SARANSH

Last Mile Referencer for

ACCOUNTING

The Institute of Chartered

Accountants of India
(Setup by an Act of Parliament)

Board of Studies (Academic)

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Saransh - Last Mile Referencer for Accounting
While due care has been taken in preparing this booklet, if any errors or omissions are noticed, the
same may be brought to the notice of the Director, BoS. The Council of the Institute is not
responsible in any way for the correctness or otherwise of the matter published herein.

© 2023. The Institute of Chartered Accountants of India (Also referred to as ICAI)

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The Institute of Chartered Accountants of India
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Noida 201 309
 Board of Studies (Academic), the student wing of the Institute, does not leave any
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the concepts and provisions by solving questions contained therein. Suggested
PREFACE

Answers containing the ideal manner of answering questions set at examination also
helps students revise for the forthcoming examination. Mock Test Papers help
students assess their level of preparedness before each examination. BoS (Academic)
also conducts live virtual classes through eminent faculty for its students across the
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To reach out to its students, the BoS (Academic) has also been publishing
subject-specific capsules in its monthly Students’ Journal “The Chartered
Accountant Student” since the year 2017 for facilitating effective revision of concepts
dealt with in different topics of each subject at the Foundation, Intermediate and
Final levels of the chartered accountancy course. Each issue of the journal includes a
capsule relating to specific topic(s) in one subject at each of the three levels. In these
capsules, the concepts and provisions are presented in attractive colours in the form
of tables, diagrams and flow charts for facilitating easy retention and quick revision
of topics.

The BoS (Academic) is now coming out with a comprehensive booklet ‘Saransh - Last
Mile Referencer for Accounting’ wherein the significant concepts dealt with across
topics in accounting are captured by way of diagrams, flow charts and tables. In the
subject of accounting, the booklet is divided into two parts viz – Part I: Accounting
Standards and Part II: Indian Accounting Standards. The booklet captures the
substantial provisions contained in Accounting Standards and Indian Accounting
Standards (Ind AS) forming part of the syllabi of the subject at different levels. The
booklet encapsulates diagrams, flow charts, tables and illustrated journal entries.
This booklet consolidates all significant topics of accounting at one place, by
capturing the key points. This would help the reader appreciate the requirements
contained in each such accounting standard / Ind AS at a glance. It will surely
facilitate the reader to grasp the essence of the subject as a whole by serving them as
a ready reckoner.

Happy Reading!

© ICAI BOS(A)
SARANSH

Topic Pg No.

PART II: INDIAN ACCOUNTING STANDARDS

Ind AS 1: Presentation of Financial Statements II. 2

Ind AS 2: Inventories II. 8
Ind AS 7: Statement of Cash Flows II. 12
Ind AS 8: Accounting Policies, Changes in Accounting Estimates and Errors II. 16
Ind AS 10: Events after the Reporting Period II. 18
Ind AS 12: Income Taxes II. 21
Ind AS 16: Property, Plant and Equipment II. 35
Ind AS 19: Employee Benefits II. 40
Ind AS 20: Accounting for Government Grants and Disclosure of Government Assistance II. 57
Ind AS 21: The Effects of Changes in Foreign Exchange Rates II. 59
Ind AS 23: Borrowing Costs II. 65
Ind AS 24: Related Party Disclosures II. 67
Ind AS 27: Separate Financial Statements II. 71
Ind AS 28: Investment in Associates and Joint Ventures II. 76
Ind AS 32: Financial Instruments: Presentation II. 85
Ind AS 33: Earnings per Share II. 96
Ind AS 34: Interim Financial Reporting II. 102
Ind AS 36: Impairment of Assets II. 105
Ind AS 37: Provisions, Contingent Liabilities and Contingent Assets II. 109
Ind AS 38: Intangible Assets II. 118
Ind AS 40: Investment Property II. 123
Ind AS 41: Agriculture II. 127
Ind AS 101: First Time Adoption of Indian Accounting Standards II. 130
Ind AS 102: Share Based Payment II. 146
Ind AS 103: Business Combinations II. 158
Ind AS 105: Non-current Assets Held for Sale and Discontinued Operations II. 178
Ind AS 108: Operating Segments II. 182
Ind AS 109: Financial Instruments II. 185
Ind AS 110: Consolidated Financial Statements II. 206
Ind AS 111: Joint Arrangements II. 225
Ind AS 113: Fair Value Measurement II. 232
Ind AS 115: Revenue from Contracts with Customers II. 240
Ind AS 116: Leases II. 247

© ICAI BOS(A)
SARANSH Part II: Indian Accounting Standards

Part II
INDIAN ACCOUNTING
STANDARDS

© ICAI BOS(A) II. 1

SARANSH Part II: Indian Accounting Standards

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Objective

Ind AS 1 sets out

Ind AS 1 prescribes the basis for
presentation of general purpose financial
statements to ensure comparability

Overall requirements Guidelines Minimum requirements

With the entity’s financial With the financial statements For the presentation
of financial For their
statements of previous of other entities structure For their content
periods statements

Scope

Applicability Non-applicability

Ind AS 1 is applied in preparing and Ind AS 1 does not apply to the structure
presenting general purpose financial and content of condensed interim financial
statements in accordance with Ind AS statements prepared in accordance
with Ind AS 34 (except paras 15-35).

To all entities
Ind AS 1 uses terminology Entities whose share capital is
suitable for profit-oriented not equity may need to adapt the
entities including public financial statement presentation
sector business entities of members’ interests

Presenting Presenting
consolidated separate financial
financial statements in
statements in accordance with
accordance with Therefore, entities with not-
Ind AS 27 for-profit activities may apply
Ind AS 110
this Standard, by amending
the descriptions used for
financial statements themselves

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SARANSH Part II: Indian Accounting Standards

Complete set of financial statements

includes

A balance sheet A statement of A statement of A statement of Notes, comprising significant

profit and loss changes in equity cash flows accounting policies and other
explanatory information

As at the end of Comparative information

For the period Of the preceding period
the period for narrative and descriptive
(comparative information
for all amounts reported information shall be given if it
in the current period’s is relevant for understanding
Of the preceding period financial statements) the current period’s financial
(comparative information statements
for all amounts reported
in the current period’s At the beginning of the preceding period when
financial statements) • An entity applies an accounting policy retrospectively; or
• An entity makes a retrospective restatement of items in its financial statements; or
• An entity reclassifies items in its financial statements.

Note:
1. An entity shall present a single statement of profit and loss, with profit or loss and other comprehensive income (OCI)
presented in two sections. The sections shall be presented together, with the profit or loss section presented first followed
directly by the other comprehensive income section.
2. Reports and statements presented outside financial statements are outside the scope of Ind AS.
3. An entity is not required to present the related notes to the opening balance sheet as at the beginning of the preceding period.

General features

Presentation of Going Accrual basis of Materiality and Frequency of

True and Fair View Offsetting
concern accounting aggregation reporting
and compliance
with Ind ASs

Consistency of Comparative
presentation information

Change in accounting policy, retrospective Additional comparative Minimum comparative

restatement or reclassification information information

Note: The above general features have been summarised below.

Presentation of True and Fair View and compliance with Ind ASs

Of the financial position Of the financial performance Of the cash flows of an entity

Presentation of a true and fair view requires an entity to

To select and apply accounting To present information, in a To provide additional disclosures,

policies as per Ind AS 8 manner that provides relevant, if required, to enable users
reliable, comparable and to understand the impact of
understandable information particular item

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SARANSH Part II: Indian Accounting Standards

When an entity departs from a requirement of an Ind AS (in extremely rare circumstances), it shall disclose

Management’s conclusion Management’s compliance • The title of the Ind AS For each period presented,
that the financial with applicable Ind ASs, departed the financial effect of the
statements present a true except departure from a • The nature of the departure on each item in
and fair view particular requirement to departure the financial statements
present a true and fair view • The treatment that the
Ind AS would require
• The reason why that
treatment would be so
misleading; and
• The treatment adopted

Note:
1. An entity shall make an explicit and unreserved statement of compliance of ALL Ind AS in the notes.
2. An entity shall not describe financial statements as complying with Ind ASs unless they comply with all the requirements of Ind ASs.
3. An entity cannot rectify inappropriate accounting policies either by disclosure of the accounting policies used or by notes or
explanatory material.

Going  An entity shall prepare financial statements Change in When an entity reclassifies comparative amounts,
concern on a going concern basis unless management accounting it shall disclose (including as at the beginning of
 intends to liquidate the entity or policy, the preceding period):
 to cease trading, or retrospective (a) the nature of the reclassification;
 has no realistic alternative but to do so. restatement or (b) the amount of each item or class of items that
 When management has significant doubt reclassification is reclassified; and
upon the entity’s ability to continue as a (c) the reason for the reclassification.
going concern, the entity shall disclose When it is impracticable to reclassify comparative
 the basis on which it prepared the amounts, an entity shall disclose:
financial statements and (a) the reason for not reclassifying the amounts,
 the reason why the entity is not regarded and
as a going concern. (b) the nature of the adjustments that would
To assess going concern basis, management may have been made if the amounts had been
need to consider a wide range of factors like reclassified.
 current and expected profitability, Consistency An entity shall retain the presentation and
 debt repayment schedules and of classification of items in the financial statements
 potential sources of replacement financing presentation from one period to the next unless:
Accrual basis  An entity shall prepare its financial (a) presentation or classification would be more
of accounting statements, except for cash flow information, appropriate having regard to the criteria for
using the accrual basis of accounting. the selection and application of accounting
 When the accrual basis of accounting is policies in Ind AS 8; or
used, an entity recognises items as assets, (b) an Ind AS requires a change in presentation.
liabilities, equity, income and expenses.
Materiality  Present separately each material class of STRUCTURE AND CONTENT
and similar items.
Identification An entity shall clearly identify each financial
aggregation  Present separately items of a dissimilar
of the statement and the notes.
nature or function only if it is material or
financial
required by law (even if it is immaterial). It shall display prominently:
statements
 If a line item is not individually material, it is (a) the name of the reporting entity or other
aggregated with other items either in those means of identification, and any change
statements or in the notes.
 Do not reduce the understandability of its in that information from the end of the
financial statements by preceding reporting period;
 obscuring material information with (b) whether the financial statements are of an
immaterial information; or individual entity or a group of entities;
 aggregating material items that have
different natures or functions.
(c) the date of the end of the reporting period
or the period covered by the set of financial
Offsetting Offsetting of assets and liabilities or income and
expenses is not allowed unless required or permitted statements or notes;
by an Ind AS or except when offsetting reflects the (d) the presentation currency; and
substance of the transaction or other event (e) the level of rounding used in presenting
Frequency of An entity shall present a complete set of financial amounts in the financial statements.
reporting statements (including comparative information) The rounding off is acceptable as long as
at least annually.
the entity discloses it and does not omit
Comparative Refer chart 3 of Ind AS 1 for minimum and
material information.
information additional comparative information.

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SARANSH Part II: Indian Accounting Standards

Information to  The balance sheet shall present line items  Where there is a breach of a material
be presented and additional line items (including by provision of a long-term loan arrangement
in the balance disaggregating the line items listed in on or before the end of the reporting period
sheet paragraph 54), headings and subtotals. with the effect that the liability becomes
 Presents current and non-current assets, payable on demand on the reporting date,
and current and non-current liabilities, as the entity does not classify the liability
separate classifications in its balance sheet. as current, if the lender agreed, after the
 It shall not classify deferred tax assets reporting period and before the approval
(liabilities) as current assets (liabilities). of the financial statements for issue, not to
demand payment as a consequence of the
breach.
Exception
An entity may present all assets and liabilities in Information Disclose sub-classifications of the line items
order of liquidity but shall disclose the amount to be presented, classified in a manner appropriate to
expected to be recovered or settled presented the entity’s operations.
(a) no more than twelve months after the either in the
reporting period, and balance sheet
(b) more than twelve months after the reporting or in the
period. notes
 An entity is permitted to present some of Statement  The statement of profit and loss shall present,
its assets and liabilities using a current/non- of Profit and in addition to the profit or loss and other
current classification and others in order of Loss comprehensive income sections:
liquidity when this provides information that (a) profit or loss;
is reliable and more relevant. (b) total other comprehensive income;
Current  Classify an asset as current when: (c) comprehensive income for the period,
assets (a) it expects to realise the asset, or intends to being the total of profit or loss and other
sell or consume it, in its normal operating comprehensive income.
cycle;  An entity shall not present any items of
(b) it holds the asset primarily for the purpose income or expense as extraordinary items.
of trading;  An entity shall present an analysis of
(c) it expects to realise the asset within twelve expenses recognised in profit or loss using
months after the reporting period; or a classification based on the nature of
(d) the asset is cash or a cash equivalent expense method.
unless the asset is restricted from being  An entity shall present additional line items,
exchanged or used to settle a liability for headings and subtotals in the statement of
at least twelve months after the reporting profit and loss, when such presentation is
period. relevant to an understanding of the entity’s
 Classify all other assets as non-current.
financial performance.
Note: The term ‘non-current’ includes tangible,
intangible and financial assets of a long-term Information to  Present line items for the amounts for the
nature. be presented period of:
in the other (a) items of OCI classified by nature and
Operating  It is the time between the acquisition of
comprehensive grouped into those that:
cycle assets for processing and their realisation in
income (OCI) (i) will not be reclassified subsequently
cash or cash equivalents.
section to profit or loss; and
 When the entity’s normal operating cycle is
not clearly identifiable, it is assumed to be (ii) will be reclassified subsequently
twelve months. to profit or loss when specific
 The same normal operating cycle applies conditions are met.
to the classification of an entity’s assets and (b) the share of OCI of associates and joint
liabilities. ventures accounted for using the equity
method, separated into the share of
Current  An entity shall classify a liability as current items that:
liabilities when: (i) will not be reclassified subsequently
(a) it expects to settle the liability in its to profit or loss; and
normal operating cycle; (ii) will be reclassified subsequently
(b) it holds the liability primarily for the to profit or loss when specific
purpose of trading; conditions are met.
(c) the liability is due to be settled within  Disclose the amount of income tax relating to
twelve months after the reporting period; each item of OCI, including reclassification
or adjustments, either in the statement of profit
(d) it does not have an unconditional right to and loss or in the notes.
defer settlement of the liability for at least  Present items of OCI either
twelve months after the reporting period. (a) net of related tax effects, or
 An entity shall classify all other liabilities as (b) before related tax effects with one
non-current. amount shown for the aggregate amount
 An entity classifies some operating items of income tax relating to those items.
like trade payables and some accruals for  If an entity elects alternative (b), it shall
employee and other operating costs (part allocate the tax between the items that might
of the working capital) as current liabilities be reclassified subsequently to the profit
even if they are due to be settled more than or loss section and those that will not be
twelve months after the reporting period. reclassified subsequently to the profit or loss
section.

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SARANSH Part II: Indian Accounting Standards

Reclassification  When amounts previously recognised in Information  Present, either in SOCE or in the notes,
adjustment other comprehensive income are reclassified to be the amount of dividends recognised as
to profit or loss they are referred as presented distributions to owners during the period,
reclassification adjustments. in the and the related amount of dividends per
 It is included with the related component of statement share.
other comprehensive income in the period of changes  Changes in an entity’s equity between the
in equity beginning and the end of the reporting period
that the adjustment is reclassified to profit or reflect the increase or decrease in its net
loss. (SOCE) or in
the notes assets during the period except for changes
 These amounts may have been recognised resulting from transactions with owners
in OCI as unrealised gains in the current or in their capacity as owners (such as equity
previous periods. contributions, reacquisitions of the entity’s
 Those unrealised gains must be deducted own equity instruments and dividends) and
from OCI in the period in which the realised transaction costs directly related to such
gains are reclassified to profit or loss to transactions.
avoid including them in total comprehensive  Retrospective adjustments and retrospective
income twice. restatements are not changes in equity but
 An entity may present reclassification they are adjustments to the opening balance
adjustments in the statement of profit and of retained earnings, except when an Ind AS
requires retrospective adjustment of another
loss or in the notes. component of equity.
 An entity presenting reclassification  Standard requires disclosure in the statement
adjustments in the notes presents the items of changes in equity of the total adjustment
of OCI after any related reclassification to each component of equity resulting
adjustments. from changes in accounting policies and,
 Reclassification adjustments do not arise separately, from corrections of errors.
on changes in revaluation surplus or on  These adjustments are disclosed for each
reameasurements of defined benefit plans prior period and the beginning of the period.
since they are recognised in OCI and are not Notes  The notes shall:
reclassified to profit or loss in subsequent -Structure (a) present information about the basis of
periods. Changes in revaluation surplus preparation of the financial statements
may be transferred to retained earnings in and the specific accounting policies;
subsequent periods as the asset is used or (b) disclose the information required by Ind
when it is derecognised. ASs that is not presented elsewhere in
 Reclassification adjustments do not arise the financial statements; and
if a cash flow hedge or the accounting (c) provide information that is not presented
elsewhere in the financial statements,
for the time value of an option (or the
but is relevant to an understanding of
forward element of a forward contract any of them.
or the foreign currency basis spread of a  Present notes in a systematic manner
financial instrument) result in amounts  Cross-reference each item in the balance
that are removed from the cash flow hedge sheet and in the statement of profit and loss,
reserve or a separate component of equity, and in the statements of changes in equity
respectively, and included directly in the and of cash flows to any related information
initial cost or other carrying amount of in the notes.
an asset or a liability. These amounts are Notes -  An entity shall disclose its significant
directly transferred to assets or liabilities. Disclosure of accounting policies comprising:
Information SOCE includes the following information: accounting (a) the measurement basis (or bases) used in
to be (a) total comprehensive income for the period, policies preparing the financial statements; and
presented showing separately the total amounts (b) the other accounting policies used that
in the are relevant to an understanding of the
attributable to owners of the parent and to
statement financial statements.
non-controlling interests;  Additionally, it shall disclose, the judgements,
of changes (b) for each component of equity, the effects of apart from those involving estimations, that
in equity retrospective application or retrospective management has made in the process of
(SOCE) restatement; applying the entity’s accounting policies and
(c) for each component of equity, a that have the most significant effect on the
reconciliation between the carrying amount amounts recognised in the financial statements.
at the beginning and the end of the period,  Disclosure of an accounting policy may
separately (as a minimum) disclosing changes be significant because of the nature of the
resulting from: entity’s operations even if amounts for
(i) profit or loss; current and prior periods are not material.
(ii) other comprehensive income; Notes An entity shall disclose information about the
(iii) transactions with owners in their -Sources of assumptions it makes about the future, and other
capacity as owners, showing separately estimation major sources of estimation uncertainty at the
contributions by and distributions uncertainty end of the reporting period, that have a significant
to owners and changes in ownership risk of resulting in a material adjustment to the
interests in subsidiaries that do not carrying amounts of assets and liabilities within
the next financial year. In respect of those assets
result in a loss of control; and
and liabilities, the notes shall include details of:
(iv) any item recognised directly in equity (a) their nature, and
such as amount recognised directly in (b) their carrying amount as at the end of the
equity as capital reserve. reporting period.

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SARANSH Part II: Indian Accounting Standards

changes in revaluation surplus

reameasurements of defined benefit plans

gains and losses arising from translating the financial statements of a foreign
comprehensive income (OCI)

gains and losses from investments in equity instruments designated at fair value through OCI
Components of other

gains and losses on financial assets measured at fair value through OCI

the effective portion of gains and losses on hedging instruments in a cash flow hedge and the gains and losses
on hedging instruments that hedge investments in equity instruments measured at fair value through OCI

for particular liabilities designated as at FVTPL, the amount of the change in fair value that is attributable to changes in the
liability’s credit risk

changes in the value of the time value of options when separating the intrinsic value and time value of
an option contract and designating as the hedging instrument only the changes in the intrinsic value

changes in the value of the forward elements of forward contracts when separating the forward element
and spot element of a forward contract and designating as the hedging instrument only the changes in
the spot element, and changes in the value of the foreign currency basis spread of a financial instrument
when excluding it from the designation of that financial instrument as the hedging instrument

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SARANSH Part II: Indian Accounting Standards

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Scope of Ind AS 2

Non-applicability of Ind AS 2

Financial instruments (Ind AS Biological assets (i.e. living animals or plants) Measurement of
32 and Ind AS 109) related to agricultural activity and agricultural inventories
produce at the point of harvest (Ind AS 41)

At NRV in accordance with well-established At fair value less costs to sell

practices in those industries for inventories held by

Producers of Agricultural produce Minerals and mineral Commodity

after harvest products broker-traders

Agricultural products Forest products Changes in fair

value less costs to
sell are recognised
in profit or loss in
Changes in NRV are recognised in profit or loss in the period
the period of the change

* NRV- Net Realisable Value

Definition of Inventories

Inventories are assets held

For sale in the ordinary course of In the process of production for In the form of materials or
business such sale supplies to be consumed in

It includes goods It includes finished goods Production process Rendering of services

purchased and held for produced, or work in
resale progress, or materials and
supplies awaiting use in the
production process

Costs incurred to fulfill a contract with a customer that do not

give rise to inventories are accounted for in accordance with
Ind AS 115

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SARANSH Part II: Indian Accounting Standards

Measurement of Inventories

Inventories are measured at the lower of

Cost of inventories NRV of inventories

Costs of purchase Costs of conversion Other costs

Purchase price Direct labour Overheads

Costs incurred
to bring the
inventories to
Import duties their present
and other taxes location and
(non-recoverable condition
from the taxing
authorities)
Fixed production Variable production
overheads (it overheads (It
remain relatively vary directly, or
constant regardless nearly directly, Borrowing Costs
Transport cost (Refer Ind AS 23)
of the volume of with the volume of
production) production)

Handling other
costs directly
attributable to If AP = NC,
the acquisition of
goods/services then Allocated fixed Estimated Estimated
O/H = Total fixed Selling Estimated cost cost
O/H price in the of completion necessary
ordinary to make the
course of sale
Trade discounts, business
rebates and other If AP < NC,
similar items
are deducted in then Allocated fixed
determining the O/H = AP x cost per
costs of purchase unit of fixed O/H
(based on NC)
NRV = Net Realisable Value
Expense recognised AP = Actual Production
in Profit or loss =
Total fixed O/H - NC = Normal Capacity
Allocated fixed O/H O/H = Overhead

If AP > NC,

then Allocated fixed

O/H = Total fixed
O/H

Costs excluded from the cost of inventories and recognised as expenses

• Abnormal amounts of wasted materials, labour or other production costs.

• Storage costs (If those costs are not necessary in the production process before a further production stage).
• Administrative overheads that do not contribute to bringing inventories to their present location and condition.
• Selling costs.
• Interest expenses (financial element in deferred settlement terms).

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SARANSH Part II: Indian Accounting Standards

Allocation of cost to joint products and by-products

When more than one product is produced

in the process

The outcome is Main product

The outcome is Joint products
with a By-product

When the cost of When the cost of

When the by-product is When the by-product is
conversion is separately conversion is not
immaterial material
identifiable separately identifiable

Cost of each product is Allocation of cost is By-product is measured By-product is treated

based on the separate based on relative sales at NRV and this value is as joint product
cost incurred. value of each product deducted from the cost of and accordingly the
either at the stage in the the main product. accounting is done.
production process when
the products become
separately identifiable,
or at the completion of
production.

Cost Formulas

Inventory Valuation
Techniques

Inventory ordinarily Inventory not ordinarily

interchangeable interchangeable

Historical Cost Methods Non Historical Cost Methods

Specific Identification
Method
(generally used in
jewellery and tailor
made industries)
Retail Inventory / Adjusted Standard Cost
FIFO selling price method Method

It takes into account

normal levels of (and
It is used when large
are reviewed regularly)
numbers of rapidly changing
Weighted Average
items with similar margins
are involved Materials

Supplies

Cost is determined by reducing the Labour efficiency

sales value of the inventory by the
appropriate percentage gross margin
Capacity utilisation

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SARANSH Part II: Indian Accounting Standards

Material and other supplies held for use in

the production of inventory

When finished goods are sold When finished goods are

at or above cost sold at NRV

Raw material is measured Raw material is measured at

at cost replacement cost measured as NRV

Important points of Ind AS 2 to be remembered Disclosure

NRV It is an entity specific value
Inventories comprising They are measured on initial recognition
agricultural produce at their fair value less costs to sell at the
that an entity has point of harvest. Inventories carried
harvested from its at fair value less costs
to sell
biological assets
New assessment of ™ A new assessment is made of NRV in ™ Amount of
Analysis of inventories
NRV each subsequent period.
carrying recognised as
™ When the circumstances that amount an expense
previously caused inventories to be during the
written down below cost no longer period
™ Amount of any
exist or when there is clear evidence
write-down
of an increase in NRV, the amount of of inventories
the write-down is reversed (i.e. the recognised as
reversal is limited to the amount of an expense
™ The amount
the original write-down)
Sale of inventories The financial of any reversal
™ When inventories are sold, the Accounting of any write-
statements
carrying amount of those inventories policies shall disclose down
shall be recognised as an expense in ™ The
the period the sale is recognised. circumstances
or events that
™ If NRV is less than cost, then the led to the
difference and all losses of inventories reversal of a
shall be recognised as an expense in write-down
that period.
™ When in later year, if NRV increases The carrying amount
then difference to the extent of cost of inventories pledged
shall be recognised as a reduction in as security for liabilities
the amount of inventories recognised
as an expense in the period in which
the reversal occurs.

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SARANSH Part II: Indian Accounting Standards

,1',$1$&&2817,1*67$1'$5' ,1'$6 67$7(0(172)&$6+)/2:6

Objectives of Ind AS 7

To assess To require

the ability of the entity to the needs of the entity to the timing and certainty the provision of information about
generate cash and cash utilise those cash flows of generation of cash the historical changes in cash and
equivalents flows cash equivalents of an entity

Presentation of a statement of cash flows

Report cash flows (inflows and outflows) during the period as

Operating activities Investing activities Financing activities Cash and cash equivalents

These are the Investing activities Financing activities Cash Cash equivalents
principal revenue- are the acquisition are activities that
producing activities and disposal result in changes
of the entity other of long-term in the size and It Are short-
than investing or assets and other composition of the comprises term, highly
financing activities investments not contributed equity cash on liquid
included in cash and borrowings of hand & investments
equivalents the entity demand
deposits Are readily
Reporting convertible
An entity shall report separately to known
major classes of gross cash amounts of
receipts and gross cash payments cash
arising from investing and
Under direct Under indirect financing activities
method method Are subject
to an
insignificant
risk of
Whereby major Whereby profit or loss is adjusted for changes in
classes of gross • non-cash transactions value
cash receipts • any deferrals or accruals of past
and gross cash or future operating cash receipts
payments are or payments Are not for
disclosed • items of income or expense investment
associated with investing or purposes
financing cash flows
has a short
maturity of,
Exception say, 3 months
or less from
Entities are encouraged to follow the direct method. The Equity investments are excluded the date of
direct method provides information which may be useful from cash equivalents acquisition
in estimating future cash flows and which is not available
under the indirect method.

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SARANSH Part II: Indian Accounting Standards

Cash flows arising from operating activities Cash flows arising from investing activities

Key indicator Examples Represent Examples

of the extent the extent
to which the to which
operations expenditures
of the entity have been
have generated (a) Cash receipts from the sale (a) Cash payments to acquire
of goods and the rendering of made for property, plant and equipment,
sufficient cash resources
flows to services intangibles and other long-term
intended
• repay loans (b) Cash receipts from royalties, to generate assets. These payments include
• maintain the fees, commissions and other future income those relating to capitalised
operating revenue and cash development costs and self-
capability of (c) Cash payments to suppliers for flows constructed property, plant and
the entity goods and services equipment;
• pay
dividends (d) Cash payments to and on behalf (b) Cash receipts from sales of
• make new of employees property, plant and equipment,
(e) Cash receipts and cash payments Only intangibles and other long-term
investments expenditures
without of an insurance entity for that result in assets;
recourse premiums and claims, annuities a recognised (c) Cash payments to acquire equity
to external and other policy benefits asset in the or debt instruments of other
sources of (f ) Cash payments or refunds of balance sheet entities and interests in joint
financing income taxes unless they can are eligible for ventures (other than payments
be specifically identified with classification for those instruments considered
financing and investing activities as investing to be cash equivalents or those
(g) Cash receipts and payments activities held for dealing or trading
Primarily
derived from from contracts held for dealing purposes);
the principal or trading purposes (d) Cash receipts from sales of
revenue- (h) Cash flows arising from the equity or debt instruments
producing purchase and sale of dealing or of other entities and interests
activities of trading securities in joint ventures (other than
the entity (i) Cash advances and loans receipts for those instruments
made by financial institutions considered to be cash
since they relate to their main equivalents and those held for
revenue-producing activity dealing or trading purposes);
Generally, (e) Cash advances and loans made
result to other parties (other than
from the advances and loans made by a
transactions financial institution);
and other (f ) Cash receipts from the
events that repayment of advances and
enter into the
determination loans made to other parties
of profit or (other than advances and loans
loss of a financial institution);
(g) Cash payments for futures
contracts, forward contracts,
option contracts and swap
Cash flows arising from financing activities contracts except when the
contracts are held for dealing
or trading purposes, or the
payments are classified as
Useful in Examples financing activities; and
predicting (h) Cash receipts from futures
claims on contracts, forward contracts,
future cash
flows by (a) Cash proceeds from issuing option contracts and swap
providers of shares or other equity contracts except when the
capital to the instruments; contracts are held for dealing or
entity (b) Cash payments to owners to trading purposes, or the receipts
acquire or redeem the entity’s are classified as financing
shares; activities.
(c) Cash proceeds from issuing
debentures, loans, notes, bonds, Note: When a contract is
mortgages and other short-term accounted for as a hedge of an
or long-term borrowings; identifiable position the cash
(d) Cash repayments of amounts flows of the contract are classified
borrowed; and in the same manner as the cash
(e) Cash payments by a lessee for flows of the position being hedged.
the reduction of the outstanding
liability relating to a finance
lease.

© ICAI BOS(A) II. 13

SARANSH Part II: Indian Accounting Standards

Reporting cash flows on a net basis

Other than financial institutions Financial institutions

Cash flows arising from operating, investing or

financing activities may be reported on a net basis Cash flows arising from each of the
following activities of a financial
institution may be reported on a net basis:
Cash receipts and payments on behalf Cash receipts and payments for items in (a) Cash receipts and payments for
of customers when the cash flows which the turnover is quick, the amounts the acceptance and repayment of
reflect the activities of the customer are large, and the maturities are short deposits with a fixed maturity date;
rather than those of the entity
(b) The placement of deposits with
and withdrawal of deposits from
Examples of cash receipts and payments other financial institutions; and
Examples of cash receipts and payments
referred to in paragraph 22(b) are advances (c) Cash advances and loans made
referred to in paragraph 22(a) are: to customers and the repayment
(a) The acceptance and repayment made for, and the repayment of:
(a) Principal amounts relating to credit of those advances and loans.
of demand deposits of a bank;
card customers;
(b) Funds held for customers (b) The purchase and sale of investments;
by an investment entity; and and
(c) Rents collected on behalf (c) Other short-term borrowings, for
of, and paid over to, the example, those which have a maturity
owners of properties. period of three months or less.

Foreign currency cash flows

Arising from transactions in a foreign currency Of a foreign subsidiary

Recorded in an entity’s functional currency Cash

flows of Exchange rates between the functional
a foreign currency and the foreign currency at
subsidiary the dates of the cash flows
Foreign Exchange rate between the functional
currency currency and the foreign currency at
amount the date of the cash flow

Note:
1. Cash flows denominated in a foreign currency are reported in a manner consistent with Ind AS 21.
2. A weighted average exchange rate for a period may be used for recording foreign currency transactions or the translation of the cash
flows of a foreign subsidiary.
3. Ind AS 21 does not permit use of the exchange rate at the end of the reporting period when translating the cash flows of a foreign
subsidiary.
Important Points
1. Unrealised gains and losses arising from are not cash flows.
changes in foreign currency exchange rates
2. The effect of exchange rate changes on is reported in the statement of cash flows in order to reconcile cash and cash
cash and cash equivalents held or due in a equivalents at the beginning and the end of the period.
foreign currency is presented separately from cash flows from operating, investing and
financing activities and includes the differences, if any, had those cash flows
been reported at end of period exchange rates.

Shall be
separately Investments W h e n an investor restricts its reporting
disclosed Tax cash in accounted in the statement of cash flows
When it is flow is
Cash practicable subsidiaries, for by use of to the cash flows between itself
classified associates the equity or and the investee, for example, to
flows to identify as an
arising and joint cost method dividends and advances.
investing or ventures
from financing
taxes on When it is Shall be classified W h e n Includes in its statement of cash
impracticable as cash flows from activity as reporting its flows:
income appropriate
to identify operating activities interest in • the cash flows in respect of its
when impracticable an associate investments in the associate
to identify with or a joint or joint venture, and
financing and venture using • distributions and other
investing activities the equity payments or receipts between
Note: When tax cash flows are allocated over more than one class of method it and the associate or joint
activity, the total amount of taxes paid is disclosed. venture.

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SARANSH Part II: Indian Accounting Standards

Interest and Dividends

Cash flows from interest and dividends received and paid shall
each be disclosed separately

In case of financial institutions In the case of other entities

Interest paid Interest and dividends Dividends paid Dividends Interest paid Interest and dividends
received paid received

Classified as cash Classified as cash

flows arising from Classified as cash flows from financing activities flows from investing
operating activities activities

They are costs of obtaining financial resources

They are returns on
investments

Changes in ownership interests in subsidiaries

and other businesses

Cash flows arising from

Obtaining control of Losing control of subsidiaries

subsidiaries or other businesses or other businesses

Shall be classified as Shall be presented Shall disclose, in aggregate, during the period
investing activities separately

The cash flow effects of losing control are not

deducted from those of obtaining control

The total consideration The portion of the The amount of cash and cash The amount of the assets and
paid or received consideration consisting of equivalents in the subsidiaries liabilities other than cash or cash
cash and cash equivalents or other businesses over which equivalents in the subsidiaries
control is obtained or lost or other businesses over which
control is obtained or lost,
Cash flows arising from changes in ownership interests in a summarised by each major
subsidiary that do not result in a loss of control category

Shall be classified as cash flows from financing activities,

unless the subsidiary is held by an investment entity Need not apply to an investment in a subsidiary measured at
fair value through profit or loss (FVTPL)
Important points/disclosures
Investing and financing  Shall be excluded from a statement of cash flows
transactions that do not require
 Disclosed elsewhere in the financial statements
the use of cash or cash equivalents
Components of cash and cash  Disclose the components of cash and cash equivalents
equivalents  Shall present a reconciliation of the amounts in its statement of cash flows with the equivalent items
reported in the balance sheet
 Disclose the policy which entity adopts in determining the composition of cash and cash equivalents.
Other Disclosures Disclose, together with a commentary by management, the amount of significant cash and cash
equivalent balances held and are not available for use by the group
Note: The requirements shall be equally applicable to the entities in case of separate financial
statements also.

© ICAI BOS(A) II. 15

SARANSH Part II: Indian Accounting Standards

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32/,&,(6&+$1*(6,1$&&2817,1*(67,0$7(6$1'(55256
Objective and Scope

Is to prescribe

The criteria for selecting and changing accounting policies The accounting treatment and disclosure of

Changes in accounting policies Changes in accounting estimates Corrections of errors

Important Definitions
1. Accounting Specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial
policies statements
2. A change in  It is an adjustment of the carrying amount of an asset or a liability, or the amount of the periodic
accounting consumption of an asset.
estimate  Change in accounting estimates result from new information or new developments.
 It is not corrections of errors.
 Effect of such a change is given prospectively.
3. Prior period  They are omissions from, and misstatements in, the entity’s financial statements for one or more prior periods
errors arising from a failure to use, or misuse of, reliable information
 Such errors include the effects of
 mathematical mistakes,
 mistakes in applying accounting policies,
 oversights or misinterpretations of facts, and
 fraud.
4. Retrospective It is applying a new accounting policy to transactions, other events and conditions as if that policy had always been
application applied unless it is impracticable to do so.
5. Retrospective It is correcting the recognition, measurement and disclosure of amounts of elements of financial statements as if a
restatement prior period error had never occurred.

Accounting Policies

Selection and application of accounting policies Changes in accounting policies (Refer Note 3)

When an Ind AS specifically When no Ind AS specifically If the change is If the change results providing reliable and
applies to a transaction, applies to a transaction, required by an more relevant information about the effects
other event or condition other event or condition Ind AS of transactions, other events or conditions
on the entity’s financial position, financial
performance or cash flows
The accounting policy(s) Management shall use its
applied to the item shall judgement in developing
be determined as per that and applying an accounting When an entity changes an accounting policy voluntarily, it
Ind AS policy (Refer Note 1) shall apply the change retrospectively, if specific transitional
provisions does not apply to that change. (Refer Note 4)

Retrospective application of a change in accounting policy

Adjust the opening balance of each affected component of equity for the earliest prior period presented and the other comparative
amounts disclosed for each prior period presented as if the new accounting policy had always been applied. Usually the adjustment
is made to retained earnings.

Exception

When it is impracticable to determine the period-specific effects of changing an accounting policy on comparative information for
one or more prior periods presented,
 apply the new accounting policy to the carrying amounts of assets and liabilities as at the beginning of the earliest period for
which retrospective application is practicable.
If it is impracticable to determine the cumulative effect, at the beginning of the current period, of applying a new accounting
policy to all prior periods,
 adjust the comparative information to apply the new accounting policy prospectively from the earliest date practicable.

© ICAI BOS(A) II. 16

SARANSH Part II: Indian Accounting Standards

Notes:
1. For judgement, management may also first consider the most recent pronouncements of International Accounting Standards Board
and in absence thereof those of the other standard-setting bodies that use a similar conceptual framework to develop accounting
standards, other accounting literature and accepted industry practices,
2. An entity shall select and apply its accounting policies consistently for similar transactions, other events and conditions.
3. The following are not changes in accounting policies:
(a) the application of an accounting policy for transactions, other events or conditions that differ in substance from those previously
occurring; and
(b) the application of a new accounting policy for transactions, other events or conditions that did not occur previously or were
immaterial.
4. Early application of an Ind AS is not a voluntary change in accounting policy.

Changes in Accounting Estimates

Reasons for revision in [Link] a change occur in the circumstances on which the estimate was based
accounting estimates [Link] a change is as a result of new information or more experience.
Nature of change in  A change in accounting estimates neither relates to prior periods nor is a correction of an error.
accounting estimates  When it is difficult to distinguish a change in an accounting policy from a change in an accounting estimate,
the change is treated as a change in an accounting estimate.
Treatment of a change  The effect of change in an accounting estimate, shall be recognised prospectively by including it in profit
in accounting estimates or loss in:
 the period of the change, if the change affects that period only; or
 the period of the change and future periods, if the change affects both.
 To the extent that a change in an accounting estimate gives rise to changes in assets and liabilities, or relates
to an item of equity, it shall be recognised by adjusting the carrying amount of the related asset, liability or
equity item in the period of the change.
Errors
Stage of occurrence Errors can arise in respect of the recognition, measurement, presentation or disclosure of elements of
of errors financial statements.
Effects of errors Financial statements will not be considered as complied with Ind ASs if they contain either material errors or
immaterial errors made intentionally to achieve a particular presentation of an entity’s financial position, financial
performance or cash flows.
Nature of correction Corrections of errors are distinguished from changes in accounting estimates.
of errors
Accounting  Prior period errors are corrected in the comparative information presented in the financial statements for that
treatment for subsequent period
 An entity shall correct material prior period errors retrospectively in the first set of financial statements
correction of such approved for issue after their discovery by:
errors  restating the comparative amounts for the prior period(s) presented in which the error occurred; or
 if the error occurred before the earliest prior period presented, restating the opening balances of assets,
liabilities and equity for the earliest prior period presented.
The correction of a prior period error is excluded from profit or loss for the period in which the error is discovered.
Exception
When it is impracticable to determine the amount of an error (eg a mistake in applying an accounting policy) for all
prior periods, the entity restates the comparative information prospectively from the earliest date practicable.

© ICAI BOS(A) II. 17

SARANSH Part II: Indian Accounting Standards

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Objective

Overview of prescribes
Ind AS 10 Ind AS 10

When to adjust financial Disclosures that an Not to prepare financial statements on

statements for events entity should give about a going concern basis if events after the
after the reporting period reporting period indicate that the going
Objective Scope Definitions Recognition Going
concern assumption Disclosure
is not appropriate
And Measurement Concern

Date when the financial statements

Events after the reporting period
were approved for issue

Adjusting events Date of authorisation

after the reporting for issue
period

Updating disclosure
Non-adjusting about conditions at
events after the the end of the report-
reporting period ing period

Dividends Non-adjusting
events after the
reporting period

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Objective

Ind AS 10 prescribes

When to adjust financial Disclosures that an Not to prepare financial statements on

statements for events entity should give about a going concern basis if events after the
after the reporting period reporting period indicate that the going
concern assumption is not appropriate

Date when the financial statements

Events after the reporting period
were approved for issue

© ICAI BOS(A) II. 18

SARANSH Part II: Indian Accounting Standards

Both favourable and unfavourable By the Board of Directors

Events after the in case of a company
reporting period
That occur between the end of the
reporting period and the date when By the corresponding approving
the financial statements are approved authority in case of any other entity

Adjusting events Non-adjusting events

Those that provide evidence of

Those that are indicative of conditions
conditions that existed at the
that arose after the reporting period
end of the reporting period

Carve Out: Where there is a breach of a material provision of a long-term loan arrangement on or before the end of the reporting
period with the effect that the liability becomes payable on demand on the reporting date, the agreement by lender before the
approval of the financial statements for issue, to not demand payment as a consequence of the breach, shall be considered as an
adjusting event.

Recognition, Measurement and Disclosure

Adjusting events after the reporting period Non-adjusting events after the reporting period

Adjust the amounts recognised in

Do not adjust the amounts recognised in the
the financial statements to reflect it
financial statements to reflect it

Examples of adjusting events:

(a) Adjust any previously recognised provision or recognises a new provision when the
Example of a non-adjusting
related court case is settled before the financial statements are approved as per Ind
event
AS 37
A decline in fair value
(b) Account for the impairment (if any) on receipt of information after the reporting
of investments between
period like: the end of the reporting
(i) the bankruptcy of a customer that occurs after the reporting period; and period and the date when
(ii) the sale of inventories after the reporting period may give evidence about their the financial statements
NRV at the end of the reporting period. are approved for issue
(c) the determination after the reporting period of the cost of assets purchased, or the
proceeds from assets sold, before the end of the reporting period.
(d) the determination after the reporting period of the amount of profit-sharing or
bonus payments, if the entity had a present legal or constructive obligation at the
end of the reporting period to make such payments If non-adjusting events after the
(e) the discovery of fraud or errors that show that the financial statements are incorrect. reporting period are material,
then disclose
• the nature of the event; and
• an estimate of its financial
effect, or a statement that
such an estimate cannot be
made.

© ICAI BOS(A) II. 19

SARANSH Part II: Indian Accounting Standards

Important points to remember

S. No. Item Timing Treatment Reason
1 Dividends Declared after the reporting  Do not recognise it as a No obligation exists at that time
period but before approval of liability at the end of the
financial statements reporting period.
 Disclosed in the notes
2. Going concern If management determines after  Do not prepare the financial The deterioration in operating
the reporting period either that statements on a going results and financial position
it intends to liquidate the entity concern basis; or after the reporting period may
or to cease trading  Make necessary disclosure be so pervasive that it may
of not following going require a fundamental change in
concern basis or events or the basis of accounting
conditions that may cast
significant doubt upon the
entity’s ability to continue as
a going concern
3. Date of approval Approved after the reporting Disclose the date when the Important for users to know
of financial period financial statements when the financial statements
were
statements for approved for issue and who gave
were approved for issue because
issue that approval the financial statements do not
reflect events after this date
4. U p d a t i n g Received information after the Update disclosures that relate to When the information does
disclosure about reporting period new information / conditions not affect the amounts that
conditions at it recognises in its financial
the end of the statements, disclosures are
reporting period required

Distribution of Non-cash Assets to Owners as dividend by an entity

Timing of recognition of dividend Measurement of a dividend Presentation and disclosures

payable by an entity payable by an entity by an entity

When the dividend is Presentation

 Measure a liability at the fair value The difference between the carrying
appropriately authorised
of the assets to be distributed amount of the assets distributed
/ approved by the  If an entity gives a choice of and the carrying amount of the
relevant authority, eg receiving either a non-cash dividend payable is presented as a
the shareholders or the asset or a cash alternative, separate line item in profit or loss
management as per the  estimate both the fair
jurisdiction value of each alternative
and the associated Disclosure
probability of owners An entity shall disclose
selecting each alternative. (a) the carrying amount of the
 At the end of each reporting period dividend payable at the beginning
and at the date of settlement and end of the period; and
 review and adjust the (b) the increase or decrease in the
carrying amount of the carrying amount recognised in the
dividend payable, with period as result of a change in the fair
any changes recognised in value of the assets to be distributed.
equity as adjustments to the
amount of the distribution
If dividend is declared to distribute a non-
 Account for any difference cash asset (non-adjusting event), disclose
between the carrying amount with respect to the asset to be distributed:
of the assets distributed and the (a) its nature;
carrying amount of the dividend (b) its carrying amount and fair value at the
payable on its settlement end of the reporting period; and
 by recognising the difference, (c) if carrying amount and fair value is
if any, in profit or loss. different than the information about
the method(s) used to measure that fair
value.

© ICAI BOS(A) II. 20

SARANSH Part II: Indian Accounting Standards

INDIAN ACCOUNTING STANDARD (IND AS) 12:

INCOME TAXES
Objective

Prescribe the accounting treatment for income taxes

Accounting for the current and future tax consequences of

Future recovery (settlement) of the carrying Transactions and other events of the current
amount of assets (liabilities) that are period that are recognised in an entity’s
recognised in an entity’s balance sheet financial statements

Transactions and Transactions & Events

Events recognised recognised in P/L
If probable that recovery or settlement
outside P/L
of the carrying amount will make future
tax payments larger (smaller) than they
would be if such recovery or settlement
were to have no tax consequences, entity Related Tax Related Tax Related Tax
should recognise a DTL (DTA), with effects effects effects also
certain limited exceptions recognised in recognised in recognised in
OCI SOCE P/L

Definitions (Para 5)

Accounting Profit / (loss) = profit or loss for a period before deducting tax expense

Add: expenses recognized, but non-deductible for tax purposes e.g. Sec. 43B payments
Add: income not recognized, but included under tax laws e.g. revenue taxed on receipt basis
Less: expenses not recognized, but deductible for tax purposes e.g. accelerated depreciation
Less: income recognized, but not under tax laws e.g. income accrued but taxed on cash basis

Net Taxable Income as per Computation of Income

under Tax Laws

Taxable Profit / (loss) = profit / (loss) for a period, determined in accordance with
the applicable tax rules

Definitions (Para 5)

Tax Expense (tax income) = Current Tax Expense + Deferred Tax Expense

Current Tax = amount of income taxes payable (recoverable) in respect

of the taxable profit (tax loss) for a period

= Taxable Profit / (Loss) x Tax Rate

Debit: Expenses in P/L Credit: Provision for Tax Measured at amounts

expected to be paid to tax
Can be offset in B/S against current tax assets if legally
enforceable right to set-off the amounts and entity authorities using enacted /
Exception: Equity / OCI
intends to settle on net basis or realize and settle substantively enacted rates:
simultaneously * estimate
* Offsetting in Separate FS v/s Consolidated FS

© ICAI BOS(A) II. 21

SARANSH Part II: Indian Accounting Standards

Definitions (Para 5)

= amount of income taxes payable (recoverable) in future in respect of the

Deferred Tax
temporary differences, unused tax losses and unused tax credits

Temporary Differences x Tax Rate

Carrying Amount Tax Base

Deferred Tax: Recognition, Measurement and Presentation

Step 4:
Classify
temporary
Step 1: differences
Compute Step 3: into either (a) Step 5:
Carrying Step 2:
Compute Taxable Identify
Amounts of Compute Tax
temporary Temporary Exceptions, if
Assets and Base
differences Difference, or applicable
Liabilities (b)
Deductible
Temporary
Difference

Step 10:
Offsetting
Step 6:
Deferred Tax
Assess
Step 8: Step 9: Assets and
Deductible Step 7:
Calculate and Accounting Deferred Tax
Temporary Determine
recognise of Deferred Liabilities, and
Differences, Tax the Tax Rate
Deferred Tax Tax comply with
Losses and
other
Credits
requirements
of Ind AS

STEP 1: Compute Carrying Amount

What is Carrying Amount?

Balance as per the ledger

Amount at which an asset or liability is recognised in the balance sheet,

after making necessary adjustments like depreciation, impairment, etc.

© ICAI BOS(A) II. 22

SARANSH Part II: Indian Accounting Standards

STEP 2: Compute Tax Base

What is Tax Base of an Asset or Liability?

es!!
al Cas
Gener
It is the amount attributed to an Asset or Liability for tax purposes. (Para 5)

Tax Base of

Asset Liability*
If the Economic Benefits flowing from the Asset are Carrying Amount xxx
Less: Amount deductible for tax
purpose in respect of that
Liability in future periods, if any xxx
Taxable Non-Taxable Tax Base of Liability xxx
Tax base = amount deductible for Tax base =
tax purposes against any taxable Carrying * Revenue received in advance: Tax Base of the
economic benefits that will flow Amount of resulting liability is its Carrying Amount, less
to an entity when it recovers the the Asset any Revenue that will not be taxable in future
carrying amount of the asset. periods

STEP 2: Compute Tax Base

Certain Specific Cases

Items having Tax Base but not recognized Tax Base of an Asset or Liability is not
in the Balance Sheet (Para 9) immediately apparent (Para 10)

E.g. preliminary expenses are recognised as an expense Consider the fundamental principle upon which Ind
in determining accounting profit in the period in AS 12 is based
which they are incurred but may not be permitted as a
deduction in determining taxable profit (tax loss) until
a later period(s) e.g. Sec. 35D Entity shall, with certain limited exceptions,
recognise a DTL/DTA whenever recovery or
settlement of the carrying amount of an asset or
Difference between tax base of the preliminary
liability would make future tax payments larger
expenses, being the amount permitted as a deduction
(smaller) than they would be if such recovery or
in future periods under taxation laws, and the carrying
amount of NIL is a deductible temporary difference settlement were to have no tax consequences.
that results in a DTA.

STEP 3: Compute Temporary Differences

Temporary Differences

Differences between Carrying Amount of an Asset / Liability in the Balance Sheet and its Tax Base

Taxable Temporary Differences Deductible Temporary Differences

Result in taxable amounts in determining Taxable Result in amounts that are deductible in determining
Profit / (Tax Loss) of future periods when the Carrying Taxable Profit / (Tax Loss) of future periods when the Carrying
Amount of the Asset or Liability is recovered or settled Amount of the Asset or Liability is recovered or settled.

Carrying Amount of Asset > Tax Base of Asset Carrying Amount of Asset < Tax Base of Asset
Carrying Amount of Liability < Tax Base of Liability Carrying Amount of Liability > Tax Base of Liability

© ICAI BOS(A) II. 23

SARANSH Part II: Indian Accounting Standards

STEP 3: Compute Temporary Differences

Temporary Differences (Ind AS 12) v/s Timing Differences (AS 22) – a wordplay

Temporary Differences

Timing Differences Other Differences

Example-1: Example-1: Business Combinations

Interest income recognized in income statement on a The identifiable assets acquired and liabilities assumed in a
time proportion basis but recognized in taxable profit business combination are recognised at their fair values in
on cash basis as and when income is received. accordance with Ind AS 103, Business Combinations, but no
Example-2: equivalent adjustment is made for tax purposes.
Depreciation used in determining taxable income may Temporary differences arise when the tax bases of the identifiable
differ from that used in determining accounting profit. assets acquired and liabilities assumed are not affected by the
Example-3: business combination or are affected differently.
Development costs may be capitalized and amortized Example-2: Revaluation
over future periods in determining accounting profit Ind AS permit or require certain assets to be carried at fair value or
but deducted in determining taxable profit in the to be revalued, which may not be permitted for tax purposes,
period in which they are incurred. giving rise to a temporary difference.

STEP 4: Classify Temporary Differences

What is a DTA/DTL

Deferred Tax Assets (DTA): Deferred Tax Liabilities (DTL):

These refer to amounts of Income tax recoverable in These refer to amounts of Income tax payable in future periods in
future periods in respect of: respect of Taxable Temporary Differences.
a. Deductible Temporary Differences,
b. Carry Forward of Unused Tax Losses, and
c. Carry Forward of Unused Tax Credits

STEP 4: Classify Temporary Differences

ule!! Identification of DTA/DTL

ral R
Gene

PARTICULARS UNDERLYING ASSET UNDERLYING LIABILITY

(e.g. PPE) (e.g. Accrued Expenses)

Carrying Value > Tax Base Taxable Temporary Difference Deductible Temporary Difference
(Inverse)

Deferred Tax Liability Deferred Tax Asset

(e.g. PPE) (e.g. Sec. 43B Items)

Carrying Value < Tax Base Deductible Temporary Difference Taxable Temporary Difference
(Direct)

Deferred Tax Asset Deferred Tax Liability

(e.g. Preliminary Expenses) (e.g. Loan with Processing Fee)

Carrying Value = Tax Base No Deferred Tax No Deferred Tax

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SARANSH Part II: Indian Accounting Standards

Step 5: Identify Exceptions

Recognition of DTA/DTL for Goodwill arising in a Business Combination

Creates a taxable temporary difference

Financial Accounts Tax Profits

Carrying Amount of Goodwill is computed as - Goodwill not tax deductible
per Ind AS 103 - Goodwill not even deductible when subsidiary
disposes of underlying business
Tax Base is NIL

Treatment of taxable temporary difference

On initial recognition of Goodwill Relating to Initial Recognition of Not arising from Initial Recognition
Do NOT recognize DTL Goodwill e.g. impairment loss of Goodwill e.g. goodwill deductible
(creates a circular reference) Do NOT recognize DTL in tax Recognize DTL

Step 5: Identify Exceptions

Temporary Differences on initial recognition of an Asset or Liability

Case Treatment

A temporary difference may arise on initial recognition Depends on the nature of the transaction that led to the
of an asset or liability, e.g. if part or all of the cost of an initial recognition of the asset or liability
asset will not be deductible for tax purposes.

Nature of the above transaction: (a)DTA/DTL is recognised

a)In a Business Combination (with limited exceptions, (b)This affects Goodwill or Bargain Purchase Gain,
identifiable assets and liabilities acquired in a business recognised by the Entity
combination are fair valued at the DOA, but the tax
base of the identifiable assets and liabilities are not
affected/affected differently)

b)If the transactions affects either accounting Recognise DTA / DTL and corresponding income /
profit/taxable profit expense in the Profit or Loss

c)Transaction not falling in (a) or (b) above e.g. DTL/DTA not recognised. Subsequent changes, as the
purchase of asset or receipt of government grants asset is depreciated, is also not recognised.

In accordance with Ind AS 32, Financial Instruments: The deferred tax is charged directly to the carrying
Presentation, the issuer of a compound financial amount of the equity component. In accordance with
instrument (for example, a convertible bond) classifies paragraph 58, subsequent changes in the deferred tax
the instrument’s liability component as a liability and liability are recognised in profit or loss as deferred tax
the equity component as equity. In some jurisdictions, expense (income).
the tax base of the liability component on initial
recognition is equal to the initial carrying amount of the
sum of the liability and equity components. The
resulting taxable temporary difference arises from the
initial recognition of the equity component separately
from the liability component.

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SARANSH Part II: Indian Accounting Standards

Step 5: Identify Exceptions

Investments in Subsidiaries, Branches and Associates and Interests in Joint Arrangements

Existence of undistributed profits Foreign exchange rate changes Reduction to recoverable amount

Deferred Tax Liability Deferred Tax Asset

Recognize DTL except for Recognize DTA only when

Control over Non-reversal Reversal in Taxable Profit

timing probable foreseeable future available

Do not recognize DTL

Step 5: Identify Exceptions

Items / Situation Treatment

As a parent controls the dividend policy of its subsidiary, it is able When the parent has determined that those
to control the timing of the reversal of temporary differences profits will not be distributed in the
associated with that investment (including the temporary differences foreseeable future the parent does not
arising not only from undistributed profits but also from any foreign recognise a DTL. The same considerations
exchange translation differences). Furthermore, it would often be apply to investments in branches.
impracticable to determine the amount of income taxes that would be
payable when the temporary difference reverses.

Non-monetary assets and liabilities of an entity (subsidiary / branch) The resulting deferred tax is charged or
are measured in its functional currency under Ind AS 21. If the credited to profit or loss.
entity’s taxable profit (loss) (and, hence, its tax base) is determined in
a different currency, changes in the exchange rate give rise to
temporary differences that result in a recognised DTL/DTA.

An investor in an associate does not control that entity and is usually Investor recognizes DTL arising from
not in a position to determine its dividend policy. There is an Taxable Temporary Difference associated
agreement which requires that the profits of the associate will not be with such Investments.
distributed in the foreseeable future.

Investor in an associate may not be able to determine the amount of DTL is measured at this amount.
tax that would be payable if it recovers the cost of its investment in an
associate, but can determine that it will equal or exceed a minimum
amount.

Joint venturer or joint operator can control the timing of the DTL is not recognized.
distribution of its share of the profits of the joint arrangement and
it is probable that its share of the profits will not be distributed in the
foreseeable future

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SARANSH Part II: Indian Accounting Standards

Step 6: Assess (also reassess) deductible temporary differences, tax losses and tax credits

Deductible temporary differences reduce the taxable profits of future periods.

An entity should recognise deferred tax assets only when it is probable that taxable profits will be available
against which the deductible temporary differences can be utilised. (Based on principle of prudence/conservatism.)

Recognition of DTA due to…

Deductible Temporary Differences Entity has a history of recent losses OR Carry

Forward of Unused Tax Loss/Credits
Strong evidence that future profit may not be
available, therefore restricted recognition of DTA

There are sufficient Taxable Differences There are insufficient Taxable Differences
It is probable that Taxable Profit will be DTA is recognised to the extent that:
available, hence DTA is recognised in the a. It is probable that Entity will have sufficient Taxable Profit, or
period in which Deductible Temporary b. Tax Planning Opportunities are available to the entity that
Differences arise will create taxable profit in appropriate periods

Step 6: Assess (also reassess) deductible temporary differences, tax losses and tax credits

Existence of taxable temporary differences

The entity at the balance sheet date should see whether there are sufficient taxable temporary differences whose
reversal pattern matches with the reversal profile of deductible temporary differences.

Probability of future profits

If it is probable that there will be sufficient taxable profits, then to the extent of available profits, deductible temporary
differences should be applied for recognition of deferred tax assets.

Availability of Tax Planning Opportunities

Tax planning opportunities: Actions that the entity would take in order to create or increase taxable income in a
particular period before the expiry of a tax loss or tax credit carry forward.
After evaluating the previous criteria, if there are still unrecognised Deductible Temporary Differences, the entity
should see whether any tax planning opportunities are available

Step 6: Assess (also reassess) deductible temporary differences, tax losses and tax credits

Reassessment / Review of DTAs

At the end of each reporting period, the Entity should (a) re-assess
Unrecognised DTA, and (b) review the Carrying Amount of DTA

Recognize previously unrecognised DTA, if Reduce the carrying amount of DTA, if

It has become probable that future taxable profit It is no longer probable that sufficient taxable
will allow the previously unrecognised DTA to be profit will be available to allow the benefit of part
recovered. or all of that DTA to be utilized.

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SARANSH Part II: Indian Accounting Standards

Step 7: Determine the tax rate (law)

DTA / DTL shall be measured

at the tax rates that are expected to apply to the based on tax rates (and tax laws) that have been
period when the asset is realised or the liability enacted or substantively enacted by the end of the
is settled; reporting period.

The measurement of DTA/DTL shall reflect the tax consequences that would follow from the manner in which the
entity expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities

In some jurisdictions, the manner in which an entity recovers (settles) the carrying amount of an asset (liability) may
affect either or both of
a. the tax rate applicable when the entity recovers (settles) the carrying amount of the asset (liability); and
b. the tax base of the asset (liability).
In such cases, an entity measures DTL/DTA using the tax rate and the tax base that are consistent with the
expected manner of recovery or settlement.

Step 7: Determine the tax rate (law)

Distribution of Dividends

In some jurisdictions, income taxes are payable at In some other jurisdictions, income taxes may be
a higher or lower rate if part or all of the net profit refundable or payable if part or all of the net profit
or retained earnings is paid out as a dividend to or retained earnings is paid out as a dividend to
shareholders of the entity. shareholders of the entity.

In these circumstances, current and deferred tax assets and liabilities are measured at
the tax rate applicable to undistributed profits.

Step 8: Calculate and recognize Deferred Tax

DTA / DTL shall be measured

Taxable Temporary Differences x Tax Rate = Deferred Tax Liability

Deductible Temporary Differences x Tax Rate = Deferred Tax Asset

Tax Rate as applicable in period and

No discounting of Carrying amount of DTA shall
expected manner of recovery /
Deferred Tax Assets / settlement based on laws enacted /
be reviewed at the end of each
Liabilities substantively enacted reporting period

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SARANSH Part II: Indian Accounting Standards

Step 9: Accounting of Deferred Tax

Accounting of deferred tax of an event is consistent with accounting for that transaction or event

Transactions and Events recognised outside P/L Transactions and Events recognised in P/L

Related Tax effects Related Tax effects Related Tax effects also
recognised in OCI recognised in SOCE recognised in P/L

e.g. revaluation as e.g. rectification of errors as per

per Ind AS 16 Ind AS 8 Accounting Policies,
Property, Plant and Changes in Accounting
Equipment Estimates and Errors

Step 9: Accounting of Deferred Tax

Carrying Amount of DTA/DTL may change even though there is no change in related temporary differences

e.g. change in tax rates or tax e.g. reassessment of recoverabil- e.g. change in expected manner
laws ity of DTAs of recovery of asset

Resulting deferred tax recognized in P/L unless recognized outside P/L

When an entity pays dividends to its shareholders, it may be required to pay a portion of the dividends to
taxation authorities on behalf of shareholders (withholding tax). Such an amount paid or payable to taxation
authorities is charged to equity as a part of the dividends.

Step 10: Offsetting DTA and DTL

OFFSETTING

Current income tax Deferred income tax

- legally enforceable right - when current tax can be offset

- intention to settle on net basis - by the same tax authority

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SARANSH Part II: Indian Accounting Standards

Deferred Tax arising from a Business Combination

Temporary differences arise in a business combination

Identifiable Assets and Liabilities acquired in Business Tax bases of such identifiable assets and liabilities
Combination are recognized at their Fair Values at the are not affected on Business Combination or are
Acquisition date other than exceptions permitted by Ind AS affected differently

Examples:

Situation Result

Carrying Amount is increased to Fair Value, but Tax Base remains at Taxable Temporary Difference
Cost to the Previous Owner (i.e. target) [Para 19] resulting in DTL

Liability assumed is recognized at the acquisition date but related costs Deductible Temporary Difference
are not deducted in determining taxable profits until a later period arises which results in DTA
[Para 26(c)]

Fair Value of identifiable asset acquired is less than its tax base [Para
26(c)]

Resulting DTL/DTA affects Goodwill or Bargain Purchase Gain recognized

Deferred Tax arising from a Business Combination

Recognition Principles for Deferred Tax arising from a Business Combination

Situation Result

Temporary differences arising in a a. DTA/DTL is recognized at the acquisition date. It affects amount of
business combination under Para 19 & goodwill / bargain purchase gain
26(c) b. DTA shall be recognized to the extent that they meet the
recognition criteria in paragraph 24
c. Entity does not recognise DTL arising from the initial recognition of
goodwill

Carrying amount of goodwill arising in a a. The difference gives rise to a DTA.

business combination is less than its tax b. The DTA arising from the initial recognition of goodwill shall be
base recognised as part of the accounting for a business combination to
the extent that it is probable that taxable profit will be available
against which the deductible temporary difference could be utilised.

Change in probability of realising a

pre-acquisition DTA of the acquirer, as a
result of Business Combination -
a. An acquirer may consider it probable a. Acquirer recognises a change in the DTA in the period of the
that it will recover its own DTA not business combination, but should not include it as part of the
recognised before the business accounting for the business combination
combination e.g., the acquirer may
be able to utilise the benefit of its b. Hence, acquirer should not take it into account in measuring the
unused tax losses against the future goodwill or bargain purchase gain it recognises in the business
taxable profit of the acquiree, or combination
b. It is no longer probable that future
taxable profit will allow the DTA to
be recovered

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SARANSH Part II: Indian Accounting Standards

Deferred Tax arising from a Business Combination

Recognition Principles for Deferred Tax arising from a Business Combination

Situation Result

Potential benefit of the acquiree’s Income a. Acquired deferred tax benefits recognised within the measurement
Tax Loss Carry Forwards or other DTA period that result from new information about facts and
does not satisfy the criteria for separate circumstances that existed at the acquisition date shall be applied to
recognition when a business reduce the carrying amount of any goodwill related to that
combination is initially accounted for but acquisition.
might be realised subsequently b. All other acquired deferred tax benefits realised shall be recognised
in profit or loss (or, if this Standard so requires, outside profit or
loss).

Deferred Tax arising from Share-based Payment Transactions

Recognition Principles for Deferred Tax arising from a SBPT

Situation Result

Tax deduction (i.e., an amount that is Difference between the following is a Deductible Temporary Difference
deductible in determining taxable profit) resulting in DTA
is available in respect of remuneration a. Tax Base of Employee Services received to date (being amount
paid in shares, share options or other permitted as a deduction in future periods under Tax Laws).
equity instruments of the entity. The b. Carrying Amount of NIL (since it is technically not an ‘obliga-
amount of tax deduction may differ from tion’, as equity is given).
related cumulative remuneration
expense, and may arise in a later
accounting period.

E.g.: an entity may recognise an expense for the consumption of employee services received as consideration for share
options granted, in accordance with Ind AS 102, Share-based Payment, and not receive a tax deduction until the share
options are exercised, with the measurement of the tax deduction based on the entity’s share price at the date of exercise.

Deferred Tax arising from Share-based Payment Transactions

If the amount permitted as a deduction in future periods under taxation laws is not known at the reporting date, it shall be
estimated, based on information available at the end of the period. e.g. tax deduction is based on share price on date of exercising
of options, then measurement of deductible temporary difference would be based on entity’s share price at the balance sheet date.

Situation Result

Due to above, the amount of the tax If the amount of the tax deduction (or estimated future tax deduction)
deduction or estimated future tax exceeds the amount of the related cumulative remuneration expense,
deduction, measured above may differ this indicates that the tax deduction relates not only to remuneration
from related cumulative remuneration expense but also to an equity item. In this situation, the excess of the
expense associated current or deferred tax should be recognised directly in
equity.

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SARANSH Part II: Indian Accounting Standards

Change in Tax Status of Entity or its Shareholders

A change in the tax status of an entity or of its shareholders may have consequences for an entity by increasing or decreasing its
tax liabilities or assets e.g.
a. public listing of an entity’s equity instruments
b. restructuring of an entity’s equity
c. controlling shareholder’s move to a foreign country
Principle: Account for the tax consequences of transactions and other events in the same way that it accounts for the
transactions and other events themselves.

Items Treatment

Current and deferred tax consequences except items below Recognised in Profit or Loss

Tax consequences that relate to changes in the recognised amount of Charged or credited directly to equity
equity, in the same or a different period

Tax consequences relating to amounts recognised in OCI Recognised in OCI

Disclosures

Disclosure 1: Disclose components of tax expenses (income)

Components of tax expense (income) include
• current tax expense (income);
• any adjustments recognised in the period for current tax of prior periods;
• the amount of deferred tax expense (income) relating to the origination and reversal of temporary differences;
• the amount of deferred tax expense (income) relating to changes in tax rates or the imposition of new taxes;
• the amount of the benefit arising from a previously unrecognised tax loss, tax credit or temporary difference of a
prior period that is used to reduce current tax expense;
• the amount of the benefit from a previously unrecognised tax loss, tax credit or temporary difference of a prior
period that is used to reduce deferred tax expense;
• deferred tax expense arising from the write-down, or reversal of a previous write-down, of a deferred tax asset; and
• the amount of tax expense (income) relating to those changes in accounting policies and errors that are included in
profit or loss in accordance with Ind AS 8, because they cannot be accounted for retrospectively.

Disclosure 2: Tax related to items charged directly to equity

• Indian Accounting Standards require or permit particular items to be credited or charged directly to equity.
• Examples of items charged directly to equity:
a. adjustment to the opening balance of retained earnings resulting from either a change in accounting policy that
is applied retrospectively or the correction of an error
b. amounts arising on initial recognition of the equity component of a compound financial instrument
• The current and deferred tax relating to these items have to be recognised and accounted for directly in equity.
• Disclose the aggregate current and deferred tax relating to items that are charged or credited directly to equity.

Disclosure 3: Tax related to items recognised in statement of other comprehensive income

• Indian Accounting Standards require or permit particular items to be recognised in other comprehensive income.
• Examples of items recognised in statement of other comprehensive income:
a. a change in carrying amount arising from the revaluation of property, plant and equipment (see Ind AS 16);
b. exchange differences arising on the translation of the financial statements of a foreign operation
• Disclose the amount of income tax relating to each component of other comprehensive income.

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SARANSH Part II: Indian Accounting Standards

Disclosure 4: Explanation of relationship between tax expense (income) and accounting profit
a. In ideal situation, if accounting profit is say ༤ 100 and tax rate is 30%, the tax expense should be ༤ 30. But this is
seldom the case due to differences in accounting principles and standards vis–a–vis tax laws.
b. Therefore, Ind AS 12 requires an explanation to be disclosed of the relationship between tax expense (income) and
accounting profit in either or both of the following forms
• a numerical reconciliation between tax expense (income) and the product of accounting profit multiplied by
the applicable tax rate(s), disclosing also the basis on which the applicable tax rate(s) is (are) computed; or
• a numerical reconciliation between the average effective tax rate (tax expense divided by the accounting profit)
and the applicable tax rate, disclosing also the basis on which the applicable tax rate is computed.

Disclosure 5: Change in tax rates

An explanation of changes in the applicable tax rate(s) compared to the previous accounting period

Disclosure 6: Unrecognised deductible temporary differences, unused tax losses and unused tax credits
The amount (and expiry date, if any) of deductible temporary differences, unused tax losses, and unused tax credits for
which no deferred tax asset is recognised in the balance sheet;

Disclosure 7: Temporary differences associated with investments in subsidiaries etc.

The aggregate amount of temporary differences associated with investments in subsidiaries, branches and associates
and interests in joint arrangements, for which deferred tax liabilities have not been recognised

Disclosure 8: Amount of deferred tax liabilities (assets) or income (expenses)

In respect of each type of temporary difference, and in respect of each type of unused tax losses and unused tax credits:
a. the amount of the deferred tax assets and liabilities recognised in the balance sheet for each period presented;
b. the amount of the deferred tax income or expense recognised in profit or loss, if this is not apparent from the
changes in the amounts recognised in the balance sheet;

Disclosure 9: Discontinued Operations

In respect of discontinued operations, the tax expense relating to:
a. the gain or loss on discontinuance; and
b. the profit or loss from the ordinary activities of the discontinued operation for the period, together with the
corresponding amounts for each prior period presented

Disclosure 10: Dividend tax

The amount of income tax consequences of dividends to shareholders of the entity that were proposed or declared
before the financial statements were approved for issue, but are not recognised as a liability in the financial statements

Disclosure 11: Disclosures in case of business combination

If a business combination in which the entity is the acquirer causes a change in the amount recognised for its
pre-acquisition deferred tax asset, the amount of that change; and
if the deferred tax benefits acquired in a business combination are not recognised at the acquisition date but are
recognised after the acquisition date, a description of the event or change in circumstances that caused the deferred tax
benefits to be recognised.

Disclosure 12: Deferred tax asset and evidence thereto where based on future taxable profits
An entity shall disclose the amount of a deferred tax asset and the nature of the evidence supporting its recognition, when:
a. the utilisation of the deferred tax asset is dependent on future taxable profits in excess of the profits arising from the
reversal of existing taxable temporary differences; and
b. the entity has suffered a loss in either the current or preceding period in the tax jurisdiction to which the deferred
tax asset relates.

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SARANSH Part II: Indian Accounting Standards

Disclosure 13: Tax consequences of distribution of dividends

In the circumstances described in paragraph 52A, an entity shall disclose the nature of the potential income tax conse-
quences that would result from the payment of dividends to its shareholders. In addition, the entity shall disclose the
amounts of the potential income tax consequences practicably determinable and whether there are any potential
income tax consequences not practicably determinable.
Para 52A: In some jurisdictions, income taxes are payable at a higher or lower rate if part or all of the net profit or
retained earnings is paid out as a dividend to shareholders of the entity. In some other jurisdictions, income taxes may
be refundable or payable if part or all of the net profit or retained earnings is paid out as a dividend to shareholders of
the entity. In these circumstances, current and deferred tax assets and liabilities are measured at the tax rate applicable
to undistributed profits.

Disclosure 14: Tax related contingencies

An entity discloses any tax-related contingent liabilities and contingent assets in accordance with Ind AS 37, Provisions,
Contingent Liabilities and Contingent Assets. Contingent liabilities and contingent assets may arise, for example, from
unresolved disputes with the taxation authorities

Disclosure 15: Change in tax rates or tax laws

Where changes in tax rates or tax laws are enacted or announced after the reporting period, an entity discloses any
significant effect of those changes on its current and deferred tax assets and liabilities (see Ind AS 10, Events after the
Reporting Period).

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SARANSH Part II: Indian Accounting Standards

INDIAN ACCOUNTING STANDARD (IND AS) 16 : PROPERTY, PLANT AND EQUIPMENT

PPE and its Recognition

PPE are tangible items that

Are held for use Are expected to be used during more than one period

In the production or supply of goods or services

For rental to others

For administrative purposes

Its cost is recognised if, and only if (both)

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

Recognition of Initial costs Recognition of Subsequent costs

Even if the item of PPE Day-to-day cost Parts of some items Regular major
is not directly increasing (including cost of of PPE replaced at inspections
the future benefits but is small parts) regular intervals
necessary for an entity to
obtain future economic
benefits from its other
assets

Recognised in
profit or loss as Recognised in the Carrying cost of those
Such an asset is reviewed incurred carrying amount of replaced parts/ previous
for impairment as per PPE (if recognisation inspection (as the case may
Ind AS 36 criteria is met) be) is derecognised

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SARANSH Part II: Indian Accounting Standards

Measurement of PPE (or an item of PPE)

at recognition

No
Recognised to Profit Does it qualify for recognition as an asset?
and Loss

Yes

Shall be measured at its cost which includes

Directly attributable costs Intitial estimates of the costs of

Purchase price dismantling & removing the items
and restoring the site

Is the cost incurred when the

Costs of employee benefits (as
Add: item is acquired or cost incurred
defined in Ind AS 19) arising
Import duties and non- for using the PPE during a
directly from the construction
refundable purchase taxes particular period?
or acquisition of the item of PPE

Costs of site preparation

Yes No

Subtract:
Trade discounts and Initial delivery and handling
rebates costs Capitalised
Capitalised to
the cost of PPE to the cost of
Installation and assembly costs inventory

Net cost of testing whether the

asset is functioning properly
Also recognised and measured
as provision as per Ind AS 37
Professional fees

Note: Measurement of Cost

1. Items such as spare parts, stand-by equipment and servicing
equipment are recognised when they meet the definition of PPE. Payment deferred beyond normal credit terms
Otherwise, such items are classified as inventory.
2. Recognition of costs in the carrying amount of an item of PPE
ceases when the item is in the location and condition necessary
No Yes
for it to be capable of operating in the manner intended by Is payment
management. deferred
3. Costs incurred in using or redeploying an item are not included beyond the
in the carrying amount of that item. normal credit
terms?
4. Incidental operations that are not necessary to bring an item
to the location and condition necessary for it to be capable of Cost of PPE
operating in the manner intended by management, the income is cash price
and related expenses such incidental operations are recognised equivalent at the
recognition date
in profit or loss and included in their respective classifications of
income and expense. Total Less Cash price
Payment equivalent
5. The cost of a self-constructed asset is determined using the
same principles as for an acquired asset. Any internal profits
are eliminated in arriving at such costs. Similarly, the cost of =
abnormal amounts of wasted material, labour, or other resources Interest over the
incurred in self-constructing an asset is not included in the cost period of credit
of the asset.
6. Bearer plants are accounted for in the same way as self-
constructed items of PPE. Either charged to Profit
or Loss or capitalised
as per Ind AS 23

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SARANSH Part II: Indian Accounting Standards

Exchange of Assets

Entity

Measured at
Asset acquired/received Asset given up

Yes Whether exchange No

transaction has
commercial substance
Or
the fair value
is reliably
measurable?

An item of PPE is measured

Yes No
at the carrying amount of
Whether F.V. of
asset received is
the asset given up
clearly evident?

An item of PPE is measured An item of PPE is measured

at F.V. of asset received at F.V. of asset given up

Measurement after recognition Frequency of revaluation

as an Accounting policy

Either Or Yes No
Whether the F.V.
of a revalued asset Revalue
Annual the item
differs materially
Cost Model Revaluation Model revaluation only every
from its carrying
is required 3 or 5
amount?
years
An item of PPE is carried at

No Whether
F.V. On applying revaluation model – the asset is treated in one of
can be the following ways:
Cost measured
Either Or
reliably?
Less • The gross carrying amount may be The accumu-
restated by reference to observable market lated depreci-
Accumulated Yes data or it may be restated proportionately to ation is elimi-
depreciation the change in the carrying amount. nated against
An item of PPE is carried at • The accumulated depreciation at the date the gross car-
Less of the revaluation is adjusted to equal the rying amount
difference between the gross carrying amount of the asset.
Accumulated and the carrying amount of the asset after
impairment loss taking into account accumulated impairment
losses.
The amount of the adjustment of accumulated depreciation
forms part of the increase or decrease in carrying amount that is
Revalued accounted for.
Any Any
amount Less subsequent Less subsequent Note:
being F.V. at accumulated accumulated 1. If an item of property, plant and equipment is revalued, the
the date of depreciation impairment entire class of property, plant and equipment to which that asset
revaluation loss belongs shall be revalued.
2. Here a class of property, plant and equipment is a grouping of
assets of a similar nature and use in an entity’s operations.

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SARANSH Part II: Indian Accounting Standards

Treatment of revaluation gain or loss

First time revaluation Subsequent revaluation

Increase in the carrying amount Decrease in the carrying amount Increase in CA of the
Decrease in CA of the revalued asset
(CA) of the revalued asset (CA) of the revalued asset revalued asset

Recognise the revaluation Was there a previous Was there a previous

Recognise the increase in CA of the decrease in CA of the
revaluation gain in OCI loss in P & L Yes No
revalued asset? revalued asset?

No Yes
Recognise the Recognise the
revaluation gain revaluation loss
Recognise the Recognise the
in OCI in P & L
revaluation gain in revaluation loss in
P & L to the extent OCI to the extent of
that it reverses a any credit balance
revaluation decrease existing in the
of the same asset revaluation surplus in
previously recognised respect of that asset.
in P & L

Remaining increase to Remaining decrease to

be recognised in OCI be recognised in P & L

Note:
1. The revaluation surplus included in equity in respect of an item Particular Treatment
of property, plant and equipment may be transferred directly 7 Revision in ™ The residual value and the useful life of an
to retained earnings when the asset is derecognised. This may residual value asset shall be reviewed annually.
involve transferring the whole of the surplus when the asset is and the useful life ™ The change(s) in depreciation on account
retired or disposed of. of an asset of revision, if any, shall be accounted for as
2. Some of the surplus may be transferred as the asset is used by a change in an accounting estimate as per
an entity. In such a case, the amount of the surplus transferred Ind AS 8
would be the difference between depreciation based on the
revalued carrying amount of the asset and depreciation based on 8 Land and ™ Land and buildings are separable assets
the asset’s original cost. Buildings and are accounted for separately, even
3. Transfers from revaluation surplus to retained earnings are not when they are acquired together.
made through profit or loss. ™ Land has an unlimited useful life and is
not depreciated.
Depreciation = (Cost of the Asset -Residual value)/Useful life of ™ Buildings have a limited useful life and are
depreciated.
the asset ™ An increase in the value of the land on
Particular Treatment which a building stands does not affect the
determination of the depreciable amount
1 If the cost is Separate depreciation is computed for each of the building.
significant in item of PPE. ™ If the cost of land includes the costs of site
relation to total dismantlement, removal and restoration,
then that portion of the land asset is
cost of PPE
depreciated over the period of benefits
obtained by incurring those costs.
2 PPE given as an Depreciate separately amounts reflected in ™ In some cases, the land itself may have
operating lease the cost of that item that are attributable to a limited useful life, in which case it is
favourable or unfavourable lease terms relative depreciated in a manner that reflects the
to market terms. benefits to be derived from it.
9 Depreciation ™ The depreciation method applied shall be
3 Grouping of If more than one significant parts of an item method reviewed annually.
items of PPE have similar useful life and depreciation ™ If there has been a significant change in
method then such parts may be grouped in the expected pattern of consumption of
determining the depreciation charge. the future economic benefits embodied
in the asset, the method shall be changed
4 Remainder If an entity has varying expectations for such
to reflect the changed pattern otherwise
insignificant parts, approximation techniques may be used the method is applied consistently from
parts of the item to depreciate the remainder in a manner that period to period.
of PPE faithfully represents the consumption pattern ™ Such a change shall be accounted for as a
and/or useful life of its parts. change in an accounting estimate as per
Ind AS 8.
5 Commencement Depreciation of an asset begins when it is
of depreciation available for use. 10 Impairment Apply Ind AS 36, Impairment of Assets.
11 Compensation Compensation from third parties for items
6 Treatment of The depreciation charge for each period shall for impairment of PPE that were impaired, lost or given up
depreciation be recognised in profit or loss if not included in shall be included in profit or loss when the
charge the carrying amount of another asset. compensation becomes receivable.

© ICAI BOS(A) II. 38

SARANSH Part II: Indian Accounting Standards

Factors determining the Useful Life of an Asset Depreciation Method

Expected physical Technical or commercial •Straight-line depreciation
wear and tear obsolescence results in a constant charge
• Depends on the • Arising from changes Straight-line over the useful life if the
number of shifts for or improvements in method asset’s residual value does
which the asset is to production, or not change
be used or • From a change in the
• The repair and market demand for the
maintenance product or
programme, or • Service output of the
• The care and asset.
maintenance of the • The diminishing balance
asset while idle. Diminishing method results in a
balance decreasing charge over
method the useful life

Factors Legal or similar

determining the limits on the use of
useful life of an the asset Units of • The units of production
Expected usage asset method results in a charge
of the asset • i.e. the expiry production
dates of related method based on the expected use
leases or output

Derecognition of PPE
Depreciation Period
On disposal
Derecognition of carrying
amount of an item PPE

When no future economic

Asset unused benefits are expected from
Fair Value Repair and its use or disposal.
> Carrying Residual or held for sale The gain or loss arising
or included in a maintenance of from the derecognition of
Amount (If Value > = an asset
Residual Carrying disposal group an item of property, plant
Value is less Amount that is classified and equipment shall be
than Carrying as held for sale included in profit or loss
Amount)

Gains shall not be classified

Depreciation is Depreciation Depreciation Depreciation is as revenue.
charged is zero ceases recognised
For disclosure requirement, students are advised to refer the study
material.

© ICAI BOS(A) II. 39

SARANSH Part II: Indian Accounting Standards

INDIAN ACCOUNTING STANDARD (IND AS) 19:

EMPLOYEE BENEFITS
Objective

To prescribe accounting and disclosure for employee benefits

Provides service i.e. works for the entity

efi e!!

Be acc
en ipl
ts

ne r u
e b nc

• Entity should recognize liability for

fit e t
th ri

s( ot
Employee Benefits to be paid in the future
o P

re he
s t ng

in respect of services provided by employee.

ve e
st hi

nu m
co atc

Employee Employer (Entity)

e, plo
• As benefit from the service provided by the
ch M

pr ye
at ly

employee is consumed, the entity should

ofi r
M pp

recognize the related employee benefit

ts
A

)
expense

Provides benefits = salary, leave encashment, gratuity, pension etc.

What would happen without Ind AS 19?

Employee Benefit Expenses

Monthly outflows Outflows on superannuation / resignation / wage revision e.g.

e.g salary, contribution to PF / ESIC etc. accumulated leave encashment, gratuity etc.

In absence of Ind AS 19

Liability and related expense would be account- Tendency to account for such expenses on payment basis
ed on accrual basis without accrual of liability over period of service

Matching Principle / Accrual Basis followed!! Matching Principle / Accrual Basis violated!!

Violation of Para 1.17 of the Conceptual Framework for

Financial Reporting under Indian Accounting
Standards (Ind AS)

Hence Ind AS 19 assumes significant importance since it ensures compliance with the Conceptual Framework

Employee defined (Para 7): What is covered in Ind AS 19?

Includes full-time, part-time,
permanent, casual or temporary basis
Scope of Ind AS 19 (Para 2 and 3)
workforce. Also includes directors and
other management personnel Applies to Excluding

Applied by Employer in accounting for ALL Scope exclusions as per Para 2 & 3
Employee Benefits
Employees’ Share Accounting and Reporting
based payments by Employee Benefit Plans
Classification of Employee Benefits (Para 5, 8)

Covered under Ind AS 102

Short-term Post-employment Other long-term Termination Employee benefits include (Para 6):
employee benefits benefits employee benefits Benefits Benefits provided to employees / dependents /
•
Within 12 months • After completion • Residual category • Result of beneficiaries, and may be settled by payments (or
• current • For current provisions of goods or services) made either
For of employment terminating
• Other than directly to :
employees employees employment
- To the employees, to their spouses, children or
•
Other than termination before retirement, other dependents / to legal heirs or nominees or
termination benefits either voluntary - To others, such as trusts, insurance companies
benefits or otherwise

© ICAI BOS(A) II. 40

SARANSH Part II: Indian Accounting Standards

Short-term Employee Benefits

Employee benefits due to be settled within twelve months after the end of the period in which the employees render the related service

Salaries, wages, social Paid annual leave + Profit sharing and Non-monetary
security contribution paid sick leave bonuses benefits

Straight forward accounting

Actuarial assumptions are No possibility of No specific disclosure Change in timing

not required for measur- actuarial gain or loss under Ind AS-19. Other of settlement
ing obligation or the cost Ind AS like Ind AS-24
may require disclosures
Journal Entry:
Expenses (asset) Dr. xxx Measured on an Entity’s expectations of Entity’s expectations
To Liability / Cash xxx undiscounted basis at the timing of of the timing of
Nominal Value of settlement change settlement change is
Cash Flow temporarily not temporary /
characteristics of
benefits change

Reclassification is not Consider whether

needed definition of
short-term benefits is
still met

Short-term Employee Benefits

Short-term compensated absences

Accumulating Paid Non-accumulating Paid

Absences (Para 15) Absences (Para 18)

Can be carried forward for use in future periods if Cannot be carried forward. They lapse if current
current period’s entitlement is not used in full period’s entitlement is not used in full

Recognition Obligation arises as employees Obligation arises when

based on render service that increases their absences occur because Recognition based on
services rendered absences occurred
entitlement to future paid absences employee service does not
increase the amount of benefit
Vesting Non-vesting

Mea suring Employees are entitled to Employees are not entitled

expected cost of a cash payment for to a cash payment for
Accumulating Paid unused entitlement on unused entitlement on
Absences: the leaving the entity leaving the entity
additional amount
an entity expects to
pay as a result of
the unused
Measurement of obligation is affected if
entitlement that
employee leaves before using an
has accumulated at
accumulated non-vesting entitlement
the Balance Sheet
date (Para 16)

© ICAI BOS(A) II. 41

SARANSH Part II: Indian Accounting Standards

Short-term Employee Benefits

Profit-sharing and Bonus Plans

Present obligation Reliable estimate (Para 22)

(Para 20) (Para 21) Formal plans Amounts are Past practice
Plans requiring employees to No legal obligation, but determined by gives evidence
stay till end of specified period entity has a practice of the entity of the amount
As per plan
to receive share of profits paying bonus
formula

Employees render services No realistic alternative

thus increasing amount to be apart from paying the Measurement should reflect the possibility that
paid if they remain in service bonus some employees may leave without receiving
share of profits / bonus
Create a constructive
obligation on the entity (Para 19): Recognize expected cost of Profit-sharing Plans
and Bonuses when and only when:
(Para 23): Recognize as expense, and not as a distribution of - There is a present legal or constructive obligation due to
Net Profit, as the obligation arises from employee service past events AND
and not from a transaction with the entity’s owners - Reliable estimate of the obligation can be made

Post Employment Benefits

Arrangements whereby entity provides post-employment benefits

Defined Contribution Plans Defined Benefit Plans

Benefit Plans under which an Entity pays fixed Benefit plans other than Defined Contribution
Meaning Plans
contribution into a separate entity (fund).

Entity’s obligation is limited to the amount of Entity’s obligation is to provide the agreed benefits
contributions to the Fund. No need to contribute Entity to current and former employees
if fund’s assets are insufficient to pay all Employ- Obligation
ee Benefits.

Actuarial Risk + Investment Risk fall on the Risk Actuarial Risk + Investment Risk fall on the Entity
Employee Bearing

Straightforward accounting - no actuarial Complex accounting with actuarial assumptions +

Accounting discounting
assumptions or discounting of contributions

Post Employment Benefits

(Para 29) Examples of Cases where entity’s obligation is not limited to the amount it agrees to contribute to the fund

When entity has an obligation through:

a Plan Benefit Formula which is not linked a Guarantee of a specified return on Informal practices giving rise to an
solely to the amount of contributions, and contributions, either directly or obligation e.g. entity increasing
requires entity to contribute if the assets are indirectly through a plan benefits in accordance with the
insufficient to meet the benefits in the Plan inflation rate, even in absence of a
Benefit Formula legal obligation
e.g. Gratuity is a liability computed as 15 days
last-drawn salary for each completed year of
service, and has to be discharged regardless of
the contribution made to a Plan

© ICAI BOS(A) II. 42

SARANSH Part II: Indian Accounting Standards

Post Employment Benefits

Multi-Employer Plans (Para 8, Paras 32-39)

Pool the assets contributed by Use these assets to provide basis Contribution and benefit levels are
Meaning various entities which are not benefits to employees of determined without regard to identity
under common control more than one entity of the entity that employs the employees

Could be Defined Benefit Plan or Defined Contribution Plan (in both cases, other than State Plans)

as Defined Benefit Plan, or under the terms of the plan, including any constructive
Classification
obligation that is beyond formal terms
as Defined Contribution Plan

Accounting Treatment of Multi-Employer Plans

as a Defined Benefit Plan
• Accounting for its proportionate share of the
Defined Benefit Obligation, Plan Assets and If adequate informa-
tion is not available to Account as if it
Disclosures
+ +
associated Plan Costs were a Defined Recognize asset / liability
• Disclosures per Para 135-148 use Defined Benefit as per Para
Contribution for surplus / deficit
• Recognize liability on the winding-up of, or Plan Accounting for a 148
entity’s withdrawal from the Defined Benefit Defined Benefit MEP Plan
MEP as per Ind AS-37

Post Employment Benefits

Multi-Employer Plans (continued)

Accounting Defined Benefit MEP as Defined Contribution Plan

Adequate information not available Recognize Asset / Liability for Surplus / Deficit
such as
• No consistent and reliable basis for Pursuant to agreement, Recognize asset /
allocating Obligation, Plan Assets and surplus in the MEP will be liability + corresponding
Plan Costs to Individual Entities distributed to / deficit will be income / expense in
• No access to information about the plan funded by the participants Profit or Loss

Additional Disclosure Requirements in respect of MEP Defined Benefit Plans (Para 148)

Funding Extent to which Agreed If DBP is accounted as a DCP, disclose:

Arrangements, entity can be liable allocation of 1 The fact that the Plan is a DBP.
including method to to the Plan for Other deficit or surplus 2 Why sufficient information is unavailable?
determine the entity’s Entities’ Obligations on winding-up 3 Expected contributions to the Plan for the next accounting period.
rate of contributions under terms and of or on entity’s 4 Information about deficit/surplus in the Plan that may affect future
and any Minimum conditions of the withdrawal from contributions, basis of computing deficit/surplus, entity implications
Funding Requirements MEP the Plan 5 Indication of level of participation by the entity in the plan compared to
other entities

Post Employment Benefits

Group Administration Plans (Para 38)

Pool the assets contributed Aggregate Single Employer Plans basis Claims of different Employers
Meaning by various entities which are for investment purposes and to are segregated for benefit of own
not under common control lower investment management and employees (identifiable)
administration costs

Could be Defined Benefit Plan or Defined Contribution Plan (distinct from Multi-Employer Plans)

as Defined Benefit Plan, or under the terms of the plan, including any constructive
Classification
as Defined Contribution Plan obligation that is beyond formal terms

Easier to Account for

Information is readily available to treat Participating entities are not exposed to actuarial risks associated
them as any Single Employer Plan with current and former employees of other entities

© ICAI BOS(A) II. 43

SARANSH Part II: Indian Accounting Standards

Post Employment Benefits

Risk-Sharing Plans (Para 40-42)

Participating in these plans is a
Related Party Transaction –
Meaning Risk-sharing between various e.g. a parent and its disclose information in Separate
Not MEPs
entities under common control subsidiaries or Individual Financial
Statements per Para 149!!

Information Participating Entities should obtain information about Plan as a whole measured in
accordance with Ind AS-19 based on assumptions applicable to the Plan as a whole

Accounting for Risk-sharing Plans

Contractual arrangement or stated policy exists for There is no agreement or policy for sharing or charging of
charging Net Defined Benefit Cost for the Plan as a cost to the Individual Group Entities
whole, to the individual Group Entities

Recognize Net Defined Benefit Other Group Entities

Each Entity should recognize the Net Defined Cost in the Separate Financial recognize cost equal to
Benefit Cost charged as per the agreement/policy in Statements of the Group Entity contribution payable for
Separate or Individual Financial Statements that is legally the Sponsoring the period, in their Separate
Employer for the Plan Financial Statements

Post Employment Benefits

Risk-Sharing Plans (continued)

Additional Disclosures (Para 149)

Contractual agreement or stated Policy for determin- Information about Plan as a Information about Plan as
policy for charging the Net Defined ing Contribution to whole for allocation of Net a whole for accounting of
Benefit Cost or the fact that no such be paid by the Entity Defined Benefit Cost Contribution Payable
policy exists
These disclosures can be cross referenced to disclosures in
another Group Entity’s Financial Statements if –

That Group Entity’s Financial That Group Entity’s Financial Statements are
Statements separately identify and available to the Users of the Financial Statements
and disclose information on the same terms as the Financial Statements of
about the Plan the Entity, and at the same time as, or earlier than,
the Financial Statements of the Entity

Post Employment Benefits

State Plans (Para 43-45)

Cover all entities (or all Operated by National/Local Government

Meaning Established by Legislation entities in a particular or another body not in control or influence
category) of Reporting Entity

Could be Defined Benefit Plan or Defined Contribution Plan

Most cases – entity has only obligation to make contributions upon becoming due. Upon cessation of
employing such employees, entity has no obligation to pay benefits earned by such employees in past years

e.g. Provident Fund

Accounting Same way as for MEP

© ICAI BOS(A) II. 44

SARANSH Part II: Indian Accounting Standards

Post Employment Benefits

Insured Benefits (Para 46-49)

Case 1 = entity pays insurance premiums to fund a Post-Employment Benefit Plan Case 2
Entity funds a post-employment benefit obligation Insurance policy is in the name of specified Plan
FORM FORM
by contributing to an Insurance Policy participant(s)

Entity retains a legal or constructive obligation -

Entity’s only obligation is to pay the policy premium
directly or indirectly through the Insurance Plan -
through a mechanism for setting future premiums or SUBSTANCE
through Related Party Relationship with the Insurer
Insurer is solely responsible for paying the benefits.
Entity has no obligations to pay employee benefits
Not a Defined Contribution arrangement
SUBSTANCE

Account for Qualify- Recognize other Payment of premium is not investment but the
ing Insurance Policy Insurance Policies as settlement of the employee benefit obligation
as a Plan Asset reimbursement rights

SUBSTANCE OVER FORM SUBSTANCE OVER FORM

Accounting for Defined Contribution Plans

Straight forward accounting

Obligation for each period is Actuarial assumptions are No possibility of Obligations are measured
determined by the amounts to not required to measure actuarial gain or on an undiscounted basis
be contributed for that period obligation or the expense loss
Exception

not expected to be settled wholly within 12 months after the end of the
Recognition and Measurement annual reporting period in which the employees render the related service

Date Particulars LF Debit Credit

xxxxx Dr. Employee Benefit Expense / Asset (amount relating to reporting period)
Dr. Prepaid Expenses (amount relating to future periods)
Cr. Cash / Bank (amount paid)
Cr. Accrued Liability (amount unpaid)
Disclosure: Disclose amount recognized as an expense for Defined Contribution Plans. Disclose contribution to Defined Contribution
Plans for Key Management Personnel under Ind AS-24

Defined Benefit Plans: Issues Involved

An employee joins an entity on 1.4.2016
1.4.2016 2022-23 31.3.2050
(start) (reporting period) (retire)

PV of Defined Benefit Obligation

Period of Service: 34 years

Current Service Cost

Regular investment in Plan Assets; After 34 years, Investment + Returns on Plan Assets provides cash to pay Retirement Benefits after 34 years

Various Uncertainties involved: high degree of estimation involved

Will employee Will Discount Benefit Taxes Various

Will
continue for 34 employee be Rate to be Levels borne payable on other
employee
years with the physically fit used to by the the Income estimates to
live for 34
company? to work for discount company + earned by be made
years?
(Labour 34 years? liabilities to Future Salary the Plan (discussed
(Mortality)
Attrition) (Disability) Present Value Increase Assets later)

© ICAI BOS(A) II. 45

SARANSH Part II: Indian Accounting Standards

Accounting for Defined Benefit Plans: The 4-Step Model

Step 1: Determine Step 2: Recognition Step 3: Recognition in the Step 4: Determine remeasurements to
deficit or (surplus) in the Balance Sheet Statement of Profit & Loss Other Comprehensive Income

1.1 Ultimate Cost of The deficit or surplus The following amounts need Remeasurement of Net Defined
Benefit from Step 1 should be to be determined: Benefit Liability (Asset) comprises of:
1.2 Discount it to adjusted for any effect
determine the of limiting a Net
present value of Defined Benefit Asset C u r r e n t Actuarial Gains
defined benefit to the Asset Ceiling Service Cost and Losses
obligation (Para 64) (Para 70-74, (Para 128-129)
1.3 Determine Fair 122A)
Value of Plan Assets Any Past Service Return on Plan Assets
1.4 Deficit / Surplus Cost and Gain/Loss excluding Net Interest on
= Present Value of on Settlement the Net Defined Liability
Defined Benefit (Para 99-112) (Asset) (Para 130)
Obligation from 1.2
above (less) FV of Net Interest on the Any change in the effect of
Plan Assets from Net Defined Benefit Asset Ceiling excluding Net
1.3 above Liability (Asset) Interest on the Net Defined
(Para 123-126) Benefit Liability (Asset)

STEP 1: Determine Deficit or (Surplus)

1.1 Computing the Ultimate Cost of Benefit to the Entity

Multiple Variables High degree of uncertainty Long period of time

Final Other
Salaries variables Cannot estimate the Benefits are usually paid
amounts as easily as is after several years, with the
Employee Medical
done, say, in case of transaction horizon
Turnover and Cost
depreciation due to extending to a few decades
Mortality Trends
uncertainty of each of the
Investment Earnings on Plan multiple variables involved
Assets in case of Funded Plans

Thus, the objective = Accounting for these benefits as they accrue + including impact of uncertainties in the amounts accounted
How to achieve the objective?

A. Apply an actuarial valuation method B. Attribute benefits to the periods of service C. Make actuarial assumptions

STEP 1: Determine Deficit or (Surplus)

1.1 Computing the Ultimate Cost of Benefit to the Entity
Usage of Projected Unit Credit Method (Para 67)
A. Actuarial Valuation Method (Para 67-69) (Also known as Accrued Benefit method pro-rated
To determine on service, or, Benefit/Years of Service method)

PV of Defined Benefit Obligations Past Service Cost, where applicable

Related Current Service Cost

(Para 70-74) (Para 75-98)

Application (Para 68)
Each period of service gives rise to Measures each unit separately to
additional unit of benefit entitlement build up the final obligation

The entire post-employment benefit must be discounted even

if part of the obligation is due within 12 months of the Balance Sheet date!! (Para 69)

Unit 1 Unit 2 Unit 3 Unit 4 Unit 5 Unit 6 Unit 7 Unit 8 Unit 9 Unit 10

In line with benefit plan formula Straight line basis over the period of
service giving rise to material benefits
Attribute benefits
to the periods of service

© ICAI BOS(A) II. 46

SARANSH Part II: Indian Accounting Standards

STEP 1: Determine Deficit or (Surplus)

1.1 Computing the Ultimate Cost of Benefit to the Entity

B. Attribute benefits to the periods of service (Para 70-74)

In line with benefit plan formula Straight line basis over the period of
To determine
service giving rise to material benefits
- PV of Defined Benefit Obligations
- Related Current Service Cost
- Past Service Cost, where applicable

Consider Vesting Requirements under Defined Benefit Plans (Para 72)

Conditional Benefits give rise to obligations Post-employment Benefits payable on
Conditional Benefits under Defined Benefit Plan occurrence of specified event
• Employment benefits • This is because at each successive Balance • e.g. Post Employment Medical Benefits payable on
dependent on fulfilment of Sheet date, the amount of service to be occurrence of specified event, even when employee is no
certain conditions rendered by the employee before getting longer in service
• Such benefits are also said entitled to the benefit is reduced. • Obligation is already created when employee renders the
to not be vested until the • In measuring the Defined Benefit Obligation, service that provides entitlement to the benefit.
conditions are fulfilled consider the probability that some employees • The probability that the specified event occurs affects the
may not satisfy the vesting condition. measurement of the obligation, but does not determine
whether the obligation exists.

Concept Illustrated
Illustration:
Acer Ltd. hired a professional in April 2020 for 6 years of service which would terminate in March 2026. Apart from regular salary and annual
bonus, Acer Ltd. will pay a lumpsum remuneration of ༤ 45 lakhs to her upon termination of employment. Discount rate used for actuarial
valuations is 10% per year.
Show how the obligation builds up over the employee's service. Ignore actuarial assumptions other than presented discount rate.

!
solution! ZĞƉŽƌƟŶŐĚĂƚĞϯϭ͘ϯ͘ϮϬϮϯ
entation of the
ic Repres
Dia grammat 2020-21 2021-22 2022-23 2023-24 2024-25 2025-26

Unit of benefit ༤7,50,000 ༤7,50,000 ༤7,50,000 ༤7,50,000 ༤7,50,000 ༤7,50,000

Current Service Cost ༤4,65,691 ༤ϱ͕ϭϮ͕ϮϲϬ ༤ϱ͕ϲϯ͕ϰϴϲ ༤ϲ͕ϭϵ͕ϴϯϱ ༤ϲ͕ϴϭ͕ϴϭϴ ༤ϳ͕ϱϬ͕ϬϬϬ

/ŶƚĞƌĞƐƚŽƐƚĂƚϭϬй ༤ϰϲ͕ϱϲϵ ༤ϭ͕ϬϮ͕ϰϱϮ ༤ϭ͕ϲϵ͕Ϭϰϲ ༤Ϯ͕ϰϳ͕ϵϯϰ ༤ϯ͕ϰϬ͕ϵϬϵ

10% 10% 10% 10% 10%

ůŽƐŝŶŐKďůŝŐĂƟŽŶ ༤ϰ͕ϲϱ͕ϲϵϭ ༤ϭϬ͕Ϯϰ͕ϱϮϬ ༤ϭϲ͕ϵϬ͕ϰϱϴ ༤Ϯϰ͕ϳϵ͕ϯϯϵ ༤ϯϰ͕Ϭϵ͕Ϭϵϭ ༤ϰϱ͕ϬϬ͕ϬϬϬ

STEP 1: Determine Deficit or (Surplus)

1.1 Computing the Ultimate Cost of Benefit to the Entity

C. Actuarial Assumptions (Para 75-98)

An entity’s best estimates of variables that will determine the ultimate cost of
providing post-employment benefits (Para 76)

Demographic Assumptions Para 76 Financial Assumptions

Relates to future characteristics of current and former Should be based on market expectations, at the end of the
employees (and their dependents) who are eligible for reporting period, for the period over which the obligations are
benefits. They deal with matters like: to be settled. They deal with matters like:
• Mortality rates – during and after employment • Discount rates to be in nominal terms, unless real terms are more
• Rates of employee turnover, disability and early retirement reliable (e.g. hyper inflation)
• Proportion of plan members with dependents eligible for benefits • Future salary and benefit levels
• Proportion of plan members who will select each from payment • Future medical costs including claim handling costs
option available under plan terms • Taxes payable by the plan on contributions relating to service before
• Claim rates under medical plans the reporting date, or on benefits resulting from that service

Can actuarial assumptions Experience adjustments (Para 128) Recognize in Other

[Para 120(c) read
change over time? Comprehensive Income, with Para 127(a)]
Obviously yes!! Effects of changes in actuarial assumptions without reclassification!!

© ICAI BOS(A) II. 47

SARANSH Part II: Indian Accounting Standards

STEP 1: Determine Deficit or (Surplus)

1.1 Computing the Ultimate Cost of Benefit to the Entity

C. Actuarial Assumptions (relating to Salary Increases and Changes in Benefits)

Defined Benefit Obligation to be Future Benefit Limit on Employer Other

measured on a Basis that reflects Changes Share Variables

Benefits as Effect of Formal Informal Limit is imposed on Reflect changes in

per Plan Changes contributions variables such as State
Terms in State Medical Care, level of
Benefits Such changes should not be State Retirement
reflected – such changes result in Ultimate cost of benefit Benefits etc. based on
Estimated Contribution Past Service Cost and Current considers such limit past history and reliable
S a l a r y from Employees Service Cost, as applicable evidence
Increases or Third Parties
Actuarial assumptions should reflect such changes Effect of a limit on
e.g. past history of increasing benefits as per contributions is
Limit on Employer’s Share of Cost of inflation rate, entity is obliged to use surplus in the determined over shorter
Future Benefits Plan for benefits of plan participants etc. of (i) Life of Entity, and (ii)
Estimated life of the Plan

STEP 1: Determine Deficit or (Surplus)

1.1 Computing the Ultimate Cost of Benefit to the Entity

C. Actuarial Assumptions

Mortality Medical Costs

Determined by reference to best estimates of Considers estimated changes in costs of

mortality of Plan members both during and medical services due to inflation as well as
after employment specific changes in medical costs

Considers expected changes in mortality e.g. by modifying Standard

Mortality Tables with estimates of mortality improvements

STEP 1: Determine Deficit or (Surplus)

1.1 Computing the Ultimate Cost of Benefit to the Entity

ive Past Service Cost If

os
it Set Plan
b e p ) or O) dis tleme Ame
y O B tin n
ma f DB of D Change in the PV of the Defined Benefit Obligation for gu nt ha dme
st ish pp nt,
e co PV o n PV Employee Service in prior periods (Para 8 & 102) bet en Cu
rv
i c in se i rel een toget rtailm
w
Se ease crea ate Pa her, e
s t r e d to st S no nt an
Pa (inc e (d Plan Amendment (Para 104) Arises due to Curtailment (Para 105) the erv ne d
tiv m! ice ed t
a !
ne
g
The introduction or withdrawal of, or A significant reduction by the entity in the
C ost o
s
changes to, a Defined Benefit Plan number of employees covered by a plan
Exclusions from Past Service Cost (Para 108)
New/change
in benefit Items which are Actuarial gains / Return Estimated costs are
actuarial assumptions from Plan Assets are recognized as Current
Past
service already recognized in Service Cost as the
cost Current the financial statements service was rendered
Difference in actual and
previously assumed Such gains / returns lead
salary increases on
Treatment Recognize past service cost as an expense obligation to pay to estimates of benefit Increase in already
benefits for service in improvements vested benefits (benefits
Timing Earlier of prior years Entity is obliged to use not conditional on
Change in estimates of Future Employment)
discretionary pension any surplus in the plan when in absence of
increases where entity for Plan participants
When plan amendment When entity recognizes has a constructive Such increase in obligation new/improved benefits,
or curtailment occurs related restructuring costs obligation to grant such employees complete
or termination benefits increases is an actuarial loss vesting requirements

© ICAI BOS(A) II. 48

SARANSH Part II: Indian Accounting Standards

STEP 1: Determine Deficit or (Surplus)

1.1 Computing the Ultimate Cost of Benefit to the Entity

Gains and Losses on Settlement

transaction eliminates all further legal or constructive payment of benefits to, or on behalf of,
Settlement obligations for part or all of the benefits employees as per the plan and included in
provided under Defined Benefit Plan actuarial assumptions

replaced by
Old Plan New Plan with benefits same in substance Not a settlement

+ = + +
Plan Obligation Plan ceases to Plan
Curtailment Settlement
terminated settled exist Amendment

When any of the above occurs

=
Gain or Loss
on Settlement
Recognize and measure any past service cost or Gain/Loss
on settlement as per Para 99-101 and 102-112 without
PV of Defined Benefit Obligations Settlement Price, including any Plan considering the effect of Asset Ceiling
being settled, as determined on - Assets transferred and direct payments
date of settlement made by Entity towards settlement
After the Plan Amendment, Curtailment or Settlement,
the entity shall determine effect of Asset Ceiling and
recognize any change in that effect as per Para 57(d)

STEP 1: Determine Deficit or (Surplus)

1.2 Discount Ultimate Cost of Benefit to determine PV

The entire post-employment benefit must be discounted even

if part of the obligation is due within 12 months of the Balance Sheet date!! (Para 69)

Unit 1 Unit 2 Unit 3 Unit 4 Unit 5 Unit 6 Unit 7 Unit 8 Unit 9 Unit 10

Attribute benefits to the periods of service

Which discount rate to use for determining the PV under Defined Benefit Plant? (Para 83-86)

General Rule Special Rule

Currency and term of these bonds must For currencies other than INR, for
Market yields at the end of the reporting
be consistent with that of the Post-em- which there is a deep market in High
period on Government bonds
ployment benefit obligations Quality Corporate Bonds

Time value of money

Reflects
Estimated timing of benefit payments
Nature of
Discount
Rate The actual or investment risk
Does not reflect The entity-specific credit risk borne by the entity’s creditors
The risk that future experience may differ from actuarial assumptions

Extrapolating current market rates along the yield curve is Single weighted-average discount rate may be used that
allowed in case government bond with matching tenure of reflects the estimated timing, amount of benefit payments
post employment benefits are not available and currency in which benefits are paid

© ICAI BOS(A) II. 49

SARANSH Part II: Indian Accounting Standards

STEP 1: Determine Deficit or (Surplus)

1.3 Determine Fair Value of Plan Assets F

-sa air V
me alu
defi e -
nit exit
Defined Benefit Plan ion pr
as ice c
pe
r In once
d A pt
S1
13
!
Non-funded / without Funded / with
2 modes of investments
asset backing asset backing

Create a separate entity (fund) Take a Qualifying

Provision for Defined Benefit insurance policy Provision for Defined Benefit
Obligation is made as discussed Obligation is made as discussed
(non-cash provisions) Investments are held (non-cash provisions)
by this entity Issued by unrelated
party - Ind AS 24

These investments are

Cash is not set aside Cash is set aside and invested -

called plan assets

These investments are to be preferably in risk-free
used solely for payment or Proceeds of the policy are to be investments like government
Risk of cash not available at the funding of Employee Benefits used solely for payment or securities / deposits
time of payment of the Defined funding of Employee Benefits
Benefit Obligations under Defined Benefit Plans
Intention is to make sure cash is
available when liability is due
Not available even for payment to creditors of
reporting entity in event of bankruptcy

STEP 1: Determine Deficit or (Surplus)

1.4 Deficit / Surplus

Deficit / Surplus

Present Value of Defined (Less) Fair Value of

Benefit Obligation Plan Assets

From Step 1.1 and Step 1.2 From Step 1.3

It is the PV, without deducting any Plan Assets, of expected

+
Assets held by Long-term Qualifying
future payments required to settle the obligation resulting
Employee Benefit Fund Insurance Policies
from Employee Service in the current and prior periods

Deficit / (Surplus) = Net Defined Benefit Liability / (Asset)

STEP 1: Determine Deficit or (Surplus)

Other Important Points

Para 57 - Entity has more Para 59 – Para 60 - Estimates, Account for legal and
than one Defined Benefit Encouraged, but not averages, simplified constructive
Plan: mandated to use computations may provide obligation. It is
Separately apply these Qualified Actuary reliable approximation in assumed that benefits
procedures for each some cases continue to be provided
material plan under DBP over the
remaining working lives
Para 59 - Valuation to be done
of the entity
before the end of reporting
period.
Results updated up to the end
of the Reporting Period

© ICAI BOS(A) II. 50

SARANSH Part II: Indian Accounting Standards

STEP 2: Recognition in the Balance Sheet

I
rt If PV of Defined Benefit Obligation (less) Fair Value of Plan Assets is
Pa
n II, 2013
s i o ct ,
ivi A
, D ies
III an Positive Negative
u le omp
d C
he
Sc o the
t Called as Deficit Called as Surplus

It becomes “Net Defined It becomes “Net Defined

Benefit Liability” Benefit Asset”

Entire deficit is recognized Para 64: Surplus is recognized

in Balance Sheet as in Balance Sheet at least of

‘Provisions’ under Surplus as Asset Ceiling determined using

Non-Current Liabilities computed above discount rate specified in Para 83

Set-off permitted if and only if:

Net Defined Net Defined
+ • Legally enforceable right available to settle ‘Investments’ under
Benefit Asset Benefit Liability
obligations of Plan B using surplus of Plan A Non-Current Assets
under Plan A under Plan B
• Intends to settle on net basis or realize
Asset Ceiling = PV of any Economic Benefits
surplus in Plan A and settle obligation under
Similar offsetting criteria in Ind AS 32!! available in the form of refunds from the Plan or
Plan B simultaneously
Reductions in future contributions to the Plan

STEP 3: Recognition in the Profit & Loss

Recognition principles of Defined Benefit Cost (Para 120)

Service Cost Net interest on the Net Defined Remeasurements of the Net Defined
Benefit Liability / (Asset) Benefit Liability / (Asset)

Current Past Service Gain or Loss

Service Cost Cost on Settlement Actuarial Gains Return on Any change in the
and Losses Plan Assets effect of Asset Ceiling
Change during the period in the
Plan Curtailment Net Defined Benefit Liability /
amendment (Asset) that arises from passage
of time excluding amounts
included in Net Interest on
Profit the Net Defined Benefit
or Loss Interest on Defined Interest earned on Liability (Asset)
(Less)
Benefit Obligation Plan Assets

Similar to unwinding of Calculated at discount rate

discount in Ind AS 16 determined as per Para 83 Other Comprehensive
Income without reclassifica-
tion to P/L
Profit or Loss

STEP 3: Recognition in the Profit & Loss

Para 123 - Net interest on the Net Defined Benefit Liability / (Asset)

= Net Defined Benefit Liability / (Asset) x Discount Rate (as per Para 83)

Para 123A - General Rule Para 123A – On Remeasurement as per Para 99

Net Interest = Opening balance of Net Defined Up to date of Remainder of the annual
Benefit Liability / (Asset) x Discount Rate remeasurement reporting period
determined at the start of the reporting period
Calculate based on Calculate based on
Consider changes in Net Defined Benefit opening balances remeasured balance of Net
Liability / (Asset) during the period due Defined Benefit Liability /
to contribution or benefit payments for (Asset) and the Discount rate
the purpose of computing Net Interest used for remeasurement

= + +
Net Interest on the Net Defined Interest Cost on Defined Interest Income on Interest on the effect
Benefit Liability / (Asset) Benefit Obligation Plan Assets of Asset Ceiling

Apply above principles individually to the above items

© ICAI BOS(A) II. 51

SARANSH Part II: Indian Accounting Standards

STEP 3: Recognition in the Profit & Loss

Remeasurement of Net Defined Benefit Liability / (Asset)

Para 122A Para 99 Return on Plan Assets

Determine Current Service Cost Applicable when determining past
using actuarial assumptions at the service cost, or a gain/loss on I n t e r e s t , a. Any Costs of managing Plan
start of the annual reporting period settlement Dividends and b. Assets, and
other Income Any Tax payable by the Plan
derived from Plan (Less) itself, other than Tax
Net Defined Benefit Liability / (Asset) Remeasure Net Defined Benefit Assets + Realised included in the Actuarial
is remeasured as per Para 99 Liability / (Asset) using current Fair and Unrealised Assumptions used to
Value of Plan Assets and current Gains or Losses on measure the PV of the
actuarial assumptions, including the Plan Assets Defined Benefit Obligation
Determine Current Service Cost for
current Market Interest Rates and
the remainder of the annual
other Current Market Price Other Administration Costs are not deducted from the Return
reporting period using the actuarial
assumptions used to remeasure Net on Plan Assets
Defined Liability / (Asset) as per
Para 99(b)
reflecting
benefits offered under the Plan benefits offered under the Plan
& the Plan Assets before the & the Plan Assets after the
Plan Amendment, and Plan Amendment,
Curtailment or Settlement Curtailment or Settlement

STEP 4: Remeasurements to OCI

Following items are remeasured in OCI without reclassification

Actuarial Gains and Losses Return on Plan Assets Change in the effect of
Arise due to, for example:
Asset Ceiling
a. Unexpected fluctuation of employee
turnover, early retirement or mortality,
increase in salaries, benefits or medical
Total Return on
Plan Assets - Net Interest on
Net Defined
costs (Past)
b. Changes to assumptions concerning
Benefit Liabili-
Change in effect
of Asset Ceiling - Net Interest on
Net Defined
ty / (Asset)
benefit payment options B e n e fi t
c. Change in estimates of future employee Liability /
turnover, early retirement or mortality, or (Asset)
of increases in salaries, benefits or
medical costs (Future)
d. Changes in discount rates

Defined Benefit Plans - Right to Reimbursement

Recognition as Assets Insurance Policies

Only when it is virtually certain Nature Qualifying Insurance Policy Not a Qualifying Insurance Policy
that another party will reimburse
Type of Asset Recognized as a Plan Asset It is NOT a Plan Asset
some or all of expenditure required
to settle Defined Benefit Obligation Recognition It is NOT considered as a It is considered as a
Reimbursement Right (Para Reimbursement Right (Para 116
116 is not applicable) is applicable)
Recognize right to Disaggregate and
Treatment Reduced from PV of Defined Treated as a separate asset,
reimbursement as a recognize changes in fair
separate asset, value same as Change in Benefit Obligation carried at Fair Value
measured at Fair Value Fair Value of Plan Assets

Components of Defined Benefit Cost

as per Para 120 can be netted off
against Changes in Carrying Amount
of Right to Reimbursement

© ICAI BOS(A) II. 52

SARANSH Part II: Indian Accounting Standards

Defined Benefit Plans – Specific Disclosures

Characteristics and Explanation of Disaggregation of Fair Assets owned / Actuarial Assumptions
Risks Amounts in Financial Value Items occupied / used etc (Para 144)
(Para 139) Statements (Para 142) (Para 143)
(Para 140-141)
• Characteristics • Reconciliation from Opening • Disaggregate Fair Value • Disclose Fair Value of: • Disclose significant
• Nature of Benefit Balance to Closing Balance for of Plan Assets into classes • Entity’s own actuarial assumptions
provided by the Plan each of the following: distinguishing nature and transferable Financial made to determine PV of
• Regulatory Framework • Net Defined Benefit risks e.g.: Defined Benefit
Instruments held as
in which the Plan Liability / (Asset), showing Obligation
• Cash and Cash • Plan Assets, and
operates separate reconciliations for • Such disclosure should be
Plan Assets, PV of the Equivalents Plan Assets that are
• Description of any • Equity Instruments Property occupied by, in absolute terms
Defined Benefit Obligation,
Other Entity’s Effect of the Asset Ceiling (segregated by Industry or other Assets, used • In respect of grouping of
Responsibilities for • Any Reimbursement Rights Type, Geography, by, the Entity Plans, disclosure shall be
governance of the Plan • Components of Reconciliation: Company size etc.) in the form of Weighted
• Risks to which plan • Current Service Cost • Debt Instruments Averages or relatively
exposes the entity • Interest Income or Expense (segregated by Industry narrow ranges
• Description of any Plan • Remeasurements of Net
Type, Geography,
A m e n d m e n t s , Defined Benefit Liability /
(Asset) with maximum Company size etc.)
Curtailments and • Real Estate (segregated
possible breakup
Settlements • Past Service Cost and Gains by Geography etc.)
and Losses arising on • Derivatives (segregated
Settlements by type of underlying
• Effects of Changes in Foreign risk in the Contract)
Exchange Rates • Investment Funds
• Contributions to the Plans by (segregated by type of
Employers and participants Fund)
• Payments from the Plan,
• Asset-backed Securities
showing Settlement payments
• Structured Debt
separately
• Effects of Business Combina-
tions and Disposals

Defined Benefit Plans – Specific Disclosures

Para 145 Para 146 Para 147

• A Sensitivity Analysis for each significant • Description of any Asset-Liability Matching • Description of any Funding Arrangements and
actuarial assumption (as disclosed under Para Strategies used by the Plan or the Entity, Funding Policy that affect future contributions
144) as of the end of the reporting period, including the use of Annuities and other • The expected contributions to the Plan for the
showing how Defined Benefit Obligation would techniques, such as Longevity Swaps, to manage next accounting period
have been affected by changes in the relevant risks • Information about the Maturity Profile of the
actuarial assumption that were reasonably Defined Benefit Obligation. This will include
possible at the date Weighted Average Duration of the Defined
• Methods and Assumptions used in preparing Benefit Obligation and may include other
sensitivity analysis required above and limitations information about the distribution of the timing
of those methods of Benefit Payments, such as Maturity Analysis of
• Changes from the previous period in the the Benefit Payments
methods and assumptions used in preparing • These Disclosures provide an indication of the
Sensitivity Analysis and reasons for such changes. effect of the Defined Benefit Plan on the entity’s
future cash flows.

Other long-term Employee Benefits

all employee benefits other than short-term benefits, post-employment benefits and termination benefits

Long-term paid Jubilee or other Long-term Profit sharing Deferred

absences long-service benefits disability and bonuses Remuneration

If benefit depends on length of service, If benefit is same regardless of years of service, obligation
obligation arises when service is rendered arises when event occurs that causes long-term disability

Measurement of obligations reflects probability that payment is required

and length of time for which payment is expected to be made
e
ur
los de Recognition and Measurement
D isc e ma
. b
res d
su oul
i s clo S sh
cd dA Deficit or Surplus Reimbursement Right Recognition in P&L / Asset
cifi In
s pe ther
No er o
d
un Same as applicable for Post-Employment Same as applicable for Service Cost + Net Interest on Net
Benefits as per Para 56-59 and 113-115 Post-Employment Benefits Defined Benefit Liability / (Asset) +
as per Para 116-119 Remeasurements of the Net Defined
Benefit Liability / (Asset)

© ICAI BOS(A) II. 53

SARANSH Part II: Indian Accounting Standards

Termination Benefits

event giving rise to obligation is termination instead of employee service

employee benefits are payable as a result of either

Employee’s decision to accept When to recognize? (Para 165) Entity’s decision to

an offer of benefits in terminate employment
exchange for the termination before the normal
of employment earlier of retirement date

Date when entity can no longer Date when entity recognizes costs
withdraw the benefits offered for restructuring which involves
payment of termination benefits

(Para 166) (Para 167)

Employee’s decision Entity’s decision Measurement (Para 169-170)
Depends on nature of employee benefit
Employee Restriction Plan of termination:
accepts the (earlier of ) to withdraw • Significant changes Enhancement to Expected to be Not wholly
offer the offer to the plan unlikely Post-Employment settled within settled within
takes effect • No. of employees, Benefits 12 months 12 months
location, function,
time is identified As post- As short-term As other
No specific disclosures. • Te r m i n a t i o n employment employee long-term
Disclosure under other Ind b e n e fi t s benefits benefits employee benefits
AS should be made established in the
plan

Appendix A to Ind AS-19: Application Guidance

Accounting for Contributions from Employees or Third Parties

Set out in the formal terms of the Plan (or arise from a Discretionary
constructive obligation that goes beyond these terms)

Linked to Service Not linked to Service

Reduce Service
Cost upon
Dependent on the Independent of
A ff e c t payment to the
number of years in the number of
remeasuremenUT
Plan (Para 92)
service years in service
(Para 93)
(option)

Reduce service cost by being Reduce service cost in the

attributed to periods of service period in which the related
[Para 93(a)] service is rendered [Para 93(b)]
Dotted line indicates
option to choose
Changes in contributions treatment

Not set out in Set out in formal

formal terms of terms of the Plan,
the Plan, and not or arising from
arising from constructive
constructive obligation
obligation

Current and Past Actuarial Gains

Service Cost and Losses

© ICAI BOS(A) II. 54

SARANSH Part II: Indian Accounting Standards

Appendix B to Ind AS-19: The Limit on a Defined Benefit Asset,

Minimum Funding Requirements and their Interaction

Background about Minimum Funding Requirements

Meaning Why would minimum Effects

funding be specified?

A statutory or legislative • Limits ability of Entity to reduce future

requirement specifying minimum contributions
Improves security of the • Limit on measurement of Defined Benefit
amount or level of contributions to
Post-Employment Benefit Asset may cause Minimum Funding
fund a Post-Employment or Other
promise made to Members Requirements to become onerous resulting in
Long-term Defined Benefit Plan
of an Employee Benefit Plan; liability if required contributions will not be
over a period
available to Entity once they have been paid.

Scope: Issues addressed in this Appendix

When refunds or reduction in How a minimum funding When a minimum

future contributions should be requirement might affect the funding requirement
regarded as available in accordance availability of reductions in might give rise to liability
with definition of asset ceiling future contributions

Appendix B to Ind AS-19: The Limit on a Defined Benefit Asset,

Minimum Funding Requirements and their Interaction

Principles relating to availability of a refund or reduction in future contributions

Availability of a refund or reduction in future contributions shall be determined in accordance with:

• Terms and conditions of the plan, and
• Any statutory requirements in the jurisdiction of the plan

Principles

Ability to Realize Immediate Realization Intention of use is not Refund / Reductions / Both
not a criteria relevant (Para 9 of (Para 9 of Appendix B)
Appendix B)

Determine maximum economic

Realizability is possible at some benefit available; not to be
point during the life of the Plan or recognized from combination of
when the Plan Liabilities are settled refunds and reductions in future
(Para 8 of Appendix B) contributions based on mutually
exclusive assumptions

Disclose key sources of estimation uncertainty that have a significant risk of causing material
adjustment to the Carrying Amount of Net Asset or Liability recognized in the Balance Sheet as
per Ind AS-1 (Para 10 of Appendix B)

© ICAI BOS(A) II. 55

SARANSH Part II: Indian Accounting Standards

Appendix B to Ind AS-19: The Limit on a Defined Benefit Asset,

Minimum Funding Requirements and their Interaction

Concepts of Economic Benefit available as a refund or reduction in future contributions

Economic Benefit available as a refund Economic Benefit available as a

contribution reduction
Unconditional Measurement Effect of No Time Value
right to refund wind-up Adjustments (Para
Costs If there is no Future Service Future Service Cost
without any 15 of Appendix B)
Minimum Funding Cost to the Entity determined based on:
dependence on
Requirements for excludes amounts •a ssumptions
future uncertain Deduct costs to contributions borne by consistent with those
events * the Plan of settling If the amount of a refund
related to future Employees used to determine the
Plan Liabilities is determined as the full
service Defined Benefit
amount or a proportion of
Obligation, and
= Surplus at the end of the reporting the surplus, rather than a Economic benefit available as • Situation existing at
period i.e. fixed amount, even if the contribution reduction is
the end of the
FV of Plan Assets xxx refund is realisable only at
Future Service Cost to reporting period as
Less: PV of DBO xxx a future date.
the Entity for each determined by Ind
Surplus xxx AS-19
Reduce associated costs, if any period over the shorter
of (a) expected life of the
Plan, and (b) expected
* If the entity’s right to a refund of a surplus depends on the occurrence or
life of the Entity
non-occurrence of one or more uncertain future events not wholly within its
control, the entity does not have an unconditional right and shall not
recognise an asset. (Para 12 of Appendix B)

Appendix B to Ind AS-19: The Limit on a Defined Benefit Asset,

Minimum Funding Requirements and their Interaction
Effect of a Minimum Funding Requirement on the economic benefit available as a reduction in Future Contributions

Entity shall analyse Minimum Funding Requirement at a given date into:

Contributions required to cover any Contributions required

existing shortfall for past service AND to cover Future Service
received, on the minimum funding basis

These contributions do NOT affect Economic Amount that reduces Estimated Future Service Cost in
Contributions for Future Service B e n e fi t future minimum each period less estimated

If obligation exists under minimum funding

available as a
reduction in = funding requirement
contributions for future + minimum funding requirement
contributions that would be
f u t u r e service because entity required for future service in those
requirement to pay contributions to cover such an contributions made a prepayment
existing shortfall, determine whether contributions periods if were no prepayment
payable will be available as Refund or Reduction in
Future Contributions after they are paid into the plan
a. Estimate future minimum funding requirement contributions for future service
Manner of Estimation

considering the effect of existing surplus determined using minimum funding

To the extent contribution payable will not be basis excluding prepayment.
available after they are paid into the Plan – b. Use assumptions consistent with the minimum funding basis, and for factors not
recognize a Liability when the obligation arises specified by that basis, assumptions consistent with those used to determine
Defined Benefit Obligation and with situation that exists at the end of the
reporting period as determined by Ind AS-19.
Liability shall reduce / increase Net Defined
Benefit Asset / Liability so that no Gain or Loss c. Estimate shall include any changes expected as a result of the entity paying
minimum contributions when due.
is expected to result from applying Para 64
d. Estimate shall not include effect of expected changes in terms and conditions of
minimum funding basis not substantively enacted at end of reporting period.

Appendix B to Ind AS-19: The Limit on a Defined Benefit Asset,

Minimum Funding Requirements and their Interaction
Effect of a Minimum Funding Requirement giving rise to a liability
• If an entity has an obligation under a minimum funding requirement to pay contributions to cover an existing shortfall on the minimum
funding basis in respect of services already received, the entity shall determine whether the contributions payable will be available as a
refund or reduction in future contributions after they are paid into the plan.

• To the extent that the contributions payable will not be available after they are paid into the plan, the entity shall recognise a liability when
the obligation arises. The liability shall reduce the net defined benefit asset or increase the net defined benefit liability so that no gain or loss
is expected to result from applying paragraph 64 of Ind AS 19 when the contributions are paid.

© ICAI BOS(A) II. 56

SARANSH Part II: Indian Accounting Standards

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Overview of Ind AS 20

Government Grants Government Assistance Disclosure

Recognition of Government Presentation of Repayment of

Grants Government Grants Government Grants

Reasonable assurance for

receipt and compliance Related to asset Related to income

Non-monetary Presented in balance Presented as part of

government grants sheet by setting up profit or loss, either
grant as deferred separately or under
income 'other income'

Alternatively, deduct Alternatively,

the grant in arriving deducted in
at the carrying reporting related
amount of the asset expense

Scope

Applicable Not applicable

(a) To special problems arising in accounting for government grants reflecting the effects of
In accounting for In disclosure of changing prices or supplementary information of a similar nature.
(b) To government assistance that is provided for an entity in the form of benefits that are
available in determining taxable profit or tax loss, or are determined or limited on the basis of
income tax liability.
Examples: Income tax holidays, investment tax credits, accelerated depreciation.
Government grants Other forms of (c) To government participation in the ownership of the entity.
government assistance (d) To government grants covered by Ind AS 41, Agriculture.

© ICAI BOS(A) II. 57

SARANSH Part II: Indian Accounting Standards

Entity will comply with the conditions of the grant

Only when
Recognition
of government
there is
reasonable
+
grant
assurance that Grant will be received

Note:

S. Non-monetary government grants

Type Treatment
No.
1. Grant whether received Same manner of accounting is followed
in cash or as a reduction for all grants
of a liability to the
government
2. Forgivable loan from Treated as a government grant when Either Or
government there is reasonable assurance that the
entity will meet the terms for forgiveness
of the loan
3. Government loan at a • Treat the benefit as a government
below-market rate of grant Assess the fair value of the Record both
interest • Recognise and measure in accordance non-monetary asset and asset and grant
with Ind AS 109. account for both grant at a nominal
Benefit = and asset at that fair value amount
Initial carrying value of the loan
determined as per Ind AS 109 - the
proceeds received
4. Grants received as part • Identify the conditions giving rise to
of a package of financial costs and expenses which determine
or fiscal aids with the periods over which the grant will be
conditions attached earned.
• It may be appropriate to allocate part Presentation of government grant
of a grant on one basis and part on
another.
5. Grant receivable as • Recognise in profit or loss of the
compensation for period in which it becomes receivable
expenses or losses • Provide disclosure to ensure that its
already incurred or for effect is clearly understood.
immediate financial Related to assets Related to income
support with no future
related costs
6. Government Assistance • Government assistance to entities meets
– No Specific relation the definition of government grants in
to Operating Activities Ind AS 20
• Do not credit directly to shareholders’ Either present Or deduct the Present as Alternatively,
interests. Recognise in profit or loss on in balance sheet grant in arriving part of profit deduct in
a systematic basis. by setting up at the carrying or loss, either reporting
7. Government assistance- Exclude from the definition of grant as deferred amount of the separately or related
with no reasonable government grants income asset under 'other expense
value income'
8. Transactions with Exclude from the definition of
government government grants
Basic principle for recognition of government grant- Government
grants should be recognised in profit or loss on a systematic basis
over the periods in which the entity recognises as expenses the
related costs for which the grants are intended to compensate.

First applied towards any unapplied deferred credit and

then charged to profit and loss account immediately
Related to income

* Recognise by increasing the carrying amount of the asset

* The cumulative additional depreciation that would have been
Repayment of recognised in profit or loss to date in the absence of the grant
government Either shall be recognised immediately in profit or loss
grant * Check the possible impairment of the new carrying amount of
the asset
Related to assets

Or
Reduce the deferred income balance by the amount payable

© ICAI BOS(A) II. 58

SARANSH Part II: Indian Accounting Standards

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1. Functional It is the currency of the primary economic
To prescribe guidance on currency environment in which the entity operates
Note: The primary economic
environment will normally be the one in
which it primarily generates and expends
Inclusion in the financial Translation of financial
cash i.e. it operates
statements of the entity statements into
presentation currency 2. Foreign It is a subsidiary, associate, joint venture
operation or branch of a reporting entity, the
activities of which are based or conducted
in a country or currency other than those
Foreign Currency Foreign of the reporting entity
Transactions Operations
3. Presentation • It is the currency in which the financial
currency statements are presented.
• The presentation currency may be
different from the entity’s functional
currency
6FRSH 4. Spot exchange It is the exchange rate for immediate
rate delivery
Scope 5. Closing rate It is the spot exchange rate at the end of
the reporting period
6. Exchange It is the difference resulting from
Applied in Not applied to difference translating a given number of units of
one currency into another currency at
Accounting for Hedge accounting for different exchange rates
transactions and foreign currency items, 7. Monetary items Units of currency held and assets and
balances in foreign including the hedging
currencies, except for of a net investment in a liabilities to be received or paid in a
derivative transactions foreign operation fixed or determinable number of units of
and balances covered by currency
Note: Ind AS 109 is
Ind AS 109 applied for hedge 8. Net Investment It is the amount of the reporting entity’s
accounting in Foreign interest in the net assets of that operation
Operation
Note: Presentation of cash
1. Foreign currency flows from transactions
derivatives not in a foreign currency
covered by Ind AS or to translation of
109 are within the cash flows of a foreign
scope of Ind AS 21 operation in the
2. Ind AS 21 applies statement of cash flows )XQFWLRQDO&XUUHQF\
for translation of
amounts relating Long-term foreign • The functional currency is normally the currency of the country
to derivatives from currency monetary in which the entity is located. It might, however, be a different
functional currency items for which an
to presentation currency
entity has opted for the
currency exemption as per Ind AS • An entity measures its assets, liabilities, equity, income and
101. expenses in its functional currency
Translating the results Note: Such an entity • All transactions in currencies other than the functional currency
and financial position may continue to apply are foreign currency transactions
of foreign operations the accounting policy as • For determination of functional currency of an entity, emphasis
that are included opted under the previous should be on the currency that determines the pricing of the
in the financial GAAP for such long-
term foreign currency undertaken transactions, rather than focusing on the currency in
statements of the
entity by consolidation, monetary items which those transactions are denominated
proportionate • Once determined, the functional currency is not changed unless
consolidation, or the there is a change in those underlying transactions, events and
equity method conditions
Translating an entity’s
results and financial
position into a
presentation currency

© ICAI BOS(A) II. 59

SARANSH Part II: Indian Accounting Standards

'HWHUPLQDWLRQRI)XQFWLRQDO&XUUHQF\
Determination of Functional Currency

Of reporting entity (1 and 2) Of foreign operations of reporting entity (1, 2 and 3)

1. Primary indicators 2. Secondary indicators 3. Additional indicators

(a) the currency: (a) the currency in which funds Determining Determining non-
i. that mainly influences sales from financing activities are integral operation integral operation
prices for its goods and generated; and Note: In this case, the Note: In this case the
services i.e. currency in which (b) the currency in which receipts functional currency functional currency
sales prices are denominated from operating activities are will be same to that may differ to that of
and settled; and usually retained of the reporting entity the reporting entity
ii. of the country whose
competitive forces and
regulations mainly determine
the sales prices of its goods (a) When the activities of foreign operations (a) When the activities of foreign
and services are carried out as an extension of the operations are carried out with a
(b) the currency that mainly reporting entity significant degree of autonomy
influences labour, material, and (b) When the transactions with the (b) When the transactions with the
other costs of providing goods reporting entity are a high proportion of reporting entity are a low proportion
and services. This will often be the foreign operation’s activities of the foreign operation’s activities
the currency in which these costs (c) When cash flows from the activities of (c) When cash flows from the activities
are denominated and settled the foreign operations directly affect the of the foreign operations does not
cash flows of the reporting entity and are directly affect the cash flows of the
readily available for remittance to it reporting entity and are not readily
(d) When cash flows from the activities of available for remittance to it
the foreign operation are sufficient to (d) When cash flows from the activities
service existing and normally expected of the foreign operation are not
debt obligation without funds being sufficient to service existing and
made available by the reporting entity normally expected debt obligation

Note:
When the above indicators are mixed and the functional currency is not obvious, the management uses its judgement
to determine the functional currency that most faithfully represents the economic effects of the underlying transactions,
events and conditions.
Accordingly, management has to give priority to the primary indicators before considering the other indicators, which
provide additional supporting evidence to determine an entity’s functional currency.

0RQHWDU\ 1RQPRQHWDU\LWHPV

Monetary items Non-monetary items

The essential feature of it is a right to The essential feature of it is the absence

receive (or an obligation to deliver) of a right to receive (or an obligation
a fixed or determinable number of to deliver) a fixed or determinable
units of currency number of units of currency

Examples: Examples:
• pensions and other employee benefits to be paid in cash • Amounts prepaid for goods and services
• provisions that are to be settled in cash • goodwill
• lease liabilities • intangible assets
• cash dividends that are recognised as a liability • inventories
• a contract to receive (or deliver) a variable number • property, plant and equipment
of the entity’s own equity instruments or a variable • right-of-use assets
amount of assets in which the fair value to be received • provisions that are to be settled by the delivery of a non-
(or delivered) equals a fixed or determinable number of monetary asset
units of currency is a monetary item

© ICAI BOS(A) II. 60

SARANSH Part II: Indian Accounting Standards

5HSRUWLQJRI)RUHLJQ&XUUHQF\7UDQVDFWLRQV

It is a transaction that is denominated or requires settlement in a

Definition
foreign currency

Transactions arising when an entity:

(a) buys or sells goods or services whose price is denominated in a
foreign currency;
Inclusion (b) borrows or lends funds when the amounts payable or receivable are
denominated in a foreign currency; or
(c) otherwise acquires or disposes of assets, or incurs or settles
liabilities, denominated in a foreign currency

Initial recognition Recorded on initial recognition in the functional currency

Foreign currency Spot exchange rate between the functional currency

amount and the foreign currency at the date of the transaction

It is the date on which the transaction first qualifies for

recognition. In case of advance receipts or payments,
the date of the transaction is the date on which an entity
initially recognises the non-monetary asset or non-monetary
liability arising from advance consideration before the entity
recognises the related asset, expense or income

translated using the Such exchange difference is recognised in

Monetary items closing rate profit or loss on that reporting date
Subsequent
reporting at
the end of
each reporting measured in terms translated • If gain or loss on
period Non-monetary items of historical cost in a using the non-monetary item
foreign currency exchange rate is recognised in
at the date of OCI, then exchange
the transaction component of
measured at that gain or loss is
fair value/NRV/ recognised in OCI
translated • If gain or loss on
recoverable amount using the
The effect of this comparison non-monetary item
in a foreign currency exchange rates
may be that an impairment loss is recognised in
is recognised in the functional at the end of P&L, then exchange
currency but would not be the reporting component of
recognised in the foreign period that gain or loss is
currency, or vice versa recognised in P&L

Note:
• For practical reasons, a rate that approximates the actual rate at the date of the transaction is often used, for example,
an average rate for a week or a month might be used for all transactions in each foreign currency occurring during that
period.
• If exchange rates fluctuate significantly, the use of the average rate for a period is inappropriate.

© ICAI BOS(A) II. 61

SARANSH Part II: Indian Accounting Standards

1HWLQYHVWPHQWLQDIRUHLJQRSHUDWLRQ

• It is the amount of the reporting entity's

interest in the net assets of that operation
Net
investment • An entity may have a monetary item that
Definition is receivable from or payable to a foreign
in a foreign opeartion
operation
• A monetary item for which settlement is
neither planned nor likely to occur in the
foreseeable future is a part of the entity’s
net investment in that foreign operation
• Such monetary items may include long-
Accounting
term receivables or loans
• They do not include trade receivables or
trade payables

When exchange differences arising on a

monetary item form part of a reporting
entity’s net investment in a foreign
operation and

Is denominated in the Is denominated in the Is denominated in a currency

functional currency of functional currency of other than the functional
the reporting entity the foreign operation currency of either the reporting
entity or the foreign operation

then then
then

Exchange Exchange Exchange difference

difference arises difference arises arises in both the
in the foreign in the reporting reporting entity’s separate
operation’s entity’s separate financial statements and
individual financial financial in the foreign operation’s
statements statements individual financial
statements

Such exchange difference shall be recognised in profit or loss

In consolidated financial Such exchange On disposal of the net

statements (which includes differences investment, it will be reclassified
the foreign operation and the shall be from equity to profit or loss as a
reporting entity) or accounted recognised reclassification adjustment (as
for using the equity method initially in OCI per para 48 of Ind AS 21)

© ICAI BOS(A) II. 62

SARANSH Part II: Indian Accounting Standards

&KDQJHLQ)XQFWLRQDO&XUUHQF\
Functional currency once determined can Example:
When the be changed only if there is a change to A change in the currency that mainly
change is the underlying transactions, events and influences the sales prices of goods and
possible? conditions which determined the earlier services may lead to a change in an entity’s
functional currency of the entity functional currency

How the Apply the translation procedures Translate all items into the
change is to applicable to the new functional new functional currency
be accounted? currency prospectively from the using the exchange rate at
date of the change the date of the change

Exchange differences arising from the translation Translated amounts of

of a foreign operation previously recognised in non-monetary items
OCI, are not reclassified from equity to profit or are treated as their
loss until the disposal of the operation historical cost

7UDQVODWLRQWRWKHSUHVHQWDWLRQFXUUHQF\
1. Why to • An entity may present its financial statements in any currency (or currencies).
translate? • If the presentation currency differs from the entity’s functional currency, it translates its results and financial
position into the presentation currency
2. When entity’s The results and financial position are translated into a different presentation currency using the following procedures:
functional S.N. Item Translation procedures
currency is not
the currency of a 1. Assets and liabilities (including comparatives) Translated at the closing rate at the date of that balance sheet
hyperinflationary 2. Income and expenses (including comparatives) Translated at exchange rates at the dates of the transactions
economy 3. All resulting exchange differences Recognised in OCI

3. When entity’s The results and financial position are translated into a different presentation currency using the following procedures:
functional All amounts (ie assets, liabilities, equity items, income and expenses, including comparatives) are translated at the
currency is the closing rate at the date of the most recent balance sheet
currency of a
hyperinflationary
economy

Comparative amounts shall not be

adjusted for subsequent changes
in the price level or subsequent
changes in exchange rates

Note:
The entity shall restate its financial statements in accordance with Ind AS 29 before applying the translation
method, except for comparative amounts that are translated into a currency of a non-hyperinflationary economy.
4. Translation of a • The incorporation of the results and financial position of a FO with those of the reporting entity follows normal
foreign operation consolidation procedures
(FO) in CFS • However, an intragroup monetary asset (or liability), whether short-term or long-term, cannot be eliminated
against the corresponding intragroup liability (or asset) without showing the results of currency fluctuations in
the consolidated financial statements
• Such an exchange difference is recognised either in profit or loss or OCI. (Refer chart on net investment in FO)
• Any goodwill arising on the acquisition of a FO and any fair value adjustments to the carrying amounts of assets
and liabilities arising on the acquisition of that FO shall be treated as assets and liabilities of the foreign operation.
Thus, they shall be expressed in the functional currency of the foreign operation and shall be translated at the
closing rate

Note:
Tax effects of all exchange differences
Gains and losses on foreign currency transactions and exchange differences arising on translating the results and financial position of an entity
(including a foreign operation) into a different currency may have tax effects as per Ind AS 12, Income Taxes.

© ICAI BOS(A) II. 63

SARANSH Part II: Indian Accounting Standards

'LVSRVDORUSDUWLDOGLVSRVDORIDIRUHLJQRSHUDWLRQ )2

Disposal of an entity’s
Partial disposals
entire interest in a FO

Reclassify from Of FO which is a Of FO in a joint arrangement or

equity to profit or loss subsidiary interest in an associate
(as a reclassification
adjustment) the
cumulative amount
of the exchange
differences It involves the It involves the When the retained interest after the
recognised in OCI loss of control partial disposal partial disposal of an interest in a joint
and accumulated of a subsidiary of a subsidiary arrangement or a partial disposal of an
in the separate without loss of interest in an associate that includes a
component of equity control foreign operation is a financial asset

Derecognise (but shall not Re-attribute the proportionate Reclassify to profit or loss only
reclassify to profit or loss) share of the cumulative amount the proportionate share of
the cumulative amount of of the exchange differences the cumulative amount of the
the exchange differences recognised in OCI to the NCI in exchange differences recognised
attributed to the NCI that foreign operation in OCI

Note:
A write-down of the carrying amount of a FO, either because of its own losses or because of an impairment recognised by
the investor, does not constitute a partial disposal. Hence, no part of the foreign exchange gain or loss recognised in OCI is
reclassified to profit or loss at the time of a write-down.

'LVFORVXUH
S. Scenarios Disclose
No.
1. In case of foreign currency • The amount of exchange differences recognised in profit or loss except for those arising on
transaction financial instruments measured at FVTPL as per Ind AS 109
• Net exchange differences recognised in OCI and accumulated in a separate component of
equity, and a reconciliation of the amount of such exchange differences at the beginning and
end of the period
2. In case of change in the • The fact that there is a change in the functional currency
functional currency of either the • The reason for the change in functional currency; and
reporting entity or a significant • The date of change in functional currency
foreign operation
3. When the presentation currency • The fact that the presentation currency is different from the functional currency;
is different from the functional • Disclosure of the functional currency
currency • The reason for using a different presentation currency
• Description that the financial statements is complying with all Ind AS
In case financial statements are not in compliance with all Ind AS, then
(a) clearly identify the information as supplementary information to distinguish it from the
information that complies with Ind AS;
(b) disclose the currency in which the supplementary information is displayed; and
(c) disclose the entity’s functional currency and the method of translation used to determine
the supplementary information

© ICAI BOS(A) II. 64

SARANSH Part II: Indian Accounting Standards

,1',$1$&&2817,1*67$1'$5' ,1'$6 %2552:,1*&2676

Are interest Acquisition of a
and other qualifying asset
Form part of If are directly
costs
the cost of attributable
incurred for
that asset to the Construction of
borrowing of
Borrowing funds a qualifying asset
costs
Production of a
Other Recognised In the period in which qualifying asset
borrowing as an it is incurred
costs expense

Borrowing Costs includes

Qualifying asset Includes Excludes
Interest Calculated using the effective interest
method as described in Ind AS 109 • that • inventories • Assets ready
expense necessarily • manufacturing for their
takes a plants intended use
*OUFSFTU
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substantial • power or sale, when
period of generation acquired.
PG
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Recognised in accordance with time to get
Ind AS 1 facilities • Financial
ready for its • intangible assets, and
Recognised to the intended use assets inventories
Exchange differences extent that they or sale • investment that are
arising from foreign are regarded as an properties manufactured,
currency borrowings adjustment to interest • bearer plants or otherwise
costs produced, over
a short period
of time
Note:
With regard to exchange difference required to be treated as
borrowing costs:
• The adjustment amount should be equivalent to the exchange Borrowing Actual borrowing Investment income
loss not exceeding the difference between the cost of borrowing costs costs incurred on on the temporary
in functional currency vis-a-vis the cost of borrowing in a foreign investment of
eligible for that borrowing
currency. those borrowings,
• The realised or unrealised gain to the extent of the unrealised capitalisation during the period
exchange loss previously recognised as an adjustment should if any.
also be recognised as an adjustment to interest.

Calculation of Borrowing Cost

Borrowing cost on funds Borrowing cost on funds borrowed for general use but applied
borrowed for specific use on qualifying asset

Step 1 : Calculate Capitalisation Rate (CR)*

Expenditure incurred on
QA** x Interest rate on
such specific borrowings
Step 2 : Calculation of Borrowing cost to be capitalised
Expenditure incurred on QA x Capitalisation rate

Total Borrowing Cost

*CR =
**QA =
Weighted average borrowing costs on BMM
outstanding borrowings of the entity (SFGFS
/PUF

CFMPX
GPS
FYDFQUJPO) Qualifying Asset
Total outstanding borrowings of the entity during the period (excluding specific borrowings)
Note:
 The amount of borrowing costs that an entity capitalises during a period shall not exceed the amount of borrowing costs it incurred during
that period.
 In some circumstances, it is appropriate to include all borrowings of the parent and its subsidiaries when computing a weighted average
of the borrowing costs; in other circumstances, it is appropriate for each subsidiary to use a weighted average of the borrowing costs
applicable to its own borrowings.
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© ICAI BOS(A) II. 65

SARANSH Part II: Indian Accounting Standards

It incurs POINTS TO REMEMBER:

expenditures for
the asset Particular Detail
1 Suspension of • It is done when active development of a
Starts from capitalisation qualifying asset is suspended.
the date when It incurs • Suspension is not done when an entity carries
Commencement the entity first borrowing costs out substantial technical and administrative
of capitalisation meets all of work.
the following It undertakes • An entity does not suspend capitalising
conditions: activities that borrowing costs when a temporary delay is a
are necessary to necessary part of the process of getting an asset
prepare the asset ready for its intended use or sale.
for its intended use 2 Cessation of • When substantially all the activities necessary
or sale. capitalisation to prepare the qualifying asset for its intended
Note: use or sale are complete.
• An asset is normally ready for its intended
Expenditures on a qualifying asset include only those use or sale when the physical construction
expenditures that have resulted in of the asset is complete even though routine
administrative work might still continue.
• payments of cash,
3 When • If each part is capable of being used while
• transfers of other assets or
• the assumption of interest-bearing liabilities. construction of construction continues on other parts, the
qualifying asset entity shall cease capitalising borrowing costs
Expenditures are reduced by is completed in when it completes substantially all the activities
• any progress payments received and parts necessary to prepare that part for its intended
• grants received in connection with the asset use or sale.

© ICAI BOS(A) II. 66

SARANSH Part II: Indian Accounting Standards

,1',$1$&&2817,1*67$1'$5' ,1'$6 5(/$7('3$57<',6&/2685(6

Scope of Ind AS 24
Objective, Related Party (RP)
Scope and
Purpose of The Standard has to be applied in:
related party Related party
disclosures transactions
Overview of Identifying related party relationships
Ind AS 24
Identification Party that are not Identifying related party transactions
of related
Identifying outstanding balances between an
Irrespective of RP entity and its related parties
transactions
Identifying commitments between an entity and
its related parties
Only when there is
Disclosures RP transactions Identifying the circumstances in which
disclosures of above items are to be made
Exemption from
disclosures to Determining the disclosures to be made about
Government related the above items
entitites
Disclosures

Objective of Ind AS 24
Disclosures are to be Disclosures not
made in required when

Individual financial It would conflict

To ensure that the To draw attention to the statements with the reporting
financial statements possibility that financial entity’s duties of
contain necessary position and profit or loss confidentiality
disclosures with respect to may have been affected by Consolidated and
separate financial
statements
Entity is prohibited
by the statute,
Related party relationships regulator or
Intra-group related similar competent
party transactions and authority to
Related party transactions outstanding balances disclose certain
are eliminated in information
preparation of CFS
Outstanding balances
with related parties
Exception:
If above items (occurred between investment
Commitments with entity and subsidiaries) are measured at FVTPL,
related parties then not eliminated

© ICAI BOS(A) II. 67

SARANSH Part II: Indian Accounting Standards

Purpose of Related Party Disclosures

It is probable that related party relationship may have an effect
on the profit or loss and financial position of an entity. The
effect gets manifested through:

(a) Transactions that

are entered between Example : An entity may sell goods
related parties may to its parent at cost. It may not sell
not be entered with goods at cost to an unrelated party.
unrelated parties

Example : S Limited, a subsidiary of H

Limited, in steel manufacturing used
(b) Transactions with to purchase billets from UR Limited.
unrelated parties get H Limited acquires 100% stake in FS
influenced because Limited who also manufactures billets.
of related party FS Limited is now a fellow subsidiary
of S Limited. H Limited instructs S
relationships
Limited not to purchase billets from
UR Limited but from FS Limited.

Determining related party of reporting entity

Person(s) Another Entity(ies)

It they are members of the same group

who has who has who is a
control or joint significant member of the
control over influence over key management One entity is an associate or joint venture of the other
the reporting the reporting personnel of entity or of a member of a group of which the other
entity entity entity is a member

the reporting Both entities are joint ventures of the same third party
entity or

One entity is a joint venture of a third entity and the

a parent of other entity is an associate of the third entity
the reporting
entity
The entity is a post-employment benefit plan for the
benefit of employees of either the reporting entity or an
entity related to the reporting entity

If the reporting entity is itself such a plan, the sponsoring

employers are also related to the reporting entity

The entity is controlled or jointly controlled by a person if

they are members of the same group

A related person has significant influence over the

entity or is a member of the key management personnel
of the entity (or of a parent of the entity)

The entity, or any member of a group of which it is a

part, provides key management personnel services to the
reporting entity or to the parent of the reporting entity

© ICAI BOS(A) II. 68

SARANSH Part II: Indian Accounting Standards

Important definitions:

Control Power over the investee when it is exposed or has rights to variable returns from its involvement with the
investee and has the ability to affect those returns
Joint Control Contractually agreed sharing of control of an arrangement which exists only when decisions about the
relevant activities require the unanimous consent of the parties sharing control
Significant Power to participate in the financial and operating policy decisions of the investee, but is not control of those
influence policies
Key management Persons having authority and responsibility for planning, directing and controlling the activities of the
personnel (KMP) entity, directly or indirectly, including any director (whether executive or otherwise) of that entity
Close members Close members of the family of a person are those family members who may be expected to influence, or
of the family of a be influenced by, that person in their dealings with the entity including:
person (a) that person’s children, spouse or domestic partner, brother, sister, father and mother;
(b) children of that person’s spouse or domestic partner; and
(c) dependants of that person or that person’s spouse or domestic partner.

Unrelated Parties

- Providers of finance, - Customer,

Two entities Two Joint venturers - Trade unions, - Supplier,
- If a director or other - If they simply share - Public utilities, - Franchisor,
member of KMP is joint control of JV - Departments and - Distributor or
common between them agencies of government - General agent doing significant
business

By virtue of their normal dealing with entity, although they may:

Affect the freedom of action of an entity Participate in its decision-making process

Disclosure

Mandatory disclosure of relationship, where Disclosure required only when there are related
control exists between a parent and its subsidiaries party transactions

Disclosures are must even when there are Compensation to key Related party
no related party transactions management personnel transactions during
- In total the year
- And for each category of:
Disclosures:
- Name of its parent and, if different, the
ultimate controlling party
- Nature of related party relationship
Short-term Post- Other Termination Share-
employee employment long-term benefits based
Disclosure requirements here are in addition benefits benefits benefits payment
to Ind AS 27 and Ind AS 112

(a) The nature of At minimum, disclosures include: Disclosures shall be made Provision of key
the related party (a) Amount of transactions separately for each of the management
relationship (b) Amount of outstanding following categories: personnel services
(b) Information balances, including (a) The parent that are provided
about: commitments, and: (b) Entities with joint control by separate
- Related party - Their terms and conditions of, or significant influence management
transactions (including secured/unsecured over, the entity
- outstanding and nature of consideration (c) Subsidiaries
balances paid in settlement) (d) Associates
including - Guarantees given or received (e) Joint ventures in which the
commitments (c) Provisions for doubtful debts entity is a joint venturer
(d) Expense recognized during (f ) Key management personnel
the period in respect of bad or of the entity or its parent
doubtful debts (g) Other related parties

© ICAI BOS(A) II. 69

SARANSH Part II: Indian Accounting Standards

Following are examples of transactions that are disclosed if they are with a related party

a Transfers under finance arrangements (including loans and

Purchases or sales of goods (finished or unfinished) g equity contributions in cash or in kind);

b Purchases or sales of property and other assets h Provision of guarantees or collateral

c Rendering or receiving of services Commitments to do something if a particular event occurs or

i does not occur in the future, including executory contracts
(as per Ind AS 37) (recognised and unrecognised)
d Leases

Settlement of liabilities on behalf of the entity or by the entity

e Transfers of research and development j on behalf of that related party

f Transfers under licence agreements k Management contracts including for deputation of employees

Note:
t "
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whether a price is charged.
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requirements to the compensation paid or payable by the management entity to the management entity’s employees or directors.
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parties.

Disclosure requirements for Government-related entities

Reporting entity is exempt from the disclosure If a reporting entity applies the exemption, it
requirements in relation to shall disclose the following about
(i) Related party transactions (i) The transactions and
(ii) Outstanding balances and (ii) Related outstanding balances
(iii) Commitments with

A government Another entity (that is a The name of Government

that has control, related party) because same
joint control government has control, joint
or significant control or significant influence
influence over the over both the reporting entity Nature of the government’s relationship
reporting entity and the other entity with the entity (Whether it has control, joint
control or significant influence over the entity)

Sufficient detail of related party transactions:

For each individually significant transaction: For other transactions that are collectively significant
-Its Nature -Its Amount -A qualitative or quantitative indication of their extent

Reporting entity shall consider the closeness of the related party relationship and other factors relevant in establishing the
level of significance of the transaction such as whether it is:

(a) Significant (b) Carried (c) Outside (d) Disclosed (e) Reported (f ) Subject to
in terms of out on non- normal to regulatory to senior shareholder
size market terms day-to-day or supervisory management approval
business authorities
operations

Note:
t (PWFSONFOU
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© ICAI BOS(A) II. 70

SARANSH Part II: Indian Accounting Standards

,1',$1$&&2817,1*67$1'$5' ,1'$6 

6(3$5$7(),1$1&,$/67$7(0(176
OBJECTIVE

When an entity prepares separate financial statements, to prescribe

Accounting Disclosures requirements

For investment in

Subsidiaries Joint Ventures Associates

Scope of Ind AS 27

Applied in accounting for investments in subsidiaries, joint ventures and associates, when

An entity elects The entity is required by law

to present separate financial statements that comply with Ind AS

Note:
Ind AS 27 does not mandate which entities should produce separate financial statements rather it mandates application of Ind AS 27 when an entity
prepares separate financial statements that comply with Ind AS.

Separate Financial Statements

prepared and presented by an investor who has

control of a subsidiary i.e. parent OR joint control of an investee OR significant influence over an investee

in which the investments are accounted for:

At Cost OR At fair value in accordance with Ind AS 109

Note: Equity method is not allowed under Ind AS 27

© ICAI BOS(A) II. 71

SARANSH Part II: Indian Accounting Standards

When can an entity prepare and present Separate Financial Statements?

Separate Financial Statements are generally presented in addition to Consolidated

Financial Statements (CFS)

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in which the assets, liabilities, equity, income,
expenses and cash flows of the parent and its
An entity may present Separate Financial subsidiaries are presented as those of a single
Statement as its only financial statement, if it is: economic entity.
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is applied are considered as CFS

Exempt from Exempt from applying Equity An investment entity which applies Consolidation
OR OR exemption as per Ind AS 110 for all of its subsidiaries
Consolidation Method Accounting as per Ind AS 28

Important Notes:
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Example: Following chart represents the group structure of Parent Ltd. and table below it explains the above requirements related to
separate financial statements

Parent Ltd. (listed entity)

100% 100% 30% 80%

Subsidiary A Subsidiary B* Associate C Investment entity D

100% 100% 100% 100%

Entity P Entity Q Entity R Entity S#

* Subsidiary B has availed the exemption from preparation of consolidated financial statements as per paragraph 4(a) of Ind AS 110
#

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All the above entities are incorporated under the Companies Act, 2013.

Name of the entity Whether entity prepares Status for separate financial statements
consolidated financial statements?
Parent Ltd. Yes Will be prepared as it is required by the Companies Act, 2013

Subsidiary A Yes Will be prepared as it is required by the Companies Act, 2013

Subsidiary B No Will be prepared as it is required by the Companies Act, 2013

(in this case, entity will present separate financial statements
as its only financial statements)

Associate C Yes Will be prepared as it is required by the Companies Act, 2013

Investment entity D No Will be prepared as it is required by the Companies Act, 2013.
Entity will present separate financial statements as its only
financial statements
Entity P No These entities will prepare their financial statements as required
by the Companies Act 2013. However, they will not be termed
Entity Q No
as separate financial statements since these entities do not
Entity R No have any subsidiary, associate or joint venture.
Entity S No

© ICAI BOS(A) II. 72

SARANSH Part II: Indian Accounting Standards

Preparation of Separate Financial Statements (for accounting of investments in subsidiaries, associates, and joint ventures)

at cost
Separate financial statements shall be prepared Either
in accordance with all applicable Ind AS, except
Investments in subsidiaries, joint ventures or,
associates shall be accounted for at fair value as
Or per Ind AS 109

Same accounting for all subsidiaries

Apply the same accounting for each In other words Same accounting for all associates
category of investments

Same accounting for all joint ventures

Investments in subsidiaries, joint ventures, and associates classified as held for sale or for distribution to owners
(or included in a disposal group that is classified as held for sale or for distribution to owners), they are accounted for:

As per Ind AS 105 In accordance with Ind AS 109, if previously

(Lower of: Carrying amount or fair value less accounted for as per Ind AS 109.
costs to sell), if previously accounted for at cost

If an entity elects, as per Ind AS 28, to measure its investments in associates or joint ventures at fair value
through profit or loss (FVTPL) as per Ind AS 109, it shall also account for those investments in the same way,
i.e., as per Ind AS 109 - FVTPL in its separate financial statements.

If a parent is required, as per Ind AS 110, to measure its investment in a subsidiary at fair value through profit
or loss (FVTPL) as per Ind AS 109, it shall also account for its investment in a subsidiary in the same way, i.e.,
as per Ind AS 109 - FVTPL in its separate financial statements.

Investments held by investment entities and similar entities

Investment entity shall account for the investments in subsidiaries at fair value through profit or loss (FVTPL) in the separate
financial statements too.

When an entity has elected to measure investments in associates and joint ventures (held by, or is held indirectly through, an entity
that is a venture capital organization, or a mutual fund, unit trust and similar entities including investment-linked insurance funds) at
fair value through profit or loss (FVTPL) as per Ind AS 109, then it shall also account for those investments in the same way, i.e., at fair
value through profit or loss (FVTPL) in its separate financial statements.

Accounting when a parent ceases to be an investment entity

Then entity shall account for an investment in a subsidiary in either of the following ways:

EITHER OR

Account at cost.
Continue to account for in accordance
The fair value of the subsidiary at the date of the change of
with Ind AS 109
status shall be used as the deemed cost at that date

© ICAI BOS(A) II. 73

SARANSH Part II: Indian Accounting Standards

Accounting when an entity becomes an investment entity

The entity shall account for an investment in a subsidiary at fair value through profit or loss (FVTPL) as per Ind AS 109

Compute the difference between the previous carrying amount of investment in subsidiary and Fair
value of investment in subsidiary at the date of the change of status of the investor

Previous carrying amount of investment in subsidiary Fair value of investment in subsidiary at the date of
Less Fair value of investment in subsidiary at the the change of status Less Previous carrying amount
date of the change of status of the investor = Loss of investment in subsidiary = Gain recognised in
recognised in profit or loss profit or loss

The cumulative amount of any fair value adjustment previously recognized in OCI in respect of those subsidiaries shall be reclassified
to profit or loss

Accounting Treatment of Dividend Income

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Dividend is accounted for in Profit and Loss Account
Venture, or associate) is recognized in profit or irrespective of whether the investment is accounted for
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right to receive the dividend is established

Determination of cost of investment of a new entity on reorganisation of the group / (original entity) structure by the
parent entity / (original entity)

If reorganisation satisfies all the following conditions:

the new parent obtains control the assets and liabilities of the new the owners of the original parent before the
of the original parent by issuing group and the original group are the reorganisation have the same absolute and relative
equity instruments in exchange same immediately before and after the interests in the net assets of the original group
for existing equity instruments of reorganisation; and and the new group immediately before and after the
the original parent; reorganisation

If the new parent elects to account for its investment in the original parent at cost then the new parent shall measure cost at the carrying
amount of its share of the equity items shown in the separate financial statements of the original parent at the date of the reorganisation.

Note:
The requirements of measuring cost of investment by a new parent as discussed above will equally apply in case where an entity that is not a parent
(i.e. it does not have a subsidiary) establishes a new parent between itself and its owners.

© ICAI BOS(A) II. 74

SARANSH Part II: Indian Accounting Standards

Significant Disclosure
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it is required to disclose:

Dislcosures in separate financial statements

The fact that: A list of significant investments in subsidiaries, A description of

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joint ventures and associates, including: the method used to
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incorporation, if different) of the entity whose consolidated incorporation, if different) of those investees. investments
financial statements that comply with Ind AS have been t

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produced for public use; and proportion of the voting rights, if different) held
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investee prepares separate financial statements, it is required to disclose:

That the financial statements are separate financial statements

A list of significant investments in subsidiaries, joint ventures and associates, including:

The
F name of those investees
The
F investees principal place of business and country of incorporation
The proportion of the ownership interest and its proportion of the voting rights held in those investees
F
A description of the method used to account for the investments
F

The financial statements prepared in accordance with Ind AS 110, Ind AS 111, or Ind AS 28 to which they relate

Significant Change in Ind AS 27 vis-à-vis IAS 27

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equity method to account for investment in subsidiaries, joint ventures, and associates in their Separate
Financial Statements (SFS).
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accounting conceptually, Ind AS 27 does not allow the entities to use equity method to account for investment in subsidiaries, joint
ventures, and associates in their SFS.

© ICAI BOS(A) II. 75

SARANSH Part II:ANIndian
ACCOUNTING FOR INVESTMENT IN OTHER ENTITY– Accounting
OVERVIEW Standards

ACCOUNTING FOR INVESTMENT IN OTHER ENTITY– AN OVERVIEW

WHETHER THE ENTITY HAS FULL CONTROL

OVER ANOTHER ENTITY?
Yes No

WHETHER THE ENTITY HAS FULL CONTROL

OVER ANOTHER ENTITY?
Yes No
Follow Ind AS 110 and consolidate the Make disclosure Whether the entity
financial statements of that entity as per Ind AS 112 has joint control on
Yes another entity

Make disclosure No
Follow Ind AS 110 and consolidate the Whether the entity
financial statements of that entity as per Ind AS 112 has joint control on
Whether the entity
Follow Ind AS 111 and classify
If Joint Operation If JointYes
Venture another entity
the joint arrangement has significant
influence
Yes No

Follow Ind AS 111 and classify Whether theNoentity

If Joint Operation If Joint Venture
the joint arrangement has significant
Account for influence
Account for assets, liabilities, Yesinterest as
per the Equity method
revenue and expenses
No

Disclosure as Account for interest

Follow as
Ind AS on Financial
Account for assets, liabilities,
per Ind AS 112 per the Equity method and other Ind AS
Instrument
revenue and expenses

Disclosure as Disclosure as per

Follow Ind ASother Ind AS
on Financial
per Ind AS 112 Instrument and other Ind AS
,1',$1$&&2817,1*67$1'$5' ,1'$6  KEY DEFINITIONS
,19(670(17,1$662&,$7(6$1'-2,179(1785(6 Consolidated Financial Disclosureofasaper
Financial statements other
group inInd AS
which
OBJECTIVE Statements (CFS) assets, liabilities, equity, income, expenses
and cash flows of the parent and its
,1',$1$&&2817,1*67$1'$5' ,1'$6  KEY DEFINITIONS subsidiaries are presented as those of a
To prescribe the accounting To set out the requirements for
,19(670(17,1$662&,$7(6$1'-2,179(1785(6
for investments in associates the application of equity method
Consolidated Financial single economic
Financial entityof a group in which
statements
OBJECTIVE Statements (CFS) assets, liabilities, equity, income, expenses
Joint arrangement and cash flows of the parent and its
It is an arrangement in which two or more
subsidiaries are presented as those of a
To prescribe the accounting ToEquity
set outmethod is applied in
the requirements for parties have joint control
single economic entity
for investments in associates theaccounting
applicationfor
ofinvestments
equity method in
associates and joint ventures Joint control
Joint arrangement It is the contractually agreed sharing of
It is an arrangement
control in whichwhich
of an arrangement, two or exists
more
Equity method is applied in parties
only whenhavedecisions
joint control
about the relevant
SCOPE
accounting for investments in activities require the unanimous
associates and joint ventures consent
Joint control It is the of the parties sharing
contractually agreed control
sharing of
Ind AS 28 is applied by all entities that are: control of an arrangement, which exists
Joint venture It is when
a jointdecisions
arrangement
SCOPE only aboutwhereby the
the relevant
parties thatrequire
activities have joint thecontrol of the
unanimous
Investors with joint control Investors with significant
arrangement
consent partiesrights
of thehave sharingtocontrol
the net
Ind AS
of an investee 28joint
i.e., all entitiesover
is applied by influence thatan
are:investee i.e., assets of the arrangement
venture of the investor Joint venture It is a joint arrangement whereby the
associate of the investor
parties that have joint control of the
Investors with joint control arrangement have rights to the net
Investors with significant
of an investee i.e., joint assets of the arrangement
influence over an investee i.e.,
venture of the investor associate of the investor

© ICAI BOS(A) II. 76

SARANSH Part II: Indian Accounting Standards

WHAT IS AN ASSOCIATE?

An entity over which the investor has

It does not imply control or

Significant Influence join control of policies of the
investee

It is the power to participate

In the financial policy decisions of the investee In the operating policy decisions of the investee

ASSESSMENT OF SIGNIFICANT INFLUENCE

Main Indicator Other Indicators

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The power to participate in the financial and operating policy
subsidiaries) decisions of the investee, but not to control them
t
20% or more (up to 50%) of voting power of the
investee (a rebuttable presumption)
Representation on board of directors or equivalent
Note: This rebuttable presumption is not always governing body of investee
decisive
Participation in policy-making process (including
participation in dividend or other distribution
decisions)

Material transactions between investor and

investee

Interchange of managerial personnel

Provision of essential technical information

OTHER POINTS
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currently exercisable (like share warrants, share call options, convertible debts, convertible equity instruments
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except
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(b) financial ability to exercise or convert those potential rights.
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existing ownership interests and does not reflect
the possible exercise or conversion of potential voting rights / other derivative instruments.
However, when an entity has, in substance, an existing ownership which currently gives it access to the returns associated with an
ownership interest, then the proportion allocated to the entity is determined by taking into account the eventual exercise of those potential
voting rights / other derivative instruments.

© ICAI BOS(A) II. 77

SARANSH Part II: Indian Accounting Standards

LOSS OF SIGNIFICANT INFLUENCE

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Financial policy decisions Operating policy decisions

The loss of significant influence can occur with or without a change in absolute or relative ownership levels

Example

When an associate becomes subject to the control Loss of significant influence may occur because of a
of a government, court, administrator, or regulator contractual arrangement

EQUITY METHOD

An investor is required to account its investments in associates and joint ventures as per:
EQUITY METHOD

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statements of the investor
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2 post-acquisition profit or loss of the investee

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revaluation of PPE or foreign exchange translation differences)
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Goodwill remains included in the carrying amount of the investment

4

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Distributions received from an investee (e.g., dividend) reduces the carrying amount of investment
5

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Equity Method Accounting is applied from the date significant influence arises to the date significant influence ceases
6

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7 non-current asset

© ICAI BOS(A) II. 78

SARANSH Part II: Indian Accounting Standards

Determination of carrying amount of investment under Equity Method

Initial Cost XXXX
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0$* XXXX
Carrying Amount of the Investment XXXX

EQUITY METHOD ACCOUNTING:

DEBIT CREDIT
1. On Initial Recognition:
Investment in associate Dr. XXXX XXXX
To Cash/Bank
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2. Goodwill or Capital Reserve:
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- Cost (of investment in associate); and

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Then,
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If Cost (of investment in associate) < Investor’s share of net assets: CAPITAL RESERVE
Note for Goodwill:
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3. Subsequently, after initial recognition:

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Investment in associate (in Balance Sheet) Dr. XXXX XXXX
To Share in Profit from associate (in Profit/Loss)
In case, the associate makes loss, then the entry would be:
Share in Loss from associate (in Profit/Loss) Dr. XXXX XXXX
To Investment in associate (in Balance Sheet)

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0$*
Investment in associate (in Balance Sheet) Dr. XXXX XXXX
To Share in Changes in OCI from associate (in OCI)

4. Distributions received from investee:

Cash/Bank (in Balance Sheet) Dr. XXXX XXXX
To Investment in associate (in Balance Sheet)
5. Losses exceeding the carrying amount of investment:
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Š Investment in associate or joint venture

© ICAI BOS(A) II. 79

SARANSH Part II: Indian Accounting Standards

EXEMPTIONS FROM APPLYING THE EQUITY METHOD

Either

The entity is a parent and is exempt from preparing CFS, by virtue of scope exception under Para 4(a)
of Ind AS 110

Or

When ALL the following conditions are met:

Š Entity is a subsidiary (wholly owned or partially owned) of another entity
and
its owners have been informed about and do not object to the entity not applying the Equity
Method
Š
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exchange or Over the Counter market)
Š Entity is not in the process of filing its financial statements for issuing any class of publicly traded
securities
Š The ultimate (or any intermediate) parent of the investor entity produces CFS (under Ind AS) in
which investment in subsidiaries are measured at FVTPL

Investment in an associate or a joint venture is held directly or indirectly by venture capital and
similar entities like mutual funds, unit trust, etc.

An entity may elect to measure investment in those associates and JVs at FVTPL as per Ind AS 109
separately for each investment at initial recognition

NON-CURRENT ASSETS (OR DISPOSAL GROUPS) HELD FOR SALE

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‘Non-current asset Held-for-Sale’

Measure the investment as per Ind AS 105

Lower of:

Fair value less costs to sell

Carrying amount (FVLCS)

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Yes No

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no longer meets the criteria to be so classified

Apply equity method retrospectively, as from the date of its classification as held for sale

© ICAI BOS(A) II. 80

SARANSH Part II: Indian Accounting Standards

CHANGE IN OWNERSHIP INTEREST

Whether it
results in
change in
SFMBUJPOTIJQ
Yes No

If the retained interest If an investment in an If an investment in a

If the investment If reduced ownership
in the former associate associate becomes an joint venture becomes
becomes (investment) continues
or joint venture is a investment in a joint an investment in an
subsidiary to be classified either as
financial asset venture associate
an associate or a joint
venture respectively

Then the investor Then

t

Discontinue t
Discontinue equity method
Equity Method The entity shall reclassify to profit or
t

Reclassify the gain or loss to
Accounting and t
Continue applying loss the proportion of the gain or loss
profit or loss on the disposal of
the equity method that had previously been recognised in
t

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t

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investment as t

Measure the retained interest retained interest to that reduction in ownership interest
per Ind AS 103 at fair value as per Ind AS 109
and Ind AS 110

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If that gain or loss is required to
be reclassified to profit or loss on
the disposal of the related assets or
liabilities
Fair value of retained
interest Carrying amount of the
+ investment (at the date
Proceeds from disposal of the equity method was
associate or joint venture discontinued)

If an entity discontinues the use of the equity method THEN,

t

A gain or loss (if any) previously recognised in OCI by the investee (e.g., Cumulative exchange differences relating to a foreign operation)
would be reclassified to profit or loss on the disposal of the related assets or liabilities
t

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(as a reclassification adjustment)

Note: The fair value of retained interest should be regarded as fair value on initial recognition.

EQUITY METHOD PROCEDURES

A. DETERMINATION OF GROUP’S SHARE

A group’s share in an associate or a joint venture is the aggregate of the The holdings of the group’s other associates
holdings in that associate or joint venture by the parent and its subsidiaries or joint ventures are ignored for this purpose

When an associate or a joint venture has subsidiaries,

associates or joint ventures

The profit or loss, other comprehensive income and net assets taken into account After any adjustments necessary to give
are those recognised in the associate’s or joint venture’s financial statements effect to uniform accounting policies

© ICAI BOS(A) II. 81

SARANSH Part II: Indian Accounting Standards

B. MUTUAL TRANSACTIONS

They are transactions between an investor entity &MJNJOBUF
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(including subsidiaries) and its associate or joint venture gains or losses resulting from these transactions

Mutual transactions are of two types

Gains and losses from such transactions are
recognised
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statements only to the extent of unrelated investors’
Upstream Downstream interests in the associate or joint venture

Example: Example:
Sales of assets from an associate or a Sales or contributions of assets from the
joint venture to the investor investor to its associate or its joint venture

When upstream transactions provide evidence of When downstream transactions provide evidence
a reduction in the NRV of the assets to be of a reduction in the NRV of the assets to be sold or
purchased or of an impairment loss of those assets contributed, or of an impairment loss of those assets

The investor shall recognise its share in those losses The investor shall recognise in full those losses

Share in loss of in Associate/JV Dr. Loss on sale of asset Dr.

To Investment in Associate./JV To Asset

Note:
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non-monetary asset to an associate or a joint venture in exchange of an equity interest in that associate or
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lacks commercial substance, then the gain / loss involved in such transaction is treated as
unrealised and such gain / loss is eliminated against the investment value (i.e., the carrying amount of the investment in associate or
joint venture will be equal to the carrying amount of non-monetary asset contributed in exchange)

C. DIFFERENT REPORTING DATES

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statements, and the reporting date of the investor
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the difference between the end of the reporting period of the associate or joint venture and that of the entity shall be no more
than three months.

D. UNIFORM ACCOUNTING POLICIES

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adjustments should be made to align the accounting policies of associate or joint venture
to those of the entity

Two Exceptions to the above rules are

Exception 2
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an associate or a joint venture that is an investment
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impracticable to do so account for its interest in subsidiaries at fair value. Hence, in such case, the entity
can elect to retain the fair value measurement used by the associate or joint venture.

© ICAI BOS(A) II. 82

SARANSH Part II: Indian Accounting Standards

E. CUMULATIVE PREFERENCE SHARES

If an associate or a joint venture has outstanding cumulative preference shares that are:
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The entity computes its share of profit or loss after adjusting for the dividends on such shares.
This computation is to be done, irrespective of the fact that whether the dividends have been declared or not

F. Loss making associate or joint venture

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its interest in the associate or joint venture.
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subsequently reports profits
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IMPAIRMENT LOSSES

An entity shall determine whether there is objective evidence
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The objective evidence of impairment can arise as a result of:

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‘loss event’) and
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impact on the estimated future cash flows from the net investment that can be reliably estimated.

It is not necessary to identify a single event that caused impairment. Rather, impairment can be a combined effect of several individual events.

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Objective evidence that the net investment is impaired includes observable data about the following loss events:

Breach of contract, such as a default in payments by the

Significant financial difficulty of the associate or joint venture associate or joint venture

The entity granting a concession to associate or joint venture It becoming probable that the associate or joint venture will
(because of its financial difficulties enter bankruptcy or other financial reorganisation

Disappearance of an active market for the net investment Adverse effect in the environment (technological, market,
because of financial difficulties of the associate or joint venture economic or legal) in which associate or joint venture operates

Significant or prolonged decline in the fair value of an

investment in an equity instrument below its cost

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no longer publicly

traded is not evidence of impairment.

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evidence of impairment, although it may be evidence of impairment when considered with other available information.

© ICAI BOS(A) II. 83

SARANSH Part II: Indian Accounting Standards

t I
f goodwill
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part of the carrying amount of the net investment in

associate or joint venture, then such goodwill is not tested separately for impairment; rather the entire carrying amount of the
investment is tested for impairment as a single asset when there is objective evidence of impairment.

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not allocated to any asset, including goodwill, that forms part of the carrying amount of the net
investment in the associate or joint venture.

Reversal of impairment loss

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‘Impairment of Assets’ to the extent that the recoverable
amount of the net investment subsequently increases.

PRESENTATION AND DISCLOSURE

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generally classified as non-current assets

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only classified as current assets if they meet the criteria to be classified as ‘held for sale’ in
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ADisclosure of Interests in Other Entities
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significant influence over, an investee

MAJOR CHANGES IN IND AS 28 FROM IAS 28

Particulars Ind AS 28 IAS 28

Capital Reserve / Any excess of: Any excess of:
Negative Goodwill
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identifiable assets and liabilities WFOUVSFT
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(b) The cost of investment (b) The cost of investment
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Capital is included as Income – in the determination
Reserve in the period in which the PG
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investment is acquired of profit/loss in the period in which the
investment is acquired

Requirement of uniform accounting policies Ind AS 28 gives an exemption in case of an

To be adhered. There is no such exemption
to be followed by associates and joint associate where it is impracticable to follow
given under IAS 28.
ventures uniform accounting policies

© ICAI BOS(A) II. 84

SARANSH Part II: Indian Accounting Standards

FINANCIAL INSTRUMENTS
Overview of standards providing guidance on Scope of Ind AS 32
ÀQDQFLDOLQVWUXPHQWV Applied by all entities to all types of financial instruments
Exceptions:
Financial InstrumentT
Interests in subsidiaries, associates or joint ventures that
are accounted for in accordance with Ind AS 110, Ind AS
27, or Ind AS 28
Note: Entities shall apply this Standard to all derivatives
linked to interests in subsidiaries, associates or joint
Ind AS 32 ‘Financial Ind AS 107 ‘Financial
Instruments:
Ind AS 109 ‘Financial
Instruments:
ventures
Instruments’
Presentation’ Disclosures’
Employers’ rights and obligations under ‘Employee
benefit plans’ to which Ind AS 19 applies
Disclosures
Classification Classification Insurance contracts as defined in Ind AS 104
as Liability vs and re- Exception 1: Derivatives that are embedded in insurance
Equity classification contracts -if accounted separately by the issuer, as
Of
Initial
required by Ind AS 109.
Financial
Compound Measurement Exception 2: Financial guarantee contracts -if the issuer
liability
Financial applies Ind AS 109 in recognising and measuring the
Instruments Measurement contracts. However, issuer can elect applying Ind AS 104
Subsequent Of in recognising and measuring them
Offsetting a Measurement Financial
Financial asset
asset Financial instruments within the scope of Ind AS 104
and a Financial
liability Recognition (because they contain a discretionary participation
and de- feature). However, exemption is limited to paragraphs
Presentation recognition 15– 32 and AG25–AG35 which relates to the distinction
of Interest, between financial liabilities and equity instruments.
dividends, Impairment Note: Ind AS 32 applies to derivatives that are embedded
losses and gains in these instruments
Hedging
Derivative Instruments
and hedge Financial instruments, contracts and obligations under
accounting share-based payment transactions to which Ind AS 102
Hedged items applies,
Exception 1: Contracts within scope of paras 8-10 of Ind
AS 32
,1',$1$&&2817,1*67$1'$5' ,1'$6  Exception 2: Treasury shares purchased, sold, issued
or cancelled in connection with employee share option
),1$1&,$/,167580(17635(6(17$7,21 plans, employee share purchase plans, and all other share-
based payment arrangements to which paras 33, 34 of Ind
Objective of Ind AS 32 is to AS 32 applies
Establish Establish Classify Classify Circumstamces
principles principles financial related in which
for
presenting
for
offsetting
instruments,
from the
interest,
dividends,
financial assets
and financial
6XPPDU\ RI WKH WUDQVDFWLRQ RXWVLGH WKH
financial financial perspective losses and liability should VFRSH)LQDQFLDO,QVWUXPHQWV
instruments assets and of the issuer gains be offset S. Particulars Covered Covered Applicable
as liabilities financial into No. under under Ind AS
or equity liabilities -financial Ind AS 109 Ind AS 32
assets, 1 Interest in subsidiaries No No Ind AS 27
-financial (At Costs)
liabilities 2 Interests in associates No No Ind AS 27
and (At Costs)
-equity 3 Interest in joint ventures No No Ind AS 27
instruments (At Costs)
4 Rights and obligations No No Ind AS 116
under leases
Note: Principles in Ind AS 32 complement the principles for 5 Employers' rights and No No Ind AS 19
recognising and measuring financial assets and financial liabilities in obligations under
Ind AS 109 and for disclosing information about them in Ind AS 107. employee benefit plans

© ICAI BOS(A) II. 85

SARANSH Part II: Indian Accounting Standards

S. Particulars Covered Covered Applicable Contracts need not

No. under under Ind AS be in writing and
Ind AS 109 Ind AS 32 may take a variety What are Financial Any assets or
6 Rights and obligations No No Ind AS 104 of forms Instruments? liabilities that are not
under an insurance
contractual are not
contract An agreement financial assets or
7 Forward contract arising No No Ind AS 104 between two or Any contract financial liabilities.
in case of business more parties that Example: Income
combination t
IBT
DMFBS taxes are a statutory
8 Loan commitment other No No Ind AS 37 economic obligation
than covered under Ind consequences and That gives rise
AS 109 and Ind AS 32 t
JT
enforceable by
9 Shared based payments No No Ind AS 102 law
10 Reimbursement right in No No Ind AS 37
respect of provision
11 Rights and obligations No No Ind AS 115 To one entity’s To another entity’s
under revenue
for contracts with OR
customers
12 Interest in subsidiaries Yes Yes Ind AS 109 Financial asset Financial liability Equity instrument
/ Associates / Joint
venture (At Fair Value)

Scope of ‘Contract to Buy or Sell a Non-Financial Item’

What are
Financial Assets?
Ind AS 32 is applicable when the contract Ind AS 32 is not
(including written option) is settled applicable when
or or
Net in By another By exchanging When an entity Contract is entered Equity Contract (Derivative or Non-
cash financial financial irrevocably into and continue instrument A contractual Derivative) settled with variable
instrument instruments designates to be held for the Cash of another amount of entity’s own equity
right:
the contract purpose of the entity instruments
as measured receipt or delivery of
at fair value a non-financial item
through profit in accordance with
As if the contract was or loss as per the entity’s expected To receive cash To exchange financial Exception:
a financial instrument para 2.5 of Ind purchase, sale or or another assets or financial Entity’s own equity
AS 109 usage requirements financial asset OR liabilities with another instruments do not
from another entity under conditions include
entity that are potentially t
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mOBODJBM
Even if it was entered into for the purpose of the receipt or favourable to the entity instruments
delivery of a non-financial item in accordance with the entity's classified as equity
expected purchase, sale or usage requirements instruments
The ability A contingent right and t
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to exercise a obligation meets the impose on the
Note: This designation is available only at inception of the
contractual definition of financial asset entity an obligation
contract and only if it eliminates or significantly reduces a
right or to satisfy and financial liability, even to deliver to
recognition inconsistency which arise from not recognising
a contractual though such assets and another party a
that contract under Ind AS 32
obligation may be liabilities are not always pro rata share of
absolute or it may recognized in the financial the net assets of
Ways in which a contract to buy or sell a non-financial item can be settled net in be contingent on statements. For eg.: A the entity only on
cash or another financial instrument or by exchanging financial instruments. occurrence of one lender may be provided liquidation and are
or more future with a financial guarantee classified as equity
events, not wholly by a party (‘guarantor’) on instruments, or
within the control behalf of borrower, entitling t
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When the When the ability to settle When, for similar When the
of either party to to recover the outstanding are contracts for
terms of the net in cash or another contracts, the non-
the contractual dues from the guarantor the future receipt
contract permit financial instrument, or entity has a financial
arrangement if the borrower were to or delivery of the
either party to by exchanging financial practice of taking item that is
default, etc. entity’s own equity
settle it instruments, is not delivery of the the subject
t
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PS explicit in the terms of the underlying and of the instruments
t
BOPUIFS contract, but the entity selling it within contract
financial has a practice of settling a short period is readily Important Points
instrument or similar contracts in the after delivery convertible t
Physical assets (such as inventories, property, plant and
t
CZ said manner for the purpose to cash equipment), right-of-use assets and intangible assets (such as
exchanging (whether with the of generating a patents and trademarks) are not financial assets.
financial counterparty, by entering profit from short- t
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prepaid expenses) for which the future economic
instruments into offsetting contracts term fluctuations benefit is the receipt of goods or services, rather than the right to
or by selling the contract in price or receive cash or another financial asset, are not financial assets.
before its exercise or lapse) dealer's margin t
‘Perpetual’ debt instruments (such as ‘perpetual’ bonds,
debentures and capital notes) normally provide the holder with
the contractual right to receive payments on account of interest
Note: Such Contracts on which Ind AS 32/Ind AS 109 is applicable are at fixed dates extending into the indefinite future, either with
considered to be derivatives while those contracts that are not covered no right to receive a return of principal or a right to a return of
under the scope of Ind AS 32 are considered as executory contracts. principal under terms that make it very unlikely or very far in the
future. The holder and issuer of the instrument have a financial
asset and a financial liability, respectively.

© ICAI BOS(A) II. 86

SARANSH Part II: Indian Accounting Standards

TEST YOUR KNOWLEDGE What are Financial Liabilities?

Particulars Whether Remarks
Financial A contractual Contract (Derivative or Non-
Asset (FA) obligation Derivative) settled with variable
or not? amount of entity’s own equity
instruments
Investment in bonds FA Contractual right to receive cash
debentures
Loans and FA Contractual right to receive cash To deliver cash To exchange financial
receivables or another assets or financial
financial asset OR liabilities with another
Deposits given FA Contractual right to receive cash to another entity under conditions
entity that are potentially
Trade & other FA Contractual right to receive cash
unfavourable to the entity
receivables
Cash and cash FA Specifically covered in the
equivalents definition
Exception:
Bank balance FA Contractual right to receive cash
Investments in FA Equity instrument of another Rights, options or warrants to acquire a fixed number of the
equity shares entity entity’s own equity instruments for a fixed amount of any
currency are equity instruments if the entity offers the rights,
Perpetual debt FA Such instruments provide the
options or warrants pro rata to all of its existing owners of
instruments contractual right to receive
the same class of its own non-derivative equity instruments
Eg. perpetual interest for indefinite future or a
bonds, debentures right to return of principal under
and capital notes. terms that make it very unlikely The equity conversion option embedded in a convertible
or very far in the future bond denominated in foreign currency to acquire a fixed
Physical assets No Control of such assets does not number of the entity’s own equity instruments if the exercise
create a present right to receive price is fixed in any currency
Eg. inventories,
property, plant and cash or another financial asset
equipment etc. Puttable financial instruments that are classified as equity
Right to use assets No Control of such assets does not instruments as per paras 16A and 16B
Eg. Lease vehicle create a present right to receive
etc. cash or another financial asset
*nstruments that impose on the entity an obligation to
Intangibles No Control of such assets does not deliver to another party a pro rata share of the net assets of
Eg. Patents, create a present right to receive the entity only on liquidation and are classified as equity
trademark etc. cash or another financial asset instruments as per para 16C and 16D, or
Prepaid expenses No These instruments provide
Eg. Prepaid future economic benefit in the *nstruments that are contracts for the future receipt
insurance, prepaid form of goods or services, rather or delivery of the entity’s own equity instruments
rent etc. than the right to receive cash
Advance given for No These instruments provide "Note: An instrument that meets the definition of a financial
goods and services future economic benefit in the liability is classified as an equity instrument if it has all the features
form of goods or services, rather and meets the conditions in paragraphs 16A and 16B or paragraphs
than the right to receive cash 16C and 16D."

TEST YOUR KNOWLEDGE

Particulars Whether Financial Remarks
Liability (FL)
or not?
Loans payable or bank loan FL Contractual obligation to pay cash / bank
Trade and other payables FL Contractual obligation to pay cash / bank
Bills payable / acceptance FL Contractual obligation to pay cash / bank
Deposits received FL Contractual obligation to pay cash / bank
Mandatory redeemable preferences FL Contractual obligation to pay cash / bank
shares
Financial guarantee given FL Contractual obligation to pay cash, due
to the occurrence of certain events

© ICAI BOS(A) II. 87

SARANSH Part II: Indian Accounting Standards

™ Settlement in own equity instruments is equity

Equity Instrument classified only if it’s a fixed-for-fixed transaction,
ie, issue of fixed number of shares and involves a
fixed amount of cash or other financial asset
Any contract that ™ Where an entity enters into a non-derivative contract
to issue a fixed number of its own equity instruments
in exchange for a fixed amount of cash (or another
financial asset), it is an equity instrument of the
Settlement entity. But this does not apply for instruments that
Evidences a residual interest in the assets of an entity
in own are equity classified being a puttable instrument or
after deducting all of its liabilities
equity other instrument entitling the holder to pro-rata
instruments share in net assets that meet specified criteria
™ However, if such a contract contains an obligation for
the entity to pay cash (or another financial asset), it
The instrument is an equity instrument if, and only if, both also gives rise to a liability for the present value of the
conditions (a) and (b) below are met: redemption amount. For example: a forward contract
entered into by an entity to repurchase fixed number
of its own shares for a fixed amount of cash gives rise
to a financial liability to be recorded at present value
of redemption amount

An issuer of non-puttable ordinary shares assumes a liability when:

(b) If the instrument will or may
(a) The instrument t
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equity instruments, it is:
obligation:
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(i) To deliver cash or another
no contractual obligation for
financial asset to another This may be the case following the:
the issuer to deliver a variable
entity; or t
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number of its own equity
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assets or financial satisfaction of liabilities become distributable to shareholders
(ii) A derivative that will be settled
liabilities with another
only by the issuer exchanging
entity under conditions
a fixed amount of cash or
that are potentially Example: When the dividend is approved by shareholders in AGM, the
another financial asset for a
unfavourable to the Company has taken an obligation to distribute dividend to its shareholders
fixed number of its own equity
issuer and hence, it is a contractual obligation meeting the definition of financial
instruments
liability

Fixed-for-fixed
transaction!

Examples of equity instruments include:

Note: A contractual obligation, including one arising from a derivative Non-puttable ordinary shares, for example: equity shares issued by companies
financial instrument, that will or may result in the future receipt or
delivery of the issuer’s own equity instruments, but does not meet
Some puttable instruments (if they meet requisite criteria and are not classified
conditions (a) and (b) above, is not an equity instrument. as financial liabilities)

Some instruments that impose on the entity an obligation to deliver to another

party a pro rata share of the net assets of the entity only on liquidation (if they
meet requisite criteria and are not classified as financial liabilities)
The key characteristics of an equity instrument have been further
explained as follows: Some types of preference shares (where repayment and distribution is at the
discretion of the Issuer);
™ A key characteristic of equity instruments is that they
carry no contractual obligation throughout for any
payment or distribution towards the holders of such Warrants or written call options that allow the holder to subscribe for or
instruments. purchase a fixed number of non-puttable ordinary shares in the issuing entity
in exchange for a fixed amount of cash or another financial asset.
™ However, following type of instruments as an
No exception are ‘equity’ classified even if they contain
contractual ™ Other instruments convertible into fixed number of equity shares, etc.
an obligation to deliver cash or other financial asset,
obligation provided certain requisite criteria are met –
1. Puttable financial instruments that meet certain Important Points
conditions
2. An instrument, or a component of an instrument,
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liabilities. Paragraphs 11 and 16 of Ind AS 32 provides guidance
to distinguish a financial liability from an equity instrument
t
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liability characteristics depending on the substance of the rights
attaching to it

© ICAI BOS(A) II. 88

SARANSH Part II: Indian Accounting Standards

Comparative Table For Classifying Financial Liabilities And The Flowchart Below Further Summarises The Distinction
Equity Instruments From The Perspective Of The Issuer Between The Definitions Of A Financial Liability And Equity:

No Not a financial instrument, account

Financial liability (Ind AS 32.11) Equity (Ind AS 32.16) Is there a contractual obligation?
for under relevant standard
A financial instrument that fulfils A financial instrument that fulfils Yes
either of (A) or (B) below: both (A) and (B) below:
Obligation to deliver cash or Yes
Condition (A): Condition (A): another financial asset?
An instrument that is a An instrument that contains no No
contractual obligation: contractual obligation:
Obligation to exchange
i. to deliver cash or another i. to deliver cash or another financial assets or liabilities Yes
financial asset to another financial asset to another under potentially unfavourable Financial liability
entity; or entity; or conditions
ii. to exchange financial assets or ii. to exchange financial assets or No
financial liabilities with another financial liabilities with another Yes
entity under conditions that are entity under conditions that are (A) Obligation to issue own
equity instruments, AND Measured at Measured at
potentially unfavourable to the potentially unfavourable to the (B) Either of the consideration Amortised cost Fair value
entity entity received/receivable
or number of equity
Condition (B): Condition (B): instruments is VARIABLE
An instrument that will or may be An instrument that will or may be t
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No, this implies statement
settled in the entity's own equity settled in the entity's own equity
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0$*
instruments and is: instruments and is:
(A) Obligation to issue own
i. A non-derivative for which the i. a non-derivative that includes equity instruments, AND Hence
entity is or may be obliged no contractual obligation for (B) Both of the consideration Equity instrument
to deliver a variable number the issuer to deliver a variable received / receivable
of the entity's own equity number of the entity's own and number of equity
instruments are FIXED
instruments; or equity instruments; or Carried at cost
ii. A derivative that will or may ii. a derivative that will or may be
be settled other than by the settled only by the exchange
exchange of a fixed amount of a fixed amount of cash or All transactions recorded directly in equity
of cash or another financial another financial asset for a
asset for a fixed number of the fixed number of the entity's
entity's own equity instruments own equity instruments

No Contractual Obligation Uo Deliver Cash Pr Another Financial Asset

A critical feature in differentiating a financial liability from an equity instrument is the existence of
a contractual obligation of the issuer either to deliver cash or another financial asset to the holder
or to exchange financial assets or financial liabilities with the holder under conditions that are
potentially unfavourable to the issuer
There are very limited exceptions to this principle in the form of “puttable instruments” and
“obligations arising on liquidation”

The financial instrument is a financial liability even when the amount of cash or other financial
assets is determined on the basis of an index or other item that has the potential to increase or
decrease

If an entity does not have an unconditional right to avoid delivering cash or another financial asset
to settle a contractual obligation, the obligation meets the definition of a financial liability

A financial instrument that does not explicitly establish a contractual obligation to deliver cash
or another financial asset may establish an obligation indirectly through its terms and conditions

© ICAI BOS(A) II. 89

SARANSH Part II: Indian Accounting Standards

Settlement In The Entity’s Own Equity Instruments

To recapitulate: A financial instrument is classified as a liability not just when there is an obligation to deliver cash or another financial
asset, it is sometimes so classified even when the entity’s obligation is to settle the instrument through delivery of its own equity instruments.

If an entity has a contractual right or obligation to receive or deliver a number of its own shares or other equity instruments that varies so
that the fair value of the entity's own equity instruments to be received or delivered equals the amount of the contractual right or obligation,
such a contract is a financial liability.

Such a contractual right or obligation may be for a fixed amount or an amount that fluctuates in part or in full in response
to changes in a variable other than the market price of the entity's own equity instruments (eg an interest rate, a commodity
price or a financial instrument price)

The number of equity instruments to be delivered could vary as a result of entity’s own share price.

A contract that will be settled by the entity (receiving or) delivering a fixed number of its own equity instruments in exchange
for a fixed amount of cash or another financial asset is an equity instrument

The above requirements are summarised in the table below:

[Link]. 2 in table S. Consideration Number of own equity Classification and rationale

is also called No. for financial instruments to be
“fixed for fixed” instrument issued in settlement
test for equity
classification 1 Fixed Variable Financial liability – own equity instruments are being used as
currency to settle an obligation for a fixed amount
i.e. fixed amount
of cash or 2 Fixed Fixed Equity – issuer does not have an obligation to pay cash and
other financial holder is not exposed to any variability
asset for fixed 3 Variable Fixed Financial liability – though issuer does not have an obligation
number of to pay cash, but holder is exposed to variability
own equity
instruments 4 Variable Variable Financial liability – though issuer does not have an obligation
to pay cash, but both parties are exposed to variability

Another point to note is a fine distinction highlighted in the definition of financial liability and equity, as mentioned in the paragraph
“Definitions – financial liability and equity”. Being mirror images of each other, for simplicity sake, let us look at condition (B) in the
definition of “financial liability”:

“An instrument that will or may be settled in the entity's own equity instruments and is:
i. 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
ii. 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”

In short, the treatment can be explained as follows

Conversion feature fails “fixed No Equity instrument – consideration

for fixed” test? received is credited to equity

Yes

Conversion feature is No Can be subsequently measured

derivative? at amortised cost

Yes

Subsequently measured at fair value

with fair value changes recognised
in profit or loss

© ICAI BOS(A) II. 90

SARANSH Part II: Indian Accounting Standards

Important Points Preference Shares

t
Changes in the fair value of a contract arising from variations
in market interest rates that do not affect the amount of
cash or other financial assets to be paid or received, or the In determining whether a preference share is a financial
number of equity instruments to be received or delivered, on liability or an equity instrument, an issuer assesses the
settlement of the contract do not preclude the contract from particular rights attached to the share to determine
being an equity instrument whether it exhibits the fundamental characteristic of a
financial liability or an equity instrument
t
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for a written option or warrant on the entity’s own shares) is
added directly to equity
Redeemable Preference shares Non-Redeemable Preference shares
t
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purchased option) is deducted directly from equity.
t
Changes in the fair value of an equity instrument are not Redemption Redemption Redemption When distributions to
recognised in the financial statements at a specified at option of at option of holders of the preference
date Holder Issuer shares, whether cumulative
or non-cumulative, are at
Contracts settled in own equity instruments but classified the discretion of the issuer
as ‘financial liability’ (where equity instrument is treated as
currency): Classified as a Classified as equity The shares are equity
financial liability instrument instruments
Terms Evaluation under Ind AS 32
Non t
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settled in a variable number
derivative of entity's own shares whose value equals a fixed The potential inability of an An obligation may arise, when the
contract amount is a financial liability, because the entity issuer to redeem a preference issuer of the shares exercises its
is under an obligation to pay a fixed amount that share when contractually option, (usually by formally notifying
is settled through equity instruments (similar to required either because of a lack the shareholders of an intention to
settlement in currency) of funds, a statutory restriction redeem the shares), at which time
t
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settled in a fixed or insufficient profits or reserves, this instrument shall be reclassified
number of the entity's own shares, but the rights does not negate the obligation from ‘equity’ to ‘financial liability’
attaching to those shares will be varied so that
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contract of the entity's own shares whose value equals an liability is not affected by
amount based on changes in an underlying variable (a) A history of making distributions
(eg a commodity price) is a financial asset or a (b) An intention to make distributions in the future
financial liability. (c) A possible negative impact on the price of ordinary shares of the issuer
An example is a written option to buy gold that, if distributions are not made
if exercised, is settled net in the entity's own (d) The amount of the issuer's reserves
instruments by the entity delivering as many of (e) An issuer's expectation of a profit or loss for a period or
those instruments as are equal to the value of the (f) An ability or inability of the issuer to influence the amount of its profit
option contract or loss for the period

Classification / Evaluation of Preference Shares Based on Distribution on and of Preference Shares

Nature Dividend Terms Evaluation Classification Accounting
whether at the
option of the issuer
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© ICAI BOS(A) II. 91

SARANSH Part II: Indian Accounting Standards

Puttable Instruments

It gives the to put the instrument for cash or another is automatically put
OR
holder the right back to the issuer financial asset back to the issuer

phrase “put on the occurrence the death or

back to the of an uncertain OR retirement of the
issuer” refers to
future event instrument holder
redemption of
the instrument

A puttable financial instrument includes a contractual obligation for the issuer to repurchase
or redeem that instrument for cash or another financial asset on exercise of the put
Note: If the holder has a right, but not an obligation to require the issuer to redeem the
instrument, it is referred to as “put option
As per the principle, it shall be classified as financial liability. However, it would be classified as
Equity, subject to fulfillment of certain conditions

Exception to the definition of a financial liability ie when a puttable financial

instrument is classified as an equity instrument if it has ALL the following features:

1. It takes a 2. It is 3. All 4. Apart from 5. Total expected 6. The issuer

pro rata share subordinate financial the contractual cash flows must have no
of the entity’s to all other instruments obligation for attributable to other financial
net assets in classes of in that class of the issuer to the instrument instrument or
the event of instrument instruments repurchase or over the life of contract that has:
the entity’s have identical redeem the the instrument t
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liquidation features instrument for are based on same terms
cash or another substantially on as point 5, with
financial asset, the: t
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there are no t
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MPTT substantially
other contractual t
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For example, they obligations: recognised net or fixing the
must all be puttable, t
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priority over other calculate the repurchase to another recognised and holders
claims to the entity's or redemption price entity, or unrecognised
assets on liquidation is the same for all t to settle net assets
(entity will need to instruments in that in variable of the entity over
assume liquidation on class n u m b e r the life of the
date of classification) of entity’s instrument
own equity
instruments
with another
entity

Or say, if the cash flows are attributable

In other words, there are no other
to any factors other than the three
features of the instrument which could
listed above, ex., an index, the
satisfy the definition of “financial
puttable instrument will fail the equity
liability”
classification

© ICAI BOS(A) II. 92

SARANSH Part II: Indian Accounting Standards

Carve Out in Ind AS 32 from IAS 32

As per IFRS Carve out
As per accounting treatment prescribed under IAS 32, equity In Ind AS 32, an exception has been included to the definition of
conversion option in case of foreign currency denominated ‘financial liability’ in paragraph 11 (b) (ii), whereby conversion option
convertible bonds is considered a derivative liability which is in a convertible bond denominated in foreign currency to acquire a
embedded in the bond. Gains or losses arising on account of change fixed number of entity’s own equity instruments is classified as an
in fair value of the derivative need to be recognised in the statement equity instrument if the exercise price is fixed in any currency.
of profit and loss as per IAS 32.

Obligations Arising on Reclassification of Puttable Instruments / Obligations

Liquidation Arising on Liquidation

Some financial instruments include a contractual obligation for the Classification Re-Classification
issuing entity to deliver to another entity a pro rata share of its net
assets only on liquidation
As an Equity instrument is Is to be done from the date,
to be done, from the date when the instrument ceases
when the instrument has all to have all the features
The obligation the features and meets the or meet all the specified
arises because: specified conditions conditions

Accounting for reclassification:

Liquidation either is certain Is uncertain to occur but
to occur and outside the is at the option of the
OR
control of the entity (for instrument holder Reclassification Reclassification Measurement Recognition
example, a limited life entity) from to of difference
in carrying
amount and
measurement
As per the principle, it shall be classified as financial liability. of reclassified
However even then it would be classified as Equity, subject to instrument
fulfillment of certain conditions Financial Equity At the carrying -N.A.-
liability value of the
financial
Note: The conditions number 1-3 and 6 given for puttable financial liability at
instrument (to be classified as equity instruments) are also the date of
applicable in case of Instruments, or components of instruments, reclassification
that impose on the entity an obligation to deliver to another party a Equity Financial At fair value of In equity
pro rata share of the net assets of the entity only on liquidation, for liability the instrument
classification as an equity instruments at the date of
reclassification

Contingent Settlement Provisions

A financial instrument may require an entity to deliver cash or another financial asset, or
settle it in some other way that would require it to be classified as a financial liability, but
only in the event of occurrence or non-occurrence of some uncertain future event

The issuer of such an instrument does not have the unconditional right to avoid delivering cash or
another financial asset (or otherwise to settle it in such a way that it would be a financial liability)

However, there are some exceptions where it is classified as equity

Note:
The occurrence or non-occurrence of uncertain future events beyond the control of both the issuer
and the holder of the instrument might include:
t
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t
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t
"
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PS
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t
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DIBOHF
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OFU
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PS
EFCUUPFRVJUZ
SBUJP

© ICAI BOS(A) II. 93

SARANSH Part II: Indian Accounting Standards

Classification of Contingent Settlement Compound Financial Instruments

Provisions into Liability or Equity
A compound financial instrument has a legal form
of a single instrument, whereas the substance is that
Is the contingent event within Yes both liability and equity instrument exist
the control of the issuer?
A compound financial instrument is a non-
No derivative financial instrument that, from the
issuer's perspective, contains both a liability and
an equity component
Assess whether the part of
the contingent settlement No
provision that indicates liability The issuer of a non-derivative financial instrument
classification is genuine should evaluate the terms of the financial instrument
to determine whether it contains both a liability and
Yes an equity instrument

Can the issuer be required to Example: In convertible bond, a bond holder

settle the obligation in cash or can either be paid cash at maturity or get fixed
Yes Equity
another financial asset only in number of shares in exchange of bond at maturity.
classification It is compound financial instrument as it contains 2
the event of the liquidation of
the issuer? elements viz Liability and Equity

No Convertible bond

Does the instrument have

all the features and meet all Liability component Equity component
the conditions relating to Yes
the exceptions for puttable
instruments and obligations Reason: Issuer has the Reason: A call option
arising on liquidation? obligation as per contractual granting the holder the right,
arrangement to deliver cash for a specified period of time,
or another financial asset to convert it into a fixed
No
number of ordinary shares of
the entity
Financial liability classification

Accounting Treatment of Compound Financial

Statements in Issuer’s Books

TEST YOUR KNOWLEDGE Issuer must perform the ‘split accounting’ on initial
Contingent settlement event Within the issuer’s recognition as follows:
control?
Issue of an IPO prospectus prior to the Yes In compound financial instrument, identify the various components
conversion date
Successful completion of IPO No Ascertain the fair value of the compound financial
instrument as a whole
A change in accounting, taxation, or No
regulatory regime which is expected to
adversely affect the financial position of the Ascertain the fair value of the liability component
issuer Note: The fair value of the liability component is to be calculated
with reference to fair value of a similar liability (with the same terms
Issuer makes a distribution on ordinary Yes. Dividends on like interest rate, duration etc) that does not have any associated
shares ordinary shares are equity conversion feature
discretionary
Appointment of a receiver, administrator, No. Depends on
entering a scheme of arrangement, or the respective Ascertain the fair value of the equity component as:
compromise agreement with creditors requirements in Fair value of the compound financial instrument as a whole (less)
each jurisdiction the fair value of liability component
Suspension of listing of the issuer's shares No
from trading on the stock exchange for This step ensures
more than a certain number of days no gain or loss on initial
recognition
Change in credit rating of the issuer No

© ICAI BOS(A) II. 94

SARANSH Part II: Indian Accounting Standards

Treasury Shares Offsetting a Financial Asset and a

Financial Liability
Treasury shares are entity’s own reacquired equity
instruments, that are held by the entity A financial asset and a financial liability shall be offset and the
net amount presented in the statement of financial position
when, and only when, an entity:
Holdings of treasury shares may arise in a number of
ways. For example:
Currently has a legally Intends either to settle on
enforceable right to a net basis, or to realise the
In Consolidated financial statement: The entity holds the set off the recognised asset and settle the liability
t
4IBSFT
IFME
CZ
UIF
FNQMPZFF shares as the result of a amounts simultaneously
benefit trust direct transaction, such as
t
4IBSFT
XFSF
QVSDIBTFE
CZ
BOPUIFS
t
B
NBSLFU
QVSDIBTF
PS
entity which subsequently t
B
CVZCBDL
PG
TIBSFT
This means that the right of set off: If an entity can
became a subsidiary of the from shareholders as a a) Must not be contingent on a settle amounts in a
reporting entity, either through whole, or future event; and manner such that
acquisition or changes in financial t
B
QBSUJDVMBS
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PG b) Must be legally enforceable in the outcome is, in
reporting requirements shareholders. the normal course of business, effect, equivalent
in the event of default and to net settlement,
in the event of insolvency or the entity will meet
bankruptcy of the entity and all the net settlement
of the counterparties criterion

Accounting Treatment of Treasury Shares Offsetting a recognised financial asset and a recognised
financial liability and presenting the net amount is different
Consideration paid or received for acquisition of from the derecognition of a financial asset or a financial liability
Treasury shares shall be adjusted in Equity

Although offsetting does not give rise to recognition of a gain

Are own equity Are own equity or loss, the derecognition not only results in the removal of the
previously recognised financial instrument from the statement
instruments acquired? instruments sold? of financial position but also may result in recognition of a gain
or loss
Debit amount paid Credit amount paid
directly to equity directly to equity A right of set-off is a debtor's legal right, by contract or
otherwise, to settle or otherwise eliminate all or a portion of an
No gains / losses recognised in profit or loss on: amount due to a creditor by applying against that amount an
t
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PXO amount due from the creditor
equity instruments or
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shares
The conditions set out above are generally not satisfied and
offsetting is usually inappropriate when:
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treasury shares held is disclosed separately
either in the balance sheet or in the notes, in accordance with
Ind AS 1.
t
An entity provides disclosure in accordance with Ind AS 24, when one financial instrument in a 'synthetic instrument'
Related Party Disclosures, if the entity reacquires its own equity is an asset and another is a liability, they are not offset and
instruments from related parties presented in an entity's statement of financial position on a
net basis unless they meet the criteria for offsetting

Interest, Dividends, Losses and Gains

Financial assets and financial liabilities arise from financial
The classification of an issued financial instrument as either a instruments having the same primary risk exposure (for
financial liability or an equity instrument determines recognition example, assets and liabilities within a portfolio of forward
of interest, dividends, gains, and losses relating to that instrument contracts or other derivative instruments) but involve
in profit or loss or directly in equity. different counterparties
t
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equity - Directly to equity. Taxes will be recognised in Equity
Financial or other assets are pledged as collateral for non-
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recourse financial liabilities
financial liabilities - Interest expense in Profit and loss. Taxes
will be recognised in Profit or loss
t
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– Financial assets are set aside in trust by a debtor for the
OCI / Profit or Loss. purpose of discharging an obligation without those assets
having been accepted by the creditor in settlement of the
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entity – Not recognised.
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are not expensed but accounted for as a deduction from equity. Obligations incurred as a result of events giving rise to
Such costs include regulatory fees, legal fees, advisory fees, and losses are expected to be recovered from a third party by
other transaction costs virtue of a claim made under an insurance contract

© ICAI BOS(A) II. 95

SARANSH Part II: Indian Accounting Standards

,1',$1$&&2817,1*67$1'$5' ,1'$6 ($51,1*63(56+$5(

Overview of Ind AS 33

Measurement Presentation Disclosure

Basic EPS Diluted EPS

Earnings Shares Earnings Shares

Weighted Average Number

Effect of
of Shares
preference
dividend Base for calculation

Deciding the date for issue

Effect of of shares
Calculation of weighted average to be
Cumulative and done independently for every period
non-cumulative
preference Change in the number of
dividend shares without change in
value of capital Shares of subsidiary, joint venture or
associate
Early conversion
of Preference
shares at Dilutive potential ordinary shares
premium

Antidilutive potential ordinary shares

Effect of
discounts, Options, warrants and their equivalents
premiums related
to preference
shares Employee stock options

Early Convertible instruments

conversion
of Preference
shares at Contingently issuable shares
premium

Contingently issuable potential ordinary

shares

Contracts that may be settled in ordinary

shares or cash

Purchased options

Written put options

© ICAI BOS(A) II. 96

SARANSH Part II: Indian Accounting Standards

Objective of Ind AS 33 *Treatment of after-tax amount of preference

dividend in calculation of Basic EPS
To prescribe principles
for

Nature of Other adjustments to

Determination of Presentation of preference Profit or loss attributable
earnings per share earnings per share shares to the parent

To improve performance comparisons Non-cumulative Cumulative

between

Different entities in the Different reporting periods Deduct Deduct When When In case of
same reporting period for the same entity after-tax after-tax preference preference an early
amount of amount of shares are shares are conversion
preference preference issued at repurchased of
Scope of Ind AS 33 dividend of dividend discount or under an convertible
the period from Profit premium entity’s preference
from Profit and Loss, to provide tender shares
Apply to companies that have issued ordinary shares and Loss whether or for a low or offer to the
(equity shares in Indian context) only when not dividend high initial holders
declared is declared dividend
Entity that discloses EPS shall calculate and disclose respectively
EPS in accordance with this Ind AS 33 to
compensate
When an entity is required to present both an entity for
consolidated financial statements and separate Any original issue selling the
financial statements then discount or premium preference
on increasing rate shares at a
preference shares is discount or
Disclosure required by this An entity shall present EPS in amortised to retained
Standard shall be presented CFS based on the information premium
earnings using the (referred as
in both consolidated financial given in CFS only. effective interest
statements (CFS) and increasing
Similarly, EPS in SFS should method and treated as a rate
separate financial statements be based on the information preference dividend
(SFS) separately preference
given in SFS only. shares)

Important Points: Return to the

• Ordinary shares participate in profit for the period only after other preference
types of shares such as preference shares have participated. shareholders
• An entity may have more than one class of ordinary shares. Fair value
(charge to retained of the Carrying
• Ordinary shares of the same class have the same rights to earnings) deducted amount
receive dividends. consideration
in calculating profit paid to the of the
or loss attributable preference preference
Measurement of basic earnings per share (Basic EPS) to ordinary equity shareholders shares
holders of the parent
Basic Earnings Profit/Loss attributable to Equity share holders entity
Per Share = Weighted average number of Equity shares
outstanding during the period

Measurement of Earnings for Basic EPS

Return to the Fair value of Fair value of
different shareholders the ordinary the ordinary
Profit or loss from continuing operations attributable to the is deducted in shares or other shares
parent entity is adjusted for: calculating profit consideration issuable under
or loss attributable paid at the time the original
After-tax amounts of preference dividends*
to ordinary equity of conversion conversion
holders of the parent terms
Differences arising on the settlement of entity
preference shares

Other similar effects of preference shares

which are classified as equity Note:
The amount of preference dividends for the period does not
Any item of income or expense which is otherwise include the amount of any preference dividends for cumulative
required to be recognized in profit or loss in preference shares paid or declared during the current period in
accordance with Ind AS is debited or credited to respect of previous periods.
securities premium account/other reserves

© ICAI BOS(A) II. 97

SARANSH Part II: Indian Accounting Standards

Weighted average number of shares (For calculation of Basic EPS) Important points:

For the purpose of calculating basic earnings per share, the number of 1. Contingently issuable shares are treated as outstanding and are
ordinary shares shall be the weighted average number of ordinary shares included in the calculation of basic earnings per share only from the
outstanding during the period. date when all necessary conditions are satisfied (i.e. the events have
occurred).
Weighted average number of equity shares: 2. Shares that are issuable solely after the passage of time are not
Ordinary shares outstanding at the beginning xxxx contingently issuable shares, because the passage of time is a
certainty.
Less: Ordinary shares bought back multiplied by time- 3. Outstanding ordinary shares that are contingently returnable (i.e.
weighting factor* xxxx subject to recall) are not treated as outstanding and are excluded
Add: Ordinary shares issued multiplied by time- from the calculation of basic earnings per share until the date the
shares are no longer subject to recall.
weighting factor * xxxx
Ordinary shares outstanding during the period xxxx Where,
Contingently issuable ordinary shares are ordinary shares issuable for
*The time-weighting factor is the number of days that the shares are little or no cash or other consideration upon the satisfaction of specified
outstanding as a proportion of the total number of days in the period. conditions in a contingent share agreement.

Change in the weighted average number of shares (increase or

Deciding the date for reduction) without a corresponding change in value of capital
issue of shares

Shares are usually included in the weighted average number

of shares from the date consideration is receivable (which is
generally the date of their issue), for example: Capitalization A bonus A reverse
A share split element in any
or bonus issue share split
other issue, (consolidation
for example, of shares)
a bonus
Ordinary shares element in a
are included in the The number of ordinary shares rights issue
Situation of issuance of outstanding is increased to existing
ordinary shares weighted average without an increase in resources
number of shares from shareholders
i.e. without any additional
the date consideration.
It reduces the
number of ordinary
When issued in exchange When cash is Refer shares outstanding
for cash receivable Rights without a
The date in that case will be Issues corresponding
considered from the beginning reduction in
When issued on voluntary of the earliest period presented resources
When dividends are
reinvestment of dividends (on
reinvested
ordinary or preference shares)

When issued as a result

of conversion of a debt When Interest
ceases to accrue However, when the overall effect
instrument to ordinary shares is a share repurchase at fair value,
the reduction in the number of
Issued in place of interest or ordinary shares outstanding is
principal on other financial When Interest the result of a corresponding
instruments ceases to accrue reduction in resources

Issued in exchange for the Rights issues

settlement of a liability On settlement date
The rights shares can either be offered at the current market price or at a
Issued as consideration for the price that is below the current market price. The notional capitalization
acquisition of an asset other When the acquired issue reflects the bonus element inherent in the rights issue and is
than cash asset is recognised measured by the following fraction:

Fair value per share immediately before the exercise of rights

Issued for rendering of services When the services
to the entity Theoretical ex-rights fair value per share
are rendered
where,
Issued as a part of the
From the date of Theoretical ex-rights fair value per share:
consideration transferred in a
acquisition
business combination
Fair value of all outstanding shares before exercise of right + Total
amount received from exercise of rights
Issued upon the conversion From the date of
of a mandatorily convertible entering into the No. of shares outstanding after the exercise of the rights
instrument contract

© ICAI BOS(A) II. 98

SARANSH Part II: Indian Accounting Standards

Dilution It is a reduction in earnings per share or conversion of all the dilutive potential ordinary shares into
an increase in loss per share resulting from ordinary shares.
the assumption that convertible instruments
are converted, that options or warrants are Important points to be considered:
exercised, or that ordinary shares are issued upon • Potential ordinary shares are weighted for the period they
the satisfaction of specified conditions. are outstanding
Antidilution It is an increase in earnings per share or a • All potential ordinary shares are assumed to be converted
reduction in loss per share resulting from
the assumption that convertible instruments into ordinary shares at the beginning of the period
are converted, that options or warrants are • If not in existence at the beginning of the period, potential
exercised, or that ordinary shares are issued upon ordinary shares are assumed to be converted into ordinary
the satisfaction of specified conditions. shares at the date of its issuance.
Potential It is a financial instrument or other contract • Potential ordinary shares shall be treated as dilutive
ordinary share that may entitle its holder to ordinary shares.
when, and only when, their conversion to ordinary shares
Examples of potential ordinary shares are: would decrease earnings per share or increase loss per
(a) financial liabilities or equity instruments, share from continuing operations.
including preference shares, that are convertible • Potential ordinary shares that are converted into ordinary
into ordinary shares shares during the period are included in the calculation
(b) options and warrants of diluted earnings per share from the beginning of
(c) shares that would be issued upon the the period to the date of conversion; from the date of
satisfaction of conditions resulting from conversion, the resulting ordinary shares are included
contractual arrangements, such as the purchase in both basic and diluted earnings per share.
of a business or other assets.

The formula can be mathematically expressed as follows: Test for determining whether potential ordinary shares are
Dilutive or Antidilutive
Profit/Loss attributable to Equity share holders
when dilutive potential shares are converted into
Diluted ordinary shares
EPS = Weighted average number of existing Equity shares Will EPS decrease or loss per share increase due to
+ Weighted average number of dilutive potential conversion of potential ordinary shares
ordinary shares

Measurement of Earnings for Diluted EPS:

Basic earnings are adjusted for after-tax effect of changes Yes No
in Profit and Loss that result from conversion of all dilutive
potential ordinary shares.
Dilutive Antidilutive
Measurement of Earnings for Diluted EPS

Consider in Diluted EPS Ignore

Measurement of Earnings for Basic EPS, adjusted for, by the
after-tax effect of:
Note:
• If potential ordinary shares of the subsidiary, joint venture
or associate have a dilutive effect on the basic earnings
Add back any dividends or other items related
per share of the reporting entity, they are included in the
to dilutive potential ordinary shares
calculation of diluted earnings per share
• Dilutive potential ordinary shares shall be determined
Add back any interest recognized in the period
independently for each period presented
related to dilutive potential ordinary shares
• In determining whether potential ordinary shares are
dilutive or antidilutive, each issue or series of potential
Add/Less any other changes in income or
ordinary shares is considered separately rather than in
expense that would result from the conversion
aggregate
of the dilutive potential ordinary shares.
• To maximise the dilution of basic earnings per share,
each issue or series of potential ordinary shares is
Note: considered in sequence from the most dilutive to the
least dilutive, i.e. dilutive potential ordinary shares with
The expenses associated with potential ordinary shares include the lowest ‘earnings per incremental share’ are included
transaction costs and discounts accounted for in accordance with in the diluted earnings per share calculation before those
the effective interest method with a higher earnings per incremental share
• Options and warrants are generally included first because
they do not affect the numerator of the calculation
Calculation of Shares for the purpose of calculating Diluted
Options, warrants and their equivalents
EPS
Existing weighted average number of ordinary shares + Weighted Options, warrants and their equivalents are financial instruments
average number of ordinary shares that would be issued on the that give the holder the right to purchase ordinary shares.

© ICAI BOS(A) II. 99

SARANSH Part II: Indian Accounting Standards

Contracts that may be settled in ordinary shares or cash

Treatment of options, warrants and their equivalents

Settlement of a contract at the entity’s option

If it is a contract to issue a
If it is a contract to issue Either Or
certain number of ordinary
remaining ordinary shares for
shares at their average market
no consideration
price during the period
Through ordinary shares Through cash

Shares are assumed to be fairly They generate no proceeds and

priced have no effect on profit or loss

In both cases, presume that the contract will be settled in

ordinary shares
These shares are neither
Such shares are dilutive
dilutive nor antidilutive

Check whether the effect is dilutive

Add to the number of ordinary

Ignore in the calculation of
shares outstanding in the
diluted earnings per share
calculation of Diluted EPS

Note: Yes No
• Options and warrants have a dilutive effect only when
the average market price of ordinary shares during
the period exceeds the exercise price of the options or
warrants (i.e. they are ‘in the money’). Consider in the
calculation of diluted Ignore
• Previously reported earnings per share are not retroactively EPS
adjusted to reflect changes in prices of ordinary shares.
• Employee share options with fixed or determinable terms
and non-vested ordinary shares are treated as options in Note:
the calculation of diluted earnings per share, even though
they may be contingent on vesting. They are treated as When an issued contract that may be settled in ordinary
outstanding on the grant date. shares or cash at the entity’s option may give rise to an asset
• Performance-based employee share options are treated or a liability, or a hybrid instrument with both an equity and a
as contingently issuable shares because their issue is liability component under Ind AS 32, the entity should adjust
contingent upon satisfying specified conditions in addition the numerator (profit or loss attributable to ordinary equity
to the passage of time. holders) for any changes in the profit or loss that would have
resulted during the period if the contract had been classified
Contingently issuable shares wholly as an equity instrument.
» Contingently issuable ordinary shares are ordinary shares
issuable for little or no cash or other consideration upon
Settlement of a contract at the holder’s option
the satisfaction of specified conditions in a contingent
share agreement.
» A contingent share agreement is an agreement to issue Either Or
shares that is dependent on the satisfaction of specified
conditions.
» In the calculation of basic earnings per share, Through ordinary shares Through cash
contingently issuable ordinary shares are treated as
outstanding and included in the calculation of diluted
earnings per share if the conditions are satisfied (i.e. the
events have occurred).
The more dilutive of following shall be considered in calculating
» Contingently issuable shares are included from the Diluted EPS
beginning of the period (or from the date of the
contingent share agreement, if later).
» If the conditions are not satisfied, the number of
contingently issuable shares included in the diluted
earnings per share calculation is based on the number of Cash settlement Share settlement
shares that would be issuable if the end of the period is
the end of the contingency period

© ICAI BOS(A) II. 100

SARANSH Part II: Indian Accounting Standards

Purchased options
Presentation as per Ind AS 33
Contracts (i.e. options held by the entity on its own ordinary
shares)

Present in the statement of profit and loss basic and

diluted earnings per share for profit or loss from
continuing operations for each class of ordinary
shares

Purchased put options Purchased call options

Earnings per share is presented for every period for
which a statement of profit and loss is presented

If diluted earnings per share is reported for at

least one period, it shall be reported for all periods
Not included in the calculation of Diluted EPS (because presented
including them would be antidilutive)

If basic and diluted earnings per share are equal,

dual presentation can be accomplished in one line
Written put options in the statement of profit and loss.
Contracts that require the entity to repurchase its own shares,
such as written put options and forward purchase contracts, are
reflected in the calculation of diluted earnings per share if the An entity that reports a discontinued operation
effect is dilutive. shall disclose the basic and diluted amounts per
share for the discontinued operation either in the
statement of profit and loss or in the notes
Incremental ordinary Number of Number of
shares shall be ordinary ordinary shares
included in the shares received from An entity shall present basic and diluted earnings per
calculation of diluted assumed to satisfying the share, even if the amounts are negative (i.e. a loss per
earnings per share be issued contract share)

Retrospective adjustments
Disclosure as per Ind AS 33
If the number of ordinary or potential ordinary
shares are outstanding

Numerators - amounts used in calculating basic and

diluted earnings per share and reconciliation of the
amount used to profit or loss
Increases as a result of Decreases as a result of a
a capitalisation, bonus reverse share split
issue or share split Denominators - weighted average number of
ordinary shares used in calculating basic and diluted
earnings per share and a reconciliation of these
denominators to each other

Calculation of basic and diluted earnings per share for all

periods presented shall be adjusted retrospectively. Instruments (including contingently issuable
shares) that could potentially dilute basic earnings
per share in the future, but were not included since
they are antidilutive for the period
Note:
1. Basic and diluted earnings per share of all periods presented
shall be adjusted for the effects of errors and adjustments Description of ordinary share transactions or
resulting from changes in accounting policies accounted for potential ordinary share transactions that occur
retrospectively. after the reporting period and that would have
2. An entity does not restate diluted earnings per share of any changed significantly the number of ordinary shares
prior period presented for changes in the assumptions used or potential ordinary shares outstanding at the end
in earnings per share calculations or for the conversion of of the period if those transactions had occurred
potential ordinary shares into ordinary shares. before the end of the reporting period

© ICAI BOS(A) II. 101

SARANSH Part II: Indian Accounting Standards

,1',$1$&&2817,1*67$1'$5' ,1'$6 ,17(5,0),1$1&,$/5(3257,1*

Minimum components of an interim financial report
Overview of Ind AS 34
It shall include at a minimum
Objective Scope Definitions Content of an Disclosure in Recognition Restatement
Interim Financial Annual Financial and of Previously
a condensed a condensed statement Report Statementsa condensedMeasurement
a condensed statement statement Reported
selected
balance sheet of profit and loss of changes in equity of cash flows explanatory notes
Interim
Minimum components of an Periods
Important points to remember
interim financial report Same accounting policies as annual
1. The interim financial report is intended to provide an update on the latestreceived
Revenues completeseasonally,
set of annual financial statements
2. It focuses on new
Form activities, events,
and content ofand circumstances and does not duplicate information previously reported
interim cyclically, or occasionally
3. Ind AS 34 does not prohibit
financial or discourage an entity from publishing a complete set of financial statements (as described in
statements
Ind AS 1) in its interim financial report Costs incurred unevenly
4. Ind ASSignificant
34 does notevents and
prohibit ortransactions
discourage an entity from including in condensed interim financial statements more than the
during the financial year
minimum line items or selected explanatory notes
5. Ind AS 34 requires to includeOtherall disclosures
the disclosures required by this Standardthe
Applying as well as those and
recognition required by other Ind AS

Disclosure of compliance with Ind AS measurement principles

Periods for which interim financial Use of estimates

Form and content of interim financial statements
statements are required to be presented

Materiality
If in its interim financial report, an entity publishes

,1',$1$&&2817,1*67$1'$5' ,1'$6 ,17(5,0),1$1&,$/5(3257,1*

A complete set of A set
Minimum of condensed
components of an interim financial report A statement presenting
financial statements financial statements components of profit or loss

Its form and content shall conform to the It shall

It shall include
include, at a minimum
at a minimum, Entity shall present basic and
requirements of Ind AS 1 for a complete  Each of the headings and subtotals that diluted earnings per share for
set of financial statements were included in its most recent annual that period
financial statements
a condensed a condensed statement  Theaselected
condensed statement a condensed
explanatory notes as required statement selected
balance sheet of profit and loss of Standard
by this changes in equity of cash flows explanatory notes
 Additional line items or notes to avoid any
Important points to remember misleading of report
1. The interim financial report is intended to provide an update on the latest complete set of annual financial statements
2. It focuses on new activities, events, and circumstances and does not duplicate information previously reported
3. Ind AS 34 does not prohibit or discourage an entity from publishing a complete set of financial statements (as described in
Ind AS 1) in its interim financial report
4. Ind AS 34 does not prohibit or discourage an entity from including in condensed interim financial statements more than the
minimum line items or selected explanatory notes
5. Ind AS 34 requires to include all the disclosures required by this Standard as well as those required by other Ind AS

Form and content of interim financial statements

If in its interim financial report, an entity publishes

A complete set of A set of condensed A statement presenting

financial statements financial statements components of profit or loss

Its form and content shall conform to the It shall include, at a minimum, Entity shall present basic and
requirements of Ind AS 1 for a complete  Each of the headings and subtotals that diluted earnings per share for
set of financial statements were included in its most recent annual that period
financial statements
 The selected explanatory notes as required
by this Standard
 Additional line items or notes to avoid any
misleading of report

© ICAI BOS(A) II. 102

SARANSH Part II: Indian Accounting Standards

Note:
1. An interim financial report is prepared on a consolidated basis if the entity’s most recent annual financial statements were
consolidated statements.
2. If an entity’s annual financial report includes the parent’s separate financial statements in addition to consolidated financial
statements, then Ind AS 34 does not restrict or mandate to include the parent’s separate statements in the entity’s interim financial
report prepared on a consolidated basis.

Significant events and transactions

Include in interim financial report Do not include in interim financial report

An explanation of events and transactions that are significant Insignificant updates to the information that was reported in
to an understanding of the changes in financial position and the notes in the most recent annual financial report because
performance of the entity since the end of the last annual the user will have access to the most recent annual financial
reporting period. report carrying such information.

Information disclosed in relation to those events and

transactions shall update the relevant information presented
in the most recent annual financial report.

List of events and transactions for which disclosures would be required if they are significant:
(a) the write-down of inventories to net realisable value and the reversal of such a write-down;
(b) recognition of a loss from the impairment of financial assets, property, plant and equipment, intangible assets, or other assets,
and the reversal of such an impairment loss;
(c) the reversal of any provisions for the costs of restructuring;
(d) acquisitions and disposals of items of property, plant and equipment;
(e) commitments for the purchase of property, plant and equipment;
(f ) litigation settlements;
(g) corrections of prior period errors;
(h) changes in the business or economic circumstances that affect the fair value of the entity’s financial assets and financial liabilities,
whether those assets or liabilities are recognised at fair value or amortised cost;
(i) any loan default or breach of a loan agreement that has not been remedied on or before the end of the reporting period;
(j) related party transactions;
(k) transfers between levels of the fair value hierarchy used in measuring the fair value of financial instruments;
(l) changes in the classification of financial assets as a result of a change in the purpose or use of those assets; and
(m) changes in contingent liabilities or contingent assets.
Note: The list is not exhaustive.

Other Disclosures

Shall be given (Refer the list in para 16A of Ind AS 34)

Either Or

In the interim financial statements Incorporated by cross-reference from the interim financial statements to some other
statement (such as management commentary or risk report)

Statements should be available to users of the financial statements on the same terms as the interim financial statements and at
the same time otherwise the interim financial statements shall be considered as incomplete

The information shall normally be reported on a financial year-to-date basis.

© ICAI BOS(A) II. 103

SARANSH Part II: Indian Accounting Standards

Periods for which interim financial statements are required to be presented

Interim reports shall include interim financial statements (condensed or complete) i.e.

Statements of Statement of Statement of cash

Balance sheet profit and loss changes in equity flows

 as of the end of the  for the current interim period  cumulatively for the  cumulatively for the
current interim  cumulatively for the current current financial year to current financial year to
period financial year to date date date
 a comparative balance  comparative statements  comparative statement  a comparative statement
sheet as of the end of profit and loss for the for the comparable year- for the comparable year-
of the immediately comparable interim periods to-date period of the to-date period of the
preceding financial (current and year-to-date) of immediately preceding immediately preceding
year the immediately preceding financial year financial year
financial year

Note: For an entity whose business is highly seasonal, financial information for the twelve months up to the end of the interim period and
comparative information for the prior twelve-month period may be useful.

Points to remember

Disclosure of If an entity’s interim financial report is in compliance with this Standard, that fact shall be disclosed.
compliance
with Ind AS An interim financial report shall be described as complying with Ind ASs when it complies with all of the requirements of
Ind ASs.
Materiality In deciding how to recognise, measure, classify, or disclose an item for interim financial reporting purposes, materiality
shall be assessed in relation to the interim period financial data.
It shall be recognised that interim measurements may rely on estimates to a greater extent than measurements of annual
financial data.
Disclosure If an estimate of an amount reported in an interim period is changed significantly during the final interim period of the
in annual financial year but a separate financial report is not published for that final interim period, the nature and amount of that
financial change in estimate shall be disclosed in a note to the annual financial statements for that financial year.
statements
An entity is not required to include additional interim period financial information in its annual financial statements.

Recognition and Measurement

Same accounting  Apply the same accounting policies in its interim financial statements as are applied in its annual financial
policies as annual statements, except for accounting policy changes made after the date of the most recent annual financial
statements that are to be reflected in the next annual financial statements.
 Measurements for interim reporting purposes shall be made on a year-to-date basis.
 The amounts reported in prior interim periods are not retrospectively adjusted. However, that the nature and
amount of any significant changes in estimates be disclosed.
Revenues received  Such revenues shall not be anticipated or deferred as of an interim date if anticipation or deferral would not be
seasonally, appropriate at the end of the entity’s financial year.
cyclically, or
occasionally  Some entities consistently earn more revenues in certain interim periods of a financial year than in other interim
periods. Such revenues are recognised when they occur.
Costs incurred Such costs shall be anticipated or deferred for interim reporting purposes if, and only if, it is also appropriate to
unevenly during anticipate or defer that type of cost at the end of the financial year.
the financial year
Use of estimates Preparation of interim financial reports generally will require a greater use of estimation methods than annual
financial reports.
Restatement A change in accounting policy, shall be reflected:
of previously (a) by retrospective application, with restatement of prior period financial data as far back as is practicable; or
reported interim
(b) if the cumulative amount of the adjustment relating to prior financial years is impracticable to determine,
periods
then under Ind AS 8 the new policy is applied prospectively from the earliest date practicable.
Interim Financial An entity shall not reverse an impairment loss recognised in a previous interim period in respect of goodwill.
Reporting and
Impairment

© ICAI BOS(A) II. 104

SARANSH Part II: Indian Accounting Standards

,1',$1$&&2817,1*67$1'$5' ,1'$6 ,03$,50(172)$66(76

Objective
,PSRUWDQWGHÀQLWLRQV
Subsidiaries,
• ensuringasthat assets are carried at no
per Ind AS 110 Cash- • It is the smallest identifiable group of assets
It more than their recoverable amount.
generating • This group of asset generates cash inflows that are largely
All assets
includes • when an impairment
unit
loss should be
independent of the cash inflows from other assets or
Financial reversed
other assets groups of assets
than non- Associates, as
classified Corporate They are assets other than goodwill that contribute to the
Applicable applicable as
per Ind AS 28
assets future cash flows of both Scope:
the cash-generating unit under
assets Applies
review and other to all asset
cash-generating [Link]
(as listed Costs of Costs of disposal are from
arising incremental
Ind AScosts
2, 12,directly
19, attributable
below)
Reversal of Joint ventures, as disposal to the disposal of an asset or cash-generating unit, excluding
Impairment losses per Ind AS 111 41, 104, 105, 109 and 115
finance costs and income tax expense.
Scope of Ind AS 36

Value in Value in use is the present value of the future cash flows
Assets that are carried at revalued use expected to be derived from an asset or cash-generating unit.
Recognition andamount * Requirement for impairment
measurement of an review when there are
Impairment loss inidcations for impairment
Impairment Carrying Recoverable
Inventories (Ind AS 2) Amount Amount
Loss
Measurement of recoverable amount : Requirement for annual review
Higher
Contract assets of115)
(Ind AS fair value less costs of diposal Intangible assets with an indefinite
and its value in use Assessment of impairment
useful life shall befor
or not yet available done
[Link] of following
assetsGoodwill
irrespectiveacquired
of whether there
in is any indication of impairment:
business
Deferred tax assets (Ind AS 12)
combination
,1',$1$&&2817,1*67$1'$5' ,1'$6 ,03$,50(172)$66(76
Assets arising from employees benefits (Ind AS 19)
Intangible Intangible Goodwill
asset acquired in
Biological Assets measured at fair value less with an asset a business
cost to sell (Ind AS 41)
Subsidiaries, as
,PSRUWDQWGHÀQLWLRQV
indefinite
useful life
not yet
available
combination
Not
applicable per Ind AS 110 Cash- for use group of assets
• It is the smallest identifiable
Deferred acquisition costs
It and intangible assets generating • This group of asset generates cash inflows that are largely
arising from insurance contracts (Ind AS 104)
includes
All assets Financial unit independent of the cash inflows from other assets or
other assets groups of assets
than non- Associates, as Note:
classified Corporate They are assets other than goodwill that contribute to the
Non-current assets (or per Ind AS 28
Applicable applicable as disposal groups) classified 1 assets
The concept futureofcash
materiality
flows of applies
both theincash-generating
identifying whether the
unit under
asassets
held for sale (Ind AS 105) review and other cash-generating units.
recoverable amount of an asset needs to be estimated.
(as listed Costs of Costs of disposal are incremental costs directly attributable
below) Assets (within the scope of Ind Joint ventures, as 2 disposal
If previous calculations
to the disposal ofshow thatoran
an asset asset’s recoverable
cash-generating amount
unit, excluding
Financial AS 109)
per Ind AS 111 is significantly
financegreater
costs andthan its carrying
income amount and no significant
tax expense.
Scope of Ind AS 36

event
Value in hadValueoccurred
in usewhich
is the will change
present valuethe
of difference, thereflows
the future cash is no
Assets that are carried at revalued useneed for expected to be derivedoffrom
annual assessment an asset or cash-generating unit.
impairment.
amount
revalued* asset will
*Note: If the disposal costs are not negligible, then the 3 If indication of impairment exists than remaining useful life, the
be impaired if its value in use is less than its revalued amount.
depreciation (amortisation) method or the residual value for the
asset should be reviewed and
Impairment Carrying Recoverable
adjusted, even if no impairment
Inventories (Ind AS 2) Amount Amount
lossLoss
is recognised for the asset.

Contract assets (Ind AS 115)

Assessment of impairment shall be done annually of following
assets irrespective of whether there is any indication of impairment:
Deferred tax assets (Ind AS 12)

Assets arising from employees benefits (Ind AS 19)

Intangible Intangible Goodwill
asset acquired in
Biological Assets measured at fair value less with an asset a business
cost to sell (Ind AS 41) indefinite not yet combination
useful life available
Not
applicable for use
Deferred acquisition costs and intangible assets
arising from insurance contracts (Ind AS 104)

Note:
Non-current assets (or disposal groups) classified 1 The concept of materiality applies in identifying whether the
as held for sale (Ind AS 105)
recoverable amount of an asset needs to be estimated.
2 If previous calculations show that an asset’s recoverable amount
Financial Assets (within the scope of Ind AS 109)
is significantly greater than its carrying amount and no significant
event had occurred which will change the difference, there is no
need for annual assessment of impairment.
*Note: If the disposal costs are not negligible, then the revalued asset will 3 If indication of impairment exists than remaining useful life, the
be impaired if its value in use is less than its revalued amount.
depreciation (amortisation) method or the residual value for the
asset should be reviewed and adjusted, even if no impairment
loss is recognised for the asset.

© ICAI BOS(A) II. 105

SARANSH Part II: Indian Accounting Standards

Indicators for impairment

External sources of information Internal sources of information Dividend from a subsidiary, joint venture or
Significant decline in market value (more than associate
normal decline) Obsolescence or physical damage of an asset
Carrying amount of investment (in separate
Significant changes in technology, market, financial statements) > Carrying amounts of
economic or legal environment with adverse Significant changes in use or expected use of investee’s net assets (including associated
effect on entity an asset with adverse effect on entity goodwill) in the consolidated financial
Increase in market interest rates or rate of statements
returns Internal reporting indicating worse economic
performance of asset than expected Dividend > Total Comprehensive Income
Carrying amount of net assets of entity is of investee
more than its market capitalisation

Measurement of Recoverable Amount

Fair value less cost of disposal

Higher of Recoverable
Amount
both

Value in use

Circumstances in which it is not necessary to calculate both an asset’s fair value less costs of disposal and its value in use
1. If either of these amounts exceeds the asset’s carrying amount, the asset is not impaired and it is not necessary to estimate the other
amount.
2. When fair value less costs of disposal would not be possible to be measured due to various reasons, the entity may use the asset’s value in
use as its recoverable amount.
3. In case of an asset held for disposal, the asset’s fair value less costs of disposal may be used as its recoverable amount.

Value in Use

Value in Use Sum of Year wise estimated future

cash flows
Applicable discount rate

Includes Excludes

It should be a pre-
Projections of cash inflows from the continuing use of the asset Future restructuring to which an tax rate (rates) that
entity is not yet committed reflect(s) current
market assessments of

Projections of cash outflows, which are necessarily incurred to Improving or enhancing the
generate the cash inflows from continuing use of the asset and asset’s performance Time value of
can be directly attributed to the asset money

Cash inflows or outflows from

financing activities Risks specific
Net cash flows, to be received/paid for the disposal of the asset at to the asset
the end of its useful life for which the
Income tax receipts or payments future cash flow
estimates have not
been adjusted
When an asset-specific rate
is not directly available from
the market, the entity uses
surrogates to estimate the
discount rates

Entity’s weighted average cost Entity’s incremental Other market

of capital borrowing rate borrowing rates

Note:
Future cash flows are estimated in the currency in which they will be generated and then discounted using a discount rate appropriate for that
currency. An entity translates the present value using the spot exchange rate at the date of the value in use calculation.

© ICAI BOS(A) II. 106

SARANSH Part II: Indian Accounting Standards

Recognising and Measuring an Impairment [Link]. Particular Guidance under Ind AS 36

Loss other than Goodwill B. Allocation ™ The carrying amount of a cash-generating unit:
of assets and (a) includes the carrying amount of only those assets
liabilities to that can be attributed directly, or allocated on
Impairment loss (IP) CGUs a reasonable and consistent basis, to the cash-
generating unit and will generate the future cash
inflows used in determining the cash-generating
unit’s value in use; and
No Whether asset is Yes (b) does not include the carrying amount of any
carried at revalued
amount? recognised liability, unless the recoverable amount
of the cash-generating unit cannot be determined
without consideration of this liability.
Whether revaluation ™ Subtract the carrying amount of the liability to
No surplus exists?
Recognise IP determine both the cash-generating unit’s value in
immediately in profit use and its carrying amount to perform a meaningful
or loss comparison between the carrying amount of the
Yes
cash-generating unit and its recoverable amount.
C. Allocating ™ For the purpose of impairment testing, goodwill
goodwill acquired in a business combination shall, from the
to cash- acquisition date, be allocated to each of the acquirer’s
generating cash-generating units, or groups of cash-generating
Recognise IP immediately units units.
Recognise IP in OCI to the extent
in profit or loss to the of the amount in the revaluation ™ The above allocation shall be irrespective of whether
extent loss exceeds the surplus for that same asset other assets or liabilities of the acquiree are assigned
revaluation surplus, if any to those units or groups of units.
™ Goodwill does not generate cash flows independently
of other assets or groups of assets and, therefore, it
will always be tested for impairment as part of a
Note: CGU or a group of CGUs.
1. Any impairment loss of a revalued asset (increased earlier) shall ™ If goodwill has been allocated to a cash-generating
be treated as a revaluation decrease as per other standard. unit and the entity disposes of an operation within
2. When the amount estimated for an impairment loss is greater that unit, the goodwill associated with the operation
than the carrying amount of the asset to which it relates, an disposed of shall be:
entity shall recognise a liability, if required. a) included in the carrying amount of the operation
3. After the recognition of an impairment loss, the depreciation when determining the gain or loss on disposal; and
(amortisation) charge for the asset shall be adjusted in future b) measured on the basis of the relative values of the
periods to allocate the asset’s revised carrying amount, less its operation disposed of and the portion of the cash-
residual value (if any), on a systematic basis over its remaining generating unit retained, unless the entity can
demonstrate that some other method better reflects
useful life.
the goodwill associated with the operation disposed
4. If an impairment loss is recognised, any related deferred tax
of.
assets or liabilities are determined in accordance with Ind AS 12 D. Timing of ™ Impairment test for a cash-generating unit to which
by comparing the revised carrying amount of the asset with its impairment goodwill has been allocated shall be performed
tax base. tests annually.
™ If some or all of the goodwill allocated to a
Recognition and Measurement of an Impairment cash-generating unit was acquired in a business
combination during the current annual period, that
Loss for a Cash-generating Unit and Goodwill unit shall be tested for impairment before the end of
the current annual period.
[Link]. Particular Guidance under Ind AS 36
A. Identification ™ Firstly, recoverable amount shall be estimated for the
of cash individual asset. If it is not possible to estimate the
Sequence for testing of impairment for Cash
generating recoverable amount of the individual asset, an entity Generating Units (CGU)
units is required to determine the recoverable amount of
the cash-generating unit to which the asset belongs
(ie. the asset’s cash-generating unit).
Separate CGU Group of CGUs
™ The recoverable amount of an individual asset
cannot be determined if:
a) the asset’s value in use cannot be estimated to be
close to its fair value less costs of disposal; and Yes
b) the asset does not generate cash inflows that are Whether CGUs Whether some
contain goodwill? CGUs in the group
largely independent of those from other assets. have goodwill
™ In such cases, value in use and recoverable amount, allocated to them?
can be determined only for the asset’s cash- No
generating unit.
No
™ If recoverable amount cannot be determined Test CGU for
for an individual asset, an entity identifies the impairment
lowest aggregation of assets that generate largely Firstly, test CGU
independent cash inflows. without goodwill
for impairment
™ If an active market exists for the output produced
by an asset or group of assets, that asset or group of
assets shall be identified as a cash-generating unit,
even if some or all of the output is used internally. Then, test CGU
™ Cash-generating units shall be identified consistently with goodwill for
from period to period for the same asset or types of impairment
assets.

© ICAI BOS(A) II. 107

SARANSH Part II: Indian Accounting Standards

Allocating corporate assets to cash-generating units for impairment

Yes
Whether a portion of the carrying amount of a corporate asset can be allocated on a reasonable and consistent basis to that unit? No

Yes No Step 1:
Whether CV of the CGU* > RV of the CGU? Compare CV of the CGU* with RV of the CGU
* CV includes the portion of the CV of the corporate asset allocated to it
* CV excludes corporate asset

Impairment loss is allocated Step 2:

No impairment loss
in the following order Identify the smallest group of CGU that includes the
CGU under review and to which a portion of the CV of
the corporate asset can be allocated on a reasonable and
Order 1 consistent basis
Reduce the CV of any goodwill allocated to CGU (group of units)
Step 3:
Compare CV of that Smallest group of CGU* with RV of
Order 2 group of units
Reduce CV of other assets of the unit (group of units) pro rata on * CV includes the portion of the CV of the corporate
the basis of the CV of each asset in the unit (group of units) asset allocated to that smallest group of CGU

In allocating an impairment loss to individual assets within a CGU, the carrying amount of an individual asset shall not be reduced below the
highest of:

Fair value less Value in use zero

costs to sell

Reversing an Impairment Loss (IP)

General Individual asset Cash-generating unit Goodwill

Impairment loss Reversal shall be allocated to the assets of the unit (except for Not permitted
is reversed if, and goodwill) on pro rata with the carrying amount of those assets.
only if, there has
been a change in the
estimates used to
determine the asset’s Increases in carrying amounts shall be treated as reversals of
recoverable amount impairment losses for individual assets.

Carrying amount of
In allocating a reversal of an impairment loss for a CGU, the
the asset is increased
carrying amount of an asset shall not be increased above the
to its recoverable
lower of:
amount.
a) Its recoverable amount; and
b) The carrying amount (net of amortisation or
depreciation) determines had no impairment loss been
Impairment loss
recognised for the asset in prior periods.
is not reversed
just because of the
passage of time, even
if the recoverable
amount of the asset The reversal of the impairment loss that would otherwise have
becomes higher than been allocated to the asset is allocated pro rata to the other
its carrying amount. assets of the unit, except for goodwill

Asset without revaluation Asset with revaluation in the earlier years

On reversal, the A reversal of an impairment A reversal of an To the extent that an impairment

increased carrying loss (other than goodwill) impairment loss on loss on the same revalued asset
amount of an asset is recognised immediately a revalued asset is was previously recognised
(other than goodwill) in profit or loss unless the recognised in OCI and in profit or loss, a reversal of
due to reversal of asset is carried at revalued increases the revaluation that impairment loss is also
an impairment loss amount surplus for that asset. recognised in profit or loss.
shall not exceed the
carrying amount
(net of amortisation/ Any increase in excess of After reversal, the depreciation /
depreciation) had no this amount would be a amortisation charge for the asset is
impairment loss been revaluation accounted for adjusted in future periods on a systematic
recognised for the under appropriate Standard basis over its remaining useful life.
asset in prior years.

For disclosure requirements of Ind AS 36 refer the study material.

© ICAI BOS(A) II. 108

SARANSH Part II: Indian Accounting Standards

,1',$1$&&2817,1*67$1'$5' ,1'$6 3529,6,216&217,1*(17

/,$%,/,7,(6$1'&217,1*(17$66(76
Overview of Ind AS 37

Recognition Measurement Reimbursements Change and use Application of Disclosure

of provisions the recognition
and measurement
rules
Provision Contingency Best estimate

Future
Provision
Present Contingent operating losses
Risk and
obligation liability
uncertainties
Onerous Contingent
Past event Contingent contracts liability
Asset Present value

Contingent
Probable outflow of Restructuring
asset
resources embodying Future events
economic benefits

Expected
Reliable estimate of the disposal of
obligation assets

To ensure that appropriate recognition criteria

and measurement bases are applied
Objective For provisions,
of Ind AS contingent liabilities and
37 contingent assets
To ensure that sufficient information is
disclosed in the notes to understand nature,
timing & amount

Financial Ind AS 115 'Revenue from Except lease that becomes

instruments Contracts with Customers' onerous before the
(including commencement date of the
guarantees) within lease as per Ind AS 116
the scope of Ind Ind AS 12 'Income Taxes'
AS 109

Except short-term leases and

Ind AS 116 'Leases' leases for which
the underlying asset is of low
Ind AS 37 value and that have become
Those covered by Ind AS 19 'Employee Benefits' onerous
does not another Ind AS
apply to
Notes:
Ind AS 104 'Insurance t
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TVDI
BT
EFQSFDJBUJPO
Contracts' impairment of assets and doubtful
debts are adjustments to the carrying
Contingent Consideration amounts of assets and are not dealt
of an acquirer in a business with in this Standard.
combination (Ind AS 103) t
*OE
"4

OFJUIFS
QSPIJCJUT
OPS
Executory requires capitalisation of the costs
Contracts* recognised when a provision is made.
t
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BQQMJFT
UP
QSPWJTJPOT

Except those are onerous in for restructurings (including
nature discontinued operations).

© ICAI BOS(A) II. 109

SARANSH Part II: Indian Accounting Standards

*Executory Contracts

Either
Or

In which neither party Both parties have partially

has performed any of its performed their obligations
obligations to an equal extent

Provisions

It is a liability**
Either Or

Of uncertain timing Of uncertain amount

Settlement is expected
**Liability Present obligation Arising from past to result in outflow of
of the entity events resources embodying
economic benefits

No realistic alternative other than to settle that obligation

Either Or

A legal obligation* #
A constructive obligation

is derived from (any) is derived from entity’s actions by

Contract (explicit or Legislation Other operation of law

implicit terms)

- Established pattern of Entity has indicated Entity has created

past practice to other parties that a valid expectation
- Published policies it will accept certain that it will
- Sufficiently specific responsibilities discharge those
current statement responsibilities

© ICAI BOS(A) II. 110

SARANSH Part II: Indian Accounting Standards

Contingent Liability

An entity shall not recognise a

contingent liability

A possible obligation A present obligation

Arising from past events Arising from past events

Or Not recognised because

Its existence will be confirmed
only by the occurrence or
Either Or
non-occurrence of one or more
uncertain future events
Outflow of resources
The amount of the
embodying economic
obligation cannot be
benefits to settle the
measured with sufficient
obligation will probably be
Not wholly within the reliability
not required
control of the entity

Notes:

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MJBCJMJUZ
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UIBU
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DSJUFSJB

8IFSF
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OPU
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B
QSFTFOU
PCMJHBUJPO
FYJTUT
BO
FOUJUZ
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B
DPOUJOHFOU
MJBCJMJUZ
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OPU
3. If the possibility of an outflow of resources embodying economic benefits is remote, contingent liability is not disclosed.
4. Where an entity is jointly and severally liable for an obligation, the part of the obligation that is expected to be met by other parties is
treated as a contingent liability. The entity recognises a provision for the part of the obligation for which an outflow of resources
embodying economic benefits is probable, except in the extremely rare circumstances where no reliable estimate can be made.
5. Contingent liabilities are assessed continually to determine whether an outflow of resources embodying economic benefits has become
probable. If it becomes probable, a provision is recognised in the period in which the change in probability occurs.

Whose existence
will be confirmed Not wholly
Contingent A possible Arising from only by the within the
Asset asset past events occurrence or non- control of the
occurrence of one entity
or more uncertain
future events

An entity shall not recognize a contingent asset

Notes:
1. Contingent assets are not recognised in financial statements since it may never be realised.
2. When the realisation of income is virtually certain, then the related asset is recognised.
3. Contingent asset is disclosed where an inflow of economic benefits is probable.
4. Contingent assets are assessed continually. If it has become virtually certain, the asset and the related income are recognised in the
financial statements of the period in which the change occurs.

Differences between Provisions & Other Liabilities

S. No Provisions Other liabilities (Trade payables or accruals)
1 In provisions, there is uncertainty about the timing or amount t
5SBEF
QBZBCMFT
BSF
MJBCJMJUJFT
UP
QBZ
GPS
HPPET
PS
TFSWJDFT

of the future expenditure required in settlement that have been received or supplied and have been invoiced
or formally agreed with the supplier. Hence uncertainty is
generally much less than for provisions
t
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BSF
TJNJMBS
UP
USBEF
QBZBCMFT

)PXFWFS
JU
NBZ
BMTP
include amounts due to employees
2 Provisions are reported separately Accruals are often reported as part of trade and other payables

© ICAI BOS(A) II. 111

SARANSH Part II: Indian Accounting Standards

Recognition of a Provision

No
Is there a present obligation (legal or constructive) for an entity?

Yes
No
Has the present obligation occurred as a result of past event?

Yes
A provision
No
Will there be probability for outflow of resources to settle the will not be
obligation? recognised

Yes
No
Can an entity make a reliable estimate of it?

Yes

Recognise a Provision

Notes:
1. If these conditions are not met, no provision should be recognised.
2. Where there are a number of similar obligations (eg product warranties or similar contracts) the probability that an outflow will be
required in settlement is determined by considering the class of obligations as a whole.
3. Provisions shall be reviewed at the end of each reporting period and adjusted to reflect the current best estimate. If it is no longer
probable, then the provision shall be reversed.
4. Where discounting is used, the carrying amount of a provision increases in each period to reflect the passage of time. This increase is
recognised as borrowing cost.

Present Obligation

Generally, present obligation is clear when it arises. However,

when it is not clear then

A past event is deemed to give rise to a present obligation

If, taking account of all available evidence

It is more likely than not It is more likely

That a present obligation exists at the end of the That no present obligation exists at the end of the
reporting period reporting period

Recognize a provision (If the recognition criteria Disclose contingent liability (Unless the
are met) possibility of an outflow of resources embodying
economic benefits is remote)
Notes:
t
No provision is recognised for costs that need to be incurred to operate in the future.
t
0OMZ
UIPTF
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BSF
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BO
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BU
UIF
FOE
PG
UIF
SFQPSUJOH
QFSJPE

© ICAI BOS(A) II. 112

SARANSH Part II: Indian Accounting Standards

Obligations arising from past events MEASUREMENT

Existing independently of an entity’s future actions

Best
Yes No Estimate

Recognize Provision Don’t recognize

(If the recognition Provision
criteria are met)

Expected Risk and

To the extent that Disposal of Measurement Uncertainity
Because the entity Assets
the entity is obliged can avoid the future
to rectify damage expenditure by its
already caused future actions

Examples:
- Penalties or clean-up costs for Future
Events Present
unlawful environmental damage Example:
Value
- Decommissioning costs of an oil - Fitting smoke
installation or a nuclear power filters in a certain
station type of factory

Best estimate in measurement of provision amount

Measurement of estimates of outcome & financial effect considers

Provision should be
the best estimate of
expenditure required Management’s judgement
to settle the present
obligation (At the end
of the reporting period)
Supplemented by:
- Experience of similar transactions - Reports from independent experts

If Provision involves items of large population (Ex. customer refunds, warranties, etc.)
Provision should be
measured before tax
Weight all possible outcomes by their associated probabilities (expected value)

In continuous range of possible outcomes

When each point in that range is as likely as any other

Then mid-point of the range is used

In case of measurement of single obligation

Individual most likely outcome may be the best estimate (Consider other possible
outcomes too)

If other possible outcomes are either mostly higher or mostly lower than the most
likely outcome

Higher or lower amount will be the best estimate

© ICAI BOS(A) II. 113

SARANSH Part II: Indian Accounting Standards

Risks and Uncertainties in measurement Present Value in measurement of provision amount

of provision amount

Whether the effect of the time value of money is material?

Risk is variability of outcome

Yes No

It should be considered in reaching the best

estimate of an amount of provision Consider present value Ignore present value
of expenditures expected
to settle the obligation as
provision amount
Risk adjustment = Expected excess amount to
be paid
The discount rate should be a pre-tax rate

Consider present value of outflows due to Discount rate should not reflect risks for which future
uncertainty cash flow estimates have been adjusted

Risk adjustment may increase the amount at The expected present value of outflows are calculated as
which a liability is measured follows:
t
&BDI
PVUDPNF
JT
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UP
JUT
QSFTFOU
WBMVF
t
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QSFTFOU
WBMVF
PG
PVUDPNFT
BSF
XFJHIUFE
CZ
UIFJS
associated probabilities
Caution: Income or assets are not overstated
and expenses or liabilities are not understated
t
8IFSF
EJTDPVOUJOH
JT
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UIF
DBSSZJOH
BNPVOU
PG
a provision increases in each period to reflect the
passage of time.
Risk adjustment can be accounted for in t
ͳJT
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JT
SFDPHOJTFE
BT
CPSSPXJOH
DPTU
number of ways as:

Future events in measurement of provision amount

Adding in: Adjusting: Adjusting:
Expected Estimates Discount
present of future rate
value of outflows
future
outflows Should be reflected where there is sufficient
objective evidence that they will occur

Disclosure of the uncertainties surrounding the Effect of possible new legislation is taken into
amount of the expenditure should be made consideration when sufficient objective evidence
exists that legislation is virtually certain to be
enacted

Evidence is required both of:

t
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MFHJTMBUJPO
XJMM
EFNBOE
t
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JU
JT
WJSUVBMMZ
DFSUBJO
UP
CF
FOBDUFE
and implemented in due course

© ICAI BOS(A) II. 114

SARANSH Part II: Indian Accounting Standards

Gains on the expected Recognise gains on expected

Expected disposal of assets disposal of assets disposals of assets at the time
in measurement of provision are not taken into specified by the Standard
amount account in measuring a dealing with the assets
provision concerned

Reimbursements
Situation The entity has no obligation for Where some or all of the expenditure required Where some or all of the
the part of the expenditure to be to settle a provision is expected to be reimbursed expenditure required to settle
reimbursed by the other party by another party and it is virtually certain that a provision is expected to be
reimbursement will be received if the entity reimbursed by another party
settles the provision but the reimbursement is NOT
virtually certain
Recognition The entity has no liability for the t
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reimbursement shall not exceed the liability
Disclosure No disclosure is required The reimbursement is disclosed together with The expected reimbursement is
the amount recognised for the reimbursement disclosed

Future operating losses Unavoidable costs

Economic
benefits
Onerous of meeting the expected to be
contract obligations under received under
the contract the contract
Provisions shall not be recognised for future
operating losses

Present obligation is to be recognised and measured

as a provision
As they do not meet the definition of a liability and
the general recognition criteria set out for provisions

Executory contracts that are not onerous fall outside

An expectation of future operating losses is an the scope of Ind AS 37
indication that certain assets of the operation may be
impaired

Make provision amount for the lower of

An entity tests these assets for impairment under
Ind AS 36, Impairment of Assets

Penalty /
Unavoidable costs of Compensation for not
fulfilling the contract meeting the obligations
from the contract

Recognize any impairment loss as per Ind AS 36

on assets dedicated to onerous contract before
making a separate provision for an onerous
contract

© ICAI BOS(A) II. 115

SARANSH Part II: Indian Accounting Standards

Restructuring

In general, restructuring is a plan of management to change the scope of business or manner of conducting
business

Examples of events that may fall under the definition of restructuring:

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Provision for restructuring costs is recognized only when the general recognition criteria set out for provisions
are met

An obligation to restructure arises only if entity has

Raised valid expectation in those affected

Detailed formal plan for restructuring that it will carry out restructuring (through
implementation or announcement of main
features of restructuring)

Identifying at least:
(i) the business or part of a business concerned;
(ii) the principal locations affected;
(iii) the location, function, and approximate number of employees who will be compensated for terminating
their services;
(iv) the expenditures that will be undertaken; and
(v) when the plan will be implemented.

No obligation arises for the sale of an operation until there is a binding sale agreement

When the sale of an operation is envisaged as part of a restructuring, the assets of the operation are reviewed for
impairment, under Ind AS 36

Restructuring provision includes only direct expenditures arising from the restructuring, which are both

Necessarily demanded by restructuring Not associated with the ongoing activities of entity

Restructuring provision does not include costs of:

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© ICAI BOS(A) II. 116

SARANSH Part II: Indian Accounting Standards

Disclosure

For Provisions (Disclose for each class)*

Carrying amount at period’s beginning and end

Additional provisions made

Amounts incurred and charged against provision

Unused amounts reversed

Unwinding of discount due to time value

Comparative information is not required

For contingent liability Whether possibility of any outflow in

settlement is remote

No Yes No disclosures required

(Disclose for each class) (a) an estimate of its financial effect#

(b) an indication of the uncertainties
relating to the amount or timing of any
outflow
A brief description of the (c) possibility of any reimbursement
nature of contingent liability

Whether inflow of economic

For contingent Assets benefits is probable

Yes No No disclosure is required

A brief description of An estimate of their

the nature of contingent financial effect#
liability

* Disclose the following for each class of provision:

a) Nature of obligation and expected timing of any resulting outflows
b) Uncertainties about the amount or timing of those outflows
c) Any expected reimbursement
Provisions or contingent liabilities may be aggregated to form a class, but consider whether the nature of items is sufficiently
similar for a single statement
#
If required information is not disclosed since not practicable to do so, that fact shall be stated

© ICAI BOS(A) II. 117

SARANSH Part II: Indian Accounting Standards

  ,1',$1$&&2817,1*67$1'$5' ,1'$6 ,17$1*,%/($66(76

Scope of Ind AS 38
Intangible assets- Criteria
Applicability Non-Applicablility
Intangible assets other than Financial assets (Ind AS 32)
included in the list of non- Identifiability Control over Existence of future
applicability resources economic benefits

Expenditure on advertising, Recognition and measurement

training, start-up, research and of exploration and evaluation An asset is Control exists when an It includes (any)
development activities assets (Ind AS 106) identifiable entity has the power to
if it obtain the future economic
Rights under licensing Expenditure on the benefits flowing from the Revenue from
agreements for items such as development and extraction underlying resource and to the sale of
motion picture films, video of minerals, oil, natural gas restrict the access of others products or
recordings, plays, manuscripts, and similar non-regenerative to those benefits services
patents and copyrights resources

Other intangible assets used Intangible assets held by an Is separable Arises from The capacity Cost savings
(such as computer software), entity for sale in the ordinary contractual of an entity to
and other expenditure incurred course of business (Ind AS 2) or other legal control stems
(such as start-up costs), in rights from legal Other benefits
extractive industries or by Deferred tax assets (Ind AS 12) rights resulting from
insurers. the use of the
Leases PG
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asset by the
entity
(Ind AS 1)
Assets arising from employee
benefits (Ind AS 19) Recognition of Intangible Assets – General
Goodwill acquired in a Principles
business combination (Ind AS
103)
It is probable
Deferred acquisition costs and that the
intangible assets, arising from expected future
an insurer’s contractual rights economic
under insurance contracts (Ind benefits
AS 104) (attributable
Non-current intangible assets to the asset)
classified as held for sale (or will flow to the
included in a disposal group entity
that is classified as held for An intangible
sale) (Ind AS 105) asset shall be
recognised if,
Assets arising from contracts and only if
with customers (Ind AS 115)
Amortisation of the intangible
assets arising from service The cost of
concession arrangements in the asset can
respect of toll roads be measured
reliably

'HÀQLWLRQRI$VVHW
Resource controlled by entity
Note: Probability of future economic benefits will exist if the entity
expects there to be an inflow of economic benefits, though there is
uncertainty about the timing or the amount of the inflow.

As a result of past event

Asset
Measurement of Intangible Asset
Future economic Intangible assets may be acquired or can be self generated. The below diagram
benefits are expected to reflect the method and mode by which Intangible assets may arise:
flow to the entity

Separate
Acquisition
'HÀQLWLRQRI,QWDQJLEOH$VVHW Part of a
Exchange of Business
assets combination
Intangible Assets
Intangible Asset
may arise from

Identifiable Non-monetary Without physical Internally

generated Government
asset substance intangible assets Grant
Internally
generated
goodwill

© ICAI BOS(A) II. 118

SARANSH Part II: Indian Accounting Standards

A. Recognition and Measurement for intangible assets acquired D. Exchanges of assets

separately Measurement • One or more intangible assets may be acquired in
Recognition • The probability recognition criterion is always exchange for a non-monetary asset or assets, or a
combination of monetary and non-monetary assets.
for intangible considered to be satisfied for separately acquired • If an entity is able to measure reliably the fair value of
assets intangible assets. either the asset received or the asset given up, then
acquired • The cost of a separately acquired intangible the fair value of the asset given up is used to measure
separately asset can usually be measured reliably. This is cost unless the fair value of the asset received is more
clearly evident. (Refer chart on “Exchange of Assets”
particularly so when the purchase consideration given in Ind AS 16)
is in the form of cash or other monetary assets.
E. Internally generated goodwill
Measurement of Cost for Intangible Assets Recognition • Internally generated goodwill shall not be recognised
Acquired Separately as an asset.
• Internally generated goodwill is not recognised as
an asset because it is not an identifiable resource
Cost of Separately Acquired Intangible Asset controlled by the entity that can be measured reliably
at cost.

Purchase price Directly attributable Cost of preparing the

Internally generated Intangible Asset
including import duties asset for its intended use. (Cost of Employee
and non - refundable Benefits, Professional and Legal Fees Cost
purchase taxes of Testing) Recognition of Internally generated intangible assets

Includes Excludes Research phase Development

phase

Research is original and planned Development is the application

investigation undertaken with the of research findings or other
Costs of Professional Costs of Costs of Costs of Administration prospect of gaining new scientific knowledge to a plan or design for the
employee fees arising testing introducing conducting and other or technical knowledge and production of new or substantially
benefits directly from a new business general understanding improved asset
bringing product or in a new overhead costs.
the asset to service location or
its working with a new
condition class of No intangible asset arising An intangible asset arising from
customer from research phase shall be development phase shall be
recognised recognised if, and only if, an entity
can demonstrate all of the following:
Note:
1. Costs incurred in using or redeploying an intangible asset are not
included in the carrying amount of that asset. The technical feasibility of completing the intangible asset so that it will
2. Incidental operations not necessary to bring an asset to the be available for use or sale
condition necessary for it to be capable of operating in the
manner intended by management, the income and related Its intention to complete the intangible asset and use or sell it.
expenses of incidental operations are recognised immediately in
profit or loss.
Its ability to use or sell the intangible asset
3. If payment for an intangible asset is deferred beyond normal
credit terms, its cost is the cash price equivalent. The difference
between this amount and the total payments is recognised as How the intangible asset will generate probable future economic benefits
interest expense over the period of credit if not capitalised as per
Ind AS 23.
The availability of adequate technical, financial and other resources to
complete the development and to use or sell the intangible asset
B. Acquisition as part of a business combination
Recognition • The probability recognition criterion is always
Its ability to measure reliably the expenditure attributable to the
criteria for considered to be satisfied for intangible assets acquired intangible asset during its development
intangible assets in business combinations.
acquired as part • The reliable measurement criterion is always considered
of a business to be satisfied for intangible assets acquired in business
Note:
combination combinations.
1. If an entity cannot distinguish the research phase from the
• The acquirer may recognise a group of complementary
development phase of an internal project to create an intangible
intangible assets as a single asset provided the individual
asset, the entity treats the expenditure on that project as if it were
assets have similar useful lives.
incurred in the research phase only.
Measuring fair • If an intangible asset is acquired in a business 2. Internally generated brands, mastheads, publishing titles,
value combination, the cost of that intangible asset is its customer lists and items similar in substance shall not be
fair value at the acquisition date. recognised as intangible assets.
C. Acquisition by way of a government grant 3. The cost of an internally generated intangible asset is the sum
of expenditure incurred from the date when the intangible asset
Recognition If an intangible asset is acquired free of charge, or for
first meets the recognition criteria.
nominal consideration, by way of a government grant, an
4. Standard prohibits reinstatement of expenditure previously
entity recognises both the intangible asset and the grant
recognised as an expense.
initially at fair value as per Ind AS 20.

© ICAI BOS(A) II. 119

SARANSH Part II: Indian Accounting Standards

Measurement after Recognition and Revaluation

Refer the charts for ‘Measurement after recognition’, ‘Frequency of revaluation’, ‘Treatment on application of revaluation model’ and
‘Treatment of revaluation gain or loss’ given in Ind AS 16. Same charts hold goods for Ind AS 38 also.

Additional important points to be remembered in case of revaluation of intangible asset

™ If an intangible asset in a class of revalued intangible assets cannot be revalued because there is no active market for this asset,
x the asset shall be carried at its cost less any accumulated amortisation and impairment losses.
™ If the fair value of a revalued intangible asset can no longer be measured by reference to an active market,
x the carrying amount of the asset shall be its revalued amount at the date of the last revaluation by reference to the active market less
any subsequent accumulated amortisation and any subsequent accumulated impairment losses.
™ The fact that an active market no longer exists for a revalued intangible asset may indicate that the asset may be impaired.

Amortisation of an Intangible asset

Recognised in profit
or loss

Annually
If useful life is finite If useful life is indefinite* Test for
impairment
by comparing
its recoverable Whenever
amount with there is an
its carrying indication for
Intangible asset is
Intangible asset is amortised amount impairment
not amortised
based on its useful life**

The useful life shall be reviewed

periodically. The change in the useful
life assessment from indefinite to
finite shall be accounted for as a
Cessation of amortisation change in an accounting estimate as
Commencement of
period per Ind AS 8.
amortisation period

When the asset is

available for use
When the asset is classified as The date that
held for sale (or included in a At the earlier the asset is
disposal group i.e. classified as of the date derecognised
held for sale) as per Ind AS 105

Amortisation of an intangible asset with a finite useful life does not cease when the
intangible asset is no longer used, if the asset has not been fully depreciated or has not
been classified as held for sale (or included in a disposal group that is classified as held
for sale) as per Ind AS 105.

*The term ‘indefinite’ does not mean ‘infinite’.

**Useful life is equivalent to the length of, or number of production or similar units.

© ICAI BOS(A) II. 120

SARANSH Part II: Indian Accounting Standards

Useful Life of an Intangible Asset

Useful life of an Factors considered in determining the useful Expected usage of the asset by the entity
intangible asset life of an intangible asset

Typical product life cycles for the asset and

public information on estimates of useful
lives of similar assets
If intangible asset arises from If an intangible asset
contractual or other legal rights is a reacquired right
arisen due to a business Technical, technological, commercial or
combination other types of obsolescence
The useful life shall
not exceed the period
of the contractual or Its useful life is the Stability of the industry in which the asset
other legal rights remaining contractual operates and changes in the market demand
period of the contract for the products or services output from the
in which the right was asset
granted and shall not
The useful life may be
include renewal periods Expected actions by competitors
shorter depending on
the period over which
the entity expects to
use the asset Level of maintenance expenditure required
Whether the
contractual or Period of control over the asset and legal or
Yes other legal rights similar limits on the use of the asset
can be renewed?

No Dependent on the useful life of other

assets of the entity
Useful life of the
intangible asset shall Useful life of the
include the renewal intangible asset
period(s) if renewal is shall not include the
without significant cost renewal period(s)

Amortisation Method
Factors influencing the useful life
Amortisation Method
Applied consistently
from period to period

Straight-line
method
The useful life is Method used is selected
Economic factors Legal factors
the shorter of the on the basis of the
Diminishing expected pattern
periods determined balance method
by these factors of consumption of
the expected future
Units of economic benefits
production method embodied in the asset

Economic factors Legal factors may Commitment

determine the period restrict the period Residual by a third party
over which future over which the entity Value is to purchase at There is an
economic benefits controls access to assumed end of useful active market
will be received by these benefits to be zero life i.e. have
the entity unless there is a guaranteed
residual value or

© ICAI BOS(A) II. 121

SARANSH Part II: Indian Accounting Standards

Note: Retirements and Disposals of Intangible

Particular Details Assets
Residual value other than zero It implies that an entity expects to dispose
of the intangible asset before the end of its By sale
economic life
Review of residual value The residual value is reviewed at least at By entering
each financial year-end On
disposal into finance
An intangible asset shall lease
Change in the asset’s residual A change in the asset’s residual value is be derecognised
value accounted for as a change in an accounting
estimate as per Ind AS 8
When
no future By donation
Increase in residual value to In such a situation, the asset’s amortisation Gain or loss = Net disposal economic
an amount equal to or greater charge is zero unless and until its residual proceeds - Carrying benefits
than the asset’s carrying value subsequently decreases to an amount of the asset are
amount amount below the asset’s carrying amount expected
Review of amortisation period Reviewed at least at each financial year-
from its
and amortisation method end Recognised in profit or use or
loss when the asset is disposal
Change in expected useful life Amortisation period shall be changed derecognised
Change in the expected pattern Amortisation method shall be changed to
of consumption of the future reflect the changed pattern
economic benefits Gains shall not be classified
as revenue
Accounting for changes in Such changes shall be accounted for
amortisation period/method as changes in accounting estimates in
accordance with Ind AS 8 For disclosure requirements of Ind AS 38 refer the study
material.

© ICAI BOS(A) II. 122

SARANSH Part II: Indian Accounting Standards

,1',$1$&&2817,1*67$1'$5' ,1'$6 ,19(670(173523(57<

Scope of Ind AS 40

Overview of Ind AS 40

Applicability Non-Applicability

Objective Classification Recognition Measurement Measurement Transfers Transitional

Measurement of Property as
Measurement at RecognitionBiological
after Provisions
Mineral rights
in a Scope
lessee’s I n v e s t mineanlessor’s
t assetsRecognition
related Disposals and mineral
financial Propertyfinancialor to agricultural reserves such as
statements of Owner statements - of activity (Ind oil, natural gas
Definitions Disclosure
Occupied AS 41 and Ind and similar non-
Property Accounting policy
AS 16) regenerative
resources
Investment Investment Fair Value Ind AS 116
property property Measurement
interests held provided to a
under a lease lessee under an Transfers of
accounted for as operating lease Cost model investment property
a finance lease

,1',$1$&&2817,1*67$1'$5' ,1'$6 ,19(670(173523(57<

Scope of Ind AS 40

Applicability Non-Applicability

Measurement Measurement Biological Mineral rights

in a lessee’s in a lessor’s assets related and mineral
financial financial to agricultural reserves such as
statements of statements of activity (Ind oil, natural gas
AS 41 and Ind and similar non-
AS 16) regenerative
resources
Investment Investment
property property
interests held provided to a
under a lease lessee under an
accounted for as operating lease
a finance lease

© ICAI BOS(A) II. 123

SARANSH Part II: Indian Accounting Standards

Investment Property

Includes Excludes

Property used in the production or supply

Land Building—or part Both Land of goods or services or for administrative
of a building and Building purposes

Property held for sale in the ordinary

course of business

Owner-occupied property. Ind AS 16

Held (by the owner or by the applies to it
lessee BT
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Property occupied by employees. Ind AS

16 applies to it
To earn rentals or for capital
appreciation or both
Owner-occupied property awaiting
disposal. Ind AS 16 applies to it

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Examples of Investment Property Property Held for More Than One Purpose
Dual Purpose – Able to split

Land held for long-term capital appreciation

Owner Occupied Rental Income

Land held for a currently undetermined future use

Ind AS 16 Ind AS 40

A building owned by the entity (PS
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A building that is vacant but is held to be leased out

under one or more operating leases
It is probable
that the future Costs include •Recognise in
economic • costs the carrying
benefits that incurred amount
Property that is being constructed or developed for future are associated initially to the cost of
use as investment property Investment with the replacing part
investment acquire an
PXOFE
property investment of an existing
property will investment
shall be flow to the property and
recognised entity property
• costs when it is
as an asset incurred incurred.
Note: when, and The cost subsequently •The carrying
only when of the to add to, amount of
In some cases, an entity owns property that is leased to, and occupied investment replace part replaced
by, its parent or another subsidiary. The property does not qualify property can of, or service part is
be measured a property derecognised
as investment property in the consolidated financial statements, reliably
because the property is owner-occupied from the perspective of the
group. /PUF
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© ICAI BOS(A) II. 124

SARANSH Part II: Indian Accounting Standards

Measurement at Recognition Important Notes

S. No. Particular Detail
1. Cost of an (a) Start-up costs (unless necessary to bring the
An PXOFE
investment property investment property to the condition necessary for it to be
shall be measured initially at property does capable of operating in the manner intended by
not include management),
(b) Operating losses incurred before the investment
property achieves the planned level of occupancy,
or
Including (c) Abnormal amounts of wasted material, labour
Its cost or other resources incurred in constructing or
Transaction costs
developing the property.
2. Deferred • Cost of an investment property is its cash price
payment equivalent.
• The difference between this amount and the total
payments is recognised as interest expense over
Purchase Any directly attributable the period of credit.
price expenditure

Professional fees
for legal services
Measurement after Recognition
If fair value of
an investment
Property transfer taxes property is not
All entities reliably measurable
on a continuing
shall measure basis, the entity
The cost model
An entity shall the fair value shall make the
to all of its disclosures for the
Other transaction costs adopt as its for the purpose
investment same as well
accounting of disclosure
policy property
only

Note:
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Entity Sells  "MM
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Investment property Transfers

Asset given up 1) Transfers to, or from, investment property shall be made when,
acquired/received
and only when, there is a change in use, evidenced by:
Measured at a) Commencement of owner-occupation, for a transfer from
investment property to owner-occupied property;
Whether exchange Ind AS 40 Ind AS 16
transaction has
b) Commencement of development with a view to sale, for a
commercial substance
Yes No transfer from investment property to inventories;
Or
the fair value is reliably Ind AS 40 Ind AS 2
measurable? c) End of owner-occupation, for a transfer from owner-
occupied property to investment property; or
Ind AS 16 Ind AS 40
d) Commencement of an operating lease to another party, for a
Whether F.V of transfer from inventories to investment property.
Yes No An Investment property Ind AS 2 Ind AS 40
asset received is
is measured at the 2) Transfers between investment property, owner-occupied
clearly evident?
carrying amount of the
property and inventories do not change the carrying amount of
asset given up
the property transferred and they do not change the cost of that
property for measurement or disclosure purposes.

An Investment An Investment
property is property is
measured at F.V of measured at F.V of
asset received asset given up

© ICAI BOS(A) II. 125

SARANSH Part II: Indian Accounting Standards

Disposals S. Particular Detail

No.

Gain or loss = Net 1. Date of • The date is when the recipient obtains
An investment
disposal proceeds - disposal for control of the investment property
property should be
Carrying amount of investment TPME
for determining when a
derecognised property
the asset performance
obligation is satisfied.
• Ind AS 1 applies to a disposal effected
by entering into a finance lease and to a
sale
and leaseback
2. Measurement • The consideration receivable on disposal
of of an investment property is recognised
No future consideration initially at fair value
On disposal When the
investment property economic receivable on • If payment for an investment property
is permanently benefits are disposal is deferred, the consideration received
withdrawn from use expected from its is recognised initially at the cash price
disposal equivalent.
• The difference between the nominal
amount of the consideration and the
cash price equivalent is recognised as
Sale interest revenue
3. Compensation • Compensation from third parties for
Recognised in profit investment property that was impaired,
& loss in the period of lost or given up shall be recognised in
retirement or disposal profit or loss when the compensation
Entering into a becomes receivable.
finance lease
For disclosure requirements of Ind AS 40 refer the study
material.

© ICAI BOS(A) II. 126

SARANSH Part II: Indian Accounting Standards

,1',$1$&&2817,1*67$1'$5' ,1'$6 $*5,&8/785(

Scope of Ind AS 41

Non-Applicability
Applicability

Land related to agricultural activity

(Ind AS 16 and Ind AS 40)

Agricultural produce Government grants as Bearer plants related to agricultural

Biological assets
at the point of harvest defined in Ind AS 20 activity (Ind AS 16)

Government grants related to bearer

When they relate to plants (Ind AS 20)
Living animal or plant
agricultural activity

Intangible assets related to

Produce growing on agricultural activity (Ind AS 38)
bearer plant

Right-of-use assets arising from a lease of

land related to agricultural activity
(Ind AS 116)

The table below provides examples of biological assets,

Note: agricultural produce, and products that are the result of
processing after harvest:
1. This Standard is applied to agricultural produce, which
Biological assets Agricultural Products that
is the harvested produce of the entity’s biological assets, produce are the result of
at the point of harvest. Thereafter, Ind AS 2 or another processing after
harvest
applicable Ind AS is applied. Hence, Ind AS 41 does not
deal with the processing of agricultural produce after Sheep Wool Yarn, carpet
harvest. Trees in a timber Felled Trees Logs, lumber
plantation
2. Ind AS 41 does not apply to Bearer plants but applies to Dairy Cattle Milk Cheese
the produce on those bearer plants.
Pigs Carcass Sausages, cured
hams
The following are NOT bearer plants:
Cotton plants Harvested cotton Thread, clothing
(a) Plants cultivated to be harvested as agricultural
produce (for example, trees grown for use as lumber); Sugarcane Harvested cane Sugar
Tobacco plants Picked leaves Cured tobacco
(b) Plants cultivated to produce agricultural produce
when there is more than a remote likelihood that Tea bushes Picked leaves Tea
the entity will also harvest and sell the plant as Grape vines Picked grapes Wine
agricultural produce, other than as incidental Fruit trees Picked fruit Processed fruit
scrap sales (for example, trees that are cultivated Rubber trees Harvested latex Rubber products
both for their fruit and their lumber); and
(c) Annual crops (for example, maize and wheat). Note:
3. Bearer plants no longer used to bear produce are still Some plants, for example, tea bushes, grape vines, oil palms
and rubber trees, usually meet the definition of a bearer plant
considered as bearer plant even when they might be cut
and are within the scope of Ind AS 16. However, the produce
down and sold as scrap. growing on bearer plants, for example, tea leaves, grapes, oil
palm fruit and latex, is within the scope of Ind AS 41.

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SARANSH Part II: Indian Accounting Standards

Agricultural biological into agricultural

activity is the transformation produce
management by
an entity of for sale or for
conversion
harvest of
biological assets
Features into additional
biological assets

Capability to change - Living animals/plants are capable of biological transformation

Management of change - Management facilitates biological transformation by enhancing,

or at least stabilising, conditions necessary for the process to take place (for example,
nutrient levels, moisture, temperature, fertility, and light)

Measurement of change - The change in quality (for example, genetic merit, density,
ripeness, fat cover, protein content, and fibre strength) or quantity (for example, progeny,
weight, cubic metres, fibre length or diameter, and number of buds) brought about
by biological transformation or harvest is measured and monitored as a routine
management function

Note: Harvesting from unmanaged sources (such as ocean fishing and deforestation) is not agricultural activity.

Biological Assets
Biological Transformation
Recognition Measurement
(when and only when)
is a processes of (causing qualitative
or quantitative changes in a biological
asset) the it is the fair initial at the end
entity probable value or recognition of each
controls that future cost of reporting
the economic the asset period
Growth Degeneration Production Procreation asset as benefits can be
a result associated measured
of past with the reliably
events asset will at its fair value less
An increase A decrease in Of flow to the costs to sell
in quantity or the quantity or agricultural Creation of entity
improvement deterioration produce such additional
in quality of in quality of as latex, tea living animals Exception
an animal or an animal or leaf, wool, and or plants
plant plant mik

This presumption can be rebutted only on initial recognition for a

biological asset when
Bearer plant It is a living plant that: a. quoted market prices are not available and
(a) is used in the production or supply of b. alternative fair value measurements determined are clearly unreliable.
agricultural produce; In such a case, it shall be measured at its cost less any accumulated
depreciation and any accumulated impairment losses.
(b) is expected to bear produce for more than Note: Once the fair value of such a biological asset becomes reliably
one period; and measurable, an entity shall measure it at its fair value less costs to sell.
(c) has a remote likelihood of being sold as
agricultural produce, except for incidental
Note:
scrap sales Once a non-current biological asset meets the criteria to be
Harvest It is the detachment of produce from classified as held for sale (or is included in a disposal group that is
a biological asset or the cessation of a classified as held for sale) as per Ind AS 105, it is presumed that fair
biological asset’s life processes value can be measured reliably.

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Gain or Loss
Agricultural harvested is measured
produce from an at its fair
entity’s value less
biological costs to sell at From biological asset From agricultural produce
assets the point of
harvest

Change in fair Gain or loss

Gain or loss
value less costs on initial
on initial
Important points: to sell on the recognition
recognition
1. Entities often enter into contracts to sell their biological reporting date
assets or agricultural produce at a future date. Generally,
contract prices are not relevant in measuring the fair value.
2. The fair value of a biological asset or agricultural produce
is not adjusted because of the existence of a contract.
3. There may be no separate market for biological assets A loss A gain may Eg. A gain or
that are attached to the land but an active market may may arise arise on loss may arise on
exist for the combined assets, that is, the biological because reproduction initial recognition
assets, raw land, and land improvements, as a package. costs to or generation of agricultural
An entity may use information regarding the combined sell are like when a produce as a result
assets to measure the fair value of the biological assets. deducted in calf is born of harvesting
(For example, the fair value of raw land and land determining
improvements may be deducted from the fair value of the fair value
combined assets to arrive at the fair value of biological less costs
assets.) to sell of a
biological
4. An entity once measured a biological asset at its fair asset
value less costs to sell has to continue to measure the
biological asset at its fair value less costs to sell until
disposal.
5. Ind AS 41 assumes that the fair value of agricultural
produce at the point of harvest can always be measured Taken to Profit or Loss for the
reliably. period in which it arises

Government Grant for

Biological Asset

Measured at Fair value

less cost to sell Measured at Cost

When the grant is When the grant is Recognise as per Ind

conditional unconditional AS 20

Recognise the government Recognise the government

grant in Profit and Loss Account grant in Profit and Loss Account
when the condition attaching when it becomes receivable
to it are met

For disclosure, refer paragraphs 40-57 of bare text of Ind AS 41.

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SARANSH Part II: Indian Accounting Standards

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Objective

Ind AS 101 ensures that an entity’s first Ind AS financial statements and first
Ind AS interim financial statements contain high quality financial information that:

Transparent • Financial Statements are transparent and comparable over all periods presented

Serves as Starting point • Financial Statements provide a suitable starting point for accounting under Ind AS

Cost v/s benefit • Financial Statements can be generated at a cost that does not exceed the benefits to users

Scope

In Scope • First Ind AS annual financial statements

• Interim financial statement covered under period of First Ind AS financial statements

Out of • Changes in accounting policy made by an entity already applying Ind AS

Scope • Such changes to be accounted under Ind AS 8 or transitional period under other Ind AS
• Interim financial statement covered under period of First Ind AS financial statements

Key Definitions

First Time Adopter An entity that presents its first Ind AS Financial Statements

First Ind AS The first annual financial statement in which an entity adopts Ind AS by an explicit and unreserved
financial statements statement of compliance with Ind AS

Previous GAAP The basis of accounting that a first-time adopter used for its statutory reporting requirements in India
immediately before adopting Ind AS

For instance - Companies required to prepare their financial statements in accordance with Section
133 of the Companies Act, 2013, shall consider those financial statements as previous GAAP financial
statements

Deemed Cost · An amount used as a surrogate for cost or depreciated cost at a given date

· Subsequent depreciation or amortisation assumes that the entity had initially recognised the asset or
liability at the given date and that its cost was equal to the deemed cost

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SARANSH Part II: Indian Accounting Standards

Timelines

Mandatory Implementation

Date of transition First Ind AS Financial Statements

IND-AS opening balance sheet

1 April 2015 31 March 2016 31 March 2017

30 June 2015 30 September 31 December 30 June 30 September 31 December

2015 2015 2016 2016 2016

For interm reporting, Ind AS may first be applicable

from quarter ending 30 June 2016

Comparative Period
Reporting Date

Selection and Application of Accounting Policies

Opening Ind AS balance

sheet at transition data

Transitional Provisions in Use same accounting

other Ind AS is not applicable policies for opening
to a First Time Adopter (FTA) Ind AS Balance Sheet
and all interim periods
Key
Requirements
Comply with recognition and
measurement principles of Apply Ind AS effective
each Ind AS, with limited at reporting date
exceptions and exemptions

Apply new Ind AS that is not

yet mandatory if it permits
early application

Except where Ind AS 101 contains an exception or an exemption, an entity must:

Step 1 Step 2 Step 3 Step 4

• Recognise all assets • De-recognise all assets • Reclassify all items • Measure all
and liabilities and liabilities not in accordance with recognized assets and
permitted by Ind AS liabilities in accordance
required to be Ind AS with Ind AS
recognised by Ind AS • E.g. Proposed dividend
• E.g. Redeemable • E.g. Discounting of
• E.g. Share based long term provisions
preference shares
transactions with
non-employees

The restatement is booked through retained earnings (or, if appropriate, another category of equity)
except for certain adjustments (acquired intangibles, impairment which is adjusted against goodwill)

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Exemptions and Exceptions

To facilitate the implementation of Ind AS, this standard provides some relief
from retrospective application of Ind AS which can be broadly divided in two categories:

Optional Exemptions: FTAs* can choose to adopt one or more of the exemptions available under Ind AS 101

Mandatory Exceptions: FTAs* are prohibited from applying certain provisions of Ind AS retrospectively

No relief: from any presentation and disclosure requirements of other Ind AS

*First Time Adopters

20 - Optional Exemptions

Fixed Assets related Business combination Financial Instruments Others

and group accounts related
Deemed cost of PPE/ Business combination Compound financial Severe hyperinflation
Investment property and instrument
certain intangible asset

Decommissioning liabilities Investment in subsidiaries / Fair Value measurement of Non-current assets held for
included in PPE associates/joint venture financial asset and financial sale and discontinuing
liability operations

Leases Assets and liabilities of Designation of previously Share-based payment

subsidiaries / associates/ recognized financial transactions
joint venture instruments

Service Concession Cumulative translation Extinguishing financial Insurance contracts

agreements difference liabilities with equity

Stripping costs in the Joint arrangements Designation of contracts to Revenue from contract with
production phase buy or sell non financial item others

Property,Plant and Equipment related exemptions

Deemed cost
Fair value or revaluation or previous GAAP’s carrying value

FTA may adopt any of the options as deemed cost at transition date:

Use fair value of assets at Previous GAAP’s Recognize assets at carrying

transition date revaluation amount value of previous GAAP after
making necessary adjustments
If revalued amount at the date
of revaluation was broadly
comparable to:
• Fair value or
• Cost or depreciated cost in Previous GAAP’s
Fair value accordance with Ind AS carrying value

• This option may be elected asset by asset • If selected, becomes

• Applicable to intangible assets only if active market exists applicable to all assets

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Deemed cost- Previous GAAP’s carrying value

If entity avails option of considering previous GAAP’s carrying value as deemed cost, then:

Necessary adjustments to be made for decommissioning liabilities

No further transitional adjustment is required to determine deemed cost in the opening balance sheet
that other Ind AS might require

Applicable to PPE, investment property and intangible assets

Decommissioning, Restoration and Similar Liabilities

Appendix A to Ind AS 16 requires specified changes in a decommissioning, restoration or similar liability to be

added to or deducted from the cost of the asset to which it relates; the adjusted carrying amount of the asset is then
depreciated prospectively over its remaining useful life.

A FTA may not apply above requirements for changes in such liabilities that occurred before transition date. If a FTA
uses this exemption, it shall:
• Measure the decommissioning liability at transition date as per Ind AS 37
• Capitalize discounted liability back to the date the obligation arose (using the best estimate of historical risk-adjust-
ed discount rates)
• Calculate accumulated depreciation on that amount at transition date (calculated by applying current estimated life
and entity’s depreciation policy for the asset under Ind AS)

Note :
If an entity opts for fair value measurement of PPE, it would need to determine whether the fair value of the assets
is inclusive or exclusive of the decommissioning obligation in order to make the necessary adjustment to remove
any potential overstatement

Leases

If an arrangement existing at the date of transition to Ind AS contains a lease on the basis of facts and circumstanc-
es existing on the date of transition, then

measure a lease liability at the present value of the remaining lease payments discounted using the lessee’s
incremental borrowing rate at the date of transition to Ind AS;

measure a right-of-use asset on a lease-by-lease basis either at:

its carrying amount as if Ind AS 116 had been applied since the commencement date of the lease, but
discounted using the lessee’s incremental borrowing rate at the date of transition to Ind AS; or

an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments
relating to that lease recognised in the Balance Sheet immediately before the date of transition to Ind AS.

apply Ind AS 36 to right-of-use assets

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Leases

A first-time adopter that is a lessee may do one or more of the following at the date of transition to Ind AS, applied
on a lease-by lease basis:

apply a single discount rate to a portfolio of leases with reasonably similar characteristics.

elect not to apply the above requirements given in (a) to (c) to leases for which the lease term ends within 12 months
of the date of transition to Ind AS and instead, account for these leases as if they were short-term leases.

elect not to apply the above requirements given in (a) to (c) to leases for which the underlying asset is of low value
and instead, account for these leases as per Ind AS 116.

exclude initial direct costs from the measurement of the right-of-use asset at the date of transition to Ind AS

use hindsight, such as in determining the lease term if the contract contains options to extend or terminate the lease.

Service Concession Arrangements

• Financial assets or Intangible assets are accounted for as per Appendix D to Ind AS 115 Service Concession Arrange-
ments

• An entity may apply provisions of Appendix D of Ind AS 115 i.e. Service Concession arrangements from the date of
transition rather than retrospectively.

Recap of Appendix D of Ind AS 115: An entity (the operator) may enter into an arrangement with another entity (the
grantor) to provide services that give the public access to major economic and social facilities. The grantor may be a
public or private sector entity, including a governmental body. Examples of service concession arrangements involve
water treatment and supply facilities, car parks, tunnels, bridges, airports, and telecommunication networks. The
common characteristic of all service concession arrangements is that the operator receives a right as well as incurs an
obligation to provide public services.

Stripping Costs in the Production Phase of a Surface Mine

• An entity may apply Appendix B of Ind AS 16 i.e. Stripping cost in the production phase of a surface mine from the
date of transition i.e. retrospective application is not required.

Recap of Appendix B of Ind AS 16: In surface mining operations, entities may find it necessary to remove mine waste
materials (‘overburden’) to gain access to mineral ore deposits. This waste removal activity is known as ‘stripping’.
After initial recognition, the stripping activity asset shall be carried at either its cost or its revalued amount less
depreciation or amortisation and less impairment losses, in the same way as the existing asset of which it is a part.

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Business Combination

First-time adopter can choose not to restate business combinations (in accordance with Ind AS 103) that have
occurred before transition date

Optional restatement Mandatory application

under Ind AS 103 of Ind AS 103

31.3.2015 1.4.2016 31.3.2017 31.3.2018

Date of transition Reporting date

However, if an entity chooses to restate one business combination under Ind AS 103 prior to transition date,
it will need to restate all the business combinations which occur after such restatement, for its opening Ind
AS balance sheet.

Business combination exemption is applicable only if past transactions qualify as business as per Ind AS 103

Business Combination - Recognition of Assets and Liabilities

If FTA avails this exemption, should recognize assets and liabilities acquired or assumed in past business
combination in the below explained steps:

Maintain previous GAAP classification except for Ind AS requirements to classify assets & liabilities into
1 Financial / Non- Financial

Derecognize assets and liabilities recognized under previous GAAP but do not qualify for recognition
2 under Ind AS e.g. intangible asset which does not meet Ind AS 38 criteria

Recognize all assets and liabilities not recognized under Previous GAAP but qualify for recognition under
3 Ind AS e.g. intangible assets which meets Ind AS 38 criteria

Mandatorily test for impairment of goodwill recognized under previous GAAP on transition date regardless
4 of whether any indicators are there or not

Re-measure such assets & liabilities on transition date if appropriate. Correct any errors in previous GAAP
5 accounting / estimates discovered on transition date

Business Combination - Recognition/De-recognition of Assets and Liabilities

• Adjust against retained earning

Recognition of
assets and
• Recognition of an intangible asset that was previously subsumed within goodwill
liabilities
should be adjusted either by decreasing goodwill or increasing capital reserve

• Adjust against retained earning

De-recognition
of assets and
• Derecognition of intangible asset should be adjusted either by increasing goodwill or
liabilities
decreasing capital reserve

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Business Combination - Measurement of Assets and Liabilities

Measurement of assets and liabilities acquired or assumed under past business combination at transition date

If, were recognized under If, were NOT recognized

previous GAAP under previous GAAP

Assets and liabilities not

Measures at fair value Measures at previous previously recognized
with resulting change in GAAP’s carrying value should be recognized in
carrying amount to be immediately after date of acquirer’s consolidation
adjusted in retained business combination less balance sheet on the basis
earning and not against depreciation / amortiza- that Ind AS would require
goodwill or capital tion from that date till in the Balance Sheet of
reserve transition date the acquiree

Business Combination - Previously Unconsolidated Subsidiary

In accordance with its previous GAAP, the First Time Adopters (FTA) may not have
consolidated a subsidiary acquired in a past business combination. For example because:

Parent did not regard it as a subsidiary as per previous GAAP or

Parent did not prepare consolidated financial statements

Recognize assets and liabilities Deemed cost of goodwill =

at the amount Ind AS would • Parent’s interest in adjusted carrying amount at transition date
require in the subsidiary’s Less
balance sheet • Cost of investment in parent’s separate financial statements

Business Combination - Goodwill/ Capital Reserve

Goodwill/ capital reserve must be recognized at previous GAAP’s carrying amount after
making only adjustments permitted at transition date in opening Ind AS Balance Sheet

Adjustments permitted Examples of adjustment not permitted

• Recognition or derecognition of intangible assets • In-process research and development acquired
acquired in business combinations in business combination (unless meet the
• Test goodwill for impairment on the basis of recognition criteria under Ind AS 38)
condition on transition date
• Recognition of any impairment loss in retained
earnings
• No other adjustments must be made

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Business Combination - Goodwill/ Capital Reserve

If the first-time adopter had recognised goodwill in

accordance with previous GAAP as a deduction
from equity, then

Need not recognize such Need not reclassify Adjustment due to

goodwill in opening Ind AS goodwill to P & L on subsequent resolution of a
balance sheet disposal or on impairment contingency affecting PC*
of investment in subsidiary shall be recognized in
retained earnings

PC* = Purchase Consideration

Business Combination - Deferred Tax and Minority Interest

Measurement Book base for deferred tax calculation is the amount of assets and liabilities as per opening
of deferred tax Ind AS balance sheet (after considering Ind AS 101 adjustments)

Measurement
Minority interest related to subsidiaries should be calculated after all assets acquired,
of minority
liabilities assumed and deferred taxation has been adjusted under Ind AS 101
interests

Application of
• investments in associates
exemptions for
• interests in joint ventures
past business
• interests in joint operations in which activity of the joint operation constitutes a business
combination is also
under Ind AS 103
applicable to

Joint Venture- Transition from Proportionate Consolidation to the Equity Method

Recognize investments Recognize inidital investment in joint venture as at transition date to Ind AS

Measure investments • Measure at the aggregate carrying amount of assets and liabilites that the entity has
previously proportionately consolidated including goodwill
• Allocate goodwill, if any on the basis of relative carrying value of joint venture
• Such cost will be regarded as deemed cost at transiton date

Impairement testing • Test of impairment in accordance with Ind AS 36 at the date of transition regardless of
existence of impairment indication
• Any resulting impairment shall be recognised as an adjustment to retained earnings at
the date of transition to Ind AS

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Investment in Subsidiaries, Joint Ventures and Associates

Ind AS 27 requires while preparing Separate Financial Statements, investments in subsidiaries, joint ventures
and associates to be recorded either at cost or in accordance with Ind AS 109

If measured at cost by a first-time adopter, the investment to be measured at the following amounts in
separate opening Ind AS Balance Sheet:

Cost as per Ind AS 27 or;

Deemed cost i.e.

Fair value at the entity’s date of transition to Ind AS or;

Previous GAAP carrying amount at transition date

Assets and Liabilities of Subsidiaries, Associates and Joint Ventures –

MCA made it Redundant

The exemption was applicable when the subsidiary company has adopted Ind AS after parent, the subsidiary
shall measure its assets and liabilities at either

The carrying amounts that would be included in parent’s CFS or;

The carrying amounts based on the subsidiary's transition date

However, as MCA requires that if Ind AS is applicable to an entity, then its subsidiaries, associates and JVs are
also required to prepare their financial statements in Ind AS simultaneously, hence this exemption has
become redundant.

Cumulative Translation Differences

Recap of Ind AS 21: It requires to recognise and accumulate FCTR through OCI and reclassify to P/L on
disposal of foreign operation

A first-time adopter may elect to:

set its cumulative translation differences for all foreign operations as zero at transition date; and

exclude these translation differences that arose before the transition date from subsequent disposal gain or
loss calculations of any foreign operation

Exemption has to be adopted for all net investment in foreign operations collectively

Retrospective application of translation Subsequent disposal of foreign operation,

difference would be costly or impracticable calculation of gain / loss include only translation
difference post transition data

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Financial Instrument – Compound Financial Instrument

Compound financial instrument under Ind AS 32 to be recognized as at inception

Equity Component Liability Component

A FTA need not separate the compound financial instrument if liability component is not outstanding at transition date

Fair Value Measurement of Financial Assets or

Financial Liabilities at Initial Recognition

• Ind AS 109 requires to initially recognize financial assets and liabilities at fair value. If the fair value differs from
transaction price, the difference is recognized as gain or loss.

• An entity may apply these requirements of initial recognition prospectively to transactions entered on or after the
date of transition i.e. no need to apply Ind AS 109 for such transactions entered into before transition date.

Financial Instrument –
Designation of Previously Recognized Financial Instruments

FTA may designate following financial instruments on the basis of facts and circumstances existing on transition date

Financial Liabilities Financial Assets Investment is equity instruments

• Designate a financial • Designate financial asset to • Designate such instruments at

liability to be measured at be measured at FVTPL FVTOCI under Ind AS 109.
FVTPL or amortized cost under Ind AS 109 Such instruments should not be
on meeting criteria under • held for trading or as contingent
Ind AS 109 consideration under Ind AS 103

Extinguishing Financial Liabilities with Equity Instruments

An entity may apply Appendix D of Ind AS 109 i.e. Extinguishing financial liabilities with Equity Instruments
from the date of transition.

Recap of Appendix D of Ind AS 109:

When equity instruments issued to a creditor to extinguish all or part of a financial liability are recognised
initially, at the fair value of the equity instruments issued, unless that fair value cannot be reliably measured.

If the fair value of the equity instruments issued cannot be reliably measured then the equity instruments shall be
measured to reflect the fair value of the financial liability extinguished.

The difference between the carrying amount of the financial liability extinguished, and the consideration paid,
shall be recognised in profit or loss.

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Designation of Contracts to Buy or Sell a Non-financial Item

Ind AS 109 permits some contracts to buy or sell non financial items to be designated at inception as measured
at FVTPL.

Therefore, this exemption provides the option to designate such contracts (i.e. contracts to buy or sell a
non-financial item), if existed at transition date, to be measured at FVTPL on the date of transition, instead of
doing that retrospectively from the initial date of that contract, provided entity designates all similar contracts.

Other Exemptions- Severe Hyperinflation

If an entity has a functional currency which is currency of hyperinflationary economy, it shall determine
whether it was subject to severe hyperinflation before the date of transition

Measure assets and liabilities at fair value as at the date of transition

Other Exemptions- Non-current Assets

Held for Sale and Discontinued Operations

An entity may apply the requirements of Ind AS 105 at the date of transition to Ind AS
and recognise the difference between

the carrying amount as per previous GAAP and;

lower of carrying value and fair value less cost to sell

in retained earnings.

Other Exemptions- Insurance contracts

An entity may apply Ind AS 104 for annual periods beginning on or before transition date.

If they elect to do so they shall disclose the fact in the financial statements

Other Exemptions- Revenue from Contracts with Customers

An entity is required to restate only those contracts as per Ind AS 115 which are not completed till the transition
date

This implies that the revenue contracts which are already completed are not required to be restated as per Ind AS
115.

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Other Exemptions- Long Term Foreign Currency Monetary Items

A FTA may continue the policy adopted in accounting for exchange differences arising from translation of
long-term foreign currency monetary items recognised in the financial statements as per the previous GAAP for
the period ending immediately before the beginning of the first Ind AS financial reporting period i.e. Accounting
policy as per para 46 / 46A of AS 11 can be continued if and only if it has been availed in IGAAP.

This exemption cannot be used for foreign currency monetary items arising in future.

Exemption from Application of Ind AS 102

“Share-based Payment Transaction” on Transition Date

• A FTA is encouraged, but not required, to apply Ind AS 102 to equity instruments vested and
Retrospective to liabilities that were settled before the transition date to Ind AS.
Application • If FTA elects to apply Ind AS 102, it may do so only if entity has disclosed publicly the fair
value of those equity instruments

Modification
• On availing the exemption from restropective application, any modification before transition
of Terms and
date need not be treated as required under Ind AS 102.
Conditions

Disclosure: For all grants of equity instruments to which Ind AS 102 has not been applied, FTA shall disclose the
information required by Ind AS 102

Mandatory Exceptions -
to Retrospective Application of Other Ind AS

Ind AS 101 prohibits retrospective application of some aspects of other Ind AS relating to:

1 Estimates

2 De-recognition of financial assets and financial liabilities;

3 Hedge accounting

4 Classification and measurement of financial assets

5 Impairment of financial assets

6 Embedded derivatives

7 Some aspects of accounting for non-controlling interests

8 Government loans

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Estimates

Estimates made in accordance with Ind AS at the transition date shall be consistent with estimates made for the
same date in accordance with previous GAAP (after adjustments to reflect any difference in accounting
policies), except where there is an error

Information in respect of any estimate received after the transition date to be treated as non-adjusting event,
except where there is an error

New estimates required for Ind AS transition to be reflective of conditions at the transition date

The requirement applies both to estimates made in respect of the date of transition and to those in respect of
the end of any comparative period.

Estimates

YES NO
Estimates required by
previous GAAP

YES
Make estimate reflecting
Evidence of Error
condition at relevant date

NO
YES
Consistent with
Use previous estimates
Ind AS

NO

Use previous estimates and

adjust to reflect Ind AS

De-recognition of Financial Assets and Financial Liabilities

Prospective application
De-recognition criteria under Ind AS 109 to be applied to transactions occurring on or after transition date

Classification and Measurement of Financial Assets

An entity shall classify and measure its financial assets either

at amortized cost or;
at FVTOCI or;
at FVTPL
by assessing its contractual cash flow characteristics only on the basis of facts and circumstances existing at the date
of transition

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Impairment of Financial Assets

Approximate Credit Risk No undue cost or effort If unable

• An entity shall • Based on reasonable and • If an entity is unable to make

determine the supportable information that is this determination without
approximate credit risk available without undue cost or undue cost or effort, it shall
at the date that effort recognise a loss allowance at an
financial instruments • i.e. no need to do an exhaustive amount equal to lifetime
were initially search for such information at expected credit losses at each
recognized and transition date to determine if reporting date until that
compare that to the there is significant increase in financial instrument is
credit risk at the date credit risk since initial derecognized
of transition to Ind AS recognition date

Embedded Derivatives

Entity shall assess whether an embedded derivative is required to be separated from the host contract and
accounted for as a derivative either on the basis of conditions that existed on the date of:
it first became party to the contract; or
when reassessment is required under Ind AS 109 i.e. significant modification of the contract
whichever is later

Hedge Accounting

All derivatives to be measured at fair value at the date of transition to Ind AS

All deferred gains and losses arising on derivatives under previous GAAP to be eliminated at the date of
transition to Ind AS

The opening Ind AS balance sheet must not reflect a hedging relationship that does not qualify for hedge
accounting under Ind AS 109

If, before the date of transition to Ind AS, an entity had designated a transaction as a hedge, but the hedge does
not meet the conditions for hedge accounting in Ind AS 109, then entity shall discontinue hedge accounting

Transaction entered into before the date of transition to Ind AS shall not be retrospectively designated as hedges

Non-controlling Interest

Accounting for changes in

Attribute total comprehensive
parent’s ownership interest in
income to owners of parent
subsidiary that do not result in
and NCI, even if NCI results to
Mentioned loss of control to be accounted
have a deficit balance
requirements of Ind as equity transaction
AS 110 to be applied
prospectively from
Accounting for loss of control transition date If FTA adopts Ind AS 103
over a subsidiary as required in retrospectively, it shall also
Ind AS 110 and apply Ind AS 110
Ind AS 105 retrospectively

© ICAI BOS(A) II. 143

SARANSH Part II: Indian Accounting Standards

Government Loans

If under its previous GAAP, below market interest rate govt. loans were not recognised as govt. grant, then it
shall use its previous GAAP carrying amount of the loan at the date of transition

Ind AS 109 is applied to such loans after the date of transition

Now, classify all government loans received as a financial liability or an equity instrument in accordance with
Ind AS 32

Alternatively, an entity may apply the requirements in Ind AS 109 and Ind AS 20 retrospectively to any
government loan originated before the transition date, provided that the information needed to do so had been
obtained at the time of initial accounting of that loan

Disclosure Requirements

3 Balance Sheets & 2 2 Statements of

Statements of Profit/Loss First set of cash flows
Ind AS Financial
Statements
2 Statements of contains Related notes, including
Changes in Equity comparative information

Disclosure Requirements – Explanation of Transition to Ind AS

FTA to explain how transition to Ind AS affected its balance sheet, Statement of Profit and Loss and cash flows

With equity under previous GAAP at

Reconcile • Transition date
equity under • The end of latest period presented under previous GAAP in the most recent Financial
Ind AS Statements

Reconcile total With total comprehensive income /profit & loss at

comprehensive
• The end of latest period presented under previous GAAP in the most recent Financial
income under
Statements
Ind AS

Other • Explain material adjustment to cash flow

disclosure/ • Disclosures as required under Ind AS 36 for recognition or reversal of impairment done in
explanations opening Ind AS balance sheet

© ICAI BOS(A) II. 144

SARANSH Part II: Indian Accounting Standards

How Reconciliations to be presented in First Ind AS Financial Statements?

Entity A's date of transition to Ind AS is 1st April, 2015 and the end of it first Ind AS reporting period is 31st March,
2017. Entity A should present the following primary financial statements and reconciliations in its first Ind AS
financial statements:
1/04/2015 31/03/2016 31/03/2017
Balance Sheet
Reconciliation of equity
For the period ending
Statement of profit or loss
Statement of cash flows
Statement of changes in equity
Reconciliation of total comprehensive income / profit & loss
Explanation of material adjustments to the statement of cash flows

© ICAI BOS(A) II. 145

SARANSH Part II: Indian Accounting Standards

,1',$1$&&2817,1*67$1'$5' ,1'$6 6+$5(%$6('3$<0(17

Overview of Ind AS 102: Share-based Payment

Types of Share-based Share-based Payment Transactions

Recognition Disclosure
Payment Transactions among group entities

Equity Settled Share-based Cash Settled Share-based Share-based Payment Transaction

Payment Transaction Payment Transaction with Cash Alternative

Transactions in which services are received

Share-based payment transactions
which provide the counterparty with a
Transactions measured by reference to the choice of settlement
fair value of the equity instruments granted

Modifications including Share-based payment transactions

cancellations and settlements which provide the entity with a choice
of settlement

Determining the
fair value of equity Treatment of a Treatment of
instruments granted reload feature conditions

If the fair value of the equity instruments

Vesting Non-vesting
cannot be estimated reliably

Objective

To specify financial reporting for an entity when it undertakes a share-based payment transaction

Requires an entity to reflect in its profit or loss and financial position the effects of share-based payment transactions,
including associated expenses

Entity receives Share based

Payment is based
or acquires payment
on price or value
goods or services Arrangement
of shares
in a SBPA* (SBPA)

*Share-based Payment Arrangement

© ICAI BOS(A) II. 146

SARANSH Part II: Indian Accounting Standards

Share-based
To Employees payment To Other
is made to parties
whom?

Scope

Applicable to Not applicable to

Transaction clearly identified for a purpose

All share-based payment transactions, irrespective of other than payment for goods or services
specific identification by the entity of goods or services
received, including:
Transaction with the holder of equity
instruments of the entity
Equity-settled share-based
payment transactions
Transactions covered by other Ind AS
Goods includes
inventories, Cash-settled share-based
payment transactions Transactions in which the entity
consumables,
acquires goods as part of the net assets
PPE, intangible
acquired in a business combination or
assets and other
Settlement of transaction businesses under common control
non-financial
assets in cash (or other assets) or
equity instruments- either
the entity or the supplier Contribution of a business as a joint
have a choice venture as per Ind AS 111

Cancellation, replacement or
Settlement of a share-based payment other modification of share-based
transaction by another group entity (or a payment arrangements because of a
shareholder of any group entity) on behalf business combination or other equity
of the entity of the same group receiving or restructuring
acquiring the goods or services

Transactions in which the entity receives

Equity instruments granted to employees of or acquires goods or services under a
the acquiree in their capacity as employees contract as financial instrument (Ind AS
in return for continued service 32 and 109)

Share-based Payment Transaction (SBPT)

Entity

Incurs an obligation to settle the transaction with the supplier

Receives goods or services from the supplier of those goods or services
in a share-based payment arrangement when another group
(including an employee) in a share-based payment arrangement
entity receives those goods or services

Example: A Ltd. issues share Example: H Ltd. issues share options

options to its employees / issues to employees of S Ltd. issues shares to
shares to a supplier of PPE a S Ltd.’s supplier of PPE

© ICAI BOS(A) II. 147

SARANSH Part II: Indian Accounting Standards

Share-based Payment Arrangement (SBPA)

An agreement between

Party 1 Party 2

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(e.g.: an employee or a supplier of PPE)
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entitles the other party to receive

Cash or other assets of the entity for amounts based on the

price (or value) of equity instruments (including shares or Equity instruments (including shares or share options)
Or of the entity/another group entity
share options**) of the entity/another group entity

Provided the specified vesting conditions, if any, are met

Note:
*As per Ind AS 110, a group means ‘a parent and its subsidiaries’ from the perspective of the reporting entity’s ultimate parent.
**Share option is a contract that gives the holder the right, but not the obligation, to subscribe to the entity’s shares at a fixed or determinable
price for a specified period of time.

Term Definition Points to remember

Exercise period The period during which options can be exercised An employee who leaves the company during exercise period will still be
and shares can be purchased. entitled to the options.
Fair value The amount for which an asset could be exchanged, This Standard uses the term ‘fair value’ in a way that differs in some
a liability settled, or an equity instrument granted respects from the definition of fair value in Ind AS 113. Therefore, when
could be exchanged, between knowledgeable, applying Ind AS 102 an entity measures fair value in accordance with this
willing parties in an arm’s length transaction. Standard, not Ind AS 113.
Intrinsic value The difference between the fair value of the shares Intrinsic value is not permitted for accounting of SBP.
and the price required to pay for those shares.
For eg: A share option with an exercise price of R15,
on a share with a fair value of R20, has an intrinsic
value of R5.
Vest To become an entitlement. Under SBPA, a counterparty’s right to receive cash / other assets / equity
instruments of the entity vests when the counterparty’s entitlement is no
longer conditional on the satisfaction of any vesting conditions.
Vesting period The period during which all the specified vesting
conditions of a share-based payment arrangement
are to be satisfied.
Vesting condition It determines whether the entity receives the services Under SBPA, a counterparty’s right to receive vests when the
that entitle the counterparty to receive cash / other counterparty’s entitlement is no longer conditional on the satisfaction of
assets/ equity instruments of the entity, under SBPA. any vesting conditions.

© ICAI BOS(A) II. 148

SARANSH Part II: Indian Accounting Standards

Conditions

Vesting condition Explanation: Non-vesting conditions

Conditions determining whether the entity is
entitled to receive the services that entitle the
counterparty to receive cash / other assets/
Type of vesting conditions Conditions not satisfying the
equity instruments of the entity, under SBPA
service or performance conditions

Service condition Performance condition

t

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of service during which services are provided to the entity.
(a) the counterparty to complete a specified period of service (i.e., a
t

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provide service during the vesting period, it has failed to and
satisfy the condition.
(b) specified performance target(s) to be met while the counterparty is
t

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Market-related condition Non-market-related condition

In it, the exercise price, vesting or exercisability of an equity t

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Service Condition Vs Performance Condition

S. No. Aspects Service Condition Performance Condition

1. Condition Counterparty should complete a specified (a) Complete a specified period of service, and
period of service, during which services (b) Achieve specified performance targets during that period
are provided to the entity

2. Performance target Only service to be completed, no Achievement of performance target is a must in this condition
performance target

3. Nature Service condition is explicit Service requirement could be explicit or implicit

4. Period Service period is specified, e.g., a Target should be achieved within the service period. Period
requirement to be employed for 3 years of achieving performance targets may start before (but not
substantially before) the commencement of the service period.

Market-related condition Vs Non-market related condition

S. No. Aspects Market-related Condition Non-market related Condition

1. Basis of Target is based on the price (or value) of the Target is based on the entity’s own operations
performance target equity instruments of the entity/another group (or activities) or the operations or activities of another
entity (including shares and share options) entity in the same group

2. Examples (a) increase in share price by 10% (a) 8% decrease in employee turnover of this entity (or
(b) increase in shareholders’ returns by 15% subsidiary/parent)
(c) increase in parent’s share price from (b) 20% increase in parent entity’s revenue
500 to 850 (c) 11.5% increase in parent’s market share

© ICAI BOS(A) II. 149

SARANSH Part II: Indian Accounting Standards

Decision tree satisfying the condition

Start

Condition determines if the entity No

receives the services against share- Non-vesting condition
based payments

Yes

No
Condition requires only specified Performance Is the target, based on share
period of service to be completed condition price of entity/group entity?

Yes Yes No

Service condition Market condition Non-market condition

Grant Date

The date at which the entity and another party At grant date the entity confers on the If that agreement is subject to an
(including an employee) agree to SBPA, being counterparty the right to cash/other approval process (for example, by
when both have a shared understanding of assets/equity instruments of the entity, shareholders), grant date is the date
the terms and conditions of the arrangement on meeting of vesting conditions when that approval is obtained

Measurement Date

The date at which the fair value of the equity instruments granted is measured for the purposes of Ind AS 102

For transactions with employees and others For transactions with parties other than employees
providing similar services (and those providing similar services)

The measurement date is the date the entity obtains

The measurement date is the grant date the goods or the counterparty renders service

Recognition of share-based payment transaction (SBPT) (Journal Entry)

Debit Credit

Assets or Expenses Equity or Liability

Goods or services received Goods or services acquired

in an Equity-settled SBPT in a Cash-settled SBPT

Recognise increase in Equity Recognise increase in Liability

© ICAI BOS(A) II. 150

SARANSH Part II: Indian Accounting Standards

Recognition of share-based payment transaction (SBPT)

Provides goods or services

t
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or a ognise
sset
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le
time or, in case of inventories sold at
Counterparty a later date Entity
t

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Research Phase of a project to develop
a new product

Settles in Cash or Equity: Recognise liability or equity accordingly

Types of Share-based Payment Transactions (SBPTs)

Equity Settled Share-based Cash Settled Share-based Share-based Payment Transaction

Payment Transaction Payment Transaction with Cash Alternative

Share-based payment
In this, the entity In it, the entity acquires transactions which
(a) receives goods or goods or services by provide the counterparty
services as consideration incurring a liability to with a choice of settlement
for its own equity transfer cash or other
instruments (including assets to the supplier of
shares or share options), or those goods or services Share-based payment
for amounts that are based transactions which
on the price (or value) provide the entity with a
b) receives goods or services
of equity instruments choice of settlement
but has no obligation to
settle the transaction with (including shares or share
the supplier options) of the entity /
another group entity

Treatment of Equity-settled SBPTs - Basic Principles in Measurement

Rule 1: Directly, at the fair value

of the goods or services received If fair value of goods or services cannot be estimated
reliably, then use Rule 2

Rule 2: Indirectly, by reference

to the fair value of the equity
instruments granted If fair value of the equity instruments granted cannot
be estimated reliably, then use Rule 3

Rule 3: Initial measurement

at intrinsic value, adjusted for
changes at the end of each
reporting period Mentioned only in para 24(a) of Ind AS 102

© ICAI BOS(A) II. 151

SARANSH Part II: Indian Accounting Standards

Treatment of Equity-settled SBPTs

Measurement based on with whom the transaction has been done

Transaction with

Employees and others providing Parties other than employees (and

similar services those providing similar services)

By reference to the At fair value of goods and

fair value of the equity Measurement services received if it can be
instruments granted principle estimated reliably*

Fair value as on Fair value as on date on which the *rebuttable

Measurement entity obtains the goods or the
grant date date presumption
counterparty renders the service

The date on which

goods or services Recognition The date on which goods or
has been received date services has been received

Treatment of Equity-settled SBPTs

Transactions in which services are received and equity instruments granted

If vest immediately, then If do not vest immediately, then

The counterparty is not required to complete a specified Services to be rendered by the counterparty will be
period of service for entitlement of equity instruments received in the future, during the vesting period
In other words, it is presumed that services rendered by the
counterparty as consideration for the equity instruments
have been received The entity shall account for those services during the
vesting period, with a corresponding increase in equity

On grant date the entity shall recognise the services Vesting period may be based upon
received in full, with a corresponding increase in equity

Service condition only Performance condition, i.e.,

For e.g., Remaining in employment for 3 years t
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on satisfaction of performance condition

Entity shall presume that the services

to be rendered by the employee as Entity shall presume that the services to be rendered by
consideration for the share options will be the employee as consideration for the share options will
received in the future, over that three-year be received in the future, over the expected vesting period
vesting period

Estimate the length of the expected vesting period at grant date,

based on the most likely outcome of the performance condition

If the performance condition is a market condition If the performance condition is not a market condition

The estimate of the length of the expected vesting period

The entity shall revise its estimate of the length of the vesting
t

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fair value of the options granted, and
length of the vesting period differs from previous estimates
t
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© ICAI BOS(A) II. 152

SARANSH Part II: Indian Accounting Standards

Transactions measured by reference to the fair value of the equity instruments granted

Determining the fair value of equity instruments granted

If market prices are available Scenario If market prices are not available

Measure the fair value of equity Estimate the fair value of the equity instruments
instruments granted at the granted using a valuation technique to estimate
measurement date, based on market what the price of those equity instruments would
prices if available, taking into account The entity shall
have been on the measurement date in an arm’s
the terms and conditions upon which length transaction between knowledgeable,
those equity instruments were granted willing parties

Treatment of Equity-settled SBPTs

Treatment of a reload feature

Definition Treatment

It provides for an automatic grant of additional share options It shall not be taken into account when
Reload feature whenever the option holder exercises previously granted estimating the fair value of options
options using the entity’s shares, rather than cash, to satisfy the granted at the measurement date
exercise price

It is a new share option granted when a share is used to satisfy It shall be accounted for as a new
Reload option option grant, if and when a reload
the exercise price of a previous share option
option is subsequently granted

Accounting of Equity-settled SBPTs

t

Initially, at the measurement date, the entity shall recognise an amount for the goods or services received during the vesting period based on
the best available estimate of the number of equity instruments expected to vest.
t

Subsequently at every reporting date during vesting period, it shall revise that estimate, if necessary, if subsequent information indicates that
the number of equity instruments expected to vest differs from previous estimates.
t

On vesting date, the entity shall revise the estimate to equal the number of equity instruments that ultimately vested.

Journal Entries
At the measurement date
Employee benefits expenses Dr.
To Share based payment reserve (equity)
(Recognition of proportionate amount of expected equity instruments to be vested based on the vesting period)
Subsequently, at every reporting date during vesting period

Employee benefits expenses Dr.

To Share based payment reserve (equity)
(Recognition, till reporting date, of proportionate amount of expected equity instruments to be vested based on the vesting
period less proportionate amount already recognised in the previous year)
On vesting date
Employee benefits expenses Dr.
To Share based payment reserve (equity)
(Final value of equity instruments vested)
Share based payment reserve (equity) Dr.
To Share Capital
(Re-allocation of equity by issuing of shares)
Note:
t

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© ICAI BOS(A) II. 153

SARANSH Part II: Indian Accounting Standards

Treatment of Equity-settled SBPTs

Modifications to the Terms and Conditions of the Plan

Recognise services received Recognise effects of modification that

Basic
measured at grant date fair value increase the total fair value of SBPA or are
Principle
of equity instruments granted otherwise beneficial to the employee

Treatment of Equity-settled SBPTs

Types of Modification to SBPA

Beneficial to employee Not beneficial to employee

A. Increase in fair value of equity instruments granted A. Decrease in fair value of equity instruments granted- ignore
B. Increase in number of equity instruments granted B. Decrease in number of equity instruments granted- treat as
C. Modification of vesting conditions to the benefit of cancellation of that portion of the Grant
the employees C. Modification of vesting conditions to the detriment of the
employees - ignore

Account prospectively

Treatment of Equity-settled SBPTs

Cancellation/Settlement of the Grant

Aspects of Cancellation/Settlement

Cancellation/Settlement Payment to employee Choice as to compliance Repurchase of vested equity instruments

1. Account as an 1. Payment on cancellation/ settlement is treated as 1. Payment of employee shall be

acceleration of repurchase of equity interest, i.e., deduction from equity accounted as deduction from equity
WFTUJOH
BOE
2. If payment > fair value of the equity instruments granted, 2. If payment > fair value of the equity
2. R e c o g n i s e then excess shall be expensed instruments purchased, then excess
immediately the 3. If SBPA includes liability components, then remeasure the shall be expensed
amount that would liability at fair value on cancellation / settlement and then
be recognised for account for as an extinguishment of the liability
services received over
the remainder of the
vesting period

Note: Not applicable to forfeiture due to vesting conditions not satisfied

© ICAI BOS(A) II. 154

SARANSH Part II: Indian Accounting Standards

Treatment of Cash-settled SBPTs

Measurement and Recognition

Measurement

Initial Measurement Re-measurement

The entity shall measure the goods or Until the liability is settled, the entity shall
services acquired and the liability incurred at t

SFNFBTVSF
the fair value of the liability at the end of each reporting
the fair value of the liability period and at the date of settlement
t

recognise any changes in fair value in profit or loss for the period

Note:
t
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R Expenditure to be spread over the vesting period if SARs vest over period of service
R Recognised immediately if no criteria for vesting period
R Treatment of vesting conditions

Accounting of Cash-settled SBPTs

Journal Entries
At the measurement date
Employee benefits expenses Dr.
To Share based payment liability
(Recognition of SBP liability at fair value)
Subsequently, at every reporting date during vesting period
Employee benefits expenses Dr.
To Share based payment liability
(Recognition of increase in fair value of SBP liability on remeasurement at the reporting date)
Or
Share based payment liability Dr.
To Employee benefits expenses
(Recognition of decrease in fair value of SBP liability on remeasurement at the reporting date)
On vesting date
Employee benefits expenses Dr.
To Share based payment liability
(Recognition of decrease in fair value of SBP liability on remeasurement at the reporting date)
Share based payment liability Dr.
To Cash/Bank
(Settlement of SBP liability)

Treatment of Cash-settled SBPTs

Change in Classification of SBPT from Cash-settled to Equity-settled

Equity-settled SBPT is measured by reference to fair value of equity instruments granted at the modification date

Liability for cash-settled SBPT as at the modification date is de-recognised

Difference between carrying amount of de-recognised liability and amount of recognised equity on modification
date, is recognised immediately in Profit and Loss

Note: Such a transaction is accounted for, from the date of modification

© ICAI BOS(A) II. 155

SARANSH Part II: Indian Accounting Standards

Accounting for SBPTs with Cash Alternatives

SBPTs provide counterparty SBPTs provide entity with

with a choice of settlement a choice of settlement

It is a compound financial It is a compound financial

instrument instrument

Debt component Equity component Does the entity have a present obligation
to settle in cash/other assets?

Counterparty’s right to Counterparty’s right to

demand payment in cash/ demand payment in equity Yes No
other assets instruments

SBPT is a cash-settled SBPT SBPT is a equity-settled SBPT

Its fair value is measured Its fair value is measured
separately on the date of separately as a balancing
receipt of goods or services figure
Note:
1. Choice of settlement in equity instruments has no commercial
The entity shall recognise the substance
The entity shall recognise the
goods and services acquired goods and services received 2. Entity generally settles in cash/other assets when counter party
and a liability to pay for it, and increase in equity, as asks for cash settlement
as applicable to cash-settled applicable to equity-settled 3. Entity has past practice or a stated policy of settling in cash/
SBPTs SBPTs other assets

Accounting for SBPTs with Cash Alternatives- At

the time of Settlement

SBPTs provide counterparty SBPTs provide entity with a

with a choice of settlement choice of settlement

Cash / Other assets paid Equity instruments issued Entity elects Entity elects
Entity elects to
settle in cash/ to settle by to settle
other assets issuing equity alternative
instruments with higher FV
t

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Tettle Liability shall be transferred
at settlement
liability in full directly to equity, as a
date
t

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equity component consideration for equity
recognised shall remain instrument issued
within equity. However,
there is no restriction
on recognising transfer
within equity

Cash payment will No further accounting Recognise additional expense for excess value given, i.e.,
be accounted for as is required, apart from t
%JëFSFODF
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'7
repurchase of equity transfer from one of equity instruments that would otherwise have been
interest, i.e., as deduction component of equity issued
from equity, except as per to another, if necessary, t
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third option except as per third option and cash /other assets that would otherwise be issued

© ICAI BOS(A) II. 156

SARANSH Part II: Indian Accounting Standards

Does Counterparty Get My

Equity Instruments?

Yes No

Equity-settled expenses Does counterparty get equity instruments

of another entity in the same group?

No Yes
Does counterparty get cash (or other assets) based
on the value of either my equity instruments or Do I have to provide those instruments
equity instruments of another group entity? (i.e., am I the settler?)

Yes No Yes Cash-settled expenses

Do I have to settle the
Not in the scope of Ind AS 102 No
obligation?
Equity-settled expenses
Yes
Cash-settled expenses

No
Equity-settled expenses

Accounting for SBPTs among Group Entities

H Ltd. would treat as an equity-settled SBPT

only if it is settled in H Ltd.’s own equity H
L
instruments. Otherwise, the transaction eq td. i
Listed Parent Co. H Ltd. uit ssu
shall be recognised as a cash-settled SBPT y s es
ha it
Companies of the

res s
same group

Substance
over form Employees of S Ltd.
Unlisted Subsidiary Co. S Ltd.
Ind AS 102 is applicable to the recipient of
des
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DBTF
UP
4
-UE
o

to Provi es
v ic
be treated as cash-settled/equity-settled ser

Accounting for SBPTs among Group Entities

S Ltd. would treat as an equity-settled SBPT

only if it is settled in S Ltd.’s own equity SL
instruments. Otherwise, the transaction eq td. i
Listed Subsidiary Co. S Ltd. uit ssu
shall be recognised as a cash-settled SBPT y s es
ha its
Companies of the

res
same group

Substance
over form Employees of H Ltd.

Unlisted Parent Co. H Ltd.

Ind AS 102 is applicable to the recipient of
ides
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o to Prov ices
be treated as cash-settled/equity-settled ser v

Disclosures

Type and Terms and Number of weighted Range of exercise Valuation

Average Impact on
scope of conditions of average price of share prices and weighted method used
share price P&L and
agreement each type pf options outstanding average of remaining to estimate
of exercised Balance
in force share-based with movement contractual life of fair value of
options Sheet
payment plans options outstanding awards

© ICAI BOS(A) II. 157

SARANSH Part II: Indian Accounting Standards

,1',$1$&&2817,1*67$1'$5' ,1'$6 %86,1(66&20%,1$7,216

Overview of Ind AS 103: Business Combinations

Definition and Acquisition Subsequent Measurement Common Control

Disclosures
Elements Method and Accounting Transactions

Identifying Reacquired rights

Of Business the acquirer
Combination
Contingent liabilities
Determining the
acquisition date
Indemnification of assets
Of Business Purchase
Consideration Contingent consideration

Determination of Purchase consideration Allocation of Purchase Consideration Recognition and Measurement of

Identifiable assets acquired and Goodwill or gain from a /PODPOUSPMMJOH
JOUFSFTU

the liabilities assumed bargain purchase in the acquiree

Objective

To improve the relevance, reliability and comparability of the information provided in the
financial statements about a business combination and its effects

To accomplish that, this Ind AS establishes principles and requirements for how the acquirer, in its financial statements

Recognises and measures Determines what information to disclose to enable users

Identifiable Liabilities "OZ
OPODPOUSPMMJOH
Goodwill acquired in the business To evaluate the nature and
assets acquired assumed interest in the combination or a gain from a financial effects of the
acquiree bargain purchase business combination

Scope

This Ind AS applies to a transaction or other event that meets the definition of a business combination

This Ind AS does not apply to:

Accounting for Acquisition of an asset Acquisition by an investment Combination of entities

formation of a joint or group of assets that entity in subsidiary which is or businesses under
arrangements is not a business measured at FVTPL common control

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liabilities assumed
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relative fair values at the date of purchase
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© ICAI BOS(A) II. 158

SARANSH Part II: Indian Accounting Standards

An entity shall account for each business combination by applying the ACQUISITION METHOD

STEPS FOR ACCOUNTING OF BUSINESS COMBINATION (ACQUISITION METHOD)

identify a business combination

1
identify the acquirer
2

determine acquisition date

3

recognise/measure identifiable assets acquired/liabilities assumed

4

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5

identify and measure consideration transferred

6
determine goodwill or gain on a bargain purchase
7

Identifying a Business Combination

Is there a transaction or event in which acquirer obtains control* over a business**?

Yes /P

It is a Business Combination It is an Asset Acquisition

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Control* t
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Business** t
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goods
or services to customers, generating investment income (such as dividends or
interest) or generating other income from ordinary activities

A business combination may be structured in a variety of ways for legal, taxation or other reasons, which include but are not
limited to:
(a) one or more businesses become subsidiaries of an acquirer or the net assets of one or more businesses are legally merged
into the acquirer
(b) one combining entity transfers its net assets, or its owners transfer their equity interests, to another combining entity or its
owners
(c) all of the combining entities or its owners transfer their net assets or equity interest, to a newly formed entity
(d) a group of former owners of one of the combining entities obtains control of the combined entity.

An acquirer might obtain control of an acquiree in a variety of ways, for example:

(a) by transferring cash, cash equivalents or other assets (including net assets that constitute a business)
(b) by incurring liabilities
(c) by issuing equity interests
(d) by providing more than one type of consideration
(e) without transferring consideration, including by contract alone

© ICAI BOS(A) II. 159

SARANSH Part II: Indian Accounting Standards

Business Elements
(It generally consists of:)

Inputs Inputs and processes are

(economic resource that creates, or has the ability to create, outputs) mandatorily required:
t
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current assets)
Process t
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(Any system, standard, protocol, convention or rule that when applied to an input or operation management)
inputs, creates or has the ability to create outputs.)
Outputs are not mandatorily
required for a set of activities
and assets to qualify as a
Output
business.
(The result of inputs and processes applied to those inputs that provide or have the
ability to provide a return in the form of dividends, lower costs or other economic t
Development stage activities
benefits directly to investors or other owners) without outputs may still be
businesses

Goodwill :
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But
A business need not necessarily have goodwill

Meaning of a Business

A business need not include all the inputs or processes that the seller used in operating that business

If a market participant is capable of utilising the acquired set of activities and assets to produce outputs by
integrating the acquired set with its own inputs and processes, the acquired set might constitute a business

If the elements that are missing from an acquired set are not present with a market participant but easily
replaced/replicated, the acquired set might still be a business

The acquired set of activities and assets must have at least some inputs and processes in order to be
considered a business

Definition of a Business: Development Stageof a set of Activities and Assets

Is the transferred set of activities and assets a business?

Factors include but are not limited to whether the set:

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inputs
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Determination should be based on whether the integrated set is capable of being conducted and managed as
a business by a market participant (rather than the specific acquirer)

© ICAI BOS(A) II. 160

SARANSH Part II: Indian Accounting Standards

Further Assessment to Determine Whether Transaction is Business or not:

/P
Acquired
Inputs GO T O A
and
Processes GO TO B

Yes
Yes Yes

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ability to continue producing unique/scarce or cannot be
GO TO A
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Outputs Yes
perform that process
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acquisition 8IFUIFS
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date? include both an organized
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workforce to perform that
ability to develop/convert process AND include other GO TO B
acquired input or inputs into inputs the workforce could
outputs? Yes develop/convert into outputs? Yes
/P

/P /P

/P
TVCTUBOUJWF
It is an asset GO TO A
A process acquired acquisition

Substantive It is a business
B process acquired combination

Concentration Test
An optional test (the concentration test) has been introduced in Ind AS 103 to permit a simplified assessment of whether an acquired set
of activities and assets is not a business.
On the basis of the above test, following will be the consequences:

Test is met Test is not met

/PU
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assessment
to be made

/P
GVSUIFS

assessment is
needed

t
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t
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election separately for each transaction or other event
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all of the fair value of the gross assets acquired is concentrated in a single identifiable
asset or group of similar identifiable assets

© ICAI BOS(A) II. 161

SARANSH Part II: Indian Accounting Standards

Differences in Accounting for Business Combination Vs. Asset Acquisition

Impact on Business combination Asset acquisition
Intangible assets Intangible assets are recognised at fair Intangible assets acquired as part of a
value, if they are separately identifiable group of assets would be recognised
and measured based on an allocation of
the overall cost of the transaction with
reference to their relative fair values
Goodwill Goodwill (or gain on bargain purchase) /P goodwill is recognized
may arise
Initial measurement of assets acquired and Fair value Allocated cost (on a relative fair value
liabilities assumed basis)
Directly attributable transaction costs &YQFOTFE Capitalised
%FGFSSFE
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Contingent liabilities assumed To be recognised if represents present /PU
recognised, subject to Ind AS 37
obligation that arises from past events and
its fair value can be measured reliably with
subsequent changes to profit or loss
Disclosures More
FYUFOTJWF Less disclosures required

All business combination within the scope of Ind AS 103 are accounted under the
acquisition method (also known as purchase method)
Identifying the Acquirer
For each business combination and in order to apply the purchase method, one of the
combining entities shall be identified as the acquirer

The guidance in Ind AS 110 shall be used to identify the acquirer

As per Ind AS 110, an investor controls an investee if and only if the investor has all the following:

Power over the &YQPTVSF
PS
The ability to use Control over the
investee rights, to variable its power over the Investee
returns from its investee to affect
involvement with the amount of the
the investee investor’s returns

Note: The above definition is very wide and control assessment does not depend only on voting rights instead it
depends on other factors as well, which are discussed in detail in Ind AS 110

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making the determination :

Acquirer is usually the Acquirer is usually the entity that issues its The entity whose size is
entity that transfers the equity interests significantly greater than
cash or other assets or [Note: )PXFWFS
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that of the other combining
incurs the liabilities combinations, commonly called ‘reverse entity or entities
acquisitions’, the issuing entity is the acquiree]

Acquirer normally has the largest portion of the voting rights in the combined entity
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warrants or convertible securities)

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or organised group of owners has a significant voting interest

Acquirer will have ability to elect or appoint or to remove a majority of the members
of the governing body of the combined entity

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

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combination fair value of the equity interests of the other combining entity or entities

© ICAI BOS(A) II. 162

SARANSH Part II: Indian Accounting Standards

Date of Acquisition

The date on which the acquirer obtains control of the acquiree (as identified by the acquirer)

In general, the date of obtaining the control is

the date on which the acquirer legally transfers the
consideration, acquires the assets and assumes the
liabilities of the acquiree

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Classification

The acquirer classifies and designates assets and liabilities at acquisition date based on:
– acquirer's economic conditions
– contractual terms of the assets/liabilities
– acquirer's operating or accounting policies
o
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t
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with Ind AS 116, Leases
t
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*OTVSBODF
$POUSBDUT

The acquirer shall classify those contracts on the basis of the contractual terms and other factors at the inception of the contract
(and not on the acquisition date)

Recognition and Measurement Principle

At the acquisition date, the acquirer shall recognise, separately from goodwill:

UIF
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Exceptions to recognition principle:
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which acquiree is the lessee

The acquirer shall measure the identifiable assets acquired and the liabilities assumed at their acquisition-date fair values

Exceptions to measurement principle:
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For recognition of identifiable assets acquired/ liabilities assumed as part of the acquisition method, these assets/ liabilities
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The acquirer shall determine which assets acquired or liabilities assumed, if any, are the result of separate transactions, they are
to be accounted for in accordance with their nature and the applicable Ind AS

The acquirer’s application of the recognition principle and conditions may result in recognising some assets and liabilities that the
acquiree had not previously recognised as assets and liabilities in its financial statements

© ICAI BOS(A) II. 163

SARANSH Part II: Indian Accounting Standards

Exceptions to Recognition
& Measurement Principles

Limited to acquisition date accounting

An asset or liability which otherwise would The assets and liabilities are measured at a value
not have been recorded gets recorded other than the acquisition date fair values

Both Recognition and Measurement

3FDPHOJUJPO
&YDFQUJPOT
.FBTVSFNFOU
FYDFQUJPOT FYDFQUJPOT

Contingent Income Employee Indemnification Lessees in which the

liabilities 5BYFT benefits assets acquiree is the lessee

Recognise if its Recognise and Recognise and Recognise and measure

fair value can be measure as per measure as per at the acquisition date
measured reliably Ind AS 12 Ind AS 19 at its fair value

t
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lease
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at present value of remaining lease payments as a new lease at the
acquisition date
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Share based payment awards Assets held for sale Reacquired rights

Measured as per Measured as per Ind AS Measured on the basis

Ind AS 102 at the 105 at the acquisition date of remaining contractual
acquisition date at fair value less cost to sell term of related contract

© ICAI BOS(A) II. 164

SARANSH Part II: Indian Accounting Standards

Recognising Particular Assets Acquired and Liabilities Assumed

For recognition Intangible The acquirer shall recognise, separately from goodwill, the identifiable intangible
purposes assets assets acquired in a business combination

An intangible asset is identifiable if it meets either the separability criterion or the

DPOUSBDUVBMMFHBM
DSJUFSJPO

An acquirer may reacquire a right that it had previously granted to the acquiree to use one or
Reacquired rights
more of the acquirer’s recognised or unrecognised assets

A reacquired right is an identifiable intangible asset that the acquirer recognises separately from
goodwill

Assembled workforce
and other items that The acquirer subsumes into goodwill the value of an acquired intangible asset that is not
are not identifiable identifiable or not qualifies as assets as of the acquisition date

Operating The acquirer shall recognise assets or liabilities related to an operating lease in
For measurement leases in which the acquiree is the lessor
purposes which the
acquiree is
the lessee The acquirer does not recognise a separate asset or liability if the terms of an
operating lease are either favourable or unfavourable when compared with the
market terms

Recognising and Measuring Goodwill or Gain from Bargain Purchase

Consideration /PO
Acquisition date fair Fair value of net

Goodwill transferred Controlling value of acquirer’s identifiable assets
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/$* previously held at the acquisition
equity interest date

At Fair value At Proportionate share in

OR the recognized amounts of
acquiree’s identifiable net assets

t
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to a parent
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Choice is made for each business combination (not a policy choice)

Note:
“Bargain Purchase” is accounted when sum total of fair value of net assets and /$* FYDFFET
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In case of bargain purchase, the acquirer should reassess whether it has correctly identified all of the assets acquired and all of the
liabilities assumed

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any gain is recognized in equity as capital reserve (routed through OCI) on the
acquisition date.
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purchase, the gain (bargain purchase) should be recognised directly in equity as capital reserve.

To determine the amount of goodwill in a business combination in which no consideration is transferred, the acquirer shall use the
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Note:
Acquisition related costs charged to P&L
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Equity issue cost recognized in equity (Ind AS 32).

© ICAI BOS(A) II. 165

SARANSH Part II: Indian Accounting Standards

Consideration Transferred

Consideration transferred is the TVN
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Assets transferred Liabilities incurred by Equity interests

by the acquirer the acquirer to former issued by the
owners of the acquiree acquirer

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is included in consideration transferred in the business combination shall be measured in accordance with Ind AS 102 rather
than at fair value.

It also includes acquisition date fair value of contingent consideration

Examples of potential forms of consideration include cash, other assets, a business or a subsidiary of the acquirer, contingent
consideration, ordinary or preference equity instruments, options, warrants and member interests of mutual entities.

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"/%

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transferred to the acquiree rather than to its former owners)

Yes /P

t
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their carrying amounts immediately assets or liabilities to their fair
before the acquisition date values as of the acquisition date
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not recognized in Profit t
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or Loss (when acquirer controls the Profit or Loss
assets or liabilities both before and after
the combination)

Acquisition-Related Costs

Definition "DRVJTJUJPOSFMBUFE
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Those costs include finder’s fees; advisory, legal, accounting, valuation and other professional or consulting
&YBNQMFT fees; general administrative costs, including the costs of maintaining an internal acquisitions department;
and costs of registering and issuing debt and equity securities

Accounting ͳF
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treatment incurred and the services are received

&YDFQUJPO The costs to issue debt or equity securities shall be recognised in accordance with Ind AS 32 and Ind AS 109

© ICAI BOS(A) II. 166

SARANSH Part II: Indian Accounting Standards

It is the obligation by the acquirer to transfer

Contingent Consideration additional assets or equity interest, if specified
future events occur or conditions are met

For changes occurred during the measurement period,

Initial recognition at fair value the acquirer shall retrospectively adjust the provisional
amounts recognised at the acquisition date

Equity Other contingent consideration

/PU
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Subsequent settlement is of Ind AS 109 Ind AS 109
accounted for within equity

Measured at fair Changes in fair value Measured at fair Changes in fair value
value at is recognised in value at each is recognised in
each reporting date profit or loss reporting date profit or loss

A Business Combination Achieved in Stages

An acquirer may obtain the control of an acquiree in stages, by successive purchases of shares (commonly referred to as a ‘step
acquisition’)

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obligations for the liabilities relating to that joint operation immediately before the acquisition date, the transaction is a
business combination achieved in stages

The acquirer shall remeasure its entire previously held interest in the joint operation as follows:

*G
UIF
BDRVJSFS
IPMET
B
OPODPOUSPMMJOH
FRVJUZ
JOWFTUNFOU
JO
UIF
BDRVJSFF
JNNFEJBUFMZ
CFGPSF
PCUBJOJOH
DPOUSPM

Remeasure investment to fair value as at the date of gaining control

Recognise any gain or loss on remeasurement in profit or loss or OCI, as appropriate

In prior periods, whether the acquirer had recognised changes in the value of the equity interest in OCI?

Yes /P

Amount that was recognised in OCI should Any resulting gain or loss is
be recognised on the same basis as would recognised in profit or loss
be required if the acquirer had disposed
directly of the previously held equity interest

© ICAI BOS(A) II. 167

SARANSH Part II: Indian Accounting Standards

A Business Combination Achieved Without the Transfer of Consideration

The acquisition method of accounting applies to such business combinations

It includes following circumstances:

ͳF
BDRVJSFF
SFQVSDIBTFT
B
TVĊDJFOU
OVNCFS
PG
JUT
PXO
TIBSFT
GPS
BO
FYJTUJOH
JOWFTUPS
UIF
BDRVJSFS
UP
PCUBJO

control

Minority veto rights lapse that previously kept the acquirer from controlling an acquiree in which the acquirer held
the majority voting rights

The acquirer and acquiree agree to combine their businesses by contract alone

Example: Bringing two businesses together in a stapling arrangement or forming a dual listed
corporation

The equity interests in the acquiree held by parties other than the acquirer BSF
B
OPODPOUSPMMJOH
JOUFSFTU
JO
UIF
BDRVJSFST

QPTUDPNCJOBUJPO
mOBODJBM
TUBUFNFOUT even if the result is that all of the equity interests in the acquiree are attributed to the
OPODPOUSPMMJOH
JOUFSFTU

Measurement Period

It is the period after the acquisition date during which the acquirer may adjust the provisional amounts
Definition
recognized for a business combination

It ends as soon as the acquirer receives the information it was seeking about facts and circumstances that
Duration
FYJTUFE
BT
PG
UIF
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EBUF
PS
MFBSOT
UIBU
NPSF
JOGPSNBUJPO
JT
OPU
PCUBJOBCMF

Note: ͳF
NFBTVSFNFOU
QFSJPE
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OPU
FYDFFE
POF
ZFBS
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EBUF

Accounting / Adjustment:
Information that
t
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BNPVOUT
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BU
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t
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OFX
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UP
SFnFDU
UIF
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acquisition date
t
"EKVTU
UIF
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Information Accounting / Adjustment:

Time of occurred during t
*ODMVEF
BEKVTUNFOUT
GPS
TVDI
EFWFMPQNFOUT
BGUFS
UIF
BDRVJTJUJPO
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EVSJOH

occurrence of the measurement the measurement period only (like changes in estimates)
information and period t
Prospectively adjust the provisional amounts
UP
SFnFDU
OFX
JOGPSNBUJPO
BSJTJOH

its accounting/ after the acquisition date
adjustment t
/P adjustment to goodwill
t
Correct the errors retrospectively in accordance with Ind AS 8

1PTU Accounting / Adjustment:

measurement t
/P
BEKVTUNFOU
to the accounting for the business combination
period t
"DDPVOUJOH
GPS
B
CVTJOFTT
DPNCJOBUJPO
JT
amended only to correct an error as
information per Ind AS 8

© ICAI BOS(A) II. 168

SARANSH Part II: Indian Accounting Standards

Measurement Period Review

8IFUIFS
DPOEJUJPOT
FYJTUFE
PO

acquisition date?

Yes /P

8IFUIFS
JOGPSNBUJPO
QFSUBJOJOH
UP
/P
business acquisition obtained within Recognise increase/decrease in
1 year of acquisition date? asset or liability as error as per
applicable Ind AS.
Yes

Then recognise increase/decrease in

identifiable asset or liability by giving
corresponding effect in Goodwill.

Determining what is Part of the Business Combination Transaction

ͳF
BDRVJSFS
BOE
UIF
BDRVJSFF
NBZ
IBWF
B
QSFFYJTUJOH
The acquirer and the acquiree may enter into an

relationship or other arrangement before negotiations OR arrangement during the negotiations that is separate
for the business combination began from the business combination

In either situation, the acquirer shall identify any amounts that are not part of what the acquirer and the acquiree (or its former
PXOFST
FYDIBOHFE
JO
UIF
CVTJOFTT
DPNCJOBUJPO
JF
BNPVOUT
UIBU
BSF
OPU
QBSU
PG
UIF
FYDIBOHF
GPS
UIF
BDRVJSFF

The acquirer shall recognise as part of applying the acquisition method only the consideration transferred for the acquiree and
UIF
BTTFUT
BDRVJSFE
BOE
MJBCJMJUJFT
BTTVNFE
JO
UIF
FYDIBOHF
GPS
UIF
BDRVJSFF

Separate transactions shall be accounted for in accordance with the relevant Ind AS

A transaction entered into by or on behalf of the acquirer or primarily for the benefit of the acquirer or the combined entity,
rather than primarily for the benefit of the acquiree (or its former owners) before the combination, is likely to be a separate
transaction

ͳF
GPMMPXJOH
BSF
FYBNQMFT
PG
TFQBSBUF
USBOTBDUJPOT
UIBU
BSF
not to be included in applying the acquisition method:

a transaction that a transaction that a transaction that reimburses

JO
FĉFDU
TFUUMFT
QSF remunerates employees the acquiree or its former
FYJTUJOH
SFMBUJPOTIJQT
or former owners of owners for paying the
between the acquirer the acquiree for future BDRVJSFST
BDRVJTJUJPO
and acquiree services related costs

ͳF
BDRVJSFS
TIPVME
DPOTJEFS
UIF
GPMMPXJOH
GBDUPST
XIJDI
BSF
OFJUIFS
NVUVBMMZ
FYDMVTJWF
OPS
JOEJWJEVBMMZ
DPODMVTJWF
JO

determining whether the transaction is separate from business combination:

Reasons for the transaction 8IP
JOJUJBUFE
UIF
USBOTBDUJPO Timing of the transaction

© ICAI BOS(A) II. 169

SARANSH Part II: Indian Accounting Standards

Accounting for a Pre-existing Relationship

5ZQFT
PG
1SFFYJTUJOH
3FMBUJPOTIJQT

/PODPOUSBDUVBM
FH
-FHBM
4VJU Contractual (e.g. Supply Agreement) Reacquired right (e.g. Franchise Agreement)

Lesser
of

Fair Value

Fair Value based

Favourable/ on remaining
Measurement Stated Settlement
6OGBWPVSBCMF
contractual term
Provisions
contract position (without renewals)

Profit & Loss, not goodwill Capitalised and amortised

Contingent Payments to Employees or Selling Shareholders

5P
JEFOUJGZ
BO
BSSBOHFNFOU
GPS
QBZNFOUT
UP
FNQMPZFFT
PS
TFMMJOH
TIBSFIPMEFST
JT
QBSU
PG
UIF
FYDIBOHF
GPS
UIF
BDRVJSFF
PS
JT
B

transaction separate from the business combination, the acquirer should consider the following indicators:

Duration of continuing
Continuing employment Level of remuneration
employment

Incremental payments
/VNCFS
PG
TIBSFT
PXOFE Linkage to the valuation
to employees

Formula for determining Other agreements and

consideration issues

© ICAI BOS(A) II. 170

SARANSH Part II: Indian Accounting Standards

Acquirer Share Based Payment Awards Exchanged for Awards Held by the Acquiree’s Employees

Business combination "O
BDRVJSFS
NBZ
FYDIBOHF
JUT
TIBSFCBTFE
QBZNFOU
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SFQMBDFNFOU
BXBSET
GPS
BXBSET
IFME
CZ

transaction employees of the acquiree

/BUVSF
PG
BXBSET The above share based payment awards will include vested and unvested shares

&YDIBOHFT
PG
TIBSF
PQUJPOT
PS
PUIFS
TIBSFCBTFE
QBZNFOU
BXBSET
JO
DPOKVODUJPO
XJUI
B
CVTJOFTT

Type of Accounting
combination are BDDPVOUFE
GPS
BT
NPEJmDBUJPOT
PG
TIBSFCBTFE
QBZNFOU
BXBSET as per Ind AS 102

To allocate the replacement award's value between the amounts attributable to:
Objective of t
QSFDPNCJOBUJPO
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USFBUFE
BT
QBSU
PG
consideration transferred)
Accounting t
QPTUDPNCJOBUJPO
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BDDPVOUFE
GPS
BT
DPNQFOTBUJPO
FYQFOTF in the post combination financial
statements)

1SF .BSLFUCBTFE
Completed Greater of total

combination measure of vesting period original vesting
period the acquiree as on the period or total revised
service cost award acquisition date vesting period

Accounting

1PTU
combination Market based Amount attributed
period measure of the to pre combination
service cost replacement award service

Market based measure means that awards will be

re-measured on the acquisition date as per the
requirements of Ind AS 102

t
ͳF
BDRVJSFS
TIBMM
BUUSJCVUF
B
QPSUJPO
PG
B
SFQMBDFNFOU
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QPTU
combination service if it requires post combination service, regardless of
whether employees had rendered all of the service required for their acquiree
awards to vest before the acquistion date

t
$IBOHFT
JO
UIF
FTUJNBUFE
OVNCFS
PG
SFQMBDFNFOU
BXBSET
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*NQPSUBOU
/PUFT are SFnFDUFE
JO
SFNVOFSBUJPO
DPTU
GPS
UIF
QFSJPET
JO
XIJDI
UIF
DIBOHFT
PS
forfeitures occur not as adjustments to the consideration transferred in the
business combination.

t
ͳF
FĉFDUT
PG
PUIFS
FWFOUT
TVDI
BT
NPEJmDBUJPOT
PS
UIF
VMUJNBUF
PVUDPNF

of awards with performance conditions, that occur after the acquisition date
are accounted for as per Ind AS 102 in determining remuneration cost for the
period in which an event occurs

t
3FRVJSFNFOUT
GPS
EFUFSNJOJOH
UIF
QPSUJPOT
PG
B
SFQMBDFNFOU
BXBSE
BUUSJCVUBCMF
UP
QSFDPNCJOBUJPO
BOE
QPTUDPNCJOBUJPO
TFSWJDF
apply regardless of whether
a replacement award is classified as a liability or as an equity instrument as per
Ind AS 102

t
ͳF
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UBY
FĉFDUT
PG
SFQMBDFNFOU
BXBSET
PG
TIBSFCBTFE
QBZNFOUT
TIBMM
CF
recognised as per Ind AS 12

© ICAI BOS(A) II. 171

SARANSH Part II: Indian Accounting Standards

Equity-Settled Share-Based Payment Transactions of the Acquiree

"DRVJSFF
NBZ
IBWF
PVUTUBOEJOH
TIBSFCBTFE
QBZNFOU
USBOTBDUJPOT
UIBU
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EPFT
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GPS
JUT
TIBSFCBTFE

payment transactions

"DRVJSFFT
FYJTUJOH
BXBSE
XJMM
CF
TFUUMFE
JO
JUT
PXO
TIBSFT
BOE
UIF
DPOTFRVFOUJBM
TIBSFIPMEFST
XJMM
CFDPNF
UIF
/PODPOUSPMMJOH

shareholders

Accounting

Vested shares 6OWFTUFE
TIBSFT

Measured at their Such acquiree 1SFDPNCJOBUJPO
1PTUDPNCJOBUJPO

N B S L F U  C B T F E
TIBSFCBTFE
period period
measure and the payment
value credited to transactions
Share based payment are part of Considered as a Debited as employee cost
reserve /$* QBSU
PG
/$* BOE
DSFEJUFE
UP
/$* in the
balance sheet

.BSLFU Completed Greater of total

b a s e d vesting period original vesting Market based A m o u n t
measure of as on the period or total measure of the attributed to pre
the acquiree acquisition revised vesting replacement combination
award date period award service

Subsequent Measurement and Accounting

An acquirer shall subsequently measure and account for assets acquired, liabilities assumed or incurred and equity instruments
issued in a business combination in accordance with other applicable Ind AS

Exception: Ind AS 103 provides guidance on subsequently measuring and accounting for the following assets acquired, liabilities
assumed or incurred and equity instruments issued in a business combination

Reacquired Contingent liabilities Indemnification Contingent

rights recognised as of the assets consideration
acquisition date

t
Recognised as an On subsequent After initial It results when the seller Refer chart
intangible asset selling to a third party, recognition and in a business combination given earlier
t
Amortised over acquirer shall include until the liability is contractually indemnifies the in this chapter
the remaining the carrying amount settled, cancelled or acquirer for the outcome of on contingent
contractual period of of the intangible asset FYQJSFE
UIF
BDRVJSFS
a contingency or uncertainty consideration
the contract in which in determining the shall measure it at related to all or part of a
the right was granted gain or loss on the sale the higher of specific asset or liability

The amount that would be

In each subsequent reporting period, the acquirer shall
recognised as per Ind AS 37
t
Measure an indemnification asset on the same basis as the
indemnified liability or asset
The amount initially t
'PS
BO
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not subsequently
recognised less the cumulative measured at its fair value, management needs to do
amount of income recognised assessment of its collectability
as per Ind AS 115 t
Derecognise the indemnification asset only when it collects
the asset, sells it, or otherwise loses the right to it

© ICAI BOS(A) II. 172

SARANSH Part II: Indian Accounting Standards

Other Ind AS that Provide Guidance on Subsequent Measurement and

Accounting in a Business Combination

t
*OE
"4

QSFTDSJCFT
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t
ͳF
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BU
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Ind AS 36 prescribes the accounting for impairment losses

Ind AS 104 provides guidance on the subsequent accounting for an insurance contract acquired in a business combination

*OE
"4

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acquired in a business combination

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"4

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awards issued by an acquirer that is attributable to employees’ future services

Ind AS 110 provides guidance on accounting for changes in a parent’s ownership interest in a subsidiary after control is obtained

Common Control Business Combinations

Applicable "QQFOEJY
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"4

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pronouncement common control

It is a business combination involving entities or businesses in which all the combining entities or
Definition businesses are ultimately $0/530--&% by the SAME party or parties both BEFORE and AFTER the
business combination, and that control is not transitory

Common control business combinations will include transactions, such as transfer of subsidiaries or
Inclusion
businesses, between entities within a group

t
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/$*
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not
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/$* relevant to determine whether a combination involves entities under common control
t
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It is not necessary that combining entities are included as part of the same CFS
Scope
A group of individuals shall be considered as controlling an entity when, as a result of contractual
arrangements, they collectively have the power to govern its financial and operating policies so as to
obtain benefits from its activities, and that ultimate collective power is not transitory

Accounting Business combinations involving entities or businesses under common control shall be accounted for
using the pooling of interests method

© ICAI BOS(A) II. 173

SARANSH Part II: Indian Accounting Standards

Method of Accounting for Common Control Business Combinations

Business combinations involving entities or businesses under common control shall be accounted for using the pooling of
interests method

"TTFUT
BOE
MJBCJMJUJFT
PG
UIF
DPNCJOJOH
FOUJUJFT
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carrying amounts

Only adjustments that are made are to harmonise accounting policies

/P
BEKVTUNFOUT
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NBEF
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WBMVFT or recognize any new assets or liabilities

/P
hOFXh
HPPEXJMM
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SFDPHOJ[FE as a result of the combination

Any FYQFOTFT of the combination are written off immediately in the P&L

Financial information in financial statements in respect of prior periods should be restated as if business combination had
occurred from beginning of preceding period in financial statements, irrespective of actual date of combination

)PXFWFS
JG
CVTJOFTT
DPNCJOBUJPO
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t
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t
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Identity of reserves shall be preserved and shall appear in financial statements of transferee in same form in which they
appeared in financial statements of transferor

General Reserve of the transferor entity becomes the General Reserve of the transferee, the Capital Reserve of the transferor
becomes the Capital Reserve of the transferee and the Revaluation Reserve of the transferor becomes the Revaluation Reserve of
the transferee. As a result of preserving the identity, reserves which are available for distribution as dividend before the business
combination would also be available for distribution as dividend after the business combination.

Difference, if any, between amount recorded as share capital issued plus any additional consideration in form of cash or other
assets and amount of share capital of transferor shall be transferred to capital reserve and should be presented separately from
other capital reserves with disclosure of its nature and purpose in the notes

© ICAI BOS(A) II. 174

SARANSH Part II: Indian Accounting Standards

Summary of Accounting for Common Control Business Combination

S. No. Particular Treatment
1. Method of accounting Pooling of interests method
2. Assets and liabilities of transferor company taken over by the At carrying values
transferee company
3. Adjustments in accounting of business combination Adjustments are made only to harmonise the accounting
policies
4. Financial information in financial statements in respect of prior Restated as if business combination had occurred from
periods beginning of preceding period in financial statements,
irrespective of actual date of combination.
)PXFWFS
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UIBU

date, prior period information shall be restated only from
that date.
5. Reserves of transferor company Identities are preserved and shall appear in financial
statements of transferee in same form in which they
appeared in financial statements of transferor company
6. Goodwill /PU
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7. &YQFOTFT
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8. Purchase Consideration (PC) Consists of securities, cash or other assets
9. Securities given under purchase consideration Recorded at nominal value
10. Assets other than cash given under purchase consideration Considered at their fair values
11. Cash given under purchase consideration Actual value
12. Difference, if any, between amount recorded as share capital Transferred to capital reserve and should be presented
issued plus any additional consideration in form of cash or separately from other capital reserves with disclosure of its
other assets and amount of share capital of transferor
nature and purpose in the notes

Reverse Acquisitions

Issued equity shares

Say Entity A Say Entity B

Legal Acquirer Legal Acquiree

Issues no consideration

Identified as Identified as
Accounting Acquiree Accounting Acquirer
For accounting,
measure the
consideration as

Acquisition date fair value of Fair value of the number of equity interests
the consideration transferred the legal subsidiary (Entity B) would have had
by the accounting acquirer for to issue to give the owners of the legal parent
its interest in the accounting (Entity A) the same percentage equity interest
acquiree in the combined entity that results from the
reverse acquisition

© ICAI BOS(A) II. 175

SARANSH Part II: Indian Accounting Standards

Preparation and Presentation of Consolidated

Financial Statements (Reverse Acquisitions)

Consolidated financial statements prepared following a reverse acquisition are issued under the name of the legal parent (accounting
acquiree)

But it is described in the notes as a continuation of the financial statements of the legal subsidiary (accounting acquirer), with
one adjustment, which is to BEKVTU
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PG
UIF
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acquiree
ͳBU
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Comparative information presented in those consolidated financial statements also is retroactively adjusted
UP
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of the legal parent (accounting acquiree).

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PG
UIF
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GPS

JUT
DBQJUBM
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UIF
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mOBODJBM
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B
UIF
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PG
UIF
MFHBM
TVCTJEJBSZ
UIF
BDDPVOUJOH
BDRVJSFS
SFDPHOJTFE
BOE
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UIFJS
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carrying amounts.

(b) the assets and liabilities of the legal parent (the accounting acquiree) recognised and measured in accordance with this Ind AS.

(c) the retained earnings and other equity balances of the legal subsidiary (accounting acquirer) before the business combination.

(d) the amount recognised as issued equity interests in the consolidated financial statements determined by adding the issued
equity interest of the legal subsidiary (the accounting acquirer) outstanding immediately before the business combination to the
fair value of the legal parent (accounting acquiree).

F
JO
B
SFWFSTF
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BNPVOUT
PG
UIF
MFHBM
BDRVJSFFT
OFU
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even if the non-controlling interests in other acquisitions are
measured at their fair value at the acquisition date.

*O
B
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TPNF
PG
UIF
PXOFST
PG
UIF
MFHBM
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UIF
BDDPVOUJOH
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NJHIU
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FYDIBOHF
UIFJS
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for equity interests of the legal parent (the accounting acquiree).
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For Earnings per Share for the current period

In calculating the weighted average number of ordinary shares outstanding (the denominator of the earnings per share calculation)
during the period in which the reverse acquisition occurs:
(a) the number of ordinary shares outstanding from the beginning of that period to the acquisition date shall be computed on the
basis of the weighted average number of ordinary shares of the legal acquiree (accounting acquirer) outstanding during the
QFSJPE
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CZ
UIF
FYDIBOHF
SBUJP
FTUBCMJTIFE
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BOE
(b) the number of ordinary shares outstanding from the acquisition date to the end of that period shall be the actual number of
ordinary shares of the legal acquirer (the accounting acquiree) outstanding during that period.

For Earnings per Share for the comparative period

The basic earnings per share for each comparative period before the acquisition date presented in the consolidated financial
statements following a reverse acquisition shall be calculated by dividing:
(a) the profit or loss of the legal acquiree attributable to ordinary shareholders in each of those periods by
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established in the acquisition agreement

© ICAI BOS(A) II. 176

SARANSH Part II: Indian Accounting Standards

Main Disclosures

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Carve-Out in Ind As 103 From IFRS 3

As Per IFRS

IFRS 3 requires bargain purchase gain arising on business combination to be recognised in profit or loss as income

Carve-Out

Ind AS 103 requires the bargain purchase gain to be recognised in other comprehensive income and accumulated in equity as
capital reserve

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which case, it shall be recognised directly in equity as capital reserve

Reason for Carve-Out

Bargain purchase gain occurs at the time of acquiring a business
Recognition of such gains in profit or loss would result into recognition of unrealized gains, which may get distributed in the
form of dividends
Such a treatment may lead to structuring through acquisitions, which may not be in the interest of the stakeholders of the
company

Carve-In in Ind As 103 From IFRS 3

As Per IFRS

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Business Combinations gives guidance on business combinations of entities under
common control

© ICAI BOS(A) II. 177

SARANSH Part II: Indian Accounting Standards

,1',$1$&&2817,1*67$1'$5' ,1'$6 

121&855(17$66(76+(/')256$/($1'',6&217,18('23(5$7,216
Scope out -
Objective Measurement
Accounting provisions
for assets Deferred tax assets Criteria for Measurement Presentation
held for sale - Ind AS 12 classifying Presentation
of assets and
Financial Assets existing and
Presentation classified as Disclosure of
- Ind AS 109 assets as held Disclosure of
and disclosure held for sale Non-current
Agriculture for sale Discontinued
of asset held asset held for
- Ind AS 41 sale Operations
for sale and Contractual rights
discontinued - Ind AS 104
operations Employee benefits
- Ind AS 19

Objective Classification Measurement and Presentation

Measurement = at the lower of carrying amount and fair
Accounting for value - costs to sell
non-current
assets held for
sale or disposal Cessation of depreciation on such assets
groups
Ind AS 105 Presented separately in the balance sheet

Discontinued Results of discontinued operations to be presented

operations separately in the statement of profit and loss

Disclosure

Measurement provisions of Ind AS 105 do not apply to

Deferred tax Assets arising from Non-current Assets

Assets Financial Assets Contractual rights
Employee benefits which are measured under Insurance
at Fair value less cost contracts
to sell
Ind AS 12 Ind AS 19 Ind AS 109

Ind AS 41 Ind AS 104

Note: 5. Measurement requirements of this Ind AS apply to

the group as a whole, so that the group is measured
1. Assets classified as non-current (as per Ind AS 1), at the lower of its carrying amount and fair value
shall not be reclassified as current assets until they less costs to sell.
meet the criteria to be classified as held for sale as 6. The classification, presentation and measurement
per Ind AS 105. requirements in this Ind AS are applicable to
2. Non-current assets acquired exclusively for resale shall both non-current asset (or disposal group) that is
not be classified as current unless they meet the criteria classified as:
to be classified as held for sale as per Ind AS 105. • held for sale; and
3. Disposal group may be a group of cash-generating • held for distribution to owners.
units, a single cash-generating unit, or part of a 7. This Ind AS specifies the disclosures required in
cash-generating unit. respect of non-current assets (or disposal groups)
4. The group may include any assets and any liabilities classified as held for sale or discontinued
of the entity, including current assets, current operations. Disclosures in other Ind ASs do not
liabilities and assets excluded from the measurement apply to such assets.
requirements of this Ind AS.

© ICAI BOS(A) II. 178

SARANSH Part II: Indian Accounting Standards

Classification of non-current assets (or disposal groups) as held for sale or held for distribution to owners

An entity shall classify a non-current asset (or disposal group) as held for sale if its carrying amount will
be recovered principally through a sale transaction rather than through continuing use

Available for In its present condition

immediate Sale*/
distribution
Management is committed to a plan to sell/
distribute the asset

Key requirements for

non-current assets An active programme to locate a buyer and
held for sale or held for complete the plan/distribution has been initiated
distribution to owners
Asset is actively marketed for sale at a price
that is reasonable in relation to its current fair
value***
Sale/distribution must
be highly probable Sale/distribution should be expected to qualify
for recognition as a completed sale/distribution
within one year from the date of classification**

It is unlikely that significant changes to the

plan will be made for completion of plan/sale/
distribution or plan/distribution should not
be withdrawn

* Sale transactions include exchanges of non-current assets for Measurement of non-current assets (or disposal
other non-current assets when the exchange has commercial groups) classified as held for sale
substance

**If the entity remains committed to its plan to sell the asset Fair value less
(or disposal group), events or circumstances beyond the costs to sell
Value of
entity’s control may extend the period to complete the sale non-current
beyond one year asset (or
Lower of disposal
***Not applicable for non-current assets held for distribution Carrying both group)
to owners amount classified as
held for sale

Note: Note:
If the asset (or disposal group) is acquired as part of a business
S. No. Particular Details
combination, it shall be measured at fair value less costs to sell.

1. Acquisition of non- Classify the non-current Fair value

current asset (or asset (or disposal group) as less costs to
disposal group) with held for sale subject to the distribute* Value of non-
current asset
intention to subsequent conditions specified in the (or disposal
sale within a year above chart Lower of group)
Carrying both classified
2. Non-current assets that It shall not be classified amount as held for
are to be abandoned as held for sale since its distribution to
owners
carrying amount will be
recovered principally
*Costs to distribute are the incremental costs directly
through continuing use
attributable to the distribution, excluding finance costs and
and not from sale
income tax expense.

© ICAI BOS(A) II. 179

SARANSH Part II: Indian Accounting Standards

Recognition of impairment losses and reversals Changes to a plan of sale or to a plan of distribution
to owners
• An entity shall recognise an impairment loss for any
initial or subsequent write-down of the asset (or • If an asset (or disposal group) classified as held for sale
disposal group) to fair value less costs to sell. or as held for distribution to owners previously, no
longer meets the criteria for such classification, then
• An entity shall recognise a gain for any subsequent it shall be ceased to classify as the asset (or disposal
increase in fair value less costs to sell of an asset to group) held for sale or held for distribution to owners
the extent of the cumulative impairment loss that has (respectively).
been recognised previously
• If an entity reclassifies an asset (or disposal group)
• An entity shall not depreciate (or amortise) a non- directly from being held for sale to being held for
current asset while it is classified as held for sale or while distribution to owners, or directly from being held for
it is part of a disposal group classified as held for sale. distribution to owners to being held for sale, then the
change in classification is considered a continuation
• Interest and other expenses attributable to the of the original plan of disposal.
liabilities of a disposal group classified as held for sale
shall continue to be recognised. • The entity shall not change the date of classification.

Measurement in case of above changes

Carrying amount before

the asset was classified as
held for sale/distribution to
owners, adjusted for any
depreciation, amortisation
or revaluations that would
have been recognised
Any required
had the asset (or disposal adjustment to
Value of a
group) not been classified non-current the carrying
as held for sale or as held asset (or amount of a
Lower of for distribution to owners. disposal non-current
group) on asset shall be
reclassification in profit or loss
from continuing
operations

Its recoverable amount at

the date of the subsequent
decision not to sell or
distribute.

Presentation and Disclosure of a non-current asset (or disposal group) classified as held for sale

• Present a non-current asset classified as held for sale separately from other
assets in the balance sheet.
• Present the liabilities of a disposal group classified as held for sale separately
from other liabilities in the balance sheet. Those assets and liabilities should not
be offset and presented as a single amount.
• Separate disclosure is required for major classes of assets and liabilities
classified as held for sale.
Presentation • Present separately any cumulative income or expense recognised in OCI
relating to such non-current asset classified as held for sale.
• Comparative amounts are not reclassified or re-presented to reflect the
classification in the balance sheet for the latest period presented.
• Any gain or loss on the remeasurement does not meet the definition of a discontinued
operation shall be included in profit or loss from continuing operations.

© ICAI BOS(A) II. 180

SARANSH Part II: Indian Accounting Standards

• Description of the non-current asset (or disposal group)

• Description of facts and circumstances of the sale, or leading to the expected
disposal and the expected manner and timing of that disposal
• Gain or loss recognised and if not presented separately on the face of the income
Disclosure statement, the caption in the income statement that includes that gain or loss
• The reportable segment in which the non-current asset (or disposal group) is
presented, if any
• If there is a change of plan to sell, a description of facts and circumstances leading to
the decision and its effect on results

Discontinued operations
represents
a separate
major line of
business or
A component of geographical
an entity* operations; or
that has
Discontinued
either been operations
disposed of is a subsidiary is part of a single
acquired co-ordinated
exclusively with plan to dispose of
or classified as a separate major
a view to
held for sale resale; or line of business
or geographical
operations

* A component of an entity will have been a cash-generating unit or a group of cash-generating units while being held for use

Presentation and Disclosure of Discontinued Operations

S. No. Particulars Detail disclosure
1. Separate Ŷ Presentation and disclosure shall enable users of the financial statements to evaluate the financial
presentation effects of discontinued operations and disposals of non-current assets (or disposal groups)
Ŷ This allows the user to distinguish between continuing operations and those which will not
2. In the Ŷ Disclose a single amount comprising the total of:
statement of (a) the post-tax profit or loss of discontinued operations; and
profit and (b) the post-tax gain or loss recognised on the measurement to fair value less costs to sell or on the
loss disposal of the assets or disposal group(s) constituting the discontinued operation.
Ŷ Disclose the analysis of this single amount into:
(a) the revenue, expenses and pre-tax profit or loss of discontinued operations;
(b) the related income tax expense as required in Ind AS 12;
(c) the gain or loss recognised on the measurement to fair value less costs to sell or on the disposal of the
assets or disposal group(s) constituting the discontinued operation; and
(d) the related income tax expense as required in Ind AS 12
Ŷ Present the analysis in the notes or in the statement of profit and loss
Ŷ Disclosure of analysis is not required for disposal groups that are newly acquired subsidiaries that meet
the criteria to be classified as held for sale on acquisition
Ŷ Disclose the amount of income from continuing operations and from discontinued operations
attributable to owners of the parent. These disclosures may be presented either in the notes or in the
statement of profit and loss
3. In the Ŷ Disclose the net cash flows attributable to the operating, investing and financing activities of discontinued
statement of operations either in the notes or in the financial statements
cash flows Ŷ These disclosures are not required for disposal groups that are newly acquired subsidiaries that meet
the criteria to be classified as held for sale on acquisition
Ŷ Comparative figures for prior periods are also re-presented
4. Adjustment Adjustments in the current period to amounts previously presented in discontinued operations that
to prior are directly related to the disposal of a discontinued operation in a prior period should be classified
period separately in discontinued operations. The nature and amount of such adjustments are disclosed.
disposals

© ICAI BOS(A) II. 181

SARANSH Part II: Indian Accounting Standards

,1',$1$&&2817,1*67$1'$5' ,1'$6 23(5$7,1*6(*0(176

,GHQWLÀFDWLRQ RI 2SHUDWLQJ 6HJPHQW

Overview DFRPSRQHQWRIDQHQWLW\
Identification of Operating Segments
Is the component engaged in business activities from
which it may earn revenues and incur expenses? No
Determination of Reportable Operating Segments
Yes

Not an operating segment

Aggregation criteria Are the component’s results reviewed regularly by
the chief operating decision maker (CODM*)? No
Quantitative thresholds
Yes

Is discrete financial information for the

component available? No
Disclosure Measurement Entity-wide disclosure
Yes
General Reconciliations Information about Operating segment
Information products and
Restatement services
Information of previously
about profit or reported Information about * The term ‘Chief Operating Decision Maker’ (CODM) identifies
loss, assets and information geographical areas a function, not necessarily a manager with a specific title. The
liabilities chief operating decision maker of an entity may be
Information about ¾ chief executive officer, or
major customers
¾ chief operating officer, or
¾ a group of executive directors or others.

Core Principle
Important Points regarding identification of operating
segment
An entity shall disclose information to 1. An operating segment may engage in business activities for
enable users of its financial statements
which it has yet to earn revenues.
2. An entity’s post-employment benefit plans are not operating
segments.
to evaluate the nature and the economic 3. If CODM uses more than one set of segment information,
financial effects of the business environments in
other factors may identify a single set of components as
activities in which it engages which it operates.
constituting an entity’s operating segments, like
a. the nature of the business activities of each component,
b. the existence of managers responsible for them, and
Important points: c. information presented to the board of directors.
1. If an entity that is not required to apply Ind AS 108 4. If the characteristics for identifying the operating segment
chooses to disclose information about segments that does apply to more than one set of components of an organisation
not comply with Ind AS 108, it should not describe the but there is only one set for which segment managers* are
information as segment information. held responsible, that set of components constitutes the
2. If a financial report contains both the consolidated financial operating segments.
statements of a parent that is within the scope of Ind AS * The term ‘segment manager’ identifies a function, not
108 as well as the parent’s separate financial statements, necessarily a manager with a specific title. He is directly
segment information is required only in the consolidated accountable to and maintains regular contact with the chief
financial statements. operating decision maker. A CODM may also be a segment
manager for some operating segments.

© ICAI BOS(A) II. 182

SARANSH Part II: Indian Accounting Standards

5HSRUWDEOHVHJPHQWV 4XDQWLWDWLYH7KUHVKROGV&ULWHULD
An entity should report separately information about each
Whether reported revenue (both external and internal

Report separately information about an operating segment

operating segment that: Yes
sales) of an operating segment is 10% or more of the
(a) has been identified as operating segment or results combined revenue, of all operating segments?
from aggregating two or more of those segments (as per
aggregation criteria); AND No
(b) exceeds the quantitative thresholds. Whether the absolute amount of reported profit or loss
is 10% or more of the greater, in absolute amount, of
Standard specifies other situations in which separate information
(i) the combined reported profit of all operating Yes
about an operating segment should be reported. segments that did not report a loss and
(ii) the combined reported loss of all operating
Identify CODM segments that reported a loss?
No
Whether the assets are 10% or more of the combined Yes
assets of all operating segments?
Identify operating segments No
Whether the management believes that information Yes
about the segment would be useful to users of the
financial statements?
Determine reportable operating segments
No
Do not report separately information about an
operating segment
Disclose information about each reportable segments

Overall determination of reportable operating

segments based on management reporting system
$JJUHJDWLRQ&ULWHULD
Do some Yes Aggregate
Two or more operating segments may be operating segments segments,
aggregated into a single operating segment if meet all aggregation if desired
criteria?
All
No

Do some
aggregation is the segments have the segments are Yes operating
consistent with the similar economic similar in respect to segments meet the
core principle of characteristics quantitative
this Ind AS thresholds?

No
the nature of the products and services
Yes Do some
Aggregate remaining operating
the nature of the production processes All
segments, segments meet a majority
if desired of the aggregation
criteria?
the type or class of customer for their
products and services No

Do
the methods used to distribute their Yes identified
products or provide their services reportable segments
account for 75% of the
entity revenue?
the nature of the regulatory environment,
if applicable
No
These are Report additional Aggregate
reportable segment if external remaining
segments to be revenue of all segment segments into ‘all
disclosed is less than 75% of the other segments’
entity’s revenue category

© ICAI BOS(A) II. 183

SARANSH Part II: Indian Accounting Standards

0HDVXUHPHQW
Important points:
1. The information about two or more operating segments that 1. The amount of each segment item reported should be the
do not meet the quantitative thresholds may be combined to measure reported to the CODM for the purposes of making
produce a reportable segment only if the operating segments decisions about allocating resources to the segment and
have similar economic characteristics and share a majority of assessing its performance.
the aggregation criteria. 2. Adjustments and eliminations made in preparing an
2. Based on the management judgement, information about entity’s financial statements are included in the measure of
immediate preceding period reportable operating segment reporting of segment items only if that is used by the chief
shall continue to be reported separately in the current period operating decision maker.
even if it no longer meets the criteria for reportability. 3. If CODM uses only one measure, then that measure shall be
3. If a new operating segment is identified as a reportable used for reporting operating segment. However, if CODM
segment in the current period in accordance with the uses more than one measure, then the reported measures
quantitative thresholds, segment data for a prior period should be those that are most consistent with those used
presented for comparative purposes shall be restated, if in measuring the corresponding amounts in the entity’s
practicable. financial statements.

5HFRQFLOLDWLRQV
'LVFORVXUH
An entity shall provide reconciliations of all of the following:
(a) the total of the reportable segments’ revenues to the entity’s
An entity shall disclose the following for each period for which a revenue.
statement of profit and loss is presented
(b) the total of the reportable segments’ measures of profit
or loss to the entity’s profit or loss before tax expense (tax
income) and discontinued operations.
(c) the total of the reportable segments’ assets to the entity’s
General information: Information about Reconciliation assets if the segment assets are reported.
(a) factors used to reported segment of the totals (d) the total of the reportable segments’ liabilities to the entity’s
identify the entity’s profit or loss, of segment liabilities if segment liabilities are reported.
reportable segments, including revenues, (e) the total of the reportable segments’ amounts for every other
including the basis of ¾ specified reported material item of information disclosed to the corresponding
organisation revenues and segment amount for the entity.
(b) the judgements made expenses profit or loss,
All material reconciling items shall be separately identified and
by management included in segment
described.
in applying the reported assets,
aggregation criteria ie segment profit segment
(i) a brief description or loss, liabilities and
of the operating ¾ segment assets, other material 2WKHULQIRUPDWLRQWREHGLVFORVHG
segments that have ¾ segment segment
been aggregated liabilities; and items to 1. An entity should report the following geographical
and ¾ the basis of corresponding information, if possible:
(ii) the economic measurement. entity amounts (a) revenues from external customers
indicators that (i) attributed to the entity’s country of domicile and
have been (ii) attributed to all foreign countries in total from
assessed; which the entity derives revenues. If revenues from
(c) types of products external customers attributed to an individual
and services from foreign country are material, those revenues should
which each reportable be disclosed separately alongwith the basis.
segment derives its (b) non-current assets other than financial instruments,
revenues. deferred tax assets, post- employment benefit assets,
and rights arising under insurance contracts
(i) located in the entity’s country of domicile and
(ii) located in all foreign countries in total in which
Note: the entity holds assets. If assets in an individual
1. An entity shall report a measure of profit or loss for each foreign country are material, those assets should be
reportable segment. disclosed separately.
2. An entity shall report a measure of total assets and liabilities 2. If revenues from transactions with a single external customer
for each reportable segment if such amounts are regularly amount to 10% or more of an entity’s revenues, the entity
provided to the chief operating decision maker. should disclose that fact, the total amount of revenues from
each such customer, and the identity of the segment or
segments reporting the revenues.

© ICAI BOS(A) II. 184

SARANSH Part II: Indian Accounting Standards

INDIAN ACCOUNTING STANDARD (IND AS) 109:

FINANCIAL INSTRUMENTS

Classification of Financial Instruments

Financial Assets Financial Liabilities

Amortized Fair Value Fair Value Amortized Fair Value

Cost through other through profit Cost through profit
comprehensive or loss or loss
income (FVTPL) (FVTPL)
(FVTOCI)

Classification of Financial Assets

Amortized Fair Value Fair Value

Cost through other through profit
comprehensive or loss
income (FVTPL)
(FVTOCI)

Business SPPI Business SPPI Held for Residual

Model Contractual Model Contractual trading category
‘Hold-to- + cash flow ‘Hold-to-col + cash flow
collect’ test lect’ and sell test

Financial Assets Measured at

Amortized Fair value through Fair value

Cost Other Comprehensive through profit
Income or loss

If below conditions are met: • FA shall be measured at FVOCI if FA are accounted at FVTPL if:
(a) FA is held with BM whose below conditions are met: (a) Any asset which is not
objective is to hold (a) FA is held with BM whose measured at amortised
financial assets in order objective is achieved both by cost and not measured at
to collect contractual collecting contractual cash flows FVOCI; or
cash flows and selling FA If on initial recognition,
(b) Contractual terms give (b) Contractual terms give rise on (b) any asset may irrevocably
rise on specified dates to specified dates to cash flows that be designated as FVTPL
cash flows that are solely are solely payments of principal if specific criteria met.
payments of principal and interest on the principal
and interest on the amount outstanding
principal amount • Any equity instruments for which the
outstanding. entity makes an irrevocable election to
carry at fair value through OCI

© ICAI BOS(A) II. 185

SARANSH Part II: Indian Accounting Standards

Measurement of Financial Assets

Initial measurement Subsequent measurement

Fair value –
• Normally evidenced by the FA measured at FA measured at fair value
transaction price (ie, fair value Amortised cost [FVTPL/ FVOCI]
of consideration given or
received)
• Where part of consideration Fair value at initial recognition • Fair value determined
is for other than the financial periodically
• Principal repayments
instrument, then entity shall • For equity instruments – cost
• Cumulative interest using EIR*
measure fair value of the may represent fair value in
financial instrument some situations

• Interest. Dividend For FVTPL/FVOCI debt For FVOCI equity instruments

recorded in P&L instruments– • Dividend recorded in P&L
• Gains/ losses also • Interest / Dividend • Gains / losses recorded in OCI
recorded in P&L recorded in P&L
• Gains/ losses also
recorded in P&L

The decision tree for classification of financial assets can be understood with the help of following flow chart

Debt investments Derivative investments Equity investments

Contractual cash flows solely payments of principal and interest

Pass Fail Fail Fail

Business model (BM) test (at entity level) Held for trading?
Hold to BM to collect
collect contractual Neither No
1 2 Yes
contractual cash flows 1 or 2
cash flows and sell asset

Fair value option elected? FVOCI option elected?

No Yes
No Yes
No
FVOCI FVOCI
Amortised cost (with recycling) FVPL (no recycling)

© ICAI BOS(A) II. 186

SARANSH Part II: Indian Accounting Standards

What Is Amortized Cost?

Particulars Amount
Initial Recognition (Fair value / Transaction value) XXXX
Less : Principal repayment XXXX
Less : Cumulative amortization (EIR) XXXX
Less : Impairment / un-collectability XXXX
Amortized costs XXXX

• Effective interest rate (EIR) method is used to calculate the amortized costs of a financial asset or a financial liability as well as
the allocation & recognition of interest revenue or expense in income statement.
• EIR is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial asset
or financial liability to the gross carrying amount of a financial asset or to the amortised cost of a financial liability.
The computation of EIR includes all cash flows between the parties in the contract e.g. Fees, transaction costs, premium or
discounts.
• Transactions costs are the incremental costs that are directly attributable to the acquisition or issue of any financial assets or
liability.

Accounting For Transaction Costs For The Purpose Of Effective Interest Rate Method

Fees that are integral part of effective interest rate Fees that are not an integral part of effective interest rate

(a) Origination fee received by the entity relating to the (a) Fee charged for servicing a loan;
creation or acquisition of a financial asset. Such fees may
include compensation for activities such as evaluating the
borrower's financial condition, evaluating and recording
guarantees, collateral and other security arrangements,
negotiating the terms of the instrument, preparing and
processing documents and closing the transaction. These
fees are an integral part of generating an involvement with
the resulting financial instrument.

(b) Commitment fee received by the entity to originate a (b) Commitment fee to originate a loan when it is unlikely
loan where it is probable that the entity will enter into a that a specific lending arrangement will be entered
specific lending arrangement. These fees are regarded as into;
compensation for an ongoing involvement with the
acquisition of a financial instrument. If the commitment
expires without the entity making the loan, the fee is
recognised as revenue on expiry.

(c) Origination fee paid on issuing financial asset measured (c) Loan syndication fee received by an entity that arranges a
at amortised cost. These fees are an integral part of loan and retains no part of the loan package for itself (or
generating an involvement with a financial liability. An retains a part at the same effective interest rate for compa-
entity distinguishes fees and costs that are an integral part rable risk as other participants).
of the effective interest rate for the financial liability from
origination fees and transaction costs relating to the right
to provide services, such as investment management
services.

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Financial Asset (FA) Classified as Subsequently Measured at Amortised Cost

if it meets both of following criteria:

‘Hold-to-collect’ business model test + ‘SPPI’ contractual cash flow characteristics test

Objective is to hold the financial asset in Objective is to hold the financial asset in
order to collect contractual cash flows order to collect contractual cash flows

Note: Equity instrument can never be classified at amortized costs

Examples of FA classified and accounted for at amortised cost:

• Trade receivables
• Investments in government bonds (not held for trading)
• Investments in term deposits (at standard interest rates)
• Loan receivables with ‘basic’ features

Business Model Tests

• An entity’s business model refers to how an entity manages its financial assets so to generate / realise cash
flows
• In other words, business model is concerned with whether an entity will collect contractual cash flows by
holding them to maturity or sell those financial assets or both.

• An entity is not required to perform this assessment on ‘worst case’ or ‘stress case' scenarios
• Rather, it is determined on the basis of scenarios which are reasonably expected to occur
• For example, if an entity expects that it will sell a particular portfolio of financial assets only in a stress
case scenario which is not likely to occur, the entity will not consider such scenario to determine its
business model.

An entity may have one of the following models for its debt instruments :

(a) Hold to collect (b) Hold to collect contractual cash (c) Other business model –
contractual cash flows: flows and selling financial assets: Actively buying & Selling :

An entity holds • In this type of business model, the entity’s key • In this business model, an entity
financial assets to management personnel have made a decision manages its financial assets with the
collect contractual that both collecting contractual cash flows objective of realising cash flows
cash flows till and selling financial assets are integral to through the sale as against realizing
maturity. That is, the achieve the objective of the business model. contractual cash flows.
entity manages the • Consider that an entity anticipates capital • The entity makes decisions to hold /
assets held within the expenditure in a few years. The entity invests sell the investment based on an
portfolio to collect its excess cash in short and long—term asset's fair values and manages its
those particular financial assets so that it can fund the financial assets to realise their fair
contractual cash expenditure when needed. Many financial values.
flows. assets have contractual lives which exceed the • In this case, the entity’s objective
entity’s anticipated investment period. Hence, will typically result in an active
the entity will hold financial assets to collect buying and selling. This business
the contractual cash flows and, when an model results in measurement as at
opportunity arises, it will sell the financial FVTPL.
assets to reinvest cash in other financial or
non-financial assets with a higher return.

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SPPI TEST

Contractual terms give rise to cash flows that are Solely Payments of Principal and Interest on the principal amount
outstanding

Contractual cash flows consistent with a basic lending arrangement

Interest element – Consider factors like:

• Time value of money
• Credit risk
• Liquidity
• Profit margin
• Service or administrative costs.

Interest rate can be fixed or floating, zero /any other interest rate

Contractual cash flows linked to features such as changes in equity or commodity prices, would not pass the SPPI test
because they introduce exposure to risks or volatility

SPPI Test will be met if there is a prepayment penalty i.e. additional compensation for early termination or extension of
contract

Features consistent with SPPI Test Features not consistent with SPPI Test
Prepayment option Options, forward and swaps
Fixed / variable rate of interest Conversion options
Caps, floors, collars

Financial Assets Classified as Fair Value Through OCI (FVOCI)

Financial asset (FA) is measured at FVOCI

if it meets both of following criteria:

‘Hold-to-collect and sell’ business

model test + ‘SPPI’ contractual cash flow characteristics test
-characteristics test

Objective is achieved by both holding the financial Contractual terms give rise to cash flows that are
asset in order to collect contractual cash flows and Solely Payments of Principal and Interest (SPPI) on
selling the financial asset the principal amount outstanding.

Intention of the entity is to sell the instrument before the investment matures.

Examples of FA classified and accounted for at FVOCI:

• Investments in government bonds where the investment period is likely to be shorter than maturity
• Investments in corporate bonds where the investment period is likely to be shorter than maturity

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FVOCI – Debt Instruments – Accounting Requirement

For Debt instruments classified as FVOCI, accounting requirements are as follows:

[Link] Nature of Item Accounting treatment

1 Interest income To be recognised in profit or loss using the effective
interest rate method
2 Other changes in the carrying amount on To be recognized in OCI
re-measurement to fair value
3 when the related financial asset is Cumulative fair value gain or loss recognised in OCI
derecognised is recycled to profit or loss.

• For debt instruments that are classified as FVOCI, entities will need to track both the amortised cost and fair value
• The amounts recorded in profit or loss will reflect amortised cost and the balance sheet will reflect the fair value of
the financial asset

FVOCI – Equity Instruments – Accounting Requirement

Default Approach –
• Ind AS 109 requires all equity investments to be measured at fair value
• All changes in fair value to be recognised in profit or loss

FVOCI category option – Equity investments (not held for trading)

• Entities can make an irrevocable election at initial recognition to classify the instruments as at FVOCI
• Such option is available instrument by instrument i.e. (item by item)
• All subsequent changes in fair value being recognised in OCI
• Dividends received on equity investments to be recognised in profit or loss

Financial Assets Classified as Fair Value Through PL (FVTPL)

Fair value through profit or loss (FVTPL) is the residual category in Ind AS 109

Financial asset (FA) classified and measured at FVTPL if FA is:

• A held-for-trading financial asset
• A debt instrument that does not qualify to be measured at amortised cost or FVOCI
• An equity investment which the entity has not elected to classify as at FVOCI

Examples of FA classified and accounted for at FVTPL are:

• Derivatives that have not been designated in a hedging relationship, e.g.:
- Interest rate swaps
- Commodity futures/option contracts
- Foreign exchange futures/option contracts
• Investments in shares that the entity has not elected to account for at FVOCI
• Contingent consideration receivable from the sale of a business

Under Ind AS 109, consideration is first given to whether a financial asset is to be measured at amortised cost and
FVOCI and, if it is not, it will be measured at FVTPL

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Classification of Financial Liabilities

Amortized Fair Value through

Cost profit or loss (FVTPL)

Default Residual
category Category

Held for Entity elects to

trading measure at FVTPL
(using fair value option)

Financial liability is classified into two categories:

Category Main use Examples
Amortised Cost • Trade payables
(Default category) All liabilities not in the below category
• Bank borrowings
Fair value through • Financial liabilities that are held for • Derivatives eg. Interest rate swaps,
profit or loss trading (including derivatives). Commodity futures/option contracts
• Financial liabilities that are designated as • Contingent consideration payable
FVTPL the entity on initial recognition. arising from one or more
• Contingent consideration recognised by business combinations.
an acquirer in a business combination

Initial Recognition

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

Initial Measurement

• On initial recognition, financial assets or financial liabilities are measured at FAIR VALUE.
• If the financial assets or financial liabilities are not recognized at fair value, transaction costs that are directly attribut-
able to the acquisition or issue of the financial asset or financial liability are adjusted against the fair value

What is Transaction Cost?

Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial
instrument.

Examples of costs that qualify as transaction costs Examples of costs that do not qualify as transaction costs
Fees and commissions paid to agents, advisers, brokers Debt premiums or discounts
and dealers
Levies by regulatory agencies and securities exchanges Financing costs
Transfer taxes and duties Internal administration costs
Credit assessment fees and registration charges

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Initial Measurement & Transaction Costs – Financial Assets & Liabilities

Financial asset Initial measurement Transaction costs

At amortized cost Fair value Capitalize
At fair value through OCI Fair value Capitalize
At fair value through profit or loss Fair value Expense

Financial liability Initial measurement Transaction costs

Amortized cost Fair value Deduct from the amount originally recognized
At fair value through profit or loss Fair value Expense

Subsequent Recognition of Financial Assets

Amortized Cost FVOCI FVTPL

• Amortized Cost • Change in FV is • Change in FV is

• Interest / Dividends recognized in OCI recognized in PL
to be recognized in • Interest / Dividends • Interest / Dividends
Profit or loss to be recognized in to be recognized in
Profit or loss Profit or loss

Subsequent Recognition of Financial Liabilities

Amortized Cost FVTPL

Amortized Cost Fair Value

• Change in the FV is
charged to PL

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The classification and measurement of financial instruments

are summarized as below:

Financial Assets Financial Liabilities

Classification Amortised FVTOCI FVTPL Amortised FVTPL

Cost Cost

Basis of Classification • BM test to • BM test to • Held for • Default • If held for

collect collect & sell trading (SPPI criterial trading
• SPPI test • SPPI test or BM test fail) • Entity elects
FVTPL
(using fair
value option)

Initial recognition • Fair Value • Fair Value • Fair Value • Fair Value • Fair Value • Fair Value

Subsequent recognition • Amortised • Fair Value • Fair Value • Amortised • Fair Value • No Re-
Cost Cost measurement

Reclassification of Financial Assets

An entity shall reclassify financial assets, only if the entity changes its business model for managing those financial
assets

Such changes are determined by the entity's senior management as a result of external or internal changes
and must be significant to the entity's operations and demonstrable to external parties

Accordingly, a change in an entity's business model will occur only when an entity either begins or ceases to
perform an activity that is significant to its operations; for example, when the entity has acquired, disposed of
or terminated a business line

Such changes are expected to be very infrequent

Examples of a change in business model include the following:

(a) An entity has a portfolio of commercial loans that it holds to sell in the short term. The entity acquires a
company that manages commercial loans and has a business model that holds the loans in order to collect
the contractual cash flows. The portfolio of commercial loans is no longer for sale, and the portfolio is now
managed together with the acquired commercial loans and all are held to collect the contractual cash flows.
(b) A financial services firm decides to shut down its retail mortgage business. That business no longer accepts
new business and the financial services firm is actively marketing its mortgage loan portfolio for sale.

Following are not changes in business model:

(a) A change in intention related to particular financial assets (even in circumstances of significant changes in
market conditions);
(b) Temporary disappearance of a particular market for financial assets;
(c) A transfer of financial assets between parts of the entity with different business models.

A change in the objective of the entity's business model must be effected before the reclassification date

If an entity reclassifies financial assets, it should apply the reclassification prospectively from the reclassification date

The entity should not restate any previously recognised gains, losses (including impairment gains or losses) or
interest

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Reclassification Of Financial Assets – Accounting

Original Revised Accounting treatment

Classification Classification
Amortised FVTPL • Fair value is measured at reclassification cost date
Cost • Difference between previous amortized cost and fair value is recognised in
P&L

FVTOCI • Fair value is measured at reclassification cost date.

• Difference between previous amortised cost and fair value is recognised in
OCI
• No change in EIR due to reclassification.
FVTPL Amortised • Fair value at reclassification date becomes its new gross carrying amount
Cost • EIR is calculated based on the new gross carrying amount

FVTOCI • Fair value at reclassification date becomes its new carrying amount
• No other adjustment is required

FVTOCI Amortised • Fair value at reclassification date becomes its new amortised cost
Cost carrying amount
• However, cumulative gain or loss in OCI is adjusted against fair value.
Consequently, the asset is measured as if it had always been measured at
amortised cost

FVTPL • Assets continue to be measured at fair value

• Cumulative gain or loss previously recognized in OCI is reclassified to
P&L at the reclassification date

Reclassification of financial liability is not allowed

Accounting for Instruments Exchanged at Off Market Terms

Initial measurement

Instrument at market terms Instrument at off-market terms

Transaction price Determine fair value of financial instrument

If FV based on Level 1 input or valuation technique Any other basis

that uses only data from observable markets

Difference between Difference between FV & transaction price recognized as

FV and transaction price (i) asset (if it qualifies to be);
recognized in P&L (ii) otherwise amortised to P&L

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Impairment- Financial Instruments

General Approach Simplified Approach

• In General Approach, impairment loss is recognized • This approach does not require an entity to track the
based on either 12 month ECL or lifetime ECL. changes in credit risks.
• Impairment loss will be lower in 12 month ECL as it • Each entity recognizes the impairment loss based on
focusses only on the probability of default within lifetime ECL at each reporting date right from its
next 12 months as compared to lifetime ECL as it initial recognition.
focusses on probability of default over life the life of • This approach is mandatory for Trade receivables
an instrument. that do not contain a significant financing
• This method depends whether there has been a component.
significant increase in credit risk.
• One needs to track the change in credit rating /
quality.

Scope and variation of the expected credit loss model

General Simplified
Scope of ECL requirements
approach approach
1. Ind AS 109 Financial Instruments
• Trade receivables that do not contain a significant financing component
• Trade receivables that contain a significant financing component Policy election at entity level
• Other debt financial assets measured at AC or at FVOCI
• Loan commitments and financial guarantee contracts not accounted for at FVPL

2. Ind AS 115 Revenue iron Contracts with Customers

• Contract assets that do not contain a significant financing component
• Contract assets that contain a significant financing component Policy election at entity level
3. Ind AS 116
• Lease receivables Policy election at entity level

What is a credit loss allowance?

Discounted value of
Amount of Contractual cash
Credit loss = flows that are due - cash flows that the
entity expects to
to an entity
receive

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General Approach

Stage 1 Stage 2 Stage 3

12-month ECL Lifetime ECL

Loss allowance Credit losses that result from

updated at each default events that are
reporting date possible within the next 12
months

Credit risk has increased significantly

since initial recognition
Lifetime ECL whether on an collective basis
criterion
+
Credit-impaired

Interest Effective Interest Rate EIR on gross carrying EIR on amortised cost
revenue (EIR) on gross amount
(gross carrying amount
recognised carrying amount less loss allowance)

Credit Risk has Credit Risk has Financial asset

not increased increased is credit
Significantly Significantly impaired

Change in credit risk since initial recognition

Improvement Deterioration

Three Stage Model for Impairment

Stage 1 Stage 2 Stage 3

Particular
Initial Significant increase Credit
Recognition in credit risk Impaired

Credit Risk Low Moderate to High Significant

ECL Model 12 Month ECL Life-time ECL Life-time ECL

Interest recognition Interest on gross Interest on gross Interest on net

recognition recognition carrying amount

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What is a ‘significant’ increase in credit risk?

Interpretation of ‘significant’

Original credit risk at initial recognition Expected life or term structure

• Change in absolute probability of default (PD) • Risk of a default occurring increases with the
occurring is more significant for financial expected life of the financial instrument
instruments with lower initial credit risk as • PD will decrease less quickly over time for
compared to financial instrument with higher initial instrument with significant payments obligations
risk of default occurring close to maturity

Factors or Indicators of Change in the Risk of a Default Occurring

Credit spread (e.g., Operating results Business, financial or

credit default swap) economic conditions

Credit rating (internal Regulatory, economic

or external) or technological
Factors or indicators of
change in the risk of a environment
Rates or terms (e.g., default occurring
covenants, collateral)
Collateral, guarantee
or financial support, if
Credit risk management Payment status this impacts the risk of
approach and behaviour a default occurring

Simplified Approach: Provision Matrix

According to the simplified approach, for trade receivables and contract assets that do not contain a significant
financing component, an entity shall always measure loss allowance at an amount equal to lifetime expected
credit losses

A provision matrix could be used to estimate ECL for these financial instruments

For example, an entity may set up the following provision matrix based on its historical observed default
rates, which is adjusted for forward-looking estimates:
• non-past due: 0.3% of carrying value
• 30 days past due: 1.6% of carrying value
• 31-60 days past due: 3.6% of carrying value
• 61-90 days past due: 6.6% of carrying value
• more than 90 days past due: 10.6% of carrying value

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Probability of Default

Expected credit loss (ECL) = EAD * PD * LGD

Exposure at default (EAD) will be the gross amount of debt financial asset or borrowing

Probability of default (PD) is the likelihood that a loan will not be repaid and will fall into default. It must be
calculated for each borrower. The credit history of the borrower and the nature of the investment must be
taken into consideration when calculating PD

Loss given default (LGD) is the fractional loss due to default

LGD = 1 – Recovery Rate (RR)

Recovery Rate (RR) is defined as the proportion of a bad debt that can be recovered

Derecognition of Financial Assets

Derecognition refers to the timing of removing a financial asset from the balance sheet

Process

Determine whether the de-recognition principles below are

applied to a part or all of an asset (or group of similar assets)

Yes
Have the rights to the cash flows from the asset expired Derecognise the asset
No

Yes Has the entity transferred its contractual rights to receive the
cash flows from the asset?
No
Has the entity assumed an obligation to pay the cash flows from No Continue to recognise
the asset under pass-through arrangement the asset
Yes
Yes
Has the entity transferred substantially all risks and rewards? Derecognise the asset
No
Yes Continue to recognise
Has the entity retained substantially all risks and rewards?
the asset
No
No
Has the entity retained control of the asset? Derecognise the asset
Yes
Continue to recognise the asset to the extent of the entity's
continuing involvement

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Derecognition of Financial Liabilities

An entity shall remove a financial liability (or a part of a financial liability) from its statement of financial
position when, and only when, it is extinguished - ie when the obligation specified in the contract is discharged
or cancelled or expires

A financial liability (or part of it) is extinguished when the debtor either:
(a) Discharges the liability (or part of it) by paying the creditor, normally with cash, other financial assets, goods
or services; or
(b) Is legally released from primary responsibility for the liability (or part of it) either by process of law or by the
creditor.

Legal release by creditor

A debtor can derecognise a liability can only if the creditor legally releases the debtor from the liability

Accounting for an Extinguishment of Financial Liability

1. The difference between the carrying amount of a financial liability (or part of a financial liability)
extinguished or transferred to another party and the consideration paid, including any non-cash assets
transferred or liabilities assumed, shall be recognised in profit or loss
2. Any costs or fees incurred on extinguishment shall be charged to profit & loss

Exchange or Modification of Financial Liability

Debt Restructuring
An exchange between an existing borrower and lender of debt instruments with substantially different terms
shall be accounted for as:
(a) A extinguishment of the original financial liability, and
(b) Recognition of a new financial liability.

The substantially different terms are as below:

(A) (B)
Present value of:
Is greater
• cash flows under the new LESS Discounted present value of
than or equal
terms, the remaining cash flows of
to 10% of (B)
• any fees paid the original financial liability
• net of any fees received

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Accounting treatment –
Costs of fees incurred on extinguishment or Modification

Scenario Accounting

Where exchange of debt instruments or modification Any costs or fees incurred are recognised as part of the
is accounted for as an extinguishment gain or loss in PL on the Extinguishment

Where exchange of debt instruments or modification Any costs or fees incurred shall be adjusted in the
is not accounted for as an extinguishment carrying amount of the liability and are amortised over
the remaining term of the modified liability

Exchange or Modification of Financial Liability – Accounting Treatment

If the 10% test is passed, principle of “extinguishment accounting” are applied, that is:

1. De-recognition of the existing liability.

2. Recognition of the new or modified liability at its FAIR VALUE (net of any fees incurred directly related to
the new liability). Fair value of the new or modified liability is estimated based on the expected future cash flows
of the modified liability, discounted using the interest rate at which the entity could raise debt with similar
terms and conditions in the market.

3. Gain or loss on extinguishment : Charge to PL.

4. Recognising any incremental costs or fees incurred for modification (and not for the new liability), and any
consideration paid or received, in profit or loss.

5. EIR Accounting for New Loan : Calculating a new effective interest rate for the modified liability, which is then
used in future periods.

Modification of Financial Liability – Accounting Treatment

Two alternate approaches are possible: Approach 1 and Approach 2

Approach 1: Recognition of gain or loss on date of modification

1. Under this approach, the difference between:
(a) discounted present value of the remaining cash flows of the original financial liability, and
(b) discounted present value of the remaining cash flows of the new financial liability both computed using
original effective interest rate, is recognized in profit or loss.
2. In addition, any fees or costs incurred will also be recognized in profit or loss.

Approach 2: Amortisation of gain or loss on date of modification

Under this approach,
1. Fees or costs incurred are netted against the existing liability;
2. the effective interest rate is recalculated. This is the rate which discounts the future cash flows as per modified
contractual terms to the adjusted carrying amount mentioned above
3. the adjusted effective interest rate is used to determine the amortised cost and interest expense in future periods

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Derivatives and Embedded Derivatives

DERIVATIVE DEFINITION

Three characteristics

Fair value changes in No or little initial net Settled at a future date

response to changes investment
in one or more
underlying variables

• Measured at Fair Value

• Any change in Fair value needs to be recognised in PL (except for hedge accounting)

Examples of derivatives and underlying

Type of contract Main variable

Interest rate swap Interest rate

FX forward Foreign exchange rate

Commodity option Commodity price

Credit default swap Credit risk

Purchased or written stock call or put option Equity price

Accounting Treatment of Derivative

All derivatives are measured at fair value with changes in fair value being recognized in profit or loss for the
period, except derivatives that qualify as hedging instruments

Particulars DR / CR Amount
Derivative Assets (BS) Dr XXXX
To income on account of derivative (PL) Cr XXXX
(Derivative assets is recorded in case of MTM gain)

Expense on account of derivative (PL) Dr XXXX

Derivative Liability (BS) Cr XXXX
(Derivative liability is recorded in case of MTM loss)

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Embedded Derivatives

Hybrid Instrument

Embedded
Derivative

Host Contract

Host Contract may be Debt , Equity, Executory Contract, Lease, Insurance

Embedded derivative may be Interest rate index, Commodity Index, Equity index

An embedded derivative is:

• a component of a hybrid contract
• that also includes a non-derivative host
• with the effect that some of the cash flows of the combined instrument vary in a way similar
• to a stand-alone derivative.

An embedded derivative causes:

• Some or all of the cash flows that otherwise would be required by the contract
• to be modified according to a specified interest rate, financial instrument price, commodity price, foreign
exchange rate, index of prices or rates, credit rating or credit index, or other variable,
• provided in the case of a non-financial variable that the variable is not specific to a party to the contract.

Host Embedded
Particulars
Contract Derivative
1 Company A holds a bond which is convertible into the ordinary shares Bond Asset Conversion option
of Company B of Bond into shares

2 Company A enters into a lease contract with an inflation factor such Lease contract Adjustment to RPI
that each year, rentals are adjusted for changes in Risk Price Index (RPI)

3 Company A sells PPE to Company B of USD 1 lac. Both the Companies Sale Contract INR / USD foreign
are located in India. Exchange

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Separation of Embedded Derivatives from Host Contract

Does the hybrid contract contain a host that is an asset within the scope of Ind AS 109?

No – separate embedded Yes – don’t separate

derivatives that fulfil certain embedded derivatives (Refer
conditions as below note 1 below)

Economic characteristics and Entire hybrid instrument is

risks of the embedded Yes measured at fair value
derivative are closely related through profit or loss
to those of the host? (Refer note 2 below)

No

A separate instrument with

the same terms as the No
embedded derivative would
meet the definition of a
derivative?

Yes

Is the hybrid contract Yes

measured at fair value
through profit or loss?

No

Embedded derivative is
separated and accounted for
separately (refer section
below)

Note 1:
This implies that embedded derivatives are permitted to be separated from only such hybrid contracts that contain a
host which is either a (a) financial instrument classified as financial liability or equity or compound; or (b) contract
for purchase or sale of a non-financial item.

Note 2:
If both the host and embedded derivative have economic characteristics of an equity instrument, the hybrid
instrument is not carried at fair value through profit or loss. In other words, this measurement category is applicable
only for host contracts which are financial liabilities.

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Accounting For Embedded Derivatives

Is the hybrid contract designated at fair value through profit

or loss in its entirety (paragraph 4.3.5 of Ind AS 109)?

No Yes

Can the fair value of Yes Measure embedded Don’t separate

embedded derivative be derivative and allocate embedded
measured reliably? residual to host derivatives

No

Is the entity able to Yes Is the entity able to Entire hybrid

measure the fair value of measure the fair value of instrument is measured
the hybrid contract? the host contract? at fair value through
profit or loss
No Yes

Fair value of embedded

derivative = Fair value of
hybrid contract minus
fair value of host
contract

Regular Way Purchase or Sale of Financial Assets

Ind AS 109 defines a regular way purchase or sale as,

• a purchase or sale of a financial asset
• under a contract
• whose terms require delivery of the asset
• within the time frame
• established generally by regulation or convention in the marketplace concerned

Regular way purchase or sale of financial assets

Trade date accounting Settlement date accounting

Trade date = date that an entity commits Settlement date = date that an asset is
itself to purchase or sell an asset delivered to or by an entity

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Regular Way Purchase or Sale of Financial Assets – Examples

• For instance, on the Bombay Stock Exchange in India, all transactions in all groups of securities in the Equity
segment, Fixed Income securities and Government securities are settled on “T+2” basis.

• In this case, “T” is the trade date and “T+2” is the settlement date i.e. exchange of monies and securities between
the buyers and sellers respectively takes place on second business day (excluding Saturdays, Sundays, bank and
Exchange trading holidays) after the trade date.

• It follows that if a contract is entered into with a broker for purchase or sale of securities which is normally
traded on the Bombay Stock Exchange, with a settlement period that differs from the norms mentioned above,
it would not be regarded as a regular way purchase or sale.

Trade Date & Settlement Date Accounting

Books Trade Date Settlement Date

In the books Initial Recognition : • Account for any change in the fair value
of buyer • Recognises : Financial asset and of the asset to be received during the
Financial liability on the trade date period between the trade date and the
itself. settlement date.

Subsequent Recognition : Classification wise accounting:

• Subsequently measures the financial • Amortized costs: change in value is not
asset in accordance with its recognised;
classification category. • FVTOCI : FV changes to be recognized
in OCI .
• PVTPL : FV changes to be recognized
in PL.

In the books • Seller derecognises the financial asset. • Derecognises financial asset at the
of seller settlement date.
• Recognises any gain or loss on sale on • Does not recognise any fair value
the trade date. changes between the trade date and
settlement date.

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INDIAN ACCOUNTING STANDARD (IND AS) 110:

CONSOLIDATED FINANCIAL STATEMENTS
MULTIPLE STANDARDS FOR GROUP ACCOUNTS

GROUP ACCOUNTS/CONSOLIDATION

Ind-AS-27 Ind-AS-28 Ind-AS-103 Ind-AS-110 Ind-AS 111

Separate financial Investment in Business Consolidated Joint Arrangement
statements associates combination financial
Statements

- Presenting -Accounting for - Define business -Control -Joint ventures

separate financial associates combination -Consolidated -Joint operations
statements -Equity method -Recognition financial
(investor) -Measurements Statements
-Procedures
-Investment entities

Ind-AS-112: Disclosures of interests in other entities

TYPES OF INVESTMENTS

Subsidiary Associate Joint Arrangement Other Investments

Criteria Control Significant influence Joint Control Not applicable

Share (Guidance only) >50% 20%+ Not Applicable <20%

Accounting Acquisition Method Equity Method Depends on Type Financial Instrument

(Full Consolidation) Accounting Ind-AS 109

IND AS 110: CONSOLIDATED FINANCIAL STATEMENTS

TYPES OF CONTROL –OUTRIGHT CONTROL AND JOINT CONTROL

Control can be

1 Outright Control 2 Joint Control

11
AS -1
ly Ind
App

Apply • Using Ind AS-110 Principles:

Ind-AS 110 • First, decide, if there is a control?
• Then decide, is the control jointly exercised?
• If Joint Control – then, it is a Joint Arrangement
• Classify between Joint Venture and Joint Operation

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TYPES OF CONTROL – DE FACTO CONTROL

De Facto Control represents a situation, where Power (as defined in

Ind-AS 110) exists with less than 50% of the voting rights

De Facto Example:
Control • Parent owns 20% of voting rights and the balance 80% voting rights
are spread over 2000 shareholders across the country
• There exists a contractual arrangement to direct, despite having just
20% voting rights

Control is possible without majority of voting rights

INTERACTION BETWEEN IND-AS 110,IND-AS 111, IND-AS 112 AND IND-AS 28

Outright
YES NO
Control

Joint
YES NO
Control?

Which type of Joint Significant influence

Agreement
YES NO

Joint Operation Joint Venture

Consolidate Accounts of assets Equity Accounting Ind Financial Assets

Ind AS 110 liabilities etc. Ind AS 111 AS 28 Accounting Ind AS 109
Apply Ind AS 107
Apply Ind AS 112 Disclosures
Disclosures

OBJECTIVE OF IND AS 110

Objective of To establish principles for preparation and presentation of:

Ind AS 110 - Consolidated Financial Statements (CFSs) when an entity controls another entity

Objective Ind AS 110

Consolidate Financial
Control Accounting requirement Investment entities
statements

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SCOPE OF IND AS 110

More specifically Ind AS 110

requires an entity (a parent) that controls one or more other entities (subsidiaries) to present
consolidated financial statements (CFS)

defines the principle of control and establishes Control as the basis for consolidation

SCOPE OF provides guidance on how to interpret or apply control

IND AS
110
sets out how to identify whether the investor controls the investee

sets out the accounting requirements for the preparation of CFS

defines an investment entity and sets out an exception to consolidating particular

subsidiaries of an investment entity

Ind AS 110 does not cover the following

Covered by

1. Business Combination and initial recognition of goodwill Ind AS 103

2. Accounting for investments without having control Ind AS 111, Ind AS 28, Ind AS 109

3. Disclosures Ind AS 112

KEY DEFINITIONS

Parent Parent is an entity that controls one or more subsidiaries

Subsidiary Subsidiary is an entity that is controlled by another entity

Associate is an entity, over which an investor has significant influence and which is
Associate
neither a subsidiary nor an interest in joint venture

Joint
An arrangement of which two or more parties have joint control
Arrangement

Consolidated CFSs are the financial statements of a Group in which (1)assets (2)liability (3)equity
Financial (4)income (5)expenses and (6)cash flows of the parent and the subsidiary – are present-
Statements (CFS) ed as those of a single economic activity

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(a)Existing rights that give the (b)current ability to direct the c) relevant activities

Assume that:
• CT Corp owns 40% shares of ABSPL
• ABSPL’s shares are structured in such a way that every share has one voting
right
• CT Corp also owns options (that are exercisable at any stage) under which CT
Corp can obtain another 20% share capital of ABSPL
• At the reporting date, CT Corp has the financial ability and the intention to
exercise these options and acquire 20% shares of ABSPL
Power
Does CT Corp controls ABSPL?
YES
In this case:
• Power over investee Voting Rights + Potential Voting Rights
• Exposure to Variability:
o CT Corp’s profit will depend on ABSPL’s financial performance (Equity Shares)
• Ability to Affect the Outcome:
o The voting rights give CT Corp the ability to control decisions made by the
BODs, viz. the relevant activities are affected by CT Corp’s

Power arises from right which can be (a) voting rights (b) potential voting rights (c) arising from
contractual arrangements or (d) a combinations of these rights

Activities of the investee that significantly affect investee’s returns

Relevant • Assume that a structured entity (SE) is formed to manage debts of a financial
Activities institution including activities such as (a) restructuring of debts (b) debt collection
(c) debt management (d) legal process relating to debt management etc.
• In this case, the party which controls the above activities actually control the SE

If more than one investors direct different relevant activities, identify which investors can
direct that activities that most significantly affect return

Exposure to Link between

Control = Power + variability in + power and
return return

Removal
Rights to deprive the decision-maker of its decision-making authority
Rights

Participative Participative rights generally do not provide the holder of such rights with power,
Rights but may preclude another party from having power

Rights designed to protect the interest of the party holding those rights, without giving
that party power over the entity to which the rights relate

Protective • When entering into a contract, there may be certain T&C that protect the interest
Rights of the party under certain circumstances
• These rights apply only under those circumstances
• Therefore, protecting rights are not considered as substantive in all circumstances,
and hence are not seen as Power

Protective Rights held by others can’t prevent control

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• Substantive rights are that are exercisable when decisions about the
relevant activities of the investee need to be made
• The investor must have the current ability to direct relevant activities
• The holder of these rights has the practical ability to exercise them;
they are not merely in the nature of protective rights

Key factor to consider-to determine if the rights are substantive in nature

Do several parties need to agree

Are their barriers that prevents
Substantive for the right to become
holder from exercising the rights?
Rights exercisable or operational

Would party holding the rights Practical ability to

benefits from their exercise exercise the rights

• Only substantive rights are considered in assessing Power

• Determination of whether the rights are substantive calls for judgement and is
based on considering all facts and circumstances

Potential • Potential Voting Rights are considered in assessment of power only if they are
Voting substantive
Rights
Purpose and Design also considered

• Potential voting rights that are substantive-can give the holder power
• Determining whether potential voting rights are substantive require judgement !

DEFINITION OF “CONTROL” UNDER IND-AS 110

An investor controls an investee when the investor:

• is exposed to (or, has right to) variable returns from its involvement with the
Control investee
• has the ability to affect those returns
• through its power over the investee
idiar y
a subs
Here investee
is the

Three Elements of Control, which are the basis of consolidation under Ind-AS 110

Control = 1 Power + 2 Variability of returns + 3

Link between power
and variability

Power is signified by Returns that are not fixed and Ability to use power to
existing (substantive) rights have the potential to vary – affect returns
that give the current ability with the performance of the
to direct the relevant activities investee
of the investee

To have power, it is necessary for the investor to have (a) existing (substantive) rights that give it (b)
current ability to direct (c) the relevant activities (that significantly affect the investee’s returns)

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The new control model under Ind-AS 110 is based on the existence of three elements of control:

Control = 1 Power + 2 Variability of returns + 3

Link between power
and variability

When all of these three elements of control are present, then an investor is considered to control an
investee and consolidation is required

An Investor Consider Potential Potential Voting When one or more of the

takes into Voting Rights only if Rights need to be elements is not present, an
account all facts they are substantive currently exercisable investor will not consolidate,
and (Consider factors and must take into but instead be required to
like exercise price, account the determine the nature of its
circumstances to
date, procedures etc) economic reality viz. relationship with the
assess whether
control exists Is it practically to investee (eg. Significant
Control is re
assessed, if there is a exercise - influence, joint control) and
Protective Rights change in the considering will follow appropriate
don’t provide underlying facts & financial and accounting under the
Control circumstances intention to exercise requisite Ind AS

SINGLE CONTROL MODEL… UNDER IND-AS 110

Control = 1 Power + 2 Variability of returns + 3

Link between power
and variability

Control assessed on continuous basis

Re-assessment of control is required if facts and circumstances
indicate that ANY of THREE key elements have CHANGED

Ind-AS 110 requires extensive use of judgment; and

Ind-AS 112 requires disclosure of such areas of judgment

• Same criteria for all entities – for determination of control

• For determining control, consider all facts and circumstances
• Temporary control does not prevent consolidation

WHAT IS POWER ?
Do
e
t
no d Power is the (a) existing right – that give an investor Pro s not
ed e tec aris
Ne ercis (b) current ability to direct (c) the relevant activities tive e fr
ex Rig om
be Power arises from substantive rights to direct the relevant activities hts

• Rights depend on the (a) nature of activities, (b) legal structure and (c) the
manner in which decisions are taken
Rights • Can arise from voting rights, potential voting rights, contractual rights, or a
combination
• Evaluate the impact of various rights and their interaction

• Practical ability to exercise the right

Substantive • Current ability to direct relevant activities
• Rights need not be actively exercised (a passive majority owner has the power)

• These are activities that significantly affect the returns

Relevant
• Examples include (a) purchases/sales, (b) financial assets management,
Activities
(c) acquisition/disposal of investments, (d) R&D, (e) financing etc.

Rights that are solely protective:

DO NOT provide Power and DO NOT prevent another investor from having control

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EVALUATION OF POWER

A. Assess purpose B. Determine relevant activities

and design of entity

C. Determine how relevant activities are directed

D. Determine whether
investor’s rights provide ability
to direct relevant activities E. Does entity have
power over
structured entity?
YES Directed by
Does entity own> 50% of
contracts
substantive voting rights NO YES
Directed by
contracts
NO
YES
Is there de-facto control? No Power Power

NO

YES
Do substantive potential voting
rights give controlling power?

NO

Do other contractual
agreements, or some
YES UNCLEAR
combination of contracts, Consider factors in
voting rights and potential Ind AS110. B18-B20
voting rights provide
controlling power?

NO e.g.
• Appointment of KMPS
• Verb power held by investor
No Power • Investee’s KMP are related party of
investor
• Investee is dependent on investor’s
Power funds/technology

FACTORS TO CONSIDER IN EVALUATING POWER

A. Purpose and Design of the Investee- Key questions to be asked

Purpose Identify For instance

of the • Why the invested has been formed or incorporated? An investor may form a trust
investee • What is the purpose and objective of the investee? • To carry out CSR activities; or
• Whether the purpose is to enter into new line of business? • To implement ESOP plans; or
• Whether it has been incorporated to comply with a • To provide post-employment
regulatory requirements? • employee benefits to its EEs

Design of Look at the structure of the investee as to whether

the • It is a firm, trust, listed entity, public entity, private entity, SPV etc.?
investee • It is controlled through voting rights, shareholder’s agreement or contractual arrangement?
• It is controlled through convertible instruments?
• Who takes the decision for the design and what are the investee’s exposure to risk and rewards?

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FACTORS TO CONSIDER IN EVALUATING POWER

B. and C. • How (a) operating and capital decisions (b) budget (c) appointment and
Relevant activities remuneration of KMPs etc. are made?
and how decisions • How decisions that arise only in response to specific circumstances are made?
are made w.r.t. these • If different investors have ability to direct different activities – which activities
relevant activities most significantly affect returns?

D. Current ability • Consider all substantive rights

to direct relevant • Protective vs participating rights
activities • Direct and indirect rights (financing, guarantees, operational ties)

Power can exist - even if others participates in directing the relevant activities.
For instance, other participating may have significant influence over the investee

Evidence that an investor directed activities in the past is an indicator of power, but is not conclusive

APPLYING SINGLE CONTROL MODEL UNDER IND AS 110

Identify the investee

Identify the relevant activities of the investee

Identify how decisions about the relevant activities are made

Assess whether the investor has power over the relevant activities

Assess whether the investor is exposed to variability in returns

Assess whether there is a link between power and returns

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HOW CONTROL IS ASSESSED?

Application of Single Control Model under Ind AS 110 entails several steps

1. Identify the investee (legal entity or SILO)

2. Identify the relevant activities of the investee

3. Identify how decision about the relevant activities are made

4. Assess whether the investor has power over the relevant activities

4A. Consider only substantive rights

Voting rights are relevant 4D. Rights other than

voting rights are relevant

Majority of voting rights 4D. Rights other than Consider

voting rights are relevant
Consider Purpose and design
Consider
Rights may be held Evidence of practical
by others Agreement with
ability to direct
other vote holders
Special relationship
Other contractual
agreement
Large exposure to
variability in returns
4B. Potential voting
rights

4C. De facto power

5. Assess whether the investor is exposed to variability in returns

6. Assess whether there is link between power and returns

IDENTIFY THE INVESTEE (LEGAL ENTITY OR SILO)

Control by an Investor is generally assessed @ entity level

However, in some circumstances, the assessment is made for a portion of an entity

viz’- over only specified assets and liability (i.e. a Silo)

Silo = portion
of an entity • None of the silo’s assets can be used to pay other obligations of the entity
that is treated • The Silo’s assets are the only source of payment for the silo’s liabilities and
as a deemed • Other than the silo’s creditors, no party has any rights or obligations related
separate entity to the silo’s assets or to residual cashflows from those assets

This will be the case if all the assets, liabilities and equity of that part of the investee are
ring-fenced from the rest of the entity

Note: If an Investor has control over specified assets of an investee, it treats that portion(‘silo’) of the
investee as a separate entity

Existence of silos is not confined to structured entities but is more likely to arise there

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IDENTIFY THE INVESTEE (LEGAL ENTITY OR SILO)

Legal entity • New Millennium Fund is open-ended investment

fund with two sub-funds, viz. Tech Fund and
Pharma Fund, that are cells within the legal entity
New Millennium Fund
• Assets of Tech Fund are not available to meet
liabilities of Pharma Fund, including in the event
of insolvency – and vice versa
Tech Fund Pharma Fund
• Contracts entered into each sub-fund implies that
the counterparty does not have access to the
Que: Whether Tech and assets of the other
Pharma Funds are silos?
• No liquidity assistance available from New
Yes Millennium Fund

IDENTIFY RELEVANT ACTIVITIES OF THE INVESTEE

Relevant activities are those activities that significantly affect the investor’s returns

Example of relevant activities include the following:

• Establishing operating, capital and financing policies
• Determining funding structure and obtaining funding
• Appointing, remunerating, and terminating employment of service providers or KMPs
• Researching and developing new products or processes

If two investors direct different relevant activities, identify which investor can direct the activities
that most significantly affect the investor’s returns

Also, consider and understand the purpose and design of the investee

Determination of relevant activities will often entail the following:

• Understand purpose and design of the investee
• Identify the activity that significantly affects returns
• Identify which investor can direct the activities that most significantly affect returns
• Investors’ exposure to variability of returns

IDENTIFY RELEVANT ACTIVITIES OF THE INVESTEE

Appointing Major Capital

Board Members Expenditure

Buying / Selling Relevant Acquiring / Disposing

goods and services Activities off Subsidiary

Dividend & Approving Budgets or

Remuneration Decisions Determining Funding

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IDENTIFY RELEVANT ACTIVITIES OF THE INVESTEE

Relevant Activities Key Take Away

Examples of activities that can potentially be Assess which activity most significantly
relevant activities include: affects investee’s returns, considering the
• Selling and purchasing of goods or services following factors:
• Managing financial assets during their life • Purpose and design of the investee
(including on default) • Factors that determine profit margin,
• Selecting, acquiring or disposing of assets revenue, value of the investee
• Researching & developing new products / • Effect of each investor’s decision-making
processes authority on investee’s returns
• Determining a funding structure or obtaining • Investor’s exposure to variability of returns
funding etc.

Relevant activities can change over a period of time………..need for continuous assessment…..

IDENTIFY HOW DECISIONS ABOUT RELEVANT ACTIVITIES ARE MADE

Are voting rights relevant? ( In assessing whether investors has over investee)

Yes – Voting rights are No- Voting rights are not

relevant relevant
More Complex
Investee is controlled by Investee is controlled by Cases
means of voting rights means of contractual
rights

Focus on and consider: Focus on and consider: Number of factors

Which investor has voting Rights other than voting relevant in assessing
rights sufficient to direct rights what drives power
investee’s relevant activities

How decisions about relevant activities are taken?

Determine What is the process of making decisions with respect to relevant activities?

Who is the decision maker – Shareholders / BoDs / Contractually Appointed Person?

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ASSESS WHETHER INVESTOR HAS POWER OVER RELEVANT ACTIVITIES

Are voting rights relevant? (In assessing whether investor has power over invested)

Voting Rights are relevant (4A) Rights other than voting rights are
relevant (like contractual rights)
Majority of voting rights Less than majority of
voting rights Consider
Consider
Consider • Purpose and design
Rights held by (like investor’s commitment to continued
others Agreement with operation of investee, contractual agreement
other vote holders etc.)
• Evidence of practical ability to direct
Other contractual (E.g. directing investee to enter into significant
agreements transactions for investor’s benefit)
• Special relationships
Potential voting (like De facto Agent, Investee’s operations
rights (4B) depend on investor funding or technology etc.)
• Large Exposure to variability of returns
De facto power 4(C)

Protective rights
NOT evaluated Consider only substantive rights

Note:
Only one investor can have power over the investee at a single point in time (Ind AS 11.16)

ASSESS WHETHER INVESTOR HAS POWER OVER RELEVANT ACTIVITIES

Whether the holder has the practical ability to exercise the rights?

Consider the following factors for determining the practical ability

Only
Are there barriers that prevent
Substantive
holder from exercising the rights? Do several parties need to agree
Rights
considered for the rights to become
Would party holding the rights exercisable or operational?
benefit from their exercise?

Yes

Is the right exercisable when decision about the relevant activities of an investee
need to be made?

Yes

Substantive Right

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ASSESS WHETHER INVESTOR HAS POWER OVER RELEVANT ACTIVITIES

Substantive vs. Protective Rights

Substantive Rights Protective Rights

• Substantive Rights are rights that are Protective rights are right that:
exercisable when decision on relevant • Are intended solely to protect the interest of
activities are made their holders rather than to transfer power to
• Substantive rights are existing rights, that give that party
the investor the current ability to direct the • Relate to fundamental changes in entity’s
relevant activities of the investee activities or apply only in exceptional
• A right is substantive if the holder has the circumstances
practical ability to exercise that right, when
decisions about relevant activities are made

Factors to consider is assessing whether a right is substantive, inter alia, include the following:

Are there barriers (economic or otherwise) that would prevent the holder from exercising their
rights?

• Exercise or conversion price

• Penalties that may prevent/deter exercise
• Absence of explicit mechanism allowing exercise
• Inability to obtain information required for exercise
• Legal or regulatory constraints
• Other constraints, making it unlikely for exercise of rights

Do the holders have the practical ability to exercise their rights - in cases where exercise
requires agreement by more than one investor?

Would the investor that holds the rights benefit from their exercise of conversion?

Are the rights currently exercisable or convertible?

POTENTIAL Potential Voting Rights are considered in assessment of power, only if they are
VOTING substantive (considering factors like exercise price, date, procedures, etc.)
RIGHTS

Factors for evaluating whether options are Other aspects to be considered

substantive: • Purpose and design of the instrument
• Exercise price/conversion price, relative to • Investor’s apparent expectations, motives and
market terms reasons for agreeing the terms of the
• Ability to obtain financing instrument
• Timing and length of exercise period • Combination of potential voting rights and
• Benefits, which the investor could derive from other rights (voting or contractual)
exercising these instruments (like economies • Other involvements the investor has with the
of scale, synergies etc) investee

Example
Parameters Substantive Non-substantive Depends on facts and
circumstances
Exercise Price At market (fair value) OR Deeply out-of-the-money Out-of-the-money
in-the-money
Exercise Period Currently exercisable Not exercisable Exercisable, but decisions
need to be made
Financial Ability to Exercise Holder has cash/financing Holder has no financial Holder would have to raise
readily available ability financing

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ASSESS WHETHER INVESTOR IS EXPOSED TO VARIABLE RETURNS

Variable Return Examples of Variable Returns

Exposure to variability in returns is a broader • Residual interests
concept than ownership benefits • Dividends / changes in value
• Fixed interest payments from bond (exposes
 Variability in returns is not limited to:
investor to credit /default risk of the issue)
• Distributions and changes in value of
• Remuneration for servicing assets or liabilities
investment
• Synergistic returns (like economies of scale, cost
 Also include: savings and other synergies)
• Fees • Tax benefits
• Tax benefits • Access to future liquidity
• Residual interest in net assets • Fees for exposures to loss from providing credit /
• Exposure to loss providing credit or liquidity liquidity support
support etc.
• Returns that are not available to other interest
holders e.g. the investor’s ability to use
investee’s assets… in combination with its own
to achieve economies of scale

• Exposure to variable returns is an indicator of control

• Greater the exposure – greater incentive to obtain power

• Other parties may also share in the returns ([Link])

ASSESS WHETHER THREE IS A LINK BETWEEN POWER AND RETURN

Delegated Rights – an overview

• An agent is a party engaged to act on behalf of other party (the Principal)
Delegated • A principal may delegate some or all decision-making authority to the agent
Rights • An agent does not control an investee
• All facts and circumstances must be considered
If the agent gains any benefit from the arrangement – the agent could be regarded as the “Principal” and could
then “Control” the investee
The conclusion as to whether the agent Controls and investee is to be drawn after considering all facts and
circumstances, including the following:
• Rights of the agent
• Discretion available to the agent
• Range of Decision-making authority of the agent
• Agent’s level of involvement with the investee
• Financial benefit enjoyed by the agent

LINK BETWEEN POWER AND RETURN

Ability to use Power to affect Return Ability Returns

On its own account as Principal On Behalf of Other Investors as Agent

An investor with decision-making power shall determine – whether it is a principal or an agent

An agent is primarily engaged to act on behalf of and for the benefit of others

Principal’s power may be held and exercisable by an agent, but on behalf of the principal

Only principal may have control, and not agent

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Power Power
+ +
Exposure to Exposure to
Variability in returns Variability in returns
+ +
Use of Power – primarily to Use of Delegated Power –
generate returns for itself primarily for the benefit of others
= =
Investor is a Principal Investor is an Agent

CONSOLIDATION EXEMPTION FOR INVESTMENT ENTITIES

Investment entities:
• should not consolidate controlled investments
• measure investments at FVTPL
A parent of an investment entity should consolidate all subsidiaries it controls, unless the parent itself is an
investment entity

CONTINUOUS ASSESSMENT OF CONTROL

• Reassess to determine whether the investor continue to control the investee

When to
• Reassessment must be done if facts and circumstances suggest there is a change to one /
re-assess?
more of the criteria for control

If change in market conditions affect one of the Control criteria, re-evaluate control
Consolidation of an investee shall:
• begin from the date the investor obtains control of the investee; and
• cease when the investor loses control of the investee

CONSOLIDATION PROCEDURE UNDER IND AS 110

Combine like items of assets, liabilities, equity, income, expenses and cash flows of the parent
Step 1 with those of its subsidiaries

Offset (eliminate):
Step 2 • Carrying amount of parent’s investment in subsidiary
• Parent’s portion if equity of each subsidiary

Step 3 Offset (eliminate) items related to intragroup transactions

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TRANSACTIONS WITHIN THE GROUP (CONSOLIDATION PROCEDURE)

Eliminate in full intra-group….

Balances Income and expense Dividends

Profits / losses from intra-group transactions recognized in assets are eliminated in full

Intra-group losses may indicate an impairment

OTHER KEY REQUIREMENTS RELATED TO CONSOLIDATION

Apply uniform accounting policies to all subsidiaries
(Adjustment is required, if different accounting policies followed and impact is significant)

Parent and Subsidiary to use the same reporting date unless impracticable
(Difference in period ends cannot exceed 3 months)

Significant events adjusted, even if difference in period ends is up to 3 months

• NCI is shown separately within Equity

• Losses are allocated to NCI even if NCI balance goes Negative

EXEMPTION FROM PREPARING CFS

A parent need not present Consolidated Financial Statement, If all the following conditions are met:

1 Entity is a subsidiary (wholly owned or, partially owned) and no owners object to non-consolidation
2 No debt or equity instrument traded in public market
3 Did not file and is not in the process of filing its financial statements with a regulatory organization – to issue
any class of instruments in a public market
4 The ultimate parent (or, any intermediate parent of the parent) produces a CFS that comply with Ind-AS & the
same is available for public use

Note: There is mandatory consolidation exception for an investment entity

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De facto control is a situation, where an entity that owns less than 50% of the
DE FACTO
voting rights in another entity is deemed to have control, when it has the
CONTROL
practical ability to direct relevant activities of the entity

To ascertain if… De facto control exists, consider all facts and circumstances like
• Contractual arrangements between the investor and other vote holders
• Contractual rights arising from other arrangements (such as operational or financial agreements that
may provide significant substantive rights)
• Potential voting rights of the investor and/or other investors
• Relative size of the investor’s % of vote and dispersion of the voting rights
• Size of an investor’s voting rights
- Voting rights (absolute amount and relative to other vote holders)
- Number of other vote holders that will need to act together
- Voting patterns at previous shareholders’ meetings

Note:
If after considering the above factors, it is not clear that the investor has power- then the investor does not
control the investee

ACCOUNTING TREATMENT ON LOSS OF CONTROL OF A SUBSIDIARY

If a parent loses control of a subsidiary, it shall follow the accounting treatment mentioned below:

Derecognise: Recognise: Reclassify: Recognises gain / loss:

• the assets (including • the fair value of the • to profit or loss, or • recognise any resulting
any goodwill) and consideration received transfer directly to difference as a gain or
liabilities of the • if loss of control retained earnings if loss in profit or loss
subsidiary involves a distribution required by other Ind attributable to the
• the carrying amount of of shares of the ASs, the amounts parent
any non-controlling subsidiary to owners, recognised in other
interests in the former then that distribution; comprehensive income
subsidiary and in relation to the
• any investment subsidiary (refer note 2
retained in the former below)
subsidiary at its fair
value at the date when
control is lost (refer
note 1 below)

Note 1:
The fair value at which the retained interest is recognized shall be regarded as the fair value on initial
recognition of a financial asset in accordance with Ind AS 109 or, when appropriate, the cost on initial
recognition of an investment in an associate or joint venture.

Note 2:
If a parent loses control of a subsidiary, the parent shall account for all amounts previously recognized in
other comprehensive income in relation to that subsidiary on the same basis as would be required if the
parent had directly disposed of the related assets or liabilities.

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LOSS OF CONTROL OF A SUBSIDIARY IN

TWO OR MORE ARRANGEMENTS TRANSACTIONS

In determining whether to account for the arrangements as a single transaction, a parent shall consider all the terms
and conditions of the arrangements and their economic effects. One or more of the following indicate that the parent
should account for the multiple arrangements as a single transaction:

They are entered into at the same time or in contemplation of each other.

They form a single transaction designed to achieve an overall commercial effect

The occurrence of one arrangement is dependent on the occurrence of at least one other arrangement.

One arrangement considered on its own is not economically justified, unless it is considered together with
other arrangements. (e.g. when a disposal of shares is priced below market and is compensated for by a
subsequent disposal priced above market)

DISCLOSURES RELATED TO INTERESTS IN SUBSIDIARIES

An entity shall disclose information that enables users of its consolidated financial statements

to understand

• the composition of the group; and

• the interest that non-controlling interests have in the group’s activities and cash flows; and

to evaluate

• the nature and extent of significant restrictions on its ability to access or use assets, and settle liabilities, of the group
• the nature of, and changes in, the risks associated with its interests in consolidated structured entities
• the consequences of changes in its ownership interest in a subsidiary that do not result in a loss of control; and
• the consequences of losing control of a subsidiary during the reporting period

When the financial statements of a subsidiary used in the preparation of consolidated financial statements are as of a date
or for a period that is different from that of the consolidated financial statements, an entity shall disclose:
• the date of the end of the reporting period of the financial statements of that subsidiary; and
• the reason for using a different date or period

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THE INTEREST THAT NONCONTROLLING INTERESTS

HAVE IN THE GROUP’S ACTIVITIES AND CASH FLOWS

An entity shall disclose for each of its subsidiaries that have non-controlling interests that are material to the
reporting entity:

the name of the subsidiary.

the principal place of business (and country of incorporation if different from the principal place of business) of the
subsidiary.

the proportion of ownership interests held by non-controlling interests.

the proportion of voting rights held by non-controlling interests, if different from the proportion of ownership
interests held.

the profit or loss allocated to non-controlling interests of the subsidiary during the reporting period.

accumulated non-controlling interests of the subsidiary at the end of the reporting period.

summarised financial information about the subsidiary

THE NATURE AND EXTENT OF SIGNIFICANT RESTRICTIONS

An entity shall disclose following:

Significant restrictions (eg statutory, contractual and regulatory restrictions) on its ability to access or use the
assets and settle the liabilities of the group, such as:

• those that restrict the ability of a parent or its subsidiaries to transfer cash or other assets to (or from) other
entities within the group.
• guarantees or other requirements that may restrict dividends and other capital distributions being paid, or loans
and advances being made or repaid, to (or from) other entities within the group.

The nature and extent to which protective rights of non-controlling interests can significantly restrict the entity’s
ability to access or use the assets and settle the liabilities of the group (such as when a parent is obliged to settle
liabilities of a subsidiary before settling its own liabilities, or approval of non-controlling interests is required
either to access the assets or to settle the liabilities of a subsidiary).

The carrying amounts in the consolidated financial statements of the assets and liabilities to which those
restrictions apply.

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INDIAN ACCOUNTING STANDARD (IND AS) 111 :

JOINT ARRANGEMENTS
Objective and Scope

The objective of Ind AS 111

Defining the How is the

Objective (Para 1) objective met?

What is sought? For whom? Defines Outlines the Requirement

Establish Principles for Entities that have an Joint Control An entity that is a party to a joint
financial reporting interest in arrangements arrangement should determine the
that are controlled jointly type of joint arrangement in which it
(i.e., joint arrangements) is involved by assessing its rights and
obligations and to account for those
rights and obligations in accordance
with that type of joint arrangement.

Scope of Ind AS 111 This Ind AS shall be applied by all entities that are a party to a joint arrangement.

Appendix A: Defined Terms

Joint Arrangement An arrangement of which two or more parties have joint control.

The contractually agreed sharing of control of an arrangement, which exists only when decisions
Joint Control
about the relevant activities require the unanimous consent of the parties sharing control.

A joint arrangement whereby the parties that have joint control of the arrangement have
Joint Operation
rights to the assets, and obligations for the liabilities, relating to the arrangement.

A joint arrangement whereby the parties that have joint control of the arrangement have rights
Joint Venture
to the net assets of the arrangement.

The Concept of Joint Arrangements

Characteristics of a Joint Arrangement

The parties are bound by a A joint arrangement is either a joint The contractual arrangement gives two or more
contractual arrangement operation or a joint venture of those parties joint control of the arrangement

In assessing whether an entity has joint control of an arrangement, an entity shall assess first whether
all the parties, or a group of the parties, control the arrangement.

Assessment Ind AS 110 defines ‘control’ and shall be used to determine whether all the parties, or a group of the parties
(a) are exposed, or have rights, to variable returns from their involvement with the arrangement and
of Joint
(b) have the ability to affect those returns through their power over the arrangement.
Control
When all the parties, or a group of the parties, considered collectively, are able to direct the
activities that significantly affect the returns of the arrangement (i.e., the relevant activities), the
parties control the arrangement collectively.

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The Concept of Joint Arrangements

Does the contractual arrangement give all NO

the parties, or a group of the parties,
control of the arrangements collectively?
(Control as defined in Ind AS 110)

YES

Do decisions about the relevant activities NO

require the unanimous consent of all the No Joint Control. Outside
parties, or of a group of the parties, that the scope of Ind AS 111.
collectively control the arrangement?

YES
Interest in such arrangement is accounted
Joint control exists. Hence, the in accordance with relevant Ind ASs, such
arrangement is a Joint Arrangement. as Ind AS 110, Ind AS 28 or Ind AS 109.

The Concept of Joint Arrangements

Key Points:

1. In a joint arrangement, no single party controls the arrangement on its own. A party with joint control of an
arrangement can prevent any of the other parties, or a group of the parties, from controlling the arrangement.

2. An arrangement can be a joint arrangement even though not all of its parties have joint control of the
arrangement. Ind AS 111 distinguishes between parties that have joint control of a joint arrangement (joint
operators or joint venturers) and parties that participate in, but do not have joint control of, a joint arrangement.

3. An entity will need to apply judgement when assessing whether all the parties, or a group of the parties, have joint
control of an arrangement. An entity shall make this assessment by considering all facts and circumstances.

4. If facts and circumstances change, an entity shall reassess whether it still has joint control of the arrangement.

Types / Forms of Joint Arrangements

Forms of Joint Arrangements

Joint Operation Joint Venture

a. Rights to the Assets, and Rights to the Net

Nature of Rights / Obligations b. Obligations for the Liabilities Assets of the
relating to the arrangement Arrangement

Joint Arrangement is called as Joint Operation Joint Venture

Parties to the Arrangement

are called as Joint Operators Joint Venturers

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Classification of a Joint Arrangement

Assessment of the Parties’ Rights and Obligations arising from the arrangement

Structure of the Joint Arrangement

Not structured through Structured through a separate vehicle

a separate vehicle

An Entity shall consider:

a. The Legal Form of the Separate Vehicle,
b. The Terms of the Contractual Arrangement, and
c. When relevant, other facts and circumstances

Joint Operations Joint Venture

A separately identifiable financial structure, including separate legal entities or entities recognised
Separate
by statute, regardless of whether those entities have a legal personality e.g., partnership firm, trust,
Vehicle
LLP, company, Association of Persons, government authority etc.

Classification of a Joint Arrangement

Assessing the terms of the Contractual Arrangement: An illustrative (and not exhaustive) list

Joint Operation Joint Venture

The terms of the The contractual arrangement provides the The contractual arrangement provides the parties
contractual parties to the joint arrangement with rights to to the joint arrangement with rights to the net
arrangement the assets, and obligations for the liabilities, assets of the arrangement (i.e., it is the separate
relating to the arrangement. vehicle, not the parties, that has rights to the
assets, and obligations for the liabilities, relating to
the arrangement).

Rights to assets The parties to the joint arrangement share all The assets brought into the arrangement or
interests (e.g. rights, title or ownership) in the subsequently acquired by the joint arrangement
assets relating to the arrangement in a specified are the arrangement’s assets. The parties have no
proportion (e.g. in proportion to the parties’ interests (i.e., no rights, title or ownership) in the
ownership interest in the arrangement or in assets of the arrangement.
proportion to the activity carried out through
the arrangement that is directly attributed to
them).

Obligations for The parties to the joint arrangement share all The joint arrangement is liable for the debts and
Liabilities liabilities, obligations, costs and expenses in a obligations of the arrangement.
specified proportion (e.g. in proportion to the The parties to the joint arrangement are liable to
parties’ ownership interest in the arrangement the arrangement only to the extent of their
or in proportion to the activity carried out respective investments in the arrangement or to
through the arrangement that is directly their respective obligations to contribute any
attributed to them). unpaid or additional capital to the arrangement,
The parties to the joint arrangement are liable or both.
for claims raised by third parties. The creditors of the joint arrangement do not have
rights of recourse against any party with respect to
debts or obligations of the arrangement.

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Joint Operation Joint Venture

Revenues, Revenues and expenses are allocated on the basis Each party has share in the profit or loss
expenses, profit of the relative performance of each party to the relating to the activities of the arrangement.
or loss joint arrangement.
However, the parties might have agreed to share
the profit or loss relating to the arrangement on
the basis of a specified proportion such as the
parties’ ownership interest in the arrangement.
This would not prevent the arrangement from
being a joint operation if the parties have rights to
the assets, and obligations for the liabilities,
relating to the arrangement.

Guarantees The parties to joint arrangements might provide guarantees to third parties that, for example, receive a
service from, or provide financing to, the joint arrangement. The provision of such guarantees, or the
commitment by the parties to provide them, does not, by itself, determine that the joint arrangement is
a joint operation. The feature that determines whether the joint arrangement is a joint operation or a joint
venture is whether the parties have obligations for the liabilities relating to the arrangement (whether they
are guaranteed by the parties or not is irrelevant).

Classification of a Joint Arrangement

Assessing Other Facts and Circumstances

When to assess?

A joint arrangement might be structured in a separate vehicle whose legal form confers separation between the parties and the
separate vehicle. The contractual terms agreed among the parties might not specify the parties’ rights to the assets and obligations
for the liabilities, yet consideration of other facts and circumstances can lead to such an arrangement being classified as a joint
operation. This will be the case when other facts and circumstances give the parties rights to the assets, and obligations for the
liabilities, relating to the arrangement.

How to determine whether joint operation or joint venture?

The activities of the arrangement are primarily designed for The parties are substantially the only source of cash flows
the provision of output to the parties, (i.e., the parties have contributing to the continuity of the operations of the arrange-
rights to substantially all the economic benefits of the assets held ment. Hence, the arrangement depends on the parties on a
in the separate vehicle). continuous basis for settling the liabilities relating to the activity
conducted through the arrangement.

If both these conditions are satisfied, the arrangement is a joint operation.

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Classification of a Joint Arrangement

Classification of a Joint Arrangement structured through a Separate Vehicle

Legal form of YES

Does the legal form of the separate vehicle give the parties rights to the assets,
the separate
and obligations for the liabilities, relating to the arrangement?
vehicle

NO

Terms of the YES

Do the terms of the contractual arrangement specify that the parties have rights
contractual
to the assets, and obligations for the liabilities, relating to the arrangement?
arrangement Joint
NO Operation

Other facts Have the parties designed the arrangement so that YES
and a. its activities primarily aim to provide the parties with an output (i.e., the
circumstances parties have rights to substantially all the economic benefits of the assets
held in the separate vehicle) and
b. it depends on the parties on a continuous basis for settling the liabilities
relating to the activity conducted through the arrangement?

NO

Joint Venture

Classification of a Joint Arrangement

Why is it essential to classify a Joint Arrangement as a Joint Operation or a Joint Venture

It is because the accounting treatment followed is different for a Joint Operation as compared to a Joint Venture

Accounting for Interests in Joint Arrangements in Separate Financial Statements

Joint Operation Joint Venture

Entity having Joint Control Entity participating, Entity having Joint Control Entity participating,
over a Joint Operation (i.e., but not having Joint over a Joint Operation (i.e., but not having Joint
Joint Operator) Control Joint Venturer) Control

Proportionate As per Para 10 of Ind AS As per Para 10 of

Consolidation (Paras 27 i.e., at cost or as per Ind AS 27 i.e., at
20-22 of Ind AS 111) Ind AS 109 cost or as per Ind
AS 109 if
significant
Party has rights to assets and Party has no rights or influence exists,
obligations for liabilities obligations relating to otherwise as per
relating to joint operation joint operation Ind AS 109

Proportionate Other applicable

Consolidation (Paras Ind ASs
20-22 of Ind AS 111)

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Accounting of Joint Arrangements

Paras 20-21 of Ind AS 111: Accounting for Joint Operations in Separate Financial Statements

Para 20: A joint operator shall recognise in relation to its interest in a joint operation:

a. its assets, including its share of any assets held jointly;

b. its liabilities, including its share of any liabilities incurred jointly;

c. its revenue from the sale of its share of the output arising from the joint operation;

d. its share of the revenue from the sale of the output by the joint operation; and

e. its expenses, including its share of any expenses incurred jointly

Para 21: The above assets, liabilities, revenue and expenses shall be accounted as per respective Ind ASs for
those assets, liabilities, revenue and expenses.

Accounting of Joint Arrangements

Para 22 of Ind AS 111: Accounting for transactions between Entity and Joint Operation

Sale or Contribution of Assets to a Joint Operation:

a. The entity (i.e., joint operator) is conducting the transaction with the other parties to the joint operation and, as
such, the joint operator shall recognise gains and losses resulting from such a transaction only to the extent of
the other parties’ interests in the joint operation.

b. When above transactions provide evidence of a reduction in the net realisable value of the assets to be sold or
contributed to the joint operation, or of an impairment loss of those assets, those losses shall be recognised fully
by the joint operator.

Purchase of Assets from a Joint Operation

a. The entity (joint operator) shall not recognise its share of the gains and losses until it resells those assets to a
third party.

b. When such transactions provide evidence of a reduction in the net realisable value of the assets to be purchased
or of an impairment loss of those assets, a joint operator shall recognise its share of those losses.

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Accounting of Joint Arrangements

Paras 21A of Ind AS 111: Acquisition of Interest in Joint Operations

Acquisition of interest in Joint Operation which is a business as defined in Ind AS 103:

• Apply, to the extent of its share / interest, all of the principles on business combinations accounting in Ind AS
103, and other Ind ASs, that do not conflict with the guidance in Ind AS 111 (measuring identifiable assets and
liabilities at fair value, recognizing acquisition related costs as expenses, deferred tax implications on initial
recognition of assets or liabilities, recognition of goodwill and impairment testing thereof ), and

• Increase in interest in a joint operation by acquiring additional stake: Do NOT remeasure previously held
interests.

• If acquisition of interest is a common control transaction, apply the guidance specified in Appendix C of Ind AS 103.

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INDIAN ACCOUNTING STANDARD (IND AS) 113:

FAIR VALUE MEASUREMENT
Need for Ind AS 113

Normally assets and liabilities are exchanged between parties at their agreed terms and
conditions based on the prices which might not be at arm‘s length prices.

ifi c
ec
t y -sp s Buyer Seller
ti ce
En Pri

e.g.: reduced prices; reduction in interest rates; long credit period as compared to market participants

To define fair values, it should be ensured that the values reflect all assumptions/ adjustments to change
from transaction specific/ entity specific to normal transaction which is common for all interested parties.

se d
ba Buy - Sell Market participants
rket- e
a u
M Val

Value should be from the perspective of market participants (i.e. arm’s length prices), instead of it being
transaction specific / entity specific

What would happen without Ind AS 113?

Significance of Fair Value under the Ind AS Regime

Shift in Accounting Absence of guidelines

Perspective to compute Fair Value

True and Fair View of Financial

IGAAP Ind AS Statements will not be achieved

Primarily Cost Fair Value Model

Model of of accounting Relevance and Faithful
accounting e.g. Ind AS 109 / Representation (fundamental
Ind AS 40 / Ind qualitative characteristics) and
AS 105 Verifiability (enhancing
qualitative characteristics)
violated!!

Violation of Para 2.8, 2.18 and

2.30 of Conceptual Framework
for Financial Reporting under
Indian Accounting Standards
(Ind AS)

Hence Ind AS 113 assumes significance since it ensures compliance with the Conceptual Framework

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Objective and Scope of Ind AS 113

Objective and Scope of Ind AS 113

Objective (Para 1) Scope (Para 5)

= to define + set out in a + require Applicability Non-applicability

Fair Value single Ind AS Disclosures
Framework for When another Ind AS Measurement Disclosures of
measuring Fair requires / permits fair value and Disclosure Ind AS 113
Value measurement (and
• SBP - Ind AS 102 • Plan Assets at FV
measurements, such as
FVLCTS, based on fair • Leases - Ind AS 116 •
-Ind AS 19
value or disclosures about • Measurement Assets for which
those measurements) e.g. similar to Fair recoverable
Value but not Fair amount is FV less
Value e.g. NRV in costs of disposal -
WHEN Ind AS 109 Ind AS 2 or value Ind AS 36.
in use in Ind AS 36
HOW Ind AS 113

What is Fair Value?

Fair Value (Para 9) = 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.

Key Aspects in Fair Value Measurement

Price Appropriate Market Market Participants

Orderly Transaction Measurement Date

Key Aspects: Asset or Liability Specific Fair Value

FAIR VALUE IS MARKET-SPECIFIC AND NOT ENTITY-SPECIFIC

Fair Value Measurement takes into account the characteristics of the asset or liability, e.g. the condition and
location of the asset and restrictions, if any, on its sale or use. However, the restrictions or conditions that
might be related to a particular entity should not be taken into account because a fair value will be based on
market participant assumptions rather to an entity specific conditions or restriction which usually will not
affect fair valuation of an asset/ liability.

An entity shall measure the fair value of an asset or a liability using the assumptions that market participants
would use when pricing the asset or liability, assuming that market participants act in their economic best
interest.

RULE

ENTITY-SPECIFIC RESTRICTIONS / CONDITIONS: IGNORED

ASSET / LIABILITY-SPECIFIC RESTRICTION / CONDITIONS TRANSFERRED TO BUYER: CONSIDERED

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Key Aspects: Unit of Account

Unit of Account:
Standalone asset / liability The level at which an asset or a
Liability / Asset liability is aggregated or
Group of assets / liabilities disaggregated in an Ind AS for
recognition and / or measurement
purposes.

Ind AS 113 describes how to measure fair value, not what is being measured at fair value. Other Ind AS specify
whether a fair value measurement considers an individual asset or liability or a group of assets or liabilities
(i.e. the unit of account).

Whether the asset or liability is a stand-alone asset or liability, a group of assets, a group of liabilities or a
group of assets and liabilities for recognition or disclosure purposes depends on its unit of account.

The unit of account for the asset or liability shall be determined in accordance with the Ind AS that requires
or permits the fair value measurement, except as provided in this Ind AS.

Key Aspects: Market Participants

Fair Value is always computed from the perspective of the market participant i.e. price that would be received / paid
on sale / settlement or transfer of an asset / liability by / to a market player.

What are Market Participants?

The parties which eventually transact the assets/ liabilities either in the principal market or the most advantageous
market in their best economic interest

Characteristics of Market Participants

They should be independent and not a related party. However, if related parties have done similar transaction
on arm‘s length price, then it can be between related parties as well.

The parties should not be under any stress or force to enter into these transactions

All parties should have reasonable and sufficient information about the same.

Key Aspects: Appropriate Market

Principal Market Most Advantageous Market

Market which is normally the place in which the assets / This is the market which either maximizes the amount that
liabilities are being transacted with highest volume with would be received (Net Proceeds) when an entity sells an
high level of activities comparing with any other market asset or minimizes the amount that is to be paid while
available for similar transactions. transferring the liability.
If there is principal market, the price in the market must be Net Proceeds = Available Price (-) Transport Costs (-)
used even if the prices in the other market are more advanta- Transaction Costs
geous. In the absence of principal market, this market is used for
Because the principal market is the most liquid market for Fair Valuation of the Assets/ Liabilities. In many cases
the asset or liability, that market will provide the most Principal market & most advantageous market will be same.
representative input for a fair value measurement.

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Key Aspects: Price

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the
principal (or most advantageous) market at the measurement date under current market conditions (i.e. an exit
price) regardless of whether that price is directly observable or estimated using another valuation technique.

FAIR VALUE (PRICE) = AVAILABLE PRICE (LESS) TRANSPORTATION COST

Transaction costs e.g. brokerage, commission, STT etc. are not a characteristic of an asset or a liability, but a
characteristic of the transaction. Hence, it would not be appropriate to consider any transaction cost further while
assessing fair values. However, they would be considered while ascertaining Net Proceeds for determining the most
advantageous market.

NET REALIZABLE VALUE (NRV) = FAIR VALUE (LESS) TRANSACTION COSTS

Transport cost is the cost that would be incurred to transport the asset from its current location to its principal
(or most advantageous) market. Unlike transaction costs, transport costs arise from an event (transport) that does
change a characteristic of an asset (its location) and hence, it is deducted from available price to arrive at Fair
Value.

Valuation of Non-Financial Assets (e.g. Land, Biological Assets)

Highest and Best Use Concept

• It is a valuation concept used to value many non- financial assets (e.g. real estate). The highest and best use of a
non- financial asset must be physically possible, legally permissible and financially feasible.
• The highest and the best use is determined from market participant perspective. It does not matter whether the
entity intends to use the asset differently.
• To find out the best possible use, one has to identify its market participants and then to find the best legitimate
use of this non-financial asset which one would normally do.
• All restrictions specific to any market participant would not be considered while finding out fair value of the
non-financial asset.
• In absence of potential best use which is not easily available, current use would be considered as best use.

• While considering fair value under any alternative use, deduct the estimated cost to be incurred in order to
make the asset ready for alternative use.

Valuation Techniques

• The objective of using a valuation technique is to estimate the price (i.e. quoted prices are not available in the
principal / most advantageous market) at which an orderly transaction would take place between market
participants at the measurement date under current market conditions.
• An entity shall use valuation techniques that are appropriate in the circumstances and for which sufficient data
are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use
of unobservable inputs.

Inputs to Valuation Techniques

Observable Inputs Unobservable Inputs

Based on Market Data obtained from independent sources Based on entity’s own assumptions about financial factors
e.g. share prices on BSE, gold rate on commodity exchange e.g. projected future cash flows
OBJECTIVE HIGHLY SUBJECTIVE

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Valuation Techniques
Inputs to Valuation Techniques: Fair Value Hierarchy

LEVEL 1 INPUTS
LEVEL 2 INPUTS
Quoted prices (unadjusted) in LEVEL 3 INPUTS
active markets for identical assets Inputs other than quoted prices
or liabilities that the entity can included within Level 1 that are Unobservable inputs for the asset
access at the measurement date. observable for the asset or or liability which shall reflect the
e.g. quoted prices of equity shares liability, either directly or assumptions that market
on the BSE/NSE, quoted price of indirectly. These inputs include participants would use when
gold held as investment quoted prices for similar assets or pricing the asset or liability,
liabilities requiring certain including assumptions about risk
adjustments e.g. entity holding 21 e.g. financial forecasts, historical
KT gold, whereas price of 24 KT volatility required for valuing
gold is only available. options under Black-Scholes
model etc.

Note: More than one level of input could be used; level of input for the class of asset / liability will depend on
overall significance

Valuation Techniques

Adjustment to Quoted Price when it does not reflect the Fair Price

In certain situations, a quoted In these situations, companies A company‘s valuation policies

price in an active market might should adjust the quoted price to and procedures should address
not faithfully represent the fair incorporate this new information how these ‘after hour’ events will
value of an asset or liability, such into the fair value measurement. be identified and assessed.
as when significant events occur However, if the quoted price is Controls should be put in place to
on the measurement date but adjusted, the resulting fair value ensure that any adjustments made
after the close of trading measurement would no longer be to quoted prices are appropriate
considered a Level 1 measurement. and are applied in a consistent
manner.

Valuation Techniques

Approaches to Valuation

Market Approach Income Approach Cost / Asset Approach

• Uses prices and other relevant • The income approach converts • This method describes how
information generated by future amounts (e.g. cash flows much cost is required to replace
market transactions involving or income and expenses) to a existing asset/ liability in order
identical or comparable (i.e. single current (i.e. discounted) to make it in a working
similar) assets, liabilities or a amount i.e. DCF Method e.g. condition. All related costs will
group of assets and liabilities, Gordon’s formula be its fair value. It actually
such as a business. • Assumption of future cash flows considers replacement cost of
• Using market multiples derived and appropriate discount rate the asset/ liability for which we
from a set of comparable would be based on market need to find fair value.
companies e.g. EV/EBITDA or participant‘s views. Related • For valuing a business / share, it
P/E multiple risks and uncertainty to be may be the NAV.
considered would be taken in
cash flow or discount rate.

Valuation Approach should be consistently followed. If there is a change in Valuation Approach, it shall be
treated as a change in Accounting Estimate as per Ind AS 8 i.e. disclose the reason for such change.

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Applying Fair Value Rules to Liabilities and Own Equity

Assumption made while carrying out fair value measurement:

Financial Liability e.g. Non-financial Liability e.g. Entity’s own equity

borrowings, trade payables advance received towards instruments e.g. equity
OR OR
sale of PPE issued as consideration in
business combination

Transferred to a market participant at the measurement date

Assumption under Ind AS 113

The liabilities and /or equity instruments so transferred will remain outstanding on the date of measurement

Standard prescribes to use all observable inputs (if direct quoted prices are not available) and
should minimize any unobservable inputs. The transaction considered to find fair value should
be evaluated in line with an orderly transaction (not entity specific).
Ind AS 113 specifically provides guidance on the respective scenarios while evaluating fair values
of the liabilities and own equity instruments in case direct quoted prices are not available.

Applying Fair Value Rules to Liabilities and Own Equity

Liabilities and / or Equity Instruments of the entity

Held by other parties as assets Not held by other parties as

e.g. equity shares / debentures issued by the entity assets
e.g. decommissioning liabilities,
When a quoted price for the transfer of an identical or a similar liability or entity's provision for expenses
own equity instrument is not available, an entity shall measure FV of the liability
/ equity instrument from the perspective of a market participant that holds When a quoted price for the
the identical item as an asset at the measurement date. transfer of an identical or a similar
liability or entity's own equity
instrument is not available, an
Preference 1: Preference 2: Preference 3: entity shall measure FV of the
Use the quoted price If quote price is not available, If observable prices liability / equity instrument
in an active market use other observable inputs in (1) and (2) are not using a valuation technique
for identical item such as quoted price in a available, use a from the perspective of a market
held by another market that is not active for valuation technique participant that owes the
party as an asset, if the identical items held by such as income or liability or has issued the claim
available another party as an asset market approach. on equity.

Applying Fair Value Rules to Liabilities and Own Equity

General Principles: Assume transfer and not settlement of a liability / own equity instrument

Is there a quoted price? Use quoted price

YES
NO

Is there identical item held as asset by another party?

YES NO
Use FV of identical asset Use valuation technique

L = A = Adjust quoted price only

if factors specific to the
= apply present value
technique; include
asset, but not to liability / expectations of costs /
own equity are present compensations

© ICAI BOS(A) II. 237

SARANSH Part II: Indian Accounting Standards

Applying Fair Value Rules to Liabilities and Own Equity

FV of liability reflects Non-performance risk

(includes entity’s own credit risk)

Transfer Restrictions no separate input / adjustment

FL with demand feature FV is not less than the amount payable on demand, discounted
from the first date that the amount could be required to be paid

Applying Fair Value Rules to Financial Assets and Financial Liabilities with
Offsetting Positions in Market Risks or Counterparty Credit Risk

Measurement exception Financial assets and liabilities with offsetting positions

MARKET RISK Trade Receivables (USD) Liabilities (USD)

$༤ FX loss + FX gain = 0
1. Documented risk management /
Price receivable to sell net long position investment strategy
FV on net basis: 2. Info to key managerial personnel
3. FV at the end of each reporting
Price payable to transfer net short position
IC E
period
O
CH

Applying Fair Value Rules to Financial Assets and Financial Liabilities with
Offsetting Positions in Market Risks or Counterparty Credit Risk

Analysis of applying offsetting position in market or credit risk

This exception is allowed only in case the other market participants also manage the similar risk on net
basis.

There should ideally be same information and market practice available for making these assets / liabilities on
net basis.

Once the exception to fair value certain assets / liabilities on net basis is being used, then unit of account to
measure fair value would be considered as net.

Market risk should be same while combining any asset / liability e.g. interest rate risk cannot be netted with
commodity price risk.

Duration of a market risk should be identical to use the exception for valuing assets / liabilities on net basis e.g.
an interest rate swap of longer period will only be allowed to value at net basis up to the duration of financial
instrument of the same duration.

© ICAI BOS(A) II. 238

SARANSH Part II: Indian Accounting Standards

Fair Value at Initial Recognition

• An entity (A Ltd.) acquires an asset or assumes a liability (from B Ltd.) in a normal market
Normal transaction
Transaction • A Ltd. enters the transaction, and B Ltd. exits the transaction, and therefore:

Normal Transactions
Transaction
Entry Price = Exit Price
However, Fair
=
value as per
Price
Ind AS 113
Special Cases

II. Under duress / III. Different unit IV. Not on principal / most
I. Related Parties
seller forced of account advantageous market

Transaction Price – Fair Value = Day 1 PROFIT

Recognize in P/L, if cannot be
attributed to Transaction Costs

Disclosure Requirements

An entity shall disclose information that helps users of its financial statements assess both of the following:
a. for assets and liabilities that are measured at fair value on a recurring or non-recurring basis in the balance
sheet after initial recognition, the valuation techniques and inputs used to develop those measurements.

b. for recurring fair value measurements using significant unobservable inputs (Level 3), the effect of the
measurements on profit or loss or other comprehensive income for the period.

Summary of Disclosure Requirements:

Fair Value Measurement

Disclosure
Recurring Non-recurring
level level level level level level level level level
1 2 3 1 2 3 1 2 3
Fair Value at each reporting date • • • • • •
Reasons for measurement • • •
Level of Hierarchy • • • • • • • • •
Transfers • • •
Valuation Techniques • • • • • •
If change in valuation techniques • • • • • •
Quantitative information about significant unobservable inputs • •
Reconciliation of opening and closing •
Unrealized gains / losses from remeasurement •
Valuation process and policies • •
Sensitivity to changes in unobservable inputs •
If highest and best use differs from actual • • • • • • • • •

© ICAI BOS(A) II. 239

SARANSH Part II: Indian Accounting Standards

,1',$1$&&2817,1*67$1'$5' ,1'$6 

5(9(18()520&2175$&76:,7+&86720(56
Ind AS 115 is based on a core principle that requires an entity to recognise revenue:
(a) In a manner that depicts the transfer of goods or services to customers
(b) At an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services.
To achieve the core principle, an entity should apply the following five-step model:
Identify the Identify the Allocate the transaction Recognise revenue when
Determine the
contract(s) with a performance price to the performance or as an entity satisfies
transaction price
customer obligations obligations performance obligations

Step 1 : Identify the contract(s) with a customer

An accounting contract exists only when an arrangement with a customer meets each of the following five criteria:

Consider if the contract meets each of the five criteria to pass Step 1: Continue to assess the contract to
determine if the Step 1 criteria are met.
Have the parties approved the contract? (approval may be written, oral, or implied, as
long as the parties intend to be bound by the terms and conditions of the contract)
No Recognise consideration received
Yes
as a liability until each of the five
Can the entity identify each party's rights regarding the goods/services to be transferred? criteria in Step 1 are met or one of
No
Yes the following occurs:
Can the entity identify the payment terms for the goods/services to be transferred? 1. entity has no remaining
No performance obligations and
Yes
substantially all consideration
Does the contract have commercial substance? has been received and is non-
No
Yes refundable.
Is it probable that the entity will collect substantially all of the consideration to which it will 2. contract is terminated
be entitled in exchange for the goods/services that will be transferred to the customer? and consideration is non-
No
Yes refundable
Proceed to Step 2 and only reassess the Step 1 criteria if there is an
indication of a significant change in facts and circumstances.

Notes:
1. If at the inception of an arrangement, an entity concludes that the criteria below are not met, it should not apply Steps 2 through 5
of the model until it determines that the Step 1 criteria are subsequently met.
2. When a contract meets the five criteria and ‘passes’ Step 1, the entity will not reassess the Step 1 criteria unless there is an
indication of a significant change in facts and circumstances.
3. Two or more contracts may need to be accounted for as a single contract if they are entered into at or near the same time with the
same customer (or with related parties), and if one of the following conditions exists:
(a) The contracts are negotiated as a package with a single commercial objective;
(b) The amount of consideration paid in one contract depends on the price or performance in the other contract; or
(c) The goods or services promised in the contract are a single performance obligation.

Combining contracts
An entity is required to combine two or more contracts and account for them as a single contract if they are entered into at or near the same
time and meet any one of the following criteria:
Yes
Are the contracts negotiated as a package with a single commercial objective?

No

Whether consideration in one contract depends on the price or performance of Yes

another contract?
Treat as a single
No contract

Whether goods or services promised in the contract are a single performance Yes
obligation?

No

Treat as separate contracts

© ICAI BOS(A) II. 240

SARANSH Part II: Indian Accounting Standards

Accounting for the modification

Are both of the following true: Yes Account for the modification as a separate
 The scope of the contract increases because distinct promised contract.
goods or services are added to the contract.
 The consideration increases by the stand-alone selling price of the
added goods or services. Allocate the remaining transaction price
not yet recognised to the outstanding
No performance obligations. In other words,
Yes treat as a termination of the old contract
Are the remaining goods or services distinct from the goods or services and the creation of a new contract.
transferred on or before the date of the contract modification?

No
Account for the contract modification as
Are the remaining goods or services not distinct and, therefore, form Yes if it were a part of the existing contract—
part of a single performance obligation that is partially satisfied at the that is, the adjustment to revenue is made
date of the contract modification? on a cumulative catch-up basis.

No
Are some of the remaining goods or services distinct and others not Yes Follow the guidance for distinct and non-
distinct? distinct remaining goods or services.

Step 2: Identifying performance obligations

A contract with a customer may also include promises that are implied by an entity’s customary business practices, published policies or
specific statements if, at the time of entering into the contract, those promises create a valid expectation of the customer that the entity will
transfer a good or service to the customer. Therefore. performance obligations under a contract with the customer are not always explicit or
clearly mentioned in the contract, but there can be implied promises or performance obligation under the contract as well.
Performance obligations has been defined as a promise in a contract with a customer to transfer to the customer either:
(a) good or service (or a bundle of goods or services) that is distinct; or
(b) a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer.

Distinct

Customer can benefit either alone or Separately identifiable from other

with other readily available resources promises in the contract

Readily available resource = Sold separately Significant integration No significant Not highly depedent or
customisation or interrelated
or customer has already obtained services not provided modification

Promise to This will be considered as single performance Multiple Element  If the goods or services are not considered
transfer a series obligation, if the consumption of those Arrangements/ as distinct, those goods or services are
of distinct goods Goods and combined with other goods or services
services by the customers is symmetrical
or services services that are under the contract till the time the entity
i.e. they meet both of the following criteria: not distinct identifies a bundle of distinct goods or
(a) each distinct good or service would meet services.
the criteria to be a performance obligation  The combination would result in
satisfied over time; and accounting of multiple goods or services
(b) In each transfer, same method is used to in the contract as a single performance
obligation.
measure the entity’s progress towards
 An entity may end up accounting for all the
complete satisfaction of the performance goods or services promised in a contract
obligation. as a single performance obligation if the
entire bundle of promised goods and
services is the only distinct performance
obligation identified.

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SARANSH Part II: Indian Accounting Standards

Customer  When an entity grants a customer the Consignment  Revenue generally would not be
options for option to acquire additional goods or Arrangements recognised for consignment arrangements
additional goods services, that option is only a separate when the goods are delivered to the
or services performance obligation if it provides consignee because control has not yet
a material right to the customer. The transferred.
right is material if it results in a discount  Revenue is recognised when the entity
that the customer would not receive has transferred control of the goods to the
without entering into the contract. consignor or the end consumer
 If the option provides a material right
to the customer, the customer in Principal vs agent  When the entity is the principal in the
effect pays the entity in advance for consideration arrangement, the revenue recognised
future goods or services and the entity is the gross amount to which the entity
recognises revenue when those future expects to be entitled.
goods or services are transferred or  When the entity is acting as an agent, the
when the option expires. revenue recognised is the net amount i.e.
 If the discounted price in the option the amount, entity is entitled to retain in
reflects the stand-alone selling price return for its services under the contract.
(separate from any existing relationship The entity’s fee or commission may be
or contract), the entity is deemed to the net amount of consideration that the
have made a marketing offer rather than entity retains after paying the other party
having granted a material right. the consideration received in exchange
 Account for only when the customer for the goods or services to be provided
exercises the option to purchase the by that party.
additional goods or services. Since the identification of the principal
 Allocate the transaction price to
in a contract is not always clear, Ind AS
performance obligations on a relative
115 provides following indicators that a
stand-alone selling price basis.
 If the stand-alone selling price performance obligation involves an agency
for a customer’s option to acquire relationship:
additional goods or services is not (a) the entity is primarily responsible for
directly observable, an entity shall fulfilling the contract. This typically
estimate it. That estimate shall reflect includes responsibility for the
the discount that the customer would acceptability of the specified good or
obtain when exercising the option, service;
adjusted for both of the following: (b) the entity has inventory risk before
(a) any discount that the customer the specified good or service has been
could receive without exercising transferred to a customer or after transfer
the option; and of control to the customer (for example, if
(b) the likelihood that the option will the customer has a right of return).
be exercised. (c) the entity has discretion in establishing
Long term  It may be appropriate to treat long term prices for the goods or services.
arrangements arrangements as separate one-year
performance obligations, if the contract Non-refundable It is an advance payment for future goods
can be renewed or cancelled by either upfront fees and services and, therefore, would be
party at discrete points in time (that is, at recognised as revenue when those future
the end of each service year). goods and services are provided, even
 Separately account for its rights and though it relates to an activity undertaken
obligations for each period in which the at or near contract inception to fulfil the
contract cannot be cancelled by either contract and the activity does not result in
party. the transfer of a promised good or service
 When the consideration is fixed,
to the customer.
the accounting generally will not
change regardless of whether a single
performance obligation or multiple
performance obligations are identified.

Step 3: Determining the transaction price Significant

financing
• The consideration promised in a contract with a customer may component
include fixed amounts, variable amounts, or both. Variable
• For the purpose of determining the transaction price, an entity Consideration consideration
shall assume that the goods or services will be transferred to the payable to
customer
customer as promised in accordance with the existing contract Transaction
and that the contract will not be cancelled, renewed or modified. price
• The nature, timing and amount of consideration promised by a
customer affect the estimate of the transaction price. constraining
• When determining the transaction price, an entity shall consider Non-cash estimates
the effects of all of the following: consideration of variable
consideration

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SARANSH Part II: Indian Accounting Standards

Variable consideration 6 Sale with  To account for the transfer of products with
1 Penalties  Accounted for as per the substance of the a right of a right of return (and for some services that
return are provided subject to a refund), an entity
contract.
shall recognise all of the following:
 Where the penalty is inherent in (a) revenue for the transferred products
determination of transaction price, it in the amount of consideration
shall form part of variable consideration. to which the entity expects to be
2 Estimating Estimate an amount of variable consideration entitled (therefore, revenue would
the amount by using either of the following methods: not be recognised for the products
of variable (a) Expected value - expected to be returned);
consideration It is the sum of probability-weighted (b) a refund liability; and
(c) an asset (and corresponding
amounts in a range of possible adjustment to cost of sales) for its right
consideration amounts. to recover products from customers
It will be appropriate if an entity has a on settling the refund liability.
large number of contracts with similar  Promise to stand ready to accept a
characteristics. returned product during the return
(b) Most likely amount – period shall not be accounted for as a
It is the single most likely amount in a performance obligation in addition to the
obligation to provide a refund.
range of possible consideration amounts
 For any amounts received (or receivable)
(ie the single most likely outcome of the for which an entity does not expect to be
contract). entitled, the entity shall not recognise
It will be appropriate, if the contract has revenue when it transfers products to
only two possible outcomes. customers but shall recognise those
An entity shall apply one method consistently amounts received (or receivable) as a
throughout the contract. refund liability.
 Subsequently, at the end of each
3 Refund  Recognise a refund liability if the entity reporting period, the entity shall update
liabilities receives consideration from a customer its assessment of amounts for which it
and expects to refund some or all of that expects to be entitled in exchange for
consideration to the customer. the transferred products and make a
 A refund liability is measured at the corresponding change to the transaction
amount of consideration received / price and, therefore, in the amount of
revenue recognised.
receivable for which the entity does not
 An entity shall update the measurement
expect to be entitled (i.e. amounts not of the refund liability at the end of
included in the transaction price). each reporting period for changes
 The refund liability shall be updated in expectations about the amount
at the end of each reporting period for of refunds. An entity shall recognise
changes in circumstances. corresponding adjustments as revenue
(or reductions of revenue).
4 Constraining Include in the transaction price some or all of
 An asset recognised for an entity’s right
estimates an amount of variable consideration estimated to recover products from a customer on
of variable only to the extent that it is highly probable settling a refund liability shall initially
consideration that a significant reversal in the amount be measured by reference to the former
of cumulative revenue recognised will not carrying amount of the product less any
occur when the uncertainty associated with expected costs to recover those products.
the variable consideration is subsequently  An entity shall present the asset separately
resolved. from the refund liability.
 Exchanges by customers of one product for
5 Reassessment At the end of each reporting period, account another of the same type, quality, condition
of variable for changes in the transaction price, if any. and price are not considered returns.
consideration  Return of a defective product in exchange
for a functioning product shall be
evaluated as warranties.

Warranties

Customer has option to purchase separately Customer does not have option to purchase separately

Distinct service, as the entity promises to provide service Warranty provides an assurance that the product complies
in addition to the product’s described functionality with agreed-upon specifications

Account for the promised warranty as a performance

obligation and allocate a portion of the transaction price Account for the warranty in accordance with Ind AS 37
to that performance obligation

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SARANSH Part II: Indian Accounting Standards

Significant Adjust the promised amount of consideration for the (b) a substantial amount of the consideration
financing effects of the time value of money. promised by the customer is variable and
component In assessing whether a contract contains a financing the amount or timing of that consideration
component and whether that financing component varies on the basis of the occurrence or
is significant to the contract, consider both non-occurrence of a future event that is not
(a) the difference, if any, between the amount of substantially within the control of the
promised consideration and the cash selling customer or the entity
price of the promised goods or services; and (c) the difference between the promised
(b) the combined effect of both of the following: consideration and the cash selling price of
(i) the expected length of time between when the good or service arises for reasons other
the entity transfers the promised goods than the provision of finance to either the
or services to the customer and when the customer or the entity, and the difference
customer pays for those goods or services; between those amounts is proportional to the
and reason for the difference
(ii) the prevailing interest rates in the relevant
market. Non-cash  measure the non-cash consideration (or promise
Use the discount rate that would be reflected in a consideration of non-cash consideration) at fair value.
separate financing transaction between the entity  And, if it cannot reasonably estimate the
and its customer at contract inception. fair value of the non-cash consideration, it
shall measure the consideration indirectly
After contract inception, an entity shall not update by reference to the stand-alone selling price
the discount rate for changes in interest rates or of the goods or services promised to the
other circumstances.
customer (or class of customer) in exchange
If the combined effects for a portfolio of similar for the consideration.
contracts were material to the entity as a whole, but
if the effects of the financing component were not Subsequent  If the fair value of the non-cash consideration
material to the individual contract, such financing measurement varies after contract inception because of its
component shall not be considered significant and of non-cash form, the entity does not adjust the transaction
shall not be separately accounted for. price for any changes in the fair value of the
consideration
consideration.
Exception  If the fair value of the non-cash consideration
A contract with a customer would not have a promised by a customer varies for reasons other
significant financing component if any of the
than only the form of the consideration, apply
following factors exist:
the guidance on variable consideration and the
(a) the customer paid for the goods or services
in advance and the timing of the transfer of constraint when determining the transaction
those goods or services is at the discretion of the price.
customer.

Consideration payable to a customer

Is the consideration payable to a customer a payment for a distinct good Yes Account for the consideration as a
or service from the customer? reduction of the transaction price.

No

Does the consideration exceed the fair value of the distinct goods or Yes Account for the excess as a reduction of
services that the entity receives from the customer? the transaction price.

No

Account for the purchase of the good or service in the same way that
the entity accounts for other purchases from suppliers.

Step 4: Allocating the transaction price to performance obligations

Allocate the transaction price to each performance obligation identified in the contract on a relative stand-alone selling price basis except for
 allocating discounts, and
 allocating variable consideration
Determining The stand-alone selling price is the price at which an entity would sell a promised good or service separately to a customer.
stand-alone The best evidence of a stand-alone selling price is - the observable price of a good or service when the entity sells
selling price that good or service separately in similar circumstances and to similar customers.
Suitable methods for estimating the stand-alone selling price of a good or service include, but are not limited to, the following:
(a) Adjusted market assessment approach
(b) Expected cost plus a margin approach
(c) Residual approach
A combination of methods may need to be used to estimate the stand-alone selling prices of the goods or services promised in the
contract if two or more of those goods or services have highly variable or uncertain stand-alone selling prices.

© ICAI BOS(A) II. 244

SARANSH Part II: Indian Accounting Standards

Allocation of aAllocate a discount proportionately to all performance obligations in the contract on the basis of the relative stand-alone selling
discount prices of the underlying distinct goods or services.
When to Allocate a discount entirely to one or more, but not all, performance obligations in the contract if all of the following
allocate criteria are met:
discount to (a) the entity regularly sells each distinct good or service (or each bundle of distinct goods or services) in the contract on a
‘less than all’ stand-alone basis;
performance (b) the entity also regularly sells on a stand-alone basis a bundle (or bundles) of some of those distinct goods or services at a
obligations? discount to the stand-alone selling prices of the goods or services in each bundle; and
(c) the discount attributable to each bundle of goods or services described in (b) above is substantially the same as the
discount in the contract and an analysis of the goods or services in each bundle provides observable evidence of the
performance obligation (or performance obligations) to which the entire discount in the contract belongs.
Note: – As a first step, always allocate the discount entirely to one or more performance obligations in the contract (if
applicable), and then as a second step, use the residual approach to estimate the stand-alone selling price of a good or service.
Allocation Variable consideration may be attributable to (1) the entire contract or (2) a specific part of the contract, such as either of
of variable the following:
consideration (a) one or more, but not all, performance obligations in the contract.
(b) one or more, but not all, distinct goods or services promised in a series of distinct goods or services that forms part of a
single performance obligation.
How to Allocate a variable amount (and subsequent changes to that amount) entirely to a performance obligation or to a distinct
allocate good or service that forms part of a single performance obligation if both of the following criteria are met:
variable  the terms of a variable payment relate specifically to the entity’s efforts to satisfy the performance obligation or transfer
consideration? the distinct good or service (or to a specific outcome from satisfying the performance obligation or transferring the
distinct good or service); and
 allocating the variable amount of consideration entirely to the performance obligation or the distinct good or service
when considering all of the performance obligations and payment terms in the contract.

STEP 5: Satisfying performance obligation Transfer of control at a point in time

Where a company does not meet any of the criteria for recognising
Transfer of Satisfaction of Revenue revenue over a period of time, then revenue shall be recognised at a
control performance recognition point in time.
obligation achieved

Transfer of control over a period of time

Legal title
Does customer
control the asset
as it is created or Yes
enhanced?
Entity has
No present right Physical
to payment possession
Indicators
Does customer of control
receive and consume Yes
the benefits as the
transfer
entity performs? Does entity have
the enforceable
No right to receive
payment for work
to date? Yes Customer
Does asset have an
Customer has
No Yes acceptance significant
alternative use to risk and
the entity? rewards

Yes

Control is transferred
Control is over time
transferred at a No
point in time

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SARANSH Part II: Indian Accounting Standards

Service Concession Arrangements

Repurchase agreements
Does the grantor
control or regulate what
Forward: Call option: Put option: services the operator
must provide with the
An entity's An entity's right An entity's infrastructure, to whom
obligation to to repurchase the obligation to it must provide them,
repurchase the asset. repurchase and at what price? No
asset. the asset at OUTSIDE THE
the customer's Yes SCOPE OF
request. APPENDIX SEE
INFORMATION
NOTE 2
Does the grantor control, No
through ownership,
beneficial entitlement or
otherwise, any significant
residual interest in
Contract Cost the infrastructure at
the end of the service
arrangements? Or is the No
infrastructure used in
the arrangements for the
entire useful life?
Contract Contract
acquisition fulfilment
Yes

Incremental Cost to fulfil (i.e. Is the infrastructure Is the

costs to obtain perform/deliver) a constructed or infrastructure
a contract that contract. Consider acquired by the No existing
would not deferral under Ind operator from a infrastructure
be incurred AS 115.95 only if not third party for the of the grantor to
if contract covered in scope of purpose of the service which the operator
not obtained another standard. arrangement? is given access
(Eg. Sales
commission)
Yes Yes

Recognise as an asset
Recognise as under this standard if WITHIN THE SCOPE OF
an asset the costs: APPENDEIX
incremental
costs to obtain Operator does not recognise
a contract that All infrastructure as property, plant and
are expected to equipment or as a leased asset
be recovered.

Directly relate
to a contract (or
anticipated contract),
such as direct labour Does the Does the 0VUTJEF
UIF

and materials, indirect operator operator
costs of production, TDPQF
PG

have a have a
etc. contractual contractual "QQFOEJY

right to right to "
TFF

receive cash No charge users No QBSBHSBQI

or other of the public 
PG

financial services as
asset from or described in "QQFOEJY
"

Generate or enhance at direction paragraph
resources that will of the 17 of
be used to satisfy grantor as Appendix?
performance described in
obligations in the paragraph 16
future, AND of Appendix?

Yes Yes

Operator recognises a Operator recognises

Expect to be recovered
financial asset to the extent an intangible asset to
that it has a contractual the extent that has a
right to receive cash or contractual right to
another financial asset as receive an intangible asset
described in paragraph 16 as described in paragraph
of Appendix. 17 in Appendix.

© ICAI BOS(A) II. 246

SARANSH Part II: Indian Accounting Standards

,1',$1$&&2817,1*67$1'$5' ,1'$6 /($6(6

Objective

This information gives

a basis for users of
This Standard sets out the principles for financial statements
to assess the effect of
the lease on

recognition measurement presentation disclosure

financial financial cash

position performance flows
of lease

of an entity

Scope

Ind AS 116 shall be applied to ALL LEASES, including leases of Right-of-Use (ROU) assets in a sub-lease, EXCEPT for:

Sr. No. Particulars Reason

1 Leases to explore for or use minerals, oil, natural gas and Within the scope of Ind AS 106 ‘Exploration for and Evaluation
similar non-regenerative resources of Mineral Resources’

2 Leases of biological assets held by a lessee Within the scope of Ind AS 41 ‘Agriculture’

3 Service concession arrangements Within the scope of Appendix D of Ind AS 115 ‘Revenue from
Contracts with Customers’

4 Licences of intellectual property granted by a lessor Within the scope of Ind AS 115 ‘Revenue from Contracts with
Customers’

5# Rights held by a lessee under licensing agreements for such Within the scope of Ind AS 38 ‘Intangible Assets’
items as motion picture films, video recordings, plays,
manuscripts, patents and copyrights

#A lessee may, but is not required to, apply Ind AS 116 to leases of intangible assets other than those described herein.

© ICAI BOS(A) II. 247

SARANSH Part II: Indian Accounting Standards

Recognition Exemptions

Short-term leases Leases for which the underlying asset is of low-value

ONLY IF BOTH the conditions are satisfied

A short-term lease A short-term
is a lease that, at the lease does
commencement not include
date, has a lease an option to The lessee can The underlying
term of 12 months purchase the benefit from use asset is not highly
or less underlying asset of the underlying dependent
asset on its own or on, or highly
together with other interrelated
resources that are with, other
readily available to assets
This exemption can be made by
the lessee
class of underlying asset (assets of
a similar nature and use) to which
the right of use relates.

The exemption can be made on a

Note: A lease cannot be classified as short-term if the lease lease-by-lease basis
term is subsequently reduced to less than 12 months

Note:
1. The exemption for leases of low-value items intend to capture leases that are high in volume but low in value
2. If a lessee subleases an asset, or expects to sublease an asset, the head lease does not qualify as a lease of a low-value
asset, i.e., an intermediate lessor who subleases, or expects to sublease an asset, cannot account for the head lease
as a lease of a low-value asset

Important points regarding the leases of low-value assets

Leases of low-value assets are
Value of an underlying asset to be assessed based on
exempted regardless of whether
the value of the asset when it is new, regardless of the
those leases are material to the lessee
age of the asset being leased *

Examples of low-value underlying assets can include: The assessment performed on an

- tablet absolute basis. It is not affected by
- personal computers, the size, nature or circumstances of
- small items of office furniture the lessee
- telephones

* A lease of an underlying asset does not qualify as a lease of low value asset if the nature of the asset is such that, when new, the asset is typically
not of low value. For e.g., leases of cars would not qualify as leases of low-value assets because a new car would typically not be of low value.

Accounting on election of recognition exemption

The lease payments shall be recognised as an expense

either or

Straight-line basis over Another systematic basis if that basis is more representative
the lease term of the pattern of the lessee’s benefit.

© ICAI BOS(A) II. 248

SARANSH Part II: Indian Accounting Standards

Lease as per Ind AS 116

Definition A lease is defined as a contract, or part of a contract that conveys the right to control the use of
an identified asset for a period of time in exchange for consideration.

Date to identify the contract as a lease Ind AS 116 requires customers and suppliers to determine whether a contract is or contains a lease
at the inception of the contract.

Inception date The inception date is defined as the earlier of the following dates:
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Whether an Arrangement contains Lease?

No
Is there an identified asset?

Yes

Does the customer have right to

obtain substantially all of the No
economic benefits from the use of asset
throughout the period of use?

Yes

Does the customer or the supplier has

Customer the right to direct how and for what Supplier
purpose the asset is used throughout
the period of use?

If pre-determined then, whether the

customer No
Operates the asset ?
OR
Designed the asset ?

Yes

Contract Contract does not

contains a lease contain a lease

© ICAI BOS(A) II. 249

SARANSH Part II: Indian Accounting Standards

The above chart can be elaborated as follows:

Leases

Identified asset Customer has right to control the use of

the asset throughout the period of use

Explicitly / Supplier has NO Right to obtain substantially Right to

implicitly substantive rights all economic benefits shall direct the
specified to substitute the accrue to customer from use
asset use of an asset

These are decision

The supplier has The supplier would Directly or making rights for
no PRACTICAL not BENEFIT indirectly by assessing which
A B I L I T Y ECONOMICALLY* using, holding or party directs
to substitute from the exercise of sub-leasing the the use of the
alternative assets its right to substitute asset identified asset
throughout the the asset
period of use
It includes
primary output
and by -products
There should be (including
a commercial potential cash
*The economic transaction with flows derived
benefits associated a third party from these items)
with substituting the
asset are expected
to exceed the costs
associated with
substituting the asset Either Or

How What Where When Operating Designing

Or
rights rights

These rights should vest with customer / lessee

Note:
1. In the case of substitution rights, the analysis primarily considers factors from the supplier’s perspective.
2. If the supplier has a right or an obligation to substitute the asset only on or after either a particular date, or the occurrence of
a specified event, the supplier’s substitution right is not substantive because the supplier does not have the practical ability to
substitute alternative assets throughout the period of use.
3. An entity’s evaluation of whether a supplier’s substitution right is substantive is based on facts and circumstances at inception of the
contract. At inception of the contract, an entity should not consider future events that are not likely to occur.
4. Contract terms that allow or require a supplier to substitute alternative assets only when the underlying asset is not operating properly
(for e.g., a normal warranty provision) or when a technical upgrade becomes available do not create a substantive substitution right.
5. Circumstances, at inception of the contract, if are not likely to occur, are excluded from the evaluation of whether a supplier’s
substitution right is substantive throughout the period of use:
6. The right to control the use of an asset may not necessarily be documented, in form, as a lease agreement.
7. A customer should presume that a supplier’s substitution right is not substantive when the customer cannot readily determine
whether the supplier has a substantive substitution right. This requirement is intended to clarify that a customer is not expected to
exert undue effort to provide evidence that a substitution right is not substantive.
8. An identified asset must be physically distinct. A physically distinct asset may be an entire asset or a portion of an asset. Similarly, a
capacity or other portion of an asset that is not physically distinct is not an identified asset unless it represents substantially all of the
capacity of the asset and thereby provides the customer with the right to obtain substantially all of the economic benefits from use
of the asset.

© ICAI BOS(A) II. 250

SARANSH Part II: Indian Accounting Standards

Examples of circumstances that, at inception of the contract, are not likely to occur and, thus, are excluded from the evaluation of whether a
supplier’s substitution right is substantive throughout the period of use:

(1) (2)
An agreement by a future customer to pay an above The introduction of new technology that is not
market rate for use of the asset substantially developed at inception of the contract

(3) (4)
A substantial difference between the customer’s use A substantial difference between the market price
of the asset, or the performance of the asset, and the of the asset during the period of use, and the market
use or performance considered likely at inception of price considered likely at inception of the contract
the contract

Right to Direct the Use

Identify the rights that are most relevant to

changing how and for what purpose the asset
is used (i.e., those that affect the economic
benefits to be derived from the asset)

No Are the decisions made related to the rights

Does the customer
hold the rights? identified above predetermined?
Yes
Yes
Does the customer have the right to operate (or
direct others to operate) the asset throughout
The customer has the Yes the period of use without supplier having right
right to direct the use to change those operating instructions?
of the asset
No
Did the customer design the asset in a way that
Yes determined how and for what purpose the asset
will be used throughout the period of use?
No
No
The supplier has the right to direct the use of
the asset

Examples of relevant decision-making rights that grant the right to change how and for what purpose the
asset is used
1 Lease of trucks / aircraft / rail cars etc t
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© ICAI BOS(A) II. 251

SARANSH Part II: Indian Accounting Standards

Specifying the output of an asset before the period of use

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throughout the period of use, the customer does not have the right to direct the use of that asset unless it designed the asset, OR
specific aspects of the asset.
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other relevant decision-making rights relating to the use of the asset (for e.g., the ability to change when, whether and what output is
produced) gives the customer the same rights as any customer that purchases goods or services in an arrangement (i.e., a contract that
does not contain a lease).

Protective rights
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in isolation, do not prevent the customer from having the right to direct the use of an identified asset.
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right to direct the use of an asset.

Separation of Lease and Non-Lease Components

Identifying and separating lease components of a contract

The right to use each asset is considered as a ‘separate’ lease component

ONLY IF BOTH the following conditions are satisfied

The lessee can benefit from the use of the asset The underlying asset is neither highly dependent
either on its own OR together with other resources on, nor highly interrelated with, the other
that are readily available to the lessee underlying assets in the contract

Note: If one or both criteria are not met then, the right to use multiple assets is considered as a ‘single’
lease component, i.e., not a ‘separate’ lease component

1. Separating lease Only items that contribute to securing the output of the asset are lease components.
components from non- Costs incurred by a supplier to provide maintenance on an underlying asset, as well as the materials
lease components and supplies consumed as a result of the use of the asset, are not lease components.
The non-lease components are identified and accounted for separately from the lease component in
accordance with other standards. For e.g., the non-lease components may be accounted for as executory
arrangements by lessees (customers) or as contracts subject to Ind AS 115 by lessors (suppliers).
Costs related to property taxes and insurance that do not involve the transfer of a good or service,
are fixed in the contract. Hence, they should be included in the overall contract consideration to be
allocated to the lease and non-lease components.
2. Lessee reimbursements Reimbursements (or certain payments on behalf of lessor) by lessee that do not transfer a good or
– whether a separate service to the lessee are not separate components of the contract.
component of a contract? Such items are considered as part of the total consideration which is allocated to the separately
identified components of the contract (i.e., the lease and non-lease components, if any).
3. Optional exemption of Ind AS 116 provides a practical expedient that permits lessees to make an accounting policy election,
using Practical Expedient- by CLASS OF UNDERLYING ASSET, to account for each separate lease component of a contract and
not to separate non-lease any associated non-lease components as a SINGLE LEASE COMPONENT.
component This practical expedient is not permissible for lessor.
Lessees that make the policy election to account for each separate lease component of a contract
and any associated non-lease components as a SINGLE LEASE COMPONENT, allocate ALL of the
contract consideration to the lease component.
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single lease component, if it meets the conditions given in point 1 above.
4. Determining and allocating Lessees that do not use the practical expedient, are required to allocate the consideration in the
the consideration in the contract to the lease and non-lease components on a RELATIVE STAND-ALONE PRICE BASIS.
contract – Lessee If observable stand-alone prices are not readily available, lessees estimate stand-alone prices,
maximising the use of observable information.
5. Determining and allocating Lessor are required to allocate the consideration in the contract to the lease and any associated non-
the consideration in the lease components as per paragraphs 73 – 90 of Ind AS 115 Revenue from Contracts with Customers.
contract – Lessors

© ICAI BOS(A) II. 252

SARANSH Part II: Indian Accounting Standards

Contract Combinations
Ind AS 116 requires that two or more contracts entered into at or near the same time with the same counterparty (or related parties of the
counterparty) be considered a ‘single’ contract IF ANY ONE of the following criteria is met:

The contracts are The amount of The rights to use the

negotiated as a consideration to be underlying assets
package with an paid in one contract conveyed in the contracts
overall commercial depends on the price (or some of the rights to
Or Or
objective that cannot or performance of the use underlying assets
be understood other contract conveyed in each of the
without considering contracts) are a single
the contracts together lease component

Portfolio Application
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includes a practical expedient that allows entities to use a portfolio approach for leases with similar characteristics if the
entity reasonably expects that the effects on the financial statements would not differ materially from the application of the standard
to the individual leases in that portfolio.
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decision some entities make today to expense, rather capitalise,
certain assets when the accounting difference is, and would continue to be, immaterial to the financial statements.

Determination of contract that whether it contains a lease is done at the inception of the contract.

Date of a lease agreement

Whichever date is earlier
Inception date of a lease

Date of commitment by the parties to the principal

terms and conditions of the lease

Commencement date of a lease

On this date
The commencement date is the date on which a lessor
makes an underlying asset* available for use by a lessee

a lessee initially recognises a lessor (for finance leases)

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initially recognizes
*The ‘underlying asset’ is t
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an asset that is the subject
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to a lessee *‘ROU Asset’ represents a lessee’s right to use
an underlying asset for the lease term

Note:
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does not affect the commencement date of the lease.

© ICAI BOS(A) II. 253

SARANSH Part II: Indian Accounting Standards

Lease Term
The assessment of the lease term is a critical estimate and a key input to the amount of the lease liability.
Particulars Years
1 Rent free period XXX
2 Non-cancellable period XXX
3 Optional renewable periods (where lessee is reasonably certain to extend the lease) XXX
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not to terminate early) XXX
Total Lease terms XXXX
Notes:
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at the commencement date and include any rent-free period.
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by the lessor are not considered when determining the lease term.
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should be done on
lease commencement date.

An entity should consider all relevant facts and circumstances that create an economic incentive for the lessee to exercise, or not to exercise,
the option, including any expected changes in facts and circumstances from the commencement date until the exercise date of the option.
Example of relevant factors to consider are:
Contractual terms vis-a vis market rates Asset related factors
1. -FBTF
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1. Specialised asset
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2. Variable or contingent payment 2. Location of underlying asset
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4. Cost relating to the termination of the lease and signing of new replacement lease 4. Existence of significant leasehold
improvement

Cancellable In assessing the length of the non-cancellable An arrangement is not

leases period of a lease, determine the period for which enforceable if
the contract is enforceable

both the lessor and with no

Any non-cancellable lessee each have the right more than an
periods are considered to terminate the lease i n s i g n i f i c a nt
part of the lease term without permission penalty
from the other party

If only the lessor If only the lessee has If both the lessee and the lessor can
has the right to the right to terminate terminate the contract without more
terminate a lease a lease than an insignificant penalty

the period covered by the right is a there are no enforceable rights

the option to terminate termination option and obligations beyond the non-
the lease is included which is included in cancellable term
in the non-cancellable determining the lease Hence, the lease term is limited to
period of the lease term the non-cancellable term

© ICAI BOS(A) II. 254

SARANSH Part II: Indian Accounting Standards

Explained through an example:

Suppose the term of a contract is 10 years and the non-cancellable / lock-in period is 6 years. The lease term shall be as follows:
If the termination option If the termination option is with ‘Lessee’ If the termination option is
is with ‘Lessor’ with ‘Both’ (i.e., any party can
terminate)
The lease term shall be The lease term shall be 10 years assuming The lease term shall be
10 years. reasonable certainty. 6 years.
Because even after 6th year, the lessee Because after the expiry of 6th year, though the lessee is not Because after 6th year, either party
would be contractually bound until contractually bound till 10th year, i.e., the lessee can refuse to can terminate the contract without
10th year i.e. lessee cannot refuse to make payment anytime without lessor’s permission but, it is the consent of the other party
make the payment till the expiry of assumed that the lessee is reasonably certain that it will not and hence, the contract is not
the contract and also, has the right exercise this option to terminate. Hence, though there is no enforceable after 6th year ONLY IF
to use the asset until 10th year, unless enforceable obligation from lessee’s point of view beyond 6th year there is insignificant penalty for
lessor terminates the contract. but, basis the said assumption, the lease term shall be 10 years. termination.

Reassessment of lease term and purchase options

A. For lessees
Lessees are required to reassess the lease term upon the occurrence of either a significant event OR a significant change in the
circumstances that:

Is within the Affects whether the lessee is reasonably certain to exercise / not
control of the to exercise renewal, termination and / or purchase option, not
lessee previously included in its determination of the lease term

Following are some of the examples of significant events or significant changes in circumstances within the lessee’s control:

1) Constructing significant leasehold improvements that are expected to have significant economic value
for the lessee when the option becomes exercisable

2) Making significant modifications or customisations to the underlying asset

3) Making a business decision that is directly relevant to the lessee’s ability to exercise, or not to exercise,
an option (e.g., extending the lease of a complementary asset or disposing of an alternative asset)

4) Subleasing the underlying asset for a period beyond the exercise date of the option

Note: Changes in market-based factors (for e.g., a change in market rates to lease or purchase a comparable asset) are not within the lessee’s
control, and therefore, they do not trigger a reassessment by themselves.

Revision of Lease Term

Lessees are required to revise the lease term if there is change in the non-cancellable period of lease. Following are the example which leads
to change in non-cancellable period of a lease:

If the lessee exercises an option not previously If the lessee does not exercise an option
included in the entity’s determination of the previously included in the entity’s
lease term determination of the lease term

Change in non-cancellable
lease period
An event occurs that contractually obliges An event occurs that contractually prohibits
the lessee to exercise an option not previously the lessee from exercising an option previously
included in the entity’s determination of the included in the entity’s determination of the
lease term lease term

B. For lessors
Lessor revises the lease term to account for the lessee’s exercise of an option to extend or terminate the lease or purchase the underlying
asset when exercise of such options was not already included in the lease term.

© ICAI BOS(A) II. 255

SARANSH Part II: Indian Accounting Standards

Lease Payments

Lease payment for the Lessors

Lease payment for the Lessees

Fixed payments Variable lease Exercise price 1BZNFOUT
PG
Expected Residual value
(including in- payments that of a purchase penalties for residual guarantees
substance fixed depend on an option if terminating the v a l u e provided by the
payments), index or a rate the lessee is lease, if the lease guarantees lessee or a third
less any lease measured using the reasonably term reflects the payable by party related
incentives* prevailing rate at certain to lessee exercising the lessee to the lessee or
the measurement exercise that an option to unrelated to the
date** option terminate the lease lessor

It includes any in-substance fixed lease payments which are the payments that may, in
form, contain variability but in substance, are unavoidable

*Lease incentives
t
For lessee - lease incentives that are paid or payable to lessee by the lessor are deductible from lease payments and reduce
the initial measurement of lessee’ ROU asset.
t
For lessors - lease incentives are also deducted from lease payments and affect the lease classification test.
¾ For finance leases
ƒ lease incentives reduce the expected lease receivables at the commencement date and thereby the initial
measurement of the lessor’s net investment in the lease.
ƒ selling profit or loss is not affected.
¾ For operating leases
ƒdefer the cost of any lease incentives paid or payable to the lessee and recognise that cost as a reduction to lease
income over the lease term.

**Lessees subsequently remeasure the lease liability if there is a change in the cash flows (i.e., when the adjustment to the lease
payments takes effect) for future payments resulting from a change in index or rate used to determine lease payments.

Exclusion of payments for calculating lease liability:

a. Lease payments allocated to non-lease components of a contract, unless the lessee elects to combine non-lease
components with a lease component and to account for them as a single lease component.
b. Variable lease payments that do not depend on index or rate. They are recognised in profit or loss in the period in which the
event that triggers the payment occurs.

Lessee Involvement before Commencement Date

The lessee may obtain legal title to an underlying asset before that legal title is
transferred to the lessor and the asset is leased to the lessee

Yes Whether the lessee obtains control No

of the underlying asset before that
asset is transferred to the lessor?

The transaction is a ‘sale The transaction is

and leaseback transaction’ accounted as a lease

© ICAI BOS(A) II. 256

SARANSH Part II: Indian Accounting Standards

‘Initial direct costs’ are the incremental costs of obtaining a lease

that would not have been incurred if the lease had not been obtained,
Definition except for such costs incurred by a manufacturer or dealer lessor
in connection with a finance lease

Accounting by
It is included in his initial measurement of the right-of-use asset
lessee
Initial Direct Costs

t
*OJUJBM
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other than those incurred by manufacturer

or dealer lessors, are included in the initial measurement of the
net investment in the lease and reduce the amount of income
Accounting by
recognised over the lease term
lessor
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that the initial direct costs are included automatically in the net
investment in the lease and there is no need to add them separately

Note Lessees and lessors apply the same definition of initial direct costs

Examples Costs included and excluded from initial direct costs

Inclusion Exclusion
Commission (including payments to employees acting Employee salaries
as selling agents)
Legal fees resulting from the execution of the lease Legal fees for services rendered
before the execution of the lease
Lease document preparation costs incurred after the Negotiating lease term and
execution of the lease conditions
Certain payments to existing tenants to move out Advertising
Consideration paid for a guarantee of a residual asset Depreciation and amortization
by an unrelated third party

Discount Rates
Discount rates are used to determine the present value of the lease payments, which are used to determine Right-of Use asset and Lease
liability in case of a lessee and to measure a lessor’s net investment in the lease.

For a Lessee
Discount rate to be used should be:

THE INTEREST RATE IMPLICIT If not, then the lessee shall use
IN THE LEASE, if that rate can be OR THE LESSEE’S INCREMENTAL
readily determined BORROWING RATE

Where,
‘Interest rate implicit in the lease’ is defined as the rate of interest that causes the following:

The present value The The fair Any initial

of lease payments unguaranteed value of the direct costs
made by the lessee for residual value underlying of the lessor
the right to use the asset
underlying asset

© ICAI BOS(A) II. 257

SARANSH Part II: Indian Accounting Standards

t
-FTTFFT
incremental borrowing rate is the rate of interest that

- the lessee would have to pay to borrow over a similar term
- and with a similar security
- the funds necessary to obtain an asset of a similar value to the Right of use Asset
- in a similar economic environment.
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determined based on a borrowing of a similar amount in that foreign currency.

For a Lessor:
Lessor to use the interest rate implicit in the lease.

Fair Value
The fair value for the purposes of applying the lessor accounting requirements in Ind AS 116 is the amount for which an asset could be
exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.
Note: For the purposes of determination of fair value under Ind AS 116, above stated definition is to be considered, hence Ind AS 113 “Fair
Value Measurement” is not applicable for determination of fair value.

Accounting in the Books of Lessee

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COST, which consists of ALL of the following:

Initial Measurement of Right-of Use Asset (ROU Asset)

Present Value of Lease Liability (Refer Chart on 'Lessee Payments')

Initial direct costs

Estimated cost to dismantle, remove or restore,

measured as per Ind AS 37

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Lease incentives received

Right-of use asset

Journal entry in the books of lessee

ROU Asset Dr. Sum total of all below items
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dismantling / removing (Ind AS 37)
the underlying asset

© ICAI BOS(A) II. 258

SARANSH Part II: Indian Accounting Standards

Subsequent Measurement

Right-of-use assets (ROU Asset) Lease liability

a. Increase the carrying amount

Measured either using a cost model or
to reflect interest on the lease
revaluation model as per Ind AS 16
liability;
b. Reduce the carrying amount
to reflect the lease payments
Cost Model: Measure a right- Revaluation made; and
of-use asset initially at cost model c. Remeasure the carrying
amount to reflect any
reassessment or lease
modifications or to reflect
If ROU assets
revised in-substance fixed
Less accumulated Adjusted for re- relate to
lease payments.
depreciation measurements
and accumulated of the lease
impairment losses liability A class of Investment
property, property
plant and under Ind
equipment AS 40
Whether the ownership of the 11&
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underlying asset transfers to AS 16)
the lessee at the end of the lease
Y term, or it is reasonably certain N
that the lessee will exercise a A p p l y Re valuation
purchase option? revaluation model cannot
model to all be applied
of the ROU because Ind
assets of AS 40 does
Depreciate from Depreciate from that class of not permit
the commencement the commencement 11&
date based on the date based on
useful life of the earlier of
underlying asset

End of the End of the

useful life of the lease term
ROU Asset

Recognition of a lease

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financing activities financing activities

© ICAI BOS(A) II. 259

SARANSH Part II: Indian Accounting Standards

Leases denominated in a foreign currency

Lease Liability Applying Ind AS 21, Lessees remeasure the foreign currency-denominated lease liability
using the exchange rate at each reporting date, like they do for other monetary liabilities.
Any changes to the lease liability due to exchange rate changes are recognised in profit or
loss.
ROU Asset Since ROU Asset is a non-monetary asset measured at historical cost, it is not affected by
changes in the exchange rate.

Remeasurement
Remeasure lease liabilities upon a change in lease payments on account of ANY of the following:

The reassessment of lease term on The reassessment of whether the

account of reasonable certainty to lessee is reasonably certain to In-substance fixed
exercise/not exercise of extension exercise an option to purchase the lease payments
and/or termination option underlying asset

The amounts expected to be

Future lease payments resulting
payable under residual value
from a change in an index or rate
guarantees

When to use the ‘original’ and a ‘revised’ discount rate?

Revised Discount Rate Original Discount Rate
Lessees use a revised discount rate when lease payments are Lessees use the original discount rate when lease payments are
updated for updated for
- reassessment of the lease term OR - a change in expected amounts for residual value guarantees
- a reassessment of a purchase option. AND
The revised discount rate is based on the interest rate implicit in the - payments dependent on an index or rate, unless the rate is a
lease for the REMAINDER of the lease term. If that rate cannot be floating interest rate.
readily determined, the lessee uses its incremental borrowing rate. - the variability of payments is resolved so that they become in-
substance fixed payments.
Note: A lessee recognises the amount of the remeasurement of the lease liability as an adjustment to the ROU Asset. However, if the carrying
amount of the ROU Asset is reduced to zero and there is a further reduction in the measurement of the lease liability, a lessee recognises any
remaining amount of the remeasurement in profit or loss.

© ICAI BOS(A) II. 260

SARANSH Part II: Indian Accounting Standards

A ‘lease modification’ is a change in the scope of a lease, or the consideration for a lease, that
was not part of the original terms and conditions of the lease.
Examples of lease modifications that may be negotiated after the lease commencement date:
A ‘lease modification’ is a change in the scope of a lease, or the consideration for a lease, that
was not part of the original terms and conditions of the lease.
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Examples of lease modifications that may be negotiated after the lease commencement date:

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Early termination A change in the timing
A lease extension
of the lease of lease payments

Early termination A change in the timing

A lease extension
Leasing additional space of the lease Surrendering a part of lease payments
in the same building the underlying asset

Leasing additional space Surrendering a part of

in the same building the underlying asset

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Is an additional right of use granted? No

/HVVHH·V$QDO\VLVRID&KDQJHLQ/HDVH Yes

Yes Is the price of the additional right No

Is anofadditional right of use
use commensurate granted?
with its No
standalone price ?
Yes

Yes Is the right No

price of the additional right Reassess lease classification
Account for the additional
of use commensurate with itsand remeasure the lease liability
of use as a new separate lease
standalone price ? and adjust right-of-use asset
(i.e., two leases)
(i.e., one lease)

The exercise of an existing purchase or renewal option or a change in the assessment of whether such options are reasonably certain to be
Reassess lease classification
exercised are not lease modifications
Accountbutfor can result in the
the additional remeasurement of Lease Liabilities and ROU Assets.
right
and remeasure the lease liability
of use as a new separate lease
and adjust right-of-use asset
(i.e., two leases)
(i.e., one lease)

The exercise of an existing purchase or renewal option or a change in the assessment of whether such options are reasonably certain to be
exercised are not lease modifications but can result in the remeasurement of Lease Liabilities and ROU Assets.

© ICAI BOS(A) II. 261

SARANSH Part II: Indian Accounting Standards

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Leases
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* The implicit rate in the lease is to be used. If it cannot be readily determined, the incremental rate of borrowing is to be used.

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a following example:
Case study: A lessee enters into a lease arrangement with a lessor to lease an asset for 10 years. At the beginning of year 8, the lessee and
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Scenario 1 Scenario 2 Scenario 3

(Increase in scope – (Increase in scope – Separate Lease) (Decrease in scope)
Not a Separate Lease)
Lessee will re-allocate the Lessee will allocate the consideration in the modified
Lessee will re-allocate the
consideration in the modified contract to each of the existing and new lease and non-
consideration in the modified contract
contract to each of the existing lease components at the date both parties agreed to the
to each existing lease and non-lease
lease and non-lease components modification (the beginning of year 8). component and remeasure the
and The lessee will remeasure the lease liability for the lease liability and ROU Asset at the
Remeasure the lease liability at the existing lease components
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effective date of the modification (the
date both parties agreed to the recognition of the lease liability and ROU Asset for any beginning of year 8).
modification (the beginning of new lease component occurs at the commencement date
year 8). of the new lease component
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Summarised Flowchart for Lease Modification in the Books of Lessee:

Lease Modification

Change in consideration Change in lease term Change in scope

Increase Decrease Decrease Increase

Consideration not Consideration

- Remeasure the lease - Derecognise the lease commensurate to stand- commensurate to stand-
liability at modification liability and ROU Asset to alone selling price alone selling price
date reflect the partial or full
- Make corresponding termination of the lease
adjustment to ROU 
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Asset or loss on termination of the - Remeasure the Increase in scope of
lease lease liability at the lease of underlying
modification date asset to be accounted
- Make corresponding as a new lease
adjustment to ROU
Asset

© ICAI BOS(A) II. 262

SARANSH Part II: Indian Accounting Standards

3UHVHQWDWLRQLQWKH%RRNVRI/HVVHH
Balance Sheet Statement of profit and loss Statement of cash flows
ROU Assets: Depreciation and Interest: Principal portion of the lease liability:
They are presented either: Depreciation on Right of use asset - These cash payments are presented within
and interest expense accreted on lease mOBODJOH
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- Separately from other assets (e.g., owned liabilities are presented separately
assets) OR (i.e., they CANNOT be combined). Interest portion of the lease liability:
- Together with other assets as if they were - These cash payments are presented within
owned, with disclosures of the balance This is because interest expense on mOBODJOH
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sheet line items that include ROU Assets the lease liability is a component of
and their amounts finance costs Short-term leases and leases of low-value assets:
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Ind AS 116 requires lessees to present all disclosures in:
- a single note OR
- separate section in the financial statements.

Quantitative Disclosure Requirement

Balance Sheet Statement of profit and loss Statement of cash flows
– Additions to right-of-use assets – Depreciation for assets by class – Total cash outflow for leases
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at the end of the reporting period by – Short-term leases expensed*
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separately from other liabilities based – Income from subleasing
on Ind AS 107 requirements – Gains or losses arising from sale and leaseback transactions

* These disclosures need not include leases with lease terms of one month or less.
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Investment Property,
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Qualitative Disclosure Requirements

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© ICAI BOS(A) II. 263

SARANSH Part II: Indian Accounting Standards

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understand:

The flexibility provided by leases for e.g., a lessee can reduce its exposure by exercising termination options or renewing
leases with favourable terms and conditions
Restrictions imposed by leases for e.g., by requiring the lessee to maintain particular financial ratios
Sensitivity of reported information to key for e.g., future variable lease payments
variables
Deviations from industry practice for e.g., unusual or unique lease terms and conditions that affect a lessee’s lease portfolio
Exposure to other risks arising from leases
(b) Whether that information is apparent from information either presented in the primary financial statements or disclosed in the notes.

Note: A lessee need not duplicate information that is already presented elsewhere in the financial statements.

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a lease that does not transfer substantially
Operating Lease all the risks and rewards incidental to
ownership of an underlying asset

Classification of Lease
at Inception
a lease that transfers substantially all the
Finance Lease risks and rewards incidental to ownership
of an underlying asset

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The lease transfers ownership of the asset to the lessee by the end of the lease term
Ownership

The lessee has the option to purchase the asset at a price that is expected to be sufficiently
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certain, at the inception date, that the option will be exercised
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is not defined in Ind AS 116.

© ICAI BOS(A) II. 264

SARANSH Part II: Indian Accounting Standards

Additionally, Ind AS 116 lists the following indicators of situations that, JOEJWJEVBMMZ
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If the lessee can cancel the lease, the lessor’s losses associated with the
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the residual asset to the lessee (e.g., in the form of a rent rebate that is equal to most of the
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modification

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lease a lease, that was the lease
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original terms

Note: If a lease modification results in a separate new lease, that new lease would be classified in the same manner as any
new lease.

© ICAI BOS(A) II. 265

SARANSH Part II: Indian Accounting Standards

The lease payments (refer chart on Lease Any unguaranteed

Gross investment
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at an amount equal to the net investment in the lease.

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Journal entry for finance lease

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© ICAI BOS(A) II. 266

SARANSH Part II: Indian Accounting Standards

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© ICAI BOS(A) II. 267

SARANSH Part II: Indian Accounting Standards

Lease Modifications in the Book of Lessor

Finance Lease Modification Operating Lease Modification

The modification increases the scope of the lease by adding A lessor shall account for a
the right to use one or more underlying assets modification to an operating
lease as a new lease from the
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considering any prepaid or
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in scope lease payments for the new lease

Whether both the conditions are satisfied?

Y N

Modification results into a separate lease, hence Modification

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at the inception date?
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Quantitative Disclosure Requirements

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appropriate to be presented.

© ICAI BOS(A) II. 268

SARANSH Part II: Indian Accounting Standards

Qualitative Disclosure Requirements

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Lessor

Sub Head
Lease Original Lessee / Intermediate Lessor / Sub-lessor Lease

Ultimate Lessee / Sub-lessee

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criteria for combining contracts. If the contracts are required to be combined, the intermediate lessor accounts
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performance and cash flows of the lessor (refer the disclosures for ‘lessors’ and ‘lessees’)

© ICAI BOS(A) II. 269

SARANSH Part II: Indian Accounting Standards

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How to determine whether the transfer of an asset is a sale:
When determining whether the transfer of an asset should be accounted for as a sale or purchase, both the seller-lessee and the buyer-lessor
shall apply the requirements of Ind AS 115 on when an entity satisfies a performance obligation by transferring ‘control’ of an asset.

If Control is passed If Control is NOT passed

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the transaction is accounted for as a ‘sale or purchase’ of the asset lessor, both the seller-lessee and the buyer-lessor account for the
and a ‘lease’.
transaction as a ‘financing transaction’.
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When Sale Price or Present Value is LESS When Sale Price or Present Value is GREATER
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© ICAI BOS(A) II. 270

SARANSH Part II: Indian Accounting Standards

'LVFORVXUH
A seller-lessee is also required to disclose any gains and losses arising from sale and leaseback transaction separately from gains and losses on
disposals of other assets under Ind AS 116.
Additional information relating to sale and leaseback transactions depending on the circumstances, may need disclosure that helps users of
financial statements to assess, for e.g.:

(a) The lessee’s reasons for sale and leaseback C
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measurement of lease liabilities transactions in the reporting period

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© ICAI BOS(A) II. 271

SARANSH Part II: Indian Accounting Standards

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leases

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direct cost

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for a particular prior period, or for periods before those for a particular prior period, or for periods before those
presented, the circumstances that led to the existence of that presented, the circumstances that led to the existence of that
condition and a description of how and from when the change condition and a description of how and from when the change
in accounting policy has been applied. in accounting policy has been applied.
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© ICAI BOS(A) II. 272

SARANSH Part II: Indian Accounting Standards

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‘Intermediate Lessor’, the entity shall:
(a) reassess subleases that were classified as operating leases applying Ind AS 17 and are ongoing at the date of initial
application, to determine whether each sublease should be classified as an operating lease or a finance lease applying Ind AS 116.
The intermediate lessor shall perform this assessment at the date of initial application on the basis of the remaining contractual
terms and conditions of the head lease and sublease at that date with reference to the ROU Asset associated with the head lease
and not the underlying asset.
(b) for subleases that were classified as operating leases applying Ind AS 17 but, finance leases applying Ind AS 116, account
for the sublease as a new finance lease entered into at the date of initial application. Any gain or loss arising on the sublease
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Finance Lease Operating Lease

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immediately before the date of initial application.

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temporary rent reductions:
As a practical expedient, a lessee may elect not to assess a rent concession as a lease modification only if ALL of the following conditions
are met:
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substantially the same as, or less than, the
consideration for the lease immediately preceding the change;
b) any reduction in lease payments affects only payments originally due on or before the 30th June, 2022* (for example, a rent
concession would meet this condition if it results in reduced lease payments on or before the 30th June, 2022* and increased lease
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c) there is no substantive change to other terms and conditions of the lease.
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not a lease modification.
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*As per the amendment made by the MCA on 18th June, 2021.

© ICAI BOS(A) II. 273

SARANSH Part II: Indian Accounting Standards

The key conditions for applying the practical expedient are as follows:

No
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than, the consideration for the lease immediately preceding the change?

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b. The amount recognized in profit or loss for the reporting period to reflect changes in lease payments that arise from rent concessions
to which the lessee has applied the practical expedient.
Note: The disclosure requirements of paragraph 28(f ) of Ind AS 8 do not apply on initial application of these amendments.

© ICAI BOS(A) II. 274

SARANSHLast Mile Referencer for

ACCOUNTING

The Institute of Chartered

Accountants of India
(Setup by an Act of Parliament)

Board of Studies (Academic)

ICAI Bhawan, A-29, Sector-62, Noida 201 309
Phone: 0120 - 3045930

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