CMA FINAL

CONCEPT BOOK
39TH EDITION
NEW SYLLABUS

CORPORATE FINANCIAL
REPORTING
CONTACT: 6305450878, 8247686623.
 CORPORATE FINANCIAL REPORTING

INDEX(CMA FINAL: CORPORATE FINANCIAL REPORTING , 39TH EDITION)

(NEW SYLLABUS)
S.NO CHAPTER NAME PAGE NUMBER

1. IND AS 16 PROPERTY, PLANT & EQUIPMENT 1-6

2. IND AS – 23 BORROWING COSTS 7 - 12

3. IND AS 36 IMPAIRMENT OF ASSETS 13 - 22

4. IND AS 38 INTANGIBLE ASSETS 23 - 27

5. IND AS - 115 28 - 32

6. IND AS – 116 LEASES 33 - 35

7. IND AS 102 SHARE BASED PAYMENT 36 - 42

8. ACCOUNTING OF FINANCIAL INSTRUMENTS 43 - 47

9. BUSINESS COMBINATION & RESTRUCTURING 48 - 60

10. NBFC 61 - 65

11. SUSTAINABILITY REPORTING 66 - 77

12. GOVERNMENT ACCOUNTING IN INDIA 78 - 94

CMA US 1
Contact: 9010676997, 8247686623 CMA FINAL INDEX
 IND AS 16
PROPERTY, PLANT &
EQUIPMENT
CONTACT: 90009 18237.

1
 IND AS 16 - PROPERTY, PLANT & EQUIPMENT
MEANING
Property, plant and equipment are tangible items that:
✓ are held for use in the production or supply of goods or services, for rental to others, or for
administrative purposes, and
✓ are expected to be used during more than one period

OBJECTIVE
To prescribe the accounting treatment for PPE so that understandable to the users The principal
issues in accounting for PPE are the

✓ Recognition of the assets,

✓ The determination of their carrying amounts and
✓ The depreciation charges and impairment losses to be recognised in relation to them
RECOGNITION
Cost of PPE shall be recognised as an asset if and only if

a) It is probable that future economic benefits associated with the item will flow to the entity
b) The cost of the item can be measured reliably

RECOGNITION
INITIAL RECOGNITION - (COST MODEL)

PARTICULARS AMOUNT (₹)

Purchase price XXX

(-) Trade discount/rebate but not cash discount XXX

(+) Non-refundable taxes XXX

(+) Cost directly attributable to bring the asset to it’s location XXX
and condition

✓ Employee cost
✓ Cost of preparing the site
✓ Freight and delivery cost
✓ Installation and assembly cost
✓ Costs during the test run
✓ Professional fees (Architects fees)

CMA US 1
IND AS – 16 (PPE) CMA FINAL CFR
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 (+) Estimating dismantling cost (present value) XXX

TOTAL COST OF ASSET XXXX

COST EXCLUDES

✓ Administration and general overhead

✓ Advertising and promotion cost of a new product
✓ Cost of relocating
✓ Initial losses when asset is operating at low level
✓ Incidental cost not directly related to installation

SUBSEQUENT RECOGNITION

A) COST MODEL

PARTICULARS AMOUNT (₹)

Cost XXX
(-) Depreciation XXX
(-) Impairment loss XXX

BOOK VALUE XXXX

B) REVALUATION MODEL

PARTICULARS AMOUNT (₹)

Fair value on the date of revaluation XXX
(-) Depreciation XXX
(-) Impairment loss XXX

BOOK VALUE XXXX

NOTE:

Addition of all capital expenditure to (A) or (B)

✓ expenditure which enhances the revenue generating capacity

✓ cost of replacements
✓ major inspection and overhauling expenses

CLASS OF PROPERTY, PLANT AND EQUIPMENT:

Land Land and Building Motor Vehicles

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IND AS – 16 (PPE) CMA FINAL CFR
3 FOUNDATIO
 Equipment Aircraft Furniture & Fixture

Bearer Plant Machinery Ships

Revaluation to be made for entire class of assets

If an item of property, plant and equipment is revalued, the entire class of property, plant and
equipment to which that asset belongs shall be revalued.
Treatment of surplus or deficit arising on revaluation
✓ If asset’s Carrying Amount INCREASES due to revaluation - recognised in OCI
✓ If asset’s Carrying Amount DECREASES due to revaluation - recognised in P/L
Notes:

✓ However, the increase should be credited in P/L to the extent that it reverses a revaluation
decrease of the same asset previously recognised in P/L.
✓ However, the decrease should be debited in OCI to the extent of any credit balance existing
in the revaluation surplus in respect of that asset.

The revaluation surplus (OCI) in respect of PPE transferred directly to retained earnings when the
asset is derecognized.

DEPRECIATION
Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life

Depreciable amount is the cost of an asset or other amount substituted for

cost, less its residual value

METHODS OF DEPRECIATION:

THE STRAIGHT-LINE METHOD:

Annual depreciation amount = Depreciable amount/ No. of years of useful life.

It is a constant amount.

THE REDUCING (DIMINISHING) BALANCE METHOD:

Annual depreciation is calculated at a fixed percentage on the carrying amount

The carrying amount is getting reduced over the years and at the end of useful life of the asset it
becomes equal to the estimated residual value

Here the annual depreciation amount is reducing over the years

THE UNITS OF PRODUCTION METHOD:

Annual depreciation amount = (Annual production units/ Life time production units) ×

CMA US 3
IND AS – 16 (PPE) CMA FINAL CFR
4 FOUNDATIO
 Depreciable amount

Problem 1:
X Ltd. Sets up a plant at the purchase price of ₹5,00,000 plus GST at 18% (Intra-state). Freight
paid ₹ 20,000 plus GST at 18% (Intra-state). Paid ₹10,000 as employee expenses for installation of
the planet. After the plant was put to use maintenance cost incurred ₹ 5,000. Measure the initial cost
to be recognized and pass journal. Estimated dismantling cost ₹30,000, present value ₹12,000

Sol:
An asset is recognized in the class Machinery under the item PPE in the non-current group of assets.
The initial cost of
Particulars (₹)
Purchase Price 5,00,000
Freight 20,000
Installation cost 10,000
Present value of dismantling cost 12000
5,42000
the asset is measured as —
GST and maintenance cost not to be recognized in initial cost of asset.
Particulars (₹) (₹)
Machinery A/c Dr. 5,42,000
Input CGST A/c Dr. 46,800
Input SGST A/c Dr. 46,800
Maintenance Exp. A/c Dr. 5,000
To, Bank A/c 6,28,600
To Liability for Dismantling A/c 12,000
WORKING NOTE:
GST State (9%) Central
(9%)
On ₹5,00,000 ₹45,000 ₹45,000
On ₹ 20,000 ₹1,800 ₹1,800
Total ₹46,800 ₹46,800
Problem 2:
A Ltd. Purchased an aircraft at a price of ₹6,300 crores that requires major inspection and
overhauling very 4 years. The estimated life of the aircraft is 15 years. The aircraft was purchased in
2015 and major inspection and overhauling made in 2019 at a cost of ₹ 100 crores. In 2020 A Ltd.
Further incurred repair and maintenance in the engine to raise it capacity by 10% amounting to ₹

CMA US 4
IND AS – 16 (PPE) CMA FINAL CFR
5 FOUNDATIO
70 crores. One worn out component in the wing was replaced in2020 at a cost of ₹ 80 crores. The
carrying amount of the old component was ₹ 30 crores. Scrap realized ₹ 12 crores. find the amount
to be recognized as expense and as asset in 2019 and in 2020 and also show the carrying amount.
The aircraft residual value is estimated at ₹ 300 crores

Additional questions
Problem 1:
Pluto Ltd owns land and building which are carried in its balance sheet at an aggregate carrying
amount of 10 million. The fair value of such asset is 15 million. It exchanges the land and building
for a private jet, which has a fair value of cash. Apply necessary provisions of Ind AS 16 for the above
transactions and pass journal entry for the Same
Sol:
Provided that the transaction has commercial substance, the entity should recognize the private jet at
a cost of 18 million (being 15 million plus 3 million cash) and should recognize a profit on disposal
of the land and building of 5 million, calculated as follow

(000)
Recognition of fair value of asset acquired (15,000 + 3,000) 18,000
Less: Carrying amount of land and building disposed (10,000)
Cash Paid (3,000)
Profit on exchange of assets 5,000

The required journal entry is therefore as follow:

Property, Plant and Equipment (Private Jet) Dr. 18,000
To Property, Plant and Equipment 10,000
(Land and Building)

To Cash 3,000
To Profit on exchange of assets 5,000

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IND AS – 16 (PPE) CMA FINAL CFR
6 FOUNDATIO
 IND AS – 23 BORROWING COSTS
Scope:
The objective of IND AS 23 is accounting for borrowing costs.
It does not deal with the actual or imputed cost of owners’ equity, including preference share
capital not classified as a liability.

Borrowing cost:
Borrowing costs are interest and other costs incurred by an enterprise in connection with the
borrowing of funds.

It includes

a) Interest and commitment charges.

b) Ancillary cost relating to borrowings.
c) Finance charges for asset acquired on finance lease.
d) Exchange differences. **(discuss later)
e) Amortisation of discount/premium on borrowings.
Qualifying asset
A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its
intended use or sale. (generally 12 months)

Examples of qualifying assets

• Manufacturing plants,
• Power generation facilities,
• Inventories that require a substantial period of time to bring them to a saleable condition
• Investment properties
• Construction of building

Recognition of borrowing cost

Borrowing cost are the costs directly related to
• Acquisition
• Construction
• Production of qualifying asset then it should be capitalised.

Borrowing costs are capitalised as part of the cost of a qualifying asset

a) when it is probable that they will result in future economic benefits to the enterprise and
b) the costs can be measured reliably.
Note: Other borrowing costs are charged to P&L

7
Period of capitalisation

a) When to start capitalisation?

b) When to suspend?
c) When to stop?
Commencement of capitalisation

Capitalisation of borrowing cost should commence when all the following conditions are satisfied

a) Expenditure on qualifying asset being incurred.

b) Borrowing cost are being incurred
c) Activities are in progress. (which are necessary to make the asset for its intended
use or sale)
IF NOT – CHARGED TO P&L

Physical construction
Technical and administrative work prior to the commencement of physical
construction (obtaining approval from local authorities, designing)

Suspension of capitalisation

Capitalisation of borrowing cost should be suspended when there is NO ACTIVE DEVELOPMENT OR

ACTIVE DEVELOPMENT IS INTERRUPTED

Except

Technical work Such temporary

carried out is delay is necessary
carried out for asset ready

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IND AS – 23 CMA FINAL CFR
8 FOUNDATIO
Cessation of capitalisation
Capitalisation of borrowing cost should be stopped when substantially all necessary activitiesare
complete (asset ready for use)
When a qualifying asset is completed in parts- stop capitalisation for part asset if it is capable of
being used while construction continues for other parts.

Types of borrowings:

1. Specific borrowings
2. General borrowings

Specific borrowings
When an enterprise borrows funds specifically for the purpose of obtaining a particular qualifying
asset, the borrowing costs that directly relate to that qualifying asset can be readily identified.

Calculation of amount to be capitalised

Particulars Amount (₹)

Actual borrowing cost xxx

(-) Income on temporary investment xxx

Amount to be capitalised xxx

General borrowings:
Steps to calculate the borrowing cost to be capitalized

1. Calculation of capitalization rate:

The capitalization rate should be the weighted average of the borrowing costs applicable to the
borrowings of the enterprise that are outstanding during the period, other than specific borrowings

𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝒃𝒐𝒓𝒓𝒐𝒘𝒊𝒏𝒈 𝒄𝒐𝒔𝒕 𝒊𝒏𝒄𝒖𝒓𝒓𝒆𝒅 𝒅𝒖𝒓𝒊𝒏𝒈 𝒕𝒉𝒆 𝒚𝒆𝒂𝒓

Capitalization rate =
𝑨𝒈𝒈𝒓𝒆𝒈𝒂𝒕𝒆 𝒂𝒗𝒆𝒓𝒂𝒈𝒆 𝒐𝒖𝒕𝒔𝒕𝒂𝒏𝒅𝒊𝒏𝒈 𝒃𝒐𝒓𝒓𝒐𝒘𝒊𝒏𝒈𝒔

2. Calculation of average outstanding borrowings:

𝑵𝒐 𝒐𝒇 𝒎𝒐𝒏𝒕𝒉𝒔 𝒐𝒖𝒕𝒔𝒕𝒂𝒏𝒅𝒊𝒏𝒈
Average outstanding borrowings = Amount of borrowings x
𝟏𝟐

3. Calculation of Interest to be capitalized:

CMA US 2
IND AS – 23 CMA FINAL CFR
9 FOUNDATIO
NOTE:

**Exchange differences arising from foreign currency borrowings to the extent they are regarded
as an adjustment to borrowing cost**

With regard to exchange difference required to be treated as borrowing costs the manner of arriving
at the adjustments stated therein shall be as follows:
(i) The adjustment should be of an amount which is equivalent to the extent to which the

exchange loss does not exceed the difference between the cost of borrowing in functional

currency when compared to the cost of borrowing in a foreign currency.

(ii) where there is an unrealized exchange loss which is treated as an adjustment to interest and
subsequently there is a realized or unrealized gain in respect of the settlement or translation

of the same borrowing, the gain to the extent of the loss previously recognized as an adjustment

should also be recognized as an adjustment to interest.

Disclosures

The financial statements should disclose:

The accounting policy adopted for borrowing costs; and

The amount of borrowing costs capitalized during the period.

Problem 1:
X Ltd began construction of a new building on 1st January, 20X1 It obtained ₹ 1 lakh special loan to
finance the construction of the building on 1st January, 20X1 at an interest rate of 10%The
company’s other outstanding two non-specific loans were
Amount(₹) Rate of Interest

5,00,000 11%

9,00,000 13%

The expenditures that were made on the building project were as follows:

January 20X1 2,00,000

April 20X1 2,50,000

CMA US 3
IND AS – 23 CMA FINAL CFR
10 FOUNDATIO
 July 20X1 4,50,000

December 20X1 1,20,000

Building was completed by 31st December 20X1 Following the principles prescribed in AS 16
‘BorrowingCost Calculate the amount of interest to be capitalised and pass one Journal Entry for
capitalising thecost and borrowing cost in respect of the building?
Sol:
i) Computation of weighted average accumulated expenses

2,00,000 x 12 / 12 = 2,00,000

2,50,000 x 9 / 12 = 1,87,500

4,50,000 x 6 / 12 = 2,25,000

1,20,000 x 1 / 12 = 10,000

6,22,500

ii) Calculation of weighted average interest rate other than for specific borrowing:

Amount of loan (₹) Rate of Amount of

interest interest (₹)

5,00,000 11% = 55,000

9,00,000 13% = 1,17,000

14,00,000 1,72,000

Weighted average rate of interest = 12 285%

(approximately)

iii)Calculation of interest to be capitalized as per AS 16

Specific borrowings (₹ 1,00,000 x 10%) = 10,000

Non-specific borrowings (₹ 5,22,500 x 12.285%) =
64,189
Amount of interest to be capitalized =
74,189

Problem 2:
Alpha Ltd on 1st April, 20X1 borrowed 9% ₹ 30,00,000 to finance the construction of two
qualifyingassets Construction started on 1st April, 20X1 The loan facility was availed on 1st April,
20X1 and was utilized as follows with remaining funds invested temporarily at 7%
CMA US 4
IND AS – 23 CMA FINAL CFR
11 FOUNDATIO
 Factory Office
Building Building

1st April, 20X1 5,00,000 10,00,000

1st October, 20X1 5,00,000 10,00,000

Calculate the cost of the asset and the borrowing cost to be capitalized
Sol:
Particulars Factory Building Office Building

Borrowing Costs (10,00,000 x 9%) (20,00,000 x 9%)

90,000 1,80,000

Less: Investment (5,00,000 x 7% x 6/12) (10,00,000x7% x 6/12)

Income (17,500) (35,000)

72,500 1,45,000

Cost of the asset:

Expenditure 10,00,000 20,00,000

incurred Borrowing 72,500 1,45,000
Costs
Total 10,72,500 21,45,000

CMA US 5
IND AS – 23 CMA FINAL CFR
12 FOUNDATIO
 IND AS 36
IMPAIRMENT OF ASSETS

CONTACT: 90009 18237.

13
 IND AS 36 – IMPAIRMENT OF ASSETS
OBJECTIVE
✓ ensuring that assets are carried at no more than their recoverable amount
✓ when an impairment loss should be reversed

SCOPE

✓ This Standard shall be applied in accounting for the impairment of all assets, other than:
✓ INVENTORIES (as covered in IND AS 2)
✓ Contract assets and assets arising from costs to obtain or fulfill a contract (Ind AS 115)
✓ Deferred tax assets (Ind AS 12)
✓ Assets arising from employees benefits (Ind AS 19)
✓ Biological assets measured at fair value less than cost to sell (IND AS 41)
✓ Deferred acquisition costs and intangible assets arising from insurance contracts (Ind AS 104)
✓ Non-current assets (or disposal groups) classified as held for sale (as covered in Ind AS 105)
✓ Financial Assets (within the scope of Ind AS 109)

The following are the key terms used in this standard:

✓ Carrying amount is the amount at which an asset is recognised after deducting any
accumulated depreciation (amortisation) and accumulated impairment losses thereon
✓ A cash-generating unit is the smallest identifiable group of assets that generates cash inflows
that are largely independent of the cash inflows from other assets or groups of assets
✓ Corporate assets are assets other than goodwill that contribute to the future cash flows of both
the cash-generating unit under review and other cash-generating units
✓ Costs of disposal are incremental costs directly attributable to the disposal of an asset or cash-
generating unit, excluding finance costs and income tax expense
✓ Depreciable amount is the cost of an asset, or other amount substituted for cost in the
financial statements, less its residual value
✓ Depreciation (Amortisation) is the systematic allocation of the depreciable amount of an
asset over its useful life
✓ Fair value is the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date (refer Ind AS
113 Fair Value Measurement)

impairment loss is the amount by which the carrying amount of an asset or a cash- generating
unit exceeds recoverable amount

CMA US 1
IND AS – 36 CMA FINAL CFR
14 FOUNDATIO
 Carrying Recoverable Impairment
Amount Amount Loss

The recoverable amount of an asset or a cash-generating unit is the higher of its fair value less costs
of disposal and its value in use

Useful life is either:

a) The period of time over which an asset is expected to be used by the entity; or

b) The number of production or similar units expected to be obtained from the asset by the entity

Value in use is the present value of the future cash flows expected to be derived from an asset
or cash-generating unit

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 is required to estimate the
recoverable amount of the asset
Irrespective of whether there is any indication of impairment, an entity is required to test following
items for impairment at least annually:

➢ Intangible asset with an indefinite useful life

➢ Intangible asset not yet available for use

➢ Goodwill acquired in a business combination for impairment annually

(a) Recoverable amounting determined for an individual asset.

If the asset does not generate cash inflows that are largely independent of those from other
assets the recoverable amount is determined for cash generating unit to which the asset
belongs.
(b) A cash generating unit is the smallest identifiable group of assets that generates cash
inflows that are largely independent of cash in flows from other assets or group of assets.
(c) The recoverable amount of an asset or a Cash Generating Unit (CGU) is measured whenever
there is an indication that the asset may be impaired.
(d) At each reporting date an entity assesses whether there is any indication that an asset (or)
CGU) may be impaired.
(e) The recoverable amount of the following assets we measured annually.
(i) An intangible asset with an indefinite useful life.
(ii) An intangible asset not yet available for use
(iii) Goodwill

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IND AS – 36 CMA FINAL CFR
15 FOUNDATIO
(f) The recoverable amount of an asset or a cash generating unit is the higher of its fair value
less costs to sell and its value in use.

An impairment loss is the excess of the carrying amount over the recoverable amount and it
is recognized in P & L a/c immediately, unless the asset is carried at revalued amount in
(a) which case any impairment loss of a revalued asset should be treated as a revaluation
decrease to the extent of the carrying amount revaluation profit.
(b) After the recognition of an impairment loss, depreciation (or amortization) change for the
asset will be calculated based on the revised carrying amount and its remaining useful life.
(c) When impairment loss is computed for a cash generating unit, it should be allocated to
reduce the carrying amount of the assets of the CGU in the following order.

First, to goodwill (to the extent of the carrying amount of goodwill).

Then to all other assets of the unit in pro-rata basis on the carrying amount of the assets of the
unit. Thus impairment loss in always shown as deduction from individual assets even when it is
measured on the CGU.
In case of assets of a CGU, for allocation of the impairment loss the revised carrying amount of the
assets should not be reduced below the highest of the following
(i) its net selling price
(ii) its value in use
(iii) zero
If the allocation of impairment loss cannot be made fully, the unallocated part shall again be re-
allocated to other assets pro- rata
PROBLEM 1:
An entity has the following assets with relevant data on the reporting data:(₹ in Lakhs)

Assets Carrying Fair value less cost to Value-in-

Amount sell use
A 280 300 250
B 460 400 390
C 220 240 270
D 180 150 170
E 100 80 —

Assets C and D were revalued before. The carrying amounts of revaluation surplus are ₹ 40 Lakhs and
₹ 30 Lakhs respectively. Asset E falls in the cash generating unit consisting of goodwill ₹ 50 Lakhs
and intangible asset 90. The fair value less cost to sell of the CGU is ₹ 180 Lakhs and value-in-use
is ₹ 170 Lakhs.

CMA US 3
IND AS – 36 CMA FINAL CFR
16 FOUNDATIO
Determine impairment loss and revised carrying amount of all the assets stated above. Show the
accounting
SOL:
Asset Recoverable Impairment Revised Carrying
Amount Loss Amount
A 300 — 280

B 400 60 400
C 270 — 220
D 170 10 170
CGU 180 60 180
Goodwill 50 NIL
Intangible asset 4.74 85.26
E 5.26 94.74
Working Note:
CGU consist of : (₹ in lakhs)

Goodwill 50
In-Tangible 90
Asset E 100
Carrying Amount 240
Recoverable 180
Amount

Problem 2:
ABC Ltd. has three cash-generating units: A, B and C, the carrying amounts of which as on 31st
March, 20X1 are as follows

Cash-generating units Carrying amount (₹ in crore) Remaining useful

life

A 500 10
B 750 20
C 1100 20

ABC Ltd. also has two corporate assets having a remaining useful life of 20 years.

(₹ in crore)
Corporate asset Carrying amount Remarks

CMA US 4
IND AS – 36 CMA FINAL CFR
17 FOUNDATIO
 X 600 The carrying amount of X can be
allocated on a reasonable basis
(i.e., pro rata basis) to the
individual cash-generating units.
Y 200 The carrying amount of Y cannot be
allocated on a reasonable basis to
the individual cash- generating
units.

Recoverable amount as on 31st March, 20X1 is as follows:

Cash-generating units Recoverable amount (₹ in

crore)
A 600
B 900
C 1,400
ABC Ltd. 3,200

Calculate the impairment loss, if any. Ignore decimals

SOL:
Allocation of corporate assets
The carrying amount of X is allocated to the carrying amount of each individual cash- generating
unit. A weighted allocation basis is used because the estimated remaining useful life of A’s cash-
generating unit is 10 years, whereas the estimated remaining useful lives of B and C’s cash-
generating units are 20 years

CMA US 5
IND AS – 36 CMA FINAL CFR
18 FOUNDATIO
 (₹ in crore)
Particulars A B C Total
Carrying amount 500 750 1,100 2,350
Useful life 10 years 20 years 20 years —
Weight based on useful life 1 2 2 —
Carrying amount

(after assigning

weight) 500 1,500 2,200 4,200

Pro-rata allocation of X 12% 36% 52% 100%
(500/4,200) (1,500/4,200) (2,200/4,200)

Allocation of carrying 72 216 312 600

amount of X
Carrying amount 572 966 1,412 2,950
(after allocation of
X)

Calculation of impairment loss

Step I: Impairment losses for individual cash-generating units and its allocation
Impairment loss of each cash-generating units

(₹ in crore)

Particulars A B C

Carrying amount 572 966 1,412

(after allocation of X)

RA 600 900 1400

Impairment loss 66 12

Allocation of the impairment loss

(₹ in crore)
Allocation to B C
X 15 (66 x 216/966) 3 (12 x312/1,412)

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IND AS – 36 CMA FINAL CFR
19 FOUNDATIO
 Other assets 51 (66 x 750/966) 9 (12 x 1,100/1,412)
in CGU
Impairment
loss 66 12

Impairment losses for the larger cash-generating unit, i.e., ABC Ltd. as a whole

(₹ in crore)

Particulars A B C X Y ABC Ltd.

Carrying amount 500 750 1,100 600 200 3,150

Impairment loss (Step - (51) (9) (18) - (78)

I)

Carrying amount (after 500 699 1,091 582 200 3,072

Step I)

Recoverable amount 3,200

Impairment loss for the ‘larger’ Nil

cash- generating unit

Problem 3:
Mars Ltd. gives the following estimates of cash flows relating to property, plant and equipment on
31st March, 20X4. The discount rate is 15%

Year Cash Flow ( in

lakh)
20X4-20X5 2,000
20X5-20X6 3,000
20X6-20X7 3,000
20X7-20X8 4,000
20X8-20X9 2,000
Residual Value at 31st March, 20X9 500

Property, plant & equipment was purchased on 1st April, 20X1 for
20,000 lakh Useful Life was 8 Years
Residual Value estimated at the end of 8 years 500 lakh
Fair value less cost to disposal 10,000 lakh

CMA US 7
IND AS – 36 CMA FINAL CFR
20 FOUNDATIO
 Calculate impairment loss, if any on the property, plant and equipment. Also calculate
the revised carrying amount and revised depreciation of property, plant and equipment
Sol:
Calculation of Carrying Amount on 31st March, 20X4 ( in lakh)

Particular Amount
Original Cost on 1st April, 20X1 [20000-500]*3/8 20,000

Less: Depreciation
(7,313)
Carrying Amount 12,687

Calculation of Value in Use

Year Cash Flows P.V. Amount

20X4-20X5 2,000 .870 1,740
20X5-20X6 3,000 .756 2,268
20X6-20X7 3,000 .658 1,974
20X7-20X8 4,000 .572 2,288
20X8-20X9 (including residual 2,500 .497 1,243
value)
Total 9,513

Calculation of Recoverable Amount

Particular Amount

Value in Use 9,513

Fair value less costs of disposal 10,000
Recoverable Amount 10,000

Calculation of Impairment Loss

Carrying Amount – Recoverable Amount 12,687 – 10,000 = 2,687

Calculation of Revised Carrying Amount

Particular Amount

Carrying Amount 12,687

Less: Impairment Loss (2,687)
Revised Carrying Amount 10,000
Calculation of Revised Depreciation
Revised Carrying Amount – Residual Value
Remaining life

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 =10000-500/2 = 1900

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 IND AS 38
INTANGIBLE ASSETS

CONTACT: 90009 18237.

23
 IND AS 38 – INTANGIBLE ASSETS
OBJECTIVE:
The objective of this Standard is to prescribe the accounting treatment for intangible assets that are
not dealt with specifically in another Standard
This standard deals with accounting treatment for IA

Recognition of IA

An intangible asset, it should be recognised if, and only if:

a) It is probable that the expected future economic benefits that are attributable to the asset
will flow to the entity; and
b) The cost of the asset can be measured reliably Cost of Intangible asset The cost of a
separately acquired intangible asset comprises:

Particulars Amount

Purchase price xxx

(-) trade discount/rebate (xxx)

(+) import duties and other taxes xxx

(+) Registration charges xxx

(+) non refundable taxes xxx

(-) government grants as per AS 12 (xxx)

(+) directly attributable cost xxx

Cost of IA xxx

Following costs should not be capitalised

1. Selling overheads
2. Administration overheads
3. Initial operating losses
4. Abnormal loss of material

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 Amortisation

Meaning Begin Cease

Allocation of the Earlier of the date

depreciable amount - when asset is
of an intangible When the asset is classified as held for
asset with a finite available for use sale
useful life on a
systematic basis over - when asset is
it's useful life derecognised

By sale

On disposal By entering into

finance lease
Retirement and
disposal of intangible
assets When no future
economic benefits By donation
are expected from
it's use or disposal

An intangible asset shall be

derecognised

Gain or Loss = Net disposal proceeds -

Carrying amount of the asset

Recognised in profit or loss when the

asset is derecognised

Gains shall not be classified as revenue

PROBLEM 4
Expenditure on a new production process in 20X1-20X2:

1st April to 31st December 2,700

1st January to 31st March 900
3,600
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The production process met the intangible asset recognition criteria for development
on 1st January, 20X2. The amount estimated to be recoverable from the process is ₹ 1,000.
Expenditure incurred for development of the process in FY 20X2-20X3 is ₹ 6,000. Asset was brought
into use on 31st March, 20X3 and is expected to be useful for 6 years.
What is the carrying amount of the intangible asset at 31st March, 20X2 and 31st March, 20X3. Also
determine the charge to profit or loss for 20X1-20X2?
At 31st March, 20X4, the amount estimated to be recoverable from the process is ₹ 5,000.
What is the carrying amount of the intangible asset at 31st March, 20X4 and the charge to profit or
loss for 20X3-20X4 on account of impairment loss?
Sol:

1) Expenditure to be transferred to profit or loss in 20X1-20X2

Total Expenditure ₹ 3,600

Less: Expenditure during development phase (900)

Expenditure to be transferred to profit or loss 2,700
2) Carrying amount of intangible asset on 31st March, 20X2
Expenditure during Development Phase will be capitalised ₹ 900
(Recoverable amount is higher being ₹ 1,000, hence no impairment)
3) Carrying amount of intangible asset on 31st March, 20X3
Carrying amount of intangible asset on 31st March, 20X2 ₹ 900
Add: Further expenditure during development phase 6,000
Total capital expenditure on development phase 6,900
4) Expenditure to be charged to profit or loss in 20X3-20X4
Opening balance of Intangible Asset 6,900
Less: Amortisation for the year (6,900 / 6) (1,150)
Carrying amount of intangible asset 5,750
Less: Recoverable Amount (5,000)
Amount charged to profit or loss (Impairment Loss) 750
5) Carrying Amount of Intangible Asset on 31st March, 20X4

Value of Intangible Asset will be recoverable amount i.e. ₹ 5000

PROBLEM 5
Limited engaged in the business of manufacturing fertilisers entered into a technical collaboration
agreement with a foreign company Y Limited. As a result, Y Limited would provide the technical know-
how enabling X Limited to manufacture fertiliser in a more efficient way. X Limited paid
₹ 10,00,00,000 for the use of know-how for a period of 5 years. X Limited estimates the production of
fertiliser as follows:
Year (In metric tons)

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 1 50,000
2 70,000
3 1,00,000
4 1,20,000
5 1,10,000
At the end of the 1st year, it achieved its targeted production. At the end of 2nd year, 65,000 metric
tons of fertiliser was being manufactured, and X Limited considered to revise the estimates for the
next 3 years. The revised figures are 85,000, 1,05,000 and 1,15,000 metric tons for year 3, 4 & 5
respectively.
How will X Limited amortise the technical know-how fees as per Ind AS 38?
Sol:
Based on the above data, it may be suitable for X Ltd. to use unit of production method for
amortisation of technical know-how.
The total estimated unit to be produced 4,50,00 MT. The technical know-how will be amortised on the
basis of the ratio of yearly production to total production.
The first year charge should be a proportion of 50,000/4,50,000 on ₹ 10,00,00,000 = ₹ 1,11,11,111.

At the end of 2nd year, as per revised estimate the total number of units to be produced in future are
3,70,000 MT (ie 65,000 + 85,000 + 1,05,000 + 1,15,000).
The amortisation for second year will be 65,000 / 3,70,000 on (10,00,00,000 – 1,11,11,111) ie 1,56,15,615.
Amortisation for remaining years (unless the estimates are again revised) :
Year 3 = 85,000 / 3,70,000 on (10,00,00,000 – 1,11,11,111) i.e. ₹ 2,04,20,420
Year 4 = 1,05,000 / 3,70,000 on (10,00,00,000 – 1,11,11,111) i.e. ₹ 2,52,25,225
Year 5 = 1,15,000 / 3,70,000 on (10,00,00,000 – 1,11,11,111) i.e. ₹ 2,76,27,629

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 IND AS - 115

CONTACT: 90009 18237.

28
 IND AS 115 - REVENUE FROM CONTARCT WITH CUSTOMERS
PROBLEM 1 (MODIFICATION)
An entity promises to sell 120 products to a customer for ` 120,000 (` 1,000 per product). The products
are transferred to the customer over a six-month period. The entity transfers control of each product
at a point in time. After the entity has transferred control of 60 products to the customer, the
contract is modified to require the delivery of an additional 30 products (a total of150 identical
products) to the customer at a price of ` 950 per product which is the standalone selling price for
such additional products at the time of placing this additional order. The additional 30 products
were not included in the initial contract.

It is assumed that additional products are contracted for a price that reflects the stand -alone
selling price.
Determine the accounting for the modified contract?
SOL:
When the contract is modified, the price of the contract modification for the additional 30 products
is an additional ` 28,500 or ` 950 per product. The pricing for the additional products reflects the
stand-alone selling price of the products at the time of the contract modification and the
additional products are distinct from the original products.
Accordingly, the contract modification for the additional 30 products is, in effect, a new and
separate contract for future products that does not affect the accounting for the existing contract and
` 950 per product for the 30 products in the new contract.
PROBLEM 2 (MODIFICATION)
Growth Ltd enters into an arrangement with a customer for infrastructure outsourcing deal.
Based on its experience, Growth Ltd determines that customising the infrastructure will take
approximately 200 hours in total to complete the project and charges 150 per hour.
After incurring 100 hours of time, Growth Ltd and the customer agree to change an aspect of the
project and increase the estimate of labour hours by 50 hours at the rate of 100 per hour.
Determine how contract modification will be accounted for as per Ind AS 115?
SOL:
Considering that the remaining goods or services are not distinct, the modification will be accounted
for on a cumulative catch up basis, as given below:

Particulars Hours Rate ( ) Amount ( )

Initial contract amount 200 150 30,000
Modification in contract 50 100 5,000
Contract amount after 250 140* 35,000
modification
Revenue to be 100 140 14,000
recognized
Revenue already booked 100 150 15,000

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 Adjustment in revenue (1,000)

*35,000 / 250 = 140

PROBLEM 8 (STEP 2)
An entity provides broadband services to its customers along with voice call service.

Customer buys modem from the entity. However, customer can also get the connection from the
entity and modem from any other vendor. The installation activity requires limited effort and the
cost involved is almost insignificant. It has various plans where it provides either broadband services
or voice call services or both.
Are the performance obligations under the contract distinct?
SOL:
Entity promises to customer to provide
❖ Broadband Service
❖ Voice Call services
❖ Modem
Entity’s promise to provide goods and services is distinct if
❖ customer can benefit from the goods or service either on its own or together with other
resources that are readily available to the customer, and
❖ entity’s promise to transfer the goods or service to the customer is separately
identifiable from other promises in the contract
For broadband and voice call services -

❖ Broadband and voice services are separately identifiable from other promises as
company has various plans to provide the two services separately. These two services
are not dependant or interrelated. Also the customer can benefit on its own from the
services received.
For sale of modem -
❖ Customer can either buy product from entity or third party. No significant
customisation or modification is required for selling product.
Based on the evaluation we can say that there are three separate performance obligation: -
❖ Broadband Service
❖ Voice Call services
❖ Modem
PROBLEM 14 (STEP 3)
AST Limited enters into a contract with a customer to build a manufacturing facility. The entity
determines that the contract contains one performance obligation satisfied over time.

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Construction is scheduled to be completed by the end of the 36th month for an agreed-upon price
of25 crore.
The entity has the opportunity to earn a performance bonus for early completion as follows:

• 15 percent bonus of the contract price if completed by the 30th month (25% likelihood)

• 10 percent bonus if completed by the 32nd month (40% likelihood)

• 5 percent bonus if completed by the 34th month (15% likelihood)

In addition to the potential performance bonus for early completion, AST Limited is entitled to a
quality bonus of 2 crore if a health and safety inspector assigns the facility a gold star rating as
defined by the agency in the terms of the contract. AST Limited concludes that it is 60% likely that
it will receive the quality bonus.
Determine the transaction price

PROBLEM 20 (STEP 4)

An entity regularly sells Products X, Y and Z individually, thereby establishing the following stand-
alone selling prices

Product Stand-alone selling

price

Product X 50,000
Product Y 25,000
Product Z 45,000
Total 1,20,000

In addition, the entity regularly sells Products Y and Z together for50,000. Case A—Allocating a
discount to one or more performance obligations
The entity enters into a contract with a customer to sell Products X, Y and Z in exchange for
100,000. The entity will satisfy the performance obligations for each of the products at different points
in time; or Product Y and Z at same point of time. Determine the allocation of transaction price to
Product Y and Z.

Case B—Residual approach is appropriate

The entity enters into a contract with a customer to sell Products X, Y and Z as described in Case
A. The contract also includes a promise to transfer Product Alpha. Total consideration in the
contract is 130,000. The stand-alone selling price for Product Alpha is highly variable because the
entity sells Product Alpha to different customers for a broad range of amounts ( 15,000 – 45,000).

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Determine the stand-alone selling price of Products, X, Y, Z and Alpha using the residual approach.
Case C—Residual approach is inappropriate
The same facts as in Case B apply to Case C except the transaction price is 1,05,000 instead of
130,000

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 IND AS – 116
LEASES
CONTACT: 90009 18237.

33
 IND AS 116 - LEASES
PROBLEM 1 (LESSE ACCOUNTING)

Entity L enters into a lease for 10 years, with a single lease payment payable at the beginning of each
year. The initial lease payment is ` 100,000. Lease payments will increase by the rate of LIBOR each
year. At the date of commencement of the lease, LIBOR is 2 per cent.

Assume that the interest rate implicit in the lease is 5 per cent. How is lease liability initially
measured?
SOL:

In the given case, the lease payments depend on a rate (i.e., LIBOR) and hence is included in
measuring lease liability. As per Ind AS 116, the lease payments should initially be measured using
the rate (i.e. LlBOR) as at the commencement date. LIBOR at that date is 2 per cent; therefore,
in measuring the lease liability, it is assumed that each year the payments will increase by 2 per
cent, as follows:

Year Lease Discount factor PV of lease payments

Payment @ 5%
1 1,00,000 1 100,000
2 1,02,000 0.952 97,102
3 1,04,040 0.907 94,364
4 1,06,121 0.864 91,689
5 1,08,243 0.823 89,084
6 1,10,408 0.784 86,560
7 1,12,616 0.746 84,012
8 1,14,869 0.711 81,672
9 1,17,166 0.677 79,321
10 1,19,509 0.645 77,083
8,80,887

Therefore, the lease liability is initially measured at ` 8,80,887

PROBLEM 2
Entity Y and Entity Z execute a 12-year lease of a railcar with the following terms on 1 January, 20X1:
 The lease commencement date is 1 February 20X1.
Entity Y must pay Entity Z the first monthly rental payment of ` 10,000 upon execution of the
lease.
 Entity Z will pay Entity Y ` 50,000 cash incentive to enter into the lease payable upon lease
execution.
Entity Y incurred ` 1,000 of initial direct costs, which are payable on 1 February 20X1. Entity Y
calculated the initial lease liability as the present value of the lease payments discounted using

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34 FOUNDATIO
its incremental borrowing rate because the rate implicit in the lease could not be readily
determined; the initial lease liability is ` 8,50,000.
How would Lessee Company measure and record this lease?
SOL:
Entity Y would calculate the right-of-use asset as follows: `

Initial measurement of lease liability 8,50,000

Lease payments made to Entity Z at or before the commencement date 10,000

Lease incentives received from Entity Z (50,000)

Initial direct cost 1,000
Initial measurement of right-of-use asset 8,11,000

PROBLEM 3 (LESSOR AND LESSE BOOKS)

Lessor Y leases out an equipment (carrying amount ₹ 1,36,000 having 5 years life) to Lessee X for 3
years for annual payment of ₹ 50,000 (at the end of every year) and residual value of ₹50,000,
guaranteed by X up to loss of₹ 30,000. Interest rate implicit is 10%. At the end of the lease the
equipment is valued at ₹ 33,000. Show accounting in books of X. Interest rate implicit in lease
payments is 10%. At the end of the lease the equipment is valued at ₹ 33,000. Show accounting of
lease classified as finance lease in books of Y. The rate of interest income on the net investment in
lease, however, is 19.274%.
PROBLEM 4 – UNEARNED FINANCE INCOME

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 IND AS 102
SHARE BASED PAYMENT

CONTACT: 90009 18237.

36
 IND AS 102 – SHARE BASED PAYMENT
Scope:

Share based payments cover all forms of share-based payment for the goods as-well-as for the
services supplied to the reporting entity, including:

employee share or share option schemes;

share-based payments to parties other than employees that have supplied goods or services to the
entity;
payments to be settled in cash or other assets at amounts that depend on share values, e g , share
appreciation rights

Share-based payment is a transaction in which the entity receives goods or services either as
consideration for its equity instruments or by incurring liabilities for amounts based on the price of
the entity’s shares or other equity instruments of the entity.
Definitions:
• Grant: Grant of the option means giving an option to the employees to subscribe to the shares of
the company.

• Vesting: It is the process by which the employee is given the right to apply for shares of the company
against the option granted to him in purchase of employee in pursuance of employee stock option
scheme (ESOS).

• Vesting Period: It is the time period during which the vesting of the option granted to the employee
in pursuance of ESOS takes place.

• Option: Option means a right but not an obligation granted to an employee in pursuance of ESOS to
apply for shares of the company at a pre-determined price.

• Exercise Period: It is the time period after vesting within which the employee should exercise his
right to apply for shares against the option vested in him in pursuance of the ESOS.

• Exercise Price: It is the price payable by the employee for exercising the option granted to him in
pursuance of ESOS.

• Intrinsic Value: It is the excess of the market price of the share under ESOS over the exercise price
of the option (including up-front payment, if any).

• Fair Value: It is the amount for which stock option granted or a share offered for purchase could be
exchanged between knowledgeable, willing parties in an arm’s length transaction.
TYPES OF SBP: 3 types

DETERMINING TYPES OF CONDITION AND THEIR IMPACT

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37 FOUNDATIO
Types of conditions:
1. Vesting conditions
a) Service
b) Performance
- market related
- non-market related
2. Non - Vesting conditions
Impact of conditions:
Service condition and non-market conditions
If these conditions are not met, the expense previously recognised shall be reversed.
Market condition and non-market conditions
The entity shall recognise the expense even if these conditions are satisfied are not satisfied,
provided other vesting conditions are satisfied

NOTE:
In case of cash option, sometimes in questions they may give year ending fair value of shares , but
not options, then we have to reduce exercise price from fair value at end of each year.

PBROBLEMS

Problem 1

ABC Limited granted to its employees, share options with a fair value of ₹ 5,00,000 on 1st April, 20X0,
if they remain in the organization upto 31st March, 20X3. On 31st March, 20X1, ABC Limited
expects only 91% of the employees to remain in the employment. On 31st March, 20X2, company
expects only 89% of the employees to remain in the employment. However, only 82% of the employees
remained in the organisation at the end of March, 20X3 and all of them exercised their options. Pass
the Journal entries?

Sol:
Calculation of employee benefit expenses
Particulars Year 1 Year 2 Year 3

Total employee benefit expense ₹ 5,00,000 ₹ 5,00,000 ₹ 5,00,000

Vesting period 3 years 3 years 3 years

Expected % of employees 91% 89% 82%

vesting

Expense upto date ₹ 1,51,667 ₹ 2,96,667 ₹ 4,10,000

CMA US 2
IND AS 102 CMA FINAL CFR
38 FOUNDATIO
 (5,00,000*91%*1/ 5,00,000*89%*2/ 5,00,000*8
3) 3) 2%*3/3)

Expense during year ₹ 1,51,667 ₹ 1,45,000 ₹ 1,13,333

Journal entries in the books of ABC Ltd

Date Particulars Debit (₹) Credit(₹)

31-03-21 Employee benefit expense a/c 1,51,667

To share based payment reserve a/c 1,51,667

31-03-22 Employee benefit expense a/c 1,45,000

To share based payment reserve a/c 1,45,000

31-03-23 Employee benefit expense a/c 1,13,333

To share based payment reserve a/c 1,33,333

31-03-23 Share based payment reserve 4,10,000

a/c To share capital a/c 4,10,000

Problem 2:
XYZ issued 10,000 Share Appreciation Rights (SARs) that vest immediately to its employees on 1st
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 ₹ 95. SAR can be exercised any time upto 31st March,
20X3. At the end of period on 31st March, 20X1 it is expected that 95% of total employees will
exercise the option, 92%of total employees will exercise the option at the end of next year and finally
89% were exercised at the end of the 3rd year. Fair Values at the end of each period have been
given below

Fair value of SAR₹ ₹

31st March, 20X1 112

31st March, 20X2 109

31st March, 20X3 114

Sol:
Particulars 31/03/2021 31/03/2022 31/03/2023

Share appropriation rights 10,000 10,000 10,000 10,000

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39 FOUNDATIO
 Fair value of SAR ₹ 95 ₹ 112 ₹ 109 ₹ 114

% of Expected vesting 100 95 92 89

Estimated total expense ₹9,50,000 ₹10,64,000 ₹10,02,800 ₹10,14,600

₹9,50,000 ₹ 1,14,000 (₹ 61,200) ₹ 11,800

Expense during year

Date Particulars Debit (₹) Credit (₹)

01-04-20 Employee benefit expense a/c 9,50,000

To share based payment liability a/c 9,50,000

31-03-21 Employee benefit expense a/c 1,14,000

To share based payment liability a/c 1,14,000

31-03-22 share based payment liability a/c 61,200

To employee benefit expense a/c 61,200

31-03-23 Employee benefit expense a/c 11,800

To share based payment liability a/c 11,800

31-03-23 Share based payment liability a/c 10,14,000

10,14,000
To cash a/c

Problem 3:
On 1st January, 20X1, ABC limited gives options to its key management personnel (employees) to
Take either cash equivalent to 1,000 shares or 1,500 shares. The minimum service requirement is 2
years and shares being taken must be kept for 3 years.
Fair values of the shares are as follows: ₹

Share alternative fair value (with restrictions) 102

Grant date fair value on 1st January, 20X1 113

Fair value on 31st December, 20X1 120

Fair Value on 31st December, 20X2 132

The employees exercise their cash option at the end of 20X2. Pass the journal entries.

Sol:
When counterparty has a choice of settlement for such share based payments, then this will be treated
as compound instrument which has debt and equity components
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IND AS 102 CMA FINAL CFR
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 Calculation of employee benefit expense

Particulars 01/01/2021 31/12/2021 31/12/2022

Fair value of equity alternative 1,53,000

(1500*102)

Fair value of cash alternative 1,13,000

(1000*113)

Fair value Equity component 40,000

Expense (for cash component) 60,000 72,000

(1000*120*1/2) (100*132*2/2 – 60,000)

Expense for the period

Equity option 20,000 20,000

Cash Option 60,000 72,000

Total 80,000 92,000

Journal entries
Date Particulars Debit (₹) Credit(₹)

31-12-11 Employee benefit expense a/c 80,000

To share based payment reserve a/c To share 20,000
based payment liability a/c
60,000

31-12-12 Employee benefit expense a/c 92,000

To share based payment reserve a/c To share 20,000
based payment liability a/c
72,000

31-03-13 Share based payment liability a/c 1,32,000

To bank / cash a/c 1,32,000

PROBLEM 4:
Grant with a performance condition, in which the length of the vesting period varies:

At the beginning of year 1, X Ltd. grants 200 shares each to 400 employees, conditional upon the
employees’ remaining in employment with the company during the vesting period. The shares will
vest at the end of year 1 if the entity’s earnings increase by more than 15 per cent; at the end of
year 2 if the entity’s earnings increase by more than an average of 12 per cent per year over the
two-year period; and at the end of year 3 if the entity’s earnings increase by more than an average

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IND AS 102 CMA FINAL CFR
41 FOUNDATIO
of 10 per cent per year over the three- year period. The shares have a fair value of ₹ 40 per share at
the start of year 1. No dividends need be considered.

By the end of year 1, the entity’s earnings have increased by 13 per cent, and 32 employees left. The
entity expects further 30 employees to leave during year 2. By the end of year 2, the entity’s
earnings have increased by only 11 per cent and 27 employees left during the year. The entity
expects a further 25 employees to leave during year 3. By the end of year 3, 22 employees left and
the company’s earnings increased by 9 per cent, resulting in an average increase over 10 per cent per
year
Sol:
Particulars Year 1 Year 2 Year 3

No. of shares 200 200 200

Employees 400 400 400

Employees left (32) (32+27) (32+27+2

2)

Estimated employees to be left (30) (25) -

Remaining employees 338 316 319

Estimate employee benefit 13,52,000 16,85,333 25,20,000

expense (338*200*40*1/2) (316*200*40*2/3) (319*200*4
0*3/3)
Expense during the year 13,52,000 3,33,333 8,66,667

Problem 5:

On 01.07.2018 AMLA, GILOY & TULSI Ltd. grants 100 options to each of its 2100 employees at 60 when
the market price is 200. The vesting date is 31st March, 2021 and the exercise date is 31st March,
2022. At the end of year 1, the company found that 100 employees had left. Fair Value of a share
issued under ESOP was 93. At the end of year 2, the company found that 80 employees had left.
Fair Value of a share issued under ESOP was 104. At the end of year 3, the company found that 192
employees had left. Fair Value of a share issued under ESOP was 80. Only 1700 employees exercised
their options on 31st March, 2022. The face value of equity share is 10 per share.
(I) Calculate Expenses to be recognised in Year 1 by Fair Value Method. 2
(II) Calculate Expenses to be recognised in Year 2 by Fair Value Method. 2
(III) Calculate Expenses to be recognised in Year 3 by Fair Value Method. 1
(IV) Calculate Value of Options Forfeited.
Sol: Video

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42 FOUNDATIO
 ACCOUNTING OF
FINANCIAL INSTRUMENTS
CONTACT: 90009 18237.

43
 ACCOUNTING OF FINANCIAL INSTRUMENTS
The following three Indian Accounting Standards are relevant for recognition, measurement and
disclosure of financial instruments

❖ Financial instruments: Presentation (Ind AS 32)

❖ Financial instruments: Disclosure (Ind AS 107)

❖ Financial instruments: (Ind AS 109)

IND AS 32 FINANCIAL INSTRUMENTS (PRESENTATION)

OBJECTIVE

The objective of this Standard is to establish principles for presenting financial instruments as
liabilities or equity and for offsetting financial assets and financial liabilities

Scope:
This Standard shall be applied by all entities to all types of financial instruments except:
Share based payments
Insurance contracts employers’ rights and obligations under employee benefit plans, to which
Ind AS 19 Employee Benefits applies
Interests in subsidiaries, associates and joint ventures
FINANCIAL INSTRUMENT

A financial instrument is any contract that gives rise to a financial asset of one entity and a financial
liability or equity instrument of another entity
FINANCIAL ASSET

A financial asset is any asset that is:

(a) cash;
(b) an equity instrument of another entity;
(c)a contractual right:

• to receive cash or another financial asset from another entity; or

• to exchange financial assets or financial liabilities with another entity under conditions
that are potentially favorable to the entity; or
(d) a contract that will or may be settled in the entity’s own equity instruments and is:
a non-derivative for which the entity is or may be obliged to receive a variable number of the
entity’s own equity instruments or

a derivative that will or may be settled other than by the exchange of a fixed amount of cash
or another financial asset for a fixed number of the entity’s own equity instruments

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FINANCIAL LIABILITY

A financial liability is any liability that is:

(a) contractual obligation:

• to deliver cash or another financial asset to another entity; or

• to exchange financial assets or financial liabilities with another entity under

conditions that are potentially unfavourable to the entity; or

(b) contract that will or may be settled in the entity’s own equity instruments and is:

• a non-derivative for which the entity is or may be obliged to deliver a variable

number of the entity’s own equity instruments; or
• a derivative that will or may be settled other than by the exchange of a fixed
amount of cash or another financial asset for a fixed number of the entity’s
own equity instruments

EQUITY
An equity instrument is any contract that evidences a residual interest in the assets of an entity
after deducting all of its liabilities

PUTTABLE INSTRUMENT

A puttable instrument is a financial instrument that gives the holder the right to put the
instrument back to the issuer for cash or another financial asset or is automatically put back to the
issuer on the occurrence of an uncertain future event or the death or retirement of the instrument
holder

Examples of classification:
(a) Borrowing from banks: It is classified as financial liability as it is an obligation to deliver cash

(b) bank deposits: It is classified as financial asset as it gives right to receive cash

(c) Investment in shares of a company: It is classified as financial asset as it is equity

instrument of another entity
(d) Forward contract in the money: It is classified as financial asset as it is a favorable contract

(e) Redeemable preference share: It is classified as financial liability as it is an obligation to deliver

cash on redemption

IND AS 109 FINANCIAL INSTRUMENTS (MESUREMENT)

OBJECTIVE

The objective of this Standard is to establish principles for the financial reporting of financial
assets and financial liabilities that will present relevant and useful information to users of financial
statements for their assessment of the amounts, timing and uncertainty of an entity’s future
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cash flows
Interests in subsidiaries, associates and joint venture
Leasing commitments
Employee benefits
Financial instruments resulting in business combination
Insurance contracts

Recognition:
Initial Recognition:

An entity shall recognise a financial asset or a financial liability in its balance sheet when, and
only when, the entity becomes party to the contractual provisions of the instrument

CLASSIFICATION

An entity shall classify financial assets as subsequently measured at amortised cost, fair value
through other comprehensive income or fair value through profit or loss on the basis of both:
(a) the entity’s business model for managing the financial assets and

(b) the contractual cash flow characteristics of the financial asset

IND AS 107 FINANCIAL INSTRUMENTS (DISCLOSURE)

The objective of this Indian Accounting Standard (Ind AS) is to require entities to provide
disclosures in their financial statements that enable users to evaluate

(a) the significance of financial instruments for the entity’s financial position and
performance; and

(b) the nature and extent of risks arising from financial instruments to which the entity

Scope:
This Standard shall be applied by all entities to all types of financial instruments except those
specified in the standard:

Interests in subsidiaries, associates and joint ventures Leasing commitments

Employee benefits
Financial instruments resulting in business combination Insurance contracts

Disclosure:

An entity shall disclose information that enables users of its financial statements to
evaluate the significance of financial instruments for its financial position and
performance

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 The carrying amounts of each of the following categories, as specified in Ind AS 109, shall
be disclosed either in the balance sheet or in the notes
(a) financial assets and liabilities measured at fair value through profit or loss, showing
separately those designated as such upon initial recognition or subsequently in accordance
with Ind AS 109 and those mandatorily measured at fair value through profit or loss in
accordance with Ind AS 109
(b) financial assets and liabilities measured at amortised cost

PROBLEM 1
G Ltd. issued 6% Debenture of total ₹10,00,000 on 01.04.2017 repayable on 31. 03.2022. The
debenture holders have right to receive equity shares of face value of ₹4,00,000 at maturity as
alternative to repayment in cash. The required rate of return is 10%. How the transaction will be
recognised, measured and presented in 2017-2018?

PROBLEM 2

X ltd. Granted a loan to Y ltd amounting to ₹40 lakhs repayable in 2 years at ₹46 lakhs. However, due
to eco- nomic recession after 1 year the repayable amount has been revised at
₹44 lakhs. Effective annual interest rate for such a loan is determined at 6% pa. The loan processing
cost was ₹2 lakhs.
X Ltd’s accountant suggested to

a) Charge processing cost to the first year profit and loss A/c.

b) To credit ₹4 Lakhs as interest income in the second year profit and loss a/c. To carry loan a/c in
the first year balance sheet at ₹40 lakhs. Your advice is solicited.

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BUSINESS COMBINATION &
RESTRUCTURING

CONTACT: 90009 18237.

48
 BUSINESS COMBINATIONS & RESTRUCTURING
Introduction:

In today’s global business environment, companies – both new and existing, face immense
competition for their survival
Moreover, the companies have to ensure a steady growth

As per IND-AS 103, two terms are used i.e.,

✓ business combination and

✓ business combination under common control
the terms merger, absorptions, amalgamation, de-merger, external reconstruction, reverse merger are
accommodated within above 2 terms.
Concept of business combination (IND AS 103):

Business Combination is a transaction or an event in which an acquirer obtains control

of one or more businesses

This Standard applies to a transaction or other event that meets the definition
of a business combination.

This Indian Accounting Standard does not apply

a) Formation of joint venture
b) Asset acquisition
Definitions:
Business combinations (Acquisition method).
Under Ind AS 103, A business combination is a transaction or other event in which an acquirer
obtains CONTROL of one or more BUSINESS.
Generally, companies doing similar type of business or involved in similar line of activities
may be combined to get the economies of scale and to minimize the possibility of tough
competition.
Business combination results in growth
Business combination can be in the form of merger and acquisition.
AS-14 ‘Amalgamations’ and Ind AS-103 ‘Business Combination’ is substantially different
Ind AS-103 lays down the accounting principles for business combination and not for asset
combination
Control: As per Ind AS-110, an investor controls an investee if and only if the investor has
all the following:
a) Power over the investee
b) Exposure or right to variable returns in investee

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 c) he ability to use its power over the investee to affect the amount of investors

ACCOUNTING FOR BUSINESS COMBINATIONS

All the business combinations shall be accounted by applying acquisition method (Purchase
method) The application of acquisition method involves the following steps

➢ Step-1: Identifying the acquirer. (Standard applied to acquirer only)

➢ Step-2: Determining the acquisition date.

➢ Step-3: Identifying and measuring the purchase consideration.

➢ Step-4: Identifying & measuring identifiable assets and liabilities.

➢ Step-5: Measuring non-controlling interest.

➢ Step-6: Determining goodwill/gain on bargain purchase.

STEP 1: IDENTIFYING THE ACQUIRER

In order to apply the purchase method, the parties involved has to identify the acquirer
i.e., the entity that obtains the control of another entity.
The acquiring enterprise is the enterprise which obtains control and the determination of
control is as per the guidance given in Ind AS 110.
If the guidance under Ind as-110 doesn’t provide a clear indication then the following points are
to be considered in deciding acquirer

a) The acquirer is the entity that pays the consideration (except in case of reverse acquisition).

b) The acquirer is usually the combining entity whose owners as a group retain or receive the
largest portion of the voting rights in the combined entity.

c) The acquirer is usually the combining entity whose single owner or organised group of owners
holds the largest minority voting interest in the combined entity.

d) The acquirer is usually the combining entity whose owners have the ability to elect or
appoint or to remove a majority of the members of the governing body of the combined
entity.

e) The acquirer is usually the combining entity whose (former) management dominates the
management of the combined entity.

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STEP-2: DETERMINING ACQUISITION DATE
Acquisition date is the date on which acquirer obtains control over the investee.
Generally, it is the date on which the acquirer legally transfers the consideration, acquires
the assets and assumes the liabilities of the acquiree—the closing date.
However, the acquirer might obtain control on a date that is either earlier or later than the
closing date.

Examples in questions:
✓ date of obtaining control
✓ power to control operations

Step acquisition:
In the case an entity acquires an entity step by step through series of purchase then the
acquisition date will be the date on which the acquirer obtains control.

Till the acquisition date, the prior investment shall be accounted as per IND AS 109 or IND AS 28
as applicable.

In case of step acquisition investment held by acquirer till acquisition is remeasured at fair
value on the date of acquisition and any difference between carrying amount and fair value of
investment on acquisition date shall be transferred to P&L and OCI.

STEP-3: IDENTIFYING AND MEASURING PURCHASE CONSIDERATION:

Particulars Amount ₹

1) Acquisition date fair value of consideration (cash)transferred

2) Acquisition date fair value of deferred consideration

3) Acquisition date fair value of contingent consideration

4) Acquisition date fair value of share-based payments to the extent

period expired
(AD fair value of original awards X completed vesting period/original
vesting period or revised vesting period whichever is higher)

5) Acquisition date fair value of securities issued

Total Purchase consideration

Note:
(1) Direct cost of acquisition is not included in determination of purchase consideration and

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 those cost shall be charged to P&L.

(2) The acquirer shall classify an obligation to pay contingent consideration as a liability or
equity as per Ind AS-32.
STEP-4: IDENTIFYING & MEASURING IDENTIFIABLE ASSETS AND LIABILITIES (ACQUIREE ENTITY)

Recognition: Acquirer can recognized only those assets and liabilities which meet definition of asset
and liability.

Measurement: All assets and liabilities are measured at FV at acquisition date.

STEP-5: MEASURING NON-CONTROLLING INTEREST

It can be measured by using 2 methods
✓ Fair value method
✓ Proportionate net assets method
Fair value method
NCI = No of equity shares held by NCI x fair value of share on acquisition date
Proportionate net assets method
NCI= Fair value of net assets of acquiring on acquisition date x % of NCI

STEP-6: DETERMINING OF GOODWILL OR GAIN ON BARGAIN PURCHASE

Amount

Amount of PC xxx

(+) Acquisition date fair value of previously held equity investment in acquiree xxx

(+) NCI xxx

(-) Acquisition date fair value of net assets recognised xxx

Goodwill/gain on bargain purchase xxx

NOTES:

➢ When NCI shown at fair value – represents full goodwill of acquiree.

➢ When NCI shown at proportionate net assets- partial goodwill.

➢ When after business combination, acquiree continues to exist, it is to be recorded in the books
of the acquirer in two sets

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 • consolidated accounts
• separate financial statements i.e., for its stand-alone accounts.

➢ When after business combination, acquiree ceases to exist , it is to be recorded in the books
of the acquirer in oneset only- “stand-alone accounts” (it is also called individual set).

➢ Thus, when the Acquirer acquires controlling shares of the Acquiree, no accounting is
required in the books ofthe Acquiree but in the books of the acquirer, accounting is required
in two sets of accounts:

➢ In stand-alone set as stated below:- IND AS 103( ),IND AS 109 ( ✓ )

Particulars (`) (`)

Investment in shares in the Acquiree A/c Dr. xxxx

To Consideration A/c xxxx

➢ In consolidated set, Acquisition Method of Ind AS 103 is applied

Thus, entries in the books of the acquirer are made like the following:

Particulars (`) (`)

Identified Assets of Acquiree Dr. Xxx

Goodwill (if any) Dr. xxx
To Consideration xxx
To Identified Liabilities xxx
To Non-controlling Interest xxx
To Previously-held equity interest in xxx
Acquiree
To Gain from a bargain purchase (if xxx
any)

Differences between AS 14 and IND AS 103

AS 14 IND AS 103

Scope NARROW WIDER

Method of accounting ✓ Pooling of interest method Acquisition method

✓ Purchase method

Recognition and Fair value/ book value Fair value

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 measurement

Goodwill Amortized No amortization

NCI Accounting No Yes

Contingent Consideration No Yes

Common control transaction No Yes

Reverse acquisition Not deals deals

Entries to close the books of Acquiree Company when it ceases to exist for business combination:

1. For transfer of Assets:

Realisation A/c.…Dr. (With the book value of assets)
To All Assets A/c
2. For transfer of External liabilities:
All External Liabilities A/c….Dr. (With book value of external liabilities)
To Realisation A/c
3. For the due entry for consideration:
Acquirer Company A/c…Dr. (With the aggregate amount of purchase consideration)
To Realisation A/c
4. For transfer of internal liabilities:
Equity Share Capital A/c.…Dr.
Other Equity A/c….Dr.
To Equity Share Holder A/c
5. For transfer of accumulated loss:
Equity Share Holder A/c….Dr.
To Profit & Loss A/c
6. For receiving of purchase consideration:
Equity shares in transferee Company A/c….Dr.
Preference shares in transferee Company A/c….Dr.
Debenture in transferee Company A/c….Dr.
Cash or other Assets A/c….Dr.
To Acquirer Company A/c
7. For the amount payable to Preference share Holder:
Preference Share Capital A/c….Dr.
Realisation A/c….Dr.[Excess amount payable]
To Pref. Share Holder A/c
To Realisation A/c [Deficit amount]
8. For payment to pref. shareholders:
Pref. Share Holder A/c….Dr.

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 To Bank A/c
To Shares/ Debenture in Acquirer Company A/c
9. For realisation of assets not taken over:
Bank A/c….Dr.
To Realisation A/c
10. For settlement of Liabilities not taken over:
Realisation A/c.…Dr.
To Bank A/c

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 11. For transfer of realisation profit:
Realisation A/c….Dr.
To Equity Share Holder A/c
12. For settlement of account of shareholders:
Equity share Holders A/c….Dr.
To Shares in Acquirer Company A/c
To Debenture in Acquirer Company A/c To Cash A/c
Entries in the books of Acquirer Company for its individual financial statements (stand- alone
financial statements):

1. For acquisition of Assets and liabilities:

Debtors A/c….Dr.
Stock A/c….Dr.
Bank A/c….Dr
Goodwill A/c (Bal figure)…Dr.
To Gain on Bargain Purchase A/c (bal fig )
To Creditors A/c
To Consideration A/c
2. For discharge of consideration:
Consideration A/C….Dr.
Discount on Issue of Securities A/C….Dr.
To Bank or other Asset A/C
To Equity Share Capital A/C
To Preference Share Capital A/C
To Debentures A/C
To Securities Premium A/C
Common control transactions (amalgamation, external reconstruction)

where control lies with the same parties before and after the transaction, then it is called common
control transaction.

✓ Pooling of Interest method will be applied.

✓ Consideration is measured only at nominal value of shares.
✓ Difference of consideration and other equity carried, with net assets be recognized as
Goodwill or Capital Reserve.
✓ Net assets and Other Equity of the transferee company will be carried at book value
1. For business combination
Business combination A/c….Dr.
To selling co /selling co shareholders A/c
2. Incorporate assets, liabilities and reserves at carrying amount
Assets A/c….Dr.

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 Accumulated losses A/c….Dr.
To liabilities A/c
To business combination A/c
To reserves A/c
3. Discharge of consideration
Selling co /selling co. shareholders A/c….Dr.
To cash A/c
To equity shares A/c
To preference shares A/c
To security premium A/c

Example on PC and Goodwill:

Company A and Company B are in power business Company A holds 25% of equity shares of
Company B On 1st November, Company A obtains control of Company B when it acquires a
further 65% of Company B’s shares, thereby resulting in a total holding of 90% The
acquisition had the following features:
Consideration: Company A transfers cash of ₹ 59,00,000 and issues 1,00,000 shares on 1st November The
market price of Company A’s shares on the date of issue is ₹ 10 per share

Contingent consideration: Company A agrees to pay additional consideration of

7,00,000 if the cumulative profits of Company B exceed ₹ 70,00,000 over the next two years At the
acquisition date, it is not considered probable that the extra consideration will be paid The fair
value of the contingent consideration is determined to be ₹ 3,00,000 at the acquisition date

Transaction costs: Company A pays acquisition-related costs of ₹ 1,00,000

Non-controlling interests (NCI): The fair value of the NCI is determined to be

7,50,000 at the acquisition date based on market prices Company A elects to measure non-controlling
interest at fair value for this transaction

Previously held non-controlling equity interest: Company A has owned 25% of the shares in
Company B for several years At 1st November, the investment is included in Company A’s
consolidated balance sheets at ₹ 6,00,000, accounted for using the equity method; the fair value is
₹ 20,00,000

The fair value of Company B’s net identifiable assets at 1st November is ₹ 60,00,000, determined in
accordance with Ind AS 103
Determine the accounting under acquisition method for the business combination by Company A

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PROBLEM 1:
A Ltd acquires B Ltd for ₹9,60,000 Fair Value (FV) of B’s net assets at time of acquisition amounts
₹ 8,00,000. Required:

Calculate Goodwill.
Journal Entries in the books of A.

Sol: Goodwill = 9,60,000 – 8,00,000 = 1,60,000

Journal entry in the books of A Ltd.

Net assets A/c 8,00,000

Goodwill A/c 1,60,000

To cash/bank A/c - 9,60,000

Problem-2:

D has acquired 100% of the equity of F on March 31, 20X7. The purchase consideration comprises
of an immediate payment of ₹10 lakhs and two further payments of ₹1.21 lakhs if the Return on
Equity exceeds 20% in each of the subsequent two financial years. A discount rate of 10% is used.
Compute the value of total consideration at the acquisition date.

Sol: Given, Consideration = 10 lakhs.

Further Payments of ₹1.21 lakhs in two subsequent years.

Therefore the present value of annuity for two years @ 10% p.a. is ₹2.1 lakhs.

So, Fair value of contingent consideration (PC) = 10 lakhs + 2.1 lakhs

= ₹12.1 lakhs.
BASIC BUSINESS COMBINATION QUESTIONS

Problem 3:
On 01.04.2021 the summarised balance sheets of Satellite Ltd. and Planet Ltd. are provided as:
(₹’000)

Satellite Ltd. Planet Ltd.

B/S (₹) Fair Value B/S (₹)
(₹)
Equity Share Capital(₹10) 8,000 12000

Other Equity 6,000 4000

Borrowings 2,000 2,050 3000

Trade Payables 2,500 2,400 2000

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 Property, Plant and Equipment 9,000 10000 12000

Investment Property 5,000 7000 1000

Investments 1,000 3500

Current Assets 3,500 3200 4500

Contingent Liabilities 800 750

Market price of equity shares of Planet Ltd. and Satellite Ltd. are ₹ 16 and ₹ 15 respectively on
the day. On the basis of the above data, you are required to make the necessary accounting for the
following cases.

Planet Ltd. takes over Satellite Ltd. and purchase consideration is settled by issue of 1050000 equity
shares. Pass journal entries in the books of both the companies and re-draft the balance sheet of
Planet Ltd. after the business combination.
REVERSE ACQUISITION
Problem 4:
Suppose, Entity A acquires 80% shares of Entity B and satisfies the consideration by issue of
three shares of Entity A for every share of Entity B. Market price of ₹10 share of Entity A is
₹25.

The summarized Balance Sheets:

Particulars A (₹) B (₹)

Net Assets 30,000 20,000

Equity 30,000 20,000

No. of Equity Shares 1000 750

Is it a reverse acquisition?

Sol:

80% of 750 = 600 shares of Entity B are acquired and Entity A issues 600 × 3 = 1800 shares to
Entity B. Now, shareholders of Entity A hold 1000 shares and shares holders of Entity B hold 1800
shares effectively, the group is controlled by Entity B. This is a case of reverse acquisition. In such case
accounting will be done in books of Entity A, the legal acquirer, but it would be assumed that
Entity B is the accounting acquirer and accordingly assets and liabilities of Entity A would be

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identified and effective consideration would be calculated.

In case of amalgamation also ‘reverse acquisition’ may take place when it is indicated that after
Entity A and Entity B amalgamated into Entity C, shareholders of Entity B would control Entity
C. Although Entity C is the legal acquirer, in the books recording will be done assuming that Entity
Bis the acquirer. Thus de facto acquirer is considered the accounting acquirer and de juri acquirer
is the legal acquirer.

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 NBFC

CONTACT: 90009 18237.

61
 NON-BANKING FINANCIAL INSTITUTIONS
[IND AS is applicable to NBFCs on and from 1-4-2018]
Non-Banking Finance Company (NBFC) is a financial institution which does not meet the legal
definition of bank but carries the similar activities to that of bank like lending and making
investments i.e., such an institution does not hold a banking license

As per Sec 45I(f) of RBI Act, 1934, a non-banking financial company means:

(i) a financial institution which is a company

(ii) a non-banking institution which is a company and which has as its principal business the
receiving of deposits, under any scheme or arrangement or in any other manner, or lending
in any manner
(iii) Such other non-banking institution or class of such institutions, as the Bank may, with the
previous approval of the Central Government and by notification in the Official Gazette,
specify
ASSET CLASSIFICATION FOR NBFCs

PROVISION REQUIREMENTS FOR NBFCs

a) On loans, advances and other credit facilities including bills purchased and discounted:

Loss Assets 100%

Doubtful Assets:

a) Un-Secured 100%

b) Secured: Period for which the asset has been considered as

doubtful:

i) Up to one year 20%

ii) One to three years 30%

iii) More than three years 50%

c) Sub-standard assets 10%

PROVISION AGAINST STANDARD ASSETS

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 a) Non-systemically Important Non-Banking Financial 0.25%
(Non-Deposit Accepting or Holding) Companies

b) Systemically Important Non-Banking Financial (Non- 0.4%

deposit accepting or holding company)

a) On lease and hire purchase assets in respect of hire purchase assets

Particulars Amount (₹)

Total due and future installments taken together xxx

(-) finance charges not credited to P&L xxx

(-) the depreciated value of the underlying asset xxx

Provision to be created on this value as per NBFC prudential norms xxx

Asset Depreciated value

New asset Original cost (-) depreciation

Second hand asset Actual cost incurred for acquiring

Additional provision shall be provided

Hire charges/ rentals overdue % of provision

Up to 12 months Nil

>12 months up to 24 months 10% of net book value

>24 months up to 36 months 40% of net book value

>36 months up to 48 months 70% of net book value

>48 months 100% of net book value

Calculation of net book value

Particulars Amount (₹) in lakhs

Overdue installment xxx

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 Further installments xxx

(-) finance charges not credited to P&L xxx

(-) provision as per prudential norms xxx

Net book value xxx

Problem 1:
While closing its books of accounts on 31stMarch, a NBFC has its advances classified as follows

Particulars Amount (₹) in lakhs

Standard Assets 8400

Sub-Standard Assets 910

Secured Portions of Doubtful Debts: Upto 1 year

60
One to 3 years
70
More than 3 years
20

Unsecured Portion of Doubtful Debts 87

Loss Assets 24

Calculate the amount of provision which must be made against the advances?
Sol:
Particulars Amount (₹ % of Provision
) in lakhs provision amount
(₹) in lakhs

Standard Assets 8400 0.4 % 33.6

Sub-Standard Assets 910 10 % 91

Secured Portions ofDoubtful Debts: 160 20 % 32

up to 1 year one to3 years 70 30 % 21
more than 3 years 20 50 % 10

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 Unsecured Portion 87 100 % 87
ofDoubtful Debts

Loss Assets 24 100 % 24

Total 298.6

Note:
Percentage of provision for Standard Asset is 0.25 as per Non-Banking Financial Company – Non
Systemically Important Non-Deposit taking Company

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SUSTAINABILITY REPORTING

CONTACT: 90595 29540, 90106 76997.

66
 SUSTAINABILITY REPORTING
SUSTAINABILITY:

✓ Sustainability refers to the ability to maintain a process continuously over time

✓ Two additional aspects are generally recognized as contributing to sustainability
➢ economic factors
➢ social factors

THREE PILLARS OF SUSTAINABILITY:

❖ People
❖ Planet
❖ Profit
In this scenario, the three forms of sustainability that are considered by the organisations are:

1. Social sustainability (people)

These activities focus on maintaining mutually beneficial relationships with employees,
customers and the community

Benefits:
Positive profile
Customer and community support
2. Environmental sustainability (planet)

These activities focus on the impact of resource usage, hazardous substances, waste and
emissions on the physical environment

Benefit: reducing costs

3. Economic sustainability (profit)

These activities focus on business efficiency, productivity and profit

SUSTAINABILITY REPORTING
Sustainable development is development that meets the needs of the present without
compromising the ability of future generations to meet their own needs

It is defined as “an organization’s practice of reporting publicly on its economic, environmental, and/or
social impacts, its contributions – positive or negative – towards the goal of sustainable development”

BENEFITS OF SUSTAINABILITY REPORTING

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 Internal benefits External benefits
Increased understanding of risks and Improving reputation and brand loyalty
opportunities
More focus on long term management Enhanced perception on organisation’s value
strategy and policy, and business plans Eg: TATA
reducing costs and improving
efficiency

GLOBAL REPORTING INITIATIVE

• The Global Reporting Initiative (GRI) is considered “the best-known framework for voluntary
reporting of environmental and social performance worldwide
• Guidance and standards of (GRI) are the most widely used framework of sustainability reporting
• As per GRI “materiality” is a key principle for reporting
• Materiality is achieved when a report covers topics, which is important to influence the decisions
of stakeholders

4P BOTTOM LINE/ QUADRUPLE BOTTOM LINE (QBL) REPORTING:

• It is an extension of 3P bottom line or triple bottom line (TPL) reporting

• The phrase “triple bottom line” was first coined in 1994 by John Elkington,

• The concept of ‘Triple bottom line ‘incorporates two technical terminologies –

‘Triple’ and ‘Bottom Line’

We first understand these two for better understanding of the concept of Triple bottom line
reporting

Bottom Line: the “bottom line” refers to either the “operating result”, which is usually recorded at the
very last line (or, bottom) of the income statement.

Quadruple: The Quadruple bottom line concept requires an organisation to measure and report on
four dimensions viz social, environmental, economic/ financial and spiritual performance of the
organization.

This concept requires an organization to measure and report on Four dimensions

Social
Economic/Financial

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 Environmental
Spiritual (Purpose)

Thus, it is also referred to as QBL or 4PL = People, Planet, Profit and Purpose

Bottom line

It refers to operating result, which is usually recorded at very last line of income statement 4P Bottom
Line Reporting requires that organizations should be reporting on four different ‘bottom lines’ that are
quite distinct, but related from one another

They are discussed here under:

People Account Purpose Planet Account Income

Statement

The first bottom line happens to be the bottom line of the “income statement” (which
is the traditional measure of operating result)
The second bottom line is that of an organisation’s “people account” (a measure in some shape
or form of how socially responsible an organisation has been throughout its operations)
The third bottom line is that of the organisation’s “planet account” (which measures how
environmentally responsible the company has been)
The fourth bottom line with the fourth bottom line, commerce/businessbecomes a spiritual path

BENEFITS OF 4PBL ( Eg TATA )

Reputation Secure social

Cost
and Brand license to
saving
operate

Attract
and Reduced
Improve
retention risk
acces
of high profile
calibre
employe

Implementation of QBL

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Prerequisites of implementation of QBL Reporting

Don’t take
light, requires
senior
management
commitment

Half-
hearted
approach

A decision to move to full QBL reporting should not be taken lightly It must have
senior management commitment

It may have major resource implications, and a half-hearted approach is

likely to be worse than not adopting it all

CSR

Every company including its holding or subsidiary, and a foreign company defined under clause (42) of
sec 2 of the Act having its branch office or project office in India which fulfils the criteria specified in
sub-section (l) of section 135 of the Act shall comply with the provisions of section 135 of the Act
and these rules:

Every company having either

Net worth of Rs. or Turnover of Rs.1000 or Net profit of Rs. 5

500 crorer more crore more crore more

During the immediately preceding financial year shall constitute a CSR committee of the board
consisting of three or more directors (including at least one independent director)

The Board’s report shall disclose the compositions of the CSR Committee.

AMOUNT TO BE SPENT ON CSR AND CSR ACTIVITIES

The BOD shall ensure that the company spends, in every financial year, at least 2 percent of the average
net profits of the company made during the three immediately preceding financial years by giving
preference to the local area around it where it operates.

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CSR Activities: Activities may be included by the company in their CSR Policy as per Schedule VII of the
Companies Act, 2013

Promotion of Reducing
Education Child
Mortality

Enhancing Eradicating
Vacational Extreme
Skills Hunger and
Poverty

Contribution to
Gender CSR Prime Minister
Equality Activity National Relief
Fund

Amount overspent or remaining unspent shall be treated as follows:

If the company spends an amount in excess of the requirements, then it may set off such excess amount
against the requirement to spend for three succeeding financial years

NOTE:

✓ For this purpose, the excess amount available for set off shall not include surplus arising out
of the CSR activities and

✓ the Board of the company shall pass a resolution to that effect

RELATING TO ON GOING

YES NO
Transfer to Transfer to same
special account fund specified

Unspent CSR
A/C within 30 Schedule III
days from end
of FY

Such amount shall be spent Within 3 years from DOT. If fails, transfer the same to a Fund specified in
Schedule VII, +30days from date of completion of the 3rd financial year.

In addition to the above, the following points should also be considered:

✓ The board shall ensure that the administrative overheads shall not exceed 5% of total CSR
expenditure of the company for the financial year

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 ✓ Any surplus arising out of the CSR activities shall not form part of the business profit of a company
and shall be ploughed back into the same project or
✓ shall be transferred to the Unspent CSR Account and spent in pursuance of CSR policy and
✓ annual action plan of the company or transfer such surplus amount to a Fund specified in
Schedule VII, within a period of six months of the expiry of the financial year

CSR expenses include expenses incurred for employees but not for their families CSR REPORTING:

Rule 8 of the CSR Rules provides that the companies, upon which the CSR Rules are applicable on or
after 1st April, 2014 shall be required to incorporate in its Board’s report an annual report on CSR
containing the following particulars:

✓ A brief outline of the company’s CSR Policy, including overview of projects or programs proposed
to be undertaken and a reference to the web-link to the CSR policy and projects or programs;
✓ The composition of the CSR Committee;
✓ Average net profit of the company for last three financial years; Prescribed CSR Expenditure (2%
of the amount of the net profit for the last 3 financial year)
✓ Details of CSR Spent during the financial year;
✓ In case the company has failed to spend the 2% of the average net profit of the last three
financial year, reasons thereof;
✓ A responsibility statement of the CSR Committee that the implementation and monitoring of
CSR Policy, is in compliance with CSR objectives and Policy of the company.

ESG Criteria

ESG reporting requires identification and reporting information about the three criteria in a
meaningful way
While, environmental criteria consider how a company performs as a steward of nature, social
criteria examine how it manages relationships with employees, suppliers, customers, and the
communities
Finally, governance deals with a company’s leadership, executive pay, audits, internal controls,
and shareholder rights
Accordingly, the following criteria are largely used in this context A Environmental test criterion
includes:
 Conservation of the natural world
 Climate change and carbon emissions
 Air and water pollution
 Deforestation
 Waste management

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  Water scarcity B Social test criterion includes
 Consideration of people & relationships
 Customer satisfaction
 Data protection and privacy
 Gender and diversity
 Human rights
 Labor standards

C Governance test criteria include consideration of:

 Standards for running a company

 Board composition
 Audit committee structure
 Bribery and corruption
 Lobbying
 Political contributions
 Whistle blower schemes

REPORTING THROUGH XBRL

XBRL stands for ‘eXtensible Business Reporting Language’

XBRL is the open international standard for digital business reporting of financial performance,
risk and compliance information

It is one of a family of “XML” languages which is becoming a standard means of

communicating information between businesses and on the internet

XML refers to eXtensible Markup language designed to store and transport information

XBRL is today used for multiple purposes

❖ Accounting (individual transactions tagged with XBRL Global Ledger);

❖ Internal Reporting (for drafting of management reports);
❖ External Reporting (for drafting of financial statements, regulatory reports, corporate tax
filings, statistical reports etc

MYTHS REGARDING XBRL

This section clarifies certain myths regarding XBRL In other words, it is discussed what
XBRL is not

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 Chart of Transaction Not a GAAP Not
Sets of AS Accounts Protocal Translator Proprietary
Technology

A) XBRL is not a set of Accounting Standards: It needs to be clearly understood that XBRL
does not represent a set of accounting standards, which remain the prerogative of the
regulatory standards bodies

B) XBRL is not a chart of accounts: It is not a detailed universal chart of accounts Formulation
of a company’s chart of accounts is an exercise conducted by its management with regard
to its specific business activities

C) XBRL is not a GAAP translator: It does not provide a mechanism for facilitating a drilldown
of existing GAAP information into lower levels of information that would be necessary for
translating financial statements from one GAAP to another

D) XBRL is not a proprietary technology: XBRL is freely licensed and available to the public

E) XBRL is not a Transaction Protocol: XBRL deals with business reporting information, not
with data capture at the transaction level

FEATURES OF XBRL REPORING

Clear Definitions:

XBRL allows the creation of reusable, authoritative definitions, called taxonomies, which capture
the meaning contained in all of the reporting terms used in a business report, as well as the
relationships between all of the terms

Testable Business Rules:

XBRL allows the creation of business rules that constrain what can be reported Business rules
can be logical or mathematical, or both
These business rules can be used to:

➢ Prevent poor quality information being sent to a regulator or third party

➢ Prevent poor quality information being accepted by a regulator or third party

➢ Identifying or highlighting questionable information, allowing prompt follow up, correction or

explanation

Multi-lingual Support:

XBRL allows concept definitions to be prepared in as many languages as necessary

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 Translations of definitions can also be added by third parties

Strong Software Support:

XBRL is supported by a very wide range of software from vendors large and small, allowing
a very wide range of stakeholders to work with the standard

BENEFITS OF XBRL REPORING

More
Accurate
and
Efficient

Interchange Automated
able Data
Processing

Benefits of
XBRL
Reporting

Cost and Data

Time Review
Savings

Improved
Reporting
Quality

Companies required to follow XBRL Reporting:

The following class of companies shall file their financial statement and other documents under
section 137 of the Companies Act, 2013, with the Registrar in e-form AOC-4 XBRL given in Annexure-
l for the financial years commencing on or after April 1, 2014 using the XBRL taxonomy given in
Annexure II, namely:

a) All companies listed with any Stock Exchange(s) in India and their Indian subsidiaries; or
b) All companies having paid up capital of rupees five crore or above; or
c) All companies having turnover of rupees hundred crore or above; or
d) All companies which were hitherto covered under the Companies (Filing of Documents and
Forms in Extensible Business Reporting Language) Rules, 2011
Companies exempt from XBRL Reporting
As per the Companies (Filing of Documents and Forms in Extensible Business Reporting Language) Rules,
2015 the following companies are exempt from XBRL filing of their financial statement and other

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documents:
(i) Banking companies
(ii) Insurance companies
(iii) Power Sector companies; and
(iv) Non-Banking Financial companies
Value added statement

Value-Added’ is a basic and important measurement to judge the performance of an enterprise

✓ It indicates the net value or wealth created by the manufacturer during a specified period
✓ No enterprise can survive or grow, if it fails to generate wealth
✓ An enterprise may exist without making profit, but cannot survive without adding value

Application of Value Added:

This part describes how the value added is shares by the three contributing members viz ,
a) employees,
b) government and
providers of capital
Value added statement format

Particulars (₹) (₹)

Creation of Value Added

a) Sales (including sales tax and excise duty but net of rebate,
commission, returns, discounts and goods for self-consumption)

b) Income from services (Eg: royalty, dividend and interest, rent

received etc )

c) Cost of bought-in materials (consumption of raw materials,

consumables, packing materials, stationery, fuel and oil,
electricity, repairs etc )

d) Cost of bought-in services (Eg: audit fees, insurance, rent paid,

travelling expenses, advertisement, postage and telegram,
subscriptions, other expenses)

Added Value Created [(a)+(b) –(c) – (d)]

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 Distribution of Value Added

a) To Employees (Eg: wages and salaries,

director’s fees, contribution to P F, ESI etc )

b) To Government (Eg: duties and taxes)

c) To Providers of Capital (Eg: Interest and

Dividend)

d) Retained Earnings (Eg: depreciation and

retained profit)

Disposal of Value Added [(a)+(b) +(c) + (d)]

Study EVA and MVA topics also

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GOVERNMENT ACCOUNTING IN
INDIA

CONTACT: 90595 29540, 90106 76997.

78
 GOVERNEMENT ACCOUNTING IN INDIA
GOVERNMENT ACCOUNTING:
✓ Government accounting refers to the system of financial accounting that is applicable to
government, its departments, offices and institutions

✓ The accounting system that is put to use in government offices or institutions for the purpose
of recording and reporting the financial transactions is referred to as government accounting

✓ It is also referred to as Public Finance Accounting

FEATURES OF GOVERNMENT ACCOUNTING:

✓ Specific system of accounting: It is a specific accounting system which is followed by

government in its departments, offices and institutions

✓ Reporting of utilisation of public funds:

✓ Government Regulations: Government accounting is maintained according to government rules

and regulations

✓ Double Entry System: Government accounting is based on the principles and assumptions of
double entry system of book keeping system

✓ Mode of Transaction: All government transactions are supposed to be performed through banks

✓ Auditing: Audit of books of accounts maintained by government departments, offices or

institutions are to be audited by a recognised department of the government

✓ Cash basis of accounting Fund-based Accounting

OBJECTIVES OF GOVERNMENT ACCOUNTING

The objectives of government accounting are the financial administration of the activities of the
government to promote maximization of welfare in the form of various services

The specific objectives can be stated as under:

✓ To record financial transactions of revenues and expenditure relating to the government

organization
✓ To provide reliable financial data and information about the operation of public fund
✓ To record the expenditures as per the appropriate Act, Rules, and legal provisions as set by
the government
✓ To avoid the excess expenditures beyond the limit of the budget approved by the government

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 ✓ To help in the preparation of various financial statements and reports
✓ To facilitate the auditing by the concerned government department
✓ To prevent misappropriation of government properties by maintaining the systematic records
of cash and store items

COMPARISON BETWEEN GOVERNMENT ACCOUNTING AND COMMERCIAL

Government accounting Commercial Accounting

Applicability It applied in government It applied organizations

departments, offices,
institutions

objective It is maintained by the government It is maintained by business

offices for recording and reporting organizations to know the profit or
the utilization and position of loss for an accounting period and
public funds disclose the financial position of the
entity

scope More elaborate Less elaborate than GA

Budget is directly influenced by It does not follow the government

government budgeting system budgeting system

basis Cash basis Accrual basis

Accounts of the Government

1. Consolidated Funds of India

2. Public Accounts of India
3. Contingency Funds of India
Consolidated Funds of India:
❖ It is constituted under Article 266(1) of the constitution of india

❖ All revenues received by the government by way of taxes like income tax, central excise and
customs flowing to the government in connection with conduct of government business
❖ Non-tax revenues are credited into the consolidated Fund

❖ Similarly, all loans raised by the Government by issue of Public-notifications,

❖ treasury bills (internal debt) and

❖ loans obtained from foreign governments and international institutions (external debt)

❖ are credited into this fund

❖ All expenditure of the government is incurred from this fund

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 ❖ No amount can be withdrawn from the Fund without authorization from the Parliament

❖ This is the largest of all the three funds

Public Accounts of India

❖ The Public Accounts of India is constituted under Article 266 (2) of the Constitution.

❖ The transactions to be recorded in it relate to debt other than those included in the
Consolidated Fund of India.
❖ The receipts under Public Account do not constitute normal receipts of Government

❖ Parliamentary authorization for payments from the Public Account is therefore not required

..Contingency Funds of India

❖ The Contingency Fund of India Fund set by the Government of India under Article 267 of the
Constitution of India
❖ It records the transactions connected with Contingency

❖ It is held on behalf of President by the Secretary to the Government of India, Ministry of

Finance, Department of Economic Affairs
❖ The corpus of this fund is ₹ 500 crores

❖ Advances from the fund are made for the purposes of meeting unforeseen expenditure which
are resumed to the Fund to the full extent as soon as Parliament authorizes additional
expenditure
❖ Thus, this fund acts more or less like an Imprest account of Government of India

COMPTROLER AND AUDITOR GENERAL OF INDIA (C&AG)

➢ The Comptroller and Auditor General (C&AG) of India is an authority, established by the
Constitution under Constitution of India under Article 148, who audits all receipts and
expenditure of the Government of India and the state governments, including those of bodies
and authorities substantially financed by the government
➢ The CAG is also the external auditor of Government-owned corporations
➢ He may conducts supplementary audit of government companies any non-banking/ non-
insurance company in which Union Government has an equity share of at least 51 per cent or
subsidiary companies of existing government companies
➢ Comptroller and Auditor General (C&AG) is the guardian or care-taker of the national purpose
➢ He is appointed by the President of India for a tenure of 6 years

Role of C&AG
❖ Compilation of accounts: compiling the accounts of union and of each state

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 ❖ Keeping of accounts: Keeping such accounts in relation to any of the matters specified in the
above clause as may be necessary
❖ Comptroller and Auditor General to prepare and submit accounts to the President, Governors of
States and Administrators of Union territories having Legislative Assemblies
❖ C&AG to give information and render assistance to the Union and States:

❖ To audit all expenditure from the Consolidated Fund of India and of each State and of each
Union territory having a Legislative Assembly and
❖ to ascertain whether the moneys shown in the accounts as having been disbursed were legally

❖ to audit all transactions of the Union and of the States relating to Contingency Funds and
Public Accounts;
❖ To audit all trading, manufacturing, profit and loss accounts and balance-sheets and other
subsidiary accounts kept in any department of the Union or of a State;
❖ Advising the President with regard to prescription of the form in which the accounts of the
Centre and the states shall be kept (Article 150)

Public accounts committee

The Public Accounts Committee (P A C ) is a committee of selected members of Parliament,
constituted by the Parliament of India

Even though the C&AG is to audit the accounts of the government and

➢ to ensure the propriety of the money spent

➢ yet its report is further examined by the special committee of the parliament, is known
as Public Account Committee

The Committee entrusted with the responsibility of

➢ examining the accounts of the Government

➢ The Government expenditures are thoroughly examined and
➢ ensured that the Parliamentary limits are not breached

The basic function of the committee had been to ensure that the expenditure had been incurred
for the intended purposes

Constitution of Public Accounts Committee (P A C)

➢ The Committee consists of not more than 22 members

➢ 15 members from Lok Sabha and 7 members from Rajya Sabha

➢ Thus, the present P A C is a joint committee of the two Houses

➢ The Chairman is appointed by the Speaker of Lok Sabha from amongst its members of Lok

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 Sabha

➢ Since 1967, the chairman of the committee is selected from the opposition

➢ Earlier, it was headed by a member of the ruling party

However, it is to be noted that, a Minister is not eligible to be elected as a member of the Committee

If a member after his election to the Committee is appointed a Minister, he ceases to be a member
of the Committee from the date of such appointment

Role of Public Accounts Committee (P A C)

❖ Examination of the C&AG report

❖ Role regarding unauthorized expenditures or excess expenditure

The role of the committee to bring to the notice of the Parliament instances of
unauthorized expenditures or expenditures beyond sanctioned limits
❖ Role regarding spending of money by ministries

The committee not only ensures that ministries spend money in accordance with parliamentary
grants, it also brings to the notice of the Parliament instances of extravagance, loss, in
fructuous expenditure and lack of financial integrity in public services
❖ Scrutinizing the audit reports of public corporations

The function of the PAC by entrusting it with the responsibility of scrutinizing the audit
report of public corporations
❖ Scrutinising the working process of ministries and public corporation

In examining the accounts and audits of the ministries and public corporations, the
Committee gets the opportunity to scrutinize the process of their working
GOVERMENT ACCOUNTING STANDARDS ADVISORY BOARD (GASAB)

The Government Accounting Standards Advisory Board (GASAB) was constituted

❖ By C&AG
❖ with the support of Government of India
This Board was constituted
❖ to establish and improve the standards of governmental accounting
❖ and financial reporting,
❖ and enhance the accountability mechanisms

The decision to set-up GASAB was taken in the backdrop of the new priorities emerging in the Public
Finance Management and to keep pace with international trends

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The new priorities focus on

❖ good governance

❖ fiscal prudence

❖ efficiency &

❖ transparency in public spending

Structure of GASAB
The Board has high level representation from the important accounting heads in (GM-Do-FRR)

❖ Government

❖ Ministry of Finance

❖ Department of Post

❖ Finance Secretaries of states

❖ RBI and heads of premier accounting

❖ Research organizations
Responsibilities of GASAB

1. To formulate and improve

a. standards of Government accounting and

b. financial reporting
c. enhance accountability mechanisms

2. To formulate and propose standards that improve the usefulness of financial reports based
on the needs of the users

3. To keep the standards current and reflect change in the Governmental environment

4. To provide guidance on implementation of standards

5. To consider significant areas of accounting and financial reporting

6. To improve the common understanding of the nature and purpose of information contained in
the financial reports

GOVERNMENT ACCOUNTING STANDARDS ISSUED BY GOVERNMENTACCOUNTING STANDARD ADVISORY

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BOARD (GASAB)

The mission is to formulate and recommend

❖ Indian Government Accounting Standards (IGASs) for cash system of accounting and
❖ Indian Government Financial Reporting Standards (IGFRS) for accrual system of accounting,
❖ with a view to improving standards of Governmental accounting and financial reporting
❖ which will enhance the quality of decision-making and public accountability
GASAB has been developing two types of Accounting Standards

❖ Indian Government Accounting Standards (IGAS) and

❖ Indian Government Financial Reporting Standards (IGFRS)for the Government
❖ These standards have been developed to address the issues related with
❖ the existing cash system of accounting and
❖ its migration to the accrual system of accounting in future

INDIAN GOVERMENT ACCOUNTING STANDARDS (IGAS)

The standards being developed to make existing cash system of accounting more transparent are
called Indian Government Accounting Standards (IGAS)

It was formulated by GASAB and notified by Ministry of Finance, government of India are

❖ Guarantees given by Governments: Disclosure Requirements (IGAS 1);

❖ Accounting and Classification of Grants-in-aid (IGAS 2)
❖ Loans and Advances made by Governments (IGAS 3)

The Indian Government Accounting Standards (IGAS), approved by the Government Accounting
Standards Advisory Board (GASAB) and under consideration of Government of India, are:

❖ Foreign Currency Transactions and Loss/Gain by Exchange Rate Variations (IGAS 7);
❖ Government Investments in Equity (IGAS 9);
❖ Public Debt and Other Liabilities of Governments: Disclosure Requirement (IGAS 10)
IGAS – 1 GUARANTEES GIVEN BY GOVERNMENTS: DISCLOSURE REQUIREMENTS
Guarantees are also given by the Union government
✓ for payment of interest on borrowings
✓ repayment of share capital
✓ payment of minimum annual dividend; and
✓ payment against agreements for supplies of materials and equipment on credit basis

Guarantees are also given by the Union Government to the Reserve Bank of India, other banks and

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financial Institutions:

❖ for repayment of principal and payment of interest;

❖ cash credit facility;
❖ financing seasonal agricultural operations; and
❖ for providing working capital in respect of companies, corporations, co- operative societies
and co-operative banks

Objective: The objective of this Standard is to set out disclosure norms in respect of Guarantees
given by the Union, the State Governments and Union Territory Governments in their respective
Financial Statements

Disclosure

Maximum amount for which Guarantees have been given

❖ during the year, additions and

❖ deletions (other than invoked during the year)
❖ as well as Guarantees outstanding at the beginning and end of the year
❖ Amount of Guarantees invoked and discharged or not discharged during the year

Details of Guarantee commission or fee and its realised

Effective date: 01-04-2010

IGAS — 2 ACCOUNTING AND CLASSIFICATION OF GRANTS-IN-AID

Grants-in-aid are payments in the nature of assistance, donations or contributions made by one
government to another government, body, institution or individual

Grants-in-aid are given for specified purpose of supporting an institution including construction of
assets

Such grants-in-aid could be given in cash or in kind

Grants-in-aid are given by the Union Government to State Governments and by the State
Governments to the Local Bodies discharging functions of local government under the Constitution
This is based on the system of governance in India, which follows three-tier pattern:

❖ the Union Government at the apex

❖ States in the middle, and
❖ the Local Bodies (LBs) consisting of the Panchayati Raj Institutions (PRIs) and the Urban
Local Bodies (ULBs) at the grass root level
Objective:
The objectives of this Standard are:

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 ❖ To prescribe the principles for accounting and classification of Grants-in-aid in the Financial
Statements of Government both as a grantor as well as a grantee
❖ To prescribe practical solutions to remove any difficulties experienced in adherence to the
appropriate principles of accounting and classification of Grants-in-aid by way of
appropriate disclosures in the Financial Statements of Government

Recognition:

Grants-in-aid in cash shall be recognized in the books of the grantor at the time cash disbursements
take place

Grants-in-aid in cash shall be recognized in the books of the grantee at the time cash receipts

Grants-in-aid in kind shall be recognized in the books of the grantor/grantee at the time of their
receipt by the grantee

Disclosure:

❖ In order to ascertain the extent of Grants-in-aid disbursed by the grantor to the grantee for
the purpose of creation of capital assets
❖ the Financial Statements of the grantor shall disclose the details of total funds released as
Grants-in-aid
❖ and funds allocated for creation of capital assets by the grantee during the financial year
❖ This will enhance transparency and lead to improved disclosure of information in the Financial
Statements of the grantor

Effective Date: 01-04-2011

IGAS — 3 LOANS AND ADVANCES MADE BY GOVERNMENT

❖ The Government of India has been empowered under proviso (2) of Article 293 of the
Constitution of India
❖ to make loans to the States
❖ The Union Government has been providing financial assistance to the State Governments, a
substantial portion of which is in the form of loans
❖ These loans are advanced to the States both in the form of plan and non-plan assistance
intended for both developmental and non-developmental
❖ Loans are also provided by the Union Government to Foreign Governments, Government
companies and Corporations, Non-Government institutions and Local bodies

Objective:

The objectives of the Standard are:

✓ Recognition, Measurement, Valuation and Reporting in respect of Loans and Advances made
by the Union and the State
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 ✓ To ensure adequate disclosure on Loans and Advances made by the Governments consistent
with best international practices
Scope:

This Standard applies to Loans and Advances given by the Government for incorporation
and presentation in the Financial Statements of the Government

This standard shall apply only to government accounts being maintained on a cash basis

Recognition:

A loan shall be recognized by the disbursing entity as an asset from the date the money is
actually disbursed and not from the date of sanction

If a loan is disbursed in installments then each installment shall be treated as a separate

loan for the purpose of repayment of principal and payment of interest

Measurement and Valuation:

Accounting and reporting on loans and advances made by Governments- Historical cost basis
Disclosures

Financial statements shall disclose

❖ Carrying amount of loans and advances at beginning and end of the year
❖ Interest in arrears
❖ The Financial Statements of the Union Government shall disclose the following details under
‘Loans and Advances made by the Union Government’ in the Annual Finance Accounts of
the Union Government:
✓ the summary of Loans and Advances showing Loanee group-wise details;
✓ the summary of Loans and Advances showing Sector-wise details;
✓ The summary of repayments in arrears from Governments and other loanee entities The
fresh Loans and Advances made during the year

The Financial Statements of the State Governments shall disclose the following details under
‘Statement of Loans and Advances made by the State Governments’ in the Annual Finance
Accounts of the State Government

▪ the summary of Loans and Advances showing Loanee group-wise details;

▪ the summary of Loans and Advances showing Sector-wise details;

▪ the summary of repayments in arrears from Loanee entities

Effective date: 01-04-2011

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IGAS — 7 FOREIGN CURRENCY TRANSACTIONS AND LOSS OR GAIN BY EXCHANGE RATE VARIATION

Government Accounting require that the accounts of the Government shall be

maintained in reporting currency i.e., Indian rupee is the reporting currency for the financial
statements of the Government

All transactions of the Union and State Governments taking place in other countries are
passed periodically by the Indian Embassies/ Missions to India and brought to account
finally in the Indian books after they have been converted into rupees

All transactions taking place with foreign Governments or foreign entities or international
agencies in foreign currency are also to be recorded in the reporting currency applying
exchange rate on the date of transaction

Objective: The objective of this standard is to provide accounting and disclosure requirements of
foreign currency transactions and financial effects of exchange rate variations in terms of loss or
gain in the financial statements

Scope: The Accounting Authority which prepares and presents the financial statements of the
Government under the cash basis of accounting, as defined in the Government Accounting Rule 21
of GAR 1990 and Government Financial Rule 68 of GFR 2005 should apply this Standard:

❖ In accounting and disclosure for foreign currencies transaction

❖ In accounting and disclosure for financial effects of exchange variations in terms of loss
or gain by exchange rate variation, and

❖ In disclosure of foreign currency external debts and the rate(s) applied for disclosure

Treatment of Loss or Gain by Exchange Rate Variation:

This standard set out the following accounting treatment required by this Standard with respect to
loss or gain by exchange rate variations and exchange difference on different types of foreign
currency transaction.

❖ All losses or gains by foreign exchange rate variation shall be recognised as

revenue loss or gain (transferred to P&L)
❖ Government may have losses or gains by exchange rate variations on its operating activities
like operation of its missions abroad or due to contractual commitments
❖ Loss or gain arising out of transactions for acquisition of Special Drawing Rights at the
International Monetary Fund shall be reported in the financial statements
❖ Exchange difference may arise out of Government’s financing activities like borrowing of
loans denominated in foreign currencies and issuing of rupees securities

Disclosure: The financial statements shall disclose rates of exchange adopted internally by the
Government for different types of foreign currency transactions including forward contract rate, if any,

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along with their basis as part of Statement of Accounting Policies The financial statements shall
disclose the following details of foreign loans in the format given in paragraph 30:

(a) loans outstanding on historical cost basis at the beginning and end of the year;

(b) loans outstanding on closing rate basis at the beginning and end of the year;

(c) loans outstanding in foreign currency units at the beginning and end of the year;

(d) Additions during the year in foreign currency terms and in Indian Rupee along with the rate
of exchange adopted;
(e) Discharge during the year showing separately the amounts in foreign currency units, on
historical basis and
(f) Current rate of exchange basis;
(g) loss or gain on repayment of loans due to variation of exchange rate

Effective Date: This IGAS shall be effective for financial statements for the periods commencing
from the 1st April subsequent to the date of notification of the standard by Government

IGAS — 9: GOVERNMENT INVESTMENTS IN EQUITY

Introduction:
The Union Government, State Governments, and Governments of Union Territories with Legislatures
make investments in entities like
✓ Government companies,
✓ Statutory Corporations,
✓ other Joint Stock Companies
✓ Cooperative Banks/ Societies international

bodies and authorities like the International Monetary Fund, Asian Development Fund, and International
Finance Corporation

Government’s investments in equity include direct investment in

➢ share capital (only equity, not preference)
➢ conversion of outstanding loans (principal and interest) against the entity into equity, and
➢ conversion of dividends declared by the entity, but not received, into equity

Objective: The objective of the Standard is to lay down the norms for recognition, measurement,
and reporting of investments of the Government in the Financial Statements with True and fair view

Scope: This Standard applies to investments made in different investee entities by the Government for
incorporation, and presentation in the Financial Statements

This standard will apply only to Government accounts being maintained on cash basis

It applies to investment in equity of the investee entities and not in debt, like debentures, bonds, and

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such other instruments

Recognition: An investment in equity shall be recognised by the Government as an asset from the
date on which the investment details are entered in the books of the investee entity

Loans converted into equity and dividends declared but not distributed by the investee entity,
converted into equity shall be treated as equity investments from the date on which such
conversion takes plate, i e , from the date on which details of conversion are entered in the books of
the investee entity
Measurement:

The method of initial measurement of investments in the financial statements of the

Government is the historical cost of the investment
Where investment in equity is acquired on payment of cash including on exercise of rights
granted by the investee, the historical cost is the amount of cash disbursed
Historical cost of Bonus shares is nil as there is no payment of cash
In case the Government acquires equity shares in consideration of any other asset, e g land,
the historical cost of such investment shall be the face value of the equity shares
Investments subsequent to initial measurement shall also be reflected in the financial
statements at historical cost

Disclosure:

The Financial Statements of the Government shall disclose the following details under the
statement of ‘Investments made by the Government’

(i) Detailed Statement of Investments made investee Entity wise

(ii) Detailed Statement of Disinvestments / divestments / retirement of capital / transfer of
shares made Investee Entity wise
(iii) Summary of Investments: Investee group-wise (such as Statutory Corporations, Joint
Stock Companies, Cooperative Banks, etc

(iv) Additional disclosures of investee entities which have not submitted accounts and / or
have suffered a loss during the preceding three consecutive years

Effective date: This IGAS becomes effective for the financial statements covering periods
beginning from the 01 April of the year following the notification of the Standard by the
Government

IGAS-10
PUBLIC DEBT AND OTHER LIABILITIES OF GOVERNMENTS: DISCLOSURE REQUIREMENTS

In terms of Article 292 of the Constitution

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 Objective: The objective of the IGAS is follow the principles for identification, measurement
and disclosure of public debt and other obligation of Union and the State Governments
including Union Territories with legislatures in their respective financial statements

It ensures consistency with international practices for accounting of public debt for the
benefit of various stake holders

Scope: The proposed IGAS shall apply to the financial statements prepared by the Union and
State Governments and Union Territories with legislature

The IGAS shall not include in its ambit, guarantees and other contingent liabilities and non-
binding assurances

Measurement & Valuation:

The Public Debt and Other Obligations incurred by Governments shall be accounted and
reported on the basis of Face Value
For the purpose of reporting external debt, changes in the Balance at the end of the
Accounting Period arising from variations in the rate of exchange shall also be reported as
per IGAS -07

Disclosure: The financial statements of the Union Government, State Governments and the Union
Territories with legislature shall disclose the following details concerning Public Debt and other
obligations:

The opening balance, additions and discharges during the year, closing balance and net change in
rupee terms with respect to
✓ internal debt;
✓ external debt
✓ other obligations
Effective date: This IGAS becomes effective for the Financial Statements covering periods
beginning on 1st April of the year after the notification of the Standard by the Government

INDIAN GOVERNMENT FINANCIAL REPORTING STANDARDS (IGFRS)

The standards being developed for accrual system of accounting in the Government are
called the Indian Government Financial Reporting Standards (IGFRS)

Accrual based Accounting Standards, i e , Indian Government Financial Reporting Standards

(IGFRS), approved by the Government Accounting Standards Advisory Board (GASAB) under
consideration of Government of India:

IGFRS 1: Presentation of Financial Statements

IGFRS 2: Property, Plant & Equipment

IGFRS 3: Revenue from Government Exchange Transactions

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 IGFRS 4: Inventories

IGFRS 5: Contingent Liabilities (other than guarantees) and Contingent Assets:

Disclosure Requirements 1 Formulation of some other IGFRSs/IGASs is under progress

IGFRS 1: Presentation of Financial Statements

❖ IT prescribes the manner of presentation of financial statements by Government entities

that follow accrual basis of accounting
❖ It sets out over all requirement for the presentation of financial statements and
❖ minimum requirements for the content of financial statements presented

IGFRS 2: Property, Plant and Equipment

This standard has prescribed the accounting treatment for property, plant and equipment
(PPE) so that users of financial statements can obtain information regarding an entity’s
investment in PPE

The principal issues in

❖ accounting for PPE and

❖ timing of recognition of the assets,
❖ determination of their carrying amounts and
❖ depreciation charges and impairment losses to be recognised in relation to them

The Accounting Standard is essentially an adaptation to Indian requirements of International

Public Sector Accounting Standard (IPSAS 17) issued by IFAC on Property, Plant and
Equipment
It also envisaged to provide guidance to pilot studies and the eventual development of a
common reporting framework under accrual basis for the Union and the States
The IGFRS could be revised by GASAB based on pilot studies

IGFRS 3: Revenue from Government Exchange Transaction

• This Standard lays down the principles to be followed for recognition and measurement
of revenue from exchange transactions by government entities under accrual basis of
accounting
• It is envisaged to provide guidance to the pilot studies and eventual development of a
common reporting framework under accrual basis for Union and the States
• The IGFRS could be revised by GASAB based on pilot studies
IGFRS 4: Inventories

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 • This standard has prescribed the accounting treatment for inventories
• A primary issue in accounting for inventories is the amount of cost to be recognized as
an asset and carried forward until the related revenues are recognized
• This Standard provides guidance on the determination of cost and its subsequent
recognition as an expense, including any write-down to net realizable value
• It also provides guidance on the cost formulas that are used to assign costs to
inventories The Accounting Standard has derived inputs from Indian Accounting
Standards (Ind AS 2), IPSAS 12 and IAS 2 (International Accounting Standards)
• The Standard is envisaged to provide guidance to the pilot studies and eventual development
of a common reporting framework under accrual basis for the Union and the States
• The IGFRS 4 could be revised by GASAB based on pilot studies

IGFRS 5: Contingent Liabilities (other than guarantees) and Contingent Assets:

Disclosure Requirement:

• This standard has laid down the principles for disclosure requirements of Contingent
Liabilities (other than guarantees) and Continent Assets for both the Union and the
State Governments including Union Territories with Legislatures
• An important objective of the IGFRS is to ensure that Governments portray the risks
associated with contingent liabilities and contingent assets in a transparent manner
• The purpose of this standard is to provide for disclosure requirements of contingent
liabilities (other than guarantees) and contingent assets of Governments in the financial
Statements
• Disclosure of contingent liability is relevant from the point of view of knowing what risk
of future liability the government carries
• Disclosure of contingent assets is relevant in knowing what possible assets may accrue
to government

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