PAPER – 1:

FINANCIAL REPORTING

QUESTIONS

Case Scenario I
X Ltd. prepares its financial statements based on Indian Accounting
Standards.
X Ltd. (lessee) enters into an agreement with Y Ltd. (lessor) to lease an entire
floor of a building for a period of 10 years with an option to extend the lease
for five years. At the commencement date, X Ltd. is not reasonably certain
to exercise the option to extend the lease. Lease payments are ` 50,000 per
year during the initial term and ` 55,000 per year during the optional period.
As per the terms of contract, lease payments are required to be paid at the
beginning of each year. To obtain the lease, X Ltd. incurred initial direct
costs of ` 20,000, out of which ` 15,000 relates to a payment to a former
tenant occupying that floor of the building and ` 5,000 relates to
commission paid to the real estate agent that arranged the lease. As an
incentive to X Ltd. for entering into the lease, Y Ltd. agrees to reimburse to
X Ltd. the real estate commission of ` 5,000. The interest rate implicit in the
lease is not readily determinable by X Ltd. X Ltd.'s incremental borrowing
rate is 10%. (Consider discounting factor upto 2 decimals)
X Ltd. has deferred tax assets, recognised in the balance sheet at
31st March, 20X2 in respect of unused tax losses that can be used to reduce
taxable income in future years. The income tax rate used to calculate the
deferred tax asset was 40%, which was the current rate of tax applicable at
the balance sheet date. A new government came to power on 1st April, 20X2
and passed legislation that, on 17th April, 20X2, the income tax rate was
reduced to 33% with immediate effect.
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Based on the facts given above, choose the most appropriate answer to
Questions 1 to 5 below as per the relevant Ind AS.
1. What would be the lease term in the given case?
(a) 10 years
(b) 5 years
(c) 15 years
(d) Cannot be determined
2. At what value does the lease liability be recognized initially?
(a) ` 3,07,000
(b) ` 2,87,500
(c) ` 3,37,500
(d) ` 3,52,500
3. At what value the right of use assets be recognized initially?
(a) ` 3,07,000
(b) ` 3,57,500
(c) ` 3,52,500
(d) ` 3,62,500
4. What would be the amount of depreciation to be charged annually on
ROU asset?
(a) ` 30,700
(b) ` 35,750
(c) ` 35,250
(d) ` 36,250
5. At what rate, would defer tax be calculated for the year ended
31st March, 20X2?
(a) 40%
(b) 33%

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(c) 7%
(d) Nil

Case Scenario II
A Ltd. enters into a 3-year contract to provide 1,000 hours of standard call
center operator time per annum for ` 6,00,000 (` 2,00,000 per year); the
stand-alone selling price at inception. At the end of the 1st Year, the
contract is extended for another three years @ ` 6,60,000 as follows:
(i) in accordance with the contractual provisions the fee for the 1st year is
reduced by ` 90,000 because of highly defective service; and
(ii) the contract is extended for another 3 years for ` 7,50,000 (` 2,50,000
per year); when the stand-alone selling price is ` 2,30,000.
Further, Government G has significant influence over L Ltd. L Ltd. has
significant influence over A Ltd. and controls K Ltd. All the entities have
transactions with each other.
On the basis of the facts given above, choose the most appropriate
answer to Questions 6 to 10 below based on the relevant Ind AS.
6. What amount of revenue be recognized for Year 1?
(a) ` 2,00,000
(b) ` 2,25,000
(c) ` 2,30,000
(d) ` 1,10,000
7. What will be the accounting treatment for the contract extended at the
end of year 1 with respect to its revenue recognition?
(a) The modification in the contract will be accounted for
prospectively by allocating remaining revenue equally for 5 years
(b) The modification in the contract will be accounted for
retrospectively by allocating total revenue equally for 6 years
(c) The modification in the contract will be accounted for as two
separate contract for 3 years each

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(d) The modification in the contract does not fall under the purview
of Ind AS 115
8. What would be the remaining total revenue of the contract for 5 years?
(a) ` 11,50,000
(b) ` 10,60,000
(c) ` 12,40,000
(d) ` 13,50,000
9. What amount of revenue be recognized for Year 2?
(a) ` 2,00,000
(b) ` 2,25,000
(c) ` 2,30,000
(d) ` 1,10,000
10. State which of the following statements is correct with respect to
transactions between A Ltd. and K Ltd. and between A Ltd. and L Ltd.
under Ind AS 24?
(a) Transactions between both A Ltd. and L Ltd. and A Ltd. and K Ltd.
are not disclosable.
(b) Transactions between A Ltd. and L Ltd. are not disclosable but
transactions between A Ltd. and K Ltd. are disclosable.

(c) Transactions between A Ltd. and L Ltd. are disclosable but

transactions between A Ltd. and K Ltd. are not disclosable.
(d) Transactions between both A Ltd. and L Ltd. and A Ltd. and K Ltd.
are disclosable.
Ind AS 102 : Share-based Payment
11. H Ltd. is a parent company and has a subsidiary S Ltd. H Ltd. and
S Ltd. are unlisted entities. Following arrangements with respect to
ESOP scheme took place between them:

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1. Original ESOP scheme by H Ltd. (Parent ESOP scheme)

At the beginning of year 1, H Ltd. granted 1,500 options in its
own shares to its own employees as well as S Ltd.’s employees
(i.e. 1,000 to H Ltd.’s employees and 500 to S Ltd.’s employees)
with a fair value of ` 15 per options, conditional upon the
completion of 3 years' service. H Ltd. will settle in its own equity
shares. All the options are expected to vest. H Ltd. doesn't
recharge to S Ltd. for ESOP expenses.
2. New ESOP scheme by S Ltd. (Subsidiary ESOP scheme)
H Ltd. and S Ltd. are unlisted entities. However, at the end of
Year 1, S Ltd. gets listed.
At the beginning of year 2, S Ltd. offers 1,500 options in its own
shares to H Ltd.’s employees and its own employees (i.e. 1,000 to
H Ltd.’s employees and 500 to S Ltd.’s employees), conditional
upon H Ltd. and S Ltd.'s employees surrendering the right over
parent ESOP scheme.
Remaining vesting period is same as H Ltd.’s ESOP scheme i.e.
conditional upon the completion of remaining 2 years' service.
Incremental fair value of new ESOP scheme is ` 6. All the options
are expected be vest. All H Ltd. and S Ltd.’s employees have
opted for new ESOP scheme.
S Ltd. doesn't recharge to H Ltd. for ESOP expenses.
Required:
Analyze the above arrangements from the perspective of Consolidated
Financial Statements and Individual Financial Statements of both
parent and subsidiary. Also show the accounting treatment of the
above arrangements in the Consolidated Financial Statements and
Individual Financial Statements of both parent and subsidiary.
Ind AS 21: The Effects of Changes in Foreign Exchange Rates
12. Parent A Ltd. is the reporting entity that has net investment in foreign
operations in its two foreign Subsidiaries, B Ltd. and C Ltd.

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In all the following scenarios, loans made between group entities are
permanent in nature (that is, settlement is neither planned nor likely to
occur):
Scenario 1
Parent A Ltd., with sterling as its functional currency, is preparing its
financial statements to 31st March, 20X5. It has a loan receivable of
US$ 1 million from its Subsidiary C Ltd. that has been outstanding for
some time. The parent notified the subsidiary at the beginning of the
financial year that no repayment of the amount will be requested for
the foreseeable future.
The relevant exchange rate are as follows:

31 st March, 20X5 31 st March, 20X4

£1= US$1.82 US$1.45

Scenario 2
The facts are the same as in the above Scenario 1, except that Parent
A Ltd. has a loan receivable from Subsidiary C Ltd. of £ 2,00,000 that
has been outstanding for some time. The loan is treated by Parent
A Ltd. as forming part of its net investment in Subsidiary C Ltd.
Required:
Determine the treatment of exchange differences in Standalone
Financial Statements of both subsidiary and parent company and in
Consolidated Financial Statements of parent company under both the
scenarios.
Ind AS 8: Accounting Policies, Changes in Accounting Estimates and
Errors
13. During 20X3, T Ltd. discovered that prepayments of ` 680 made during
20X1 had not been recognised in profit or loss as the related expenses
were incurred. The prepayments should have been recognised as an
expense of ` 170 in 20X1; ` 425 in 20X2; and ` 85 in 20X3. The
misstatement is material.

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Extract from draft 20X3 Statement of Profit and Loss before

correction of error

Draft 20X3 20X2

Revenue 10,200 6,800
Less: Expenses (9,350) (6,120)
Net profit 850 680

Extract from Statement of Changes in Equity

Draft 20X3 20X2

Opening retained earnings 24,480 23,800
Add: Current-year net profit 850 680
Closing retained earnings 25,330 24,480

The opening balance of retained earnings is adjusted and comparatives

are restated when practicable to reflect the correction of the error.
Assume there are no tax effects.
Required:
Draw the revised Statement of Profit and Loss (extract) and Statement
of Changes in Equity (extract) after rectifying the above error.
Ind AS 115: Revenue from Contracts with Customers
14. A Ltd. enters into a contract with a customer for the exclusive supply of
paint for a three-year period. A Ltd. makes a ` 50,000 upfront
payment, which the customer will use to customize its paint sprayers
for A Ltd.’s product. A Ltd. determines the upfront payment is not in
respect of or for a distinct good or service.
A Ltd. estimates ` 10,00,000 in sales with the customer over the three-
year period. Sales for Quarter 1 is ` 1,00,000 and for Quarter 2 is
` 1,25,000. However, A Ltd. updated its estimate of total sales over the
contract to ` 15,00,000 during Quarter 2.
Required:
Determine the net revenue to be recognized in Quarter 1 and Quarter
2 by A Ltd.

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Ind AS 32 : Financial Instruments – Presentation

15. A Ltd. has issued Optionally Convertible Debentures (OCD) amounting
to ` 300 crores to B Ltd. on following terms:
o Tenor : 4 years
o Coupon : Nil
o IRR : 15% p.a.
During the tenor of OCDs, A Ltd. can call the OCD and redeem it with
stated IRR.
The market rate for similar debt without conversion features is 17% p.a.
B Ltd. can also ask for conversion at any time before maturity based on
following formula:
No of equity shares = (Investment amount + applicable IRR) / (Face
value of equity share; i.e. ` 10)
If redemption or conversion doesn’t happen before maturity, then
OCDs will be redeemed mandatorily at maturity in same manner as for
conversion.
Required:
How is this instrument accounted for in the books of A Ltd. in the
following two scenarios:
Scenario A – When B Ltd. opts for conversion before maturity at the
end of year 1
Scenario B – When B Ltd. doesn’t opt for conversion and OCDs are
redeemed at maturity.
Ind AS 24 : Related Party Disclosures
16. Mr. A, Mr. B and Mr. C have direct interests of 40%, 10% and 10%
respectively, of Trust T. The remaining 40% interest in Trust T is held
by 20 unrelated investors.
Mr. A, Mr. B and Mr. C wish to control the trust, and so they enter into
a contractual arrangement to act together. In this situation, assume
that 1% interest constitutes one voting right.

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S Ltd. is a wholly owned subsidiary of P Ltd. and P Ltd. is wholly owned

by Trust T.
Required:
Should a group of persons be disclosed as the ultimate controlling
party where they have a contractual arrangement to act together?
Ind AS 2 : Inventories
17. An entity manufactures a equipment in three stages. There is a market
for semi-finished product for each state, but the entity only sells the
completed equipment. The following are details of the cost structure
of the equipment as at the year-end:

Conversion Selling
Cost/unit price /unit
` `
Stage 1 170 130
Stage 2 – Incremental cost 35
205 195
Stage 3- Incremental cost 62
267 275

Required:
Assuming that the selling cost are zero, what is the NRV of the semi-
finished product in stage 1 and stage 2 at the year end?
Ind AS 23 : Borrowing Costs
18. An entity has borrowed ` 10,00,000 specifically to finance the cost of
constructing a new head office. The loan was availed on 1st May 20X8.
Interest was payable at 12% per annum up to 1st February 20X9, after
which the rate was revised to 13% owing to an increase in the Secured
Overnight Financing Rate (SOFR). Construction of the building does
not begin until 1st December 20X8 and continues, without interruption,
until after the year end on 31st March 20X9. During the period of
construction, the entity incurs directly attributable costs of ` 1,00,000

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in December 20X8 and ` 250,000 in each month from January 20X9 to

March 20X9 (for simplicity, it is assumed that these costs are incurred
on the first day of each month). Each month, the borrowings (less any
amount that is to be expended for the building works in that month)
are re-invested and earn interest at a rate of 5% per annum.
For the year ended 31st March, 20X9, the entity incurred interest
expense of ` 1,11,667 on the ` 10,00,000 loan and earned ` 37,917 as
interest on the re-invested portion.
Required:
Determine the amount of borrowing cost to be capitalized to the
qualifying asset for the year ended 31st March, 20X9.
Ind AS 7 : Statement of Cash Flows

19. Z Ltd. had acquired a subsidiary V Ltd. during the year 20X1-20X2.
Summarized information from the consolidated statement of profit and
loss and balance sheet together with some supplementary information
have been provided:
Consolidated Statement of Profit and Loss for the year 20X1-20X2

`
Revenue 4,56,000
Cost of sales (2,64,000)
Gross profit 1,92,000
Depreciation (36,000)
Other operating expenses (67,200)
Interest cost (4,800)
Profit before taxation 84,000
Taxation (18,000)
Profit after taxation 66,000

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Consolidated Balance Sheet as at 31 st March

20X2 20X1
` `
Assets
Non-current assets
Property, plant and equipment 1,92,000 96,000
Goodwill 21,600 -
Current assets
Inventories 36,000 42,000
Financial assets
Trade receivables 64,800 60,000
Cash and cash equivalents 9,600 6,000
Total 3,24,000 2,04,000
Equity and Liabilities
Shareholders’ equity 1,08,000 42,000
Non-current liabilities
Long term debt 1,20,000 76,800
Current liabilities
Income tax payables 14,400 13,200
Financial liabilities
Trade payables 81,600 72,000
Total 3,24,000 2,04,000

Other information
All of the shares of V Ltd. were acquired for ` 88,800 in cash. The fair
values of assets acquired and liabilities assumed were:

Particulars `
Inventories 4,800
Trade receivables 9,600

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Cash 2,400
Property, plant and equipment 1,32,000
Trade payables (38,000)
Long-term debt (43,200)
Goodwill 21,600
Cash consideration paid 88,800

Required:
Prepare a consolidated statement of cashflows for the year 20X1-20X2
under indirect method.
Ind AS 16 : Property, Plant and Equipment
20. A Ltd. exchanges car X with a book value of ` 13,000 and a fair value of
` 13,250 for cash of ` 150 and car Y which has a fair value of ` 13,100.
The transaction lacks commercial substance, because the entity’s cash
flows are not expected to change as a result of the exchange; in other
words, the entity is in the same position as it was before the
transaction.
Required:
State the value at which Car Y should be recognized in the books of
A Ltd.

SUGGESTED ANSWERS

Answer to Multiple Choice Questions

1. Option (a) : 10 years

2. Option (b) : ` 2,87,500

3. Option (c) : ` 3,52,500

4. Option (c) : ` 35,250

5. Option (a) : 40%

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6. Option (d) : ` 1,10,000

7. Option (a) : The modification in the contract will be accounted

for prospectively by allocating remaining revenue equally for
5 years

8. Option (a) : ` 11,50,000

9. Option (c) : ` 2,30,000

10. Option (d) : Transactions between both A Ltd. and L Ltd. and
A Ltd. and K Ltd. are disclosable.

11. Analysis of new ESOP scheme given on surrendering options under

original ESOP scheme as replacement scheme

The original ESOP scheme was issued by H Ltd. to its own employees
as well as S Ltd.’s employees.

S Ltd. has issued new ESOP scheme to its own and H Ltd.’s employees,
conditional upon employees of S Ltd. and H Ltd. surrendering the right
over original ESOP scheme.

Since obtaining the options under new ESOP scheme is conditional on

surrendering the employee's entitlement under original ESOP scheme,
the new scheme S Ltd. would be designated as replacement scheme for
original scheme by S Ltd.

Accordingly, in the current fact pattern, the original ESOP scheme of H

Ltd. has been replaced with the new ESOP scheme of S Ltd. Hence,
according to para 28(c) of Ind AS 102, modification accounting would
apply.

Classification of new ESOP scheme

(i) Consolidated Financial Statements (CFS):

The award is settled in equity shares of the group and therefore

treated as an equity-settled share-based payment.

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(ii) Individual (Stand-alone) Financial Statements (SFS) of H Ltd.:

From H Ltd.'s perspective, the award is treated as an equity-
settled share-based payment. This is because H Ltd. does not
have an obligation to settle the award.
(iii) Individual (Stand-alone) Financial Statements (SFS) of S Ltd.
ESOP will be settled against issue of S Ltd.’s own shares.
Therefore, ESOP are classified as 'Equity settled’.
To the extent S Ltd. provides ESOP to H Ltd.’s employees, the
same will be treated as dividend distribution to H Ltd.
Accounting for change in settlor from H Ltd. (parent) to S Ltd.
(subsidiary)
(i) Consolidated Financial Statements (CFS) of H Ltd.:
(a) As on the date of new ESOP scheme by S Ltd., there is ESOP
reserve standing in CFS. This ESOP reserves is classified as
'Equity' in CFS considering that under original scheme,
equity shares of H Ltd. are given.
(b) ESOP reserve as per (a) above in CFS will continue even
after new scheme. Since new scheme is accounted as
modification of original scheme, grant date fair value as per
original scheme plus incremental fair value as per new
scheme is recognised as ESOP cost in CFS. Incremental fair
value is accounted prospectively.
(c) ESOP reserve as per (a) above in CFS is reclassified from
'Equity' to "Non-controlling interest' (NCI) due to change in
settlor from H Ltd. (Parent) to S Ltd. (Subsidiary). This is
because the definition of NCI refers to the equity in a
subsidiary not attributable, directly or indirectly to a Parent.
(ii) Stand-alone financial statements (SFS) of parent H Ltd. and
subsidiary S Ltd.:
(a) Ind AS 102 doesn't contain any specific guidance on
accounting for change in settlor.

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(b) Under original ESOP scheme, Parent H Ltd. was settlor.

Therefore, on the date of new ESOP scheme, in the SFS of
Parent H Ltd., there is 'ESOP reserves which would have
been utilised in case Parent continued as settlor.
(c) However, under the new ESOP scheme, Subsidiary S Ltd. is
settlor. 'ESOP reserves’ standing in SFS of Parent H Ltd. is
no longer required as H Ltd. has passed on its responsibility
of settling ESOP scheme to S Ltd. Therefore, 'ESOP
reserves' in SFS of Parent H Ltd. is reversed.
(d) Subsidiary S Ltd. under new ESOP scheme become settlor
for an existing ESOP plan. However, in SFS of S Ltd. there is
no 'ESOP reserves' standing. Therefore 'ESOP reserves'
relating to period already elapsed under original ESOP
scheme is to be recognised in SFS of Subsidiary S Ltd.

Journal Entries
Years ESOP Parent (H Ltd.) Standalone Subsidiary (S Ltd.) Standalone
scheme Financial Statement (P SFS) Financial Statements (S SFS)
references

Year 1 Original Particular Debit Credit Particular Debit Credit

ESOP
Employees 5,000 Employees 2,500
scheme by
expenses* Dr. expenses# Dr.
Parent H
Ltd. Investment in 2,500 To Equity 2,500
Subsidiary** Dr. (Capital
Contribution
To Equity (ESOP 7.500
from Parent)
reserves)
(Recognition of employees
(Recognition of employees
expenses under ESOP scheme
expenses/ investment in
by Parent for Year 1)
subsidiary under ESOP scheme
by Parent for Year 1) [ Subsidiary employees = 500
#

[*Parent employees = 1,000 options x ` 2,500]

options x ` 15 x 1/3 = ` 5,000]

[**Subsidiary employees = 500

options x ` 15 x 1/3 = ` 2,500]

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Year 2- Accounting Particular Debit Credit Particular Debit Credit

Beginning for change
Equity (ESOP 7,500 Equity 5,000
in settlor
reserves) Dr. (Distribution to
from Parent
Parent) Dr.
to To Investment in 2,500
Subsidiary Subsidiary Equity (capital 2,500
– atthe To contribution
Dividend 5,000
beginning Income from Parent) Dr.
of Year 2 (Deemed To Equity (ESOP 7,500
Distribution reserves)
from Subsidiary)
(Accounting of obligations
(Parent is no longer required to taken by Subsidiary under
settle ESOP for its own New ESOP scheme by
employees as well as subsidiary Subsidiary for parent
employees under New ESOP employees as well as its own
scheme by Subsidiary) employees. This entry is
passed since subsidiary has
taken obligation of existing
scheme)

Year 2- End Modificati Particular Debit Credit Particular Debit Credit

ons
accounting Employees 8,000 Equity 8,000
– New expenses* Dr. (Distribution to
ESOP Parent)# Dr.
To Dividend 8,000
scheme by
Income (Deemed Employees 4,000
Subsidiary
Distribution from expenses## Dr.
Subsidiary)
To Equity (ESOP 12,000
reserves)

(Recognition of employee (Recognition of employees’

expenses for parent employees expenses for parent employees
under Old ESOP scheme and as well as subsidiary employees
incremental fair value under New under Old ESOP scheme and
ESOP scheme for Year 2) incremental fair value under
[*Parent employees = New ESOP scheme for Year 2)

A. Original ESOP scheme = [#Parent employees = ` 8,000

(1000 options x ` 15 x 2/3 – (i.e. computation same as
5,000) = ` 5,000 parent)

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B. Incremental fair value – New ##

Subsidiary employees =
ESOP scheme = (1000
A. Original ESOP scheme =
options x ` 6 x ½) = ` 3,000
(500 options x ` 15 x 2/3 –
Total = ` 8,000]
2,500) = ` 2,500
B. Incremental fair value –
New ESOP scheme = (500
options x ` 6 x ½) =
` 4,000]

Year 3- End Modificati Particular Debit Credit Particular Debit Credit

ons
accounting Employees 8,000 Equity 8,000
– New expenses Dr. (Distribution to
ESOP Parent) Dr.
scheme by To Dividend 8,000
Employees 4,000
Subsidiary Income
(Deemed expenses Dr.
Distribution
To Equity (ESOP 12,000
from Subsidiary)
reserves)

(Recognition of employee
(Recognition of employees’
expenses for parent employees
expenses for parent employees
under New ESOP scheme for
as well as subsidiary employees
Year 2)
under under New ESOP scheme
for Year 2)

12. Scenario 1
The following exchange differences will arise in the financial
statements of the individual entities if the loan is re-translated at the
closing rate:
31st March,
20X5
Standalone Financial Statements of Subsidiary C Ltd.
No exchange difference arises in the foreign subsidiary
because the loan payable is denominated in its functional
currency
Standalone Financial Statements of Parent A Ltd.
Exchange difference on long-term loan receivable: £
On closing rate - US$ 1 million / $ 1.82/£ 5,49,450

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On opening rate - US$ 1 million / $ 1.45/£ 6,89,655

Exchange loss 1,40,205

In Parent A Ltd.'s separate financial statements, the loan is regarded as

a monetary item and any exchange difference is taken to profit or loss.
On consolidation, the re-translated long-term loan is regarded as part
of the net investment in Subsidiary C Ltd., so the related exchange loss
is recognised in other comprehensive income and accumulated as a
separate component of equity as per para 32 of Ind AS 21. There
would also be a corresponding exchange gain included in other
comprehensive income, arising as part of the re-translation of the net
assets (which include the US dollar loan creditor) of Subsidiary C Ltd.
under the closing rate/net investment method.
Scenario 2
In the financial statements of the individual entities, the following
exchange differences will arise if the loan is re-translated at the closing
rate.
Parent A Ltd.
There is no exchange difference in the parent's financial statements in
respect of the loan because it is denominated in sterling.
Subsidiary C Ltd.
Exchange difference on long-term loan payable:
US $
On closing rate – £ 2,00,000 @ $ 1.82/£ 3,64,000
On opening rate - £ 2,00,000 @ $ 1.45/£ 2,90,000
Exchange loss 74,000
Exchange loss translated in £ at the closing rate @ $ 1.82/£ £ 40,659

The exchange loss of US $ 74,000 on the sterling loan is recognised in

Subsidiary C Ltd.'s income statement, because the subsidiary is
exposed to the foreign currency risk.
On consolidation, the inter-company loan will be cancelled. However,
because the long-term loan is regarded as part of the net investment

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in the subsidiary, the exchange loss of £ 40,659 is recognised in other

comprehensive income and accumulated as a separate component of
equity in the consolidated financial statements. There is a
corresponding exchange gain included in other comprehensive income,
arising as part of the re-translation of the net assets of Subsidiary
C Ltd. The effect is that the consolidated income statement will not
reflect any exchange difference on the loan, which is consistent with
the fact that the loan has no impact on group cash flows, unless the
investment is sold.
13. In restating the comparatives, the adjustment will be included in the
appropriate line item. In addition, the financial statements will include
full disclosure regarding the error and the adjustments made to correct
it as per para 49 of Ind AS 8. The restated comparative financial
statements should be accompanied with the heading ‘restated’ to
highlight for users the fact that the comparative financial statements
are not the same as the financial statements previously published.
Statement of Profit and Loss after correction of error (Extract)

20X3 20X2 (Restated)

` `
Revenue 10,200 6,800
Less: Expenses (9,350 + 85) (9,435) (6,545)
Net profit 765 255

Statement of Changes in Equity (Extract)

20X3 20X2
(Restated)
` `
Opening retained earnings as reported - 23,800
previously
Correction of an error related to previous years - (170)
Opening retained earnings (restated) 23,885 23,630
Current-year net profit 765 255
Closing retained earnings 24,650 23,885

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FINAL EXAMINATION

14. Treatment of upfront payment of ` 50,000

Upfront payment of ` 50,000 would be accounted for as a reduction of
the transaction price. It would be deferred and recognised as a
reduction of revenue (in proportion to estimated sales) over the
contract term.
Accounting for Quarter 1 and Quarter 2 is as follows:
For the first quarter
• Quarter 1 sales = ` 1,00,000
• Entity estimates ` 10,00,000 sales over the three-year period
• Percentage of Quarter 1 sale to total estimated sale
= (` 1,00,000 / ` 10,00,000) x 100 = 10%
• Share of upfront payment to be recognised in Quarter 1
= 10% x ` 50,000 = ` 5,000
Hence, in Quarter 1, A Ltd. recognizes revenue of ` 95,000 (` 1,00,000
actual sales – ` 5,000 consideration paid to the customer)
For the second quarter
• Quarter 2 sales = ` 1,25,000
• A Ltd. updates its estimate of total sales over the contract to
` 15,00,000
• Total sales to date till Quarter 2
= ` 1,00,000 +` 1,25,000 = ` 2,25,000
• Percentage of sale till Quarter 2 to total estimated sale
= (` 2,25,000 / ` 15,00,000) x 100 = 15%
• Share of upfront payment to be recognised in Quarter 2
= (15% x ` 50,000 upfront payment) – Upfront payment
recognized in Quarter 1
= ` 7,500 – ` 5,000 = ` 2,500

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Hence, A Ltd. would recognize revenue of ` 1,22,500 for Quarter 2

(` 1,25,000 actual sales – ` 2,500 upfront payment made to the
customer).
15. OCD issued by A Ltd. is a compound financial instrument. The host
instrument will be classified as liability, since there is contractual
obligation to pay cash towards interest (i.e. guaranteed IRR of 15%
p.a.) and principal repayment that issuer A Ltd. cannot avoid. The
equity conversion option is accounted as equity.
Date Particulars Amount
(rounded off
in crores)
Day 1 Bank Dr. 300
To Equity (balancing figure representing 20
residual interest)
To Debentures (future cash flows 280
discounted @17%)
(Initial recognition of the financial instrument in
the nature of a compound instrument comprising
of elements of debt and equity)
Subsequent Accounting
End of Interest on Debentures Dr. 48
Year 1 To Debentures (classified under “Liability 48
component of compound financial
instrument”)
(Interest recognised in P&L @17% i.e. 280 x 17%)

Scenario A – When B Ltd opts for conversion at end of year 1

Since conversion was allowed under the original terms of instrument,
the entity should determine the amortised cost of liability component
using the original IRR till the conversion date. It will derecognise the
liability component and recognises it as equity.

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There is no gain or loss on early conversion.

Date Particulars Amount
(rounded off in
crores)
End of Debentures [ 280 + 48] Dr. 328
Year 1 To Equity Share Capital 328
(Conversion of OCD into equity shares of the
Company)

Scenario B – When B doesn’t opt for conversion and OCDs are

redeemed at maturity

Date Particulars Amount

(rounded off
in Crores)
End of Interest on debentures Dr. 245
Year 1-4 (cumulative interest for 4 years)
To Debentures 245
(Interest recognised in P&L @ 17%)
End of Debentures [280 + 245] Dr. 525
Year 4 To Bank 525
(Being debentures redeemed)

Working Note:
Computation of maturity value of OCD as per the formula stated by
B Ltd.:
Year Opening balance (In Interest @15% IRR Closing balance
crores) (In crores) (In crores)
1 300 45 345
2 345 51.75 396.75
3 396.75 59.5125 456.2625
4 456.2625 68.439 524.7015 or 525
224.7015 or 225

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FINANCIAL REPORTING

16. The following diagram shows the structure of the Group:

Contractual arrangement

Mr. A Mr. B Mr. C 20 unrelated investors

40% 10% 10% 40%

Trust T

100%

P Ltd.

100%

S Ltd.

S Ltd.’s management should disclose Mr. A, Mr. B and Mr. C as the

ultimate controlling party (as a group) of S Ltd. where they have a
contractual arrangement to act together, irrespective of whether there
were transactions between them and S Ltd. during the year.
The agreement between Mr. A, Mr. B and Mr. C provided them with a
collective control over 60% (40%+10%+10%) of Trust T’s voting rights.
Mr. A, Mr. B and Mr. C form a group that controls Trust T, which
controls P Ltd. and S Ltd.
Trust T should also be disclosed as the ultimate parent entity of S Ltd.
in the notes to the financial statements, if this information is not
disclosed elsewhere in information published with the financial
statements.
Trust T would be the ultimate controlling party of S Ltd. and only Mr. A
would be a related party of S Ltd. if the contractual arrangement to act
together did not exist. Mr. A is related to S Ltd. because his 40%
interest in Trust T gives him significant influence over S Ltd.

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FINAL EXAMINATION

17. No impact for lower of cost and NRV provision is made at stage 1 and
stage 2 because the final equipment will be sold at a profit. The profit
margin on the estimated cost of completion should, therefore, be
considered when calculating the net realisable value of work in
progress if the entity has the ability to dispose of the finished product
at a price that exceeds the production cost. The net realisable value of
the semi-finished product at stage 1 is:

`
Selling price of completed product 275
Less: Stage 3 conversion costs (62)
Less: Stage 2 conversion costs (35)
Net realisable value at stage1 178

At stage 1, inventory will be valued at ` 170 (lower of cost i.e. ` 170

and NRV i.e. ` 178). The inventory at stage 1 will be valued at ` 170,
though the selling price at stage 1 is ` 130.
18. Statement showing the interest paid and received during the
period of construction

`
Interest payable for December 20X8 at 12% (10,00,000 x 12% x 10,000
1/12)
Interest payable for January 20X9 at 12% (10,00,000 x 12% x 1/12) 10,000
Interest for February 20X9 at 13% (10,00,000 x 13% x 1/12) 10,833
Interest payable for March 20X9 at 13% (10,00,000 x 13% x 1/12) 10,834
Total interest payable during the construction period till 41,667
March 20X9 (A)
Interest receivable on re-invested funds of ` 9,00,000 in September
20X9 [(10,00,000 – 1,00,000) x 5% x 1/12] 3,750
Interest receivable on re-invested funds of ` 6,50,000 in October
20X9 [(9,00,000 – 2,50,000) x 5% x 1/12] 2,708
Interest receivable on re-invested funds of ` 4,00,000 in November
20X9 [(6,50,000 – 2,50,000) x 5% x 1/12] 1,667

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FINANCIAL REPORTING

Interest receivable on re-invested funds of ` 1,50,000 in December

20X9 [(4,00,000 – 2,50,000) x 5% x 1/12] 625
Total interest receivable till March, 20X9 (B) 8,750
Net interest cost (A) - (B) 32,917

The borrowing is specific to the qualifying asset and the borrowing

costs eligible for captialisation are the actual cost incurred during the
construction period less any investment income on the temporary
investment of the borrowings. The amount of borrowing costs that can
be capitalised is ` 32,917.
Commencement of capitalization of borrowing costs will be said from
the period when all the three criteria as mentioned in para 17 of
Ind AS 23 are met. Although the funds were drawn down under the
borrowings on 1st May 20X8, the construction started from
1st December, 20X8. Hence, the borrowing costs incurred prior to
1st December, 20X8 cannot be said to be directly attributable to the
asset's construction, as no expenditure on the asset is being incurred.
19. Consolidated Statement of Cash Flows for the 20X1-20X2

` `
Cash flows from operating activities
Profit after taxation 84,000
Adjustments for non-cash items:
Depreciation 36,000
Interest paid to be included in financing activities 4,800 40,800
1,24,800
Adjustments for working capital changes:
Decrease in inventories (W.N.1) 10,800
Decrease in trade receivables (W.N.2) 4,800
Decrease in trade payables (W.N.3) (28,800) (13,200)
1,11,600
Less: Taxation (13,200 + 18,000 – 14,400) (16,800)

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Net cash generated from operating activities 94,800

Cash flows from investing activities
Cash paid to be acquired subsidiary (88,800 – 2,400) (86,400)
Net cash outflow from investing activities (86,400)
Cash flows from financing activities
Interest paid (4,800)
Net cash outflow from financing activities (4,800)
Increase in cash and cash equivalents 3,600
Cash and cash equivalents at the beginning of the 6,000
year
Cash and cash equivalents at the end of the year 9,600

Working Notes:
1. Computation of increase/decrease in inventory of the Group
for the year

`
Total inventory of the Group at the end of the year 36,000
Inventory acquired during the year from subsidiary (4,800)
Closing inventory 31,200
Less: Opening inventory (42,000)
Decrease in inventory (10,800)

2. Computation of increase/decrease in trade receivables of the

Group for the year

Total trade receivables of the Group at the end of the year 64,800
Trade receivables acquired during the year from subsidiary (9,600)
Closing trade receivables 55,200
Less: Opening trade receivables (60,000)
Closing trade receivables (4,800)

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3. Computation of increase/decrease in trade payables of the

Group for the year

Trade payables at the end of the year 81,600

Trade payables of the subsidiary assumed during the year (38,400)
Closing trade payables 43,200
Less: Opening trade payables (72,000)
Closing trade payables (28,800)

20. Para 24 of Ind AS 16 inter alia states that in case of all exchange of
item of property, plant and equipment, the cost of an item of property,
plant and equipment is measured at fair value unless (a) the exchange
transaction lacks commercial substance or (b) the fair value of neither
the asset received nor the asset given up is reliably measurable. The
acquired item is measured in this way even if an entity cannot
immediately derecognise the asset given up. If the acquired item is
not measured at fair value, its cost is measured at the carrying
amount of the asset given up.
Further, para 25 of Ind AS 16 states that an entity determines whether an
exchange transaction has commercial substance by considering the extent
to which its future cash flows are expected to change as a result of the
transaction. An exchange transaction has commercial substance if:
(a) the configuration (risk, timing and amount) of the cash flows
of the asset received differs from the configuration of the
cash flows of the asset transferred; or
(b) the entity-specific value of the portion of the entity’s operations
affected by the transaction changes as a result of the exchange; and
(c) the difference in (a) or (b) is significant relative to the fair value
of the assets exchanged.
Since in the given case, there is no commercial substance, the entity
recognizes the assets received at the book value of car X. Therefore, it
recognizes cash of ` 150 and car Y as property, plant and equipment
with a carrying value of ` 12,850.

27 JANUARY 2026 EXAMINATION