Chapter 1_Introduction to Accounting Standards

Illustration 1
Following is a snapshot of audited balance sheet of company A as on 31st March 2014.
Company A’s equity shares are listed on Bombay Stock Exchange since 2010.
Liabilities ₹ in crores Assets ₹ in crores
Equity Share Capital 160 Fixed Assets 455
Securities Premium 200 Investments 200
General Reserve 150 Current Assets 50
Revaluation Reserve 40 Miscellaneous Expenditure 80
notwritten off
Profit and Loss A/c 75
Liabilities 160
Total 785 Total 785

• As per roadmap, which Phase company A fall into?

• Will your answer change if Company A is an unlisted company?
Solution

Calculation of Net Worth:

Particulars ₹ in crores
Equity Share Capital 160
Securities Premium 200
General Reserve 150
Profit and Loss A/c 75
Miscellaneous Expenditure not written off (80)
Net Worth as per Section 2(57) of The Companies Act, 2013 505

Note – Revaluation Reserve would not be included in the calculation of net worth as per
definition mentioned in section 2(57) of The Companies Act, 2013
The company is a listed company and it does meet the net worth threshold of ₹ 500 Crores.
Hence it would be covered under phase I. Hence Ind AS would be applicable to the company
for accounting periods beginning on or after 1st April 2016.
Even if Company A is an unlisted company as company A’s net worth is more than 500
Crores, it would be covered under Phase I of the road map and hence Ind AS would be
applicable for the accounting periods beginning on or after 1st April 2016.

1
Illustration 2
Let’s say in Illustration 1, the balance of profit and loss account is negative ₹ 375 crores.
When Ind AS should be applicable to Company A? Will you answer change if Company A is
an unlisted company?
Solution

If the balance of Profit and Loss A/c is negative 375 Crores, the net worth as per section
2(57) of The Companies Act, 2013 would be ₹ 55 Crores (Equity share capital ₹ 160 Cr +
Securities Premium ₹ 200 Cr + General Reserve ₹ 150 Cr – Debit balance of P&L ₹375 Cr –
Miscellaneous expenditure not written off ₹ 80 Cr). Hence, it does not meet the criteria as
mentioned in Phase I
i.e. Listed company or Net worth of ₹ 500 Cr or more.
However, as Company A is a listed company, it will irrespective be covered under Phase II
as the first criteria of phase II states “companies whose equity or debt securities are listed
or are in the process of being listed on any stock exchange in India or outside India and
having net worth of less than rupees five hundred crore”. Hence, Ind AS would be applicable
to Company A for the accounting periods beginning on or after 1st April 2017.
If Company A is an unlisted company, Ind AS would not be applicable until it breaches the
net worth criteria mentioned in the roadmap

Illustration 3
The net worth of Company B (an unlisted company) was ₹ 600 crores as on 31st March
2014. However due to losses incurred in FY 14-15, the net worth of the company was ₹ 400
Crores as on 31st March 2015. From when company B shall apply Ind AS?
Solution

Here the company’s net worth as on cut-off date was greater than ₹ 500 crores, which
suggests that it should be covered under phase I of the roadmap. A question may however
arise in mind that since, the net worth as on immediately preceding year-end was ₹ 400
crores, would the company be covered under phase II of the roadmap?
“It may be noted that the net worth shall be calculated in accordance with the stand-alone
financial statements of the company as on 31st March, 2014. Accordingly, if the net worth
threshold criteria for a company are once met, then it shall be required to comply with Ind
AS, irrespective of the fact that as on later date its net worth falls below the criteria
specified.”
In view of the above, the Company B will be required to follow Ind AS for accounting periods
beginning on or after 1st April 2016

2
Illustration 4
The net worth of Company C (an unlisted company) was ₹ 400 crores as on 31st March
2014. However, the net worth of the company was ₹ 600 Crores as on 31st March 2015.
From when company B shall apply Ind AS?
Solution

Similar issue has been encountered in ITFG Bulletin 1, Issue 1 which gives reference to
clause 2b of the notification wherein it is stated that:
“For companies which are not in existence on 31st March, 2014 or an existing company
falling under any of thresholds specified in sub-rule (1) for the first time after 31st March,
2014, the net worth shall be calculated on the basis of the first audited financial statements
ending after that date in respect of which it meets the thresholds specified in sub-rule (1)”
Hence, any company that meets the thresholds as specified in the Companies (Indian
Accounting Standards) Rules, 2015 in a particular financial year, Ind AS will become
applicable to such company in immediately next financial year. Hence, in the present case,
Company C is covered by Phase I of the roadmap and accordingly, Ind AS will be applicable
to Company C for accounting periods beginning on or after 1st April 2016

Illustration 5
Company D is the parent company of group A. Company A is an unlisted company having
net worth of 60 crores as on 31st March 2014. Following are the other companies of the
group
Name of the company Relationship Net worth as on 31st March 2014

Company B (Unlisted) Subsidiary of Company A ₹ 600 Crore

Company C (Unlisted) Subsidiary of Company B ₹ 150 Crore

Whether Ind AS be applicable to companyies A, B and C?

Solution

Company A and C are unlisted and do not exceed the net worth criteria. However, the net
worth of Company B exceeds ₹ 500 Crore hence it would be covered under Phase I of the
roadmap.
AS Ind AS be applicable to Company B, the parent company of Company B i.e. Company A
and subsidiary of Company B i.e. Company C would also get covered under Ind AS
irrespective of net worth criteria. Hence Ind AS would be applicable to all three companies
i.e. Company A, B and C

3
Illustration 6
Following is the structure of Company D

Company D

Company E Company H
(Subsidiary of D) (Subsidiary of D)

Company F Company G Company I

(Subsidiary of E) (Associate of E) (Subsidiary of H)

All the companies in above structure are unlisted companies and the net worth of company
E is ₹ 300 Crores and net worth of all the other companies is below ₹ 250 crores. To which
company would Ind AS be applicable?
Solution

As mentioned in the Companies (Indian Accounting Standards) Rules, 2015, if Ind AS is

applicable to a company, it would also be applicable to its Holding Company, subsidiary
company, associate company and Joint Venture.
As the turnover of company E is above ₹ 250 crores, it would be covered under Phase II of
the roadmap. Hence, its subsidiary (Company F), associate (Company G) and Holding
(Company D) would also be covered under Ind AS with effect from 1st April 2017.
With respect to other companies of the group, following guidance is given in ITFG
clarification bulletin 15, Issue 10: “It may be noted that Ind AS applies to holding, subsidiary,
joint venture and associate companies of the companies which meet the net worth/listing
criteria. This requirement does not extend to another fellow subsidiary of a holding
company which is required to adopt Ind AS because of its holding company relationship
with a subsidiary meeting the net worth/listing criteria. Holding company will be required
to prepare separate and consolidated financial statements mandatorily under Ind AS, if one
of its subsidiaries meets the specified criteria and therefore, such subsidiaries may be
required by the holding company to furnish financial statements as per Ind AS for the
purpose of preparing Holding company’s consolidated Ind AS financial statements. Such
fellow subsidiaries may, however, voluntarily opt to prepare their financial statements as
per Ind AS.”
Hence the other companies of the group i.e. Company H and Company I would not be
covered under Ind AS. However, as mentioned in ITFG, Company H and I would be required
to prepare its financial statements under Ind AS so as to facilitate Company D for
preparation of its consolidated financial statements. Hence, though statutorily Company H
and I may continue to prepare its financial statements under AS, but it will also have to
converge to Ind AS. Moreover, they may also opt to voluntarily adopt Ind AS and prepare its

4
statutory accounts under Ind AS too.

Illustration 7
ABC Inc., incorporated in a foreign country has a net worth of ₹ 700 Crores. It has two
subsidiaries Company X whose net worth as on 31st March 2014 is ₹ 600 Crores and
Company Y whose net worth is ₹ 150 Crores. Whether Company X and Y would be required
to follow Ind AS from accounting periods commencing on or after 1st April 2016 on the
basis of their own net worth or on the basis of the net worth of ABC Inc.?
Solution

Similar issue has been dealt in ITFG Clarification Bulletin 2, Issue 2. ITFG noted that as per
Rule 4(1)(ii)(a) of the Companies (Indian Accounting Standards) Rules, 2015, Company X
having net worth of ₹ 600 crores at the end of the financial year 2015-16, would be required
to prepare its financial statements for the accounting periods commencing from 1st April,
2016, as per the Companies (Indian Accounting Standards) Rules, 2015. While Company Y
Ltd. having net worth of ₹ 150 crores in the year 2015-16, would be required to prepare its
financial statements as per the Companies (Accounting Standards) Rules, 2006.
Since, the foreign company ABC Inc., is not a company incorporated under the Companies
Act, 2013 or the earlier Companies Act, 1956, it is not required to prepare its financial
statements as per the Companies (Indian Accounting Standards) Rules, 2015. As the foreign
company is not required to prepare financial statements based on Ind AS, the net worth of
foreign company ABC would not be the basis for deciding whether Indian Subsidiary
Company X Ltd. and Company Y Ltd. are required to prepare financial statements based on
Ind AS.

Illustration 8
As per the roadmap, Ind AS is applicable to Company X from the financial year 2017-18.
Company X (non-finance company) is a subsidiary of Company Y (NBFC). Company Y is an
unlisted NBFC company having net worth of ₹ 400 crores. What will be the date of
applicability of Ind AS for company X and company Y? If Ind AS applicability date for parent
NBFC is different from the applicability date of corporate subsidiary, then, how will the
consolidated financial statements of parent NBFC be prepared?
Solution

In accordance with the roadmap, it may be noted that NBFCs having net worth of less than
500 crore shall apply Ind AS from 1 April, 2019 onwards. Further, the holding, subsidiary,
joint venture or associate company of such an NBFC other than those covered by corporate
roadmap shall also apply Ind AS from 1 April, 2019.
Accordingly, in the given case, Company Y (NBFC) shall apply Ind AS for the financial year

5
beginning 1 April, 2019 with comparative for the period ended 31 March, 2019 . Company
X shall apply Ind AS in its statutory individual financial statements from financial year 2017-
2018 (as per the corporate roadmap). However, for the purpose of Consolidation by
Company Y for financial years 2017-2018 and 2018-2019, Company X shall also prepare its
individual financial statements as per AS.

6
IND AS 12
Question 1 (RTP Nov 22 - Q.5)
Following is the summarized statement of profit and loss of EARTH Limited as per Ind AS for
the year ended 31st March 2011:

Particulars ₹ in Crore
Revenue from operations 1,160.00
Other income 56.00
Total Income (A) 1,216.00
Purchase of stock-in-trade 40.00
Changes in inventories of stock-in-trade 6.00
Employee benefits expense 116.00
Finance costs 130.00
Depreciation and amortization expense 30.00
Other expenses 300.00
Total Expenses (B) 622.00
Profit Before Tax (A-B) 594.00
Current tax 165.40
Deferred tax 1.50
Tax Expenses 166.90
Profit after Tax 427.10

Additional information:
 Corporate income tax rate applicable to EARTH Limited is 30%.
 Other income includes long-term capital gains of ₹ 10 crore which are taxable at the
rate of 10%.
 Other expenses include the following items which are not deductible for income tax
purposes:
Item ₹ in Crore
Penalties 1.00
Impairment of goodwill 44.00
Corporate Social Responsibility expense 6.00
 Other expenses include research and development (R & D) expenditure of
 ₹ 8 crore in respect of which a 200% weighted deduction is available under income tax
laws.
 Other income includes dividends of ₹ 4 crore, which is exempt from tax.
 Profit before tax of ₹ 594 crore includes (i) agriculture income of ₹ 55 crore which is
exempt from tax; and (ii) profit of ₹ 60 crore earned in the USA on which EARTH
Limited is required to pay tax at the rate of 20%.
 Depreciation as per income tax laws is ₹ 25.0 crore.
During review of the financial statements of EARTH Limited, the CFO multiplied profit before
tax by the income tax rate and arrived at ₹ 178.2 crore as the tax expense (₹ 594 crore x 30%
= ₹ 178.2 crore). However, actual income tax expense appearing in the summarized statement
of profit and loss is ₹ 166.9 crore.
The CFO has sought your help in reconciling the difference between the two tax expense
amounts. Prepare a reconciliation containing the disclosure as required under the relevant Ind
AS.

7
Solution

Reconciliation of income tax expense and current tax as per accounting profit for the
year ended 31st March, 2011

Particulars ₹ in crore
Accounting profit 594.00
Tax at the applicable tax rate of 30% 178.20
Tax effect of expenses that are not deductible in
determining taxable profits:
Penalties (1.00 x 30%) 0.30
Impairment of goodwill (44.00 x 30%) 13.20
Corporate social responsibility expense (6.00 x 30%) 1.80 15.30
Tax effect of expenses that are deductible in
determining taxable profits:
Research and development expenses (8.00 x 30%) (2.40)
Tax effect of income that are exempted in determining
taxable profits:
Dividend income (Exempt) (4.00 x 30%) 1.20
Agriculture income (Exempt) (55.00 x 30%) 16.50 (17.70)
Tax effect of income on which different tax rates are
used for determining taxable profits:
Differential income tax on long term capital gain [10.00 2.00
x (30% - 10%)]
Foreign income in USA [60.00 x (30%-20%)] 6.00 (8.00)
Income tax expense (Current) reported in the
Statement of Profit and Loss for the current year 165.40

Reconciliation of deferred tax:

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

8
RTP May 2023
Ind AS 19
3. From the following particulars, compute the net defined benefit liability and expense to be
recognized in Profit and Loss account. (₹ in lakhs)
Particulars Defined benefit obligation Plan Assets
31st Dec. 31st Dec. 31st Dec. 31st Dec.
2012 2011 2012 2011
Balance at the beginning of the year 63.25 47.08 21.80 14.65
Current service cost 5.84 4.97 - -
Interest cost 4.27 3.56 - -
Changes in demographicassumptions 0.62 1.86 - -

Changes in financial assumptions 3.58 1.93 - -

Experience variance (2.49) 4.46 - -
Benefits paid - (0.61) - (0.61)
Investment income - - 1.47 1.12
Employers’ contribution - - 8.00 7.00
Return on plan assets - - 2.12 (0.35)

Solution:
Computation of defined benefit liability and expenses to be charged to Statement of
Profit and Loss:

Defined benefit Plan Assets(₹

obligation (₹ in lakhs) in lakhs)
31st Dec 31st Dec 31st Dec 31st Dec
2012 2011 2012 2011
Balance at the beginning of year 63.25 47.08 21.80* 14.65
Current service cost 5.84 4.97 - -
Interest cost 4.27 3.56 - -
Changes in demographic 0.62 1.86 - -
assumptions
Changes in financial assumptions 3.58 1.93 - -
Experience variance (2.49) 4.46 - -
Benefits paid - (0.61) - (0.61)
Investment income - - 1.47 1.12
Employers’ contribution - - 8.00 7.00
Return on plan assets - - 2.12 (0.35)
Balance at the end of year 75.07 63.25 33.39 21.81*

*Difference is due to approximation.

In the BALANCE SHEET, the following will be recognised:

9
 Net defined liability to be recognised for the period ending 31 st December, 2011:
= ₹ 41.44 lakhs (₹ 63.25 lakhs - ₹ 21.81 lakhs)
Net defined liability to be recognised for the period ending 31 st December, 2012:
= ₹ 41.68 lakhs (₹ 75.07 lakhs - ₹ 33.39 lakhs)

In the STATEMENT OF PROFIT AND LOSS, the following will be recognised:

Defined benefit obligation Plan Assets

(₹ in lakhs) (₹ in lakhs)
31st Dec., 31st Dec., 31st Dec., 31st Dec.,
2012 2011 2012 2011
Current service cost 5.84 4.97 - -
Interest cost 4.27 3.56 - -
Investment income - - (1.47) (1.12)
Total 10.11 8.53 (1.47) (1.12)

Expense to be recognised in the Statement of Profit and Loss for the period ending 31st
December, 2011 = ₹ 7.41 lakhs (₹ 8.53 lakhs - ₹ 1.12 lakhs)
Expense to be recognised in the Statement of Profit and Loss for the period ending 31st
December, 2012 = ₹ 8.64 lakhs (₹ 10.11 lakhs - ₹ 1.47 lakhs).

10
IND AS 23
Question 1 (RTP May 23 – Q.6)
LT Ltd. is in the process of constructing a building. The construction process is expected to take
about 18 months from 1st January 20X1 to 30th June 20X2. The building meets the definition of a
qualifying asset. LT Ltd. incurs the following expenditure for the construction:

1st January, 20X1 ` 5 crores

30th June, 20X1 ` 20 crores
31st March, 20X2 ` 20 crores
30th June, 20X2 ` 5 crores
On 1st July 20X1, LT Ltd. issued 10% Redeemable Debentures of ` 50 crores. The proceeds from
the debentures form part of the company's general borrowings, which it uses to finance the
construction of the qualifying asset, ie, the building. LT Ltd. had no borrowings (general or specific)
before 1st July 20X1 and did not incur any borrowing costs before that date. LT Ltd. incurred ` 25
crores of construction costs before obtaining general borrowings on 1st July 20X1 (pre-borrowing
expenditure) and ` 25 crores after obtaining the general borrowings (post-borrowing expenditure).

For each of the financial years ended 31st March 20X1, 20X2 and 20X3, calculate the borrowing
cost that LT Ltd. is permitted to capitalize as a part of the building cost.

Solution
Applying paragraph 17 of Ind AS 23 to the fact pattern, the entity would not begin capitalising
borrowing costs until it incurs borrowing costs (i.e. from 1st July, 20X1)

In determining the expenditures on a qualifying asset to which an entity applies the capitalisation
rate (paragraph 14 of Ind AS 23), the entity does not disregard expenditures on the qualifying asset
incurred before the entity obtains the general borrowings. Once the entity incurs borrowing costs
and therefore satisfies all three conditions in para 17 of Ind AS 23, it then applies paragraph 14 of
Ind AS 23 to determine the expenditures on the qualifying asset to which it applies the capitalisation
rate.

Calculation of borrowing cost for financial year 20X0-20X1

Expenditure Capitalization Period Weighted average

(current year) Accumulated Expenditure
Date Amount
1st January 20X1 ` 5 crore 0/3 Nil
Borrowing Costs eligible for capitalisation = NIL. LT Ltd. cannot capitalise borrowing costs before
1st July, 20X1 (the day it starts to incur borrowing costs).

11
 Calculation of borrowing cost for financial year 20X1-20X2

Expenditure Capitalization Period Weighted average

(current year) Accumulated Expenditure
Date Amount
1st January, 20X1 ` 5 crore 9/12* ` 3.75 crore
30th June, 20X1 ` 20 crore 9/12 ` 15 crore
31st March, 20X2 ` 20 crore 0/12 Nil
Total ` 18.75 crore
Borrowing Costs eligible for capitalisation = 18.75 cr. x 10% = ` 1.875 cr.

*LT Ltd. cannot capitalise borrowing costs before 1st July, 20X1 (the day it starts to incur borrowing
costs). Accordingly, this calculation uses a capitalization period from 1st July, 20X1 to 31st March,
20X2 for this expenditure.

Calculation of borrowing cost for financial year 20X2-20X3

Expenditure Capitalization Weighted average

Period (current Accumulated Expenditure
year)
Date Amount
1st January, 20X1 ` 5 crore 3/12 ` 1.25 crore
30th June, 20X1 ` 20 crore 3/12 ` 5 crore
31st March, 20X2 ` 20 crore 3/12 ` 5 crore
31st March, 20X2 ` 1.875crore 3/12 ` 0.47 crore
30th June, 20X2 ` 5 crore 0/12 Nil
Total ` 11.72 crore
Borrowing costs eligible for capitalisation = ` 11.72 cr. x 10% = ` 1.172 cr.

12
RTP May 2023
Ind AS 24
17. SEL has applied for a term loan from a bank for business purposes. As per the loan
agreement, the loan required a personal guarantee of one of the directors of SEL to be
executed. In case of default by SEL, the director will be required to compensate for the
loss that bank incurs. Mr. Pure Joy, one of the directors had given guarantee to the
bank pursuant to which the loan was sanctioned to SEL. SEL does not pay premium or
fees to its director for providing this financial guarantee.
Whether SEL is required to account for the financial guarantee received from its director?
Will there be any disclosures under Ind AS 24?
Solution:
Ind AS 109 ‘Financial Instruments’, defines a financial guarantee contract as ‘a
contract that requires the issuer to make specified payments to reimburse the holder
for a loss it incurs because a specified debtor fails to make payment when due in
accordance with the original or modified terms of a debt instrument.
Based on this definition, an evaluation is required to be done to ascertain whether the
contract between director and Bank qualifies as a financial guarantee contract as defined
in Appendix A to Ind AS 109. In the given case, it does qualify as a financial guarantee
contract as:
• the reference obligation is a debt instrument (term loan);
• the holder i.e. Bank is compensated only for a loss that it incurs (arising on
account of non-repayment); and
• the holder is not compensated for more than the actual loss incurred.

Ind AS 109 provides principles for accounting by the issuer of the guarantee. However,
it does not specifically address the accounting for financial guarantees by the beneficiary.
In an arm’s length transaction between unrelated parties, the beneficiaryof the financial
guarantee would recognise the guarantee fee or premium paid as an expense.
It is also pertinent to note that the entity needs to exercise judgment in assessing the
substance of the transaction taking into consideration relevant facts and circumstances,
for example, whether the director is being compensated otherwise for providing guarantee.
Based on such an assessment, an appropriate accounting treatment based on the
principles of Ind AS should be followed.
In the given case, SEL is the beneficiary of the financial guarantee and it does not pay
a premium or fees to its director for providing this financial guarantee. Accordingly,SEL
will not be required to account for such financial guarantee in its financialstatements
considering the unit of account as being the guaranteed loan, in which case the fair value
would be expected to be the face value of the loan proceeds that SEL received.
In the given case based on the limited facts provided, SEL will be required to make
necessary disclosures of such financial guarantee in accordance with Ind AS 24 as follows:
(a) the amount of the transactions;
(b) the amount of outstanding balances, including commitments, and:
(i) their terms and conditions, including whether they are secured, and the

13
 nature of the consideration to be provided in settlement; and
(ii) details of any guarantees given or received;
(c) provisions for doubtful debts related to the amount of outstanding balances; and
(d) the expense recognised during the period in respect of bad or doubtful debts due from
related parties.

14
IND AS 33
Question (RTP Nov 22 - Q.17)
Company S is a subsidiary of Company P.

Following facts are in respect of Company S:

 Company S has 10,000 ordinary shares and 1,000 options outstanding, of which
Company P owns 9,000 shares and 500 options, respectively.
 The options have an exercise price of ₹ 40.
 The average market price of Company S’s ordinary share was ₹ 50 in 2011.
 In 2011, Company S’s profit was ₹ 30,000.

Following facts are in respect of Company P:

 Company P has 5,000 ordinary shares outstanding.
 In 2011, Company P’s profit (excluding any distributed and undistributed earnings
of subsidiaries) was ₹ 7,000.
 The options outstanding are dilutive at P’s level.
Determine the diluted EPS of Company P for the year 2011. Ignore income tax.

Solution
To determine the diluted EPS of Company P, the diluted EPS of Company S has to be calculated
first.
Calculation of Company S’s diluted EPS:
Company S’s earnings for the period ₹ 30,000
Weighted average ordinary shares 10,000
Incremental shares (refer W.N.) 200
Company S’s diluted EPS ₹ 30,000/ (10,000 + 200)
₹ 2.94

Calculation of Company P’s diluted EPS:

Company P’s earning for the period ₹ 7,000
Company P’s share of Company S’s earning attributable to ordinary shares ₹ 26,460
[(9,000 /10,000) x (2.94 x 10,000)]
Company P’s share of Company S’s earning attributable to options ₹ 294
[(500 /1,000) x (2.94 x 200)]
Company P’s weighted average ordinary shares outstanding 5,000
Company P’s diluted EPS = (7,000 + 26,460 + 294) / 5,000 ₹ 6.75
Working Note:
Computation of Incremental shares related to weighted average optionsoutstanding:

15
All options are dilutive because their exercise price is below the average market price of Company S’s
ordinary shares for the period.
The incremental shares are calculated as follows:
Shares issued on assumed exercise of options 1,000
Less: Shares that would be issued at average market Price [(40 x 1,000)/50] (800)
Incremental shares 200

Question (RTP May 23 - Q.14)

Company P has both ordinary shares and equity-classified preference shares in issue. The
reconciliation of the number of shares during Year 1 is set out below:
Number of shares

Dates in Transaction Ordinary Treasury Preference

Year 1 shares shares shares
1st April Balance 30,00,000 (5,00,000) 5,00,000
15th April Bonus issue – 5% (no 1,50,000 (25,000) -
corresponding changes in
resources)
1st May Repurchase of shares for cash - (2,00,000) -
1st November Shares issued for cash 4,00,000 - -
31st March Balance 35,50,000 (7,25,000) 5,00,000

The following additional information is relevant for Year 1.

- Company P’s net profit for the year is ₹ 46,00,000.
- On 15th February, non-cumulative preference dividends of ₹ 1.20 per share were declared. The
dividends were paid on 15th March. Preference shares do not participate in additional
dividends with ordinary shares.
- Dividends on non-cumulative preference shares are deductible for tax purposes.
The applicable income tax rate is 30%.

The financial year of Company P ends on 31st March.

Determine the Basic EPS of the Company P for Year 1. Use the number of months or part of
months, rather than the number of days in the calculation of EPS.

Solution
Determination of numerator for calculation of Basic EPS
The first step in the basic EPS calculation is to determine the profit or loss that is attributable to
ordinary shareholders of Company P for the period.
Non-cumulative dividends paid on equity-classified preference shares are not deductedin arriving
at net profit or loss for the period, but they are not returns to ordinary shareholders. Accordingly,

16
these dividends are deducted from net profit or loss for the period in arriving at the numerator.

Particulars (₹)
Net profit 46,00,000
Preference dividends (5,00,000 shares x 1.2) (6,00,000)
Related tax (₹ 6,00,000 x 30%) 1,80,000 (4,20,000)
Profit or loss attributable to P’s ordinary shareholders 41,80,000
Accordingly, the numerator for calculation of Basic EPS is ₹ 41,80,000

Determination of denominator for calculation of Basic EPS

The second step in the basic EPS calculation is to determine the weighted-average number of
ordinary shares outstanding for the reporting period.

Number of shares Time Weight Weighted average

weighting number of shares
1st April – opening balance 25,00,000 1
(30,00,000 – 5,00,000)
15th April – bonus issue
(1,50,000 – 25,000) 1,25,000
1st April to 30th April 26,25,000 1/12 2,18,750
1st May – repurchase of shares (2,00,000)
1st May to 31st October 24,25,000 6/12 12,12,500
1st November – new shares issued 4,00,000
1st November to 31st March 28,25,000 5/12 11,77,083
Weighted average number of shares for the year 26,08,333

The denominator for calculation of Basic EPS is 26,08,333 shares.

Basic EPS = ₹ 41,80,000 / 26,08,333 shares = ₹ 1.60 per share (approx.).

17
IND AS 33
Question (RTP Nov 22 - Q.17)
Company S is a subsidiary of Company P.

Following facts are in respect of Company S:

 Company S has 10,000 ordinary shares and 1,000 options outstanding, of which
Company P owns 9,000 shares and 500 options, respectively.
 The options have an exercise price of ₹ 40.
 The average market price of Company S’s ordinary share was ₹ 50 in 2011.
 In 2011, Company S’s profit was ₹ 30,000.

Following facts are in respect of Company P:

 Company P has 5,000 ordinary shares outstanding.
 In 2011, Company P’s profit (excluding any distributed and undistributed earnings
of subsidiaries) was ₹ 7,000.
 The options outstanding are dilutive at P’s level.
Determine the diluted EPS of Company P for the year 2011. Ignore income tax.

Solution
To determine the diluted EPS of Company P, the diluted EPS of Company S has to be calculated
first.
Calculation of Company S’s diluted EPS:
Company S’s earnings for the period ₹ 30,000
Weighted average ordinary shares 10,000
Incremental shares (refer W.N.) 200
Company S’s diluted EPS ₹ 30,000/ (10,000 + 200)
₹ 2.94

Calculation of Company P’s diluted EPS:

Company P’s earning for the period ₹ 7,000
Company P’s share of Company S’s earning attributable to ordinary shares ₹ 26,460
[(9,000 /10,000) x (2.94 x 10,000)]
Company P’s share of Company S’s earning attributable to options ₹ 294
[(500 /1,000) x (2.94 x 200)]
Company P’s weighted average ordinary shares outstanding 5,000
Company P’s diluted EPS = (7,000 + 26,460 + 294) / 5,000 ₹ 6.75
Working Note:
Computation of Incremental shares related to weighted average optionsoutstanding:

18
All options are dilutive because their exercise price is below the average market price of Company S’s
ordinary shares for the period.
The incremental shares are calculated as follows:
Shares issued on assumed exercise of options 1,000
Less: Shares that would be issued at average market Price [(40 x 1,000)/50] (800)
Incremental shares 200

Question (RTP May 23 - Q.14)

Company P has both ordinary shares and equity-classified preference shares in issue. The
reconciliation of the number of shares during Year 1 is set out below:
Number of shares

Dates in Transaction Ordinary Treasury Preference

Year 1 shares shares shares
1st April Balance 30,00,000 (5,00,000) 5,00,000
15th April Bonus issue – 5% (no 1,50,000 (25,000) -
corresponding changes in
resources)
1st May Repurchase of shares for cash - (2,00,000) -
1st November Shares issued for cash 4,00,000 - -
31st March Balance 35,50,000 (7,25,000) 5,00,000

The following additional information is relevant for Year 1.

- Company P’s net profit for the year is ₹ 46,00,000.
- On 15th February, non-cumulative preference dividends of ₹ 1.20 per share were declared. The
dividends were paid on 15th March. Preference shares do not participate in additional
dividends with ordinary shares.
- Dividends on non-cumulative preference shares are deductible for tax purposes.
The applicable income tax rate is 30%.

The financial year of Company P ends on 31st March.

Determine the Basic EPS of the Company P for Year 1. Use the number of months or part of
months, rather than the number of days in the calculation of EPS.

Solution
Determination of numerator for calculation of Basic EPS
The first step in the basic EPS calculation is to determine the profit or loss that is attributable to
ordinary shareholders of Company P for the period.
Non-cumulative dividends paid on equity-classified preference shares are not deductedin arriving
at net profit or loss for the period, but they are not returns to ordinary shareholders. Accordingly,

19
these dividends are deducted from net profit or loss for the period in arriving at the numerator.

Particulars (₹)
Net profit 46,00,000
Preference dividends (5,00,000 shares x 1.2) (6,00,000)
Related tax (₹ 6,00,000 x 30%) 1,80,000 (4,20,000)
Profit or loss attributable to P’s ordinary shareholders 41,80,000
Accordingly, the numerator for calculation of Basic EPS is ₹ 41,80,000

Determination of denominator for calculation of Basic EPS

The second step in the basic EPS calculation is to determine the weighted-average number of
ordinary shares outstanding for the reporting period.

Number of shares Time Weight Weighted average

weighting number of shares
1st April – opening balance 25,00,000 1
(30,00,000 – 5,00,000)
15th April – bonus issue
(1,50,000 – 25,000) 1,25,000
1st April to 30th April 26,25,000 1/12 2,18,750
1st May – repurchase of shares (2,00,000)
1st May to 31st October 24,25,000 6/12 12,12,500
1st November – new shares issued 4,00,000
1st November to 31st March 28,25,000 5/12 11,77,083
Weighted average number of shares for the year 26,08,333

The denominator for calculation of Basic EPS is 26,08,333 shares.

Basic EPS = ₹ 41,80,000 / 26,08,333 shares = ₹ 1.60 per share (approx.).

20
Extra Question (July 21 FR Q2a Final)

Special Limited is a multinational entity that owns 3 properties. All 3 properties were
purchased on 1st April, 2020. The following details were furnished:
Particulars Property 1 Property 2 Property 3
Purchase Price Rs 7,50,000 Rs 10,50,000 Rs 12,00,000
Estimated life 10 years 15 years 15 years
Fair value as on 31st March, 2021 Rs 8,00,000 Rs 9,50,000 Rs 13,00,000

The Company uses Property 1 and Property 2 for its business purposes. The Company is exploring the
opportunity to sell Property 3 if it gets reasonable consideration. Till the time it is not sold, the
Company has rented the property.
It has adopted revaluation model for subsequent measurement of these properties. The
depreciation is charged on straight line method. However, the Company has not charged any
depreciation on Property 1 and Property 3 tor the current year since the fair value of properties
exceeds their carrying amount. The difference between their fair value and carrying amount has
been recognized in the statement of profit and loss. The properties are shown under the head
property, plant and equipment in the Balance Sheet.
Analyze whether the accounting policies adopted by the Company in relation to the given
properties are in accordance with Ind AS. If not, advise the correct treatment and present an
extract of the Balance Sheet for the year ended 31st March 2021.
Solution:

As per the facts given in the question, Special Ltd. has

a. Presented all three properties in balance sheet as ‘property, plant and
equipment’;
b. Not charged depreciation to Property ‘1’ and ‘3’;
c. Upward revaluation is recognised in the statement of profit and loss as profit;and
d. Applied revaluation model to Property ‘3’ being classified as Investment
Property.
The above accounting treatment is neither correct nor in accordance with provision of Ind
AS 16 and Ind AS 40.
Accordingly, Special Ltd. shall depreciate Property 1 irrespective of the fact that, their fair
value exceeds the carrying amount. The revaluation gain shall be recognised in other
comprehensive income and accumulated in equity under the heading of revaluation
surplus.
There is no alternative of revaluation model in respect to property ‘3’ being classified as
Investment Property and only cost model is permitted for subsequent measurement.
However, Special Ltd. is required to disclose the fair value of the property in the Notes to
Accounts. Further, Property ‘3’ shall be presented as separate line item as Investment
Property and depreciation should be charged on it as well.
Therefore, as per the provisions of Ind AS 16 and Ind AS 40, the presentation of these
three properties in the balance sheet will be as follows:

21
 Balance Sheet (extracts) as at 31st March, 2021
Assets Rs
Non-Current Assets
Property, Plant and Equipment
Property ‘1’ 8,00,000
Property ‘2’ 9,50,000 17,50,000

Investment Properties
Property ‘3’ (1,200,000 – 80,000) 11,20,000
Equity and Liabilities
Other Equity
Revaluation Reserve
Property ‘1’ [8,00,000 – (7,50,000 – 75,000)] 1,25,000
The revaluation reserve should be routed through Other Comprehensive Income
(subsequently not reclassified to Profit and Loss) and shown in a separate column under
Statement of Changes in Equity.
Working Notes:
Particulars Property 1 Property 2 Property 3
Purchase Price Rs 7,50,000 Rs 10,50,000 Rs 12,00,000
Estimated Life 10 years 15 years 15 years
Depreciation for the year Rs 75,000 Rs 70,000 Rs 80,000
Carrying Value as on Rs 6,75,000 Rs 9,80,000 Rs 11,20,000
31st March, 2021
Fair Value as on Rs 8,00,000 Rs 9,50,000 Rs 13,00,000
31st March, 2021
Subsequent Measurement Fair Value Fair Value Cost
Revaluation Surplus / (Deficit) Rs 1,25,000 (Rs 30,000)

22
IND AS 41
Question 1 (RTP Nov 22 – Q.7)
ABC Ltd. is in the business of manufacturing an apple beverage and requires large quantity of apples
to manufacture such beverage. In order to satisfy its requirement of apples, it enters into 3 years
lease contracts with owners of apple orchards. The lease contracts are mainly of two types:

(1) Contract 1: The owner of the apple orchard (i.e. the lessor) raises the apple trees to produce
apples. ABC Ltd. (i.e. lessee) makes a fixed annual payment to the owner of the apple
orchard who is required to cultivate the produce as per the specifications of ABC Ltd. ABC
Ltd. harvests the apples itself for fulfilling its requirement of apples.
(2) Contract 2: ABC Ltd. obtains the apple orchard from owner (i.e. the lessor) to raise the apple
trees for subsequent harvest of the apples to ensure that the apples are as per the
requirements of ABC Ltd. ABC Ltd. makes a fixed annual payment to the owner of the apple
orchards (i.e. the lessor).
Explain whether ABC Ltd. is engaged in agricultural activity as per Ind AS 41 in both of the cases?

Solution
Paragraph 5 of Ind AS 41, Agriculture defines agricultural activity and biological transformation as
follows:

“Agricultural activity is the management by an entity of the biological transformation and harvest of
biological assets for sale or for conversion into agricultural produce or into additional biological
assets.”

“Biological transformation comprises the processes of growth, degeneration, production, and

procreation that cause qualitative or quantitative changes in a biological asset.”

Contract 1:

As per contract 1, during the 3 years of the contract, ABC Ltd. only harvests apples from the apple
orchards whereas biological transformation is managed by the owners of the apple orchards (i.e.
the lessor). Since ABC Ltd. is not involved in the biological transformation of the apple orchards and
is only harvesting biological assets , it cannot be said to be an agricultural activity as per Ind AS 41.
Hence, ABC Ltd. is not engaged in agricultural activity as per Ind AS 41.

Contract 2:

As per contract 2, ABC Ltd. obtains the apple orchards and is actively involved in the raising of apple
trees in order to ensure that the apples are as per its requirements. Since, it is actively managing
the biological transformation and harvest of biological asset, Hence, ABC Ltd. is engaged in
agricultural activity as per Ind AS 41.

23
IND AS 101
Question 5 (RTP May 23 - Q.5)
ABC Ltd., a public limited company, is in the business of exploration and production of oil
and gas and other hydrocarbon related activities outside India. It operates overseas
projects directly and/or through subsidiaries, by participation in various joint
arrangements and investment in associates. The company was following Accounting
Standards as notified under the Companies (Accounting Standards) Rules until 31st
March, 2011. However, it has adopted Indian Accounting Standards (Ind AS) with effect
from 1st April, 2011.
The goodwill recognised in accordance with AS 21 and AS 27 was due to corporate
structure and the line-by-line consolidation of subsidiaries’/proportionate consolidation of
jointly controlled entities’ financial statements which was prepared on historical costs
convention. ABC Ltd. has not taken into consideration the valuation of underlying oil and
gas reserves for which excess amount (i.e. goodwill calculated as per the relevant AS
requirements) has been paid by the company at the time of acquisition. The company
further considered that in oil and gas companies, the goodwill generated on acquisition of
mineral rights either through jointly controlled entities or subsidiaries, inherently derives
its value from the underlying mineral rights and, accordingly, value of such goodwill
depletes as the underlying mineral resources are extracted.
Therefore, taking a prudent approach and considering the above substance, the
company amortised the goodwill in respect of its subsidiaries / jointly controlled assets
over the life of the underlying mineral rights using Unit of Production method. This
allowed the company to utilise the value of goodwill over the life of mineral rights and
completely charging off the goodwill over the life of the reserves.
For financial year 2010-2011, the company has availed transition exemption under Ind
AS 101 and has not applied the principles of Ind AS 103 .
ABC Ltd. considering the substance over form of the goodwill to be in the nature of
'acquisition costs' intends to continue amortisation of the goodwill recognised under AS in
respect of its subsidiaries / joint ventures (jointly controlled entities under AS) over the life
of the underlying mineral rights using Unit of Production method, under Ind AS also post
transition date.
Comment on appropriateness of the accounting treatment, under Ind AS, for amortisation
of the goodwill by the company and state whether the accounting treatment in respect of
amortisation of goodwill is correct or not.

Solution
Ind AS 101 states that the carrying amount of goodwill or capital reserve in the opening
Ind AS Balance Sheet shall be its carrying amount in accordance with previous GAAP at
the date of transition to Ind AS after the two adjustments. One of the adjustment states
that the standard requires the first -time adopter to recognise an intangible asset that was
subsumed in recognised goodwill or capital reserve in accordance with previous GAAP,
the first -time adopter shall decrease the carrying amount of goodwill or increase the
carrying amount of capital reserve accordingly (and, if applicable, adjust deferred tax and
non-controlling interests)
As per the facts given, the entity paid excess amount to avail the rights to use the
underlying oil and gas reserves. However, since the rights was not recorded in the books
at that time, the value of goodwill subsumed the value of that intangible asset which
1

24
should be separately identified in the books. Hence, value of goodwill will be reduced
accordingly and intangible asset for rights for using mine should be recognised.
Further, regardless of whether there is any indication that the goodwill may be impaired,
the first-time adopter shall apply Ind AS 36 in testing the goodwill for impairment at the
date of transition to Ind AS and in recognising any resulting impairment loss in retained
earnings (or, if so required by Ind AS 36, in revaluation surplus). The impairment test
shall be based on conditions at the date of transition to Ind AS. No other adjustments (eg-
previous amortisation of goodwill) shall be made to the carrying amount of goodwill /
capital reserve at the date of tr ansition to Ind AS.
However, once goodwill is recognised in the opening transition date balance sheet, the
entity has to follow the provisions of Ind AS, which states that goodwill is not amortised
but rather tested for impairment annually. Accordingly, the amortization of goodwill
based on ‘Unit of Production’ method is not correct after implementation of Ind AS.

25
IND AS 115
Question 1 (RTP Nov 22 - Q.13)
A Ltd. owns 20 resorts across India. Every customer who stays in any of the resorts owned
by A Ltd. is entitled to get points on the basis of total amount paid by him. Under this
scheme, 1 point is granted for every ₹ 100 spent for stay in the resort. As per the past
experience of A Ltd., the likelihood of exercise of the points is 100% and the standalone
price of each such point is ₹ 5. Customer X spends ₹ 10,000 in one of the resorts of A Ltd.
What is the accounting treatment for the points granted by A Ltd.?

Solution

Ind AS 115, inter alia, states that, “if in a contract, an entity grants a customer the option to
acquire additional goods or services, that option gives rise to a separate performance
obligation only if the option provides a material right to the customer that it would not
receive without entering into that contract”.
Further, Ind AS 115 states that if a customer has the option to acquire an additional good or
service at a price that would reflect the stand-alone selling price for that good or service,
that option does not provide the customer with a material right even if the option can be
exercised only by entering into a previous contract. In those cases, the entity has made a
marketing offer that it shall account for in accordance with this Standard only when the
customer exercises the option to purchase the additional goods or services.
In the given case, the customer does get a material right by way of a discount of ₹ 500 for
every 100 points that he would not receive without the previous stay in that resort. Thus,
the customer in effect pays the entity in advance for future goods and the entity recognises
revenue when the goods are transferred.

Accordingly Ind AS 115 requires an entity to allocate the transaction price to performance
obligations on a relative stand-alone selling price basis. If the standalone selling price for a
customer’s option to acquire additional goods or services is not directly observable, an
entity shall estimate it on the basis of percentage discount the customer may obtain upon
exercising the option and the likelihood of the option getting exercised.
In accordance with above, an entity shall account for award credit as a separate
performance obligation of the sales transactions in which they are initially granted. The
value of the consideration the entity expects to be entitled in respect of the initial sale shall
be allocated between the award credits and the other components of the sale.
In the current case, the standalone selling price of the 100 points is ₹ 500. A Ltd. should
allocate the fair value of the consideration (i.e. ₹ 10,000) between the points and the other
components of the sale as ₹ 476 (500/10,500 x 10,000) and ₹ 9,524 (10,000/10,500 x
10,000) respectively in proportion of their standalone selli ng price. Since A Ltd. supplies
the awards itself (i.e. it acts as a principal), it should recognise ₹ 476 as revenue when
points are redeemed.

26
IND AS 115
Question 1 (RTP May 23 - Q.7)
Company X enters into an agreement on 1st January, 2011 with a customer for
renovation of hospital and install new air-conditioners for total consideration of ₹
50,00,000. The promised renovation service, including the installation of new air -

conditioners is a single performance obligation satisfied over time. Total expected costs
are ₹ 40,00,000 including ₹ 10,00,000 for the air-conditioners. Company X determines
that it acts as a principal in accordance with Ind AS 115 because it obtains control of the
air conditioners before they are transferred to the customer. The customer obtains control
of the air conditioners when they are delivered to the hospital premises.
Company X uses an input method based on costs incurred to measure its progress
towards complete satisfaction of the performance obligation.
As at 31st March, 2011, other costs incurred excluding the air conditioners are ₹ 6,00,000.
Whether Company X should include cost of the air conditioners in measure of its
progress of performance obligation? How should revenue be recognized for the year
ended 31st March, 2011?

Solution
Ind AS 115 inter alia, states that, “an entity shall exclude from an input method the effects
of any inputs that, in accordance with the objective of measuring progress, do not depict
the entity’s performance in transferring control of goods or services to the customer”.
In accordance with the above, Company X assesses whether the costs incurred to
procure the air conditioners are proportionate to the entity’s progress in satisfying the
performance obligation. The costs incurred to procure the air conditioners i.e ₹
10,00,000 are significantly relative to the total costs to completely satisfy the performance
obligation i.e. ₹ 40,00,000. Also, Company X is not involved in manufacturing or
designing of air conditioners.
Company X concludes that including the costs to procure the air conditioners in the
measure of progress would overstate the extent of the entity’s performance.
Consequently, in accordance with Ind AS 115, the entity adjusts its measure of progress
to exclude the costs to procure the air conditioners from the measure of costs incurred
and from the transaction price. The entity recognises revenue for the transfer of the air
conditioners at an amount equal to the costs to procure the air conditioners (i.e., at a zero
margin). Accordingly, the total revenue on account of renovation would be ₹ 50,00,000 –
₹ 10,00,000 = ₹ 40,00,000.
Company X assesses that as at 31st March, 2011, the performance is 20% complete
(i.e., ₹ 6,00,000 / ₹ 30,00,000).
Total revenue from renovation work would be
= ₹ 50,00,000 – ₹ 10,00,000 = ₹ 40,00,000.

27
Consequently, as at 31st March, 2011, Company X recognises the following:

Particulars ₹
Revenue [( ₹ 40,00,000 x 20%) + ₹ 10,00,000] 18,00,000
Less: Cost of goods ( ₹ 6,00,000 of costs incurred
sold +
(16,00,000)
₹ 10,00,000 costs of air conditioners)
Profit 2,00,000

28
RTP Nov 2022 Que 2
Ind AS 116
A company manufactures specialised machinery. The company offers customers the choice of
either buying or leasing the machinery. A customer chooses to lease the machinery. Details
of the arrangement are as follows:
(i) The lease commences on 1st April, 20X1 and lasts for three years.
(ii) The lessee is required to make three annual rentals payable in arrears of
₹ 57,500.
(iii) The leased machinery is returned to the lessor at the end of the lease.
(iv) The fair value of the machinery is ₹ 1,50,000, which is equivalent to the selling price of
the machinery
(v) The machinery cost ₹ 1,00,000 to manufacture. The lessor incurred cost s of ₹ 2,500 to
negotiate and arrange the lease.

(vi) The expected useful life of the machinery is 3 years. The machinery has an expected
residual value of ₹ 10,000 at the end of year three. The estimated residual value does not
change over the term of the lease.
(vii) The interest rate implicit in the lease is 10.19%.
The lessor classifies the lease as a finance lease.
How should the Lessor account for the same in its books of accounts? Pass necessary
journal entries.

Solution:
The cost to the lessor for providing the machinery on lease consists of the book value of the
machinery (₹ 1,00,000), plus the initial direct costs associated with entering into the lease (₹
2,500), less the future income expected from disposing of the machinery at the end of the
lease (the present value of the unguaranteed residual value of ₹ 10,000 discounted
@ 10.19%, being ₹ 7,470). This gives a cost of sale of ₹ 95,030.
The lessor records the following entries at the commencement of the lease:

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

29
 Year Lease Lease Interest Decrease Lease
receivable at payments Income In lease receivable at
the beginning (₹) (10.19% per receivable the end of
of year (₹) (b) annum) (₹) (₹ year (₹)
(a) (c) )(d)=(b)- (e)=(a)-(d)
(c)
1 1,50,000 57,500 15,285 42,215 1,07,785
2 1,07,785 57,500 10,983 46,517 61,268
3 61,268 57,500 6,232* 51,268 10,000
*Difference is due to approximation
The lessor will record the following entries:

₹ ₹
Year 1 Cash/Bank Dr. 57,500
To Lease receivableTo 42,215
Interest income 15,285
Year 2 Cash/Bank Dr. 57,500
To Lease receivable 46,517
To Interest income 10,983
Year 3 Cash/Bank Dr. 57,500
To Lease receivable 51,268
To Interest income 6,232
At the end of the three-year lease term, the leased machinery will be returned to the
lessor, who will record the following entries:
₹ ₹
Inventory Dr. 10,000
To Lease receivable 10,000

30
RTP May 2023 Que 10
How will Entity Y account for the incentive in the following scenarios:
Scenario A:
Entity Y (lessor) enters into an operating lease of property with Entity X (lessee) for a five-year term
at a monthly rental of ₹ 1,10,000. In order to induce Entity X to enter into the lease, Entity Y
provides ₹ 6,00,000 to Entity X at lease commencement for lessee improvements (i.e., lessee’s
assets).
Scenario B:
Entity Y (lessor) enters into an operating lease of property with Entity X (lessee) for a five-year term at a
monthly rental of ₹ 1,10,000. At lease commencement, Entity Y provides ₹ 6,00,000 to Entity X for
leasehold improvements which will be owned by Entity Y (i.e., lessor’s assets). The estimated useful
life of leasehold improvements is 5 years
Solution
Para 70 of Ind AS 116 state that at the commencement date, the lease payments included in the
measurement of the net investment in the lease comprise the following payments for the right to use
the underlying asset during the lease term that are not received at the commencement date:
(a) fixed payments (including in-substance fixed payments as described in para B42),
less any lease incentives payable;
(b) variable lease payments that depend on an index or a rate, in itially measured
using the index or rate as at the commencement date;
(c) any residual value guarantees provided to the lessor by the lessee, a party related to the
lessee or a third party unrelated to the lessor that is financially capable of discharging the
obligations under the guarantee;
(d) the exercise price of a purchase option if the lessee is reasonably certain to exercise that
option (assessed considering the factors described in para B37); and
(e) payments of penalties for terminating the lease, if the lease term reflects the lessee
exercising an option to terminate the lease.
Further para 71 of the standard states that a lessor shall recognise lease payments from
operating leases as income on either a straight-line basis or another systematic basis. The lessor
shall apply another systematic basis if that basis is more representative of the pattern in which
benefit from the use of the underlying asset is diminished.”
Scenario A
In accordance with above, in the given case, at lease commencement, Entity Y accounts for the
incentive as follows:
To account for the lease incentive
Deferred lease incentive Dr ₹ 6,00,000
To Cash ₹ 6,00,000
Recurring monthly journal entries in Years 1 – 5
To record cash received on account of lease rental and amortisation of lease incentiveover the lease
term
Cash Dr ₹ 6,00,000

31
 To Lease income ₹ 1,00,000
To Deferred lease incentive ₹ 10,000*

* This is calculated as ₹ 6,00,000 ÷ 60 months.

Scenario B
Entity Y has provided lease incentive amounting to ₹ 6,00,000 to Entity X for leasehold improvements in
the premises. As Entity Y has the ownership of the leasehold improvements carried out by the
lessee, it shall account for the same as property, plant and equipment and shall depreciate the
same over its useful life.
In accordance with above, in the given case, at lease commencement, Entity Y accounts for the
incentive as follows:
To record the lease incentive

Property, plant & Equipment Dr ₹ 6,00,000

To Cash ₹ 6,00,000

Recurring monthly journal entries in Years 1 – 5

To record cash received on account of lease rental over the lease term

Cash Dr ₹ 1,10,000

To Lease income ₹ 1,10,000

To record depreciation on PPE over the lease term using straight line method

Depreciation Dr ₹ 1,10,000

To Accumulated Depreciation ₹ 1,10,000

32
Final Examination: Nov 2022

Question 5

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

(c)

1st April 31st March 31st March 31st March

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

33
 Equity option (cumulative) (4,80,000 x (4,80,000 x (4,80,000 x
1/3) 2/3) 3/3)
1,60,000 3,20,000 4,80,000

Expense for
the period
Equity 1,60,000 (3,20,000 – 1,60,000) (4,80,000 – 3,20,000)
option 1,60,000 1,60,000
Cash Option 32,90,000 (66,73,333 – 32,90,000) (1,02,20,000 – 66,73,333)
33,83,333 35,46,667
Total 34,50,000 35,43,333 37,06,667
Journal Entries

(i) If Cash alternative is chosen: ` `

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

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

34
 PAPER –1: FINANCIAL REPORTING
PART – I
Amendments applicable from November, 2022 examination
Companies (Indian Accounting Standards) (Amendment) Rules, 2022
MCA has issued Companies (Indian Accounting Standards) (Amendment) Rules, 2022 to
amend Companies (Indian Accounting Standards) Rules, 2015 vide notification G.S.R. 255(E)
dated 23rd March, 2022. These amendments are generally brought by MCA to keep uniformity
between Ind AS and IFRS. However, this time MCA has come out with a carve out in Ind AS
16. These amendments come into effect from 1 st April, 2022 and is applicable for the financial
year 2022-2023 onwards for the financial statements prepared on the basis of Ind AS.
Following are the areas in which the amendments have been brought in by the MCA through
this notification:
 Amendment to Ind AS 16 ‘Property, Plant and Equipment’ on accounting of proceeds from
selling of items produced during testing and carve out in this regard from IAS 16 .
 Amendment to Ind AS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’ on
determination of cost of fulfilling a contract for measurement of provision for an onerous
contract.
 Amendments to Ind AS 103 ‘Business Combinations’ with reference to Conceptual
Framework for Financial Reporting and insertion of certain paragraphs under exceptions
to recognition principle on liabilities, contingent liabilities and contingent assets
 Annual improvements to Ind AS (2021) in Ind AS 101 ‘First Time Adoption of Indian
Accounting Standards’, Ind AS 109 ‘Financial Instruments’ and Ind AS 41 ‘Agriculture’.
The key amendments to Ind AS pursuant to the Companies (Indian Accounting Standards)
(Amendments) Rules, 2022 are explained below:

Ind AS Significant amendment made in 2022

Ind AS 16, ‘Property, Para 17(e) of Ind AS 16 has been amended by adding a
Plant and Equipment’ clarification that the excess of net proceeds from sale of items
produced during testing will not be credited to Profit or loss i.e. it
will be deducted from the cost of an item of property, plant and
equipment.

© The Institute of Chartered Accountants of India

35
 2 FINAL EXAMINATION: NOVEMBER, 2022

Ind AS Significant amendment made in 2022

However, amendment made in IAS 16 by IASB prohibited
deduction of proceeds of items produced during testing from cost
of an item of property, plant and equipment.
This differential treatment in IAS 16 and Ind AS 16 has led to a
carve out, which will have consequential impact on depreciation,
impairment and deferred tax.
Ind AS 37 Paragraph 68A has been inserted which clarifies which cost
‘Provisions, needs to be considered in the costs to fulfil a contract while
Contingent Liabilities determining whether the contract as onerous.
and Contingent As per the amendment made in 2022, both the incremental costs
Assets’ to fulfil a contract and allocation of directly attributable costs will
form part of the cost used for determination of onerous contract.
Para 69 has been amended by replacing ‘assets dedicated to
the contract’ to ‘assets used in fulfilling the contract’. This
amendment requires to take into consideration the impairment
loss on all the assets whose cost will be considered in assessing
the contract as onerous.
These amendments are prospective from 1 st April, 2022 with
cumulative effect recognised in the opening balance of retained
earnings or other component of equity, as appropriate on
1 st April, 2022. Comparative period financials not to be restated.
Ind AS 103 ‘Business In March, 2018, IASB revised Conceptual Framework for
Combinations’ Financial Reporting.
Accordingly, ICAI in August, 2020 came out with the revised
Conceptual Framework for Financial Reporting (the Conceptual
Framework) under Ind AS.
The amendments made in Ind AS 103 is due to change in
reference to Conceptual Framework without change in the
accounting requirements for business combinations.
Due to revision in the Conceptual Framework, there were certain
accounting implications to contingent liabilities and levies within
the scope of Ind AS 37 and Appendix C ‘Levies’.
As per it, the assets and liabilities in a business combination are
recognised if they meet the definition of an asset or liability as per

© The Institute of Chartered Accountants of India

36
 PAPER – 1 : FINANCIAL REPORTING 3

Ind AS Significant amendment made in 2022

the Conceptual Framework. The timing of recognition of a levy
may sometimes be different due to specific guidance given in
Appendix C. Therefore, while recognizing levies at the acquisition
date, an acquirer might recognise at the acquisition date a liability
to pay a levy that it would not recognise subsequently when
applying Appendix C ‘Levies’. This difference would arise
because an entity might recognise a liability earlier by applying
the Conceptual Framework. This liability would be derecognized
immediately afterwards when principles of Appendix C are
applied, and the entity would recognise a so-called Day 2 gain.
Therefore, to resolve this implication, Ind AS 103 has been
amended with regards to recognition exception for contingent
liabilities and levies by inserting para 21A to 21C. An exception
has been added to the requirements of para 11 of Ind AS 103 for
liabilities and contingent liabilities that would be within the scope
of Ind AS 37 or Appendix C if incurred separately, rather than
assumed in a business combination.
Further, Ind AS 103 prohibited the recognition of contingent
assets even prior to the 2022 amendments. However, prohibition
was not stated explicitly in Ind AS 103 itself. Therefore, para 23A
has been inserted in Ind AS 103 to explicitly prohibit recognition
of contingent asset.
Ind AS 101 ‘First time Para D13 of Ind AS 101 provides an exemption to a first-time
adoption of Indian adopter of Ind AS with regard to cumulative translation differences
Accounting on the date of transition to Ind AS. According to it, first time
Standards’ adopter of Ind AS are permitted to deem all cumulative translation
differences for all foreign operations to be zero on the date of
transition to Ind AS.
Para D13A has been inserted in Ind AS 101 which removes the
conflict between the requirements of paragraph D16(a) of
Ind AS 101 which provides exemption where a subsidiary adopts
Ind AS later than its parents and the exemptions on cumulative
translation differences at the carrying amount included in the
parent’s consolidated financial statements. Similar exemption is
available to joint venture and an associate that uses the
exemption in para D16(a) of Ind AS 101. Para D16(a) of

© The Institute of Chartered Accountants of India

37
 4 FINAL EXAMINATION: NOVEMBER, 2022

Ind AS Significant amendment made in 2022

Ind AS 101 provides that a subsidiary can measure its assets and
liabilities at the carrying amounts in parent’s consolidated
financial statements.
Ind AS 109 ‘Financial As per Ind AS 109, a financial liability is derecognised when it is
Instruments’ extinguished, which includes exchange between an existing
borrower and lender due to different or substantial modification in
terms of the contract.
Further, Ind AS 109 clarified that terms are considered to have
been substantially modified when the net present value of the
cash flows under the new terms (including any fees paid net of
any fees received) and discounted using the original EIR differs
by atleast 10% from the present value of the remaining cash flows
under the original terms.
Earlier what is to be included in the fees paid and fees received
was not mentioned in the standard.
Now the amendment has been made in 2022 by substituting para
B3.3.6 and inserting para B3.3.6A in Ind AS 109 which clarify that
the fees paid (for the above purpose) includes amount paid by
the borrower to or on behalf of the lender and fees received
includes fees amounts paid by the lender to or on behalf of the
borrower.
The above amendment will be applied prospectively to
modifications and exchanges that occur on or after the date the
entity first applies the amendment.
Ind AS 41 Earlier para 22 of Ind AS 41 prescribed certain cash flows that
‘Agriculture’ would not be considered for the purpose of assessing the fair
values.
Out of those cash flows, the amendment made in 2022 deleted
the cash flows for taxation from the exclusion list for measurement
of fair value.
This implies that tax cash flows must be included in the fair value
measurement of biological assets as per Ind AS 41.

© The Institute of Chartered Accountants of India

38
 PAPER – 1 : FINANCIAL REPORTING 5

PART – II

QUESTIONS

Ind AS 101, Ind AS 102 and Ind AS 8

1. On 1st April 20X1, Nuogen Ltd. had granted 1,20,000 share options to its employees with
the vesting condition being a service condition as follows:
• Vesting date : 31 st March 20X2 - 80,000 share options (1-year vesting period since
grant date)
• Vesting date : 31 st March 20X5 - 40,000 share options (4-year vesting period since
grant date)
Each option can be converted into one equity share of Nuogen Ltd. The fair value of the
options on grant date, i.e., on 1 st April 20X1 was ` 20.
Nuogen Ltd. is required to prepare financial statements in Ind AS for the financial year
ending 31 st March 20X4. The transition date for Ind AS being 1 st April 20X2.
The entity has disclosed publicly the fair value of both these equity instruments as
determined at the measurement date, as defined in Ind AS 102.
The previous applicable GAAP for the entity was IGAAP (AS) and therein, the entity had
not adopted intrinsic method of valuation.
The share options have not been yet exercised by the employees of Nuogen Ltd.
How the share based payment should be reflected in, the books of Nuogen Ltd. as on
31st March 20X4, assuming that the entity has erred by not passing any entry for the
aforementioned transactions in the books of Nuogen Ltd. on grant date, i.e.
1 st April 20X1?
Ind AS 116
2. A company manufactures specialised machinery. The company offers customers the
choice of either buying or leasing the machinery. A customer chooses to lease the
machinery. Details of the arrangement are as follows:
(i) The lease commences on 1 st April, 20X1 and lasts for three years.
(ii) The lessee is required to make three annual rentals payable in arrears of
` 57,500.
(iii) The leased machinery is returned to the lessor at the end of the lease.
(iv) The fair value of the machinery is ` 1,50,000, which is equivalent to the selling price
of the machinery
(v) The machinery cost ` 1,00,000 to manufacture. The lessor incurred costs of
` 2,500 to negotiate and arrange the lease.

© The Institute of Chartered Accountants of India

39
 6 FINAL EXAMINATION: NOVEMBER, 2022

(vi) The expected useful life of the machinery is 3 years. The machinery has an
expected residual value of ` 10,000 at the end of year three. The estimated residual
value does not change over the term of the lease.
(vii) The interest rate implicit in the lease is 10.19%.
The lessor classifies the lease as a finance lease.
How should the Lessor account for the same in its books of accounts? Pass necessary
journal entries.
Ind AS 20
3. To encourage entities to expand their operations in a specified development zone, the
government provides interest-free loans to fund the purchase of manufacturing
equipment.
In accordance with the development scheme, an entity receives an interest -free loan of
` 5,00,000 from the government for a period of three years. The market rate of interest
for similar loans for 3 years is 5% per year.
There are no future performance conditions attached to the interest -free loan.
Discuss how to account for the above loan. Pass necessary journal entries in the entity’s
books of accounts from year 1 to year 3, as per relevant Ind AS.
Ind AS 1
4. As per the statutory requirements, exceptional items are required to be disclosed
whereas Ind AS 1 requires separate disclosures of material items and how these are to
be presented in the financial statements. Does that imply that ‘exceptional’ means
‘material’? Give examples. How should these be presented in the financial statements?
Ind AS 12
5. Following is the summarized statement of profit and loss of EARTH Limited as per
Ind AS for the year ended 31 st March 20X1:
Particulars ` in Crore
Revenue from operations 1,160.00
Other income 56.00
Total Income (A) 1,216.00
Purchase of stock-in-trade 40.00
Changes in inventories of stock-in-trade 6.00
Employee benefits expense 116.00
Finance costs 130.00
Depreciation and amortization expense 30.00

© The Institute of Chartered Accountants of India

40
 PAPER – 1 : FINANCIAL REPORTING 7

Other expenses 300.00

Total Expenses (B) 622.00
Profit Before Tax (A-B) 594.00
Current tax 165.40
Deferred tax 1.50
Tax Expenses 166.90
Profit after Tax 427.10
Additional information:
• Corporate income tax rate applicable to EARTH Limited is 30%.
• Other income includes long-term capital gains of ` 10 crore which are taxable at
the rate of 10%.
• Other expenses include the following items which are not deductible for income tax
purposes:
Item ` in Crore
Penalties 1.00
Impairment of goodwill 44.00
Corporate Social Responsibility expense 6.00

• Other expenses include research and development (R & D) expenditure of

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

© The Institute of Chartered Accountants of India

41
 8 FINAL EXAMINATION: NOVEMBER, 2022

Ind AS 34
6. PQR Ltd. is preparing its interim financial statements for quarter 3 of the year. How the
following transactions and events should be dealt with while preparing its interim
financials:
(i) It makes employer contributions to government-sponsored insurance funds that are
assessed on an annual basis. During Quarter 1 and Quarter 2 larger amount of
payments for this contribution were made, while during the Quarter 3 minor
payments were made (since contribution is made upto a certain maximum level of
earnings per employee and hence for higher income employees, the maximum
income reaches before year end).
(ii) The entity intends to incur major repair and renovation expense for the office
building. For this purpose, it has started seeking quotations from vendors. It also
has tentatively identified a vendor and expected costs that will be incurred for this
work.
(iii) The company has a practice of declaring bonus of 10% of its annual operating
profits every year. It has a history of doing so.
Ind AS 41
7. ABC Ltd. is in the business of manufacturing an apple beverage and requires large
quantity of apples to manufacture such beverage. In order to satisfy its requirement of
apples, it enters into 3 years lease contracts with owners of apple orchards. The lea se
contracts are mainly of two types:
(1) Contract 1: The owner of the apple orchard (i.e. the lessor) raises the apple trees
to produce apples. ABC Ltd. (i.e. lessee) makes a fixed annual payment to the
owner of the apple orchard who is required to cultivate the produce as per the
specifications of ABC Ltd. ABC Ltd. harvests the apples itself for fulfilling its
requirement of apples.
(2) Contract 2: ABC Ltd. obtains the apple orchard from owner (i.e. the lessor) to raise
the apple trees for subsequent harvest of the apples to ensure that the apples are
as per the requirements of ABC Ltd. ABC Ltd. makes a fixed annual payment to
the owner of the apple orchards (i.e. the lessor).
Explain whether ABC Ltd. is engaged in agricultural activity as per Ind AS 41 in both of
the cases?
Ind AS 23
8. Harish Construction Company is constructing a huge building project consisting of four
phases. It is expected that the full building will be constructed over several years but
Phase I and Phase II of the building will be operational as soon as they are completed.

© The Institute of Chartered Accountants of India

42
 PAPER – 1 : FINANCIAL REPORTING 9

Following is the detail of the work done on different phases of the building during the
current year:
(` in lakh)
Phase I Phase II Phase III Phase IV
` ` ` `
Cash expenditure 10 30 25 30
Building purchased 24 34 30 38
Total expenditure 34 64 55 68
Total expenditure of all phases 221
Loan taken @ 15% at the beginning 200
of the year
After taking substantial period of construction, at the mid of the current year, Phase I
and Phase II have become operational. Find out the total amount to be capitalized and
to be expensed during the year.
Ind AS 103
9. How should contingent consideration payable in relation to a business combination be
accounted for on initial recognition and at the subsequent measurement in the following
cases:
(a) On 1 st April 20X1, A Ltd. acquires 100% interest in B Ltd. As per the terms of
agreement the purchase consideration is payable in the following 2 tranches:
• an immediate issuance of 10 lakhs shares of A Ltd. having face value of
` 10 per share;
• a further issuance of 2 lakhs shares after one year if the profit before interest
and tax of B Ltd. for the first year following acquisition exceeds ` 1 crore.
The fair value of the shares of A Ltd. on the date of acquisition is ` 20 per share.
Further, the management has estimated that on the date of acquisition, the fair
value of contingent consideration is ` 25 lakhs.
During the year ended 31 st March, 20X2, the profit before interest and tax of B Ltd.
exceeded ` 1 crore. As on 31 st March, 20X2, the fair value of shares of A Ltd. is
` 25 per share.
(b) Continuing with the fact pattern in (a) above except for:
• The number of shares to be issued after one year is not fixed.

© The Institute of Chartered Accountants of India

43
 10 FINAL EXAMINATION: NOVEMBER, 2022

• Rather, A Ltd. agreed to issue variable number of shares having a fair value
equal to ` 40 lakhs after one year, if the profit before interest and tax for the
first year following acquisition exceeds ` 1 crore.
Ind AS 102
10. The following particulars in respect of stock options granted by a company are available:
No. of Employees covered 400 Nominal Value per share ` 100
No. of options per Employee 60 Exercise price per share ` 125
Shares offered were put in three groups. Group 1 was for 20% of shares offered with
vesting period one-year. Group II was for 40% of shares offered with vesting period two -
years. Group III was for 40% of shares offered with vesting period three -years. Fair value
of option per share on grant date was ` 10 for Group I, ` 12.50 for Group II and ` 14 for
Group III.
Position on 1st Year Position on 2nd Year Position on 3rd Year
- No. of employees left - Employees left = 35 - Employees left = 28
= 40
- Estimate of employees - Estimate of employees - Employees exercising
to leave in Year 2 = 36 to leave in Year 3 = 30 Options in Group III =
295
- Estimate of employees - Employees exercising
to leave in Year 3 = 34 Options in Group II = 319
- Employees exercising
Options in Group I
= 350
Options not exercised immediately on vesting, were forfeited. Compute expenses to
recognise in each year and show important accounts in the books of the company.
Ind AS 7
11. What will be the classification for following items in the statement of cash flows of both
(i) Banks / Financial institutions and (ii) Other Entities?
S. Particulars
No.
1. Interest received on loans and advances given
2. Interest paid on deposits and other borrowings
3. Interest and dividend received on investments in subsidiaries, associates and
in other entities

© The Institute of Chartered Accountants of India

44
 PAPER – 1 : FINANCIAL REPORTING 11

4. Dividend paid on preference and equity shares, including tax on dividend paid
on preference and equity shares by other entities
5. Finance charges paid by lessee under finance lease
6. Payment towards reduction of outstanding finance lease liability
7. Interest paid to vendor for acquiring fixed asset under deferred payment basis
8. Principal sum payment under deferred payment basis for acquisition of fixed
assets
9 Penal interest received from customers for late payments
10. Penal interest paid to suppliers for late payments
11. Interest paid on delayed tax payments
12. Interest received on tax refunds
Ind AS 38
12. An entity has an intangible asset in the form of a product protected by patented
technology which is expected to be a source of net cash inflows for at least 15 years. It
has been recognised in the books on initial date at ` 12,00,000. The entity has a
commitment from a third party to purchase that patent in five years for 60 per cent of the
fair value of the patent at the date it was acquired, and the entity intends to sell the
patent in five years. Company is amortising the asset in 15 years considering its residual
value to be Zero. Annual amortization charged to Profit and Loss is ` 80,000. State,
whether the accounting treatment done by the Company is in accordance with
Ind AS 38? If not, then calculate the annual amortization of the intangible asset and also
the amount at which it will be reflected in the balance sheet.
Ind AS 115
13. A Ltd. owns 20 resorts across India. Every customer who stays in any of the resorts
owned by A Ltd. is entitled to get points on the basis of total amount paid by him. Under
this scheme, 1 point is granted for every ` 100 spent for stay in the resort. As per the
past experience of A Ltd., the likelihood of exercise of the points is 100% and the
standalone price of each such point is ` 5. Customer X spends ` 10,000 in one of the
resorts of A Ltd. What is the accounting treatment for the points granted b y A Ltd.?
Ind AS 105
14. Company A has financial year ending 31 st March, 20X0. On 1 st June, 20X0, the Company
has classified its Division B as held for sale in accordance with Ind AS 105. How
property, plant and equipment (PPE) for which the company has adopted cost model
shall be measured immediately before the classification as held for sale on
1 st June, 20X0?

© The Institute of Chartered Accountants of India

45
 12 FINAL EXAMINATION: NOVEMBER, 2022

Ind AS 37
15. HVCL manufactures heavy equipment for construction industry. An order for supply of
90 equipment was received from ABIL. The unit price of the equipment was agreed at
` 190 lakhs each. 64 equipment was supplied during the year 20X1-20X2 and balance
quantity remaining to be supplied as on 31.3.20X2. HVCL has 5 equipment in its
inventory as on 31.3.20X2. HVCL considered that the contract was an onerous contract
and therefore, the net realisable value of inventory has been taken as value of inventory
as on 31.3.20X2.
The management of HVCL contends that costs incurred towards administrative
overheads, finance charges, R & D expenses, sales overhead, head quarter expenditure
etc., are considered as period cost and hence not considered for creation of provision.
Hence, the same have not been included in the computation of unavoidable cost.
The management of HVCL has submitted the details of costs that have been considered
for creation of provision towards onerous contract:
o Material cost - includes cost of material procured, cost of freight & insurance
incurred for material procurement and handling, loading and unloading charges
incurred.
o Labour cost/ Factory Overheads - includes salaries and other expenses of direct
production department, and also expenses allocated from indirect departments to
direct department.
o Material Overheads - Includes salaries and other expenses (including expenses
allocated from other departments) booked under departments linked with materials
like purchases, stores and quality control.
Accordingly, provision has been made considering the above costs only. The value of
provision created for 21 remaining equipment to be produced is as per the working shown
below:
Particulars Value (` in lakh)
(i) Cost of production (which includes material cost, labour 199.00
cost/factory overhead and material overhead)
(ii) Selling price (190.00)
(iii) Differential cost per equipment 9.00
(iv) Differential cost of ` 9 Lakh per equipment for 21 189.00
equipment
Whether the company's accounting treatment of cost for creation of provision towards
onerous contracts is in line with the provisions of Ind AS 37?

© The Institute of Chartered Accountants of India

46
 PAPER – 1 : FINANCIAL REPORTING 13

Ind AS 2 and Ind AS 16

16. (i) A retailer company imported goods at a cost of ` 1,30,000 including ` 20,000
non-refundable import duties and ` 10,000 refundable purchase taxes. The risks
and rewards of ownership of the imported goods were transferred to the retailer
company upon collection of the goods from the harbour warehouse. The retailer
company was required to pay for the goods upon collection. The retailer company
incurred ` 5,000 to transport the goods to its retail outlet and a further ` 2,000 in
delivering the goods to its customer. Further selling costs of ` 3,000 were incurred
in selling the goods.
State whether delivery charges and selling expenses will form part of the cost of
inventory. If not, then why? Also calculate the cost of inventory.
(ii) Company A incurred ` 20,000 as cost for restoring the site on which the item of
PPE was located. This item was used for manufacturing of goods and the
requirement for restoring will arise due to manufacturing of goods.
What will the treatment of this ` 20,000 in the books of Company A? Analyse on
the basis of the provisions of relevant Ind AS.
Ind AS 33
17. Company S is a subsidiary of Company P.
Following facts are in respect of Company S:
• Company S has 10,000 ordinary shares and 1,000 options outstanding, of which
Company P owns 9,000 shares and 500 options, respectively.
• The options have an exercise price of ` 40.
• The average market price of Company S’s ordinary share was ` 50 in 20X1.
• In 20X1, Company S’s profit was ` 30,000.
Following facts are in respect of Company P:
• Company P has 5,000 ordinary shares outstanding.
• In 20X1, Company P’s profit (excluding any distributed and undistributed earnings
of subsidiaries) was ` 7,000.
• The options outstanding are dilutive at P’s level.
Determine the diluted EPS of Company P for the year 20X1. Ignore income tax.
Ind AS 32 and Ind AS 109
18. On 1st April, 20X1 an entity granted an interest-free loan of ` 5,00,000 to an employee
for a period of three years. The market rate of interest for similar loans is 5% per year.

© The Institute of Chartered Accountants of India

47
 14 FINAL EXAMINATION: NOVEMBER, 2022

On 31st March, 20X3, because of financial difficulties, the employee asked to extend the
interest-free loan for further three years. The entity agreed. Under the restructured
terms, repayment will take place on 31 st March, 20X7. However, the entity only expects
to receive a payment of ` 2,50,000, given the financial difficulty of the employee.
Explain the accounting treatment on initial recognition of loan and after giving effect of
the changes in the terms of the loan as per Ind AS 109. Support your answer with Journal
entries and amortised cost calculation, as on the date of initial recognition and on the
date of change in terms of loan.
Ind AS 40 and Ind AS 16
19. An entity owns a two-storey building. Floor 1 is rented out to independent third parties
under operating leases. Floor 2 is occupied by the entity’s administration and
maintenance staff. The entity can measure reliably the fair value of each floor of the
building without undue cost or effort. How the same will be classified / presented in the
balance sheet as per relevant Ind AS. What will be the accounting treatment as per
relevant Ind AS on initial and subsequent date?
Ind AS 8 and Ind AS 34
20. While preparing interim financial statements for the half-year ended
30th September, 20X1, an entity notes that there has been an under-accrual of certain
expenses in the interim financial statements for the first quarter ended 30 th June, 20X1.
The amount of under accrual is assessed to be material in the context of interim financial
statements. However, it is expected that the amount would be immaterial in the context
of the annual financial statements. The management is of the view that there is no ne ed
to correct the error in the interim financial statements considering that the amount is
expected to be immaterial from the point of view of the annual financial statements.
Whether the management’s view is acceptable?

ANSWERS

1. For 80,000 share-based options vested before transition date:

Ind AS 101 provides that a first-time adopter is encouraged, but not required, to apply
Ind AS 102 on ‘Share-based Payment’ to equity instruments that vested before the date
of transition to Ind AS. Hence, Nuogen Ltd. may opt for the exemption given in
Ind AS 101 for 80,000 share options vested before the transition date. However, since
no earlier accounting was done for these share-based options under previous GAAP too,
therefore this led to an error on the transition date, as detected on the reporting date i.e.
31st March, 20X4. Hence, being an error, no exemption could be availed by Nuogen Ltd.
on transition date with respect to Ind AS 102.

© The Institute of Chartered Accountants of India

48
 PAPER – 1 : FINANCIAL REPORTING 15

While preparing the financial statements for the financial year 20X3 -20X4, an error has
been discovered which occurred in the year 20X1-20X2, i.e., for the period which was
earlier than earliest prior period presented. The error should be corrected by restating
the opening balances of relevant assets and/or liabilities and relevant component of
equity for the year 20X2-20X3. This will result in consequential restatement of balances
as at 1 st April, 20X2 (i.e, opening balance sheet as at 1st April, 20X2).
Accordingly, on retrospective calculation of Share based options with respect to 80,000
options, Nuogen Ltd. will create ‘Share based payment reserve (equity)’ by ` 16,00,000
and correspondingly adjust the same though Retained earnings.
For 40,000 share based options to be vested on 31 st March, 20X5:
Since share-based options have not been vested before transition date, no option as per
Ind AS 101 is available to Nuogen Ltd. The entity will apply Ind AS 102 retrospectively.
However, Nuogen Ltd. did not account for the same at the grant date. This will result in
consequential restatement of balances as at 1 st April, 20X2 (i.e, opening balance sheet
as at 1st April, 20X2). Adjustment is to be made by recognising the ‘Share based
payment reserve (equity)’ and adjusting the retained earnings by ` 2,00,000.
Further, expenses for the year ended 31 st March, 20X3 and share based payment
reserve (equity) as at 31 st March, 20X3 were understated because of non-recognition of
‘employee benefits expense’ and related reserve. To correct the above errors in the
annual financial statements for the year ended 31 st March, 20X4, the entity should
restate the comparative amounts (i.e., those for the year ended 31 st March, 20X3) in the
statement of profit and loss. In the given case, ‘Share based payment reserve (equity)’
would be credited by ` 2,00,000 and ‘employee benefits expense’ would be debited by
` 2,00,000
For the year ending 31 st March, 20X4, ‘Share based payment reserve (equity)’ would be
credited by ` 2,00,000 and ‘employee benefits expense’ would be debited by ` 2,00,000.
Working Note:
Period Lot Proportion Fair value Cumulative Expenses
expenses
a b d= b x a e = d-
previous
period d
20X1-20X2 1 (1-year 1/1 16,00,000 16,00,000 16,00,000
vesting period)
20X1-20X2 2 (4-year 1/4 8,00,000 2,00,000 2,00,000
vesting period)
20X2-20X3 2 (4-year 2/4 8,00,000 4,00,000 2,00,000
vesting period)

© The Institute of Chartered Accountants of India

49
 16 FINAL EXAMINATION: NOVEMBER, 2022

20X3-20X4 2 (4-year 3/4 8,00,000 6,00,000 2,00,000

vesting period)
2. The cost to the lessor for providing the machinery on lease consists of the book value of
the machinery (` 1,00,000), plus the initial direct costs associated with entering into the
lease (` 2,500), less the future income expected from disposing of the machinery at the
end of the lease (the present value of the unguaranteed residual value of
` 10,000 discounted @ 10.19%, being ` 7,470). This gives a cost of sale of
` 95,030.
The lessor records the following entries at the commencement of the lease:
` `
Lease receivable Dr. 1,50,000
Cost of sales Dr. 95,030
To Inventory 1,00,000
To Revenue 1,42,530
To Creditors/Cash 2,500
The sales profit recognised by the lessor at the commencement of the lease is therefore
` 47,500 (` 1,42,530 - ` 95,030). This is equal to the fair value of the machinery of
` 1,50,000, less the book value of the machinery (` 1,00,000) and the initial direct costs
of entering into the lease (` 2,500). Revenue is equal to the lease receivable
(` 1,50,000), less the present value of the unguaranteed residual value (` 7,470).
Year Lease Lease Interest Decrease Lease
receivable at payments Income In lease receivable at
the beginning (`) (10.19% per receivable the end of
of year (`) (b) annum) (`) (`) year (`)
(a) (c) (d)=(b)-(c) (e)=(a)-(d)
1 1,50,000 57,500 15,285 42,215 1,07,785
2 1,07,785 57,500 10,983 46,517 61,268
3 61,268 57,500 6,232* 51,268 10,000
*Difference is due to approximation
The lessor will record the following entries:
` `
Year 1 Cash/Bank Dr. 57,500
To Lease receivable 42,215
To Interest income 15,285

© The Institute of Chartered Accountants of India

50
 PAPER – 1 : FINANCIAL REPORTING 17

Year 2 Cash/Bank Dr. 57,500

To Lease receivable 46,517
To Interest income 10,983
Year 3 Cash/Bank Dr. 57,500
To Lease receivable 51,268
To Interest income 6,232
At the end of the three-year lease term, the leased machinery will be returned to the
lessor, who will record the following entries:
` `
Inventory Dr. 10,000
To Lease receivable 10,000
3. The entity measures the loan on initial recognition at ` 4,32,000, which is the present
value of the loan (financial liability) — ` 5,00,000/(1.05) 3. ` 68,000, the difference
between the loan proceeds received ` 5,00,000 (the loan’s face value) and present value
of the loan ` 4,32,000, is a government grant and is recognised immediately as there
are no specified future performance conditions.
The amount recognised on day one will accrete to ` 5,00,000 over the three-year term
using the effective interest method.
Journal Entries
On initial recognition:
` `
Cash/Bank (financial asset) Dr. 5,00,000
To Loan (financial liability) 4,32,000
To Income (profit or loss) 68,000
(Being interest-free loan recognised at fair value and the
receipt of a government grant)
At the end of
Year 1:
` `
Finance cost (profit or loss) Dr. 21,600
To Loan (financial liability) 21,600
(Being accretion of time value recognised on the financial
liability)

© The Institute of Chartered Accountants of India

51
 18 FINAL EXAMINATION: NOVEMBER, 2022

Year 2
` `
Finance cost (profit or loss) Dr. 22,680
To Loan (financial liability) 22,680
(Being accretion of time value recognised on the financial
liability)
Year 3
` `
Finance cost (profit or loss) Dr. 23,720
To Loan (financial liability) 23,720
(Being accretion of time value recognised on the financial
liability)
Immediately after all the accretions are recognised, the carrying amount of the loan is
equal to its face value of ` 5,00,000, which is also the amount payable to the government.
` `
Loan (financial liability) Dr. 5,00,000
To Cash/Bank 5,00,000
(Being loan repaid to the government)
Working Note:
Calculation of Amortised Cost
Year Opening balance Interest at 5% Cash flow Closing balance
(A) (B) = (A) x 5% (C) (A) + (B) – (C)
1 4,32,000 21,600 – 4,53,600
2 4,53,600 22,680 – 4,76,280
3 4,76,280 23,720* (5,00,000) –
* Difference is due to approximation.
4. Exceptional items have not been defined in Indian Accounting Standards (Ind AS ).
However, paragraph 97 of Ind AS 1 requires that when items of income or expense are
material, an entity shall disclose their nature and amount separately.
As per Ind AS 1, information is material if omitting, misstating or obscuring it could
reasonably be expected to influence decisions that the primary users of general purpose

© The Institute of Chartered Accountants of India

52
 PAPER – 1 : FINANCIAL REPORTING 19

financial statements make on the basis of those financial statements, which provi de
financial information about a specific reporting entity. Materiality depends on the nature
or magnitude of information, or both and it could be the determining factor.
When items of income and expense within profit or loss from ordinary activities are of
such size, nature or incidence that their disclosure is relevant to explain the performance
of the enterprise for the period, the nature and amount of such items should be disclosed
separately.
Generally, items of income or expense fulfilling the abovementioned criteria are
classified as exceptional items and are disclosed separately.
From the above, it appears that all material items are not exceptional items. In other
words, exceptional items are those items which meet the test of ‘materiality’ (si ze and
nature) and the test of ‘incidence’.
Following are some examples which may give rise to a separate disclosure of items as
an ‘exceptional item’ in financial statements if they meet the test of ‘materiality’ and
‘incidence’:
(a) write-downs of inventories to net realisable value or of property, plant and
equipment to recoverable amount, as well as reversals of such write-downs;
(b) restructurings of the activities of an entity and reversals of any provisions for the
costs of restructuring;
(c) disposals of items of property, plant and equipment;
(d) disposals of investments;
(e) discontinued operations;
(f) litigation settlements; and
(g) other reversals of provisions.
5. Reconciliation of income tax expense and current tax as per accounting profit
for the year ended 31 st March, 20X1
Particulars ` in crore
Accounting profit 594.00
Tax at the applicable tax rate of 30% 178.20
Tax effect of expenses that are not deductible in determining
taxable profits:
Penalties (1.00 x 30%) 0.30
Impairment of goodwill (44.00 x 30%) 13.20
Corporate social responsibility expense (6.00 x 30%) 1.80 15.30

© The Institute of Chartered Accountants of India

53
 20 FINAL EXAMINATION: NOVEMBER, 2022

Tax effect of expenses that are deductible in determining

taxable profits:
Research and development expenses (8.00 x 30%) (2.40)
Tax effect of income that are exempted in determining
taxable profits:
Dividend income (Exempt) (4.00 x 30%) 1.20
Agriculture income (Exempt) (55.00 x 30%) 16.50 (17.70)
Tax effect of income on which different tax rates are used for
determining taxable profits:
Differential income tax on long term capital gain [10.00 x 2.00
(30% - 10%)]
Foreign income in USA [60.00 x (30%-20%)] 6.00 (8.00)
Income tax expense (Current) reported in the Statement of
Profit and Loss for the current year 165.40
Reconciliation of deferred tax:
Particulars ` in crore
Deferred tax in relation to depreciation and amortization [(30 – 25)
x 30%] 1.50
Tax expense (deferred) reported in the Statement of Profit or Loss
for the current year 1.50
6. Paragraph 28 of Ind AS 34, Interim Financial Reporting states that an entity shall apply
the same accounting recognition and measurement principles in its interim financial
statements as are applied in its annual financial statements.
Further, paragraphs 32 and 33 of Ind AS 34, Interim Financial Reporting state that for
assets, the same tests of future economic benefits apply at interim dates and at the end
of an entity’s financial year. Costs that, by their nature, would not qualify as assets at
financial year-end would not qualify at interim dates either. Similarly, a liability at the
end of an interim reporting period must represent an existing obligation at that date, just
as it must at the end of an annual reporting period.
An essential characteristic of income (revenue) and expenses is that the related inflows
and outflows of assets and liabilities have already taken place. If those inflows or
outflows have taken place, the related revenue and expense are recognised otherwise
not. The Conceptual Framework does not allow the recognition of items in the balance
sheet which do not meet the definition of assets or liabilities.

© The Institute of Chartered Accountants of India

54
 PAPER – 1 : FINANCIAL REPORTING 21

Considering the above guidance, while preparing its interim financials, the transactions
and events of the given case should be dealt with as follows:
(i) If employer contributions to government-sponsored insurance funds are assessed
on an annual basis, the employer’s related expense is recognised using an
estimated average annual effective contribution rate in its interim financial
statements, even though a large portion of the payments have been made early in
the financial year. Accordingly, it should work out an average effective contribution
rate and account for the same accordingly, in its interim financials.
(ii) The cost of a planned overhaul expenditure that is expected to occur in later part
of the year is not anticipated for interim reporting purposes unless an event has
caused the entity to have a legal or constructive obligation. The mere intention or
necessity to incur expenditure related to the future is not sufficient to give rise to
an obligation.
(iii) A bonus is anticipated for interim reporting purposes, if and only if,
(a) the bonus is a legal obligation or past practice would make the bonus a
constructive obligation for which the entity has no realistic alternative but to
make the payments, and
(b) a reliable estimate of the obligation can be made. Ind AS 19, Employee
Benefits provides guidance in this regard.
A liability for bonus may arise out of legal agreement or constructive obligation
because of which it has no alternative but to pay the bonus and accordingly, needs
to be accrued in the annual financial statements.
Bonus liability is accrued in interim financial statements on the same basis as they
are accrued for annual financial statements. In the instant case, bonus liability of
10% of operating profit for the year to date may be accrued.
In the given case, since the company has past record of declaring annual bonus
every year, the same may be accrued using a reasonable estimate (applying the
principles of Ind AS 19, Employee Benefits) while preparing its interim results.
7. Paragraph 5 of Ind AS 41, Agriculture defines agricultural activity and biological
transformation as follows:
“Agricultural activity is the management by an entity of the biological transformation and
harvest of biological assets for sale or for conversion into agricultural produce or into
additional biological assets.”
“Biological transformation comprises the processes of growth, degeneration, production,
and procreation that cause qualitative or quantitative changes in a biological asset.”
Contract 1:
As per contract 1, during the 3 years of the contract, ABC Ltd. only harvests apples from
the apple orchards whereas biological transformation is managed by the owners of the

© The Institute of Chartered Accountants of India

55
 22 FINAL EXAMINATION: NOVEMBER, 2022

apple orchards (i.e. the lessor). Since ABC Ltd. is not involved in the biological
transformation of the apple orchards and is only harvesting biological assets , it cannot
be said to be an agricultural activity as per Ind AS 41. Hence, ABC Ltd. is not engaged
in agricultural activity as per Ind AS 41.
Contract 2:
As per contract 2, ABC Ltd. obtains the apple orchards and is actively involved in the
raising of apple trees in order to ensure that the apples are as per its requirements.
Since, it is actively managing the biological transformation and harvest of biological
asset, Hence, ABC Ltd. is engaged in agricultural activity as per Ind AS 41.
8.
Particulars `
1. Interest expense on loan ` 2,00,00,000 at 15% 30,00,000
2 Total cost of Phases I and II (` 34,00,000 +64,00,000) 98,00,000
3. Total cost of Phases III and IV (` 55,00,000 + ` 68,00,000) 1,23,00,000
4. Total cost of all 4 phases 2,21,00,000
5. Total loan 2,00,00,000
6. Interest on loan used for Phases I & II, based on proportionate 13,30,317
30,00,000 (approx.)
 98,00,000
2
Loan amount = ,21,00,000
7. Interest on loan used for Phases III & IV, based on 16,69,683
30,00,000 (approx.)
 1,23,00,00 0
proportionate Loan amount= 2,21,00,000
Accounting treatment:
1. For Phase I and Phase II
Since Phase I and Phase II have become operational at mid of the year, half of the
interest amount of ` 6,65,158.50 (i.e. ` 13,30,317/2) relating to Phase I and
Phase II should be capitalized (in the ratio of asset costs 34:64) and added to
respective assets in Phase I and Phase II and remaining half of the interest amount
of ` 6,65,158.50 (i.e. ` 13,30,317/2) relating to Phase I and Phase II should be
expensed off during the year.
2. For Phase III and Phase IV
Interest of ` 16,69,683 relating to Phase III and Phase IV should be held in Capital
Work-in-Progress till assets construction work is completed, and thereafter
capitalized in the ratio of cost of assets. No part of this interest amount should be
charged/expensed off during the year since the work on these phases has not been
completed yet.

© The Institute of Chartered Accountants of India

56
 PAPER – 1 : FINANCIAL REPORTING 23

9. Paragraph 39 of Ind AS 103 provides that the consideration the acquirer transfers in
exchange for the acquiree includes any asset or liability resulting from a contingent
consideration arrangement. The acquirer shall recognise the acquisition-date fair value
of contingent consideration as part of the consideration transferred in exchange for the
acquiree.
With respect to contingent consideration, obligations of an acquirer under contingent
consideration arrangements are classified as equity or a liability in accordance with
Ind AS 32
Paragraph 58 of Ind AS 103 provides guidance on the subsequent accounting for
contingent consideration.
(a) (i) In the given case, the amount of purchase consideration to be recognized
on initial recognition shall as follows:
Fair value shares issued (10,00,000 x ` 20) ` 2,00,00,000
Fair value of contingent consideration ` 25,00,000
Total purchase consideration ` 2,25,00,000
(ii) Subsequent measurement of contingent consideration payable for
business combination
In the given case, given that the acquirer has an obligation to issue fixed
number of shares on fulfillment of the contingency, the contingent
consideration will be classified as equity as per the requirements of Ind AS 32.
As per paragraph 58 of Ind AS 103, contingent consideration classified as
equity should not be re-measured and its subsequent settlement should be
accounted for within equity.
In the given case, the obligation to pay contingent consideration amounting to
` 25,00,000 is recognised as a part of equity and therefore not be re-measured
subsequently or on issuance of shares.
(b) (i) In the given case, the amount of purchase consideration to be recognized
on initial recognition is as follows:
Fair value shares issued (10,00,000 x ` 20) ` 2,00,00,000
Fair value of contingent consideration ` 25,00,000
Total purchase consideration ` 2,25,00,000
(ii) Subsequent measurement of contingent consideration payable for
business combination
In the given case, the contingent consideration will be classified as liability as
per Ind AS 32.

© The Institute of Chartered Accountants of India

57
 24 FINAL EXAMINATION: NOVEMBER, 2022

As per paragraph 58 of Ind AS 103, contingent consideration not class ified as

equity should be measured at fair value at each reporting date and changes in
fair value should be recognised in profit or loss.
As at 31 st March, 20X2 (being the date of settlement of contingent
consideration), the liability would be measured at its fair value and the
resulting loss of ` 15,00,000 (` 40,00,000 – ` 25,00,000) should be
recognised in the profit or loss for the period. A Ltd. would recognize issuance
of 1,60,000 (` 40,00,000 / 25) shares at a premium of ` 15 per share.
10. Total number of Options per employee = 60
Group I - 20% vesting in Year 1 Group II - 40% vesting Group III - 40%
in Year 2 vesting in Yr. 3
= 12 options, Vesting period = 24 options, Vesting = 24 options, Vesting
= 1 Yr. period = 2 Yrs. period = 3 Yrs.
Computation of Expenses for all the years
Group = No. of Group I = Group II = 24 Options Group III = 24 Options
Options 12 Options
Year 1 Year 1 Year 2 Year 1 Year 2 Year 3
(a) Employees at 400 - 40 = 400 - 40 = 360 - 35 = 400 - 40 = 360 - 35 = 325 - 28 =
year end =
[Opening
No. of 360 360 325 360 325 297
Employees -
Forfeiture]
(b) Expected to NA 36 NA 36 + 34 = 30 NA
leave in future 70
(c) No. of 360 324 325 290 295 297
employees
eligible (a - b)
(d) Options (360 x 12 (324 x 24 (325 x 24 (290 x 24 (295 x 24 (297 x 24
expected to sh.) sh.) sh.) sh.) sh.) sh.)
Vest =
[(c) x No. of 4,320 7,776 7,800 6,960 7,080 7,128
Shares]
(e) FV per option ` 10 ` 12.50 ` 12.50 ` 14 ` 14 ` 14
=

© The Institute of Chartered Accountants of India

58
 PAPER – 1 : FINANCIAL REPORTING 25

(f) Value of Total ` 43,200 ` 97,200 ` 97,500 ` 97,440 ` 99,120 ` 99,792

Options = [d x
e]
(g) Total [(f) x 1/2] [(f) x 2/2] [(f) x 1/3] [(f) x 2/3] [(f) x 3/3]
Cumulative
Cost of
Options
= [(f) x ` 43,200 ` 48,600 ` 97,500 `32,480 `66,080 ` 99,792
Completed
Yrs/ Total Yrs)
(h) Less: 0 0 ` 48,600 0 `32,480 ` 66,080
Recognized in
last years
(i) Expenses to ` 43,200 ` 48,600 ` 48,900 `32,480 `33,600 ` 33,712
be
recognized
(j) Employees 10 325 - 319 = 6 Employees 297 - 295 = 2 Employees
not Employees
exercising
ESOP
(k) Total
Expenses
for-
Year 1 ` 43,200 (Gr. 1) + ` 48,600 (Gr. 2) + ` 32,480 (Gr. 3) = ` 1,24,280
Year 2 ` 48,900 (Gr. 2) + ` 33,600 (Gr. 3) = ` 82,500
Year 3 ` 33,712 (Gr. 3 only)

Employees Benefit Expenses A/c

Year 1
` `
To Share-based Payment Reserve A/c 1,24,280 By Profit and Loss A/c 1,24,280
1,24,280 1,24,280
Year 2
To Share-based Payment Reserve A/c 82,500 By Profit and Loss A/c 82,500
82,500 82,500

© The Institute of Chartered Accountants of India

59
 26 FINAL EXAMINATION: NOVEMBER, 2022

Year 3
To Share-based Payment Reserve A/c 33,712 By Profit and Loss A/c 33,712
33,712 33,712

Share-based Payment Reserve A/c

Year 1
` `
To Retained Earnings 1,200 By Employees Benefit 1,24,280
[(360 - 350) Emp x 12 Expenses A/c
Options x ` 10]
To Share Capital (350 Emp x By Bank A/c (350 Emp x
12 Options x ` 100) 4,20,000 12 Options x ` 125) 5,25,000
To Securities Premium (350
Emp x 12 Options x ` 35) 1,47,000
To Balance c/d 81,080
6,49,280 6,49,280
Year 2
To Retained Earnings 1,800 By Balance b/d 81,080
[(325 - 319) Emp x 24 By Employees Benefit
Options x ` 12.50] Expenses A/c 82,500
To Share Capital (319 Emp x By Bank A/c (319 Emp x
24 Options x ` 100) 7,65,600 24 Options x ` 125) 9,57,000
To Securities Premium 2,87,100
(319 Emp x 24 Options x
` 37.50)
To Balance c/d 66,080
11,20,580 11,20,580
Year 3
To Retained Earnings 672 By Balance b/d 66,080
[(297 - 295) Emp x 24 By Employees Benefit
Options x ` 14] Expenses A/c 33,712

© The Institute of Chartered Accountants of India

60
 PAPER – 1 : FINANCIAL REPORTING 27

To Share Capital (295 Emp x By Bank A/c (295 Emp x

24 Options x ` 100) 7,08,000 24 Options x ` 125) 8,85,000
To Securities Premium (295
Emp x 24 Options x ` 39) 2,76,120
9,84,792 9,84,792

Working Note:
Calculation of Securities Premium
Group I Group II Group III
Year 1 Year 2 Year 3
Exercise Price received per share 125.00 125.00 125.00
Value of service received per share, being the FV
of the Options 10.00 12.50 14.00
Total Consideration received per share 135.00 137.50 139.00
Less: Nominal Value per share (100.00) (100.00) (100.00)
Securities Premium per share 35.00 37.50 39.00
11. The following are the classification of various activities in the Statement of Cash Flows:
S. Particulars Classification for reporting cash flows
No. Banks / financial Other entities
institutions
1. Interest received on loans Operating Activities Investing activities
and advances given
2. Interest paid on deposits and Operating Activities Financing activities
other borrowings
3. Interest and dividend Investing activities Investing activities
received on investments in
subsidiaries, associates and
in other entities
4. Dividend paid on preference Financing activities Financing activities
and equity shares, including
tax on dividend paid on
preference and equity shares
by other entities
5. Finance charges paid by Financing activities Financing activities
lessee under finance lease

© The Institute of Chartered Accountants of India

61
 28 FINAL EXAMINATION: NOVEMBER, 2022

6. Payment towards reduction of Financing activities Financing activities

outstanding finance lease
liability
7. Interest paid to vendor for Financing activities Financing activities
acquiring fixed asset under
deferred payment basis
8. Principal sum payment under Investing activities Investing activities
deferred payment basis for
acquisition of fixed assets
9. Penal interest received from Operating Activities Operating Activities
customers for late payments
10. Penal interest paid to Operating Activities Operating Activities
suppliers for late payments
11. Interest paid on delayed tax Operating Activities Operating Activities
payments
12. Interest received on tax Operating Activities Operating Activities
refunds
12. For determination of amortisation of the intangible asset, which has finite useful life, two
elements need to be determined: useful life and residual value.
Useful life is defined as:
(a) the period over which an asset is expected to be available for use by an entity; or
(b) the number of production or similar units expected to be obtained from the asset by
an entity.
In the instant case, since the entity expects that the asset will be available for use by it
for the period of 5 years and thereafter it will be transferred, the us eful life of the asset
is 5 years.
For residual value, paragraphs 100-102 of Ind AS 38 states that the residual value of an
intangible asset with a finite useful life shall be assumed to be zero unless:
(a) there is a commitment by a third party to purchase the asset at the end of its useful
life; or
(b) there is an active market (as defined in Ind AS 113) for the asset and:
(i) residual value can be determined by reference to that market; and
(ii) it is probable that such a market will exist at the end of the asset’s useful life.
The depreciable amount of an asset with a finite useful life is determined after deducting
its residual value. A residual value other than zero implies that an entity expects to
dispose of the intangible asset before the end of its economic life.

© The Institute of Chartered Accountants of India

62
 PAPER – 1 : FINANCIAL REPORTING 29

An estimate of an asset’s residual value is based on the amount recoverable from

disposal using prices prevailing at the date of the estimate for the sale of a similar asset
that has reached the end of its useful life and has operated under conditions similar to
those in which the asset will be used.
On application of above paragraphs, the depreciable amount of the patent will be
determined after deducting the residual value, which is 60% of its fair value at the date
of its acquisition. Accordingly, the patent will be amortised over its useful life of 5 years,
with a residual value equal to 60% of its fair value at the date of its acquisition. The
patent will also be reviewed for impairment in accordance with Ind AS 36. Therefore,
the accounting policy of amortising the asset over a period of 15 years considering its
residual value of Zero is not in accordance with Ind AS 38.
Computation of correct amount of residual value and annual amortization:
`
Cost of Intangible asset 12,00,000
Residual value (60% of ` 12,00,000) 7,20,000
Depreciable value of intangible asset (12,00,000 – 7,20,000) 4,80,000
Useful life 5 years
Annual amortisation (4,80,000 / 5) ` 96,000 p.a.

13. Paragraph B40 of Ind AS 115, inter alia, states that, “if in a contract, an entity grants a
customer the option to acquire additional goods or services, that option gives rise to a
separate performance obligation only if the option provides a material right to the
customer that it would not receive without entering into that contract”.
Further, paragraph B41 states that if a customer has the option to acquire an additional
good or service at a price that would reflect the stand-alone selling price for that good or
service, that option does not provide the customer with a material right even if the option
can be exercised only by entering into a previous contract. In those cases, the entity has
made a marketing offer that it shall account for in accordance with this Standard only
when the customer exercises the option to purchase the additional goods or services .
In the given case, the customer does get a material right by way of a discount of ` 500
for every 100 points that he would not receive without the previous stay in that resort.
Thus, the customer in effect pays the entity in advance for future goods and the entity
recognises revenue when the goods are transferred.
According to paragraph B42, paragraph 74 requires an entity to allocate the transaction
price to performance obligations on a relative stand-alone selling price basis. If the
standalone selling price for a customer’s option to acquire additional goods or services
is not directly observable, an entity shall estimate it on the basis of percentage discount

© The Institute of Chartered Accountants of India

63
 30 FINAL EXAMINATION: NOVEMBER, 2022

the customer may obtain upon exercising the option and the likelihood of the option
getting exercised.
In accordance with above, an entity shall account for award credit as a separate
performance obligation of the sales transactions in which they are initially granted. The
value of the consideration the entity expects to be entitled in respect of the initial sale
shall be allocated between the award credits and the other components of the sale.
In the current case, the standalone selling price of the 100 points is ` 500. A Ltd. should
allocate the fair value of the consideration (i.e. ` 10,000) between the points and the
other components of the sale as ` 476 (500/10,500 x 10,000) and ` 9,524
(10,000/10,500 x 10,000) respectively in proportion of their standalone selli ng price.
Since A Ltd. supplies the awards itself (i.e. it acts as a principal), it should recognise
` 476 as revenue when points are redeemed.
14. Paragraph 18 of Ind AS 105 provides that immediately before the initial classification of
the asset (or disposal group) as held for sale, the carrying amounts of the asset (or all
the assets and liabilities in the group) shall be measured in accordance with applicable
Ind AS.
In the instant case, Company A should measure the property, plant and equipment (for
which it has adopted cost model), in accordance with Ind AS 16, Property, Plant and
Equipment. Hence, depreciation should be provided upto 31 st May, 20X0.
15. As per para 68 of Ind AS 37, onerous contract is a contract in which the unavoidable
costs of meeting the obligations under the contract exceed the economic benefits
expected to be received under it. The unavoidable cost under a contract reflects the
least net cost of exiting from the contract, which is the lower of the cost of fulfilling it and
any compensation for penalties arising from failure to fulfilling it.
Ind AS 37 provides that the amount recognised shall be the best estimate of the
expenditure required to settle the present obligation, which is the amount that an entity
would rationally pay to settle the obligation at the end of the reporting period or to transfer
it to a third party at that time. In case of onerous contracts, an amount that an entity
would rationally pay to settle the obligation would be the lower of the compensation or
penalties arising from failure to fulfil the contacts and excess of unavoidable cost of
meeting the obligations under the contract from the economic benefits expected to be
received under it.
As per para 68 of Ind AS 37, the cost of fulfilling a contract comprises the costs that
relate directly to the contract. Costs that relate directly to a contract consist of both -
(a) the incremental costs of fulfilling that contract—for example, direct labour and
materials; and

© The Institute of Chartered Accountants of India

64
 PAPER – 1 : FINANCIAL REPORTING 31

(b) an allocation of other costs that relate directly to fulfilling contracts — for example,
an allocation of the depreciation charge for an item of property, plant and equipment
used in fulfilling that contract among others.
The unavoidable costs of meeting the obligations under the contract are only costs that:
• "are directly variable with the contract and therefore incremental to the performance
of the contract;"
• do not include allocated or shared costs that will be incurred regardless of whether
the entity fulfils the contract or not; and
• cannot be avoided by the entity's future actions.
Accordingly, HVCL has correctly measured the cost for creation of provision for onerous
contracts by considering material cost, labour cost (to the extent it relates directly to
production) and material overheads (to the extent it relates directly to production).
Further, HVCL is correct that the period cost will not be considered for measurement of
cost for the purpose of creation of provision on onerous contracts as they do not relate
directly to fulfilling the contracts.
16. (i) Calculation of Inventory cost:
Particulars Amount (`)
Purchase Price (1,30,000 – 20,000 – 10,000) 1,00,000
Non-refundable import duties 20,000
Transport cost 5,000
Total 1,25,000
Note: The cost of purchase excludes the refundable purchase taxes paid on
acquisition of the goods as the ` 10,000 paid will be refunded to the retailer.
Ind AS 2 specifically exclude selling cost from forming part of cost of inventory .
However, selling and distribution costs are generally used as single term because
both are related, as selling costs are incurred to effect the sale and the distribution
costs are incurred by the seller to complete a sale transaction by making the goods
available to the buyer from the point of sale to the point at which the buyer takes
possession. Since these costs are not related to bringing the goods to their present
location and condition, the same are not included in the cost of inventories.
Accordingly, though the word ‘distribution costs’ is not specifically mentioned in Ind
AS 2, these costs would continue to be excluded from the cost of inventories.
Therefore, it excludes the selling expenses incurred (i.e., ` 2,000 delivery costs
and ` 3,000 other selling costs).

© The Institute of Chartered Accountants of India

65
 32 FINAL EXAMINATION: NOVEMBER, 2022

(ii) Paragraph 16 of Ind AS 16, Property, Plant and Equipment, inter alia states that the
cost of an item of property, plant and equipment comprises the initial estimate of
the costs of dismantling and removing the item and restoring the site on which it is
located, the obligation for which an entity incurs either when the item is acquired or
as a consequence of having used the item during a particular period for purposes
other than to produce inventories during that period.
Further, paragraph 18 of Ind AS 16 states that an entity applies Ind AS 2 to the
costs of obligations for dismantling, removing and restoring the site on which an
item is located that are incurred during a particular period as a consequence of
having used the item to produce inventories during that period. The obligations for
costs accounted for in accordance with Ind AS 2 or Ind AS 16 are recognised and
measured in accordance with Ind AS 37, Provisions, Contingent Liabilities and
Contingent Assets.
Paragraph 16 of Ind AS 16 clarifies that decommissioning costs that meet the
recognition criteria under Ind AS 37, Provisions, Contingent Liabilities and Contingent
Assets, for a provision are added to the cost of an item of property, plant and
equipment if such costs are not incurred through the asset’s use to produce
inventories. Paragraph 18 fills the gap by clarifying where such costs are incurred
through the asset’s use to produce inventories, they are added to the cost of
inventories.
Where the obligation to restore the asset arises due to the use of the asset to
produce inventories but not due to the asset’s installation, construction or
acquisition, the costs are added to the costs of inventories.
Based on the above provisions and discussion, cost of restoring the site ` 20,000
incurred during the period of production as a consequence of having used the item
to produce inventories during that period should be added to the cost of inventories.
However, later the inventories are measured at the lower of cost and net realisable
value in accordance with paragraph 9 of Ind AS 2.
17. To determine the diluted EPS of Company P, the diluted EPS of Company S has to be
calculated first.
Calculation of Company S’s diluted EPS:
Company S’s earnings for the period ` 30,000
Weighted average ordinary shares 10,000
Incremental shares (refer W.N.) 200
Company S’s diluted EPS ` 30,000/ (10,000 + 200)
` 2.94

© The Institute of Chartered Accountants of India

66
 PAPER – 1 : FINANCIAL REPORTING 33

Calculation of Company P’s diluted EPS:

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

18. As the loan is not at a market interest rate, hence it is not recorded at the transaction price
of ` 5,00,000. Instead, the entity measures the loan receivable at the present value of the
future cash inflows discounted at a market rate of interest available for a similar loan.
The present value of the loan receivable (financial asset) discounted at 5% per year is
` 5,00,000 ÷ (1.05) 3 = ` 4,32,000. Therefore, ` 4,32,000 is recorded on initial
measurement of the loan receivable. This amount will accrete to ` 5,00,000 over the
three-year term using the effective interest method.
The difference between ` 5,00,000 and ` 4,32,000 i.e., ` 68,000 is accounted for as
prepaid employee cost in accordance with Ind AS 19 ‘Employee Benefits’, which will be
deferred and amortised over the period of loan on straight line basis.
The journal entries on initial recognition are:
` `
Loan receivable (financial asset) Dr. 4,32,000
Prepaid employee cost (asset) Dr. 68,000
To Cash / Bank (financial asset) 5,00,000
(Being loan granted to the employee recognised)

© The Institute of Chartered Accountants of India

67
 34 FINAL EXAMINATION: NOVEMBER, 2022

The amortised cost calculation at 1 st April, 20X1 is as follows:

Period Carrying Interest at Cash inflow Carrying
amount at 5% amount at
1 April
st 31 March
st

20X1-20X2 4,32,000 21,600 – 4,53,600

20X2-20X3 4,53,600 22,680 – 4,76,280
20X3-20X4 4,76,280 23,720* (5,00,000) –
*Difference of ` 94 (` 23,814 – ` 23,720) is due to approximation.
On 31 st March, 20X3, the carrying amount of the loan receivable is ` 4,76,280.
As a result of that modification, on 31 st March, 20X3, the present value of estimated cash
flows is recalculated to be ` 2,05,750 using the asset’s original effective interest rate of
5% (` 2,50,000 ÷ (1.05) 4).
An impairment loss of ` 2,70,530 (` 4,76,280 – ` 2,05,750) is recognised in profit or loss
in the year 20X2-20X3.
The carrying amount of the loan receivable may be reduced directly, as follows:
` `
Profit or loss - impairment loss Dr. 2,70,530
To Loan receivable 2,70,530
(Being impairment loss recognised)
In this case, the loan receivable will be measured at ` 2,05,750 at 31 st March, 20X3.
The revised amortised cost calculation at 1 st April, 20X3 is as follows:
Period Carrying Interest at 5% (the Cash Carrying
amount at original effective inflow amount at
1 st April interest rate) 31 st March
20X3-20X4 2,05,750 10,288 – 2,16,038
20X4-20X5 2,16,038 10,802 – 2,26,840
20X5-20X6 2,26,840 11,342 – 2,38,182
20X6-20X7 2,38,182 11,818 (2,50,000) –
19. Investment property is property (land or a building—or part of a building—or both) held
(by the owner or by the lessee as a right-of-use asset) to earn rentals or for capital
appreciation or both, rather than for:
a) use in the production or supply of goods or services or for administrative purposes;
or
b) sale in the ordinary course of business.

© The Institute of Chartered Accountants of India

68
 PAPER – 1 : FINANCIAL REPORTING 35

Property mentioned in (a) above would be covered under Ind AS 16 ‘Property, Plant and
Equipment’.
On applying the above provisions, Floor 1 of the building is classified as an item of
investment property by the entity (lessor) because it is held to earn rentals. Ind AS 40
is applicable in this case. An investment property should be measured initially at its cost.
After initial recognition, an entity shall measure all of its investment properties in
accordance with Ind AS 16’s requirements for cost model. However, entities are required
to measure the fair value of investment property, for the purpose of disclosure even
though they are required to follow the cost model.
Floor 2 of the building will be classified as property, plant and equipment because it is
held by administrative staff i.e. it is held for use for administrative purposes. Ind AS 16
is applicable in this case. An item of property, plant and equipment that qualifies for
recognition as an asset should be initially measured at its cost. After recognition, an
entity shall choose either the cost model or the revaluation model as its accounting policy
and shall apply that policy to an entire class of property, plant and equipment.
20. Paragraph 41 of Ind AS 8, inter alia, states that financial statements do not comply with
Ind AS if they contain either material errors or immaterial errors made intentionally to
achieve a particular presentation of an entity’s financial position, financia l performance
or cash flows.
As regards the assessment of materiality of an item in preparing interim financial
statements, paragraph 25 of Ind AS 34, Interim Financial Statements, states that while
judgement is always required in assessing materiality, this Standard bases the
recognition and disclosure decision on data for the interim period by itself for reasons of
understandability of the interim figures. Thus, for example, unusual items, changes in
accounting policies or estimates, and errors are recognised and disclosed on the basis
of materiality in relation to interim period data to avoid misleading inferences that might
result from non-disclosure. The overriding goal is to ensure that an interim financial
report includes all information that is relevant to understanding an entity’s financial
position and performance during the interim period.
As per the above, while materiality judgements always involve a degree of subjectivity,
the overriding goal is to ensure that an interim financial report includes all the information
that is relevant to an understanding of the financial position and performance of the entity
during the interim period. It is therefore not appropriate to base quantitative assessments
of materiality on projected annual figures when evaluating errors in interim financial
statements.
Accordingly, the management is required to correct the error in the interim financial
statements since it is assessed to be material in relation to interim period data.

© The Institute of Chartered Accountants of India

69
 Example 3: Extinguishment accounting
On 1 January 2010, XYZ Ltd. issues 10 year bonds for ` 10,00,000, bearing interest at 10% (payable annually
on 31st December each year). The bonds are redeemable on 31 December 2019 for ` 10,00,000. No
costs or fees are incurred. The effective interest rate is therefore 10%. On 1 January 2015 (i.e. after 5
years) XYZ Ltd. and the bondholders agree to a modification in accordance with which:
 the term is extended to 31 December 20Y1;
 interest payments are reduced to 5% p.a.;
 the bonds are redeemable on 31 December 20Y1 for ` 15,00,000; and
 legal and other fees of ` 1,00,000 are incurred.
XYZ Ltd. determines that the market interest rate on 1 January 2015 for borrowings on similarterms is
11%.
The repayment schedule for the original debt till the date of renegotiation is as below:
Date / year ended Opening Interest Cash flows Closing
balance accrual balance
1 January 2010 10,00,000 1,00,000 (100,000) 10,00,000
31 December 2010 10,00,000 1,00,000 (1,00,000) 10,00,000
31 December 2011 10,00,000 1,00,000 (1,00,000) 10,00,000
31 December 2012 10,00,000 1,00,000 (1,00,000) 10,00,000
31 December 2013 10,00,000 1,00,000 (1,00,000) 10,00,000
31 December 2014 10,00,000 1,00,000 (1,00,000) 10,00,000

On 1 January 2015, the discounted present value of the remaining cash flows of the originalfinancial liability
is ` 10,00,000.
On this date, XYZ Ltd. will compute the present value of:
 cash flows under the new terms – i.e. ` 15,00,000 payable on 31 December 20Y1 and
` 50,000 payable for each of the 7 years ending 31 December 20Y1.
 any fee paid (net of any fee received) – i.e. ` 1,00,000

using the original effective interest rate of 10%.

The total of these amounts to ` 11,13,158 (Refer Working Note). This differs from the
discounted present value of the remaining cash flows of the original financial liability by 11.32%
i.e. by more than 10%. Hence, extinguishment accounting applies.

The next step is to estimate the fair value of the modified liability. This is determined as the present value of
the future cash flows (interest and principal), using an interest rate of 11% (the market rate at which XYZ Ltd.
could issue new bonds with similar terms). The estimated fair value on this basis is ` 958,097 (Refer Working
Note). A gain or loss on modification is then determined as:
Gain (loss) = carrying value of existing liability - fair value of modified liability - fees and costs incurred i.e. `
10,00,000 – ` 9,58,097 – ` 1,00,000 = Loss of ` 58,097

70
 Working Note:
Year Discount factor @ 10% Discount factor @ 11%
1 0.909091 0.900901
2 0.826446 0.811622
3 0.751315 0.731191
4 0.683013 0.658731
5 0.620921 0.593451
6 0.564474 0.534641
7 0.513158 0.481658
Annuity 4.868419 4.712196

Amount Discounting Present Discounting Present

factor @ 10% value factor @ 11% value
15,00,000 0.513158 7,69,737 0.481658 7,22,487
1,00,000 1,00,000
50,000 for 7 years 4.868419 2,43,421 4.712196 2,35,610
11,13,158 9,58,097
PV of original cash flows @ (10,00,000)
original EIR
Difference 1,13,158
Difference % 11.32%

Example 4: Modification accounting

On 1 January 2010, XYZ Ltd. issues 10 year bonds for ` 1,000,000, bearing interest at 10% (payable annually
on 31st December each year). The bonds are redeemable on 31 December 2019 for ` 1,000,000. No costs
or fees are incurred. The effective interest rate is therefore 10%. On 1 January 2015 (i.e. after 5 years)
XYZ Ltd. and the bondholders agree to a modification in accordance with which:
 no further interest payments are made
 the bonds are redeemed on the original due date (31 December 2019) for ` 1,600,000;
 legal and other fees of ` 50,000 are incurred.

The repayment schedule for the original debt till the date of renegotiation is as below:
Date / year ended Opening balance Interest Cash Closing
accrual flows balance
1 January 2010 10,00,000 1,00,000 (1,00,000) 10,00,000
31 December 2011 10,00,000 1,00,000 (1,00,000) 10,00,000
31 December 2012 10,00,000 1,00,000 (1,00,000) 10,00,000
31 December 2013 10,00,000 1,00,000 (1,00,000) 10,00,000

71
 31 December 2014 10,00,000 1,00,000 (1,00,000) 10,00,000
31 December 2015 10,00,000 1,00,000 (1,00,000) 10,00,000

On 1 January 2015, the discounted present value of the remaining cash flows of the originalfinancial liability is
` 10,00,000.
On this date, XYZ Ltd. will compute the present value of:
i. cash flows under the new terms – i.e. ` 16,00,000 payable on 31 December 2019
ii. any fees paid (net of any fees received) – i.e. ` 50,000
using the original effective interest rate of 10%.
The total of these amounts to ` 10,43,474 (Refer Working Note). This differs from the
discounted present value of the remaining cash flows of the original financial liability by 4.35%
i.e. by less than 10%. Hence, modification accounting applies. On this
basis:
i. the fees paid of ` 50,000 are netted against the existing liability of ` 10,00,000, resulting in
an adjusted carrying amount of ` 9,50,000;
ii. the effective interest rate (EIR) is recalculated. This is the rate which discounts the future cash flows (`
16,00,000 in five years’ time) to the adjusted carrying amount of ` 9,50,000. The adjusted EIR is
10.99%
iii. the adjusted EIR is used to determine the amortised cost and interest expense in future periods.

Working Note:
For testing extinguishment -

Cash flows under new terms 16,00,000

PV as at 01 January 2015
Revised cash flows@ original EIR 9,93,474
Fees incurred 50,000
PV of revised cash flows @ original EIR 10,43,474
PV of original cash flows @ original EIR (10,00,000)
Difference 43,474
Difference % 4%
Less than 10% - Indicates modification
Accounting for revised cash flows @ original EIR

Year Opening balance Interest Payment Closing balance

0 10,00,000 - -50,000 9,50,000
1 9,50,000 1,04,405 0 10,54,405

72
 2 10,54,405 1,15,879 0 11,70,284
3 11,70,284 1,28,614 0 12,98,898
4 12,98,898 1,42,749 0 14,41,647
5 14,41,647 1,58,353* -16,00,000 -
* Difference is due to approximation

73
Question (RTP Nov 22 - Q.18)
On 1st April, 2011 an entity granted an interest-free loan of ₹ 5,00,000 to an employeefor a period
of three years. The market rate of interest for similar loans is 5% per year.

On 31st March, 2013, because of financial difficulties, the employee asked to extend the interest-free loan
for further three years. The entity agreed. Under the restructured terms, repayment will take place
on 31st March, 2017. However, the entity only expects to receive a payment of ₹ 2,50,000, given the
financial difficulty of the employee.
Explain the accounting treatment on initial recognition of loan and after giving effect of the changes
in the terms of the loan as per Ind AS 109. Support your answer with Journal entries and amortised cost
calculation, as on the date of initial recognition and on thedate of change in terms of loan.

Solution
As the loan is not at a market interest rate, hence it is not recorded at the transaction priceof ₹ 5,00,000.
Instead, the entity measures the loan receivable at the present value of the future cash inflows discounted
at a market rate of interest available for a similar loan.
The present value of the loan receivable (financial asset) discounted at 5% per year is
₹ 5,00,000 ÷ (1.05)3 = ₹ 4,32,000. Therefore, ₹ 4,32,000 is recorded on initial measurement of the
loan receivable. This amount will accrete to ₹ 5,00,000 over the three-year term using the effective
interest method.
The difference between ₹ 5,00,000 and ₹ 4,32,000 i.e., ₹ 68,000 is accounted for as prepaid employee
cost in accordance with Ind AS 19 ‘Employee Benefits’, which will be deferred and amortised over
the period of loan on straight line basis.
The journal entries on initial recognition are:
Particulars ₹ ₹
Loan receivable (financial asset) Dr. 4,32,000
Prepaid employee cost (asset) Dr. 68,000
To Cash / Bank (financial asset) 5,00,000
(Being loan granted to the employee recognised)

The amortised cost calculation at 1st April, 2011 is as follows:

Period Carrying Interest at Cash inflow Carrying
amount at 5% amount at
1st April 31st March
2011-2012 4,32,000 21,600 – 4,53,600
2012-2013 4,53,600 22,680 – 4,76,280
2013-2014 4,76,280 23,720* (5,00,000) –
*Difference of ₹ 94 (₹ 23,814 – ₹ 23,720) is due to approximation.
On 31st March, 2013, the carrying amount of the loan receivable is ₹ 4,76,280.
As a result of that modification, on 31st March, 2013, the present value of estimated cash flows is
recalculated to be ₹ 2,05,750 using the asset’s original effective interest rate of 5% (₹ 2,50,000 ÷
(1.05)4).

74
An impairment loss of ₹ 2,70,530 (₹ 4,76,280 – ₹ 2,05,750) is recognised in profit or loss in the year
2012-2013.
The carrying amount of the loan receivable may be reduced directly, as follows:
Particulars ₹ ₹
Profit or loss - impairment loss Dr. 2,70,530
To Loan receivable 2,70,530
(Being impairment loss recognised)

In this case, the loan receivable will be measured at ₹ 2,05,750 at 31st March, 2013. The revised
amortised cost calculation at 1st April, 2013 is as follows:
Period Carrying Interest at 5% (the Cash Carrying
amount at original effective inflow amount at
1st April interest rate) 31st March
2013-2014 2,05,750 10,288 – 2,16,038
2014-2015 2,16,038 10,802 – 2,26,840
2015-2016 2,26,840 11,342 – 2,38,182
2016-2017 2,38,182 11,818 (2,50,000) –

Question (RTP May 23 - Q.16)

In an arm’s length transaction, Entity X buys 10,000 convertible preference shares in
Company Z for cash payments of ₹ 40,000, with ₹ 25,000 payable immediately and
₹ 15,000 payable in two years. The market rate of annual interest for a two-year loanto the
entity would be 6%.
Explain the accounting treatment for the said transaction.

Solution
Since payment of ₹ 15,000 is deferred for two years, the fair value of the consideration given for the
shares is equal to ₹ 25,000 plus the present value of ₹ 15,000. The present value of ₹ 15,000
deferred payment is ₹ 13,350 (₹ 15,000 ÷ 1.062).
Entity X will initially measure the shares purchased at ₹ 38,350 (i.e., ₹ 25,000 +
₹ 13,350).
Since this transaction took place at an arm’s length, this is considered to be fair value
for initial recognition in the absence of evidence to the contrary.
The difference between the ₹ 40,000 cash paid out and the ₹ 38,350, i.e. ₹ 1,650, will be
recognised as interest expense in profit or loss over the two year period of deferred payment.

75
© The Institute of Chartered Accountants of India
76
© The Institute of Chartered Accountants of India
77
© The Institute of Chartered Accountants of India
78
© The Institute of Chartered Accountants of India
79
IND AS 103
Question 1 (RTP May 22 - Q.9)
Entity A acquires entity B. Entity A agrees with the former shareholders of entity B to pay
₹ 900, with an additional payment of ₹ 500 if the subsequent earnings of entity B reach a
specified target in three years. The former shareholders also become employees. On the
acquisition date, the fair value of the net assets of entity B amount to ₹ 850, and the fair value
of additional payment is estimated at ₹ 200. At the acquisition date, the outflow of additional
payment is not probable.
Over the next three years, the cumulative earnings of entity B (before considering the effects
of the additional payments) amount to ₹ 1,050. At the end of year three, entity A pays ₹ 500
as the conditions were met.
State the impact on the financial position and results of classifying the payments as
remuneration and contingent consideration.

Solution

The impact on the financial position and results of classifying the payments as remuneration
and contingent consideration is tabulated as follows:

Particulars Additional Payment is classified

as
Remuneration Contingent
consideration
Consideration 900 900
Fair value of additional payment 0 200
Total consideration 900 1,100
Fair value of net assets (850) (850)
Goodwill at acquisition date 50 250
Subsequent changes in additional payment 0 0
Total Goodwill 50 250
Cumulative earnings (before considering additional 1,050 1,050
payment)
Impact of additional payment (500) (300)

Reported results across three years 550 750

80
Question 2 (RTP May 23 - Q.11)
In October 2011, IHL acquired 75% of Very Relevant Limited by paying cash consideration of ₹ 0.80 million.
The fair value of non-controlling interest on the date of acquisition is ₹ 0.20 million. The value of Very Relevant
Limited's identifiable net assets as per Ind AS 103 is ₹ 1.10 million.
With respect to acquisition of Very Relevant Limited, determine the value of gain on bargain purchases, when
NCI is measured as per:
(a) Fair value method
(b) Proportionate share of net identifiable assets method.

Solution

(a) When NCI is measured as per fair value method

Particulars ₹ in million
Fair value of consideration transferred 0.80
Fair value of non-controlling interest 0.20
1.00
Value of Very Relevant Limited’s identifiable net assets as per (1.10)
Ind AS 103
Gain on bargain purchase 0.10

(b) When NCI is measured as per proportionate share method

Particulars ₹ in million
Fair value of consideration transferred 0.80
Proportional share of non-controlling interest in the net
identifiable assets of acquiree (1.10 x 25%) 0.275
1.075
Value of Very Relevant Limited’s identifiable net assets as per Ind (1.10)
AS 103
Gain on bargain purchase 0.025

81
Question 3 (RTP May 23 - Q.18)
An entity acquired two trade secrets (secret recipes) in a business combination. Recipe A is patented.
Recipe B is not legally protected.
How the acquisition of Recipe A and Recipe B would be accounted for by the entity as per relevant Ind AS.

Solution

Ind AS 38 states that the definition of an intangible asset requires an intangible asset to be identifiable to
distinguish it from goodwill. Goodwill recognised in a business combination is an asset representing the
future economic benefits arising from other assets acquired in a business combination that are not individually
identified and separately recognised. The future economic benefits may result from synergy between the
identifiable assets acquired or from assets that, individually, do not qualify for recognition in the financial
statements.

Further, an asset is identifiable if it either:

(a) is separable, ie is capable of being separated or divided from the entity and sold, transferred, licensed,
rented or exchanged, either individually or together with a related contract, identifiable asset or liability,
regardless of whether the entity intends to do so; or
(b) arises from contractual or other legal rights, regardless of whether those rights are transferable or
separable from the entity or from other rights and obligations.
In the given case, Recipe A meets the contractual-legal criterion for identification as an intangible asset
because it is protected by a patent. This recipe is identified an recognised separately from goodwill while
accounting the business combination.
Since Recipe B is not protected by a patent, it does not meet the contractual-legal criterion for identification
as an intangible asset. However, Recipe B is identified as a separate intangible asset because it meets the
separability criterion. Such recipes can be, and often are, exchanged, licensed or leased to others. Therefore,
the unpatented Recipe B should be accounted for as a separate intangible asset acquired in the business
combination.

82
Question 1 (RTP May 22)
1. Identify the type of joint arrangements in each of the following scenarios:
(i) X Ltd and Y Ltd, manufacturing similar type of mobile phones, form a joint arrangement
to manufacture and sell mobile phones. Under the terms of the arrangement, both X Ltd and
Y Ltd are to use their own assets to manufacture the mobile phones and both are responsible
for liabilities related to their respective manufacture. The arrangement also lays down the
distribution revenues from the sale of the mobile phones and expenses incurred thereof. X
Ltd however has exclusive control over the marketing and distribution functions and does not
require the consent of Y Ltd in this aspect. No separate entity is created for the
arrangement.
(ii) Continuing with (i) above, what would be the classification of the joint arrangement if X
Ltd and Y Ltd both jointly control all the relevant activities of the Joint arrangement
including the marketing and the distribution functions?
(iii) What would be the classification of the joint arrangement if under the terms of the
arrangement, a separate entity is created to manufacture the mobile phones.
(iv) Continuing with (iii) above, the joint arrangement is a means of manufacturing mobile
phones on a common platform but the output of the joint arrangement is purchased by both
X Ltd and Y Ltd in the ratio of 50:50. The joint arrangement cannot sell output to third
parties. The price of the output sold to X Ltd and Y Ltdis set by both the parties to the
arrangement to cover the production costs and other administrative costs of the joint
arrangement entity.
(v) Would your answer in (iv) above be different if X Ltd and Y Ltd sold their respective share of
output to third parties?
(vi) Assume that in (iv) above, the contractual terms of the arrangement were modifiedso that
the joint arrangement entity is not obliged to sell the output to X Ltd and Y Ltd but was
able to sell the output to third parties.

Solution
For a joint arrangement to be either a joint operation or joint venture, it depends on whether the parties
to the joint arrangement have rights to the assets and obligations for liabilities (will be a joint operation)
OR whether the parties to the joint arrangement have rights to the net assets of the arrangement (will
be joint venture).
(i) In order to fit into the definition of a joint arrangement, the parties to the joint arrangement
should have joint control over the arrangement. In the given case, decisions relating to
relevant activities, ie, marketing and distribution, are solelycontrolled by X Ltd and such
decisions do not require the consent of Y Ltd. Hence, the joint control test is not satisfied in
this arrangement and the arrangement does not fit into the definition of a joint arrangement
in accordance with the Standard.
(ii) Where X Ltd and Y Ltd both jointly control all the relevant activities of the arrangement
and since no separate entity is formed for the arrangement, the joint arrangement is in the
nature of a joint operation.
(iii) Where under a joint arrangement, a separate vehicle is formed to give effect to the joint
arrangement, then the joint arrangement can either be a joint operation or a joint venture.
Hence in the given case, if:

83
 (a) The contractual terms of the joint arrangement, give both X Ltd and Y Ltd rights to the
assets and obligations for the liabilities relating to the arrangement, andthe rights to the
corresponding revenues and obligations for the corresponding expenses, then the joint
arrangement will be in the nature of a joint operation.
(b) The contractual terms of the joint arrangement, give both X Ltd and Y Ltd. rights to
the net assets of the arrangement, then the joint arrangement will bein the nature of
a joint venture.
(iv) Where the rights to assets and liabilities to obligations are not clear from the contractual
arrangement, then other facts and circumstances also need to be considered to determine
whether the joint arrangement is a joint operation or a joint venture.
When the provision of the activities of the joint venture is primarily to produce output and
the output is available / distributed only to the parties to the joint arrangement in some
pre-determined ratio, then this indicates that the parties have substantially all the economic
benefits of the assets of the arrangement. The only source of cash flows to the joint
arrangement is receipts from parties through their purchases of the output and the parties
also have a liability to fund the settlement of liabilities of the separate entity. Such an
arrangement indicates that the joint arrangement is in the nature of a joint operation.
In the given case, the output of the joint arrangement is exclusively used by X Ltd. and Y
Ltd. and the joint arrangement is not allowed to sell the output to outside parties. Hence, the
joint arrangement between X Ltd. and Y Ltd. is in the nature of a joint operation.
(v) It makes no difference whether the output of the joint arrangement is exclusively for use by
the parties to the joint arrangement or the parties to the arrangement sold their share of the
output to third parties.
Hence, even if X Ltd. and Y Ltd. sold their respective share of output to third parties, the fact
still remains that the joint arrangement cannot sell output directly to third parties. Hence,
the joint arrangement will still be deemed to be in the nature of a joint operation.
(vi) Where the terms of the contractual arrangement enable the separate entity to sell the output
to third parties, this would result in the separate entity assuming demand, inventory and credit
risks. Such facts and circumstances would indicate that the arrangement is a joint venture.

Question 2 (RTP May 23)

1. 'High Speed Limited' manufactures and sells cars. The Company wants to foray into the
two-wheeler business and therefore it acquires 30% interest in Quick Bikes Limited for `
5,00,000 as at 1st November, 20X1 and an additional 25% stake as at1st January,
20X2 for ` 5,00,000 at its fair value.
Following is the Balance Sheet of Quick Bikes Limited as at 1st January, 20X2:
Carrying Fair Carrying Fair
Liabilities Assets
value value value value
Plant and
Share capital 1,00,000 3,50,000 7,50,000
equipment
Investment in
Reserves 5,50,000 4,00,000 5,00,000
bonds

84
 Trade Trade
1,50,000 50,000 50,000
payables 1,50,000 Receivables
Total 8,00,000 Total 8,00,000

Quick Bikes Limited sells the motorcycles under the brand name 'Super Start' which has a
fair value of ` 3,50,000 as at 1st January, 20X2. This is a self- generated brand therefore Quick
Bikes Limited has not recognized the brand in its books of accounts. Following is the separate
balance sheet of High Speed Limited as at 1st January, 20X2:

Liabilities Amount Assets Amount

Share capital 5,00,000 Plant and equipment 13,50,000
Reserves 15,00,000 Investment in Quick Bike 10,00,000
Short term loans 4,00,000 Trade Receivables 80,000
Trade payables 3,00,000 Cash and bank balances 5,20,000
Other liabilities 2,50,000
Total 29,50,000 Total 29,50,000

In relation to the acquisition of Quick Bikes Limited, you are required to:
(i) Pass the necessary journal entries to give effect of business combination in accordance
with Ind AS 103 as at acquisition date 1st January, 20X2. NCI is measured by the
entity at fair value. Provide working notes, Ignore deferred taximplication; and
(ii) Prepare a consolidated balance sheet of High Speed Limited as at1st
January, 20X2.

Solution
1. (i) Journal Entry

` `
Plant and Equipment Dr. 7,50,000
Investment in bonds Dr. 5,00,000
Trade Receivables Dr. 50,000
Brand Dr. 3,50,000
Goodwill (balancing figure) Dr. 5,00,000
To Investment in Quick Bikes 10,00,000
To Profit or loss A/c (W.N.1) 1,00,000
To Trade Payables 1,50,000
To NCI (W.N.3) 9,00,000
(Being assets and liabilities acquired at fair value and
previous investment considered at fair value on the
acquisition date)

Working Notes:
1. Calculation of fair value of shares on the acquisition date 1 st January, 20X2

85
 25% Shares purchase on 1st January, 20X2 (fair value) ` 5,00,000
30% Shares purchase on 1st November, 20X1 at ` 5,00,000
Fair value = [(5,00,000 / 25%) x 30%] ` 6,00,000
Total consideration at fair value on acquisition date ` 11,00,000
Less: Cost of investment (5,00,000 + 5,00,000) (` 10,00,000)
Gain recognised to Profit or Loss/OCI (as appropriate) ` 1,00,000

2. Computation of Net Identifiable Assets at fair value

`
Plant and Equipment 7,50,000
Investment in bonds 5,00,000
Trade Receivables 50,000
Self-generated Brand 3,50,000
16,50,000
Less: Trade Payables (1,50,000)
Net Identifiable Assets at fair value 15,00,000

3. Measurement of Non-controlling Interest (on fair value basis)

Share of NCI (100- 30-25) 45%

Taking fair value of shares on 1st January, 20X2 as a base ` 9,00,000
[(11,00,000/ 55%) x 45%]

(ii) Consolidated Balance Sheet of High Speed Limited as at 1 st January, 20X2

Note No. `
Assets
Non-current assets
(a) Property, plant and equipment 1 21,00,000
(b) Intangible asset 2 8,50,000
(c) Investment in bonds 5,00,000
Current Assets
(a) Financial assets
(i) Trade receivables 3 1,30,000
(ii) Cash and cash equivalents 4 5,20,000
41,00,000
Equity and Liabilities
Equity
(a) Equity share capital 5,00,000
(b) Other Equity 5 16,00,000
Non-controlling Interest (W.N.3) 9,00,000

Current Liabilities

86
 (a) Financial liabilities
(i) Borrowings 6 4,00,000
(ii) Trade Payables 7 4,50,000
(b) Other Current Liabilities 8 2,50,000
41,00,000

Notes to Accounts

S. No. ` `
1. Property, plant and equipment
High Speed Ltd. 13,50,000
Quick Bikes Ltd. 7,50,000 21,00,000
2. Intangible asset
Goodwill 5,00,000
Brand value of Quick Bikes Ltd. 3,50,000 8,50,000
3. Trade Receivables
High Speed Ltd. 80,000
Quick Bikes Ltd. 50,000 1,30,000
4. Cash and cash equivalents
Quick Bikes Ltd. 5,20,000
5. Other Equity - Reserves
High Speed Ltd. 15,00,000
Add: Gain on investment in Quick Bikes Ltd. 1,00,000 16,00,000
6. Borrowings
Short term loans of High Speed Ltd. 4,00,000
7. Trade Payables
High Speed Ltd. 3,00,000
Quick Bikes Ltd. 1,50,000 4,50,000
8. Other Current Liabilities
High Speed Ltd. 2,50,000

87
BHAVIK CHOKSHI

CONSOLIDATION – SUBSIDARY
[IND AS 110]

EXTRA QUESTIONS

Question 1 (ICAI Paper July 21)

Given below are the balance sheets of a group of companies comprising LX Limited, MX
Limited and NX Limited as on 31st March 2021 :

Particulars LX MX NX
Limited Limited Limited
Assets
Non-current Assets
Property, Plant Equipment 1,500 1,600 1,400
Investment
17.0 lakh shares in MX Limited 2,620 - -
9.6 lakh shares in NX Limited - 1,350 -
Current Assets
Inventories 1,230 730 1,180
Financial Assets
Trade Receivables 1,415 270 620
Bills Receivables 650 60 -
Cash in hand and at bank 1,085 90 150

8,500 4,100 3,350

Equity and Liabilities
Shareholders’ Equity
Share Capital (Rs 100 per share) 3,400 2,000 1,600
Other Equity
- Reserves 1,150 810 580
- Retained earnings 1,030 600 310
Current Liabilities
Financial Liabilities
Trade Payables 2,920 690 805
Bills Payable
- MX Limited - - 55
8,500 4,100 3,350

LX Limited holds 85% shares in MX Limited, which were acquired on 1st April 2020 and MX
Limited holds 60% shares in NX Limited, which were acquired on 30th September 2020.
The following balances stood in the books of MX Limited and NX Limited as on 1 st April
2020 :

1 Consolidation - Subsidary

88
BHAVIK CHOKSHI

Particulars MX Limited NX Limited

Rs in Lakhs Rs in Lakhs
Reserves 760 520
Retained Earnings 480 150

The business activities of NX Limited are not seasonal in nature.

The parent company has adopted an accounting policy to measure non-controlling interest
at fair value applying IND AS 103. The fair value is to be determined at quoted market price.
The given market price of MX Limited is Rs 120 per share and NX Limited is Rs 125 per
share. Prepare the consolidated Balance Sheet as on 31st March 2021 of the group of
companies LX Limited, MX limited and NX Limited.

Question 2 (ICAI Paper May 19)

Summarised Balance Sheets of PN Ltd. and SR Ltd. as on 31st March, 2018 were given as
below:
(Amount in Rs)
Particulars PN Ltd. SR Ltd.
Assets
Land & building 4,68,000 5,61,600
Plant & Machinery 7,48,800 4,21,200
Investment in SR Ltd. 12,48,000 -
Inventories 3,74,400 1,13,600
Trade Receivables 1,86,500 1,24,800
Cash & Cash equivalents 45,200 24,900
Total Assets 30,70,900 12,46,100
Equity & Liabilities
Equity Share Capital (Shares of Rs 100 each 15,60,000 6,24,000
fully paid)
Other Reserves 9,36,000 3,12,000
Retained Earnings 1,78,400 2,55,800
Trade Payables 1,46,900 34,300
Short-term borrowings 2,49,600 20,000
Total Equity & Liabilities 30,70,900 12,46,100

2 Consolidation - Subsidary

89
BHAVIK CHOKSHI

(i) PN Ltd. acquired 70% equity shares of Rs 100 each of SR Ltd. on 1st October,
2017.
(ii) The Retained Earnings of SR Ltd. showed a credit balance of Rs 93,600 on 1st
April, 2017 out of which a dividend of 12% was paid on 15th December, 2017.
(iii) PN Ltd. has credited the dividend received to its Retained Earnings.

(iv) Fair value of Plant & Machinery of SR Ltd. as on 1st October, 2017 was Rs
6,24,000. The rate of depreciation on Plant & Machinery was 10% p.a.
(v) Following are the increases on comparison of Fair Value as per respective
Ind AS with book value as on 1st October, 2017 of SR Ltd. which are to be
considered while consolidating the Balance Sheets:
(a) Land & Buildings Rs 3,12,000
(b) Inventories Rs 46,800
(c) Trade Payables Rs 31,200.
(vi) The inventory is still unsold on Balance Sheet date and the Trade Payables
are not yet settled.
(vii) Other Reserves as on 31st March, 2018 are the same as was on 1st April, 2017.
(viii) The business activities of both the company are not seasonal in nature and
therefore, it can be assumed that profits are earned evenly throughout the
year.
Prepare the Consolidated Balance Sheet as on 31st March, 2018 of the group of
entities PN Ltd. and SR Ltd. as per Ind AS.

3 Consolidation - Subsidary

90
 Chapter 15 Analysis of Financial Statements (New Course)

Case Study 1

On 1 April 2011, Star Limited has advanced a housing loan of 15 lakhs to one of its employeesat an
interest rate of 6% per annum which is repayable in 5 equal annual installments along with interest at
each year end. Employee is not required to give any specific performance against this benefit. The market
rate of similar loan for housing finance by banks is 10% per annum.
The accountant of the company has recognized the staff loan in the balance sheet equivalent to the
amount of housing loan disbursed i.e. 15 lakhs. The interest income for the year is recognized at the
contracted rate in the Statement of Profit and Loss by the company i.e. 90,000 (6% of 15 lakhs).
Analyze whether the above accounting treatment made by the accountant is in compliance with the relevant
Ind AS. If not, advise the correct treatment of housing loan, interest and other expenses in the financial
statements of Star Limited for the year 2011-2012 along with workings and applicable Ind AS.
You are required to explain how the housing loan should be reflected in the Ind AS compliant Balance Sheet of
Star Limited on 31 March 2012.

Solution
The accounting treatment made by the accountant is not in compliance with Ind AS 109 ‘Financial Instruments’.
As per Ind AS 109, at initial recognition, an entity shall measure a financial asset or financial liability at its fair
value. The fair value of a financial instrument at initial recognition is normally the transaction price i.e. the fair
value of the consideration given or received.
After initial recognition, an entity shall measure a financial asset either at amortised cost or at fair value
through profit and loss or fair value through other comprehensive income.
Here, the loan given to employee is not at market rate. Hence, the fair value of the loan will not be equal to its
initial loan proceeds. As per Ind AS 109, a financial instrument is initially measured and recorded in the books
at its fair value. Further, interest income to be recognised in the Statement of Profit and Loss will be the finance
income recognised at effective rate of interest i.e. @ 10% and not the rate of interest charged by the company
i.e. @ 6%.
The correct accounting treatment as per Ind AS 109 will be as under:
For measuring the fair value or present value of the loan at initial recognition, market rate of interest of similar
loan is considered (level 1 observable input) ie @ 10%, to discount the cash outflows.
The fair value of the loan shall be as follows:

Date Outstanding Principal Interes Tota Discount PV

loan tincome @ l facto
6% inflo r@
w 10%
31 March 2012 15,00,000 3,00,000 90,000 3,90,000 0.909 3,54,510
31 March 2013 12,00,000 3,00,000 72,000 3,72,000 0.826 3,07,272
31 March 2014 9,00,000 3,00,000 54,000 3,54,000 0.751 2,65,854

91
 31 March 2015 6,00,000 3,00,000 36,000 3,36,000 0.683 2,29,488
31 March 2016 3,00,000 3,00,000 18,000 3,18,000 0.621 1,97,478
Fair value of the loan 13,54,602
As per Ind AS 19, employee benefits are all forms of consideration given by an entity in exchange for service
rendered by employees or for termination of employment. Difference of loan proceeds and present value of the
loan (fair value) will be treated as prepaid employee cost irrespective of the fact that employee is not required
to give any specific performance against this benefit. This is because employee is required to be in service of
the company to continue availing the benefits of concessional rate of interest on housing loan. Practically, once
the employee leaves the organisation, they have to repay the outstanding loan because the company provides
the loan at concessional rate of interest only to its employees.
Hence, it is an employee benefit given by the company to its employees. This deemed employee cost of ₹
1,45,398 (15,00,000 – 13,54,602) will be deferred and amortised over the period of loan on straight line basis.
Calculation of amortised cost of loan to employees

Financial Amortised Interest to Repayment (including Amortised cost (closing

year ending cost be interest) balance)
on 31 March (opening recognised
balance) @ 10%
2012 13,54,602 1,35,460 3,90,000 11,00,062
2013 11,00,062 1,10,006 3,72,000 8,38,068
2014 8,38,068 83,807 3,54,000 5,67,875
2015 5,67,875 56,788 3,36,000 2,88,663
2016 2,88,663 29,337* 3,18,000 -

* 2,88,663 x 10% = 28,866. Difference of 471 (29,337 – 28,866) is due to approximation in computation.

Journal Entries to be recorded at every period end:

1. On 1 April 2011

Particulars Dr. Amount Cr. Amount

(₹) (₹)
Loan to employee A/c Dr. 13,54,602
Prepaid employee cost A/c Dr. 1,45,398
To Bank A/c 15,00,000
(Being loan asset recorded at initial fair value)

92
 2. On 31 March 2012

Particulars Dr. Amount Cr. Amount

(₹) (₹)
Bank A/c Dr. 3,90,000
To Finance income A/c (profit and loss) @10% 1,35,460
To Loan to employee A/c 2,54,540
(Being first instalment of repayment of loan accounted
for
using the amortised cost and effective interest rate
@
10%)
Employee benefit cost (profit and loss) A/c Dr. 29,080
To Prepaid employee cost A/c (1,45,398/5) 29,080
(Being amortization of pre-paid employee cost charged
to
profit and loss as employee benefit cost)
The Following housing loan balances should appear in the financial statements: Extracts of Balance sheet of
Star Ltd. as at 31 March 2012
Non- current asset
Financial Assets
Loan to Employee (11,00,062 – 3,72,000 + 1,10,006) 8,38,068
Other non-current asset
Prepaid employee cost 87,238
Current Asset
Financial Asset
Loan to Employee (3,72,000 – 1,10,006) 2,61,994
Other Current Asset
Prepaid employee cost 29,080
Deferred tax on temporary differences arising on the above-mentioned account balances (appearing in the
balance sheet) should be recognised. However, in the absence of any tax rate in the question no deferred tax
has been recognised.

93
Case Study 2
Pluto Ltd. has purchased a manufacturing plant for 6 lakhs on 1st April, 2011. The useful life of the plant is 10
years. On 30th September, 2013, Pluto temporarily stops using the manufacturing plant because demand has
declined. However, the plant is maintained in a workable condition and it will be used in future when demand
picks up.
The accountant of Pluto ltd. decided to treat the plant as held for sale until the demands picks up and
accordingly measures the plant at lower of carrying amount and fair value less cost to sell.
Also, the accountant has also stopped charging the depreciation for the rest of period considering the plant as
held for sale. The fair value less cost to sell on 30th September, 2013 and 31st March, 2014 was 4 lakhs and
3.5 lakhs respectively.
The accountant has performed the following working:

Carrying amount on initial

classification as held for sale
Purchase Price of Plant 6,00,000
Less: Accumulated dep (1,50,000 4,50,000
(6,00,000/ 10 Years) x 2.5 )
years
Fair Value less cost to sell as on 4,00,000
30th September, 2013
The value will be lower of 4,00,000
the
above two
Balance Sheet extracts as on 31st March, 2014
Assets
Current Assets
Other Current Assets
Assets classified assale held for 3,50,000

Analyse whether the above accounting treatment made by the accountant is in compliance with the Ind AS. If
not, advise the correct treatment alongwith the necessary workings.

Solution:
The above treatment needs to be examined in the light of the provisions given in Ind AS 16 ‘Property, Plant and
Equipment’ and Ind AS 105 ‘Non-current Assets Held for Sale and Discontinued Operations’.
Para 6 of Ind AS 105 ‘Non-current Assets Held for Sale and Discontinued Operations’ states that:
“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”.
Paragraph 7 of Ind AS 105 states that:
“For this to be the case, the asset (or disposal group) must be available for immediate sale in its present
condition subject only to terms that are usual and customary for sales of such assets (or disposal groups) and

94
its sale must be highly probable. Thus, an asset (or disposal group) cannot be classified as a non-current asset
(or disposal group) held for sale, if the entity intends to sell it in a distant future”.
Further, paragraph 8 of Ind AS 105 states that:
“For the sale to be highly probable, the appropriate level of management must be committed to a plan to sell
the asset (or disposal group), and an active programme to locate a buyer and complete the plan must have been
initiated. Further, the asset (or disposal group) must be actively marketed for sale at a price that is reasonable
in relation to its current fair value. In addition, the sale should be expected to qualify for recognition as a
completed sale within one year from the date of classification and actions required to complete the plan should
indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.”
Paragraph 13 of Ind AS 105 states that:
“An entity shall not classify as held for sale a non-current asset (or disposal group) that is to be abandoned.
This is because its carrying amount will be recovered principally through continuing use.”
Paragraph 14 of Ind AS 105 states that:
“An entity shall not account for a non-current asset that has been temporarily taken out of use as if it had been
abandoned.”
Paragraph 55 of Ind AS 16 states that:
“Depreciation does not cease when the asset becomes idle or is retired from active use unless the asset is fully
depreciated.”
Going by the guidance given above,
The Accountant of Pluto Ltd. has treated the plant as held for sale and measured it at the fair value less cost to
sell. Also, the depreciation has not been charged thereon since the date of classification as held for sale which
is not correct and not in accordance with Ind AS 105 and Ind AS 16.
Accordingly, the manufacturing plant should neither be treated as abandoned asset nor as held for sale because
its carrying amount will be principally recovered through continuous use. Pluto Ltd. shall not stop charging
depreciation or treat the plant as held for sale because its carrying amount will be recovered principally
through continuing use to the end of their economic life.
The working of the same for presenting in the balance sheet is given as below:

Calculation of carrying amount as on 31st March, 2014

Purchase Price of Plant 6,00,000
Less: Accumulated depreciation (6,00,000/ 10 Years) x 3 Years (1,80,000)
4,20,000
Less: Impairment loss (70,000)
3,50,000
Balance Sheet extracts as on 31st March, 2014
Assets
Non-Current Assets
Property, Plant and Equipment 3,50,000

95
Working Note:
Fair value less cost to sell of the Plant = ₹ 3,50,000
Value in Use (not given) or = Nil (since plant has temporarily not been used for
manufacturing due to decline in demand)
Recoverable amount = higher of above i.e. ₹ 3,50,000

Impairment loss = Carrying amount – Recoverable amount

Impairment loss = 4,20,000 - 3, 50,000 = 70,000

Case Study 4
On 1st April, 2011, Sun Ltd. has acquired 100% shares of Earth Ltd. for 30 lakhs. Sun Ltd. has 3 cash-generating
units A, B and C with fair value of 12 lakhs, 8 lakhs and 4 lakhs respectively. The company recognizes goodwill
of Rs 6 lakhs that relates to CGU ‘C’ only.
During the financial year 2012-2013, the CFO of the company has a view that there is no requirement of any
impairment testing for any CGU since their recoverable amount is comparatively higher than the carrying
amount and believes there is no indicator of impairment.
Analyse whether the view adopted by the CFO of Sun Ltd is in compliance of the Ind AS. If not, advise the correct
treatment in accordance with relevant Ind AS
Solution
The above treatment needs to be examined in the light of the provisions given in Ind AS 36: Impairment of
Assets.
Para 9 of Ind AS 36
‘Impairment of Assets’ states that “An entity shall assess at the end of each reporting period whether there is
any indication that an asset may be impaired. If any such indication exists, the entity shall estimate the
recoverable amount of the asset.”
Further, paragraph 10(b) of Ind AS 36 states that:
“Irrespective of whether there is any indication of impairment, an entity shall also test goodwill acquired in a
business combination for impairment annually.”
Sun Ltd has not tested any CGU on account of not having any indication of impairment is partially correct i.e. in
respect of CGU A and B but not for CGU C. Hence, the treatment made by the Company is not in accordance with
Ind AS 36.
Accordingly, impairment testing in respect of CGU A and B are not required since there are no indications of
impairment. However, Sun Ltd shall test CGU C irrespective of any indication of impairment annually as the
goodwill acquired on business combination is fully allocated to CGU ‘C’.

96
 TEST YOUR KNOWLEDGE
Question 2
On 1st January, 2012, Sun Ltd. was notified that a customer was taking legal action against the company in
respect of a financial losses incurred by the customer. Customer alleged that the financial losses were caused
due to supply of faulty products on 30th September, 2011 by the Company. Sun Ltd. defended the case but
considered, based on the progress of the case up to 31st March, 2012, that there was a 75% probability they
would have to pay damages of ₹ 10 lakhs to the customer.
However, the accountant of Sun Ltd. has not recorded this transaction in its financial statement as the case is
not yet finally settled. The case was ultimately settled against the company resulting in to payment of damages
of ₹12 lakhs to the customer on 15th May, 2012. The financials have been authorized by the Board of Directors
in its meeting held on 18th May, 2012.
Analyse whether the above accounting treatment made by the accountant is in compliance of the Ind AS. If not,
advise the correct treatment along with working for the same.
Solution
The above treatment needs to be examined in the light of the provisions given in Ind AS 37 ‘Provisions,
Contingent Liabilities and Contingent Assets’ and Ind AS 10 ‘Events After the Reporting Period’.
Para 10 of Ind AS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’ defines:
“Provision is a liability of uncertain timing or amount.
Liability is a present obligation of the entity arising from past events, the settlement of which is expected to
result in an outflow from the entity of resources embodying economic benefits”.
Further, paragraph 14 of Ind AS 37, states:
“A provision shall be recognised when:
(a) an entity has a present obligation (legal or constructive) as a result of a past event;
(b) it is probable that an outflow of resources embodying economic benefits will be required to settle
the obligation; and
(c) a reliable estimate can be made of the amount of the obligation”.
Further, paragraph 36 of Ind AS 37, states:
“The amount recognised as a provision shall be the best estimate of the expenditure required to settle the
present obligation at the end of the reporting period”.
Further, paragraph 3 of Ind AS 10 ‘Events after the Reporting Period’ defines:
“Events after the reporting period are those events, favourable and unfavourable, that occur between the end
of the reporting period and the date when the financial statements are approved by the Board of Directors in
case of a company, and, by the corresponding approving authority in case of any other entity for issue. Two
types of events can be identified:
(a) those that provide evidence of conditions that existed at the end of the reporting
period (adjusting events after the reporting period); and
(b) those that are indicative of conditions that arose after the reporting period (non-

97
 adjusting events after the reporting period).
Further, paragraph 8 of Ind AS 10 states that:
“An entity shall adjust the amounts recognised in its financial statements to reflect adjusting events after the
reporting period.”
The Accountant of Sun Ltd. has not recognised the provision and accordingly not adjusted the amounts
recognised in its financial statements to reflect adjusting events after the reporting period is not correct and
nor in accordance with provision of Ind AS 37 and Ind AS 10.
As per given facts, the potential payment of damages to the customer is an obligation arising out of a past event
which can be reliably estimated. Therefore, following the provision of Ind AS 37 ‘Provisions, Contingent
Liabilities and Contingent Assets’ – a provision is required. The provision should be for the best estimate of the
expenditure required to settle the obligation at 31st March, 2012 which comes to 7.5 lakhs ( 10 lakhs x 75%).
Further, following the principles of Ind AS 10 ‘Events After the Reporting Period’ evidence of the settlement
amount is an adjusting event. Therefore, the amount of provision created shall be increased to 12 lakhs and
accordingly be recognised as a current liability.

Question 3
Mercury Ltd. is an entity engaged in plantation and farming on a large scale diversified across India. On 1st
April, 2011, the company has received a government grant for 10 lakhs subject to a condition that it will
continue to engage in plantation of eucalyptus tree for a coming period of five years. Eucalyptus trees are not
considered as bearer plant in this case.
The management has a reasonable assurance that the entity will comply with condition of engaging in the
plantation of eucalyptus tree for specified period of five years and accordingly it recognises proportionate grant
for ₹ 2 lakhs in Statement of Profit and Loss as income following the principles laid down under Ind AS 20
Accounting for Government Grants and Disclosure of Government Assistance.
Analyse whether the above accounting treatment made by the management is in compliance of the Ind AS. If
not, advise the correct treatment alongwith working for the same.
Solution
As per given facts, the company is engaged in plantation and farming. Hence Ind AS 41 Agriculture shall be
applicable to this company.
The above facts need to be examined in the light of the provisions given in Ind AS 20 ‘Accounting for
Government Grants and Disclosure of Government Assistance’ and Ind AS 41 ‘Agriculture’.
Para 2(d) of Ind AS 20 ‘Accounting for Government Grants and Disclosure of Government Assistance’ states:
“This Standard does not deal with government grants covered by Ind AS 41, Agriculture”.
Further, paragraph 1 (c) of Ind AS 41 ‘Agriculture’, states:
“This Standard shall be applied to account for the government grants covered by paragraphs 34 and 35 when
they relate to agricultural activity”.
Further, paragraph 1 (c) of Ind AS 41 ‘Agriculture’, states:

98
“If a government grant related to a biological asset measured at its fair value less costs to sell is conditional,
including when a government grant requires an entity not to engage in specified agricultural activity, an entity
shall recognise the government grant in profit or loss when, and only when, the conditions attaching to the
government grant are met”.
Understanding of the given facts, The Company has recognised the proportionate grant for 2 lakhs in Statement
of Profit and Loss before the conditions attaching to government grant are met which is not correct and nor in
accordance with provision of Ind AS 41 ‘Agriculture’.
Accordingly, the accounting treatment of government grant received by the Mercury Ltd. is governed by the
provision of Ind AS 41 ‘Agriculture’ rather Ind AS 20 ‘Accounting for Government Grants and Disclosure of
Government Assistance’.
Government grant for 10 lakhs shall be recognised in profit or loss when, and only when, the conditions
attaching to the government grant are met i.e. after the expiry of specified period of five years of continuing
engagement in the plantation of eucalyptus tree.
Balance Sheet extracts showing the presentation of Government Grant

as on 31st March, 2012

Liabilities
Non-Current liabilities
Other Non-Current Liabilities
Government Grants 10,00,000

Question 4
Mercury Ltd. has sold goods to Mars Ltd. at a consideration of ₹ 10 lakhs, the receipt of which receivable in
three equal installments of ₹ 3,33,333 over a two year period (receipts on 1st April, 2011, 31st March, 2012
and 31st March, 2013).
The company is offering a discount of 5 % (i.e. ₹ 50,000) if payment is made in full at the time of sale. The sale
agreement reflects an implicit interest rate of 5.36% p.a.
The total consideration to be received from such sale is at ₹ 10 Lakhs and hence, the management has
recognised the revenue from sale of goods for ₹ 10 lakhs.
Analyse whether the above accounting treatment made by the accountant is in compliance of the Ind AS. If not,
advise the correct treatment along with working for the same.
Solution
The revenue from sale of goods shall be recognised at the fair value of the consideration received or receivable.
The fair value of the consideration is determined by discounting all future receipts using an imputed rate of
interest where the receipt is deferred beyond normal credit terms. The difference between the fair value and
the nominal amount of the consideration is recognised as interest revenue.
The fair value of consideration (cash price equivalent) of the sale of goods is calculated as follows:

99
 Year Consideration Present value Present value of
(Installment) factor consideration
Time of sale 3,33,333 - 3,33,333
End of 1st year 3,33,333 0.949 3,16,333
End of 2nd year 3,33,334 0.901 3,00,334
10,00,000 9,50,000
The Company that agrees for deferring the cash inflow from sale of goods will recognise the revenue from sale
of goods and finance income as follows:

Initial recognition of sale of goods

Cash Dr. 3,33,333
Trade Receivable Dr. 6,16,667
To Sale 9,50,000
Recognition of interest expense and receipt
of second installment
Cash Dr. 3,33,333
To Interest Income 33,053
To Trade Receivable 3,00,280
Recognition of interest expense and
payment of final installment
Cash Dr. 3,33,334
To Interest Income (Balancing figure) 16,947
To Trade Receivable 3,16,387
Statement of Profit and Loss (extracts) for the year ended 31st March, 2012 and 31st March, 2013

As at 31st March, 2012 As at 31st March, 2013

Income
Sale of Goods 9,50,000 -
Other Income (Finance income) 33,053 16,947

Balance Sheet (extracts) as at 31 st March, 2012 and 31st March, 2013

As at 31st March, 2012 As at 31st March, 2013

Assets
Current Assets
Financial Assets
Trade Receivables
3,16,387 XXX

10

100