in 2013-2014, 2014-2015, 2015-2016 and 2016-2017. It
bid in tenders for publication of directories for other circles – Nagpur, Nashik, Mumbai,
Hyderabad but as per the results declared on 23rd April, 2017, the company failed to
bag any of these. Its only activity till date is publication of Pune directory. The contract
for publication of directories for Pune will expire on 31st December 2017. The financial
statements for the F.Y. 2016-17 have been approved by the Board of Directors on July 10,
2017.
Whether it is appropriate to prepare financial statements on going concern basis?
(RTP MAY 2019)
SOLUTION :
With regard to going concern basis to be followed for preparation of financial statements,
Ind AS 10 provides as follows:
“14 An entity shall not prepare its financial statements on a going concern basis if management
determines after the reporting period either that it intends to liquidate the entity or to
cease trading, or that it has no realistic alternative but to do so.
15 Deterioration in operating results and financial position after the reporting period may
indicate a need to consider whether the going concern assumption is still appropriate. If
the going concern assumption is no longer appropriate, the effect is so pervasive that
this Standard requires a fundamental change in the basis of accounting, rather than an
adjustment to the amounts recognised within the original basis of accounting.”
In accordance with the above, an entity needs to change the basis of accounting if the effect
of deterioration in operating results and financial position is so pervasive that management
determines after the reporting period either that it intends to li quidate the entity or to
cease trading, or that it has no realistic alternative but to do so.
In the instant case, since contract is expiring on 31st December 2017 and it is confirmed on
23rd April, 2017, i.e., after the end of the reporting period and before the approval of the
financial statements, that no further contact is secured, implies that the entity‛ s operations
are expected to come to an end. Accordingly, if entity‛s operations are expected to come to
an end, the entity needs to make a judgement as to whether it has any realistic possibility
 IND AS 10: EVENTS AFTER THE REPORTING PERIOD 109

to continue or not. In case, the entity determines that it has no realistic alternative of
continuing the business, preparation of financial statements for 2016-17 and thereafter on
going concern basis may not be appropriate.

QUESTION 23

ABC Ltd. received a demand notice on 15th June, 2017 for an additional amount of `
28,00,000 from the Excise Department on account of higher excise duty levied by the
Excise Department compared to the rate at which the company was creating provision and
depositing the same. The financial statements for the year 2016-17 are approved on 10th
August, 2017. In July, 2017, the company has appealed against the demand of ` 28,00,000
and the company has expected that the demand would be settled at ` 15,00,000 only. Show
how the above event will have a bearing on the financial statements for the year 2016-17.
Whether these events are adjusting or non-adjusting events and explain the treatment
accordingly.
(RTP NOV. 2019)
SOLUTION :
Ind AS 10 defines ‘Events after the Reporting Period‛ as follows:
Events after the reporting period are those events, favourable and unfavourable, that
occur between the end of the reporting period and the date when the financial statements
are approved by the Board of Directors in case of a company, and, by the corresponding
approving authority in case of any other entity for issue. Two types of events can be
identified:
(a) those that provide evidence of conditions that existed at the end of the reporting
period (adjusting events after the reporting period); and
(b) those that are indicative of conditions that arose after the reporting period (non-
adjusting events after the reporting period)
In the instant case, the demand notice has been received on 15th June, 2017, which is
between the end of the reporting period and the date of approval of financial statements.
Therefore, it is an event after the reporting period. This demand for additional amount
has been raised because of higher rate of excise duty levied by the Excise Department in
respect of goods already manufactured during the reporting period. Accordingly, condition
exists on 31st March, 2017, as the goods have been manufactured during the reporting
period on which additional excise duty has been levied and this event has been confirmed by
the receipt of demand notice. Therefore, it is an adjusting event.
In accordance with the principles of Ind AS 37, the company should make a provision in
the financial statements for the year 2016-17, at best estimate of the expenditure to be
incurred, i.e., ` 15,00,000.
 110 FINANCIAL REPORTING

QUESTION 24

XYZ Ltd. sells goods to its customer with a promise to give discount of 5% on list price of
the goods provided that the payments are received from customer within 15 days. XYZ Ltd.
sold goods of ` 5 lakhs to ABC Ltd. between 17th March, 20X1 and 31st March, 20X1. ABC
Ltd. paid the dues by 15th April, 20X1 with respect to sales made between 17th March,
20X1 and 31st March, 20X1. Financial statements were approved for issue by Board of
Directors on 31st May, 20X1. State whether discount will be adjusted from the sales at the
end of the reporting period.
(RTP MAY 2022)

QUESTION 25

ABC Ltd. has announced its Interim results for Quarter 1, ending 30th June 20X2 on 5th July
20X2. However, till that time AGM for the year 20X1-20X2 was not held. The accounts for
20X1-20X2 were approved by the board of directors on 15th July 20X2. What will be the
period after the reporting date as per the definition of Ind AS 10?
SOLUTION :
As per Ind AS 10, even if partial information is published, still the reporting period will
be considered as the period end date of reporting period and approval of accounts. In
the above case the accounts are approved on 15th July. Therefore, the period after the
reporting date would be 31st March to 15th July.

QUESTION 26

ABC Ltd. is in the legal suit with the excise department. Company gets a court order in
its favors, on 15th April, 20X2 which resulted into reducing the excise liability as on 31st
March 20X2. The management has not considered the effect of the transaction as the
event is favorable to the company. Company‛s view is favorable events after the reporting
date should not be considered as it would hamper the realization Concept of accounting.
Comment In the light of Ind AS 10?
SOLUTION :
AS per Ind AS 10, even favourable event needs to be considered. What is important is
whether the conditions exist as on the end of the reporting and there is a conclusive
evidence for the same.

QUESTION 27

ABC Ltd. is trading company in Laptops. On 31st March 20X2 company has 50 laptops which
were purchased at ` 45,000 each. Company has considered the same price for calculation
of closing inventory. On 15th April 20X2, advanced version of same series of laptops is
introduced in the market. Therefore, the price of the current laptops crashes to ` 35,000
 IND AS 10: EVENTS AFTER THE REPORTING PERIOD 111

each. Company does not want to value the stock as ` 35,000 as the event of reduction took
place after the 31st march 20X2 and the reduced prices wire not applicable as on 31st March
20X2. Comment.
SOLUTION :
As per Ind AS 10, the decrease in the net realizable value of the stock after reporting
period should be considered as adjusting event.

QUESTION 28

JCB manufactures and sales earth moving machines. The machines are dispatched on 25th
March 20X2 for exports. The machines reached the customer on 15th April 20X2. The
details of the price of sale, foreign exchange rates etc. are available on 4th April 20X2. The
accounts were approved by the management on 15th May 20X2. Shall company consider it as
the sale of 20X1-20X2 and adjust the accounts for the information received on 4th April
or not?
SOLUTION :
AS per Ind As 10, any information received after the reporting period for determining
purchase of cost or sale of asset, related, to earlier financial year, should be considered as
adjusting event.

QUESTION 29

Discuss the following situations as per Ind AS 10:

(i) The financial statements of a Company for the year 2021-22 are approved by the man-
agement and were sent on 5th June 2022 for review and approval to its supervisory
board i.e. Board of Directors. The supervisory board approves the financial statements
on 26th June 2022. The financial statements are then made available to shareholders
on 4th July 2022. The financial statements are approved by shareholders in their an-
nual general meeting on 18th August 2022 and then filed with Ministry of Corporate
Affairs (MCA) on 19th August, 2022, Determine & discuss the date on which financial
statements were approved.
(ii) A Company is in litigation with Income Tax Department with respect to allowability
of certain exemptions for financial year 2018-19. No provision for tax has been made
for disallowances of exemptions as the Company was under bonafide belief based on
a legal opinion that it will succeed in litigation. On 21st April, 2023 the Hon‛ ble Su-
preme Court rejected the Company ‘s claim. The Order is received on 30th April 2023.
The financial statements for the financial year 2022-23 of the Company are yet to be
approved. The earlier year financial statements stands approved. Advise in financial
statements of which financial year the impact of the Order of the Hon‛ble Supreme
Court should be recognized.
 112 FINANCIAL REPORTING

(iii) Z Limited while preparing its financial statements on 31st March 2023 made a provision
for doubtful debts @ 6% on accounts receivables. In the last week of January, 2023, a
debtor for ` 3 lakhs had suffered heavy loss due to fire; the loss was not covered by
any insurance policy. Z limited, considering the event of fire made a provision @ 60%
of the amount receivables from that debtor apart from the general provision @ 6% on
remaining debtors. The same debtor was declared insolvent on 10th April, 2023. The
financial statements have not yet been approved. You are required to suggest whether
the company should provide for the full loss arising out of insolvency of the debtor in
the financial statements for the year ended 31st March, 2023.
(iv) D Limited acquired equity shares of another company on 1st March, 2023 at a cost
of ` 28 lakhs. The fair market value of these shares on 31st March, 2023 was ` 35
lakhs and the company measured it at ` 35 lakhs (assume that it is classified as
FVTOCI as per Ind as 109 and change in fair value is transferred to ‘fair value fluctu-
ation reserve‛) Due to market conditions subsequent to the reporting date, the value
of investments drastically came down to ` 20 lakhs. The financial statements have not
yet been approved. You are required to suggest whether D Limited should value the
investments at ` 35 lakhs or ` 20 Lakhs as on 31 March 2023.
(v) Tanmay Limited was in negotiation with Varun Limited from 1st December, 2022 to ac-
quire land for ` 5.00 crores. The negotiations were concluded in the first week of April
2023 the transaction was completed by last week of April, 2023. In which financial
year, the purchase of land should be recognized?
(CA FINAL MAY 2023 EXAM)
 IND AS 113: FAIR VALUE MEASUREMENT 119

The fair value of company XYZ‛s net assets including those recognised in its balance
sheet and those that are not recognised is ` 8,50,000. Determine the fair value of
Entity A‛s investment in XYZ‛s shares.
(RTP NOV 2021)

QUESTION 5

Mr. Q has determined the valuation of Rhythm Ltd. by two approaches i.e., Market Ap-
proach and Income Approach and selected the highest as the final value but the manage-
ment of Rhythm Ltd. is not satisfied and requests you to determine the fair value of shares
of Rhythm Ltd. by assigning the weights to Market Approach and Income Approach in the
ratio of 7:3.
Determine the Equity value on the basis of details given below:

Particulars `
Valuation as per Market Approach 35,82,380
Valuation as per Income Approach 21,99,930
Debt obligation as on measurement date 9,96,812
Surplus cash & cash equivalent 2,10,388
Fair value of surplus assets and liabilities 3,12,449
Number of shares of Rhythm Ltd. 1,06,680 shares

(4 Marks)
(CA FINAL DEC. 2021 EXAM)
SOLUTION :
Equity Valuation of Rhythm Ltd.

Particulars Weights out (`)

of 10
As per Market Approach 7 35,82,380
As per Income Approach 3 21,99,930
Enterprise Valuation based on weights (35,82,380 x 70%) + 31,67,645
(21,99,930 x 30%)
Less: Debt obligation as on measurement date (9,96,812)
Add: Surplus cash & cash equivalent 2,10,388
Add: Fair value of surplus assets and liabilities 3,12,449
Enterprise value of Rhythm Ltd. 26,93,670
No. of shares 1,06,680
Value per share 25.25
120 FINANCIAL REPORTING

QUESTION 6

Shravan Ltd. owns 6,800 ordinary shares in PQR Ltd., an unquoted company. PQR Ltd.
has a total share capital of 2,00,000 shares with nominal value of ` 10. PQR Ltd.‛s after
tax maintainable profits are estimated at ` 28,00,000 per year. An appropriate price/
earnings ratio determined from published industry data is 12 (before lack of marketability
adjustment). Shravan Ltd.‛s management estimates that the discount for the lack of
marketability of PQR Ltd.‛s shares and restrictions on their transfer is 18%.
Shravan Ltd. values its holding in PQR Ltd.‛s shares based on earnings.
Determine the fair value of Shravan Ltd.‛s investment in PQR Ltd.‛s shares.
(5 Marks)
(CA FINAL MAY 2022 EXAM)
SOLUTION :
Calculation of an earnings-based valuation of Shravan Ltd.‛s holding of shares in PQR Ltd.:

Particulars Unit
PQR Ltd.‛s after-tax maintainable profits (A) ` 28,00,000
Price / Earnings ratio (B) 12
Adjusted discount factor (1- 0.18) (C) 0.82
Value of PQR Ltd. (A) x (B) x (C) ` 2,75,52,000

Value of a share of PQR Ltd. = ` 2,75,52,000 / 2,00,000 shares = ` 137.76

The fair value of Shravan Ltd.‛s investment in PQR Ltd.‛s shares is estimated at ` 9,36,768
(that is, 6,800 shares × ` 137.76 per share).
Alternative way of presentation:

Particulars
PQR Ltd.‛s after-tax maintainable profits in ` (A) 28,00,000
PQR Ltd.‛s number of outstanding shares (B) 2,00,000
PQR Ltd.‛s EPS in ` (C = (A/B)) 14.00
Industry PE ratio (given) (D) 12
Market price of PQR Ltd. per share in ` (E = (C x D)) 168.00
Discount for lack of marketability @ 18% in ` (F = E x 18%) 30.24
Adjusted price per share of PQR Ltd. in ` (G = (E-F)) 137.76
Shravan Ltd.‛s holding (H) 6,800 shares
Fair value of Shravan‛s investment in PQR Ltd. (G x H) 9,36,768.00
 IND AS 113: FAIR VALUE MEASUREMENT 121

QUESTION 7

Silver Ltd. is in the process of acquiring shares of Blue Ltd. as a part of business reorga-
nization plan. The projected free cash flow of Blue Ltd. for the next 5 years is as follows:
(` in crores)

Particulars Year 1 Year 2 Year 3 Year 4 Year 5

Cash flows 280.65 281.40 182.70 403.50 518.20
Terminal value 5,945

The weighted average cost of capital of Blue Ltd. is 10%. The total debt as on measurement
date is ` 2,195 crore and the surplus cash and cash equivalent is ` 159.21 crore.
The total number of shares of Blue Ltd. as on the measurement date is 12.80 crore.
You are required to determine the value per share of Blue Ltd. as per Income Approach of
Ind AS 113.
(Present value factor of ` 1 should be taken upto 4 decimals for the purpose of calculation)
(5 Marks)
(CA FINAL NOV. 2022 EXAM)
SOLUTION :
Determination of Equity Value of Blue Ltd.
(` in crore)

Particulars Year 1 Year 2 Year 3 Year 4 Year 5

Cash flows 280.65 281.40 182.70 403.50 518.20
Terminal value 5,945
280.65 281.40 182.70 403.50 6,463.20
Discount rate @ 10% 0.9091 0.8264 0.7513 0.6830 0.6209
Free cashflow available to the firm 255.14 232.55 137.26 275.59 4,013.00
Total of all years 4,913.54
Less: Debt (2,195.00)
Add: Cash & cash equivalent 159.21
Equity value of PT Ltd. 2,877.75
No. of shares (in crore) 12.80 Cr.
Per share value (` 2,877.75 Cr. / ` 224.82
12.80 Cr)
 18 FINANCIAL REPORTING

Asset 1 Asset 2 Asset 3 Asset 4 Total

Valuation Valuation Cost Cost
` ` ` ` `
Cost or revaluation 5,000 2,000 4,000 4,500 15,500
A c c u m u l a t e d (1,000) (500) (2,000) (1,700) (5,200)
deprecation
Net book value 4,000 1,500 2,000 2,800 10,300
Revaluation surplus 2,500 500 - - 3,000

On adoption of Ind, its management decides that, under Ind AS, it will:
- Continue to revalue asset 1. The fair value of asset 1 at the date of transition is not
materially different from its carrying value under previous GAAP;
- Use the previous valuation of asset 2 as deemed cost, and adopt a policy of cost less
depreciation under Ind AS.
- Adopt a policy of revaluation for asset 3. The fair value of asset 3 at the entity‛s date
of transition is ` 5,000;
- Continue to use a policy of cost less depreciation for asset 4
All depreciation methods are already in accordance with those required by Ind AS 16.
Discuss the treatment under Ind AS of valuation of assets 1,2,3, & 4 being part of
property, plant & equipment?
(MTP MARCH 2022)
SOLUTION :
(i) De-commissioning Obligation of G Ltd. and recognition of decommissioning cost:
Retrospective application of Ind AS 37 requires management to recognise the provision
for decommissioning cost on the opening Ind AS Balance Sheet. The provision should
reflect the net present value of the management‛s best estimate of the amount required
to settle the obligation.
Accounting Treatment:
The obligation should be capitalised as a separate component of property, plant and
equipment, together with the accumulated depreciation from the date when the
obligation was incurred to the transition date. The amount to be capitalised as part of
the cost of the asset is calculated by discounting the liability back to the date when
the obligation initially arose, using the best estimate of historical discount rate. The
associated accumulated depreciation is calculated by applying the current estimate of
the asset‛s useful life, using the entity‛s depreciation policy for the asset.
Any difference between the provision and the related component of the property,
plant and equipment is adjusted against the retained earnings.
 IND AS 101: FIRST –TIME ADOPTION OF IND AS 19

The entity could elect to apply the deemed cost exemption. Property, plant and
equipment would be restated to fair value, with the corresponding adjustment to the
retained earnings. Management would need to ensure that the fair value obtained was
the gross fair value and not net of the decommissioning obligation. Management would
recognise the provision for decommissioning costs in accordance with Ind AS 37. No
cost in respect of provision should be added to property, plant and equipment but such
cost should be recognised in the entity‛s opening retained earnings.
(ii) Measurement basis for valuation of PPE:
An entity has the following options with respect to measurement of its property, plant
and equipment (Ind AS 16) in the opening Ind AS Balance Sheet:
• Measurement basis as per the respective standards applied retrospectively. This
measurement option can be applied on an item-by-item basis. For example, Plant A
can be measured applying Ind AS 16 retrospectively and Plant B can be measured
applying the “fair value” or “revaluation” options mentioned below.
• Fair value at the date of transition to Ind AS. This measurement option can be
applied on an item-by-item basis in similar fashion as explained above.
• Previous GAAP revaluation, if such revaluation was, at the date of revaluation,
broadly comparable to (a) fair value or (b) cost or depreciated cost in accordance
with other Ind AS adjusted to reflect changes in general or specific price index.
This measurement option can be applied on an item-by-item basis in similar fashion
as explained above.
 20 FINANCIAL REPORTING

Analysis of given case:

Asset 1 Asset 2 Asset 3 Asset 4

Basis used in Revaluation Revaluation Cost Model Cost Model
previous GAAP Model Model
Intent of To continue Use previous Adopt a policy Continue to use
G Ltd. on tran- with Revalua- valuation a s of revaluation a
sition tion model deemed cost policy of cost
less deprecia-
tion
Treatment at Since fair value An entity Fair value at The entity is
the time of at the transi- may elect to the date of not availing any
transition to tion date is not measure an item transition to exemption given
Ind AS materially dif- of property, Ind AS is ma- in Ind AS 101.
ferent from its plant and equip- terially differ- The entity can
carrying ment at the ent from its measure apply-
value under date of transi- carrying value ing Ind AS 16
previous GAAP, tion to Ind AS under previous retrospectively.
G Ltd. can carry at its fair value GAAP. It is assumed
forward with and use that that measure-
The asset
revalued ar- fair value as its ment bases for
should be reval-
rying value ` deemed cost at cost of asset
ued and stated
4,000 as per that date. In as per previous
at its fair val-
previous GAAP Ind AS financial GAAP and Ind
ue of ` 5,000
in Ind AS books statements, as- AS are same
on the date of
and continue to set will be car- so asset will be
transition to
disclose a reval- ried forward shown in the
Ind AS.
uation surplus at ` 1,500 and Ind AS financial
of ` 2,500. previously dis- A revaluation statements at `
closed revalu- surplus of ` 2,800.
ation surplus is 3,000 (5,000
transferred to – 2,000) will be
retained earn- transferred to
ings or another evaluation
component of reserve.
equity.
 IND AS 101: FIRST –TIME ADOPTION OF IND AS 21

QUESTION 24

HIM Limited having net worth of ` 250 crores is required to adopt Ind AS from 1 April,
20X2 in accordance with the Companies (Indian Accounting Standard) Rules 2015.
Rahul, the senior manager, of HIM Ltd. has identified following issues which need specific
attention of CFO so that opening Ind AS balance sheet as on the date of transition can be
prepared:
Issue 1 : As part of Property, Plant and Equipment, Company has elected to measure land at
its fair value and want to use this fair value as deemed cost on the date of transition. The
carrying value of land as on the date of transition was ` 5,00,000. The land was acquired for
a consideration of ` 5,00,000. However, the fair value of land as on the date of transition
was ` 8,00,000.
Issue 2 : Under Ind AS, the Company has designated mutual funds as investments at
fair value through profit or loss. The value of mutual funds as per previous GAAP was `
4,00,000 (at cost). However, the fair value of mutual funds as on the date of transition was
` 5,00,000.
Issue 3 : Company had taken a loan from another entity. The loan carries an interest rate
of 7% and it had incurred certain transaction costs while obtaining the same. It was carried
at cost on its initial recognition. The principal amount is to be repaid in equal instalments
over the period of loan. Interest is also payable at each year end. The fair value of loan
as on the date of transition is ` 1,80,000 as against the carrying amount of loan which at
present equals ` 2,00,000.
Issue 4 : The company has declared dividend of ` 30,000 for last financial year. On the
date of transition, the declared dividend has already been deducted by the accountant
from the company‛s ‘Reserves & Surplus‛ and the dividend payable has been grouped under
‘Provisions‛. The dividend was only declared by board of directors at that time and it was
not approved in the annual general meeting of shareholders. However, subsequently when
the meeting was held it was ratified by the shareholders.
Issue 5 : The company had acquired intangible assets as trademarks amounting to `
2,50,000. The company assumes to have indefinite life of these assets. The fair value of
the intangible assets as on the date of transition was ` 3,00,000. However, the company
wants to carry the intangible assets at ` 2,50,000 only.
Issue 6 : After consideration of possible effects as per Ind AS, the deferred tax impact
is computed as ` 25,000. This amount will further increase the portion of deferred tax
liability. There is no requirement to carry out the separate calculation of deferred tax on
account of Ind AS adjustments.
Management wants to know the impact of Ind AS in the financial statements of company for
its general understanding.
 22 FINANCIAL REPORTING

Prepare Ind AS Impact Analysis Report (Extract) for HIM Limited for presentation to the
management wherein you are required to discuss the corresponding differences between
Earlier IGAAP (AS) and Ind AS against each identified issue for preparation of transition
date balance sheet. Also pass journal entry for each issue.
(RTP MAY 2021)

QUESTION 25

GG Ltd., a listed company, prepares its first Ind AS financial statements for the year
ending 31st March, 20X3. The date of transition is 1st April, 20X1. The functional and
presentation currency is Rupee. The financial statements as at and for the year ended 31st
March, 20X3 contain an explicit and unreserved statement of compliance with Ind AS.
Previously it was using Indian GAAP (AS) as base.
It has already published its first interim results of quarter 1, quarter 2 and quarter 3 of
20X2- 20X3 in accordance with Ind AS 34 and Ind AS 101. The interim financial report
included the reconciliations both of total comprehensive income and of equity that are
required by Ind AS 101.
Since issuing the interim financial report, its management has concluded that one of
accounting policy choices applied at the interim should be changed for the full year.
How should GG Ltd. deal with the change in accounting policy under Ind AS framework?
(RTP MAY 2022)
SOLUTION :
The first annual Ind AS financial statements are prepared in accordance with the specific
requirements of Ind AS 101. Subject to certain specified exemptions and exceptions,
paragraph 7 of Ind AS 101 requires the entity to use the same accounting policies in its
opening Ind AS balance sheet and throughout all periods presented. This override Ind AS
8‛s requirements for disclosures about changes in accounting policies do not apply in an
entity‛s first Ind AS financial statements.
GG Ltd. should include an explanation of the change in policy that it has made since the
interim financial report, in the notes to the annual financial statements, in accordance
with paragraph 27A of Ind AS 101. The disclosure note is likely to include information ,
similar to what Ind AS 8 would otherwise require, to help users of the financial statements
to understand the changes that have been made. The entity should also ensure that the
reconciliations of total comprehensive income and of equity, presented in the first Ind
AS financial statements in accordance with paragraph 24 of Ind AS 101 are updated from
those included in the interim financial report to reflect the amended accounting policy
 IND AS 101: FIRST –TIME ADOPTION OF IND AS 23

QUESTION 26 (MIXED WITH IND AS 102 & IND AS 8)

On 1st April 20X1, Nuogen Ltd. had granted 1,20,000 share options to its employees with
the vesting condition being a service condition as follows:
• Vesting date : 31st March 20X2 - 80,000 share options (1-year vesting period since
grant date)
• Vesting date : 31st March 20X5 - 40,000 share options (4-year vesting period since
grant date)
Each option can be converted into one equity share of Nuogen Ltd. The fair value of the
options on grant date, i.e., on 1st April 20X1 was ` 20.
Nuogen Ltd. is required to prepare financial statements in Ind AS for the financial year
ending 31st March 20X4. The transition date for Ind AS being 1st April 20X2.
The entity has disclosed publicly the fair value of both these equity instruments as
determined at the measurement date, as defined in Ind AS 102.
The previous applicable GAAP for the entity was IGAAP (AS) and therein, the entity had
not adopted intrinsic method of valuation.
The share options have not been yet exercised by the employees of Nuogen Ltd.
How the share based payment should be reflected in, the books of Nuogen Ltd. as on
31st March 20X4, assuming that the entity has erred by not passing any entry for the
aforementioned transactions in the books of Nuogen Ltd. on grant date, i.e. 1st April 20X1?
(RTP NOV. 2022)
SOLUTION :
For 80,000 share-based options vested before transition date:
Ind AS 101 provides that a first-time adopter is encouraged, but not required, to apply
Ind AS 102 on ‘Share-based Payment‛ to equity instruments that vested before the date
of transition to Ind AS. Hence, Nuogen Ltd. may opt for the exemption given in Ind AS
101 for 80,000 share options vested before the transition date. However, since no earlier
accounting was done for these share-based options under previous GAAP too, therefore
this led to an error on the transition date, as detected on the reporting date i.e. 31st
March, 20X4. Hence, being an error, no exemption could be availed by Nuogen Ltd. on
transition date with respect to Ind AS 102.
While preparing the financial statements for the financial year 20X3 -20X4, an error has
been discovered which occurred in the year 20X1 -20X2, i.e., for the period which was
earlier than earliest prior period presented. The error should be corrected by restating
the opening balances of relevant assets and/or liabilities and relevant component of equity
for the year 20X2-20X3. This will result in consequential restatement of balances as at 1st
April, 20X2 (i.e, opening balance sheet as at 1st April, 20X2).
 24 FINANCIAL REPORTING

Accordingly, on retrospective calculation of Share based options with respect to 80,000

options, Nuogen Ltd. will create ‘Share based payment reserve (equity)‛ by ` 16,00,000 and
correspondingly adjust the same though Retained earnings.
For 40,000 share based options to be vested on 31st March, 20X5:
Since share-based options have not been vested before transition date, no option as per
Ind AS 101 is available to Nuogen Ltd. The entity will apply Ind AS 102 retrospectively.
However, Nuogen Ltd. did not account for the same at the grant date. This will result in
consequential restatement of balances as at 1st April, 20X2 (i.e, opening balance sheet as
at 1st April, 20X2). Adjustment is to be made by recognising the ‘ Share based payment
reserve (equity)‛ and adjusting the retained earnings by ` 2,00,000.
Further, expenses for the year ended 31st March, 20X3 and share based payment reserve
(equity) as at 31st March, 20X3 were understated because of non-recognition of ‘employee
benefits expense‛ and related reserve. To correct the above errors in the annual financial
statements for the year ended 31st March, 20X4, the entity should restate the comparative
amounts (i.e., those for the year ended 31 st March, 20X3) in the statement of profit and
loss. In the given case, ‘Share based payment reserve (equity)‛ would be credited by `
2,00,000 and ‘employee benefits expense‛ would be debited by ` 2,00,000
For the year ending 31st March, 20X4, ‘Share based payment reserve (equity)‛ would be
credited by ` 2,00,000 and ‘employee benefits expense‛ would be debited by ` 2,00,000.
Working Note:

Period Lot Proportion Fair value Cumulative Expenses

expenses
a b d= b x a e = d-
previous
period d
2 0 X 1 - 1 (1-year vesting 1/1 16,00,000 16,00,000 16,00,000
20X2 period)
2 0 X 1 - 2 (4-year vesting 1/4 8,00,000 2,00,000 2,00,000
20X2 period)
20X2- 2 (4-year vesting 2/4 8,00,000 4,00,000 2,00,000
20X3 period)
20X3- 2 (4-year vesting 3/4 8,00,000 6,00,000 2,00,000
20X4 period)
 IND AS 101: FIRST –TIME ADOPTION OF IND AS 25

QUESTION 27

Company A intends to restate its past business combinations with effect with from 30 June
2010 (being a date prior to the transition date). If business combinations are restated,
whether certain other exemptions, such as the deemed cost exemption for property, plant
and equipment (PPE), can be adopted?

QUESTION 28

X Ltd. was using cost model for its property, plant and equipment till March 31, 2016 under
previous GAAP. The Ind AS become applicable to the company for financial year beginning
April 1, 2016. On April 1, 2015, i.e., the date of its transition to Ind AS, it used fair value
as the deemed cost in respect of its property, plant and equipment. X Ltd. wants to follow
revaluation model as its accounting policy in respect of its property, plant and equipment
for the first annual Ind AS financial statements. Whether use of fair values as deemed cost
on the date of transition and use of revaluation model in the first annual Ind AS financial
statements would amount to a change in accounting policy?

QUESTION 29

Y Ltd is a first time adopter of Ind AS. The date of transition is April 1, 2015. On April 1,
2010, it obtained a 7 Year US $ 1,00,000 loan. It has been exercising the option provided
in Paragraph 46/46A of AS 11 and has been amortising the exchange difference in respect
of this loan over the balance period of such loan. On the date of transition to Ind AS, Y
Ltd. wants to discontinue the accounting policy as per the previous GAAP and follow the
requirements of Ind AS 21, The Effects of Changes in Foreign Exchange Rates with respect
to recognition of foreign exchange differences. Whether the Company is permitted to do
so?

QUESTION 30

A company has chosen to elect the deemed cost exemption in accordance with Ind AS
101. However, it does not wish to continue with is existing policy of capitalizing exchange
fluctuation on loan term foreign currency monetary items to fixed assets i.e. it does not
want to elect the exemption available as per Ind AS 101. In such a case, how would the
company be required to adjust the foreign exchange fluctuation already capitalised to the
cost of property, plant and equipment under previous GAAP?

QUESETION 31

Rainy Pvt Ltd. is a company registered under the Companies Act, 2013 following Accounting
Standards notified under the Companies (Accounting Standards) Rules, 2006. The company
has decided to present its first financials under Ind AS for the year ended 31st March,
2021. The transition date is 1st April, 2019.
 26 FINANCIAL REPORTING

The following adjustments were made upon transition to Ind AS:

(i) The company opted to fair value its land as on the date on transition. The fair value of
the land as on 1st April, 2019 was ` 95 lakh. The carrying amount as on 1st April, 2019
under the existing GAAP was ` 42.75 lakh.
(ii) The company has recognised a provision for proposed dividend of ` 5.7 lakh and related
dividend distribution tax of ` 1.65 lakh during the year ended 31st March, 2019. It was
written back as on opening balance sheet date.
(iii) The company had a non-integral foreign branch in accordance with AS 11 and had rec-
ognised a balance of ` 2 lakh as part of reserves. On first time adoption of Ind AS,
the company intends to avail Ind AS exemption of resetting the cumulative translation
difference to zero.
(iv) The company had made an investment in subsidiary for ` 18.62 lakh that carried a fair
value of ` 25.75 lakh as at the transition date. The company intends to recognise the
investment at its fair value as at the date of transition.
(v) The company has an Equity Share Capital of ` 760 lakh and Redeemable Preference
Share Capital of ` 180 lakh. The company identified that the preference shares were
in nature of financial liabilities.
(vi) The Reserves and Surplus as on 1st April, 2019 before transition to lnd AS was ` 910
lakh representing ` 380 lakh of general reserve and ` 40 lakh of Capital Reserve ac-
quired out of business combination and balance is surplus in the Retained Earnings.
What is the balance of total equity (Equity and other equity) as on 1 st April, 2019 after
transition to Ind AS? Show reconciliation between Total Equity as per AS (Accounting
Standards) and as per lnd AS to be presented in the opening balance sheet as on 1st April,
2019. Ignore deferred tax impact.
(8 Marks)
(CA FINAL DEC. 2021 EXAM)
SOLUTION :
Computation of balance total equity as on 1st April, 2019 after transition to Ind AS

` in lakh
Share capital- Equity share Capital 760.00
Other Equity
General Reserve 380.00
Capital Reserve 40.00
Retained Earnings (910.00 – 380.00 – 40.00) 490.00
Add: Increase in value of land (95.00 – 42.75) 52.25
 IND AS 101: FIRST –TIME ADOPTION OF IND AS 27

Add: Derecognition of proposed dividend (5.70 + 1.65) 7.35

Add: Transfer of cumulative translation difference balance to re-
tained earnings 2.00
Add: Increase in value of Investment (25.75 – 18.62) 7.13 558.73 978.73
Balance total equity as on 1st April, 2019 after transition to Ind AS 1,738.73

Reconciliation between Total Equity as per AS and Ind AS to be presented in the open-
ing balance sheet as on 1st April, 2019

` in lakh
Equity share capital 760.00
Redeemable Preference share capital 180.00
940.00
Reserves and Surplus 910.00
Total Equity as per AS 1,850.00
Adjustment due to reclassification:
Preference share capital classified as financial liability (180.00)
Adjustment due to de-recognition:
Proposed dividend not considered as liability as on 1st April, 2019
7.35
Adjustment due to re-measurement:
Increase in the value of Land due to re-measurement at fair value 52.25
Resetting of cumulative translation difference balance to zero in Ind 2.00
AS Transition date Balance Sheet
Increase in the value of investment due to re-measurement at fair value 7.13 61.38
Equity as on 1st April, 2019 after transition to Ind AS 1,738.73