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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
st
31 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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FINAL EXAMINATION

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:

31st March, 20X5 31st 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 31st 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.) Subsidiary (S Ltd.) Standalone
scheme Standalone Financial Financial Statements (S SFS)
references Statement (P SFS)

Year 1 Original Particular Debit Credit Particular Debit Credit

ESOP
Employees 5,000 Employees 2,500
scheme by
expenses* expenses Dr. #
Parent H
Dr.
Ltd. Investment 2,500 To Equity 2,500
i (Capital
n Contribution
To Equity (ESOP 7.500
Subsidiary**Dr. 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 = options x ` 2,500]

1,000 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
To Investment in 2,500 Parent) Dr.
to
Subsidiary Subsidiary Equity (capital 2,500
– at the contribution
To Dividend 5,000
beginning from Parent) Dr.
Income
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 = [#Parent employees = ` 8,000

scheme
(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.
To Dividend 8,000
scheme by
Income Employees 4,000
Subsidiary
(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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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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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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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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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.

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FINANCIAL REPORTING

QUESTIONS

Case Scenario I
HIJ Ltd. is a globally diversified business conglomerate with operations
spanning multiple business segments across various regions worldwide. For
maintaining its financial records, the company follows Indian Accounting
Standards. As the finance team diligently finalizes the books of accounts and
prepares the financial statements for the financial year ending on 31st March
20X2, it requires insights and accounting suggestions on the following
transactions:
(i) On 1st October 20X1, HIJ Ltd. subscribed for 40 million ` 1 loan notes in
Z Ltd. The loan notes were issued at 90 paise and were redeemable at
` 1.20 on 30th September 20X6. Interest is payable on 30th September in
arrears at 4% of par value. This represents an effective annual rate of
return for HIJ Ltd. of 9.9%. HIJ Ltd.’s intention is to hold the loan notes
until redemption.
(ii) On 1st April 20X1, HIJ Ltd. commenced joint construction of a property
with G Ltd. For this purpose, an agreement has been entered into that
provides for joint operation and ownership of the property. All the
ongoing expenditure, comprising maintenance plus borrowing costs, is
to be shared equally. The construction was completed on
30th September 20X1 and utilisation of the property started on
1st January, 20X2 at which time the estimated useful life of the same was
estimated to be 20 years.
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Total cost of the construction of the property was ` 40 crores. Besides

internal accruals, the cost was partly funded by way of loan of
` 10 crores taken on 1st January, 20X1. The loan carries interest at an
annual rate of 10% with interest payable at the end of year on
31st December each year. The company has spent ` 4,00,000 on the
maintenance of such property.
The company has recorded the entire amount paid as investment in
Joint Venture in the books of accounts. Suggest the suitable accounting
treatment of the above transaction as per applicable Ind AS.
On the basis of the facts given above, chose the most appropriate answer
to Questions 1 to 5 below based on the relevant Indian Accounting
Standards (Ind AS).
1. What would be the initial measurement of financial instruments as
subscription of loan notes in Z Ltd.?
(a) ` 40 million
(b) ` 37.782 million
(c) ` 38.4 million
(d) ` 36 million
2. What would be the closing balance of financial instruments (as
subscription of loan notes in Z Ltd.) as on 31st March 20X2?
(a) ` 37.6 million
(b) ` 34.218 million
(c) ` 37.782 million
(d) ` 36.182 million
3. With respect to point (ii), what is the nature of the agreement?
(a) Agreement is in the nature of Joint venture
(b) Agreement is in the nature of Joint Operations
(c) Agreement is in the nature of Holding subsidiary relationship
(d) Agreement is in the nature of Associates

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4. What will the initial cost of PPE appearing in the books of HIJ Ltd.?
(a) ` 40,50,00,000
(b) ` 40,00,00,000
(c) ` 20,25,00,000
(d) ` 20,00,00,000
5. Calculate the depreciation charge for the year ended 31st March 20X2 to
be charged by G Ltd. in its books?
(a) ` 50,62,500
(b) ` 1,01,25,000
(c) ` 1,00,00,000
(d) ` 50,00,000

Case Scenario II
FA Ltd. is a company which manufactures aircraft parts and engines and sells
them to large multinational companies like Boeing and Airbus Industries.
Following are the details of some of the transactions entered into by the
company:
i. On 1st April 20X2, the company began the construction of a new
production line in its aircraft parts manufacturing shed.
Costs relating to the production line are as follows:

Details Amount
` in lakhs
Costs of the basic materials (list price ` 12.5 lakhs less 10.00
20% trade discount)
Recoverable goods and services tax incurred but not 1.00
included in the purchase cost
Employment costs of the construction staff for three 1.20
months till 30th June, 20X2
Other overheads directly related to the construction 0.90
Payments to external advisors relating to the 0.50

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construction
Expected dismantling and restoration costs 2.00

The production line took two months to make ready for use and was
brought into use on 31st May, 20X2.
The other overheads were incurred during the two-month period
ended on 31st May, 20X2. They included an abnormal cost of ` 0.3
lakhs caused by a major electrical fault.
The production line is expected to have a useful economic life of eight
years. After 8 years, FA Ltd. is legally required to dismantle the plant in
a specified manner and restore its location to an acceptable standard.
The amount of ` 2 lakhs included in the cost estimates is the amount
that is expected to be incurred at the end of the useful life of the
production line. The appropriate discount rate is 5%. The present
value of ` 1 payable in 8 years at a discount rate of 5% is
approximately ` 0.68.
Four years after being brought into use, the production line will require
a major overhaul to ensure that it generates economic benefits for the
second half of its useful life. The estimated cost of the overhaul, at
current prices, is ` 3 lakhs.
No impairment of the plant had occurred by 31st March 20X3.
ii. During the year ended 31st March 20X3, FA Ltd. provided consultancy
services to a customer regarding the installation of a new production
system related to aircraft parts. The system has caused the customer
considerable problems, so the customer has taken legal action against
the Company for the loss of profits that has arisen as a result of the
problems with the system. The customer has claimed damages to the
tune of ` 1.6 lakhs.
The legal department of FA Ltd. considers that there is a 25% chance the
claim can be successfully defended. The legal department further stated
that they are reasonably confident the Company is covered by insurance
against these types of loss. The accountant feels nothing needs to be
provided for this claim as the Company is suitably covered against any
possible losses.

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iii. FA Ltd. has an associate company, Flynet Limited. Following are the
information of Flynet Limited for the year ended 31st March 20X3:

Particulars ` in lakhs
Net Income after taxes 120
Decrease in accounts receivables 20
Depreciation 25
Increase in inventory 10
Increase in accounts payable 7
Decrease in wages payable 5
Tax charge for the year (deferred tax liabilities) 15
Profit from sale of land 2

On the basis of the facts given above, chose the most appropriate answer
to Questions 6 to 10 below based on the relevant Indian Accounting
Standards (Ind AS).

6. Which of the following items need to be capitalized in determining the

cost of Production Line?
(a) Abnormal cost of ` 0.3 lakhs
(b) Recoverable GST of ` 1 lakhs
(c) Initial estimate of the costs of dismantling and removing the item
and restoration of site of ` 2 lakhs
(d) Initial estimate of the costs of dismantling and removing the item
and restoration of site of ` 1.36 lakhs

7. Calculate the company’s associate Flynet Ltd.’s cash flow from

operations.
(a) ` 158 lakhs
(b) ` 170 lakhs
(c) ` 174 lakhs
(d) None of the above

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8. What accounting treatment should be done in FA Ltd.’s books for the

year ending 31st March 20X3, as the customer has taken legal action
against the Company on the loss of profits that has arisen as a result of
the problems with the system?
(a) Nothing needs to be provided for claim instituted by the customer
as the Company is suitably covered against any possible losses.
(b) Provision of ` 1.6 lakhs should be recognised with a corresponding
charge to profit or loss.
(c) Provision of ` 0.4 lakhs as per best possible outcome should be
recognised with a corresponding charge to profit or loss.
(d) Contingent Liability would be disclosed in the 31st March 20X3
financial statements. Charge to profit or loss if any would be
recognised in the period when the claim is settled.

9. Compute the total amount to be charged to the Statement of Profit and

Loss with respect to Production Line for the year ending 31 st March 20X3
and the balance of Provision for Dismantling Cost carried to Balance
Sheet.
(a) ` 1.70 lakhs; ` 1.36 lakhs
(b) ` 1.42 lakhs; ` 1.70 lakhs
(c) ` 1.76 lakhs; ` 1.42 lakhs
(d) ` 1.42 lakhs; ` 1.76 lakhs

10. Compute the cost of the production Line to be capitalized initially on

31st May, 20X2.
(a) ` 13.26 lakhs
(b) ` 14.60 lakhs
(c) ` 13.96 lakhs
(d) ` 15.76 lakhs

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Consolidated Financial Statements

11. A Ltd. owns 100% of a subsidiary B Ltd. It disposes of 60% of its
interest in the subsidiary for ` 360 million and loses control of the
subsidiary. It will de-consolidate the subsidiary and account for the
remaining 40% interest as an associate using the equity method of
accounting. At the disposal date, the fair value of the retained
investment in B Ltd. is determined to be ` 240 million. The carrying
value of the identifiable net assets of the subsidiary is ` 440 million,
excluding goodwill. There is ` 60 million of goodwill recorded related
to the previously acquired interests in the subsidiary. A Ltd. tested the
subsidiary's goodwill and long-lived assets prior to disposal and there
was no impairment. There is ` 4 million credit in the available-for-sale
reserve and ` 10 million credit in the revaluation reserve relating to the
subsidiary B Ltd. The tax consequences of the gain have been ignored.
Required:
(i) Pass Journal Entries for sale of 60% stake of B Ltd. on disposal
date
(ii) Compute gain on 40% retained investment
Ind AS 105: Non-Current Assets Held for Sale and Discontinued Operations
12. A Ltd. has a wholly owned subsidiary B Ltd. A Ltd. sells subsidiary B Ltd.
to C Ltd. a listed entity, for shares in C Ltd. and ends up owning 75% of
C Ltd.'s shares.
The net assets of B Ltd. prior to the disposal are ` 10,00,000 (fair value
` 13,00,000) and goodwill previously capitalised and not impaired is
` 6,00,000; the carrying value of B Ltd. in A Ltd.'s books is ` 15,00,000.
At the date A Ltd. acquired B Ltd., B Ltd.'s profit and loss reserve was
` 400,000 and B has since made ` 100,000 post acquisition profits.
The position prior to the transaction was as follows: (Amount in `)
Consolidation of A A Ltd. B Ltd. Elim Consol
Ltd. and B Ltd.
before transaction
Goodwill - - 600,000 600,000

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Investment in 1,500,000 - (1,500,000) -

subsidiary
Net assets 10,000,000 1,000,000 - 11,000,000
Total assets 11,500,000 1,000,000 (900,000) 11,600,000
Share capital 2,000,000 500,000 (500,000) 2,000,000
Retained earnings 9,500,000 100,000 - 9,600,000
Pre-acquisition
reserves - 400,000 (400,000) -
Total equity 11,500,000 1,000,000 (900,000) 11,600,000

The net assets of C Ltd. prior to its acquisition of B Ltd. were ` 380,000
(fair value ` 500,000). C Ltd. then issued shares worth ` 17,50,000
(which is the fair value of the consideration given for the acquisition of
100% of B), being ` 600,000 nominal value and ` 11,50,000 premium.
The balance sheets of the three companies directly after the issue of
shares by C Ltd. were as follows: (Amount in `)

Summarized balance sheets A Ltd. B Ltd. C Ltd.

Investment in subsidiary 1,750,000 - 1,750,000
Net assets 10,000,000 1000,000 380,000
11,750,000 1000,000 2,130,000
Share capital 2000,000 500,000 800,000
Additional paid in capital - - 1,150,000
Retained earnings 9,750,000 500,000
180,000
Total equity 11,750,000 1,000,000 2,130,000

The parent A Ltd., had an interest in B Ltd. that cost ` 15,00,000 and
has in effect swapped this for an interest in C Ltd.'s group. In its
separate financial statements, A Ltd. states its investment in C Ltd.
group at the fair value of the consideration given ` 17,50,000.
The non-controlling interest is determined with reference to the
proportionate share of the acquired C Ltd.'s net identifiable assets.

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Required:
(i) Compute gain or loss on effective disposal of B Ltd.
(ii) Compute goodwill on acquisition of C Ltd.
Note:
a. C Ltd. is not required to prepare consolidated financial
statements.
b. Ignore the possibility that the transaction could be classified as a
reverse acquisition of C Ltd. by B Ltd.
Ind AS 28: Investment in Associates and Joint Ventures
13. H Ltd. purchased a 100% subsidiary S Ltd. for ` 500,000 at the end of
March, 20X3, when the fair value of the S Ltd.’s net assets was
` 400,000. H Ltd. sold 60% of its investment in the S Ltd. in March, 20X5
for ` 675,000, leaving H Ltd. with 40% investment and significant
influence. At the date of disposal, the carrying value of the net assets of
S Ltd., excluding goodwill, is ` 800,000. The fair value of the investment
in S Ltd. retained is proportionate to the fair value of the 60%
investment sold.
Required:
Compute gain or loss for H Ltd. on sale of 60% stake in S Ltd. for the
purpose of separate financial statements and consolidated financial
statements.

Ind AS 41 : Agriculture
14. A Ltd. purchased 100 goats at an auction for ` 1,00,000 on
30th September, 20X7. Subsequent transportation costs were ` 1,000. A
Ltd. would have to incur the same transportation costs if it had sold its
goats in this auction. In addition, there would be a 2% auctioneer's fee
on the market price of the goats payable by the seller. A Ltd. so incurred
` 500 on veterinary expenses.
On 31st March 20X8, the market value of the goats in the most relevant
market increases to ` 1,10,000. Transportation costs of ` 1,000 would
have to be incurred by the seller to get the goats to the relevant

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market. An auctioneer's fee of 2% on the market price of the goats

would be payable by the seller.
On 1st June 20X8, the entity sold 18 goats at auction for ` 20,000 and
incurred transportation charges of ` 150. In addition, there was a 2%
auctioneer's fee on the market price of the goats paid by the seller.
On 15th September, 20X8, the fair value of the 82 goats was ` 82,820.
42 goats were slaughtered on that day, with a total slaughter cost of
` 4,200. The total market price of the carcasses on that day was
` 48,300, and the estimated transportation cost to sell the carcasses is
` 420. No other selling costs are expected.
On 30th September, 20X8, the market price of the remaining 40 goats
was ` 44,800. The estimated transportation cost is ` 400. In addition,
there would be a 2% auctioneer’s fee on the market price of the goats
payable by the seller.
A Ltd. adopts the fair value model to recognize biological assets, as
required by the standard, and reports on 30th September and
31st March each year and determines fair value on these dates.
Pass Journal Entries for the above transactions.

Ind AS 28: Investment in Associates and Joint Ventures

15. Beta Limited (investee) has issued 2,000 equity shares which are
outstanding at the reporting date. On this date, Beta issues 1,000 share
options to its employees, which can be converted into 1,000 equity
shares of Beta. The grant-date fair value of each option issued is ` 1.
The options will vest over five years and all 1,000 options are expected
to vest.
Beta recognises share-based remuneration expense of ` 200 in its
profit or loss and an offsetting credit to equity in the current year.
Alpha Limited (investor) holds 600 shares of Beta. Alpha has significant
influence over Beta. Alpha recognises its share of the remuneration
expense in its profit or loss as part of income from the equity-
accounted investees. It records the offsetting credit as a reduction of
its investment in Beta.

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At the end of the vesting period, all options vest and are exercised.
The exercise price is ` 3 per option. The face value per share is ` 1.
Required
(i) Pass journal entries in the books of Beta Limited and Alpha
Limited for recording share-based payment expenses for the first
year.
(ii) Pas Journal entries for exercising of option in the 5th year, in the
books of Beta Limited.

(iii) In the books of Alpha Limited, compute the loss on dilution of

shares of Beta Limited and pass journal entries for the same. Beta
has net assets totalling ` 11,000, immediately before the shares
are issued.

Ind AS 109 : Financial Instruments

16. Zx issues a fixed-rate loan for ` 500,000 and incurs issue costs of
` 20,000, resulting in an initial carrying value of ` 480,000. The loan
carries an interest rate of 8% per annum, and it is repayable at par at the
end of year 10. However, under the contract, Zx can call the loan at any
time after year 4 by paying a fixed premium of ` 30,000. The fair value
of the option is ` 10,000 at inception. The effective interest rate
amounts to 8.30213%.
Required:
(i) How is the embedded issuer-only call feature accounted for by
Zx, the issuer initially?
(ii) Explain the accounting of the loan when
(a) In years 1 and 2, there is no change in interest rate since
inception for an instrument of similar maturity and credit
rating. The option's fair value (time value) at the end of
year 2 is ` 6,000.
(b) At the end of year 3, interest rates have fallen, and the
option's fair value increases to ` 9,000.

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(c) At the end of year 4, interest rates have fallen further. The
option's fair value increases to ` 20,000, and the entity
decides to repay the loan at the end of year 4.

Ind AS 21 : The Effects of Changes in Foreign Exchange Rates

17. PQR Ltd. has entered into a fixed price contract on 1st February, 20X2
to provide annual maintenance services worth USD 10,000 which is
rendered uniformly throughout the year over a period of two years
(1st April, 20X2 – 31st March 20X4) to a foreign customer. As per the
terms of the contract, it has received advance payment of USD 3,000
on 1st February, 20X2 and the balance is to be received on
31st March, 20X4.
The entity recognises revenue at the end of every year.
How should the entity account for the said transactions, where the
consideration is received in advance?

Ind AS 7 : Statement of Cash Flows

18. A Ltd., whose functional currency is Indian Rupee, had a balance of cash
and cash equivalents of ` 2,00,000, but no trade receivables or trade
payables on 1st April, 20X2. During 20X2-20X3, A Ltd. entered into the
following foreign currency transactions:
1. A Ltd. purchased goods for resale from Europe for € 1,00,000 when
the exchange rate was € 1 = ` 105. This balance is still unpaid at
31st March, 20X3 when the exchange rate is € 1 = ` 100.
2. A Ltd. sold the goods to an American client for $ 1,50,000 when
the exchange rate was $1 = ` 85. This amount was settled when
the exchange rate was $1 = ` 87.
3. A Ltd. also borrowed € 1,00,000 under a long-term loan agreement
when the exchange rate was € 1 = ` 105 and immediately
converted it to ` 1,05,00,000.
Recommend how cash flows arising from above transactions would be
reported in the statement of cash flows under indirect method.

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Ind AS 116 : Leases

19. Wealth Ltd. has entered into lease agreement with a lessor for a period
of 5 years at the annual lease rental of ` 8 lakhs. There is an option at
the end of the said period that lease can be owned by lessee. Other
factors to be noted are discount rate of 8% per annum and interest rate
implicit in the lease of 10% per annum.

Wealth Ltd. is reasonably certain to exercise the option to purchase the

leased asset at the end of lease term and ` 56,00,000 is the exercise
price agreed in the lease term for purchasing of land at the end of the
5th year. Therefore, the same has been considered in computing the
present value of the lease liability.

At the end of the year 3, Wealth Ltd. exercised the option to purchase
the land at value of ` 56 lakhs, whereas the market value on that date
was ` 75 lakhs.
For revised discount rate, consider the interest rate implicit in the
lease.
Required
(i) Calculate the lease liability and right of use asset for the lease
with the lessor. RoU is depreciated on SLM basis.

(ii) Provide the amounts reflecting in the balance sheet, profit and
loss and statement of cash flows at the end of year 1.
(iii) What are the accounting entries if Wealth Ltd. decides to
purchase the leased property at the end of year 3?
Ind AS 102 : Share-based Payments
20. Max Ltd. enters into a share-based payment arrangement with its
employees on the following terms:

• Each employee will receive 500 shares if they remain employed

for a period of five years.

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• It is expected that no employees are expected to leave during the

five year period.
• The grant date fair value of the award is ` 4,000.
• If an employee leaves Max Ltd. after the five -year period, but
before its shares are listed, the entity has an option to purchase
the shares for fair value from the employee.
• On grant date, Max Ltd. expects to list in the list in the next 3-5
years. This is the first share-based plan and Max Ltd. has no past
practice or stated policy of buying back shares from employees
when the employees leave. Neither does Max Ltd. expect that it
will settle the awards in cash.

• At the end of year 2, Max Ltd. on longer expects to list; and the
employees are informed of this fact. Max Ltd. announces to
employees that if it is not listed after the five years and
employees leave, Max Ltd. will repurchase the shares. The fair
value of the shares is ` 6,000 on this date.
• At the end of year 3, the fair value of the liability has increased to
` 9,000
Required
(i) Determine the accounting for years 1-3.
(ii) What would be the treatment of the awards, if at the end of year
2, Max Ltd. does not inform employees that it will repurchase the
shares after a five-year period, and a listing of the entity’s shares
is still achievable. But at the end of year 6, Max Ltd. has not yet
listed and two of the employees leave. Max Ltd. exercises its
settlement choice and buys the leaving employee’s shares at fair
value.

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SUGGESTED ANSWERS

Answer to Case Scenario I

1. Option (d) : ` 36 million

2. Option (c) : ` 37.782 million
3. Option (b) : Agreement is in the nature of Joint Operations
4. Option (c) : ` 20,25,00,000
5. Option (a) : ` 50,62,500
6. Option (d): Initial estimate of the costs of dismantling and removing
the item and restoration of site of ` 1.36 lakhs
7. Option (b) : ` 170 lakhs
8. Option (b) : Provision of ` 1.6 lakhs should be recognized with a
corresponding charge to profit or loss.
9. Option (c) : ` 1.76 lakhs; ` 1.42 lakhs
10. Option (a) : ` 13.26 lakhs

11. (i) The accounting entry on the disposal date for the 60% interest
sold, the gain recognised on the 40% retained investment and
the de-recognition of the subsidiary is as follows:

` in million
Cash / Bank A/c Dr. 360
Investment in associate Dr. 240
Available -for-sale reserve Dr. 4
Revaluation reserve Dr. 10
To Net assets (including goodwill) 500
To Retained earnings 10
To Gain on disposal of controlling interest 104

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The ` 104 million gain on the interest sold and the retained
investment is recognised in the income statement and is
disclosed in the consolidated financial statements.
(ii) Computation of remeasurement of the retained non-controlling
investment to fair value:

` in million
Fair value of retained investment 240
Percentage retained of carrying value of
subsidiary [(440+ 60) x 40%] (200)
Gain on retained investment 40

The gain or loss on the interest sold and on the retained

investment recognised in the income statement, is calculated as
follows:

` in million
Fair value of the consideration 360
Fair value of retained investment 240
600
Less: Carrying value of former subsidiary’s net
assets (440 + 60) (500)
Available for sale reserve transferred to income 4
Gain on interest sold and on retained investment 104

12. Effective disposal of stake in B Ltd. [100%- (75% of 100%)] = 25%

which will be considered as non-controlling interest in B Ltd.
With regard to A Ltd.'s consolidated financial statements, it is
necessary to calculate the 'gain or loss’ (on the disposal of 25% of
B Ltd.) that is recognised in equity and the goodwill arising (on the
acquisition of C Ltd.).
When control is retained, it should be noted that goodwill attributed to
the portion sold remains unchanged and is allocated to the non-
controlling interest. In addition, if control is retained, the gain or loss
should be recognised in equity.

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Gain or loss on disposal of 25% of B Ltd. `

Calculation of non-controlling interest B Ltd. in A’s 4,00,000
consolidated financial statement: Book value of assets
and liabilities given up plus attributable goodwill
[(` 10,00,000 + ` 6,00,000) x 25%]
Less: Fair value of business received in consideration
(W.N.1) (4,37,500)
Gain on disposal recognized in equity 37,500

The net assets compared should include an appropriate portion of any

cumulative exchange differences and any reserve on FVOCI debt
investments previously recognised in other comprehensive income and
accumulated in equity.

Goodwill on acquisition of 75% of C Ltd. `

Fair value of business given in consideration 4,37,500
(` 17,50,000 x 25%)
Non-controlling interest C Ltd. measured at the
proportionate share of the acquired net-asset (` 5,00,000
x 25%) 1,25,000
5,62,500
Less: Fair value of assets and liabilities acquired (5,00,000)
Goodwill 62,500

The consolidated entry recognised is:

` `
Fair value of net identifiable assets -C Ltd. Dr. 5,00,000
Goodwill – C Ltd. Dr. 62,500
To Non-controlling interest B Ltd. 4,00,000
(16,00,000 x 25%)
To Non-controlling interest – C Ltd. 1,25,000
(500,000 x 25%)
To Equity 37,500

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Consolidation of A Ltd., B Ltd. and C Ltd. after the transaction

(Amount in `)

Consolidation of A Ltd., B A Ltd. B Ltd. C Ltd. Elim Consolida

Ltd. and C Ltd. after the ted
transaction

Goodwill (W.N.2) - - - 662,500 662,500

Investment in subsidiary 1,750,000 - 1,750,000 (3,500,000) -

(W.N.3)

Net assets 10,000,000 1,000,000 380,000 120,000 11,500,000

11,750,000 1,000,000 2,130,000 (2,717,500) 12,162,500

Equity share capital 2,000,000 500,000 800,000 (1,300,000) 2,000,000

Additional paid in capital - - 1,150,000 (1,150,000) -

Retained earnings (W.N.4) 9,750,000 500,000 180,000 (792,500) 9,637,500

Non-controlling interest - - - 525,000 525,000

Total equity 11,750,000 1,000,000 2,130,000 (2,717,500) 12,162,500

Note:
C Ltd.'s net assets are adjusted to fair value for the purpose of the
consolidation as A Ltd. has acquired 75% of C Ltd. and gained control
of C Ltd.
Working Notes:
1. A Ltd. receives consideration (that is, shares in C Ltd.) with a fair
value of ` 17,50,000. However, the amount included in the
calculation is the amount attributable to the interest in B Ltd. that
has been disposed of, that is 25% of ` 17,50,000 = ` 4,37,500.
The fair value of the part of the subsidiary B that is effectively
disposed of is derived from the price paid by C Ltd. for the whole
of B Ltd. which is ` 17,50,000.
2. The goodwill balance of ` 6,62,500 represents the previous
balance of the goodwill of ` 6,00,000 arising on the acquisition of
B Ltd., plus the goodwill of ` 62,500 arising on the acquisition of
C Ltd. The original goodwill arising on the acquisition of B Ltd. is

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retained and a portion (25%) is allocated to the non-controlling

interest.
3. On consolidation the net assets of C Ltd. are increased from
` 3,80,000 to their fair value of ` 5,00,000.
4. Computation of consolidated retained earnings
`
Retained earnings of A Ltd. 95,00,000
(excluding the investment revaluation gain of
` 2,50,000, which is reversed)
Add: Post-acquisition profits of B Ltd. 1,00,000
Add: Gain on disposal (recognised directly in equity) 37,500
96,37,500

5. Computation of non-controlling interest

`
25% of C Ltd.'s fair value of net assets (` 5,00,000 x
25%) 1,25,000
Add: 25% of B Ltd.'s net assets (including goodwill)
(` 16,00,000 x 25%) 4,00,000
5,25,000

13. (i) Computation of gain on the sale of 60% investment in

Separate Financial Statements of H Ltd.’s for the year ended
31st March, 20X5

`
Sale proceeds 6,75,000
Less: Cost of investment in S Ltd. (5,00,000 x 60%) (3,00,000)
Gain on sale in the parent's financial statements 3,75,000

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1. Computation of gain on the sale of 60% investment in

Consolidated Financial Statements of H Ltd.’s for the year
ended 31st March, 20X5
In the consolidated financial statements, the group will calculate
the gain or loss on disposal differently. The carrying amounts of
all of the assets, including goodwill and the full amount of any
cumulative exchange differences and any FVOCI-reserve
previously recognised in equity, are de-recognised. when control
is lost. This is compared to the proceeds received and the fair
value of the investment retained.
The gain on disposal will be calculated as follows:
`
Sale proceeds 6,75,000
Add: Fair value of 40% interest retained 4,50,000
11,25,000
Less: Net assets disposed, including goodwill
(8,00,000 + 1,00,000) (9,00,000)
Gain on sale in the group's financial statements 2,25,000

This gain on loss of control would be recorded in profit or loss.

The gain or loss includes the gain of ` 1,35,000 (` 6,75,000 -
(` 9,00,000 x 60%)) on the portion sold. However, it also
includes a gain on remeasurement of the 40% retained interest
of ` 90,000 (` 4,50,000 - ` 3,60,000). The entity will need to
disclose the portion of the gain that is attributable to
remeasuring any remaining interest to fair value that is
` 90,000).
14. Journal Entries
` `

Initial recognition of goats at 30th September, 20X7

Biological asset (goats) Dr. 97,000
Loss on initial recognition Dr. 4,000

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To Cash (purchase and transport to farm) 101,000

(Initial recognition of the goats at fair value less costs
to sell)
Veterinary expenses Dr. 500
To Cash 500
Recognition of veterinary expenses at
30th September, 20X7 (such expenses do not, in
themselves, affect the fair value)
Biological asset (goats) Dr. 9,800
To Gain on change in fair value less costs
9,800
to sell (1,06,800-97,000)
(Subsequent measurement of biological assets at fair
value less costs to sell at 31st March, 20X7 reporting
date)
Sale of goats on 1st June, 20X8
Cash Dr. 19,450
Selling expenses (150+400) Dr. 550
To Revenue 20,000
(Recognition of the revenue from the sale of goats)
Transfer of biological assets to inventory on
15th September, 20X8
Inventory (Carcasses) Dr. 47,880
Fair value loss on goats Dr. 1,176
To Biological asset (goats) (the proportion of
goats sold using the fair value at the
44,856
previous reporting period, 31st March, 20X8)
(1,06,800 x 42/100)
To Cash 4,200
(Transfer of goats slaughtered to inventory)
Subsequent measurement of goats at
30 September, 20X8
th

Loss on change in fair value less costs to sell Dr. 18,440

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To Biological asset (goats) (fair value of goats at

last reporting date less transfer to inventory) 18,440
(43,504-(1,06,800-44,856))
(Subsequent measurement of biological assets at fair
value less costs to sell at 30th September, 20X8
reporting date)

Working Notes:
1. The fair value less costs to sell at initial recognition `
Fair value in the most relevant market 1,00,000
Transport costs (1,000)
Auctioneer’s fee (2,000)
97,000
2. The fair value less costs to sell at 31 st
March, 20X8 and gain
thereupon
Fair value in the most relevant market 1,10,000
Transport costs (1,000)
Auctioneer’s fee (2,200)
1,06,800
Less: Original cost recorded (97,000)
9,800
3. The fair value less estimated costs to sell of the carcasses on
15th September, 20X8
Market value of carcasses 48,300
Transport costs (420)
47,880
Initial cost of the carcasses at the date of transfer to inventory is
measured at the fair value less costs to sell of the carcasses. [Ind AS
41.13]

4. The fair value less costs to sell at 30th September, 20X8

Fair value in most relevant market 44,800
Transport costs (400)
Auctioneer’s fee (896)
43,504

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The reduction in the herd due to the sale of goats at 1st June, 20X8 is
included in the fair value adjustment at 30th September, 20X8. An
alternative to the above presentation is to remeasure the goats to fair
value just prior to the point at which they are sold and record a cost of
sales figure separately with a corresponding reduction in the value of
the biological assets. This will result in the same net profit for the
period, but the presentation of cost of sales and net fair value re-
measurements on biological assets will be different.
15. (i) Journal Entries to be recorded over the five-year vesting
period:
` `
In Beta’s books
Share based payments remuneration (profit or loss) Dr. 200
To Shareholders’ equity (ESOP reserve) 200
(To recognise share based payment at associate level)
In Alpha’s books
Share based payment remuneration (profit or loss) Dr. 60
Investment in associate 60
(To recognise share based payment at investor level)

1. Journal Entries in the books of Beta to recognise share issue:

` `

Cash Dr. 3,000

Shareholders’ equity (ESOP reserve) Dr. 1,000
To Share capital 1,000
To Share premium 3,000
(To recognise exercise of options at the associate
level)

2. Accounting in the Financial Statements of Alpha

The issue of new share options results in a dilution of Alpha's
interest in Beta by 10% [30% - {(600/(2,000+1000)x100}].
However, Alpha maintains significant influence over Beta.

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Alpha calculates loss on dilution as below.

Alpha's share of net assets before exercise (11,000 x 30%) 3,300

Alpha's share of net assets after exercise ((11,000+3,000)
x 20%) (2,800)
Cumulative adjustment required 500
Less: Adjustment previously recognized for share based
payment expense (60 x 5 years) (300)
Loss on dilution 200

Alpha passes the following entry to recognise dilution

` `
Loss on dilution (profit or loss) Dr. 200
To Investment in associate 200
(To recognize dilution of investment in associate)

16. It is first necessary to determine whether the call option is closely

related to the host debt instrument. Because the fixed premium is
required to be paid whenever the call option is exercised after year 4, it
is not known if it will be equal to the present value of any interest lost
during the remaining term after exercise of the option. Additionally,
the call option's exercise price is ` 5,30,000 (inclusive of the premium)
therefore, it is unlikely to be approximately equal to the debt
instrument's amortised cost in year 4, or at any subsequent year.
Consequently, the call option shall be separated from the host debt
contract and accounted for separately. This assumes that the expected
life of the instrument is the full 10-year term. Even if the expected life
is assumed to be four years, the 10-year loan with a call option after
four years is economically same as a four-year loan with a six-year
extension option. Because there is no concurrent adjustment to the
interest rate after four years, the term extension option would not be
closely related, and it would need to be accounted for separately.
Thus, whichever way the loan and option are viewed, the embedded
derivative needs to be separated.

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Even though the option is out of the money at inception, because the
option's exercise price is greater than the debt instrument's carrying
value, it has a time value.
Since the value of a callable bond is equal to the value of a straight
bond less the value of the option feature, the accounting entries at
inception is:

Dr (`) Cr. (`)

Embedded option (derivative asset) Dr. 10,000
Cash Dr. 4,80,000
To Debt instrument (host) 4,90,000

Since the call option will be fair valued and accounted for separately,
with fair value movements taken to profit or loss, it has no impact on
the entity's estimate of future cash flows; accordingly, the amortisation
period will be the debt host's period to original maturity. The
amortisation schedule is shown below:

Opening Interest Cash Closing

amortised expense @ payments amortised
cost ` 8.30213% ` ` cost `
Year 1 490,000 40,680 40,000 490,680
Year 2 490,680 40,737 40,000 491,417
Year 3 491,417 40,798 40,000 492,216
Year 4 492,216 40,864 40,000 493,080
Year 5 493,080 40,936 40,000 494,016
Year 6 494,016 41,014 40,000 495,030
Year 7 495,030 41,098 40,000 496,128
Year 8 496,128 41,189 40,000 497,317
Year 9 497,317 41,288 40,000 498,605
Year 10 498,605 41,395 540,000 -

The entity would recognize interest expense in profit or loss and the
loan’s amortised cost in the balance sheet each year, in accordance
with the above amortisation schedule.

25 SEPTEMBER 2025 EXAMINATION

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REVISION TEST PAPER

FINAL EXAMINATION

In years 1 and 2, there is no change in interest rate since inception for

an instrument of similar maturity and credit rating. The option's fair
value (time value) at the end of year 2 is ` 6,000. The decrease in fair
value of ` 4,000 since inception will be reported in profit or loss, and
the option will be recorded at ` 6,000 at the end of year 2.
At the end of year 3, interest rates have fallen, and the option's fair
value increases to ` 9,000. The increase in value of ` 3,000 will be
recorded in profit or loss, and the option will be recorded at its fair
value of ` 9,000 at the end of year 3.
At the end of year 4, interest rates have fallen further. The option's fair
value increases to ` 20,000, and the entity decides to repay the loan at
the end of year 4.
The accounting entries, to reflect the change in the option's fair value
and the loan's early repayment at the end of year 4, are as follows:
Dr (`) Cr. (`)
Embedded option Dr. 11,000
To Profit or loss 11,000
(Early repayment of loan)
Debt instrument (host) Dr. 4,93,080
Loss on de- recognition of liability Dr. 56,920
To Embedded option (derivative asset) 20,000
To Cash 5,30,000

17. If the advance received from the customer is determined to be in the

nature of prepayments or progress payments, these are treated as non-
monetary items.
Accordingly, in the instant case, PQR Ltd. receives the advance
payment of USD 3,000 on 1st February which it translates into its
functional currency using the exchange rate on 1st February, 20X2.
Applying paragraph 23(b) of Ind AS 21, the entity does not update the
translated amount of the nonmonetary liability.
Applying Ind AS 115, Revenue from Contracts with Customers, it
recognises revenue over a period of two years.

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REVISION TEST PAPER

FINANCIAL REPORTING

Since, the entity recognises revenue at the end of the year, revenue of
USD 5,000 will be recognised at the end of the first year.
PQR Ltd. has determined that the consideration of USD 3,000 relates to
the service it has rendered in the first year. At the end of year 1, the
entity is entitled to an unconditional right to USD 2,000 of the
remaining consideration.

Accordingly, at the end of the first year, on 31st March 20X3, it

recognises revenue of USD 5,000 out of which USD 3,000 will be
recognised by derecognising the contract liability and no exchange
fluctuation will be involved. Balance of USD 2,000 revenue will be
recognised by translating the exchange rate at the date of transaction
and a receivable (monetary asset) will be recognised and translated at
the exchange rate as at 31st March 20X3.

It will update the translated amount of the receivable until the

receivable is settled on 31st March 20X4 and recognises the
corresponding gain or loss in profit or loss.
At the end of the second year on 31st March 20X4, it recognises the
balance revenue of USD 5,000 using the exchange rate at the date of
the transaction.
18. An exchange gain on retranslation of the trade payable of ` 5,00,000 is
recorded in profit or loss [€ 1,00,000 x (105 – 100) = ` 5,00,000].
A further exchange gain of ` 3,00,000 regarding the trade receivable is
recorded in the statement of profit or loss [$ 1,50,000 x (87 – 85) =
` 3,00,000].

The loan was retranslated at 31st March, 20X3 @ ` 100 = ` 1,00,00,000,

with a further exchange gain of ` 5,00,000 recorded in the statement of
profit or loss.
A Ltd. therefore records a cumulative exchange gain of ` 13,00,000
(5,00,000 + 3,00,000 + 5,00,000) in arriving at its profit for the year.
In addition, A Ltd. records a gross profit of ` 22,50,000 (` 1,05,00,000 –
` 1,27,50,000) on the sale of the goods.

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REVISION TEST PAPER

FINAL EXAMINATION

Statement of Cash Flows

Cash flows from operating activities (Indirect method)

Particulars Amount
(`)
Profit before taxation (22,50,000 + 13,00,000) 35,50,000
Adjustment for unrealised exchange gains/losses:
Foreign exchange gain on long term loan (5,00,000)
Decrease in trade payables (5,00,000)
Operating cash flow before working capital changes 25,50,000
Changes in working capital (Due to increase in trade
payables) 1,05,00,000
Net cash inflow from operating activities 1,30,50,000
Cash inflow from financing activity 1,05,00,000
Net increase in cash and cash equivalents 2,35,50,000
Cash and cash equivalents at the beginning of the 2,00,000
period
Cash and cash equivalents at the end of the period 2,37,50,000
(W.N.)

Note: Taxation is ignored.

Working Note:
Closing Cash and Cash Equivalents

Particulars Amount (`)

Opening balance of cash and cash equivalents 2,00,000
Add: Received from settlement of Trade Receivables 1,30,50,000
Add: Received from conversion of loan 1,05,00,000
2,37,50,000

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REVISION TEST PAPER

FINANCIAL REPORTING

19. (i) Calculation of ROU Asset and Lease Liability:

Year Lease Payments / Purchase PVF @ PV of Lease

Price 10% payments
1 8,00,000 0.909 7,27,200
2 8,00,000 0.826 6,60,800
3 8,00,000 0.751 6,00,800
4 8,00,000 0.683 5,46,400
5 64,00,000 (8,00,000 + 56,00,000) 0.621 39,74,400
65,09,600

Entity would amortise the right-of-use asset over the useful life
of the underlying asset (5 years). Annual amortisation expense
would be ` 13,01,920 (` 65,09,600 / 5 years). Accordingly, ROU
Asset balance at the end of Year 1 is ` 52,07,680 (` 65,09,600 -
` 13,01,920).
1. Presentation at the end of Year 1:

In Balance Sheet In Profit and Loss In Statement of Cash

Flows
ROU Asset: Depreciation Cash flow from
` 52,07,680 (W.N.2) = ` 13,01,920 (W.N.2) financing activities:
Lease payment
= ` 8,00,000
Lease Liability: Interest expense
` 63,60,560 (W.N.1) (Finance cost)
= ` 6,50,960 (W.N.1)

2. In the above part (i), it was considered that lessee was reasonably
certain that he will exercise the option at the end of 5th year
that’s why the same has been considered in determination of
lease payment. Now, lessee is exercising the option at the end of
3rd year which implies that there is change in the assessment of
an option to purchase the underlying asset. Hence, paras 39 and
40(b) of IFRS 16 will come into the picture which are as follows
(only relevant part have been reproduced here):

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REVISION TEST PAPER

FINAL EXAMINATION

39 After the commencement date, a lessee shall apply

paragraphs 40–43 to remeasure the lease liability to reflect
changes to the lease payments. A lessee shall recognise the
amount of the remeasurement of the lease liability as an
adjustment to the right-of-use asset.
40 A lessee shall remeasure the lease liability by discounting
the revised lease payments using a revised discount rate,
if either:
(a)
(b) there is a change in the assessment of an option to
purchase the underlying asset, assessed considering the
events and circumstances described in paragraphs 20–21 in
the context of a purchase option. A lessee shall determine
the revised lease payments to reflect the change in amounts
payable under the purchase option.
Therefore, the lease liability has to be remeasured on change in
the assessment of exercising the option.
Original lease liability is ` 60,16,278 (Working Note 1). Since at
the end of the 3rd year, the lease has been terminated due to
exercise of option to purchase the asset, the revised lease liability
is the amount paid on exercising the option i.e. ` 56,00,000. The
difference of original lease liability and revised lease liability will
decrease the carrying amount of the right-of-use asset.
Accordingly, the adjustment to ROU Asset would be
= ` 60,16,278–` 56,00,000 = ` 4,16,278.
Journal Entry
Particulars (`) (`)
Lease liability Dr. 4,16,278
To ROU Asset 4,16,278
(Adjustment of difference in original lease
liability and revised lease liability to ROU
Asset)

30 SEPTEMBER 2025 EXAMINATION

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REVISION TEST PAPER

FINANCIAL REPORTING

PPE Dr. 21,87,562

To ROU Asset 21,87,562
(` 26,03,840 (Refer W.N.2) - ` 4,16,278)
(ROU Asset balance transferred to PPE on
exercising of lease option)
Lease Liability Dr. 56,00,000
To Bank/Lease payable 56,00,000
(Extinguishment of lease liability)

Note: We have stopped till the entry to exercise the option to

purchase the leased asset (as per the requirement of the
question). Treatment for change in the value of PPE due to its
fair value has not been considered here.
Working Notes:
1. Calculation of outstanding Lease Liability at the end of
3rd year

Year Opening Interest @ Lease Closing

balance 10% payments balance
(A) (B) (C) (A) + (B) - (C)

` ` ` `
1 65,09,600 6,50,960 8,00,000 63,60,560
2 63,60,560 6,36,056 8,00,000 61,96,616
3 61,96,616 6,19,662 8,00,000 60,16,278

2. Calculation of ROU Asset balance at the end of 3rd year

Year Opening balance Depreciation Closing balance
(A) (B) (A-B)
` ` `
1 65,09,600 13,01,920 52,07,680
2 63,60,560 13,01,920 39,05,760
3 61,96,616 13,01,920 26,03,840

20. (i) On the grant date, the employer accounts for the arrangement as
an equity settled share-based payment because there is no
present obligation to settle in cash.

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REVISION TEST PAPER

FINAL EXAMINATION

Journal Entries
` `
Employee benefit expenses (4,000 x 1/5) Dr. 800
To Share-based payment reserve 800

At the end of year 2, Max Ltd. has created an obligation to settle

in cash through a change in stated policy:
Employee benefit expenses (4,000 x 1/5) Dr. 800
To Share-based payment reserve 800

The above entry is to record ` 4,000 vesting over a period of five

years which was the expectation until year end.
Share-based payment reserve Dr. 2,400
To Share-based payment liability (6,000 x 2/5) 2,400

In substance the reclassification represents the repurchase by

Max Ltd. of its own shares, so no further expense is recognized.
The subsequent measurement of the liability would follow the
requirements for a cash settled share – based payment.
At the end of year 3, the award is accounted for on a cash –
settled basis as follows:
Employee benefit expenses Dr. 3,000
To Share-based payment liability (9,000x3/5–2,400) 3,000
1. The settlement of the two employee’s award may create a valid
expectation in the minds of the remaining employees that they
will also receive cash when they leave. However, judgement will
be required to determine if an isolated transaction establishes
past practice resulting in a cash settlement obligation for
Max Ltd. Depending on any contrary facts, Max Ltd. should treat
the remaining awards as cash settled, because it now revisit the
classification of any similar grants that it has made and evaluate
if it should reclassify them to cash -settled.

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Financial Reporting ALL ATTEMPTS RTP’s

PAPER – 1:
FINANCIAL REPORTING

QUESTIONS

Case Scenario I
ABC Ltd. is a dynamic company engaged in strategic acquisitions to expand
its business portfolio. As part of its growth strategy, the company has
recently acquired PQR Ltd. and RST Ltd. While these acquisitions present
growth opportunities, these acquisitions also include ongoing lawsuits
against the acquired companies. However, ABC Ltd. has secured indemnities
from the respective sellers to mitigate potential financial risks associated
with these legal matters. Following acquisitions took place during the year
(i) ABC Ltd. acquired a beverage company PQR Ltd. from XYZ Ltd. At the
time of acquisition, PQR Ltd. is the defendant in a court case whereby
certain customers of PQR Ltd. have alleged that products of PQR Ltd.
contain pesticides in excess of the permissible levels, which have caused
them health damage. PQR Ltd. is being sued for damages of ` 2 crores.
XYZ Ltd. has indemnified ABC Ltd. for the losses, if any, due to the case
for amount up to ` 1 crore. The fair value of the contingent liability for
the court case is ` 0.70 crore.
(ii) ABC Ltd. pays ` 50 crores to acquire RST Ltd. from MN Ltd. RST Ltd.
manufactured products containing fiber glass and has been named in 10
class actions concerning the effects of these fiber glass, MN Ltd. agrees
to indemnify ABC Ltd. for the adverse results of any court cases up to an
amount of ` 10 crores. The class actions have not specified amounts of
damages and past experience suggests that claims may be up to ` 1
crore each, but that they are often settled for small amounts. ABC Ltd.
makes an assessment of the court cases and decides that due to the
potential variance in outcomes, the contingent liability cannot be
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measured reliably and accordingly no amount is recognised in respect of

the court cases.

On the basis of the facts given above, chose the most appropriate
answer to Questions 1 to 5 below based on the relevant Indian
Accounting Standards (Ind AS).
1. At what amount would ABC Ltd. account for the identified liability
related to contingent liability and the indemnification assets at the time
of acquisition of PQR Ltd. related to court case by the customer?
(a) ` 2 crores; ` 1 crore
(b) ` 1 crore; ` 1 crore
(c) ` 0.70 crore; ` 1 crore
(d) ` 0.70 crore; ` 0.70 crore
2. What will be the impact on goodwill due to recognition of such liability
and indemnified asset?
(a) The net impact on goodwill will be Nil
(b) Decrease in the value of Goodwill by ` 0.30 crore
(c) Increase in the value of Goodwill by ` 0.30 crore
(d) Increase in the value of Goodwill by ` 1 crore
3. Suppose in case the fair value of the identified liability is ` 1.20 crores
instead of ` 0.70 crore, then what will be the value of the liability and
the indemnification assets at the time of acquisition of PQR Ltd.?
(a) ` 2 crores; ` 1 crore
(b) ` 1.20 crore; ` 1 crore
(c) ` 1 crore; ` 1 crore
(d) ` 1.20 crores; ` 1.20 crores
4. What will be the impact on goodwill due to recognition of such liability
and indemnified asset?
(a) Increase in the value of Goodwill by ` 1 crores
(b) Decrease in the value of Goodwill by ` 0.20 crore

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(c) Increase in the value of Goodwill by ` 0.20 crore

(d) The net impact on goodwill will be Nil
5. On acquisition of RST Ltd. at what amount should indemnification asset
be accounted for in relation to 10 class actions?
(a) ` 10 crores
(b) ` 1 crore
(c) Nil
(d) ` 9 crores

Case Scenario II
Choose the most appropriate answer to Questions 6 to 10, based on below
mentioned facts:

Date Amount Event

(`)
1st January, 20X6 7,500 Asset acquired with depreciation to be
charged based on useful life of 10 years
On 31st December, 20X7 240 Indicators of impairment noted and
impairment allowance accounted
On 28th February, 20X9 Assets has been classified as held for
sale
On 28th February, 20X9 4,600 Fair value less costs to sell
On 30th June, 20X9 5,300 Fair value less costs to sell

6. The amount of depreciation on the asset for the year 20X8 would be-
(a) ` 750
(b) ` 720
(c) ` 240
(d) ` 120
7. The amount of depreciation on the asset for the year 20X9 would be-
(a) ` 750
(b) ` 720

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(c) ` 240
(d) ` 120
8. What will be the carrying value of the asset immediately before its
classification as ‘Held for Sale’ as on 28th February, 20X9?
(a) ` 4,920
(b) ` 5,040
(c) ` 4,600
(d) ` 5,300
9. What will be the carrying value of the asset immediately after its
classification as ‘Held for Sale’ as on 28th February, 20X9?
(a) ` 4,920
(b) ` 5,040
(c) ` 4,600
(d) ` 5,300
10. What will be the amount of reversal of impairment loss and the
carrying value of the asse after reversal of impairment loss as on 30th
June, 20X9?
(a) ` 560; ` 5,300
(b) ` 440; ` 5,040
(c) ` 560; ` 5,160
(d) ` 700; ` 5,300
Ind AS 28 “Investment in Associates & Joint Ventures”
11. X Ltd. acquired a 10% interest in V Ltd. for ` 50,000 on 1st June, 20X6.
The investment in V Ltd. was accounted for as equity investment (not
held for trading) for which irrevocable option has been availed for
subsequent measurement of financial assets at FVTOCI. X Ltd.
recognized an increase in fair value of ` 30,000 in other comprehensive
income for the year ended 31st March, 20X7.

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X Ltd. acquired an additional 25% interest in V Ltd. for ` 2,00,000 on

1st April, 20X7 and achieved significant influence. The fair value of V
Ltd.’s net assets was ` 2,50,000 at June, 20X6 and had increased to
` 4,00,000 on 1st April, 20X7. V Ltd. recorded profits after dividends of
` 1,00,000 between 1st June, 20X6 and 1st April, 20X7.
How should X Ltd. account for an investment in V Ltd. on account of
piecemeal acquisition when such investment provides X Ltd. significant
influence over V Ltd.? Pass necessary journal entries for the same.
Ind AS 109 “Financial Instruments”
12. On 1st April, 20X1, ABC Ltd. issues a 10- year bond with a par value of
` 15,00,000 and an annual fixed coupon rate of 8%, which is consistent
with market rates for bonds with similar characteristics. ABC Ltd. uses
Secured Overnight Financing Rate (SOFR) as its benchmark interest
rate. At the date of inception of the bond, SOFR is 5%. At the end of
the first year:
• SOFR has decreased to 4.75%; and
• The fair value of bond is ` 15,38,110. This value is consistent with
an interest rate of 7.6%.
• The remaining cash flows on bond are ` 1,20,000 per year for
nine years and ` 15,00,000 at the end of nineth year. These cash
flows discounted at 7.6% equals ` 15,38,110.
ABC Ltd. assumes a flat yield curve, that all changes in interest rates
result from a parallel shift in the yield curve, and that the changes in
SOFR are the only relevant changes in market conditions.
Following discounting factors may be considered

Discount rate @7.75% Present value of ` 1 payable

At the end of year 9 51.1 paise
Cumulatively for the years 1–9 6.312
At the end of year 10 47.4 paise
Cumulatively for the years 1–10 6.786

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Required
What is the amount transferred to the OCI at the end of Year 1 when
bonds were measured at fair value?
Ind AS 32 "Financial Instruments: Presentation”
13. On 1st April, 2X01, A Ltd. issued a 10% convertible debenture with a
face value of ` 1,000 maturing on 31st March, 2X11. The debenture is
convertible into equity share of A Ltd. at the option of the holder at a
conversion price of ` 25 per share. Interest is payable half-yearly in
cash. At the date of issue, A Ltd. could have issued non-convertible
debt with a ten-year term bearing a coupon interest rate of 11%.
On 1st April, 2X06, the convertible debenture has a fair value of ` 1,700.
A Ltd. makes a tender offer to the holder of the debenture to
repurchase the debenture for ` 1,700, which the holder accepts. On
the date of repurchase, A Ltd. could have issued non-convertible debt
with a five-year term bearing a coupon interest rate of 8%.
Required
How does A Ltd. account for the repurchase?
Ind AS 103 “Business Combinations”
14. On 1st April, 20X1, PQR Ltd. acquired 30% of the shares of XYZ Ltd. for
` 8,000 crores. At 31st March, 20X2, PQR Ltd. recognised its share of
the net asset changes of XYZ Ltd. using equity accounting as follows:
(Amounts ` in crores)
Share of profit or loss 700
Share of exchange difference in OCI 100
Share of revaluation reserve of PPE in OCI 50

On 1st April, 20X2, PQR Ltd. acquired the remaining 70% of XYZ Ltd. for
cash of ` 25,000 crores. The following additional information is
relevant at that date. (Amount ` in crores)

Fair value of the 30% interest already owned 9,000

Fair value of XYZ Ltd's identifiable net assets 30,000

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How should such business combination be accounted for?

Ind AS 103 “Business Combinations”
15. On 1st January, 20X1, H Ltd. acquired all of the share capital of S Ltd.
for ` 15,00,000. The book values and the fair values of the identifiable
assets and liabilities of S Ltd. at the date of acquisition are set out
below, together with their tax bases in S Ltd.’s tax jurisdictions. Any
goodwill arising on the acquisitions is not deductible for tax purposes.
The tax rates in H Ltd.’s and S Ltd.’s tax jurisdictions are 30% and 40%
respectively.

Net assets acquired Book Tax Fair

values base values
` ’000 ` ’000 ` ’000
Land and buildings 600 500 700
Property, plant and equipment 250 200 270
Inventory 100 100 80
Accounts receivable 150 150 150
Cash and cash equivalents 130 130 130
Total assets 1,230 1,080 1,330
Accounts payable (160) (160) (160)
Retirement benefit obligations (100) - (100)
Net assets before deferred tax 970 920 (1070)
liability
Deferred tax liability on differences
between book values and tax bases
(` 50 @ 40%) (20)
Net assets at acquisition 950 920 1,070

Calculate deferred tax arising on acquisition of S Ltd. and goodwill

based on the above information.

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Ind AS 21 “The Effects of Changes in Foreign Exchange Rates”

16. P Ltd., incorporated in India owns 70% interest in foreign entity, S Ltd.
P Ltd. has INR (`) as its functional currency while S Ltd. has US dollars
as its functional currency. P Ltd. sells its entire investment in S Ltd. for
` 3,200 thousand. The following information is provided:

(` in thousand)

Particulars S’s P’s share NCI

Total (70%) (30%)
Net assets 4,000 2,800 1,200
Foreign currency translation 900 630 270
reserve gain

Required:
How does an entity account for cumulative translation adjustment (CTA)
on disposal of a foreign subsidiary?
Ind AS 2 “Inventories”
17. Following information have been provided for A Ltd. which account for
its inventories by using FIFO cost formula:
a) Full capacity is 10,000 labour hours in a year.
b) Normal capacity is 7,500 labour hours in a year.
c) Actual labour hours for current period are 6,500 hours.
d) Total fixed production overhead is ` 1,500,
e) Total variable production overhead is ` 2,600.
f) Total opening inventory is 2,500 units.
g) Total units produced in a year are 6,500 units.
h) Total units sold in a year are 6,700 units.
i) Total closing inventory is 2,300 units.

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How will the overhead cost be allocated to inventory at normal

capacity and at less than normal production for the current year based
on the above information and also show how much expense will be
recognized in the statement of profit and loss?
Ind AS 7 “Statement of Cash Flows”
18. The opening balance sheet at 1st April, 20X6 of an Indian company (which
account for its transactions in INR (`), which consists of cash of ` 1,00,000
and share capital of ` 100,000. The Company borrows a long term loan
on 30th September, 20X6 for US $ 2,200 when the rate of exchange is 1 US
$= ` 87. There are no other transactions during the year. The exchange
rate at the balance sheet date of 31st March, 20X7 is 1 US $ = ` 85.
The summarized balance sheet at 31st March, 20X7 is as follows:
` `
Assets
Cash (1,00,000+1,91,400) 2,91,400
2,91,400
Equity and liabilities
Capital and reserves
Share capital 1,00,000
Other Equity
Retained Earning 4,400 1,04,400
Non- current liabilities
Long -term loan 1,87,000
Total equity and liabilities 2,91,400

Required:
How the foreign exchange difference arising from unsettled transactions
will reflect in the Statement of Cash Flows?
Ind AS 24 “Related Party Disclosures”
19. Mr. Y’s father owns 100% of the shares in A Ltd. Mr. Y and Mrs. Y own
100% of the shares in B Ltd. Ms. Z who is Mrs. Y’s sister, provides

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book-keeping services from time to time to B Ltd. However, Ms. Z is

not an employee of B Ltd. A Ltd. has increased its loan of ` 1,50,000 to
B Ltd. to ` 2,00,000 during the year, for which A Ltd. charges a below
market rate of interest.
Required:
(i) State whether Mr. Y’s father & Mrs. Y’s sister are related party of
B Ltd.
(ii) What disclosure is to be made in the financial statements of both
A Ltd. & B Ltd. with respect to the loan given by A Ltd. to B Ltd.?
(iii) Whether B Ltd. is required to disclose the dealings with the sister
of Mrs. Y in its financial statements?
Ind AS 102 “Share-based Payment”
20. At 1st April, 20X1 an entity enters into a share-based payment
arrangement with its employees. The terms of the award are as
follows:
▪ Employees are required to work for the entity for five years; after
that they will receive a cash payment equal to the value of the
entity’s shares.
▪ If the entity achieves a successful IPO during the five -year
period, the employees will receive free shares rather than a cash
payment. So, employees might receive free shares at the time of
IPO or a cash payment at the end of 5th year, but not both.
▪ No employees are expected to leave the entity over the next five
years.
▪ At the date of the award and till the end of second year, it was
not probable that a successful IPO would occur before year 5.
▪ At the end of year 3, a successful IPO becomes probable; and
management expects it to occur in year 4.
▪ At the end of year 4, a successful IPO occurs; and employees
receive free shares.
▪ The fair value of the equity-settled award alternative is ` 1,000 at
the grant date. The fair value of the cash-settled alternative,

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ignoring the probability that an IPO will happen within the five
years, is as follows:
o ` 50 at the end of year 1;
o ` 500 at the end of year 2;
o ` 100 at the end of year 3; and
o ` 50 at the end of year 4.
Required:
How the entity would account for this transaction?

ANSWERS

Answer to Case Scenario I

1. Option (d): ` 0.70 crore; ` 0.70 crore
2. Option (a): The net impact on goodwill will be Nil
3. Option (b): ` 1.20 crore; ` 1 crore
4. Option (c): Increase in the value of Goodwill by ` 0.20 crore
5. Option (c): Nil
Answer to Case Scenario II
6. Option (b): ` 720
7. Option (d): ` 120
8. Option (a): ` 4,920
9. Option (c): ` 4,600
10. Option (c): ` 560; ` 5,160
11. While applying equity method, paragraph 10 of Ind AS 28 requires, the
investment in an associate to be initially recognized at cost. However,
it doesn’t include any specific guidance on how to account for existing
investment, which is accounted for under Ind AS 109, that
subsequently becomes an associate or a joint venture. One may apply

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the fair value approach, by drawing an analogy from paragraph 42 of

Ind AS 103.
Paragraph 42 of Ind AS 103, ‘Business Combinations’, deals with the
situation where control over an acquiree is achieved in stages. In such
a case, the acquirer shall remeasure its previously held equity interest
in the acquiree at its acquisitions- date fair value and recognize the
resulting gain or loss, if any, in profit or loss or OCI, as appropriate. In
prior reporting periods, the acquirer may have recognized changes in
the value of its equity interest in the acquiree on OCI. If so, the
amount that was recognized in OCI shall be recognized on the same
basis as would be required if the acquirer had disposed directly of the
previously held equity interest.
On application of the above guidance, following accounting will be
done:
Computation of goodwill on gaining significant influence on V Ltd.

Particulars `
Fair value of previously held 10% interest
[2,00,000/25% x10%] 80,000
Fair value of additional 25% (amount paid) 2,00,000
Cost of investment in associate V Ltd. 2,80,000
Less: Fair value of identifiable net assets acquired
(4,00,000 x 35%) (1,40,000)
Goodwill 1,40,000

Journal Entries

Particulars Amount Amount

(`) (`)
Investment A/c (10%) Dr. 30,000
To OCI (Equity) 30,000
Investment in Associates A/c (35%) Dr. 2,80,000
To Bank A/c 2,00,000
To Investment (FVTOCI) (10%) 80,000

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OCI (Equity) Dr. 30,000

To Retained Earning 30,000
12. The amount of change in fair value of the bond that is not attributable
to changes in market conditions giving rise to market risk is estimated
as follows:
Step (a)
The bond’s IRR at the start of the period is 8%.
Step (b)
Because the benchmark interest rate (SOFR) is 5%, the instrument -
specific component of the IRR is 3%.
Step (c)

The contractual cash flows of the instrument at the end of the period
are:
• Interest of ` 1,20,000 [` 15,00,000 x 8%] per year for the next 9
years.
• Principal repayment of ` 15,00,000 at the end of 9th year.
The present value of these cash flows is calculated using a discount
rate of 7.75%. This rate is arrived at as below:
• 4.75% end of period SOFR, plus
• 3% instrument - specific component calculated as at the start of
the period
This gives a notional present value of ` 15,23,940
= [(15,00,000 x 0.511) + (1,20,000 x 6.312)].
Step (d)
The fair value of the liability at the end of the period is ` 15,38,110.
Hence, ABC Ltd. should present ` 14,170 [` 15,38,110 – ` 15,23,940] in
the OCI.
13. In the financial statements of A Ltd., the carrying amount of the
debenture is allocated on issue as follows:

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`
Liability component
Present value of 20 half-yearly interest payments of `
50, discounted at 11% (` 50 x 11.95) 598
Present value of ` 1,000 due in 10 years, discounted at
11%, compounded half-yearly (` 1,000 x 0.342) 342
940
Equity component
Difference between ` 1,000 total proceeds and ` 940
allocated above 60
Total proceeds 1,000

The repurchase price is allocated as follows:

Carrying Fair Difference

Value Value
(`) (`) (`)
Liability component:
Present value of 10 remaining half-
yearly interest Payments of ` 50,
discounted at 11% and 8%
respectively 377 406
Present value of ` 1,000 due in 5
years, discounted at 11% and 8%,
compounded half yearly, respectively 585 676
962 1,082 (120)
Equity component 60 618 (558)
Total 1,022 1,700 (678)

A Ltd. recognises the repurchase of the debenture as follows: (`)

Liability component Dr. 962

Debt settlement expense (P&L) Dr. 120
To Cash 1,082
(To recognize the repurchase of the liability
component)

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Equity component Dr. 60

Reserves and Surplus Dr. 558
To Cash 618
(To recognize the cash paid for the equity
component)

The debt settlement expense represents the difference between the

carrying value of the debt component and its fair value.
14. Paragraph 42 of Ind AS 103 provides that in a business combination
achieved in stages, the acquirer shall remeasure its previously held
equity interest in the acquiree at its acquisition-date fair value and
recognise the resulting gain or loss, if any, in profit or loss or other
comprehensive income, as appropriate. In prior reporting periods, the
acquirer may have recognised changes in the value of its equity
interest in the acquiree in other comprehensive income. If so, the
amount that was recognised in other comprehensive income shall be
recognised on the same basis as would be required if the acquirer had
disposed directly of the previously held equity interest.
Applying the above, PQR Ltd. records the following entry in its
consolidated financial statements: (Amounts ` in crores)

Dr. Cr.
Identifiable net assets of XYZ Ltd. Dr. 30,000
Goodwill (W.N.1) Dr. 4,000
Foreign currency translation reserve Dr. 1,00
PPE revaluation reserve Dr. 50
To Cash 25,000
To Investment in associate- XYZ Ltd.
(W.N.3) 8,850
To Retained earnings (W.N.2) 50
To Gain on previously held interest in
XYZ recognized in Profit or loss 250
(W.N.4)
(To recognize acquisition of XYZ Ltd.)

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Working Notes :
1. Goodwill calculated as follows: (` in crores)

Cash consideration 25,000

Fair value of previously held equity interest in XYZ 9,000
Total consideration 34,000
Fair value of identifiable net assets acquired (30,000)
Goodwill 4,000

2. The credit to retained earnings represents the reversal of the

unrealized gain of ` 50 crores in Other Comprehensive Income
related to the revaluation of property, plant and equipment. In
accordance with Ind AS 16, this amount is not reclassified to
profit or loss.
3. The carrying amount of the investment in the associate on
31st March, 20X2 would be as follows: (` in crores)

Investment in Associate 8,000

Share of profit or loss 700
Share of exchange difference in OCI 100
Share of revaluation reserve of PPE in OCI 50
8,850

4. The gain on the previously held equity interest in XYZ Ltd. is

calculated as follows: (` in crores)

Fair Value of 30% interest in XYZ Ltd. at 1st April, 20X2 9,000
st
Carrying amount of interest in XYZ Ltd. at 1 April,
20X2 (W.N.3) (8,850)
150
Unrealised gain previously recognized in OCI 100
Gain on previously held interest in XYZ Ltd.
recognized in profit or loss 250

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15. Calculation of deferred tax arising on acquisition of S Ltd. and

goodwill

`’000 `’000
Fair values of S Ltd.’s identifiable assets and
liabilities (excluding deferred tax) 1,070
Less: Tax base (920)
Temporary difference arising on acquisition 150
Net deferred tax liability arising on acquisition of S
Ltd. (` 1,50,000 @ 40%)– replaces book deferred tax 60
Purchases consideration 1,500
Fair values of S Ltd.’s identifiable assets and
liabilities (excluding deferred tax) 1,070
Deferred tax (60) 1,010
Goodwill arising on acquisition 490

The tax base of the goodwill is nil, so a taxable temporary difference of

` 4,90,000 arises on the goodwill. No deferred tax is recognised on the
goodwill. The deferred tax on other temporary differences arising on
acquisitions is provided at 40% (not 30%), because taxes will be
payable or recoverable in S Ltd.’s tax jurisdictions when the temporary
differences are reversed.
16. As per paragraphs 48 and 48B of Ind AS 21, on the disposal of a
foreign operation, the cumulative amount of the exchange differences
relating to that foreign operation, recognised in other comprehensive
income and accumulated in the separate component of equity, shall be
reclassified from equity to profit or loss (as a reclassification
adjustment) when the gain or loss on disposal is recognised (see Ind
AS 1, Presentation of Financial Statements).
Further, the standard states that on disposal of a subsidiary that
includes a foreign operation, the cumulative amount of the exchange
differences relating to that foreign operation that have been attributed
to the non-controlling interests shall be derecognised, but shall not be
reclassified to profit or loss.

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Where the subsidiary is partially owned (that is, where a non-

controlling interest exists) and the parent has sold its entire interest,
the amount of the CTA that has been allocated to the non-controlling
interest is derecognised, but it is not transferred to profit or loss.
Derecognition of the non-controlling interest (that includes the non-
controlling interest’s share of CTA) will form part of the journal entry to
recognise the gain or loss on disposal of the subsidiary.
In P Ltd.’s consolidated financial statements, the following amounts
(` in thousand) have been recognised in relation to its investment in
S Ltd.:
- net assets of ` 4,000 and associated non-controlling interests of
` 1,200;
- foreign exchange gains of ` 900 were recognised in other
comprehensive income, of which ` 270 was attributable to non-
controlling interests and is therefore included in the ` 1,200 non-
controlling interests;
- ` 630 of foreign exchange gains have been accumulated in a
separate component of equity relating to P Ltd.'s 70% share in
S Ltd.
P Ltd. sells its 70% interest in S Ltd. for ` 3,200 and records the
following amounts:

Cash/Bank A/c Dr. 3,200

NCI Dr. 1,200
Foreign Currency Translation Reserve (OCI) Dr. 630
To Net assets 4,000
To Profit on disposal 1,030
{630+(3,200-2,800)}

It can be seen that ` 630 of the foreign currency gains previously

recognised in OCI, i.e. the amount attributed to P Ltd. is reclassified to
profit or loss (profit on disposal) and adjusted from OCI. However,
` 270 of such gains attributed to the non-controlling interests is not

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reclassified to profit or loss and is derecognised as a part of the NCI

balance.
17. Management should allocate fixed overhead costs and variable
overhead costs to units produced at a rate of ` 0.2 per hour
= ( 1,500) and ` 0.4 per hour = ( 2,600 ) respectively.
7,500 6,500

Fixed production overhead absorption rate:

= Fixed production overhead / Labour hours under normal capacity
= ` 1,500/7,500
= ` 0.2 per hour
Therefore, Fixed production overhead allocated to 6,500 units
produced during the year (one unit per hour) = 6,500 units x ` 0.2 =
` 1,300. The remaining ` 200 of overhead incurred that remains
unallocated is recognized as an expense in the profit and loss.
The amount of fixed overhead allocated to inventory is not increased
as a result of low production by using normal capacity to allocate fixed
overhead.
Variable production overhead absorption rate:
= Variable production overhead / Actual hours for current period
= ` 2,600 / 6,500 units
= ` 0.4 per hour
The above rate results in the allocation of all variable overheads to
units produced during the year.
As each unit has taken one hour to produce (6,500 hours /6,500 units
produced), total fixed and variable production overhead recognized as
part of cost of inventory:
= Number of units of closing inventory x number of hours to produce
each unit x (fixed production overhead absorption rate + variable
production overhead absorption rate)
= 2,300 x 1 x (` 0.2+ ` 0.4) = ` 1,380

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The remaining ` 2,720 {(` 1,500 + ` 2,600) – ` 1,380} is recognized as

an expense in the Statement of profit and loss as follows:
`
Absorbed in cost of goods sold (FIFO basis)
(6,500- 2,300) = 4,200 x ` 0.6 2,520
Unabsorbed fixed overheads, also included in cost of
goods sold 200
Total 2,720

18. The foreign currency loan, having been translated at the rate ruling at
the receipt date to ` 1,91,400 (US $ 2,200 x ` 87), is translated at the
balance sheet date to ` 1,87,000 (US $ 2,200 x ` 85). The exchange
gain of ` 4,400 is recognised in the Statement of profit and loss. The
cash is made up of ` 1,00,000 (received from the share issue) and
` 1,91,400 (received on converting the currency loan immediately to `).
Statement of Cash Flows
`
Cash flows from operating activities
Profit 4,400
Less: Foreign exchange gain (4,400)
Net cash flow from operating activities A 0
Cash flows from financing activities
Receipts of foreign currency loan 1,91,400
Net cash flow from financing activities B 1,91,400
Net increase in cash and cash equivalent A+B 1,91,400
Cash and cash equivalents at the beginning of the
reporting period 1,00,000
Cash and cash equivalents at the end of the reporing
period* 2,91,400
* Represents year end cash balances.

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The exchange gain of ` 4,400 does not have any cash flow effect and is
related to financing activities. Therefore, it needs to be eliminated
from profit. A similar adjustment would be necessary if the loan
remains outstanding at 31st March, 20X8.
19.

Influence
Father of Mr. Y Mr. Y and Mrs. Y

Control
Control

A Ltd. B Ltd.
Loan

(i) Mr. Y’s father and Mrs. Y’s sister are related parties of B Ltd., if they
are ‘close family’ of either Mr. Y or Mrs. Y. They are close family if
they might be expected to influence, or be influenced by, Mr. Y or
Mrs. Y in their dealing with B Ltd. Mr. Y’s father and Mr. Y and Mrs.
Y are ‘close family’, so Mr. Y’s father is a related partly of B Ltd.,
which is controlled by Mr. Y and Mrs. Y.
Mr. Y’s father has a controlling interest in A Ltd. A Ltd. is a related
party of B Ltd.
(ii) Both entities should disclose the necessary details regarding the
increase in the loan to ` 2,00,000 in their financial statements.
A Ltd. should also disclose the amounts due to it from B Ltd. on
the balance sheet date, together with any provisions and
amounts written off. B Ltd. should disclose the amount that it
owes to A Ltd. at the balance sheet date alongwith the
concessional rate of interest at which the loan was given to B Ltd.
(iii) B Ltd. would have to disclose the transactions with Mrs. Y’s sister
if the sister might be expected to influence, or be influenced by,
either Mr. Y or Mrs. Y in their dealings with B Ltd. based on
further facts of the case. In case the influence exists, disclosure

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to be made as per para 18 of Ind AS 24 about the transactions

and the outstanding balances.
20. At the end of first and second year, the entity would not record a
charge for the equity-settled award; this is because the vesting
conditions are not expected to be met (that is, a successful IPO is not
probable).
Hence, a liability is recognised, because cash settlement is probable
until year 3. (Refer para 42 of Ind AS 102)

Dr. Cr.
(`) (`)
Year end 31st March, 20X2
Employee benefits expense (` 50 / 5years) Dr. 10
To Share-based payment liability 10
(Cash settled award recognised over the vesting
period)
Year end 31st March, 20X3
Employee benefits expense{(` 500 x 2/5)- `10} Dr. 190
To Share-based payment liability 190
(Cash -settled award recognised over the vesting
period)

At the end of year 3, a successful IPO becomes probable; so the entity

would record a charge for an equity-settled award.
There should also be a reversal of the SBP liability, because this award
is now deemed not probable.

Year end 31st March, 20X4 Dr. Cr.

Share-based payment Liability Dr. 200
To Share-based Payment Reserve 200
(Reversal of cash -settled share-based payment, because
IPO deemed probable)

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Employee benefits expense {(` 1,000 x ¾) - ` 200} Dr. 550

To Share-based Payment Reserve 550
(Equity -Settled award measured at grant date fair value
of ` 550, because IPO is now deemed probable)
Year end 31st March, 20X5
Employee Benefits Expenses Dr. 250
To Share-based Payment Reserve 250
(Equity settled award recognised over the vesting
period)
Share-based Payment Reserve Dr. 1,000
To Equity share capital 1,000
(Settlement of share-based payment award through
issuance of free shares)

Equity -settled award measured at fair value of ` 1,000. All of the

vesting conditions for this ward have been met in year 4; so the award
has vested, and the remaining charge of ` 250 (` 1,000 – ` 750) is
recognised in the Statement of profit and loss.

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PAPER – 1:
FINANCIAL REPORTING

QUESTIONS

Case Scenario I
D Ltd. prepares financial statements to 31st March each year. Following
information on revenue transactions are relevant to the year ended
31st March 20X7.
(i) On 1st October 20X6, D Ltd. sold a product to a customer for
` 1,21,000. This amount is payable on 31st December, 20X8. The
manufacturing cost of the product for D Ltd. was ` 80,000. The
customer had a right to return the product for a full refund at any time
up to and including 31st December 20X6. At 1st October 20X6, D Ltd.
had no reliable evidence regarding the likelihood of the return of the
product by the customer. The product was not returned by the
customer before 31st December 20X6 and so the right of return for the
customer expired. On both 1st October 20X6 and 31st December 20X6,
the cash selling price of the product was `1,00,000. A relevant annual
rate to use in any discounting calculations is 10%.

(ii) On 1st July 20X5 D Ltd. began an arrangement to sell goods to a third
party B Ltd. The price of the goods was set at `100 per unit for all
sales in the two-year period ending 30th June 20X7. However, if sales of
the product to B Ltd. exceed 60,000 units in the two-year period
ending 30th June 20X7, then the selling price of all units is
retrospectively set at `90 per item.

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Sales of the goods to B Ltd. in the nine-month period ending on

31st March, 20X6 totalled 20,000 units and this volume of sales per
month was not expected to change before 30th June 20X7.
However, in the year ended 31st March, 20X7, total sales of the goods to
B Ltd. were 35,000 and based on current orders from B Ltd., the estimate
was revised. The directors of D Ltd. estimated that the total sales of the
goods to B Ltd. in the two-year period ending 30th June 20X7 would be
more than 60,000 units.
On the basis of the facts given above, chose the most appropriate
answer to Questions 1 to 5 below based on the relevant Indian
Accounting Standards (Ind AS).
1. When and by what amount the revenue be recognized with respect to
sales made on 1st October, 20X6?
(a) On 1st October, 20X6 by ` 1,21,000
(b) On 1st October, 20X6 by ` 1,00,000
(c) On 1st October, 20X6 by ` 80,000
(d) On 31st December, 20X6 by ` 1,00,000
2. What will be the amount of finance income to be recognized with
respect to sales in the year 20X6-20X7?
(a) ` 5,000
(b) ` 2,500
(c) ` 10,000
(d) ` 2,000
3. What will be the amount of Trade Receivable as on 31st March 20X7,
against the sale made on 1st October 20X6?
(a) ` 1,21,000
(b) ` 1,00,000
(c) ` 1,02,500
(d) ` 1,05,000

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4. What will be the amount of revenue to be recognized in the year

20X5-20X6 with respect to sales arrangement with B Ltd.?
(a) ` 20,00,000
(b) ` 18,00,000
(c) ` 55,00,000
(d) ` 49,50,000
5. What will be the amount of revenue to be recognized in the year
20X6-20X7 with respect to sales arrangement with B Ltd.?
(a) ` 35,00,000
(b) ` 29,50,000
(c) ` 55,00,000
(d) ` 49,50,000
Case Scenario II
M/s XYZ & Co. is an auditing firm. During his audit, the firm is facing
difficulty in accounting of the following transaction for which, it seeks your
answer:
(i) A Ltd. has established a defined benefit pension plan for its eligible
employees. The balance sheet of A Ltd. at 31st March, 20X7 currently
includes the estimated net liability at 31st March, 20X6 amounting
`18.75 crore. The following matters relate to the plan for the year
ended 31st March, 20X7:
– The estimated current service cost was advised by the actuary to
be `6 crore.
– On 31st March, 20X7, A Ltd. paid contributions of ` 7 crore into
the plan and charged this amount as an operating expense.
– The annual market yield on high quality corporate bonds on
1 April, 20X6 was 8%.
– The estimated net liability at 31st March, 20X7 was advised by the
actuary to be `20.5 crore.
No benefits have been paid to date.

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(ii) On 1st April 2XX0, E Ltd. completed the construction of a non-current

asset with an estimated useful life of 20 years. The costs of construction
were recognised in property, plant and equipment and depreciated
appropriately. E Ltd. has a legal obligation to restore the site on which
the non-current asset is located on 31st March 2X20. The estimated cost
of this restoration work, at 31st March 2X20 prices is `2.5 crore. The
directors of E Ltd. have made a provision of ` 0.125 crore (1/20 x ` 2.5
crore) in the draft balance sheet at 31st March, 2XX1. An appropriate
annual discount rate to use in any relevant calculations is 6% and at this
rate the present value of ` 1 payable in 20 years is 0.312.
On the basis of the facts given above, chose the most appropriate
answer to Questions 6 to 10 below based on the relevant Indian
Accounting Standards (Ind AS).
6. What is the amount of net adjustment to be made in the statement of
profit and loss for the year 20X6-20X7 with respect to defined benefit
pension plan?
(a) ` 7 crore added back to the profit of the year 20X6-20X7
(b) ` 6 crore deducted from the profit of the year 20X6-20X7
(c) ` 0.5 crore deducted from the profit of the year 20X6-20X7
(d) ` 1.5 crore deducted from the profit of the year 20X6-20X7
7. What is the amount of actuarial gain/(loss) on defined benefit pension
plan for the year 20X6-20X7?
(a) ` 1.5 crore
(b) ` 1.25 crore
(c) ` 1 crore
(d) ` 0.5 crore
8. What is the original provision required to be made on account of
restoration of non-current asset in the year 2XX0-2XX1?
(a) ` 0.78 crore
(b) ` 0.125 crore

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(c) ` 0.039 crore

(d) No provision was required in the year 2XX0-2XX1 as it is the
expense of the year 2X19-2X20
9. What will be the amount of adjustment to be made in the retained
earnings on account of restoration provision?
(a) ` 0.0468 crore
(b) ` 0.0390 crore
(c) ` 0.0392 crore
(d) ` 0.125 crore
10. What will be the amount of one year’s unwinding of discount on account
of restoration provision?
(a) ` 0.0468 crore
(b) ` 0.0390 crore
(c) ` 0.0392 crore
(d) ` 0.125 crore
Ind AS 12 ‘Income Taxes’
11. X Ltd., an Indian company owns a freehold land with carrying value of
`10,00,000 which is not depreciated for tax purposes but is indexed for
inflation. Indexed value and fair value of such land is ` 15,00,000 and
`22,00,000 respectively as of the reporting date. What will be the tax
base for such freehold land for measurement of deferred tax if:
(i) X Ltd. intends to sell it as a part of slump sale of business
eventually after using it for business purpose
(ii) X Ltd. intends to sell the land individually and not on a slump sale
basis
(iii) X Ltd. has classified such land as investment property and intends
to sell it individually and not on a slump sale basis
(iv) X Ltd. follows a revaluation model for freehold land and intends
to sell it individually and not on a slump sale

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

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Ind AS 41 ‘Agriculture’
13. ABC Ltd. is in the business of manufacturing an apple beverage and
requires a 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).
Whether ABC Ltd. is engaged in agricultural activity as per Ind AS 41 in
both of the cases?
Ind AS 10 ‘Events After the Reporting Period’
14. H Ltd. constructed a warehouse at a cost of `10 lakhs in 20X1. It first
became available for use by H Ltd. on 1st April, 20X2. On
th
29 April, 20X6, H Ltd. discovered that its warehouse was damaged.
During early May 20X6, an investigation revealed that the damage was
due to a structural fault in the construction of the warehouse. The
fault became apparent when the warehouse building leaked severely
after heavy rainfall in the week ended 27th April 20X6. The discovery of
the fault is an indication of impairment. So, H Ltd. was required to
estimate the recoverable amount of its warehouse at 31st March 20X6.
This estimate was ` 6,00,000. Furthermore, H Ltd. reassessed the useful
life of its warehouse at 20 years from the date that it was ready for use.
Before discovering the fault, H Ltd. had depreciated the warehouse on
the straight-line method to a nil residual value over its estimated 30-
year useful life.

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Seepage of rain-water through the crack in the warehouse caused

damage to inventory worth about ` 1,00,000 (cost price) and became
un-saleable. The entire damaged inventory was on hand as at
31st March, 20X6. H Ltd. has not insured against any of the losses.
It accounts for all its property, plant and equipment under the cost
model. H Ltd.’s annual financial statements for the year ended
st
31 March, 20X6 were approved for issue by the Board of Directors on
28th May, 20X6.
You are required to :
(i) Prepare accounting entries to record the effects of the events
after the end of the reporting period in the accounting records of
H Ltd. for the year ended 31st March, 20X6. Kindly ignore tax
impact.
(ii) Discuss disclosure requirement in above case as per relevant
Ind AS.
(iii) Will your answer be different if there was no structural fault and
damage to the warehouse had been caused by an event that
occurred after 31st March, 20X6?
Ind AS 36 ‘Impairment of Assets’
15. At 31st March, 20X1, the assets of a CGU are being reviewed for
impairment. The carrying value of the CGU’s net assets is `65 lakhs
(excluding any restructuring provision), and remaining useful economic
life of recognised asset is eight years.
Management’s approved budgets at 31st March, 20X1 include
restructuring costs of ` 3,50,000 to be incurred in 20X2; the
restructuring is expected to generate cost savings of ` 1,00,000 per
annum from 20X3 onwards. Formal budgets have been prepared for
the three years to 31st March, 20X4. A zero-growth rate is assumed,
because market conditions are extremely competitive, and this is
expected to continue for the foreseeable future. The future cash flow
estimates are as follows:

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Year With restructuring Without restructuring

consideration consideration
` `

20X1-20X2 5,20,000 8,70,000

20X2-20X3 10,00,000 9,00,000
20X3-20X4 10,50,000 9,50,000
20X4-20X5 10,50,000 9,50,000
20X5-20X6 10,50,000 9,50,000
20X6-20X7 10,50,000 9,50,000
20X7-20X8 10,50,000 9,50,000
20X8-20X9 10,50,000 9,50,000

In 20X2, the net cash flows without restructuring (` 8,70,000) exceed

the net cash flows with restructuring (` 5,20,000) by the amount of the
restructuring costs (` 3,50,000).
The future cash flows (which exclude inflation) have been discounted at
a rate of 4%. For simplicity, it has been assumed that the cash flows
arise at the end of each year.
Compute Impairment Loss at 31st March, 20X1 when-
(i) Restructuring costs is recognised in the financial statements at
31st March, 20X1
(ii) Restructuring costs is not recognised in the financial statements
at 31st March, 20X1
Ind AS 38 ‘Intangible Assets’
16. SS Limited had the following transactions during the Financial Year
20X1-20X2.
(i) On 1st April 20X1, SS Limited purchased the net assets of
M Limited for ` 13,20,000. The fair value of M Limited's
identifiable net assets was ` 10,00,000. SS Limited is of the view

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that due to popularity of M Limited's product, the life of goodwill

is 10 years.
(ii) On 4th May 20X1, SS Limited purchased a Franchisee to organize
musical shows from A TV for `80,00,000 and at an annual fee of
2% of musical shows revenue. The Franchisee expires after
5 years. Musical shows revenue were ` 10,00,000 for financial
year 20X1-20X2. The projected future revenues for financial year
20X2-20X3 is ` 25,00,000 and ` 30,00,000 p.a. for remaining 3
years thereafter.
(iii) On 4th July 20X1, SS Limited was granted a Copyright that had
been applied for by M Limited. During the financial year 20X1-
20X2, SS Limited incurred `2,50,000 on legal cost to register the
Patent and ` 7,00,000 additional cost to successfully prosecute a
copyright infringement suit against a competitor. The life of the
Copyright is for 10 years.
SS Limited follows an accounting policy to amortize all intangible on
SLM (Straight Line Method) basis or any appropriate basis over a
maximum period permitted by relevant Ind AS, taking a full year
amortization in the year of acquisition.
You are required to prepare:
(i) A Schedule showing the intangible section in SS Limited Balance
Sheet as on 31st March 20X2, and
(ii) A Schedule showing the related expenses that would appear in
the Statement of Profit and Loss of SS Limited for the year ended
20X1-20X2.
Ind AS 16 ‘Property, Plant and Equipment’
17. On 1st October, 20X1, XY Ltd. completed the construction of a power
generating facility. The total construction cost was ` 2 crore. The
facility was capable of being used from 1st October, 20X1 but XY Ltd.
did not bring the facility into use until 1st January, 20X2. The estimated
useful life of the facility at 1st October, 20X1 was 40 years.
Under legal regulations in the jurisdiction in which XY Ltd. operates,
there are no requirements to restore the land on which power

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generating facilities stand to its original state at the end of the useful
life of the facility. However, XY Ltd. has a reputation for conducting its
business in an environmentally friendly way and has previously chosen
to restore similar land even in the absence of such legal requirements.
The directors of XY Ltd. estimated that the cost of restoring the land in
40 years’ time (based on prices prevailing at that time) would be
` 1 crore. A relevant annual discount rate to use in any discounting
calculations is 5%. When the annual discount rate is 5%, the present
value of ` 1 receivable in 40 years’ time is approximately 0.142.
Explain and show how the above event would be reported in the
financial statements of XY Ltd. for the year ended 31st March, 20X1.
Ignore comments on potential future reclassification issues.
Ind AS 23 ‘Borrowing Costs’
18. X Ltd. commenced the construction of a plant (qualifying asset) on
1st September, 20X1, estimated to cost ` 10 crores. For this purpose, X
Ltd. has not raised any specific borrowings, rather it intends to use
general borrowings, which have a weighted average cost of 11%. Total
borrowing costs incurred during the period, viz., 1st September, 20X1 to
31st March, 20X2 were ` 0.5 crore.
The other relevant details are as follows: (` in crore)

Month Cost of Cash outflows

construction (paid in advance
accrued at the start of
each month)
September 1.50 3.00
October 0.50 1.70
November 1.50 2.50
December 0.50 —
January 1.80 1.00
February 0.70 —
March 3.00 1.50

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What is the amount of interest that should be capitalised to the cost of

the plant in the financial statements for the year ended
31st March, 20X2?
Ind AS 110 ‘Consolidated Financial Statements’
19. On 1st April 20X1, A Limited acquired 80% of the share capital of
S Limited. On the acquisition date the share capital and reserves of
S Ltd. stood at ` 5,00,000 and ` 1,25,000 respectively. A Limited paid
initial cash consideration of ` 10,00,000. Additionally, A Limited issued
2,00,000 equity shares with a nominal value of ` 1 per share at current
market value of ` 1.80 per share.
It was also agreed that A Limited would pay a further sum of ` 5,00,000
after three years. A Limited's cost of capital is 10%. The appropriate
discount factor for ` 1 @ 10% receivable at the end of
1st year: 0.91
2nd year: 0.83
3rd year: 0.75
The shares and deferred consideration have not yet been recorded by
A limited.
Below are the Balance Sheet of A Limited and S Limited as at
31st March, 20X3:

A Limited S Limited
(` 000) (` 000)
Non-current assets:
Property, plant & equipment 5,500 1,500
Investment in S Limited at cost 1,000
Current assets:
Inventory 550 100
Receivables 400 200
Cash 200 50
7,650 1,850

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Equity:
Share capital 2,000 500
Retained earnings 1,400 300
3,400 800
Non-current liabilities 3,000 400
Current liabilities 1,250 650
7,650 1,850

Further information:
(i) On the date of acquisition, the fair values of S Limited's plant
exceeded its book value by ` 2,00,000. The plant had a remaining
useful life of five years at this date;
(ii) The consolidated goodwill has been impaired by ` 2,58,000; and
(iii) The A Limited Group, values the non-controlling interest using
the fair value method. At the date of acquisition, the fair value of
the 20% non-controlling interest was ` 3,80,000.
You are required to prepare Consolidated Balance Sheet of A Limited
as at 31st March, 20X3. (Notes to Account on Consolidated Balance
Sheet is not required).
Ind AS 111 ‘Joint Arrangements’
20. P Limited and Q Limited enter into a contractual arrangement to buy a
building that has 12 floors, which they will lease to other parties.
P Limited and Q Limited are authorised to lease five floors each.
P Limited and Q Limited can unilaterally make all decisions related to
their respective floors and are entitled to all of the income from those
floors. The remaining two floors will be jointly managed – all decisions
concerning these two floors must be unanimously agreed to between
P Limited and Q Limited who will share net profits or net losses in
respect of these two floors equally, i.e. they both have the rights to the
net assets of the arrangement. The leasing of property is determined
to be the relevant activity.
Whether this arrangement is a joint operation or a joint venture?

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SUGGESTED ANSWERS

Answer to Case Scenario I

1. Option (d): On 31st December, 20X6 by ` 1,00,000

2. Option (b): ` 2,500

3. Option (c): ` 1,02,500

Reason for 1 -3: Under the principles of Ind AS 115, revenue cannot
be recognised on 1st October 20X6 because at that date the
consideration is variable and the amount of the variable consideration
cannot be reliably estimated.
However, on 1st October 20X6 ` 80,000 would be removed from
inventory and included as a ‘right to recover asset’.

Revenue of ` 1,00,000 (the present value of ` 121,000 receivable in two

years) is recognised on 31st December, 20X6 when the uncertainty
regarding potential returns is resolved.
On the same day, the ‘right to recover asset’ will be de-recognised and
transferred to cost of sales.
D Ltd. will also recognise finance income of ` 2,500 (` 1,00,000 x 10% x
3/12) in the year ended 31st March 20X7.

At 31st March, 20X7, D Ltd. will recognise a trade receivable of

` 1,02,500 (` 1,00,000 + ` 2,500).

4. Option (a): ` 20,00,000

5. Option (b): ` 29,50,000

Reason for 4 & 5

The consideration payable by the customer is variable as it depends on
the volume of sales in the two‑year period. However, D Ltd. can reliably
estimate the outcome and that the volume discount threshold will not

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be exceeded (sales for 9 months: 20,000 x 24/9 = 53,333). The revenue

included for the year ended 31st March, 20X6 will be booked at ` 100 per
unit and will be ` 20,00,000 (20,000 x ` 100).

During the year ended 31st March, 20X7, actual sales volumes and
estimates change such that the cumulative revenue should now be
booked at ` 90 per unit. It is now expected that the volume discount
threshold will be exceeded. This means that the cumulative revenue
relating to these goods at 31st March, 20X7 will be ` 49,50,000 ((20,000
+ 35,000) x ` 90).

The revenue which will actually be booked by D Ltd. for the year ended
31st March, 20X7 will be ` 29,50,000 (` 49,50,000 – ` 20,00,000
recognised in 20X5-20X6).
Answer to Case Scenario II

6. Option (c): ` 0.5 crore deducted from the profit of the year 20X6-20X7
Reason
Computation of net adjustment for defined benefit pension plan in the
statement of profit and loss

` in crore
Current service cost 6
Interest cost (8% x 18.75) 1.5
Contributions incorrectly charged to profit or loss (7)
So adjustment equals 0.5

7. Option (b): ` 1.25 crore

Reason
Computation of actuarial gain/(loss) on defined benefit pension plan

` in crore
Opening liability 18.75
Current service cost 6

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Interest cost 1.5

Contributions paid into plan (7)
19.25
Actuarial loss on re-measurement (balancing figure) 1.25
Closing liability 20.5

8. Option (a) : ` 0.78 crore

9. Option (c): ` 0.0392 crore
10. Option (a): ` 0.0468 crore
Reason for 8-10
Adjustment for restoration provision

` in crore
Originally required provision (2.5 crore x 0·312) 0.7800
One year’s unwinding of discount (0.78 x 6%) (0.0468)
One year’s depreciation of capitalised cost (0.78 x 1/20) (0.0390)
Original provision incorrectly made 0.1250
So retained earnings adjustment equals 0.0392

11. Paragraphs 51 and 51A of Ind AS 12, state that the measurement of
deferred tax liabilities and deferred tax assets shall reflect the tax
consequences that would follow from the manner in which the entity
expects, at the end of the reporting period, to recover or settle the
carrying amount of its assets and liabilities.
In some jurisdictions, the manner in which an entity recovers (settles)
the carrying amount of an asset (liability) may affect either or both of:
(a) the tax rate applicable when the entity recovers (settles) the
carrying amount of the asset (liability); and
(b) the tax base of the asset (liability).

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In such cases, an entity measures deferred tax liabilities and deferred

tax assets using the tax rate and the tax base that are consistent with
the expected manner of recovery or settlement.”
The expectation of the entity at the end of the reporting period with
regard to the manner of recovery or settlement of its assets and
liabilities will require exercise of judgement based on evaluation of
facts and circumstances in each case. It may be relevant to consider
that there is substance to management’s expectation of the entity
being able to recover the asset through slump sale or otherwise.
Depending on the facts and circumstances, it is generally assumed that
the Company will act in the most economically advantageous way.
If a non-depreciable asset is measured using the revaluation model,
then an entity is required to measure the DTA/DTL considering the tax
consequences of recovering the carrying amount through sale.
Accordingly, based on assumption around supporting facts and
circumstances to support management expectation around recovery or
settlement, following will be the tax base for computing the deferred
tax assets/ liability, in the given case:
(i) X Ltd. intends to sell it as slump sale eventually after using it for
business purpose
If it is concluded based on evaluation of facts that the freehold
land will be sold through slump sale, then the tax base of the
land will be the same as the carrying amount of the land, as
indexation benefit is not available in case of slump sale and
hence there will not be any temporary difference.
(ii) X Ltd. intends to sell the land individually and not on a slump sale
basis
In the given scenario, the company intends to sell the land
individually and not on a slump sale such that the company
would get indexation benefit.
Thus, book base of land, i.e. carrying amount of freehold land in
the balance sheet is ` 10,00,000. As per paragraph 51A of
Ind AS 12, the tax base (amount that will be deductible for tax

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purposes against any taxable economic benefits that will flow to

the entity when it recovers the carrying amount of the asset) is
the indexed valued of ` 15,00,000 since the company intends to
sell the land individually and not on slump sale and thus get
indexation benefit. Deferred tax assets will be set up, subject to
recoverability, on a deductible tax difference of ` 5,00,000.
(iii) X Ltd. has classified such land as investment property and intends
to sell it individually and not on a slump sale
Paragraph 56 of Ind AS 40, Investment property, requires that
after initial recognition, an entity shall measure all of its
investment properties in accordance with the requirement for
cost model as per Ind AS 16, other than those that meet the
criteria to be classified as held for sale in accordance with
Ind AS 105, Non-current Assets Held for Sale and Discontinued
Operations. Ind AS 40 does not allow fair value model.
Accordingly, freehold land classified as investment property will
be measured at cost.
Thus, book base of land, i.e. carrying amount of freehold land in
the balance sheet is ` 10,00,000. The Company intends to sell the
land individually and not on a slump sale and thus get indexation
benefit. Hence, as per paragraph 51A of Ind AS 12, the tax base
(amount that will be deductible for tax purposes against any
taxable economic benefits that will flow to the entity when it
recovers the carrying amount of the asset) is the indexed valued
of ` 15,00,000. Accordingly, deferred tax assets will be set up,
subject to recoverability, on deductible tax difference of
` 5,00,000.
(iv) X Ltd. follows a revaluation model for freehold land and intends
to sell it individually and not on a slump sale. If X Ltd. follows a
revaluation model, carrying amount of freehold land in the
balance sheet would be ` 22,00,000. Thus, book base of land is
` 22,00,000.
The Company intends to sell the land individually and not on a
slump sale and thus get indexation benefit. Hence, as per
paragraph 51A of Ind AS 12, the tax base (amount that will be

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deductible for tax purposes against any taxable economic

benefits that will flow to the entity when it recovers the carrying
amount of the asset) is the indexed valued of ` 15,00,000.
Accordingly, deferred tax liability will be set up on taxable
temporary difference of ` 7,00,000.
As per paragraph 39 of Ind AS 16, if an asset’s carrying amount is
increased as a result of a revaluation, the increase shall be
recognised in other comprehensive income and accumulated in
equity under the heading of revaluation surplus. Accordingly, the
effect of deferred tax liability should also be recognised in other
comprehensive income as per paragraph 57 and 61A of Ind AS
12.
12. Case I
Scenario 1:
(i) As per paragraph B13 of Ind AS 116, ‘Last mile’ which is a
dedicated cable is an identified asset since it is physically distinct.
(ii) There are no substantive substitution rights with Entity Y, as it
does not have the practical ability to substitute alternative assets
throughout the period of use.
Thus, this arrangement is within the scope of Ind AS 116.
Scenario 2:
If Entity Y has the practical ability to replace the lines and it would
benefit from such replacement, Entity Y has substantive substitution
rights. In such case, this arrangement for the ‘last mile cable’ will not
be within the scope of Ind AS 116.
Case II
The fibers are specified in the contract and are physically distinct.
Hence, in accordance with paragraph B13 and B20, the said three fibers
are identified asset.
Paragraph B18, inter alia, states that, “the supplier’s right or obligation
to substitute the asset for repairs and maintenance, if the asset is not
operating properly or if a technical upgrade becomes available does

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not preclude the customer from having the right to use an identified
asset.”
Further, paragraph B27 provides that although rights such as those to
operate or maintain an asset are often essential to the efficient use of
an asset, they are not rights to direct how and for what purpose the
asset is used and can actually be dependent on the decisions about
how and for what purpose the asset is used.
In accordance with the above, as Entity Y can substitute these three
distinct fibers only for reasons of repairs, maintenance or malfunction,
it does not preclude them from being an identified asset.
Further, the Customer X has right to control the use of the identified
fibers for 10 year since it has -
(a) the right to obtain substantially all of the economic benefits from
use of the identified fibers throughout the period of use, i.e., 10
years; and
(b) the right to direct the use of the fibers as it makes the decisions
about the use of the fibers, i.e., it has right to direct how and for
what purpose the fibers are used throughout the period of use.
Hence, this arrangement is within the scope of Ind AS 116.
Case III
Paragraph B20 specifically provides that a capacity or other portion of
an asset that is not physically distinct (for example, a capacity portion
of a fiber optic cable) is not an identified asset, unless it represents
substantially all of the capacity of the asset and thereby provides the
customer with the right to obtain substantially all of the economic
benefits from use of the asset. In the given case, the capacity portion
that will be provided to Customer X is not physically distinct from the
remaining capacity of the cable and does not represent substantially all
of the capacity of the cable, thus, it is not an identified asset. Further,
Entity Y makes all decisions about the transmission of data, (i.e.,
supplier lights the fibers, makes decisions about which fibers are used
to transmit customer’s traffic).

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Thus, the contract does not contain a lease and is therefore not within
the scope of Ind AS 116.
13. 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.
14. (i) Journal Entries on 31st March, 20X6
` `
Depreciation expense A/c (W.N.1) Dr. 19,608
To Warehouse or Accumulated 19,608
depreciation A/c
(Being additional depreciation expense
st
recognised for the year ended 31 March
20X6 arising from the reassessment of the
useful life of the warehouse)
Impairment loss A/c (W.N.2) Dr. 2,47,059
To Warehouse or Accumulated 2,47,059
depreciation A/c
(Being impairment loss recognised due to
discovery of structural fault in the
construction of warehouse at 31st March,
20X6)

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(ii) (a) The damage to warehouse is an adjusting event

(occurred after the end of the year 20X6-20X6) for the
reporting period 20X5-20X6, since it provides evidence that
the structural fault existed at the end of the reporting
period. It is an adjusting event, in spite of the fact that fault
has been discovered after the reporting date.
The effects of the damage to the warehouse are
recognised in the year 20X5-20X6 reporting period.
Prior periods will not be adjusted because those financial
statements were prepared in good faith (eg. regarding
estimate of useful life, assessment of impairment indicators
etc.) and had not affected the financials of prior years.
(b) Damage of inventory due to seepage of rainwater
` 1,00,000 occurred during the year 20X5-20X6. It is a non-
adjusting event after the end of the 20X5-20X6 reporting
period since the inventory was in good condition at
31st March 20X6. Hence, no accounting has been done for
it in the year 20X5-20X6.
H Ltd. must disclose the nature of the event (i.e. rain-
damage to inventories) and an estimate of the financial
effect (i.e. ` 1,00,000 loss) in the notes to its 31st March
20X6 annual financial statements.
(iii) If the damage to the warehouse had been caused by an event
that occurred after 31st March 20X6 and was not due to structural
fault, then it would be considered as a non-adjusting event
after the end of the reporting period 20X5-20X6 as the
warehouse would have been in a good condition at
31st March 20X6.
Working Notes:
1. Calculation of additional depreciation to be charged in the
year 20X5-20X6
Original depreciation as per SLM already charged during the year
20X5-20X6 = ` 10,00,000/ 30 years = ` 33,333.

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Carrying value at the end of 20X4-20X5 = 10,00,000 – (` 33,333 x

3 years) = ` 9,00,000
Revised depreciation = 9,00,000 / 17 years = ` 52,941
Additional depreciation to be recognised in the books in the year
20X5-20X6 = ` 52,941 – ` 33,333 = ` 19,608
2. Calculation of impairment loss in the year 20X5-20X6
Carrying value after charging depreciation for the year 20X5-20X6
= ` 9,00,000 – ` 52,941 = ` 8,47,059
Recoverable value of the warehouse = ` 6,00,000
Impairment loss = Carrying value - Recoverable value
= ` 8,47,059 - ` 6,00,000 = ` 2,47,059
15. Computation of present value of cash flows under both the
following conditions: (Amount in `)

Year Discount With restructuring Without restructuring

factor consideration coordination
Future net Present Future net Present
cash flows value cash flows value
(a) (b) (c)=(a)x(b) (d) (e)=(a)x(d)

20X1-20X2 0.962 5,20,000 5,00,000 8,70,000 8,36,000

20X2-20X3 0.925 10,00,000 9,25,000 9,00,000 8,32,000
20X3-20X4 0.889 10,50,000 9,33,000 9,50,000 8,45,000
20X4-20X5 0.855 10,50,000 8,98,000 9,50,000 8,12,000
20X5-20X6 0.822 10,50,000 8,63,000 9,50,000 7,81,000
20X6-20X7 0.790 10,50,000 8,30,000 9,50,000 7,51,000
20X7-20X8 0.760 10,50,000 7,98,000 9,50,000 7,22,000
20X8-20X9 0.730 10,50,000 7,67,000 9,50,000 6,94,000
Value in use 65,14,000 62,73,000

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The impairment calculations at 31st March, 20X1 differ according to

whether or not provision for the restructuring costs is recognised in
the financial statements. This will depend on whether the requirements
of Ind AS 37 have been met for recognition.
(i) Provision for restructuring costs recognised at 31st March, 20X1

If provision has been made for restructuring costs, the costs and
benefits of the restructuring are taken into account in
determining the CGU’s value in use. Here, the post –
restructuring value in use (` 6,514,000) exceeds the CGU’s
carrying value (` 6,500,000 less restructuring provision of
` 350,000). Hence, there is no impairment of the CGU’s assets.
In the year to 31st March, 20X1, the financial statements reflect
the following charges.
Restructuring provision ` 350,000

Impairment loss Nil

(ii) No provision for restructuring costs recognised at 31st March, 20X1
If no provision for restructuring costs is permitted by Ind AS 37,
the costs and benefits of the restructuring have to be stripped
out of the projections in determining the CGU’s value in use.
Here, the CGU’s carrying value (` 65,00,000) exceeds its pre-
restructuring value in use (` 62,73,000). Therefore, there is an
impairment loss of ` 2,27,000.
In the year to 31st March, 20X1, the financial statements reflect
the following charges:
Restructuring provisions Nil
Impairment loss ` 2,27,000

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16. (i) SS Limited

Balance Sheet (Extract relating to intangible asset)
as at 31st March 20X2

Note No. `
Assets
(1) Non- current asset
Intangible assets 1 69,45,000

(ii) SS Limited
Statement of Profit and Loss (Extract)
for the year ended 31st March 20X2

Note No. `

Revenue from Operations 10,00,000

Total Revenue

Expenses:
Amortization expenses 2 16,25,000
Other expenses 3 7,20,000
Total Expenses

Notes to Accounts (Extract)

1. Intangible Assets
Gross Block (Cost) Accumulated amortisation Net block
Opening Additions Closing Opening Additions Closing Opening Closing
balance Balance balance Balance balance Balance
` ` ` ` ` ` ` `

1. Goodwill* - 3,20,000 3,20,000 - - - - 3,20,000

(W.N.1)
2. Franchise** - 80,00,000 80,00,000 - 16,00,000 16,00,000 - 64,00,000
(W.N.2)
3. Copyright
(W.N.3) - 2,50,000 2,50,000 - 25,000 25,000 - 2,25,000
- 85,70,000 85,70,000 - 16,25,000 16,25,000 - 69,45,000

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*As per Ind AS 36, irrespective of whether there is any indication of

impairment, an entity shall test goodwill acquired in a business
combination for impairment annually. This implies that goodwill is
not amortised annually but is subject to annual impairment, if any.
**As per the information in the question, the limiting factor in the
contract for the use is time i.e., 5 years and not the fixed total
amount of revenue to be generated. Therefore, an amortisation
method that is based on the revenue generated by an activity that
includes the use of an intangible asset is inappropriate and
amortisation based on time can only be applied.

2. Amortization expenses
Franchise (W.N.2) 16,00,000
Copyright (W.N.3) 25,000 16,25,000
3. Other expenses
Legal cost on copyright 7,00,000
Fee for Franchise (10,00,000 x 2%) 20,000 7,20,000

Working Notes:
`
(1) Goodwill on acquisition of business
Cash paid for acquiring the business 13,20,000
Less: Fair value of net assets acquired (10,00,000)
Goodwill 3,20,000
(2) Franchise 80,00,000
Less: Amortisation (over 5 years) (16,00,000)
Balance to be shown in the balance sheet 64,00,000
(3) Copyright 2,50,000
Less: Amortisation (over 10 years as per SLM) (25,000)
Balance to be shown in the balance sheet 2,25,000

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17. The facility is depreciated from the date it is ready for use, rather than
when it actually starts being used. In this case, then, the facility is
depreciated from 1st October, 20X1.
Although XY Ltd. has no legal obligation to restore the piece of land, it
does have a constructive obligation, based on its past practice and
policies.
The amount of the obligation will be ` 14,20,000 being the present
value of the anticipated future restoration expenditure (1,00,00,000 x
0.142).
This will be recognised as a provision under non-current liabilities in
the balance sheet of XY Ltd. at 31st March, 20X2.
As time passes the discounted amount unwinds. The unwinding of the
discount for the year ended 31st March, 20X2 will be ` 35,500
(14,20,000 x 5% x 6/12).
The unwinding of the discount will be shown as a finance cost in the
statement of profit and loss and the closing provision will be
` 14,55,500 (14,20,000 + 35,500).
The initial amount of the provision is included in the carrying amount
of the non-current asset, which becomes ` 2,14,20,000 (2,00,00,000 +
14,20,000).
The depreciation charge in profit or loss for the year ended
31st March, 20X2 is ` 2,67,750 (2,14,20,000 x 1/40 x 6/12).
The closing balance included in non-current assets will be ` 2,11,52,250
(2,14,20,000 – 2,67,750).
18. Paragraph 14 of Ind AS 23, inter-alia, states that to the extent that an
entity borrows funds generally and uses them for the purpose of
obtaining a qualifying asset, the entity shall determine the amount of
borrowing costs eligible for capitalisation by applying a capitalisation
rate to the expenditures on that asset. The capitalisation rate shall be
the weighted average of the borrowing costs applicable to all
borrowings of the entity that are outstanding during the period.
However, an entity shall exclude from this calculation borrowing costs
applicable to borrowings made specifically for the purpose of

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obtaining a qualifying asset until substantially all the activities

necessary to prepare that asset for its intended use or sale are
complete. The amount of borrowing costs that an entity capitalises
during a period shall not exceed the amount of borrowing costs it
incurred during that period.
In this context, a question arises whether such expenditure should be
based on costs accrued or actual cash outflows. To contrast these two
alternatives, presented below is the computation of borrowing costs
based on both the alternatives:

Month Costs Average capital Cash Average capital

accrued expenditure outflows expenditure
September 1.50 1.50x7/12 = 0.875 3.00 3.00x7/12=1.75
October 0.50 0.50x6/12 = 0.25 1.70 1.70x6/ 12 = 0.85
November 1.50 1.50x5/12 = 0.625 2.50 2.50x5/12 = 1.04
December 0.50 0.50x4/12 = 0.17 - -
January 1.80 1.80x3/12 = 0.45 1.00 1x3/12 = 0.25
February 0.70 0.70x2/12 = 0.12 - -
March 3.00 3.00x1/12 = 0.25 1.50 1.50x1/12 = 0.13
9.50 2.74 9.70 4.02

If the average capital expenditure on the basis of costs accrued is

taken, the borrowing costs eligible to be capitalised would be
` 2.74 crore x 11% = 0.30 crore. Whereas if average capital
expenditure on the basis of cash flows is taken, the borrowing costs
eligible to be capitalised would be ` 4.02 crore x 11% = 0.44 crore.
Thus, there is a wide variance in the amount of borrowing cost to be
capitalised, based on the accrual basis and on actual cash flows basis.
In this regard, paragraph 18 of Ind AS 23 states that expenditures on a
qualifying asset include only those expenditures that have resulted in
payments of cash, transfers of other assets or the assumption of
interest-bearing liabilities. Expenditures are reduced by any progress
payments received and grants received in connection with the asset
(see Ind AS 20, Accounting for Government Grants and Disclosure of
Government Assistance). The average carrying amount of the asset

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during a period, including borrowing costs previously capitalised, is

normally a reasonable approximation of the expenditures to which the
capitalisation rate is applied in that period.
Where cash has been paid but the corresponding cost has not yet
accrued interest becomes payable on payment of cash. Therefore, the
amount so paid should be considered for determining the amount of
interest eligible for capitalisation, subject to the fulfillment of other
conditions prescribed in paragraph 16 of Ind AS 23. Accordingly, in
the present case, interest should be computed on the basis of the cash
flows rather than on the basis of costs accrued. Therefore, the amount
of interest eligible for capitalisation would be ` 0.44 crore.
Another important factor to be noted is that paragraph 14 requires,
inter alia, that the amount of borrowing costs that an entity capitalises
during a period shall not exceed the amount of borrowing costs it
incurred during that period.
Thus, the amount of borrowing costs to be capitalised should not
exceed the total borrowing costs incurred during the period, that is
` 0.5 crore.
19. Consolidated Balance Sheet of A Ltd. and its subsidiary, S Ltd.
as at 31st March, 20X3

Particulars ` in 000s
I. Assets
(1) Non-current assets
(i) Property Plant & Equipment (W.N.4) 7,120.00
(ii) Intangible asset – Goodwill (W.N.3) 1,032.00
(2) Current Assets
(i) Inventories (550 + 100) 650.00
(ii) Financial Assets
(a) Trade Receivables (400 + 200) 600.00
(b) Cash & Cash equivalents (200 + 50) 250.00
Total Assets 9,652.00

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II. Equity and Liabilities

(1) Equity

(i) Equity Share Capital (2,000 + 200) 2,200.00

(ii) Other Equity

(a) Retained Earnings (W.N.6) 1190.85

(b) Securities Premium 160.00

(2) Non-Controlling Interest (W.N.5) 347.40

(3) Non-Current Liabilities (3,000 + 400) 3,400.00

(4) Current Liabilities (W.N.8) 2,353.75

Total Equity & Liabilities 9,652.00

Notes:
1. Since the question required not to prepare Notes to Account, the
column of Note to Accounts had not been drawn.
2. It is assumed that shares were issued during the year 20X2-20X3
and entries are yet to be made.
Working Notes:
1. Calculation of purchase consideration at the acquisition date
i.e. 1st April, 20X1

` in 000s
Payment made by A Ltd. to S Ltd.
Cash 1,000.00
Equity shares (2,00,000 shares x `1.80) 360.00
Present value of deferred consideration
(`5,00,000 x 0.75) 375.00
Total consideration 1,735.00

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2. Calculation of net assets i.e. net worth at the acquisition date

i.e. 1st April, 20X1

` in 000s
Share capital of S Ltd. 500.00
Reserves of S Ltd. 125.00
Fair value increase on Property, Plant and
Equipment 200.00
Net worth on acquisition date 825.00

3. Calculation of Goodwill at the acquisition date i.e.

1 April, 20X1 and 31st March, 20X3
st

`in 000s
Purchase consideration (W.N.1) 1,735.00
Non-controlling interest at fair value (as given in
the question) 380.00
2,115.00
Less: Net worth (W.N.2) (825.00)
st
Goodwill as on 1 April 20X1 1,290.00
Less: Impairment (as given in the question) (258.00)
Goodwill as on 31st March 20X3 1,032.00

4. Calculation of Property, Plant and Equipment as on

31st March 20X3

`in 000s
A Ltd. 5,500.00
S Ltd. 1,500.00
Add: Net fair value gain
not recorded yet 200.00
Less: Depreciation
[(200/5) x 2] (80.00) 120.00 1,620.00
7,120.00

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5. Calculation of post-acquisition gain (after adjustment of

impairment on goodwill) and value of NCI as on
31st March 20X3
` `
in 000s in 000s
NCI A Ltd.
(20%) (80%)
Acquisition date balance 380.00 Nil
Closing balance of Retained Earnings 300.00
Less: Pre-acquisition balance (125.00)
Post-acquisition gain 175.00
Less: Additional Depreciation
on PPE [(200/5) x 2] (80.00)
Share in post-acquisition gain 95.00 19.00 76.00
Less: Impairment on goodwill 258.00 (51.60) (206.40)
347.40 (130.40)

6. Consolidated Retained Earnings as on 31st March 20X3

`in 000s
A Ltd. 1,400.00
Add: Share of post-acquisition loss of S Ltd. (130.40)
(W.N.5)
Less: Finance cost on deferred consideration (37.5
+ 41.25) (W.N.7) (78.75)
st
Retained Earnings as on 31 March 20X3 1,190.85

7. Calculation of value of deferred consideration as on

31st March 20X3

`in 000s
Value of deferred consideration as on
1st April 20X1 (W.N.1) 375.00
Add: Finance cost for the year 20X1-20X2
(375 x 10%) 37.50
412.50

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Add: Finance cost for the year 20X2-20X3

(412.50 x 10%) 41.25
Deferred consideration as on 31st March 20X3 453.75

8. Calculation of current Liability as on 31st March 20X3

`in 000s
A Ltd. 1,250.00
S Ltd. 650.00
Deferred consideration as on 31st March 20X3
(W.N.7) 453.75
Current Liability as on 31st March 20X3 2,353.75

20. Paragraphs 15-17 of Ind AS 111 state that a joint operation is a joint
arrangement whereby the parties that have joint control of the
arrangement have rights to the assets and obligations for the liabilities,
relating to the arrangement. Those parties are called joint operators.
Further, a joint venture is a joint arrangement whereby the parties that
have joint control of the arrangement have rights to the net assets of
the arrangement. Those parties are called joint venturers.
Furthermore, an entity applies judgement when assessing whether a
joint arrangement is a joint operation or a joint venture. An entity shall
determine the type of joint arrangement in which it is involved by
considering its rights and obligations arising from the arrangement.
An entity assesses its rights and obligations by considering the
structure and legal form of the arrangement, the terms agreed by the
parties in the contractual arrangement and, when relevant, other facts
and circumstances.
In the given case, accounting by P Limited and Q Limited would be as
follows:
(i) Five floors that P Limited controls
Five floors that are controlled by P Limited shall be accounted for
by P Limited as investment property under Ind AS 40, Investment
Property, which defines the term ‘investment property’ as

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property (land or a building—or part of a building—or both) held

(by the owner or by the lessee under a finance lease) 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.
(ii) Five floors that Q Limited controls
Five floors that are controlled by Q Limited shall be accounted for
by Q Limited as investment property under Ind AS 40.
(iii) Two floors that P Limited and Q Limited jointly control
For the two floors that are jointly controlled by P Limited and
Q Limited, as per the contractual arrangement, both P Limited
and Q Limited will share net profits or net losses equally i.e. they
both have the rights to the net assets of the arrangement. Thus,
the arrangement in respect of these two floors is a joint venture
and shall be accounted for accordingly by P Limited and
Q Limited.

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REVISION TEST PAPER

FINANCIAL REPORTING

PAPER – 1:
FINANCIAL REPORTING

QUESTIONS

Case Scenario - I
FA Ltd. is a company which manufactures aircraft parts and engines and sells
them to large multinational companies like Boeing and Airbus Industries.
Following are the details of some of the transactions entered into by the
company:
i. On 1st April 20X2, the company began the construction of a new
production line in its aircraft parts manufacturing shed.
Costs relating to the production line are as follows:

Details Amount
` in lakhs
Costs of the basic materials (list price ` 12.5 lakhs less 10.00
20% trade discount)
Recoverable goods and services tax incurred but not 1.00
included in the purchase cost
Employment costs of the construction staff for three 1.20
months till 30th June 20X2
Other overheads directly related to the construction 0.90
Payments to external advisors relating to the 0.50
construction
Expected dismantling and restoration costs 2.00
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The production line took two months to make ready for use and was
brought into use on 31st May 20X2.
The other overheads were incurred during the two-month period
ended on 31st May 20X2. They included an abnormal cost of
` 0.3 lakhs caused by a major electrical fault.
The production line is expected to have a useful economic life of eight
years. After 8 years, FA Ltd. is legally required to dismantle the plant in
a specified manner and restore its location to an acceptable standard.
The amount of ` 2 lakhs included in the cost estimates is the amount
that is expected to be incurred at the end of the useful life of the
production line. The appropriate discount rate is 5%. The present
value of ` 1 payable in 8 years at a discount rate of 5% is
approximately ` 0.68.
Four years after being brought into use, the production line will require
a major overhaul to ensure that it generates economic benefits for the
second half of its useful life. The estimated cost of the overhaul, at
current prices, is ` 3 lakhs.
No impairment of the plant had occurred by 31st March 20X3.
ii. During the year ended 31st March 20X3, FA Ltd. provided consultancy
services to a customer regarding the installation of a new production
system related to aircraft parts. The system has caused the customer
considerable problems, so the customer has taken legal action against
the Company for the loss of profits that has arisen as a result of the
problems with the system. The customer has claimed damages to the
tune of ` 1.6 lakhs.
The legal department of FA Ltd. considers that there is a 25% chance
the claim can be successfully defended. The legal department further
stated that they are reasonably confident the Company is covered by
insurance against these types of loss. Th accountant feels nothing
needs to be provided for this claim as the Company is suitably covered
against any possible losses.

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FINANCIAL REPORTING

iii. FA Ltd. has an associate company, Flynet Limited. Following are the
information of Flynet Limited for the year ended 31st March 20X3:

Particulars ` in lakhs
Net Income after taxes 120
Decrease in accounts receivables 20
Depreciation 25
Increase in inventory 10
Increase in accounts payable 7
Decrease in wages payable 5
Tax charge for the year (deferred tax liabilities) 15
Profit from sale of land 2

On the basis of the facts given above, chose the most appropriate
answer to Questions 1 to 5 below based on the relevant Indian
Accounting Standards (Ind AS).

1. Which of the following items need to be capitalized in determining the

cost of Production Line?
(a) Abnormal cost of ` 0.3 lakhs
(b) Recoverable GST of ` 1 lakhs

(c) Initial estimate of the costs of dismantling and removing the item
and restoration of site of ` 2 lakhs
(d) Initial estimate of the costs of dismantling and removing the item
and restoration of site of ` 1.36 lakhs
2. Calculate the company’s associate Flynet Ltd.’s cash flow from
operations.

(a) ` 158 lakhs

(b) ` 170 lakhs
(c) ` 174 lakhs

(d) None of the above

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3. What accounting treatment should be done in FA Ltd.’s books for the

year ending 31st March 20X3, as the customer has taken legal action
against the Company on the loss of profits that has arisen as a result of
the problems with the system?
(a) Nothing needs to be provided for claim instituted by the
customer as the Company is suitably covered against any
possible losses.

(b) Provision of ` 1.6 lakhs should be recognised with a

corresponding charge to profit or loss.
(c) Provision of ` 0.4 lakhs as per best possible outcome should be
recognised with a corresponding charge to profit or loss.
(d) Contingent Liability would be disclosed in the 31st March 20X3
financial statements. Charge to profit or loss if any would be
recognised in the period when the claim is settled.

4. Compute the total amount to be charged to the Statement of Profit

and Loss with respect to Production Line for the year ending
31st March 20X3 and the balance of Provision for Dismantling Cost
carried to Balance Sheet.
(a) ` 1.70 lakhs; ` 1.36 lakhs
(b) ` 1.42 lakhs; ` 1.70 lakhs

(c) ` 1.76 lakhs; ` 1.42 lakhs

(d) ` 1.42 lakhs; ` 1.76 lakhs
5. Compute the cost of the production Line to be capitalized initially on
31st May, 20X2.
(a) ` 13.26 lakhs
(b) ` 14.60 lakhs
(c) ` 13.96 lakhs
(d) ` 15.76 lakhs

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REVISION TEST PAPER

FINANCIAL REPORTING

Case Scenario - II
HS Limited (HSL) is a car manufacturing company. During the year, HSL has
entered into many transactions, details of which are given below.
i. With the intention to expand, HSL has entered into a Share Purchase
Agreement ("SPA") with the shareholders of FM Limited to purchase
30% stake in FM Limited as at 1st June 20X2 at a price of ` 30 per share.
As per the terms of SPA, HSL has an option to purchase an additional
25% stake in FM Limited on or before 15th June 20X2 at a price of ` 30
per share. Similarly, the selling shareholder has an option to sell
additional 25% stake in FM Limited on or before 15th June, 20X2 to HSL
at a price of ` 30 per share. The decisions on relevant activities of
FM Limited are made in Annual General Meeting / Extraordinary
General Meeting (AGM / EGM). A resolution in AGM / EGM is passed
when more than 50% votes are cast in favour of the resolution. An
AGM / EGM can be called by giving atleast 21 days advance notice to
all shareholders.
ii. During the year, HSL issued Compulsory Convertible Debentures
("CCDs") on a private placement basis for ` 100 lakh. Each CCD is
convertible into 5 shares at the end of 4 years from the date of issue
and an annual interest is payable at the rate of 6% p.a. At initial
recognition, HSL recognized a liability component of compound
instrument at ` 20,79,063. HSL also incurred expenses of ` 2,00,000 in
connection with the issue of the instrument. Nature of expenses
includes fees paid to legal advisors, registration and regulatory fees.
iii. HSL acquired a 40% stake in NM Limited as at 1st January, 20X2 for
` 8,00,000 and classified the investment in NM Limited as an associate.
As at 1st January, 20X2, the carrying amount and fair value of plant &
equipment of NM Limited is ` 3,00,000 and ` 5,00,000 respectively with
remaining useful life of 5 years (i.e. 20 quarters). From
st st
1 January, 20X2 to 31 March, 20X2, NM Limited generated a profit of
` 50,000.
iv. While selling a car, HSL provides a trade discount of 1% on sale price
which is mentioned on the invoice. HSL provides a credit period of 7
days to its customers, however if paid upfront then HSL gives an

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additional cash discount of 2%. HSL also provides a voucher worth

` 500 with a validity of 1 year which can be used at an apparel store.
On the basis of the facts given above, chose the most appropriate
answer to Questions 6 to 10 below based on the relevant Indian
Accounting Standards (Ind AS).
6. At what amount HSL shall carry its investments in NM Limited in its
consolidated financial statements as at 31st March, 20X2?
(a) ` 8,00,000
(b) ` 8,20,000
(c) ` 8,16,000
(d) ` 8,10,000
7. How should HSL account for the trade discount, cash discount and
voucher given to customers on sale of a car?
(a) Trade discount shall be reduced from the revenue however cash
discount and value of voucher shall be charged as expenses.
(b) Trade discount and cash discount both shall be reduced from the
revenue however value of voucher shall be charged as expenses.
(c) Trade discount, cash discount and value of voucher shall be
charged as expenses.
(d) Trade discount, cash discount and value of voucher shall be
reduced from revenue.
8. What shall be the accounting treatment of directly attributable
expenses of ` 2 lakh incurred in connection with the issue of
Compulsory Convertible Debentures?
(a) Entire ` 2,00,000 shall be recognized as expenses in the
statement of profit and loss in the current year.
(b) Entire ` 2,00,000 shall be reduced from equity in the current year.
(c) A proportion of ` 1,58,419 shall be reduced from equity and
Balance of ` 41,581 shall be recognized as interest cost over the
period of 4 years using an effective interest method.

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(d) Entire ` 2,00,000 shall be recognized as interest cost over the

period of 4 years using effective interest method.
9. With more acquisitions, at the end of the year, HSL has investments in
2 subsidiaries, 3 associates and 1 joint venture. Which of the following
statements is correct in relation to accounting of these investments in
separate financial statements?
(a) HSL is required to measure all such investments at cost.
(b) HSL has an option to account for the investments in associates
and joint ventures using equity method of accounting and carry
the investments in subsidiaries at cost.
(c) HSL has an option for each investment to measure either at cost
or in accordance with Ind AS 109.
(d) HSL has an option to measure all such investments either at cost
or in accordance with Ind AS 109. The option is available for
each category of investments separately (i.e. subsidiaries,
associates and joint venture).
10. With respect to the SPA entered by HSL, determine the date when HSL
gained control over FM Limited
(a) 1st June, 20X2.
(b) 15th June, 20X2.
(c) On the date of AGM/EGM
(d) On the date when the resolution for AGM/EGM is issued.

Ind AS 103 ‘Business Combinations’

11. On 1st April 20X1, Pride Limited acquired 30% of the ordinary shares of
Famous Limited for ` 4,000 crores. Pride Limited accounts for its
investment in Famous Limited using the equity method as prescribed
under Ind AS 28. On 31st March 20X2, Pride Limited recognized its
share of the net asset changes of Famous Limited using equity method
accounting as follows:

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Share of profit ` 350 crore

Share of exchange difference in OCI ` 50 crore
Share of revaluation reserve of PPE in OCI ` 25 crore

The carrying amount of the investment in the associate on

31st March 20X2 is therefore ` 4,425 crore (4,000 + 350 + 50 + 25).
On 1st April 20X2, Pride Limited acquired the remaining 70% of
Famous Limited for cash ` 12,500 crore.
The following additional information is relevant at that date:
Fair Value of 30% interest in Famous Limited as on ` 4,500 crore
1st April 20X2
Fair Value of Net Identifiable Assets of ` 15,000 crore
Famous Limited as on 1st April 20X2

You are required to

(i) Determine the acquisition date for Pride Ltd.
(ii) Determine the gain on previously held interest in Pride Ltd. and
suggest the accounting treatment on acquisition date as per
Ind AS 103.
(iii) Compute the amount of goodwill arising on the acquisition of
Famous Ltd.
(iv) Pass necessary journal entry on the acquisition date.
Professional and Ethical Duty of a Chartered Accountant
12. Astra Ltd. is a listed entity which operates in the defence and fibre
optics sector. It supplies fibre optic cables and racks in the domestic
country. This activity is only a trading activity for Astra Ltd. as it
procures goods from pre-approved suppliers, and after inspection,
sells the goods to IT companies. The sale contract requires Astra Ltd.
to deliver these goods to the IT companies’ locations (i.e., delivery on
site). Payment terms are 30 days after the invoice date to Astra Ltd.

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Ms. Suparna Dasgupta, a chartered accountant, has recently joined

Astra Ltd. as the Head of the Finance Department.
The Chief Operating Officer (also the executive director) of Astra Ltd. is
Ms. Padmaja Srinivasan, a mechanical engineer with an MBA from
Harvard University, who rose through the ranks through her excellent
skills in project management, marketing, and customer management.
Her remuneration includes a bonus computed as a percentage of
turnover achieved during the year, and an additional incentive for
achieving an EBITDA in excess of 15% of turnover.
Astra Ltd. has sold fibre optic cables amounting to ` 2 crores (invoice
dated 31st March 20X2) to Ethernet Bullet Ltd., a company providing
high-speed internet connectivity services through fibre optic cables as
well as dedicated leased lines. The service unit of Ethernet Bullet Ltd.
is located next to the factory of Astra Ltd. Though the goods were not
moved to Ethernet Bullet Ltd.’s service unit, Astra Ltd. recognized the
sale for the year, based on the contention that the service unit is
adjacent, and hence the transfer can happen within few minutes.
The annual results are due for board approval, for the year ending
31st March, and require the sign-off of Ms. Suparna Dasgupta.
Ms. Suparna Dasgupta has been given a 40% increment on joining
Astra Ltd., which enables her to comfortably pay off her housing loan
mortgage every month. Additionally, she is also given perquisites in
the form of business class travel, an exclusive chauffeur-driven car and
stock options of the company. Accordingly, she has stated that she
cannot afford to lose this job as the salary and perquisites are among
the best in the country.
Ms. Padmaja Srinivasan has communicated to Ms. Suparna Dasgupta
that many more benefits will accrue if she agrees to present the
numbers without any modifications. She has also said that the
company would not hesitate to replace Ms. Suparna Dasgupta should
she disagree with the contentions above.

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Required:
Discuss the potential conflicts which are arising in the above scenario
and the ethical principles that would guide Ms. Suparna Dasgupta in
responding to the situation.
Ind AS 22 ‘Income Taxes’
13. Joy Ltd. wishes to calculate tax base of its assets and liabilities as on
31st March 20X5. The Balance Sheet has been adjusted by current tax
expense.
Summarised Balance Sheet as on 31st March 20X5:

ASSETS `
Non-current Assets
Property, Plant and Equipment 12,00,000
Intangible Assets-Product Development Costs 60,000
Investment in Subsidiary - Pall Ltd. 4,40,000
Current Assets
Trade Investments 2,08,000
Trade Receivables 6,26,000
Inventories 3,04,000
Cash and Cash Equivalents 1,80,000
TOTAL ASSETS 30,18,000
EQUITY & LIABILITIES `
Equity
Share Capital 12,00,000
Accumulated Profits 7,37,438
Revaluation Surplus 88,000
Non-current Liabilities
Deferred Income - Government Grants 40,000
Liability for Product Warranty Costs 16,000

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Deferred Tax Liability (From 20X3-20X4) 22,162

Current Liabilities
Trade Payables 7,64,000
Health Care Benefits for Employees 70,000
Current Tax Liability 80,400
TOTAL EQUITY & LIABILITIES 30,18,000

Notes:
(a) Depreciation expense for the year 20X4-20X5 allowable in
accordance with tax laws is ` 2,06,000. Accounting depreciation
included in operating costs is ` 1,70,000. Cost of PPE is
` 16,00,000 and Joy Ltd has deducted expenses of ` 4,16,000 in
its tax returns prior to the financial year 20X4-20X5. Moreover, as
on 31st March 20X5, Joy Ltd for the first time revalued its
property, plant and equipment to fair value of ` 12,00,000
(revaluation surplus = ` 88,000).
(b) In 20X1-20X2, Joy Ltd incurred product development costs of
` 1,00,000. These costs were recognized as an asset and being
amortized over useful period of 10 years. For tax purposes,
Joy Ltd deducted full product development costs in 20X1-20X2.
(c) Trading investments were acquired in 20X3-20X4 with cost of
` 2,30,000. These investments are classified at fair value through
profit and loss and thus recognized at their fair value. Fair value
adjustments are not tax deductible.
(d) Bad debt provision amounts to ` 1,30,000 and relates to
2 debtors:
o Debtor A - ` 80,000 (receivable originated in 20X2-20X3
and 100% provision was recognized in 20X3-20X4) and
o Debtor B - ` 50,000 (receivable originated in 20X3-20X4 and
100% provision was recognized in 20X4-20X5).
Tax law allows deduction of 20% of provision for debtors overdue
for more than 1 year, another 30% for debtors overdue for more

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than 2 years and remaining 50% for debtors overdue for more
than 3 years.
(e) Joy Ltd accounts for inventory obsolescence provision. New
provision created in 20X4-20X5 was ` 10,800 (total provision:
` 18,000). This provision is not tax deductible, as it is a general
provision.
(f) Government grants are not taxable. Government grant received
in 20X4-20X5 is appearing in the balance sheet.
(g) In 20X4-20X5, Joy Ltd made a further provision for product
warranty of ` 5,000. Such provisions for product warranty costs
are not tax deductible until the claims are paid or settled. During
the year 20X4-20X5, warranty claims were paid/settled for
` 6,200.
(h) During the year 20X4-20X5, Joy Ltd has introduced health care
benefits for employees. The expenses are allowable as deduction
in tax only when benefits are paid but in line with Ind AS 19, such
liability is recognized in profit or loss when employees provide
service.
Calculate temporary differences and deferred tax for Joy Ltd as on
31st March 20X5 assuming the tax rate is 32%.
Ind AS 23 ‘Borrowing Costs’
14. PQR Limited is engaged in Tourism business in India. The company
has planned to construct a Holiday Resort (Qualifying Asset) at Shimla.
The cost of the project has been met out of borrowed funds of
` 100 lakhs at the rate of 12% p.a. ` 40 lakhs were disbursed on
1st April 20X2 and the balance of ` 60 lakhs were disbursed on
1st June 20X2. The site planning work commenced on 1st June 20X2,
since the Chief engineer of the project was on medical leave. The
company commenced physical construction on 1st July 20X2 and the
work of construction continued till 30th September 20X2 and thereafter
the construction activities stopped due to landslide on the road which
leads to construction site. The road blockages have been cleared by
the government machinery by 31st December 20X2. Construction

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activities have resumed on 1st January 20X3 and has completed on 28th
February 20X3.
The date of opening has been scheduled for 1st March 20X3, but
unfortunately, the District Administration gave permission for opening
on 16th March 20X3, due to lack of safety measures like fire
extinguishers which had not been installed by then.
Determine the amount of borrowing cost to be capitalized towards
construction of the resort when
(i) Landslide is not common in Shimla and delay in approval from
District Administration Office is minor administrative work
leftover.
(ii) Landslide is common in Shimla and delay in approval from
District Administration Office is major administrative work
leftover.
Ind AS 10 ‘Events Occurring After the Balance Sheet Date’ and
Ind AS 109 ‘Financial Instruments’
15. The company has made sales of ` 60,00,000 to a customer SS LLP on
31st December 20X2. The normal credit is for one month. However,
sometimes, it goes upto 2 months. The company expects to receive
the payment by 28th February 20X3. However, no payment has been
received till 31st March 20X3. On 15th April 20X3, the sales department
of the company became aware that the customer is passing through
financial crisis and has major cash flow problems.
The company has agreed to allow the customer to settle the debt by
31st March 20X4, by which time the customer is confident that the
cashflow problem will be resolved.
The company expects that an annual interest of 9% (i.e. effective
interest rate) can be received against any money lent out, yet it
allowed the customer an interest-free payment period.
Determine the amount to be shown as 'trade receivable' from SS LLP in
the books of the company as on 31st March 20X3.

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Ind AS 2 ‘Inventories’
16. B Limited has valued its Stock held for distribution as free items on
claim by customers (on offers) at zero. Customers have a right to claim
the free item within 14 days from date of invoice. If the time limit of
14-day exceeds, the claim is foregone by the customer.
The majority of the free items require online registration by the buyers
for participation in the contest conducted by the respective brand
which needs to be done by the buyers within 3 days from the date of
invoice.
Out of it, a few items under this category were found damaged. The
replacement cost of such items would be ` 2,50,000.
Determine whether the entity has to book loss of inventory or provide
for replacement cost of the goods that need to be given as free items
to customers as per the principles of Ind AS.
Ind AS 7 ‘Statement of Cashflows’
17. Following is the Balance Sheet of Mars Ltd: ` in Lakhs

Particulars 31.3.20X3 31.3.20X2

ASSETS
Non-Current Assets
Property, Plant and Equipment 450 410
Intangible asset 90 90
Deferred Tax Asset (net) 45 45
Other Non-current Asset 95 85
Total Non-current Assets 680 630
Current Assets
Financial Asset
Investments 100 60
Trade Receivables 580 600

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Cash and Cash Equivalents 300 300

Inventories 800 700
Other Current Assets 160 120
Total Current Assets 1,940 1,780
Total Assets 2,620 2,410
Equity and Liabilities
Equity
Equity Share Capital 280 250
Other Equity 980 820
Total Equity 1,260 1,070
Non-current Liabilities
Financial Liabilities
Borrowings 360 300
Other Non-current Liabilities 90 80
Total Non-current Liabilities 450 380
Current Liabilities
Financial Liabilities
Trade Payable 455 450
Bank Overdraft 410 420
Other current liabilities 45 90
Total Current Liabilities 910 960
Total Liabilities 1,360 1,340
Total Equity and Liabilities 2,620 2,410

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Additional Information:
(a) Profit before tax for the year is ` 200 lakhs and provision for tax
is ` 40 lakhs.
(b) Property, Plant and Equipment purchased during the year
` 100 lakhs.
(c) Current liabilities include Capital creditors of ` 25 lakhs as at
31st March 20X3 (Nil – 31st March 20X2)
(d) Long Term Borrowings raised during the year ` 120 lakhs.
From the information given, prepare a Statement of Cash Flows
following Indirect Method. Assume that Bank overdraft is an integral
part of the entity’s cash management.
Ind AS 115 ‘Revenue from Contracts with Customers’
18. A property sale contract includes the following:
(a) Common areas
(b) Construction services and building material
(c) Property management services
(d) Golf membership
(e) Car park
(f) Land entitlement
Whether they could be considered as separate performance
obligations as per the requirements of Ind AS 115?
Ind AS 110 ‘Consolidated Financial Statements’
19. At the beginning of its current financial year, AB Limited holds 90%
equity interest in BC Limited.
During the financial year, AB Limited sells 70% of its equity interest in
BC Limited to PQR Limited for a total consideration of ` 56 crore and
consequently loses control of BC Limited.
At the date of disposal, fair value of the 20% interest retained by
AB Limited is ` 16 crore and the net assets of BC Limited are fair valued
at ` 60 crore.

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These net assets include the following:

(a) Debt investments classified as fair value through other
comprehensive income (FVOCI) of ` 12 crore and related FVOCI
reserve of ` 6 crore.
(b) Net defined benefit liability of ` 6 crore that has resulted in a
reserve relating to net measurement losses of ` 3 crore.
(c) Equity investments (considered not held for trading) of
` 10 crore for which irrevocable option of recognising the
changes in fair value in FVOCI has been availed and related
FVOCI reserve of ` 4 crore.
(d) Net assets of a foreign operation of ` 20 crore and related
foreign currency translation reserve of ` 8 crore.
In consolidated financial statements of AB Limited, 90% of the above
reserves were included in equivalent equity reserve balances, with the
10% attributable to the non-controlling interest included as part of the
carrying amount of the non-controlling interest.
What would be the accounting treatment on loss of control in the
consolidated financial statements of AB Limited?
Ind AS 102 ‘Share-Based Payments’
20. Fashion India Ltd. (FIL) entered into an agreement with RFD Ltd. on
10th August, 20X2 for purchasing a machinery. The agreement has a
clause that FIL will have to settle the consideration of machinery
purchased by issuing its equity shares. FIL agreed to the clause and
the order was confirmed. Machinery was supplied vide invoice dated
25th October, 20X2 and delivered on 1st November, 20X2. Agreed
purchase consideration was ` 150 Lakhs and the fair value of the
machinery supplied was estimated to be ` 160 Lakhs. As agreed, FIL
issued 1,00,000 equity shares of face value ` 100 each to RFD Ltd.
As per Ind AS 102 ‘Share Based Payment’, what should be the price and
the date for recording the machinery purchased from RFD Ltd.?

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SUGGESTED ANSWERS/HINTS

Answer to Case Scenario I

1. Option (d): Initial estimate of the costs of dismantling and removing
the item and restoration of site of ` 1.36 lakhs

Reason:
As per para 16(c) of Ind AS 16, elements of cost of PPE includes 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.

2. Option (b): ` 170 lakhs

Reason:
Cash flow from operating activities – Indirect method

Particulars ` in lakhs
Net Income after taxes 120
Add /(Less) No- cash or non-operating item:
Depreciation 25
Profit from sale of land (2)
Tax charges for the year (deferred tax liabilities) 15
158
Decrease in accounts receivables 20
Increase in inventory (10)
Increase in accounts payable 7
Decrease in wages payable (5)
Cash flow from operations 170

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3. Option (b): Provision of ` 1.6 lakhs should be recognized with a

corresponding charge to profit or loss.

Reason:
In accordance with Ind AS 37 ‘Provisions, Contingent Liabilities and
Contingent Assets’, the claim made by the customer needs to be
recognised as a liability in the financial statements for the year ended
31st March 20X3.
The standard stipulates that a provision should be made when, at the
reporting date:
– An entity has a present obligation arising out of a past event.
– There is a probable outflow of economic benefits.
– A reliable estimate can be made of the outflow.
Since, all three of the above conditions are satisfied here, a provision is
required to be made.
The provision should be measured at the amount the entity would
rationally pay to settle the obligation at the reporting date.
Where there is a range of possible outcomes, the individual most likely
outcome is often the most appropriate measure to use.
In this case, a provision of ` 1.6 lakhs seems appropriate, with a
corresponding charge to profit or loss.
4. Option (c): ` 1.76 lakhs; ` 1.42 lakhs
5. Option (a): ` 13.26 lakhs
Reason for 4 & 5:
Statement showing computation of cost of production line

Particulars ` in lakhs
Purchase cost 10.00
GST – recoverable goods and services tax not included -
Employment costs during the period of getting the 0.80
production line ready for use [(1.2/3 month) x 2 month]

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Other overheads – abnormal costs of ` 0.3 lakhs has 0.60

been excluded (0.90- 0.30)
Payment to external advisors – directly attributable 0.50
cost
Dismantling costs – recognized at present value
(2 lakhs x 0.68) 1.36
Total 13.26

Provision for dismantling cost carried to Balance Sheet

Particulars ` in lakhs
Non-current liabilities (` 2 lakhs x 0.68) 1.36
Add: Finance cost (1.36 x 5% x 10/12) 0.06
Net book value – carried to Balance Sheet 1.42

Extract of Statement of Profit and Loss

Particulars ` in lakhs
Depreciation (W.N.) 1.70
Finance cost (1.36 x 5% x 10/12) 0.06
Amounts carried to Statement of Profit & Loss 1.76

Working Note:
Calculation of depreciation charge

Particulars ` in lakhs
The asset is split into two depreciable components out
of the total capitalization amount of 13.26 lakhs:
• Depreciation for ` 3 lakhs with a useful economic
life of four years (3 lakhs x ¼ x 10/12). 0.63
(This is related to a major overhaul to ensure that
it generates economic benefits for the second half
of its useful life)

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• Depreciation for ` 10.26 lakhs (13.26 – 3.00) with a

useful economic life of eight years will be:
` 10.26 lakhs x 1/8 x 10/12 1.07
Total depreciation to be charged to Statement of
Profit and Loss for the year ended 31st March 20X3 1.70

Answer to Case Scenario II

6. Option (c): ` 8,16,000

Reason:
As per para 10 of Ind AS 28, under the equity method, on initial
recognition the investment in an associate or a joint venture is
recognised at cost, and the carrying amount is increased or decreased
to recognise the investor’s share of the profit or loss of the investee
after the date of acquisition.
Accordingly,
Cost of investment for 40% stake on acquisition date ` 8,00,000
Add: Share of post-acquisition profit and loss (50,000 x 40%) ` 20,000
Less: Share of post-acquisition loss due to additional
depreciation [{(5,00,000 – 3,00,000)/20} x 40%] (` 4,000)
` 8,16,000

7. Option (d): Trade discount, cash discount and value of voucher shall
be reduced from revenue

Reason
Discounts and vouchers are incentives given to customers. For
Incentives, Paragraph 70 of Ind AS 115, inter-alia, states that
consideration payable to a customer includes cash amounts that an
entity pays, or expects to pay, to the customer (or to other parties that
purchase the entity’s goods or services from the customer).
Consideration payable to a customer also includes credit or other items
(for example, a coupon or voucher) that can be applied against
amounts owed to the entity (or to other parties that purchase the

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entity’s goods or services from the customer). An entity shall account

for consideration payable to a customer as a reduction of the
transaction price and, therefore, of revenue.
Therefore, cash incentives (payments given to the customer) would be
considered as a reduction in the transaction price and in the
measurement of revenue when the goods are delivered.
8. Option (c): A proportion of ` 1,58,419 shall be reduced from equity
and balance of ` 41,581 shall be recognised as interest cover over the
period of 4 years using effective interest method

Reason
Compulsory convertible debentures with annual interest payout is a
compound financial instrument. As per the information given in the
question the liability element to be initially recognised is ` 20,79,063.
Hence the equity element would be ` 79,20,937 (1,00,00,000 –
20,79,063). Transaction cost of ` 2,00,000 will be apportioned in equity
and liability component in the ratio of 79,20,937 : 20,79,063, which
would be as follows:
Transaction cost attributable to equity = 2,00,000 x (79,20,937 /
1,00,00,000) = ` 1,58,419
Transaction cost attributable to liability = 2,00,000 x (20,79,063 /
1,00,00,000) = ` 41,581

9. Option (d): HSL has an option to measure all such investments either
at cost or in accordance with Ind AS 109. The option is available for
each category of investments separately (i.e. subsidiaries, associates
and joint venture)

Reason
As per para 10 of Ind AS 27, when an entity prepares separate financial
statements, it shall account for investments in subsidiaries, joint
ventures and associates either: (a) at cost, or (b) in accordance with
Ind AS 109. The entity shall apply the same accounting for each
category of investments.

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In the present case, investment in subsidiaries, associates and joint

ventures are considered to be different categories of investments.
Further, Ind AS 27 requires accounting for the investment in
subsidiaries, joint ventures and associates either at cost, or in
accordance with Ind AS 109 for each category of Investment. Thus, an
entity can carry its investments in subsidiaries at cost and its
investments in associates or joint ventures as financial assets in
accordance with Ind AS 109 in its separate financial statements.
10. Option (a): 1st June, 20X2

Reason
Paragraph 10 of Ind AS 110 ‘Consolidated Financial Statements’, states
that an investor has power over an investee when the investor has
existing rights that give it the current ability to direct the relevant
activities, i.e. the activities that significantly affect the investee’s
returns.
As per the facts given in the question, HSL. has 15 days to exercise the
option to purchase 25% additional stake in FM Ltd. which will give it
majority voting rights of 55% (30% + 25%). This is a substantive
potential voting rights which is currently exercisable.
Further, the decisions on relevant activities of FM Ltd. are made in
AGM / EGM. An AGM / EGM can be called by giving atleast 21 days
advance notice. A resolution in AGM / EGM is passed when more than
50% votes are casted in favour of the resolution. Thus, the existing
shareholders of FM Ltd. are unable to change the existing policies over
the relevant activities before the exercise of option by HSL. HSL can
exercise the option and get voting rights more than 50% at the date of
AGM / EGM. Accordingly, the option contract gives HSL the current
ability to direct the relevant activities even before the option contract
is settled. Therefore, HSL controls FM Ltd. as at 1st June, 20X2.

11. (i) Acquisition date for accounting of business combination is

The date on which the acquirer obtains control of the acquiree is
generally the date on which the acquirer legally transfers the
consideration, acquires the assets and assumes the liabilities of
the acquiree. In the given case, the acquisition date is

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1st April, 20X2 i.e. when Pride Ltd. acquired 100% holding of
Famous Ltd.
(ii) Computation of gain on previously held interest
An entity shall discontinue the use of the equity method from the
date when its investment ceases to be an associate or a joint
venture. If the investment in an associate becomes a investment
in a subsidiary, the entity shall account for its investment in
accordance with Ind AS 103 and Ind AS 110.
Ind AS 103 provides that in a business combination achieved in
stages, the acquirer is required to remeasure the previously held
equity interest at its acquisition date fair value and recognise any
gain or loss in profit or loss or other comprehensive income, as
appropriate. In prior reporting periods, the acquirer may have
recognised changes in the value of its equity interest in the
acquiree in other comprehensive income. If so, the amount that
was recognised in the other comprehensive income shall be
recognised on the same basis as would be required if the
acquirer had disposed directly of the previously held equity
interest.
The gain on previously held equity interest in Famous Ltd. is
calculated as follows:

Fair value of 30% interest as on 1st April, 20X2 ` 4,500 crore

Carrying value of 30% investment as on (` 4,425 crore)

31st March, 20X2

Gain on previously held interest ` 75 crore

Unrealised gain previously recognised in OCI ` 50 crore

Total gain recognised in Profit and loss ` 125 crore

(iii) Computation of goodwill

For 70% share

For 30% share

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Total amount of purchase consideration ` 17,000 crore

Less: Fair value of net identifiable assets (` 15,000 crore)

Goodwill ` 2,000 crore

(iv) Journal Entry on 1st April, 20X2

` in crore
Net Identifiable Assets Dr. 15,000
Goodwill (W.N.1) Dr. 2,000
Foreign currency translation reserve Dr. 50
PPE revaluation reserve Dr. 25
To Cash 12,500
To Investment in Associate – Famous 4,425
Ltd.
To Retained Earnings (W.N.) 25
To Gain on previously held interest 125
recognised in profit and loss (Refer
point (ii) above)

Working Note:
The credit to retained earnings represents the reversal of the
unrealised gain of ` 25 crore in OCI related to the revaluation of PPE.
In accordance with Ind AS 16, this amount is not reclassified to profit
or loss.
12. Presentation of Revenue numbers:
Ind AS 115 ‘Revenue from Contracts with Customers’ requires revenue
to be recognized only on satisfaction of the performance obligations
under the contract. It is crucial that the performance obligations be
identified at the commencement of the contract, so that the trigger
points for revenue recognition become identifiable.
Management would always have an incentive to present higher
revenue numbers. In the given case, the fact that the COO is given an
incentive for revenues and EBITDA indicates that revenue is a potential

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area for material misstatement, given the personal interest of the COO
in the same.
The sale of fibre optic cable cannot be recognized on 31 st March 20X2
as the goods are not yet transferred to the customer Ethernet Bullet
Ltd.’s factory premises, which is one of the critical obligations of
Astra Ltd. The contention of the COO that it takes merely a few
minutes to shift the goods, and hence the sale can be recognized does
not hold true. One can always cross-question as to why the movement
of goods did not happen, if it was merely a few minutes job. It could
be a possibility that the goods may not be packed, or there may still be
some pending inspection of the goods before transferring the same
etc. In view of this, the performance obligation under this contract has
not been completed, and hence booking the revenue has resulted in an
overstatement of revenue by ` 2 crores, and a consequent inflation of
profits, assuming that Astra Ltd. is making profit on this sale
transaction. Additionally, booking this sale has resulted in an
understatement of inventory as at the reporting date of
31st March 20X2.
In view of the above, multiple conflicts of interest arise for Ms. Suparna
Dasgupta:
(a) Pressure to present favourable revenue figures and chartered
accountant’s personal circumstances
The chartered accountant is under pressure to present favourable
numbers, notably in favour of the COO, thereby increasing the
incentives to the COO, and in turn benefiting with the continued
job prospects. Thus, the ethical and professional standards
required of the accountant are at odds with the pressures of her
personal circumstances.
(b) Duty to stakeholders
The directors have a duty to act in the best interests of the
company’s stakeholders. While higher revenue numbers do
indicate a good growth trajectory of the company, recognizing
the revenue before fulfilling the performance obligations, or
incorrectly booking grant income as revenue, results in

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misleading the stakeholders about the actual performance of the

entity, thereby actually becoming detrimental to the
stakeholders.
Ethical principles guiding the chartered accountant’s response
By exhibiting bias in reporting higher revenue figures due to the risk of
losing the job, objectivity stands compromised. Knowingly disclosing
incorrect information compromises integrity, and erring in complying
with Ind AS requirements, though continuing to report so in the
financial statements, results in displaying absence of professional
competence.
Appropriate action
In the given case, the chartered accountant faces an ethical dilemma,
and must apply her moral and ethical judgment. As a professional, she
is responsible for presenting the truth, and to avoid indulging in
‘creative accounting practices’ due to pressure.
The chartered accountant accordingly must put the interests of the
company and professional ethics first and insist that the financial
statements represent correct revenue numbers, in compliance with the
relevant Ind AS. Being an advisor to the directors, she must prevent
deliberate misrepresentation / fraudulent financial reporting,
regardless of the personal consequences. The accountant should not
allow any undue influence from the directors to override her
professional judgment or integrity. This is in the long-term interests of
the company,
Further, knowingly providing incorrect information is regarded as
professional misconduct. To prevent such misconduct, the chartered
accountant should not sign off on the financial statements containing
incorrect financial information. By adhering to the ethical principles,
the chartered accountant will maintain her professional integrity and
contribute to the trust and reliability placed in the work expected from
her.
However, if she signs the financial statements containing the inflated
revenue numbers, Ms. Suparna Dasgupta would be guilty of

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professional misconduct under Clause I of Part II of Second Schedule

to the Chartered Accountants Act, 1949. The Clause states that a
member of the Institute, whether in practice or not, shall be guilty of
professional misconduct, if he contravenes any of the provisions of this
Act or the regulations made thereunder, or any guidelines issued by
the Council. As per the Council guidelines, a member of the Institute
who is an employee shall exercise due diligence and shall not be
grossly negligent in the conduct of his duties.
13. Calculation of temporary differences and deferred tax for Joy Ltd.
as on 31st March, 20X5 Amount in `

Item Carrying Tax Temporar Taxable/ DTA /

amount base y Deductible (DTL) at
Difference 32%

Property Plant & 12,00,000 9,78,000 2,22,000 Taxable (71,040)

Equipment (W.N.1)

Product
Development
Costs 60,000 0 60,000 Taxable (19,200)

Trading
investments 2,08,000 2,30,000 (22,000) Deductible 7,040

Trade receivables 6,26,000 7,06,000 (80,000) Deductible 25,600

(W.N.2)

Inventories 3,04,000 3,22,000 (18,000) Deductible 5,760

Deferred income
– Government
grants (40,000) 0 (40,000) Excluded 0

Liability for
product warranty
costs (16,000) 0 (16,000) Deductible 5,120

Health care
benefits for

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employees (70,000) 0 (70,000) Deductible 22,400

Total Deferred
Tax Asset 65,920

Total Deferred
Tax Liability (90,240)

Net Deferred Tax

Liability (24,320)

Working Notes:
1. Property Plant & Equipment as per tax records

`
Cost of PPE 16,00,000
Less: Current tax depreciation (2,06,000)
Less: Previous year tax depreciation (4,16,000)
Tax base 9,78,000

2. Trade receivables – Provision for doubtful debts:

`
Calculation of cost for tax records
Carrying amount 6,26,000
Add back: Bad debt provision 1,30,000
Cost A 7,56,000
Debtor A – ` 80,000 from 20X2-20X3
 1 year – 20% deducted in 20X3-20X4 16,000
 2 years – 30% deducted in 20X4-20X5 24,000
Already deducted for tax 40,000
Debtor B- ` 50,000 from 20X3-20X4
 1 year – 20% deducted in 20X4-20X5 10,000
Total deduction for tax purpose B (50,000)
Tax base of trade receivables A-B 7,06,000

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14. As per Ind AS 23 ‘Borrowing Costs’, the commencement date for

capitalisation of borrowing cost on qualifying asset is the date when
the entity first meets all of the following conditions:
(a) it incurs expenditures for the asset;
(b) it incurs borrowing costs; and
(c) it undertakes activities that are necessary to prepare the asset for
its intended use or sale.
Further, an entity also does not suspend capitalising borrowing costs
when a temporary delay is a necessary part of the process of getting
an asset ready for its intended use or sale. For example, capitalisation
continues during the extended period that high water levels delay
construction of a bridge, if such high-water levels are common during
the construction period in the geographical region involved.
An entity shall cease capitalising borrowing costs when substantially all
the activities necessary to prepare the qualifying asset for its intended
use or sale are complete.
Further, paragraph 23 explains that an asset is normally ready for its
intended use or sale when the physical construction of the asset is
complete even though routine administrative work might still continue.
If minor modifications, such as the decoration of a property to the
purchaser’s or user’s specification, are all that are outstanding, this
indicates that substantially all the activities are complete.
In the given case since the site planning work started for the project on
1st June, 20X2, the commencement of capitalisation of borrowing cost
will begin from 1st June, 20X2.
(i) When landslide is not common in Shimla and delay in
approval from District Administration Office is minor
administrative work leftover
In such a situation, suspension of capitalisation of borrowing cost
on construction work will be considered for 3 months i.e. from
October, 20X2 to December, 20X2 and cessation of capitalisation

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of borrowing cost shall stop at the time of completion of physical

activities.
Accordingly, the borrowing cost to be capitalized will be
effectively for 6 months i.e. from 1st June, 20X2 to
30th September, 20X2 and then from 1st January, 20X3 to
28th February, 20X3 i.e. total 6 months. The amount of borrowing
cost will be ` 6,00,000 (1,00,00,000 x 6/12 x 12%).
(ii) When landslide is common in Shimla and delay in approval
from District Administration Office is major administrative
work leftover
Since landslides are common in Shimla during monsoon period,
there shall be no suspension of capitalisation of borrowing cost
during that period.
Further, an asset can be considered to be ready for its intended
use only on receipt of approvals and after compliance with
regulatory requirements such as “Fire Clearances” etc. These are
very important to declare the asset as ready for its scheduled
operation.
In the given case, obtaining the safety approval is a necessary
condition that needs to be complied with strictly and before
obtaining the same the entity will not be able to use the building.
Accordingly, it is appropriate to continue capitalisation until the
said approvals are obtained.
Hence, the capitalisation of the borrowing cost will be for 9.5
months i.e. from 1st June, 20X2 till 15th March, 20X3. The amount
of borrowing cost will be ` 9,50,000 (1,00,00,000 x 9.5/12 x 12%).
15. Ind AS 10 ‘Events after the Reporting Date’, classify an event as
adjusting if it provides additional evidence of conditions existing at the
reporting date. In this case the additional information relates to
evidence of impairment of a financial asset, since the customer had
financial difficulties prior to 31st March 20X3.
Ind AS 109 ‘Financial Instruments’ requires financial assets to be
reviewed at each reporting date for evidence of impairment. Such

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evidence exists here because although the customer is expected to pay

the amount due the payment date has been deferred. As per para
B5.5.33 of Ind AS 109, for a financial asset that is credit-impaired at the
reporting date, but that is not a purchased or originated credit-
impaired financial asset, an entity shall measure the expected credit
losses as the difference between the asset’s gross carrying amount and
the present value of estimated future cash flows discounted at the
financial asset’s effective interest rate. Any adjustment is recognized in
the profit or loss as an impairment gain or loss. Further, para B5.5.44
of Ind AS 109 provides that expected credit losses shall be discounted
to the reporting date, not to the expected default or some other date,
using the effective interest rate determined at initial recognition or an
approximation thereof.
In such circumstances, Ind AS 109 requires that the financial asset be
re-measured at the present value of the expected future receipt,
discounted (in the case of a trade receivable) using effective interest
rate. Therefore, in the financial statements for the year ended
st
31 March 20X3, asset should be measured at ` 55,04,587 (` 60,00,000
/ 1.09) and an impairment loss of ` 4,95,413 (` 60,00,000 – ` 4,95,413)
recognised in profit and loss.
In the year ended 31st March 20X4, interest income of ` 4,95,413
(` 55,04,587 x 9%) should be recognised in the profit and loss.
16. Ind AS 2 deals with write-off in value of inventory. The stock of free
items is valued at zero by the company. The question of “Loss of
Inventory ` 2,50,000” does not arise as the claim of free stock is subject
to various conditions like claim within 14 days, online registration
within 3 days, etc. which are all contingent in nature.
However, provision is to be made for goods to be distributed in case
claims from customers are received since the customer can claim the
free items within 14 days from the date of invoice. Hence provision of
` 2,50,000 is to be made for.

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17. Statement of Cash Flows for the year ended 31 st March, 20X3

(` in (` in
lakhs) lakhs)
Cash flows from operating activities
Profit before taxation 200
Adjustments for non-cash items:
Depreciation [410 - (450 - 100)] 60
260
Increase in inventories (800 - 700) (100)
Decrease in trade receivables (600 - 580) 20
Increase in other non-current assets (95 - 85) (10)
Increase in other current assets (160 - 120) (40)
Increase in non-current liabilities (90 - 80) 10
Increase in trade payables (455 – 25 - 450) (20)
Other current liabilities (Refer Note 1)
[(90 + 40) - 45] (85)
Net cash generated from operating activities 35
Cash flows from investing activities
Cash paid to purchase PPE (100-25) (75)
Cash paid to acquire investment (100-60) (40)
Net cash outflow from investing activities (115)
Cash flows from financing activities
Raising of equity share capital (280 - 250) 30
Long-term borrowings raised during the year 120
Long-term borrowings repaid during the year
[(300 + 120) - 360] (60)
Net cash outflow from financing activities 90
Increase in cash and cash equivalents during

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the year 10
Cash and cash equivalents at the beginning of
the year (420-300) (Refer Note 2) (120)
Cash and cash equivalents at the end of the
year (410-300) (Refer Note 2) (110)

Note: Other current liabilities are assumed to consist of provision for

taxation.
18. Paragraph 22 of Ind AS 115 provides that at contract inception, an
entity evaluates the promised goods or services to determine which
goods or services (or bundle of goods or services) are distinct and
therefore constitute a performance obligation.
A performance obligation is a promise in a contract to transfer to the
customer either:
- a goods or service (or a bundle of goods or services) that is
distinct; and
- series of distinct goods or services that are substantially the same
and that have the same pattern of transfer to the customer.
As per paragraph 27 of Ind AS 115, a goods or service that is promised
to a customer is distinct if both of the following criteria are met:
(a) the customer can benefit from the goods or service either on its
own or together with other resources that are readily available to
the customer (i.e. the goods or service is capable of being
distinct); and
(b) the entity’s promise to transfer the goods or service to the
customer is separately identifiable from other promises in the
contract (i.e. the promise to transfer the goods or service is
distinct within the context of the contract).
Each performance obligation is required to be accounted for
separately. The facts and circumstances of each contract should be
carefully considered to determine the performance obligations.

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However, based on the above guidance, the following table in general

discusses whether the common goods and services in property sale
contract should be considered as separate performance obligation or
not:

Goods/Service Whether a Reason

separate
performance
obligation
(PO) or not
Common areas Unlikely to be Common areas are unlikely to
separate PO be a separate PO because the
interests received in common
areas are typically undivided
interests that are not
separable from the property
itself.
However, if the common areas
were sold separately by the
developer, then they could be
considered as a separate PO
provided that it is distinct in
the context of the contract.
Construction Unlikely to be Construction services and
services and separate PO building materials can meet
building the first criterion as they are
materials items that can be used in
conjunction with other readily
available goods or services.
However, the developer would
be considered to be providing
a significant integration
service as it is bringing
together all the separate
elements to deliver a
completed building.

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Property Likely to be Property management services

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

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undivided interest in the land

on which the apartment block
sits. This type of right is
generally considered a highly
inter-related with the
apartment itself.*

*However, if title to the land is transferred to the buyer separately – for

example in a single party development – then the separately identifiable
criterion may be met.
19. Paragraph 25 of Ind AS 110 states that, “if a parent loses control of a
subsidiary, the parent:
(a) derecognises the assets and liabilities of the former subsidiary
from the consolidated balance sheet.
(b) recognises any investment retained in the former subsidiary at
its fair value when control is lost and subsequently accounts for
it and for any amounts owed by or to the former subsidiary in
accordance with relevant Ind AS. That fair value shall be
regarded as the fair value on initial recognition of a financial
asset in accordance with Ind AS 109 or, when appropriate, the
cost on initial recognition of an investment in an associate or
joint venture.
(c) recognises the gain or loss associated with the loss of control
attributable to the former controlling interest.”
Paragraph B98(c) of Ind AS 110 states that, on loss of control over a
subsidiary, a parent shall reclassify to profit or loss, or transfer directly
to retained earnings if required by other Ind AS, the amounts
recognised in other comprehensive income in relation to the subsidiary
on the basis specified in paragraph B99.
As per paragraph B99, if a parent loses control of a subsidiary, the
parent shall account for all amounts previously recognised in other
comprehensive income in relation to that subsidiary on the same basis
as would be required if the parent had directly disposed of the related
assets or liabilities. Therefore, if a gain or loss previously recognised in

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other comprehensive income would be reclassified to profit or loss on

the disposal of the related assets or liabilities, the parent shall
reclassify the gain or loss from equity to profit or loss (as a
reclassification adjustment) when it loses control of the subsidiary. If a
revaluation surplus previously recognised in other comprehensive
income would be transferred directly to retained earnings on the
disposal of the asset, the parent shall transfer the revaluation surplus
directly to retained earnings when it loses control of the subsidiary.
In view of the basis in its consolidated financial statements, AB Limited
shall:
(a) re-classify the FVOCI reserve in respect of the debt investments
of ` 5.4 crore (90% of ` 6 crore) attributable to the owners of the
parent to the statement of profit or loss in accordance with
paragraph B5.7.1A of Ind AS 109, Financial Instruments which
requires that the cumulative gains or losses previously recognised
in OCI shall be recycled to profit and loss upon derecognition of
the related financial asset. This is reflected in the gain on
disposal. Remaining 10% (i.e., ` 0.6 crore) relating to non-
controlling interest (NCI) is included as part of the carrying
amount of the non-controlling interest that is derecognised in
calculating the gain or loss on loss of control of the subsidiary.
(b) transfer the reserve relating to the net measurement losses on
the defined benefit liability of ` 2.7 crore (90% of ` 3 crore)
attributable to the owners of the parent within equity to retained
earnings. It is not reclassified to profit or loss. The remaining 10%
(i.e., ` 0.3 crore) attributable to the NCI is included as part of the
carrying amount of NCI that is derecognised in calculating the
gain or loss on loss of control over the subsidiary. No amount is
reclassified to profit or loss, nor is it transferred within equity, in
respect of the 10% attributable to the non-controlling interest.
(c) reclassify the cumulative gain on fair valuation of equity
investment of ` 3.6 crore (90% of ` 4 crore) attributable to the
owners of the same parent from OCI to retained earnings under
equity as per paragraph B5.7.1 of Ind AS 109, Financial

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Instruments, which provides that in case an entity has made an

irrevocable election to recognise the changes in the fair value of
an investment in an equity instrument not held for trading in OCI,
it may subsequently transfer the cumulative amount of gains or
loss within equity. The remaining 10% (i.e., ` 0.4 crore) related to
the NCI are derecognised along with the balance of NCI and not
reclassified to profit and loss.
(d) reclassify the foreign currency translation reserve of ` 7.2 crore
(90% × ` 8 crore) attributable to the owners of the parent to
statement of profit or loss as per paragraph 48 of Ind AS 21 ‘The
Effects of Changes in Foreign Exchange Rates’, which specifies
that the cumulative amount of exchange differences relating to
the foreign operation, recognised in OCI, shall be reclassified
from equity to profit or loss on the disposal of foreign operation.
This is reflected in the gain on disposal. Remaining 10% (i.e.,
` 0.8 crore) relating to the NCI is included as part of the carrying
amount of the NCI that is derecognised in calculating the gain or
loss on the loss of control of subsidiary, but is not reclassified to
profit or loss in pursuance of paragraph 48B of Ind AS 21, which
provides that the cumulative exchange differences relating to
that foreign operation attributed to NCI shall be derecognised on
disposal of the foreign operation, but shall not be reclassified to
profit or loss.
The impact of loss of control over BC Limited on the consolidated
financial statements of AB Limited is summarised below: (` in crore)
Particular Amount Amount P&L RE
(Dr) (Cr) Impact Impact
Gain / Loss on Disposal
on Investments
Bank 56
Non-controlling interest 6
(Derecognised)
Investment at FV (20% 16
Retained)
Gain on Disposal (P&L) 18 18

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balancing figure
De-recognition of total net 60
assets of subsidiary
Reclassification of FVTOCI
reserve on debt
instruments to profit or
loss
FVTOCI reserve on debt 5.4
instruments (6 cr. x 90%)
To Profit and loss 5.4 5.4
Reclassification of net
measurement loss reserve
to profit or loss
Reserve and Surplus 2.7 -2.7
To Net measurement 2.7
loss reserve (FVTOCI) [(3 cr.
x 90%)]
Reclassification of FVTOCI
reserve on equity
instruments to retained
earnings
FVTOCI reserve on equity 3.6
instruments (4 crux 90%)
To Reserve and Surplus 3.6 3.6
Foreign currency
translation reserve
reclassified to profit or
loss
Foreign currency 7.2
translation reserve (FVOCI)
[8 cr. x 90%]
To Profit and loss 7.2 7.2
Total 30.6 0.9

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20. As per para 10 of Ind AS 102, for equity settled share-based payment
transactions, the entity shall measure the goods or services received,
and the corresponding increase in equity, directly, at the fair value of
the goods or services received, unless that fair value cannot be
estimated reliably. If the entity cannot estimate reliably the fair value
of the goods or services received, the entity shall measure their value,
and the corresponding increase in equity, indirectly, by reference to
the fair value of the equity instruments granted. Here, since the fair
value of the asset received can be estimated reliably, the price for
recording the machinery would be ` 160 lakhs.
Further the control is assumed to be transferred on the date the
delivery is received which is 1st November, 20X2. Therefore, this will be
the date for recognizing the machinery in the books.

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FINAL PAPER 1: FINANCIAL REPORTING
Part I : Amendments applicable for November, 2023 Examination

I. Amendments to the Companies (Indian Accounting Standards) Rules, 2015 made

by MCA on 31st March, 2023 (applicable for November, 2023 examination)
MCA has issued the Companies (Indian Accounting Standards) (Amendment) Rules,
2023 to amend Companies (Indian Accounting Standards) Rules, 2015 vide notification
G.S.R. 242(E) dated 31st March, 2023. These amendments come into effect from
1st April, 2023 and is applicable for the financial year 2023 -2024 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 1 ‘Presentation of Financial Statements’ by replacing
significant account policy disclosure to material accounting policy disclosures’
 Amendment to Ind AS 8 ‘Accounting Policies, Change in Accounting Estimates
and Errors’ by replacing the definition of ‘change in accounting estimate’ to
‘accounting estimates’ and also mentioning the manner to develop and accounting
estimates by an entity.
 Amendments to Ind AS 12 ‘Income Taxes’ by adding exception to the recognition
of deferred tax liability or deferred tax assets on taxable temporary difference or
deductible temporary difference respectively.
 Amendment to Ind AS 101 ‘First Time Adoption of Indian Accounting Standards’
by narrowing the scope of Initial Recognition Exemption with regard to leases and
decommissioning obligations.
 Annual improvements to Ind AS (2022) in Ind AS 102 ‘Share-based Payments’,
Ind AS 103 ‘Business Combinations’ Ind AS 107 ‘Financial Instruments-
Disclosures’, Ind AS 109 ‘Financial Instruments’, Ind AS 15 ‘Revenue from
Contracts with the Customers’ and Ind AS 34 ‘Interim Financial Reporting’.
The key amendments to Ind AS pursuant to the Companies (Indian Accounting
Standards) (Amendments) Rules, 2023 are explained below:

Ind AS Significant amendment made in 2022

Ind AS 1, ‘Presentation Para 10 and para 114 of Ind AS 1 have been modified
of Financial Statements’ by replacing ‘significant accounting policies’ with
‘material accounting policies’.
Further, disclosure of accounting policies has been
modified and have discussed which accounting policy
information should be considered as material.
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Ind AS Significant amendment made in 2022

According to the amendment ‘Accounting policy
information’ is material when it can reasonably be
expected to influence decisions that the primary users
of general-purpose financial statements make on the
basis of those financial statements.
An entity is required to disclose, along with material
accounting policy information or other notes, the
judgements that management has made in the process
of applying the entity’s accounting policies which have
the most significant effect on the amounts recognised in
the financial statements.
Ind AS 8, ‘Accounting Definition of ‘Change in Accounting Estimate’ given in
Policies, Changes in para 5 has been replaced with the definition of
Accounting Estimates ‘Accounting Estimates’. The revised definition states as
and Errors’ follows:
“Accounting estimates are monetary amounts in
financial statements that are subject to measurement
uncertainty.”
As per the amendment, the company develops an
accounting estimate to achieve the objective set out by
the accounting policy. Developing accounting
estimates involves the use of judgements or
assumptions based on the latest available, reliable
information. Earlier examples have been replaced by
the following examples of accounting estimates:
(a) a loss allowance for expected credit losses,
applying Ind AS 109;
(b) the net realisable value of an item of inventory,
applying Ind AS 2;
(c) the fair value of an asset or liability, applying Ind
AS 113;
(d) the depreciation expense for an item of property,
plant and equipment, applying Ind AS 16; and
(e) a provision for warranty obligations, applying Ind
AS 37.
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Ind AS Significant amendment made in 2022

To develop an accounting estimate, an entity has to use
measurement techniques and inputs. Measurement
techniques include estimation techniques and valuation
techniques.
Ind AS 12, ‘Income As per the amendment, paragraphs 15 and 24 have
Taxes’ been modified by adding an exception to the recognition
of deferred tax liability or deferred tax assets on taxable
temporary difference or deductible temporary difference
respectively, arising on account of the initial recognition
of an asset or liability in a transaction which at the time
of the transaction, does not give rise to equal taxable
and deductible temporary differences.
Ind AS 101, ‘First Time Amendment has narrowed the scope of Initial
Adoption of Indian Recognition Exemption with regard to leases and
Accounting Standards’ decommissioning obligations. According to it, the entity
will need to recognise a deferred tax asset and a
deferred tax liability for temporary differences arising on
transactions such as initial recognition of a lease and a
decommissioning provision.
As per the amendment, despite Paragraphs 15 and 24
of Ind AS 12 exempt an entity from recognising a
deferred tax asset or liability in particular
circumstances, at the date of transition to Ind AS, a
first-time adopter shall recognise a deferred tax asset
— to the extent that it is probable that taxable profit will
be available against which the deductible temporary
difference can be utilised — and a deferred tax liability
for all deductible and taxable temporary differences
associated with:
(a) right-of-use assets and lease liabilities; and
(b) decommissioning, restoration and similar liabilities
and the corresponding amounts recognised as part of
the cost of the related asset.
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II. Amendments to the Companies (Corporate Social Responsibility) Rules, 2014
(issued on 20th September, 2022) is applicable for November, 2023 Examination
The Ministry of Corporate Affairs (MCA), vide a notification dated 20 th September 2022
issued the Companies (Corporate Social Responsibility) Amendment Rules, 2022.
These amendments are effective from the date of their publication in the official gazette
i.e., 20th September 2022. Some of the significant amendments notified therein are:
 Constitution of a CSR Committee by a company having any amount in its
unspent CSR account
As per the amendment, a proviso has been added under Rule 3(1), stating that a
company that has any amount outstanding in its unspent CSR account should
constitute a CSR Committee and comply with the relevant provisions of Section
135 of the Companies Act, 2013.
 Omission of Rule 3(2) of the Companies (Corporate Social Responsibility)
Rules, 2014
Rule 3(2) required that every company that ceases to fulfil the criteria prescribed
under Section 135(1) of the Companies Act, 2013 for three consecutive financial
years is not required to constitute a CSR Committee. Now as per the amendment,
this Rule 3(2) of the Companies (Corporate Social Responsibility) Rules, 2014 has
been omitted.
 Inclusion in the list of entities that can be engaged as implementation
agencies
Rule 4(1) of the Companies (Corporate Social Responsibility) Rules, 2014
provides that the Board of Directors must ensure that CSR activities can be
undertaken by a company itself or through certain implementation agencies which
were listed therein. As per the amendment, in addition to the class of companies
listed under Rule 4(1) of the Companies (Corporate Social Responsibility) Rules,
2014, new class of entities exempted under Section 10 of Clause (23C), which
may be approved by the Principal Commissioner or Commissioner, have been
included as implementation agencies. These entities are:
- Any fund or institution established for charitable purposes having regard to
the objects of the fund or institution and its importance throughout India, or
throughout any State or States,
- Any trust (including any other legal obligation), or institution wholly for public
religious purposes, or wholly for public religious and charitable purposes,
having regard to the manner in which the affairs of the trust or institution are
administered and supervised for ensuring that the income accruing thereto is
properly applied for the objects thereof,
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- Any university or other educational institution existing solely for educational
purposes and not for purposes of profit, other than those mentioned in sub-
clause (iiiab) or sub-clause (iiiad) of Clause 23(C) of the Income Tax Act,
1961, and
- Any hospital or other institution for the reception and treatment of persons
suffering from illness or mental defectiveness, or for the reception and
treatment of persons during convalescence, or of persons requiring medical
attention or rehabilitation, existing solely for philanthropic purposes and not
for purposes of profit, other than those mentioned in sub-clause (iiiac) or
sub-clause (iiiae) of Clause 23(C) of the Income Tax Act, 1961.
 Change in the limits of expenses incurred towards impact assessment studies
Earlier Rule 8 of the Companies (Corporate Social Responsibility) Rules, 2014
provides that every company having an average CSR obligation of ` 10 crore or
more in pursuance of Section 135(5) of the Companies Act, 2013 in the three
immediately preceding financial years, should undertake an impact assessment,
through an independent agency, of their CSR projects having outlays of ` 1 crore
or more, and which have been completed not less than one year before
undertaking the impact study.
Such a company may book an expenditure towards CSR for that financial year,
which should not exceed five per cent of the total CSR expenditure for that
financial year or ` 50 lakh, whichever is less.
As per the amendment, the limit to book expenditure towards impact assessment
has now been reduced to two per cent (earlier five percent) of the total CSR
expenditure for that financial year or ` 50 lakh, whichever is higher (earlier
whichever is lower).
 Revisions in Annexure II and e-form of the Companies (Corporate Social
Responsibility) Rules, 2014.
Annexure II of the Companies (Corporate Social Responsibility) Rules, 2014
prescribes a format for the annual report on CSR activities included in the
company’s board report. Some of the significant amendments in the format are:
- Executive summary: As per the amendment in the Annexure II, companies
are required to provide an executive summary along with the weblinks of
impact assessment of CSR projects, which have been carried out.
- Disclosure on CSR spent: As per the amendment, companies are required
to disclose only the total amount spent on on-going and other CSR projects.
Earlier, the format required disclosures of details of each project undertaken
by the company (both ongoing projects as well as other projects).
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- Additional disclosure on unspent CSR amount: In disclosure of unspent
CSR amount for the preceding three financial years, companies are also
required to disclose the balance amount in unspent CSR account, and
deficiency, if any, in accordance with Section 135(6) of the Companies Act,
2013.
III. Amendments to the Companies (Indian Accounting Standards) Rules, 2015 made
by MCA on 23rd March, 2022 (applicable for November, 2023 examination)
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 1st 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 notific ation:
 Amendment to Ind AS 16 ‘Property, Plant and Equipment’ on accounting of
proceeds from sale 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 amendments 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.
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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 ‘Provisions, Paragraph 68A has been inserted which clarifies which
Contingent Liabilities cost needs to be considered in the costs to fulfil a
and Contingent contract while determining whether the contract is
Assets’ onerous.
As per the amendment made in 2022, both the
incremental costs 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
is onerous.
These amendments are prospective from 1st April, 2022
with cumulative effect recognised in the opening balance
of retained earnings or other component of equity, as
appropriate on 1st 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
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an asset or liability as per 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.
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-
adoption of Indian time adopter of Ind AS with regard to cumulative
Accounting translation differences on the date of transition to
Standards’ Ind AS. According to it, first time 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 Ind AS 101 provides that a subsidiary can
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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
Instruments’ when it is 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 ‘Agriculture’ Earlier para 22 of Ind AS 41 prescribed certain cash

flows that 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.
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PART II : QUESTIONS AND ANSWERS

QUESTIONS
Ind AS 103
1. Mini Limited is a manufacturing entity in textile industry. Mini Limited decided to
reduce the cost of manufacturing by setting up its own power plant for their captive
consumption. As per market research report, there was non-operational power plant in
nearby area. Hence, it decided to acquire that power plant which was having capacity
of 80MW along with all entire labour force. This Power entity was owned by another
entity Max Limited. Mini Limited approached Max Limited for acquisition of 80MW
power plant at following terms:
(i) Mini Limited will seek an independent valuation for determining fair value of
80MW power plant.
(ii) Value of other Non-current assets acquired, and Non–current financial liabilities
assumed is ` 11.10 million and ` 32 million respectively.
(iii) Consideration agreed between both the parties is at ` 51 million.
Both the parties agreed to the terms and entered into agreement on 1st April, 20X1 with
immediate effect.
Due to unavoidable circumstances, valuation could not be completed by the time
Max Limited finalizes its financial statements for the year ending 31st March, 20X1.
Max Limited’s annual financial statements records the fair value of 80 MW Power Plant
at ` 46.90 million with remaining useful life at 40 years.
Max Limited also has license to operate that power plant unrecorded in books. As on
31st March, 20X1, it has fair value of ` 5 million.
Six months after acquisition date, Mini Limited received the independent valuation,
which estimated the fair value of 80MW Power Plant as ` 54.90 million.
CFO of Mini Limited, wants you to work upon following aspects of the transaction:
(a) Determine whether transaction should be accounted as asset acquisition or
business combination.
(b) Calculate Goodwill / Bargain Purchase due to the above acquisition.
(c) Pass necessary journal entities in the books of Mini Limited as per Ind AS 103
and prepare balance sheet as on date of acquisition.
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(d) Determine whether any adjustment is required in case of valuation received
subsequent to acquisition. If yes, pass the necessary entries in the books of
Mini Limited.
Balance Sheet of Mini Limited as at 31st March, 20X1

Particulars (` in Million)
ASSETS
Non-current assets
Property, plant and equipment 2,158
Capital work-in-progress 12
Deferred Tax Assets (Net) 324
Other non-current assets 25
Total non-current assets 2,519
Current assets
Inventories 368
Financial assets
(i) Investments 45
(ii) Trade Receivables 762
(iii) Cash and Cash Equivalents 110
(iv) Bank balances other than (iii) above 28
(v) Other financial assets 267
Total current assets 1,580
Total assets 4,099
EQUITY AND LIABILITIES
Equity
Equity Share Capital 295
Other equity
Equity component of compound financial instruments 717
Reserves and surplus 2,481
Total equity 3,493
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Liabilities
Non-current liabilities
Financial Liabilities
Borrowings 268
Total non-current liabilities 268
Current liabilities
Financial Liabilities
(i) Trade payables 302
Other current liabilities 36
Total current liabilities 338
Total liabilities 606
Total equity and liabilities 4,099

Ind AS 21
2. Infotech Global Ltd. (a stand-alone entity) has a functional currency of USD and needs
to translate its financial statements into the presentation currency (INR). The following
is the draft financial statements of Infotech Global Ltd. prepared in accordance with its
functional currency.
Balance Sheet
Particulars 31st March, 20X3 31st March, 20X2
USD USD
Property, plant and equipment 50,000 55,000
Trade Receivables 68,500 56,000
Inventory 8,000 5,000
Cash 40,000 35,000
Total assets 1,66,500 1,51,000
Share Capital 50,000 50,000
Retained earnings 29,500 18,000
Total Equity 79,500 68,000
Trade payables 40,000 38,000
Loan 47,000 45,000
Total liabilities 87,000 83,000
Total equity and liabilities 1,66,500 1,51,000
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Statement of Profit and Loss

Particulars USD
Revenue 1,77,214
Cost of sales 1,13,100
Gross Profit 64,114
Distribution costs 2,400
Administrative expenses 18,000
Other expenses 11,000
Finance costs 12,000
Profit before tax 20,714
Income tax expense 6,214
Profit for the year 14,500

Extracts from Statement of Changes in Equity

Particulars 31st March, 20X3 (USD)

Retained earnings at the beginning of the year 18,000
Profit for the year 14,500
Dividends (3,000)
Retained earnings at the end of the year 29,500

• Share capital was issued when the exchange rate was USD 1 = INR 70.
• Retained earnings on 1st April, 20X1 was INR 4,00,000.
• At 31st March, 20X2, a cumulative gain of INR 4,92,000 has been recognised in
the foreign exchange reserve, which is due to translation of entity’s financial
statements into INR in the previous years.
• Entity paid a dividend of USD 3,000 when the rate of exchange was USD 1 =
INR 73.5
• Profit for the year 20X1-20X2 of USD 8,000, translated in INR at INR 5,72,000.
• Profit for the year 20X2-20X3 of USD 14,500, translated in INR at INR 10,72,985.
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For the sake of simplicity, items of income and expense are translated at weighted
average monthly rate as there has been no significant exchange rate fluctuation during
the entire year and the business of the entity is not cyclical in nature.
Relevant exchange rates are as follows:
• Rate at 31st March, 20X2 USD 1= INR 73
• Rate at 31st March, 20X3 USD 1= INR 75
Prepare financial statements of Infotech Global Ltd. translated from functional currency
(USD) to presentation currency (INR).
Ind AS 27 and Ind AS 110
3. Entity A owns all the share capital of Entity B and controls Entity B. On 1st April, 20X2,
Entity A acquired a building from Entity B, for ` 600 lakhs, that the group plans to use
as its new head office. Entity B had purchased the building from a third party on
1st April, 20X1 for ` 525 lakhs. At that time, the building was assessed to have a
useful life of 21 years and a residual value of Nil. On 1st April, 20X2, the carrying
amount of the building was ` 500 lakhs in Entity B’s individual financial statements.
The estimated remaining useful life of the building measured from 1st April, 20X2 is
20 years and the residual value of the building is still Nil. The method of depreciation
followed is straight-line.
Pass necessary Journal Entries for recording the above transactions in the books of
Entity B, Entity A and the Group’s general ledger.
Ind AS 110
4. Ishwar Ltd. holds investments in Vinayak Ltd. The draft balance sheets of two entities
at 31st March, 20X4 were as follows:
Particulars Ishwar Ltd. Vinayak Ltd.
` in ‘000s ` in ‘000s
Assets
Non-current Assets
Property, Plant and Equipment 26,20,000 18,50,000
Investment 21,15,000 NIL
Total non-current assets 47,35,000 18,50,000
Current Assets
Inventories 6,00,000 3,75,000
Trade Receivables 4,50,000 3,30,000
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Cash and Cash Equivalents 75,000 60,000

Total current assets 11,25,000 7,65,000
TOTAL ASSETS 58,60,000 26,15,000
Equity and Liabilities
Equity
Share Capital (` 1 shares) 7,00,000 5,00,000
Retained Earnings 28,65,000 10,50,000
Other Components of Equity 12,50,000 50,000
Total Equity 48,15,000 16,00,000
Non-current Liabilities
Provisions 6,250 NIL
Long-term Borrowings 4,13,750 4,50,000
Deferred Tax 2,25,000 1,40,000
Total Non-current Liabilities 6,45,000 5,90,000
Current Liabilities
Trade and Other Payables 3,00,000 2,50,000
Short-term Borrowings 1,00,000 1,75,000
Total Current Liabilities 4,00,000 4,25,000
TOTAL EQUITY AND LIABILITIES 58,60,000 26,15,000

Additional Information:
Ishwar Ltd.’s investment in Vinayak Ltd.
On 1st April, 20X1, Ishwar Ltd. acquired 400 million shares in Vinayak Ltd. by means of
a share exchange of one share in Ishwar Ltd. for every two shares acquired in
Vinayak Ltd. On 1st April, 20X1, the market value of one share of Ishwar Ltd. was ` 7.
Ishwar Ltd. appointed a professional firm for conducting due diligence for acquisition of
Vinayak Ltd., the cost of which amounted to ` 15 million. Ishwar Ltd. included these
acquisition costs in the carrying amount of the investment in Vinayak Ltd. in the draft
balance sheet of Ishwar Ltd. There has been no change to the carrying amount of this
investment in Ishwar Ltd.’s own balance sheet since 1 st April, 20X1.
On 1st April, 20X1, the individual financial statements of Vinayak Ltd. showed the
following balances:
- Retained earnings ` 750 million
- Other components of equity ` 25 million
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The directors of Ishwar Ltd. carried out a fair value exercise to measure the identifiable
assets and liabilities of Vinayak Ltd. at 1st April, 20X1. The following matters emerged:
- Property having a carrying amount of ` 800 million (land component ` 350 million,
buildings component ` 450 million) had an estimated fair value of ` 1,000 million
(land component ` 400 million, buildings component ` 600 million). The buildings
component of the property had an estimated useful life of 30 years at
1st April, 20X1.
- Plant and equipment having a carrying amount of ` 600 million had an estimated
fair value of ` 700 million. The estimated remaining useful life of this plant at
1st April, 20X1 was four years. None of this plant and equipment had been
disposed of between 1st April, 20X1 and 31st March, 20X4.
- On 1st April, 20X1, the notes to the financial statements of Vinayak Ltd. disclosed
contingent liability. On 1st April, 20X1, the fair value of this contingent liability was
reliably measured at ` 30 million. The contingency was resolved in the year
ended 31st March, 20X2 and no payments were required to be made by
Vinayak Ltd. in respect of this contingent liability.
- The fair value adjustments have not been reflected in the individual financial
statements of Vinayak Ltd. In the consolidated financial statements, the fair value
adjustments will be regarded as temporary differences for the purposes of
computing deferred tax. The rate of deferred tax to apply to temporary
differences is 20%.
The directors of Ishwar Ltd. used the proportion of net assets method when measuring
the non-controlling interest in Vinayak Ltd. in the consolidated balance sheet.
Impairment review of goodwill on acquisition of Vinayak Ltd.
No impairment of the goodwill on acquisition of Vinayak Ltd. was evident when the
reviews were carried out on 31st March, 20X2 and 20X3. On 31st March, 20X4, the
directors of Ishwar Ltd. carried out a further review and concluded that the recoverable
amount of the net assets of Vinayak Ltd. at that date was ` 2,000 million. Vinayak Ltd.
is regarded as a single cash generating unit for the purpose of measuring goodwill
impairment.
Provision
On 1st April, 20X3, Ishwar Ltd. completed the construction of a non-current asset with
an estimated useful life of 20 years. The costs of construction were recognised in
property, plant and equipment and depreciated appropriately. Ishwar Ltd. has a legal
obligation to restore the site on which the non-current asset is located on
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31st March, 2X43. The estimated cost of this restoration work, at 31st March, 2X43
prices, is ` 125 million. The directors of Ishwar Ltd. have made a provision of
` 6.25 million (1/20 x ` 125 million) in the draft balance sheet at 31st March, 20X4.
An appropriate annual discount rate to use in any relevant calculations is 6% and at
this rate the present value of ` 1 payable in 20 years is 31.2 paise.
Prepare the consolidated balance sheet of Ishwar Ltd. at 31 st March, 20X4. Consider
deferred tax implications.
Ind AS 20
5. An entity opens a new factory and receives at the beginning of the year a government
grant of ` 15,000 in respect of capital equipment costing ` 1,00,000. It depreciates all
plant and machinery at 20% p.a. using straight-line method. Assume that there is
reasonable assurance that the conditions attached to the grant will be fulfilled.
For year 1, pass the necessary Journal Entries and show the presentation of the effect
of this grant in both Balance Sheet and Statement of Profit and Loss under both
methods permitted under paragraph 24 of Ind AS 20?
Ind AS 8
6. In its financial statements for the year ended 31st March, 20X2, Y Ltd. reported
` 73,500 revenue (sales), ` 53,500 cost of sales, ` 6,000 income tax expense,
` 20,000 retained earnings at 1st April, 20X1 and ` 34,000 retained earnings at
31st March, 20X2.
In 20X2-20X3, after the 20X1-20X2 financial statements were approved for issue,
Y Ltd. discovered that some products sold in 20X1-20X2 were incorrectly included in
inventories at 31st March, 20X2 at their cost of ` 6,500.
In 20X2-20X3, Y Ltd. changed its accounting policy for the measurement of
investments in associates after initial recognition from cost model to the fair value
model as per Ind AS 109. It acquired its only investment in an associate for ` 3,000
many years ago. The associate’s equity is not traded on a securities exchange (that is,
a published price quotation is not available). The fair value of the investment was
determined reliably using an appropriate equity valuation model on 31 st March, 20X3 at
` 25,000 (20X1-20X2: ` 20,000 and 20X0-20X1: ` 18,000).
At 31st March, 20X3, as a result of usage of improved lubricants, Y Ltd. reassessed the
useful life of Machine A from four years to seven years. Machine A is depreciated on
the straight-line method to a Nil residual value. It was acquired for ` 6,000 on
1st April, 20X0.
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Inventories of the type manufactured by Machine A were immaterial at the end of each
reporting period.
Y Ltd.’s accounting records for the year ended 31st March, 20X3, before accounting for
change in accounting policy and change in accounting estimate, record ` 1,04,000
revenue (sales), ` 86,500 cost of sales (including ` 6,500 for the error in opening
inventory and ` 1,500 depreciation for Machine A) and ` 5,250 income tax expense.
Y Ltd. presents financial statements with one year of comparative information.
For simplicity, the tax effect of all items of income and expenses should be assumed to
be 30% of the gross amount.
Draft an extract showing how the correction of the prior period error, change in
accounting policy and change in accounting estimate could be presented in the
Statement of Profit and Loss and Statement of Changes in Equity (Retained Earnings)
and disclosed in the Notes of Y Ltd. for the year ended 31st March, 20X3.
Ind AS 12
7. On 1st April, 20X1, an entity paying tax at 30% acquired a non-tax-deductible office
building for ` 1,00,000 in circumstances in which Ind AS 12 prohibits recognition of the
deferred tax liability associated with the temporary difference of ` 1,00,000. The
building is depreciated over 10 years at ` 10,000 per year to a residual value of zero.
The entity’s financial year ends on 31st March.
On 1st April, 20X2, the carrying amount of the building is ` 90,000, and it is revalued
upwards by ` 45,000 to its current market value of ` 1,35,000. There is no change to
the estimated residual value of zero, or to the useful life of the building after
revaluation.
Determine the carrying amount, depreciation for the year ended 31 st March, 20X3 and
defer tax thereafter till the useful life of the building. Further analyse the treatment and
impact of defer tax since 31st March, 20X3 till the useful life of the building.
Ind AS 38
8. A company engaged in the provision of Information Technology Products and Services
incurred following expenditure during the development phase of its software product
that is to be offered to its customers. The entity also purchases software from third
parties for incorporating into its end software product offered to its customers. The
company is in the process of launching it in the market for licensing to customers. The
company also takes services of external professional software developers for such
software development purpose. Costs incurred in relation to the development of its
software product for the year ended 31st March, 20X2 are as follows:
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Particulars Amount
(` thousands)
Purchase price of imported software 600
Employment costs (Note 1) 1,200
Testing costs 1,800
Other costs directly related to customization (Note 2) 450
Professional fees paid for external software developers 220
Costs of training provided to staff to operate the asset 195
Costs of advertising in market 1,560
Administrative and general overheads 825

Note 1: The software was developed in nine months ended 31st December, 20X1 and
was capable of operating in the manner intended by the entity. It was brought into use
on 31st March, 20X2. The employment costs are for the period of twelve months (i.e.
up to 31st March, 20X2). The employees were engaged in developing the software and
related activities.
Note 2: Other costs directly related to development include an abnormal cost of
` 50,000 in respect of repairing the damage which resulted from a security breach.
What will be the amount of the software development costs that can be capitalized by
explaining the reason for each element of cost?
Ind AS 109
9. On 1st April, 20X1, a bank provides an entity with a four-year loan of ` 5,000 on normal
market terms, including charging interest at a fixed rate of 8% per year. Interest is
payable at the end of each year. The figure of 8% is the market rate for similar four -
year fixed-interest loans with interest paid annually in arrears. Transaction cost of
` 100 is incurred on originating the loan. Effective interest rate in this case is 8.612%.
In 20X1-20X2, the entity experienced financial difficulties. On 31st March, 20X2, the
bank agreed to modify the terms of the loan. Under the new terms, the interest
payments in 20X2-20X3 to 20X4-20X5 will be reduced from 8% to 5%. The entity paid
the bank a fee of ` 50 for paperwork relating to the modification.
Analyse whether the modification of the loan terms constitutes an extinguishment of
the original financial liability or not.
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Ind AS 7
10. One of the subsidiaries of Buildwell Ltd. submitted to Central Finance its Summarized
Statement of Profit and Loss and Balance Sheet.
Summarized Statement of Profit and Loss for the year ended 31st March, 20X3
Particulars Amount (`)
Net sales 2,52,00,000
Less: Cash cost of sales (1,92,00,000)
Depreciation (6,00,000)
Salaries & wages (24,00,000)
Operating expenses (14,00,000)
Provision for taxation (8,80,000)
Net Operating Profit 7,20,000
Non-recurring income – profit on sale of equipment 1,20,000
8,40,000
Retained earnings and profit brought forward 15,18,000
23,58,000
Dividends declared and paid during the year (7,20,000)
Profit & loss balance as on 31st March, 20X3 16,38,000

Summarized Balance Sheet

Assets 31st March, 20X2 31st March, 20X3
Property, Plant and Equipment:
Land 4,80,000 9,60,000
Buildings and Equipment 36,00,000 57,60,000
Current Assets
Cash 6,00,000 7,20,000
Inventories 16,80,000 18,60,000
Trade Receivables 26,40,000 9,60,000
Advances 78,000 90,000
Total Assets 90,78,000 1,03,50,000
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Liabilities & Equity
Share capital 36,00,000 44,40,000
Surplus in profit & loss 15,18,000 16,38,000
Trade Payables 24,00,000 23,40,000
Outstanding expenses 2,40,000 4,80,000
Income tax payable 1,20,000 1,32,000
Accumulated depreciation on buildings
and equipment 12,00,000 13,20,000
Total 90,78,000 1,03,50,000

The original cost of equipment sold during the year 20X2-20X3 was ` 7,20,000.
Prepare a statement of cashflows the year ended 31st March 20X3.
Ind AS 105
11. Company X has identified one of its division (disposal group) to be sold to a
prospective buyer and the Board has approved the plan to sell the division on
30th September, 20X1. The sale is expected to complete after one year but it still
qualifies to be held for sale under Appendix B of Ind AS 105. Costs to sell the division
is estimated to be ` 10 crores (to be incurred in March, 20X3). The fair value of the
division is ` 400 crores (on 30th September, 20X1 and 31st March, 20X2) and carrying
value is ` 500 crores.
How shall such a division (disposal group) be measured under Ind AS 105 on following
reporting dates:
A. 30th September, 20X1
B. 31st March, 20X2
Consider the discounting factor @ 10% for 1 year to 0.909 and fo r 1.5 years to be
0.867.
Ind AS 2
12. A Ltd. began operations in the year 20X1-20X2. In 20X1-20X2, it incurred the following
expenditures on purchasing the raw materials for its product:
a. Purchase price of the raw materials = ` 30,000;
b. Import duty and other non-refundable purchase taxes = ` 8,000;
c. Refundable purchase taxes = ` 1,000;
d. Freight costs for bringing the goods from the supplier to the factory’s storeroom
for raw materials = ` 3,000;
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e. Costs of unloading the materials into the storeroom for raw materials = ` 20; and
f. Packaging = ` 2,000.
On 31st March, 20X2, A Ltd. received ` 530 volume rebate from a supplier for
purchasing more than ` 15,000 from the supplier during the year.
A Ltd. incurred the following additional costs in the production run:
i. Salary of the machine workers in the factory = ` 5,000;
ii. Salary of factory supervisor = ` 3,000;
iii. Depreciation of the factory building and equipment used for production process
= ` 600;
iv. Consumables used in the production process = ` 200;
v. Depreciation of vehicle used to transport the goods from the storeroom for raw
materials to the machine floor = ` 400;
vi. Factory electricity usage = ` 300;
vii. Factory rental = ` 1,000; and
viii. Depreciation of the entity’s vehicle used by the factory supervisor is ` 200.
During 20X1-20X2, A Ltd. incurred the following administrative expenses:
1. Depreciation of the administration building = ` 500;
2. Depreciation and maintenance of vehicles used by the administrative staff
= ` 150; and
3. Salaries of the administrative personnel = ` 3,050.
Of the administrative expenses, 20% is attributable to administering the factory.
Remaining expenses are attributable, in equal proportion, to the sales and other non-
production operations (eg financing, tax and corporate secretarial functions).
In 20X1-20X2, A Ltd. incurred the following selling expenses:
a) Advertising costs = ` 300;
b) Depreciation and maintenance of vehicles used by the sales staff = ` 100; and
c) Salaries of the administrative personnel = ` 6,000.
Pass necessary journal entries to record the cost of inventory in the books of A Ltd.
Ind AS 40 and Ind AS 16
13. Besides manufacturing plants, A Ltd. has various other assets, not used for operational
activities, e.g., freehold land, townships in different locations, excess of office space
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rented to ABC, etc. Also, A Ltd. has some land, which are kept vacant as per the
government regulations which require that a specified area around the plant should be
kept vacant.
The details of these assets are as under:
Property Details
A Ltd.’s office A Ltd.’s registered office in Delhi, is a 15 storey building, of which
building only 3 floors are occupied by A Ltd., whereas remaining floors
(registered are given on rent to other companies. These agreements are
office) usually for a period of 3 years. According to A Ltd., such excess
office space will continue to be let out on lease to external parties
and have no plans to occupy it, at least in near future.
Flats in As regards township in Location 1, there are approximately 2,000
Township flats in the said township. It was built primarily for
located in A Ltd.’s employees, hence, approximately 80% of the flats are
location 1 allotted to employees and remaining flats are either kept vacant
or given on rent to other external parties. A lease agreement is
signed between A Ltd. and an individual party for every
12 months being 1st April to 31st March. The lease entered is a
cancellable lease (cancellable at the option of any of the parties).
Also, besides monthly rent, additional charges are levied by
A Ltd. on account of electricity, water, cable connection, etc.
According to A Ltd., there is no intention of selling such excess
flats or allotting it to its employees.
Flats in There are 1,000 flats in location 2 township, of which:
township • 400 flats are given to employees for their own
located in accommodation.
location 2 • 350 flats are given on rent to Central Government and State
Government for accommodation of their employees.
Average lease period being 12 months with cancellable
clause in lease agreements.
• 250 flats are kept vacant.
Hostel located 60 rooms in the hostel have been let out to G Ltd., to give
in location 1 accommodation to their personnel. Lease agreement is prepared
for every 11 months and renewed thereafter. Besides the
monthly rent amount, some charges are levied towards water,
electricity and other amenities, e.g., cable connection, etc.
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Land in In 20X4, A Ltd. purchased a plot of land on the outskirts of a

location 1 major city. The area has mainly low-cost public housing and very
limited public transport facilities. The government has plans to
develop the area as an industrial park in 5 years’ time and the
land is expected to greatly appreciate in value if the government
proceeds with the plan. A Ltd. has not decided what to do with
the property.
Land in A portion of land has been leased out to C Ltd. for its
location 1 manufacturing operations. Land has been given on lease on a
lease rental of ` 10 lacs p.a. with a lease term of 25 years.
Land in A portion of the land has been given on rent to D Ltd. which has
location 2 constructed a petrol pump on such land. It has been leased for a
period of 40 years and renewed for a further period of 40 years.

Determine the classification of properties which are not held for operational purposes,
with suitable reasoning in the financial statements of A Ltd.
Ind AS 111
14. Entities A and B establish a 50:50 joint operation in the form of a separate legal entity,
Entity J, whereby each operator has a 50% ownership interest and takes 50% of the
output.
On formation of the joint operation, Entity A contributes a property with fair value of
` 110 lakhs and intangible asset with fair value of ` 10 lakhs whereas Entity B
contributes equipment with a fair value of ` 120 lakhs.
The carrying amounts of the assets contributed by Entities A and B are ` 100 lakhs
and ` 80 lakhs, respectively.
What will be the amount of any gain or loss to be recognised by Entity A and Entity B in
its separate financial statements as well as consolidated financial statements?
Ind AS 36
15. On 31st March, 20X1, Jackson Ltd. purchased 80% of the equity of Kaplan Ltd. for
` 190 million. The fair values of the net assets of Kaplan Ltd. that were included in the
consolidated balance sheet of Jackson Ltd. at 31st March, 20X1 were measured at
` 200 million (their fair values at that date). It is the group policy to value the non-
controlling interest in subsidiaries at the date of acquisition at its proportionate share of
the fair value of the subsidiaries’ identifiable net assets.
On 31st March, 20X4, Jackson Ltd. carried out its annual review of the goodwill on
consolidation of Kaplan Ltd. for evidence of impairment. No impairment had been
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evident when the reviews were carried out on 31 st March, 20X2 and 31st March, 20X3.
The review involved allocating the assets of Kaplan Ltd. into three cash-generating
units and computing the value in use of each unit. The carrying values of the individual
units before any impairment adjustments are given below:
Unit A Unit B Unit C
` in million ` in million ` in million
Intangible assets 30 10 -
Property, Plant and Equipment 80 50 60
Current Assets 60 30 40
Total 170 90 100
Value in use of unit 180 66 104

It was not possible to meaningfully allocate the goodwill on consolidation to the

individual cash generating units but all the other net assets of Kaplan Ltd. are allocated
in the table shown above.
The intangible assets of Kaplan Ltd. have no ascertainable market value but all the
current assets have a market value that is at least equal to their carrying value. The
value in use of Kaplan Ltd. as a single cash-generating unit on 31st March, 20X4 is
` 350 million.
Recommend the treatment for impairment of goodwill.
Ind AS 19
16. Arunachalam Ltd. operates a Defined Retirement Benefits Plan for its current and
former employees. Given the large size of the company, it engaged a firm of Actuaries
for advice on the Contribution Levels and overall Liabilities of the Plan to pay benefits.
Following details are given:
(a) On 1st April, 20X1, the actuarial valuation of the present value of the defined
benefit obligation was ` 15 crores. On the same date, the fair value of the assets
of the Defined Benefit Plan was ` 13 crores. On 1st April, 20X1, the annual
market yield based on Government Bonds was 5%.
(b) During the year ended 31st March, 20X2, Arunachalam made contributions of
` 1.75 crore into the Plan and the Plan paid out benefits of ` 1.05 crore to retired
members. Assume that both these payments were made on 31st March, 20X2.
(c) The Actuarial Firm estimated that the current service cost for the year ended
31st March, 20X2 would be ` 1.55 crores. On 28th February, 20X2, the rules of
the Plan were amended with retrospective effect which led to an increase in the
present value of the defined benefit obligation by ` 37.5 lakhs from that date.
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(d) During the year ended 31st March, 20X2, Arunachalam was in negotiation with
employee representatives regarding planned redundancies. These negotiations
were completed shortly before the year end and the redundancy packages were
agreed. The impact of these redundancies was to reduce the present value of the
defined benefit obligation by ` 2 crores. Before 31st March, 20X2, Arunachalam
made payments of ` 1.875 crores to the employees affected by the redundancies
in compensation for a curtailment of their benefits. These payments were made
out of the assets of the Retirement Benefits Plan.
(e) On 31st March, 20X2, the present value of the defined benefit obligation was
` 17 crores and the fair value of the assets of the Defined Benefit Plan was
` 14 crores.
Discuss how the above will be accounted in the books of Arunachalam Ltd. for the year
20X1-20X2. Also give the extracts of financial statements affected due to above
transactions.
Ind AS 115
17. On 1st April, 20X1, Entity X enters into a contract with Entity Y to sell mobile chargers
for ` 100 per charger. As per the terms of the contract, if Entity Y purchases more
than 1,000 chargers till March 20X2, the price per charger will be retrospectively
reduced to ` 90 per unit. Till September 20X1, Entity X sold 95 chargers to Entity Y.
Entity X estimates that Entity Y's purchases by March 20X2 will not exceed the
required threshold of 1,000 chargers.
In October 20X1, Entity Y acquires another Entity C and from October 20X1 to
December 20X1, Entity X sells an additional 600 chargers to Entity Y. Due to these
developments, Entity X estimates that purchases of Entity Y will exceed the 1,000
chargers threshold for the period and therefore, it will be required to retrospectively
reduce the price per charger to ` 90. Analyse the above scenario in light of
Ind AS 115 and state how the revenue should be recognised in such a situation.
Ind AS 41
18. M. Chinnaswamy & Brothers Ltd. is a company that is engaged in growing and
maintaining coconut palms and selling their output in various forms. The company has
a farmland having 2,00,000 coconut palms in the coastal area of Karnataka near
Mangalore.
The fair value of each coconut palm is derived based on the average realisable price of
` 30 per nut (fruit). Each coconut palm grows 80 nuts per annum on an average basis.
Each coconut palm can generate revenue for as long as 80 years and the current
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palms are only 20-year-old. The management thinks that considering the risk factors in
business, the valuation of each palm can be considered at 5 times its annual revenue.
During August, 20X5, the Ooty Hotels Association (OHA) chairman and his team visited
the corporate office of the company at Mangalore. The deal was to supply tender
coconuts to Ooty Hotels at an agreed price throughout the year. The agreement came
into effect from 1st September, 20X5 whereby the company shall reserve 15,000
coconut palms (out of 2,00,000 coconut palms) for OHA and will charge a concessional
rate of ` 15 only per nut supplied to OHA. OHA will in turn supply the tender coconuts
to each Ooty Hotel at the same price. This contract price is applicable irrespective of
the ownership of palm trees (it is not an entity-specific restriction). All tender coconuts
of these 15,000 coconut palms were used by OHA irrespective of the agreement being
effective from 1st September, 20X5.
What will be the valuation of 2,00,000 coconut palms in the company’s farm for the
quarter ended 30th September, 20X5?
Ind AS 19
19. On 1st January, 20X2, the directors of Johansen Ltd. decided to terminate production at
one of the company’s divisions. This decision was publicly announced on
31st January, 20X2. The activities of the division were gradually reduced from
1st April, 20X2 and closure is expected to be complete by 30th September, 20X2.
At 31st January, 20X2, the directors prepared the following estimates of the financial
implications of the closure:
(i) Redundancy costs were initially estimated at ` 2 million. Further expenditure of
` 8,00,000 will be necessary to retrain employees who will be affected by the
closure but remained with Johansen Ltd. in different divisions. This retraining will
begin in early July 20X2. Latest estimates are that redundancy costs will be
` 1.9 million, with retraining costs of ` 8,50,000.
(ii) Plant and equipment having an expected carrying value at 31 st March, 20X2 of
` 8 million will have a recoverable amount ` 1.5 million. These estimates remain
valid.
(iii) The division is under contract to supply goods to a customer for the next three
years at a pre- determined price. It will be necessary to pay compensation of
` 6,00,000 to this customer. The compensation actually paid, on 31st May, 20X2,
was ` 5,50,000.
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(iv) The division will make operating losses of ` 3,00,000 per month in the first three
months of 20X2-20X3 and ` 2,00,000 per month in the next three months of
20X2-20X3. This estimate proved accurate for April, 20X2 and May, 20X2.
(v) The division operates from a leasehold premise. The lease is a non-cancellable
operating lease with an unexpired term of five years from 31 st March, 20X2. The
annual lease rentals (payable on 31st March in arrears) are ` 1.5 million. The
landlord is not prepared to discuss an early termination payment.
Following the closure of the division it is estimated that Johansen Ltd. would be able to
sub-let the property from 1st October, 20X2.
Johansen Ltd. could expect to receive a rental of ` 3,00,000 for the six-month period
from 1st October, 20X2 to 31st March, 20X3 and then annual rentals of ` 5,00,000 for
each period ending 31st March, 20X4 to 31st March, 20X7. All rentals will be received
in arrears.
Any discounting calculations should be performed using a discount rate of 5% per
annum. You are given the following data for discounting at 5% per annum:
Present value of ` 1 received at the end of year 1 = ` 0.95
Present value of ` 1 received at the end of year 1–2 inclusive = ` 1.86
Present value of ` 1 received at the end of year 1–3 inclusive = ` 2.72
Present value of ` 1 received at the end of year 1–4 inclusive = ` 3.54
Present value of ` 1 received at the end of year 1–5 inclusive = ` 4.32
Compute the amounts that will be included in the Statement of Profit and Loss for the
year ended 31st March, 20X2 in respect of the decision to close the division of
Johansen Ltd.
Ind AS 116
20. Entity X, a utility company enters into a contract for twenty years with Entity Y, a power
company, to purchase all of the electricity produced by a new solar power station. The
solar power station is explicitly specified in the contract and Entity Y has no
substitution rights. Entity Y owns the solar power station and will receive tax credits
relating to the construction and ownership of the solar power station, and Entity X will
receive renewable energy credits that accrue from use of the solar power station.
Whether Entity X has the right to obtain substantially all of the economic benefits from
the solar power station during the period of arrangement?
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ANSWERS

1. (a) Ind AS 103 defines business as an integrated set of activities and assets that is
capable of being conducted and managed for the purpose of providing goods and
services to customers, generating investment income (such as dividends or
interest) or generating other income from ordinary activities.
In the given scenario, acquisition of power plant along with its labour force will be
considered as integrated set of activity as it is capable of being generating power.
Hence, transaction will be considered as business combination and not asset
acquisition and acquisition method of accounting will be applied.
Thus, following will be the case:
(i) Acquirer – Mini Ltd;
(ii) Acquiree – Max Ltd;
(iii) Acquisition date – 1st April, 20X1
(b) Calculation of Goodwill:
Particulars ` in Million
Purchase consideration (A) 51
Fair Value of Power Plant – PPE 46.90
Fair Value of other non-current assets 11.10
Fair Value of Intangible Asset (License) – Refer Note 1 below 5
Non-Current Liabilities assumed (32)
Value of net assets acquired (B) 31
Goodwill 20
Note 1: The licence to operate power plant is an intangible asset that meets the
contractual-legal criterion for recognition separately from goodwill though acquirer
cannot sell or transfer it separately from the acquired power plant. Intangible
Assets needs to be recorded by the acquirer at the time of accounting for
acquisition though not recorded by the acquiree in its book.
(c) Journal Entries for acquiring power plant
Particulars ` in Million ` in Million
Fair Value of Power Plant Dr. 46.90
Fair Value of other assets Dr. 11.10
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Fair Value of License acquired Dr. 5

Goodwill Dr. 20
To Liabilities assumed 32
To Bank (PC paid) 51

Balance Sheet of Mini Limited as at 1st April, 20X1

Particulars Notes to ` in
Accounts Million
ASSETS
Non-current assets
Property, plant and equipment 1 2,204.90
Intangible Asset (License acquired in business 5.00
combination)
Capital work-in-progress 12.00
Goodwill on acquisition 20.00
Deferred Tax Assets (Net) 324.00
Other non-current assets 2 36.10
Total non-current assets 2,602.00
Current assets
Inventories 368.00
Financial assets
(i) Investments 45.00
(ii) Trade Receivables 762.00
(iii) Cash and Cash Equivalents 3 59.00
(iv) Bank balances other than (iii) above 28.00
(v) Other financial assets 267.00
Total current assets 1,529.00
Total assets 4,131.00
EQUITY AND LIABILITIES
Equity
Equity Share Capital 295.00
Other equity
Equity component of compound financial
instruments 717.00
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Reserves and surplus 2,481.00

Total equity 3,493.00
Liabilities
Non-current liabilities
Financial Liabilities
Borrowings 4 300.00
Total non-current liabilities 300.00
Current liabilities
Financial Liabilities
(i) Trade payables 302.00
Other current liabilities 36.00
Total current liabilities 338.00
Total liabilities 638.00
Total equity and liabilities 4,131.00

Notes to Accounts
1. Property, Plant and Equipment
Particulars ` in Million
PPE value as on 1st April, 20X1 2,158.00
Add: Fair Value of Power Plant acquired 46.90
Total 2,204.90

2. Other Non-current Assets

Particulars ` in Million
Other non-current assets value as on 1st April, 20X1 25.00
Add: Fair Value of Non-current assets acquired 11.10
Total 36.10

3. Cash and Cash equivalents

Particulars ` in Million
Cash and Cash equivalents as on 1st April, 20X1 110
Less: Payment of Purchase consideration transferred (51)
Total 59
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4. Non-current Liabilities

Particulars ` in Million
Non-current Liabilities value as on 1st April, 20X1 268
Add: Non-current liabilities assumed in acquisition 32
Total 300

(d) Subsequent Accounting: Ind AS 103 provides a measurement period window,

wherein if all the required information is not available on the acquisition date, then
entity can do price allocation on provisional basis. During the measurement
period, the acquirer shall retrospectively adjust the provisional amounts
recognised at the acquisition date to reflect new information obtained about facts
and circumstances that existed as on the acquisition date and, if known, would
have affected the measurement of the amounts recognised as of that date. Any
change i.e. increase or decrease in the net assets acquired due to new
information available during the measurement period which existed on the
acquisition date will be adjusted against goodwill.
Accordingly, in the financial statements for half year ending
30th September, 20X1, Mini Limited will retrospectively adjusts the prior year
information as follows:
(i) the carrying amount of PPE (including power plant) as of 1st April, 20X1 is
increased by ` 8 million (i.e. ` 54.90 million minus ` 46.90 million). The
adjustment is measured as the fair value adjustment at the acquisition date
less the additional depreciation that would have been recognised if the
asset’s fair value at the acquisition date had been recognised from that date
[(80,00,000/40) x (6/12) = 0.1 million]
(ii) the carrying amount of goodwill as of 1st April, 20X1 is decreased by
` 8 million; and
(iii) depreciation expense for the period ending 30th September, 20X1 will
increase by ` 0.1 million
(iv) disclose in its financial statements of 1st April, 20X1, that the initial
accounting for the business combination has not been completed because
the valuation of property, plant and equipment has not yet been received;
(v) disclose in its financial statements of 30th September, 20X1, the amounts
and explanation of the adjustments to the provisional values recognised
during the current reporting period. Therefore, Mini Limited discloses that
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comparative information is adjusted retrospectively to increase the fair value
of the item of property, plant and equipment at the acquisition date by
` 8 million, offset by decrease in goodwill of ` 8 million.
Journal Entries
(1) PPE (Power Plant) Dr. ` 8 Million
To Goodwill ` 8 Million
(2) Depreciation Dr. ` 0.1 Million
To Provision for Depreciation ` 0.1 Million
2. As per paragraph 39 of Ind AS 21, all assets and liabilities are translated at the closing
exchange rate, which is USD 1 = INR 73 on 31st March, 20X2 and USD 1 = INR 75 on
31st March, 20X3.
In the given case, share capital is translated at the historical rate USD 1 = INR 70. The
share capital will not be restated at each year end. It will remain unchanged.
Accordingly, the translated financial statements will be as follows:
Note 1: Retained earnings at 31st March, 20X3 and 31st March, 20X2:
Particulars 31st March, 20X3 31st March, 20X2
INR INR
Opening retained earnings 9,72,000 4,00,000
Profit for the year 10,72,985 5,72,000
Dividends paid (USD 3,000 x INR 73.5) (2,20,500) -
Closing retained earnings 18,24,485 9,72,000

Balance Sheet

Particulars 31st March, 20X3 31st March, 20X2

USD Rate INR USD Rate INR
Property, plant 50,000 75 37,50,000 55,000 73 40,15,000
and equipment
Trade Receivables 68,500 75 51,37,500 56,000 73 40,88,000
Inventory 8,000 75 6,00,000 5,000 73 3,65,000
Cash 40,000 75 30,00,000 35,000 73 25,55,000
Total assets 1,66,500 1,24,87,500 1,51,000 1,10,23,000
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Share Capital 50,000 70 35,00,000 50,000 70 35,00,000

Retained earnings 29,500 18,24,485 18,000 9,72,000
(Refer note 1)
Foreign Exchange
reserve (Balancing
figure) 6,38,015 - 4,92,000
Total Equity 79,500 59,62,500 68,000 49,64,000
Trade payables 40,000 75 30,00,000 38,000 73 27,74,000
Loan 47,000 75 35,25,000 45,000 73 32,85,000
Total liabilities 87,000 65,25,000 83,000 60,59,000
Total equity and
liabilities 1,66,500 1,24,87,500 1,51,000 1,10,23,000

The foreign exchange reserve is the exchange difference resulting from translating
income and expense at the average exchange rate and assets and liabilities at the
closing rate.
Other Comprehensive Income
Exchange differences on translating from USD to INR INR 1,46,015
(6,38,015 - 4,92,000)

Statement of Changes in Equity (INR)

Particulars Share Retained Foreign Total

capital Earnings exchange
reserve
Balance at 1st April, 20X2 35,00,000 9,72,000 4,92,000 49,64,000
Dividends - (2,20,500) - (2,20,500)
Profit for the year - 10,72,985 - 10,72,985
Exchange difference
(transferred to OCI) - - 1,46,015 1,46,015
Balance at 31st March, 20X3 35,00,000 18,24,485 6,38,015 59,62,500
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3. Journal Entries in the books of Entity B
` in lakhs ` in lakhs
1st April, 20X1
Building A/c (Property, plant and equipment) Dr. 525
To Bank A/c 525
(To recognise the purchase of the building for cash)
31st March, 20X2
Depreciation (Refer W.N.) Dr. 25
To Building A/c (Property, plant and equipment) 25
(To recognise depreciation on building for its use in the
year 20X1-20X2)
1st April, 20X2
Bank A/c Dr. 600
To Building A/c (Property, plant and equipment) 500
To Profit on sale of Building 100
(To recognise the sale of the building for cash)

Journal Entries in the books of Entity A

` in lakhs ` in lakhs
1st April, 20X2
Building A/c (Property, plant and equipment) Dr. 600
To Bank A/c 600
(To recognise the purchase of a building for cash from
Entity B)
31st March, 20X3
Depreciation A/c (Refer W.N.) Dr. 30
To Building A/c (Property, plant and equipment) 30
(To recognise depreciation on building for its use in the
year 20X2-20X3)
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Journal Entries in the books of Group

` in lakhs ` in lakhs
31st March, 20X3
Profit on sale of Building Dr. 100
To Building A/c (Property, plant and equipment) 100
(To eliminate the effects of the intragroup transaction)
Building A/c (Property plant and equipment) Dr. 5
To Depreciation A/c (W.N.) 5
(To eliminate the effects of the intragroup transaction)

Working Note:
Computation of Depreciation and its Adjustment in the Group’s Financial
Statements

In Individual For
financial adjustment
statements of in the books
Entity B/Entity A of Group
Particulars ` in lakhs ` in lakhs
Cost of Building on 1st April, 20X1 for Entity B 525
Useful life 21 years
Depreciation per year (` 525 lakhs / 21 years) 25 25
Cost of Building on 1st April, 20X2 for Entity A 600
Useful life 20 years
Depreciation per year (` 600 lakhs / 20 years) 30 30
Reversal of depreciation in the books of (5)
Group
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4. Consolidated Balance Sheet of Ishwar Ltd. at 31st March, 20X4
Particulars ` in ‘000s
Assets
Non-current Assets:
Property, Plant and Equipment
[(26,20,000 + 18,50,000) + {(2,00,000 (W.N.1) – 15,000 (W.N.1)) +
(1,00,000 (W.N.1) – 75,000 (W.N.1)) + (39,000 – 1,950) (WN 7)}] 47,17,050
Investment (21,15,000 – 14,00,000 – 15,000) 7,00,000
Goodwill (W.N.2) 1,85,600
Total non-current assets 56,02,650
Current Assets:
Inventories (6,00,000 + 3,75,000) 9,75,000
Trade Receivables (4,50,000 + 3,30,000) 7,80,000
Cash and Cash Equivalents (75,000 + 60,000) 1,35,000
Total current assets 18,90,000
TOTAL ASSETS 74,92,650
Equity and Liabilities
Equity attributable to equity holders of the parent
Share Capital 7,00,000
Retained Earnings (W.N.5) 30,31,960
Other Components of Equity (W.N.6) 12,70,000
50,01,960
Non-controlling Interest (W.N.4) 3,53,600
Total equity 53,55,560
Non-current Liabilities
Provisions (39,000 + 2,340 (W.N.7)) 41,340
Long-term Borrowings (4,13,750 + 4,50,000) 8,63,750
Deferred Tax (W.N.8) 4,07,000
Total non-current liabilities 13,12,090
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Current Liabilities
Trade and Other Payables (3,00,000 + 2,50,000) 5,50,000
Short-term Borrowings (1,00,000 + 1,75,000) 2,75,000
Total Current Liabilities 8,25,000
TOTAL EQUITY AND LIABILITIES 74,92,650

Working Notes:
1. Computation of Net Assets of Vinayak Ltd.
1st April, 20X1 31st March, 20X4
(Date of (Date of
acquisition) consolidation)
` in ‘000s ` in ‘000s
Share Capital 5,00,000 5,00,000
Retained Earnings:
Per accounts of Vinayak Ltd. 7,50,000 10,50,000
Fair Value Adjustments:
Property (10,00,000 – 8,00,000)* #2,00,000 $2,00,000

Extra depreciation due to Buildings

appreciation*
((6,00,000 – 4,50,000) x 3/30) $(15,000)

Plant and Equipment

(7,00,000 – 6,00,000)* #1,00,000 $1,00,000

Extra depreciation due to Plant and

Equipment appreciation*
(1,00,000 x ¾) $(75,000)

Contingent Liability* #(30,000) $NIL

Other Components of Equity 25,000 50,000

Deferred Tax on Fair Value Adjustments*:
Date of acquisition (20% x #2,70,000 (from
above)) (54,000)
Date of Consolidation (20% x $2,10,000
(from above)) (42,000)
Net Assets for Consolidation 14,91,000 17,68,000
The post-acquisition increase in Net Assets is ` 2,77,000 (` 17,68,000 –
` 14,91,000). ` 25,000 of this increase is due to changes in Other Components
of Equity and the remaining ` 2,52,000 due to changes in retained earnings.
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2. Computation of Goodwill on Consolidation

Vinayak Ltd.
` in ‘000s
Cost of Investment:
Shares issued to acquire Vinayak Ltd. (4,00,000 x ½ x ` 7) 14,00,000
Non-controlling Interests at the date of acquisition:
Vinayak Ltd. – 20% x ` 1,491,000 (from W.N.1) 2,98,200
16,98,200
Net Assets at the date of acquisition:
Vinayak Ltd. (W.N.1) (14,91,000)
Goodwill before Impairment 2,07,200
Less: Impairment of Goodwill (refer W.N.3) (21,600)
Goodwill reported in Consolidated Balance Sheet 1,85,600

3. Impairment of Goodwill on acquisition of Vinayak Ltd.

Vinayak Ltd.
` in ‘000s
Net Assets of Vinayak Ltd. at 31st March, 20X4 (W.N.1) 17,68,000
Grossed up Goodwill on acquisition (100/80 x ` 2,07,200)
(Refer Note 1 below) 2,59,000
20,27,000
Recoverable amount of Vinayak Ltd. as a CGU (20,00,000)
Therefore, gross impairment will be 27,000
Impairment attributed to Parent (refer Note 2 below) 21,600

Note 1: Grossing up of Goodwill

As per Para C4 of Appendix C to Ind AS 36 Impairment of Assets – If an entity
measures non-controlling interests at its proportionate interest in the net
identifiable assets of a subsidiary at the acquisition date, rather than at fair value,
goodwill attributable to non-controlling interests is included in the recoverable
amount of the related Cash Generating Unit but is not recognised in the parent’s
consolidated financial statements. As a consequence, an entity shall gross up
the carrying amount of goodwill allocated to the unit to include the goodwill
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attributable to the non-controlling interest. This adjusted carrying amount is
then compared with the recoverable amount of the unit to determine whether
the cash-generating unit is impaired.
Note 2: Allocation of Impairment of Goodwill
Since the non-controlling interests of Vinayak Ltd. are measured at proportionate
share of identifiable net assets of Vinayak Ltd., the goodwill computed is entirely
attributable only to the parent of Vinayak Ltd. Accordingly, the impairment also
would be attributed entirely to the parent of Vinayak Ltd., and not to the non-
controlling interest.
4. Computation of Non-controlling Interest (NCI)

Vinayak Ltd.
` in ‘000s
NCI at the date of acquisition (W.N.2) 2,98,200
Share of post-acquisition increase in net assets
(20% x ` 2,77,000 (from W.N.1)) 55,400
3,53,600

5. Computation of consolidated Retained Earnings

` in ‘000s
Balance as per accounts of Ishwar Ltd. 28,65,000
Adjustments:
Acquisition costs (15,000)
Restoration Provision (W.N.7) 1,960
Share of Vinayak Ltd.’s post-acquisition profits
(80% x ` 2,52,000 (W.N.1)) 2,01,600
Impairment of Goodwill (W.N.3) (21,600)
30,31,960
6. Other Components of Equity

` in ‘000s
Balance as per accounts of Ishwar Ltd. 12,50,000
Share of Vinayak Ltd.’s post-acquisition balance
(80% x ` 25,000 (W.N.1)) 20,000
12,70,000
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7. Computation of Restoration Provision

` in ‘000s
Provision for Restoration originally required (` 1,25,000 x 0.312) 39,000
One year’s unwinding of discount (` 39,000 x 6%) A (2,340)
One year’s depreciation of capitalized cost (` 39,000 x 1/20) B (1,950)
Original provision incorrectly made C 6,250
So retained earnings adjustment equals [C -A – B] 1,960

8. Computation of Deferred Tax

` in ‘000s
Ishwar Ltd. + Vinayak Ltd. 3,65,000
Fair value adjustments in Vinayak Ltd. (from W.N.1) 42,000
4,07,000

5. Paragraph 24 of Ind AS 20 provides that government grants related to assets, including

non-monetary grants at fair value, shall be presented in the balance sheet either by
setting up the grant as deferred income or by deducting the grant in arriving at the
carrying amount of the asset.
In accordance with the above, journal entries and presentation of grants related to
assets under both the methods are as follows:
Method 1: When the deferred income account is set-up with the amount of
government grant
(I) Journal Entries
S. Particulars Nature of Account Dr./ Amount Amount
No. Cr. (in `) (in `)
(i) Bank A/c Balance Sheet (Asset) Dr. 15,000
To Government Balance Sheet Cr. 15,000
Grant Deferred (Liability)
Income A/c
(Being grant received
and deferred income
set up)
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(ii) Government Grant Balance Sheet Dr. 3,000

Deferred Income A/c (Liability)
To Government Income (P/L) Cr. 3,000
Grant Income A/c
(Being amortisation of
the grant in Profit and
loss A/c for the current
year)
(iii) Depreciation A/c Expense (P/L) Dr. 20,000
To Accumulated Balance Sheet Cr. 20,000
Depreciation A/c (Asset)
(Being depreciation
charge of the asset for
the current year)
(iv) Government Grant Income (P/L) Dr. 3,000
Income A/c
To Profit and Loss P/L Cr. 3,000
A/c
(Being transfer of
government grant
income to profit and loss
A/c)
(v) Profit and Loss A/c P/L Dr. 20,000
To Depreciation A/c Expense (P/L) Cr. 20,000
(Being the charge of
depreciation transferred
to profit and loss A/c)

(II) Presentation in Balance Sheet and Statement of Profit and Loss

Extract of Statement of Profit and Loss
Particulars Amount (in `)
Income
Government grant (Refer W.N.1) 3,000
Expenses
Depreciation (1,00,000 x 20%) (20,000)
Net effect on profit and loss (17,000)
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Presentation in Balance Sheet (Year 1)

Particulars Amount (in `)

Non-current Assets
Property, Plant and Equipment
Plant & machinery 1,00,000
Accumulated depreciation (1,00,000 × 20%) (20,000)
80,000
Non-current liabilities
Government grant (Refer W.N.1) 9,000
Current liabilities
Government grant (Refer W.N.1) 3,000

Working Note 1: Presentation in Balance Sheet as current and non-current

liability
Particulars Amount (in `)
Portion to be amortised in next 12 months (15,000 x 20%) 3,000
Portion to be amortised after 12 months 9,000
Total Balance 12,000

Method 2: When the government grant is deducted from the cost of the asset
(I) Journal Entries
S. Particulars Nature of Account Dr./ Amount Amount
No. Cr. (in `) (in `)
(i) Bank A/c Balance Sheet Dr. 15,000
(Asset)
To Government Balance Sheet Cr. 15,000
Grant A/c (Liability)
(Being grant
received)
(ii) Government Grant Balance Sheet Dr. 15,000
A/c (Liability)
To Plant & Balance Sheet Cr. 15,000
Machinery A/c (Asset)
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(Being cost of asset

reduced with grant
received)
(iii) Depreciation A/c Expense (P/L) Dr. 17,000
(85,000 x 20%)
To Accumulated Balance Sheet Cr. 17,000
Depreciation A/c (Asset)
(Being depreciation
charge of the asset
for the current year)
(iv) Profit and Loss A/c P/L Dr. 17,000
To Depreciation Expense (P/L) Cr. 17,000
(Being the charge of
depreciation
transferred to the
profit and loss A/c)

(II) Presentation in Balance Sheet and Statement of Profit and Loss

Extract of Statement of Profit and Loss (Year 1)

Particulars Amount (in `)

Depreciation (` 85,000 x 20%) (17,000)

Extract of Balance Sheet (Year 1)

Particulars Amount (in `)

Non-current Assets
Property, Plant and Equipment
Plant & machinery
Original cost 1,00,000
Less: Government Grant (15,000)
Adjusted cost 85,000
Accumulated depreciation (17,000)
Carrying amount 68,000
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6. Extract of Y Ltd.’s Statement of Profit and Loss
for the year ended 31st March, 20X3
20X2-20X3 Reference 20X1- Reference
to W.N. 20X2 to W.N.
Restated
` `
Revenue 1,04,000 73,500
Cost of sales (20X1-20X2
previously ` 53,500) (79,100) 1 (60,000) 4
Gross profit 24,900 13,500
Other income — change in
the measurement policy
i.e. the value of
investment in associate at
FVTPL 5,000 2 2,000 5
Profit before tax 29,900 15,500
Income tax expense (8,970) 3 (4,650) 6
Profit for the year 20,930 10,850

Extract of Y Ltd.’s Statement of Changes in Equity (Retained Earnings)

for the year ended 31st March, 20X3
20X2-20X3 Reference 20X1-20X2 Reference
to W.N. Restated to W.N.
` `
Retained earnings, as
restated, at the beginning
of the year
- as previously stated 34,000 20,000
- effect of the -
correction of a prior (4,550) 7
period error
- effect of a change in
accounting policy 11,900 13 10,500 12
41,350 30,500
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Profit for the year 20,930 10,850

Retained earnings at the
end of the year 62,280 41,350

Y Ltd.
Extract of Notes to the Financial Statements for the year ended 31st March, 20X3
Note X : Change in Accounting Estimates
Due to usage of improved lubricants the estimated useful life of the machine used for
production was increased from four years to seven years. The effect of the change in
the useful life of the machine is to reduce the depreciation allocation by ` 900 in
20X2-20X3 and 20X3-20X4. The after-tax effect is an increase in profit for the year of
` 630 for each of the two years.
Depreciation expense in 20X4-20X5 to 20X6-20X7 is increased by ` 600 because of
revision in the useful life of machinery, as under the initial estimate, the asset would
have been fully depreciated at the end of 20X3-20X4. The after-tax effect for these
three years is a decrease in profit for the year by ` 420 per year.
Note Y : Correction of Prior Period Error
In 20X2-20X3 the entity identified that ` 6,500 products that had been sold in
20X1-20X2 were included erroneously in inventory at 31st March, 20X2. The financial
statements of 20X1-20X2 have been restated to correct this error. The effect of the
restatement is ` 6,500 increase in the cost of sales and ` 4,550 decrease in profit for
the year ended 31st March, 20X2 after decreasing income tax expense by ` 1,950.
This resulted in ` 4,550 (decrease) restatement of retained earnings at
31st March, 20X2.
Note Z : Change in Accounting Policy
In 20X2-20X3 the entity changed its accounting policy for the measurement of
investments in associates from cost model to fair value model as per Ind AS 109.
Management judged that this policy provides reliable and more relevant information
because dividend income and changes in fair value are inextricably linked as integral
components of the financial performance of an investment in an associate and
measurement at fair value is necessary if that financial performance is to be reported in
a more meaningful way. This change in accounting policy has been accounted for
retrospectively. The comparative information has been restated. A new line item,
‘Other income — change in the fair value of investment in associate’, has been added
in the Statement of Profit and Loss and Retained Earnings. The effect of the
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restatement has been to add income of ` 2,000 as a result of the increase in value of
the associate during the year ended 31st March, 20X2 which resulted in ` 1,400
increase in profit for the year (after including a resulting increase in income tax
expense of ` 600). This, together with ` 10,500 (increase) restatement of retained
earnings at 31st March, 20X1, resulted in a ` 11,900 increase in retained earnings at
31st March, 20X2. Furthermore, profit for the year ended 31st March, 20X3 was ` 3,500
higher (after deducting ` 1,500 tax effect) as a result of recording a further ` 5,000
(W.N.2) increase in the fair value of the investment in an associate.
Working Notes:
1. ` 86,500 (given) minus ` 6,500 correction of error (now recognised as an
expense in 20X1-20X2) minus ` 900 (W.N.9) effect of the change in accounting
estimate.
2. ` 25,000 fair value (20X2-20X3) minus ` 20,000 fair value (20X1-20X2) = ` 5,000
(the effect of applying the new accounting policy (fair value model) in 20X2-20X3).
3. ` 5,250 + ` 1,950 (W.N.8) + 30% (` 900 (W.N.9) reduction in depreciation
resulting from the change in accounting estimate) + 30% (` 5,000 increase in the
fair value of investment property — change in accounting policy) = ` 8,970.
4. ` 53,500 as previously stated + ` 6,500 (products sold and incorrectly included in
closing inventory in 20X1-20X2) = ` 60,000 (that is, the prior period error is
corrected retrospectively by restating the comparative amounts).
5. ` 20,000 fair value (20X1-20X2) minus ` 18,000 fair value (20X0-20X1) = ` 2,000
(the effect in 20X1-20X2 of the change in accounting policy for investments in
associates from the cost model to the fair value model).
6. ` 6,000 as previously stated minus ` 1,950 (W.N.8) correction of prior period error
+ 30% (` 2,000 change in accounting policy) = ` 4,650.
7. ` 6,500 (products sold and incorrectly included in inventory in 20X1 -20X2) –
` 1,950 (W.N.8) (tax overstated in 20X1-20X2) = ` 4,550.
8. ` 6,500 (products sold and incorrectly included in inventory in 20X1 -20X2) x 30%
(income tax rate) = ` 1,950.
9. ` 1,500 depreciation (using old estimate, that is, ` 6,000 cost ÷ 4 years) minus
` 600 (W.N.10) (using new estimate of useful life) = ` 900.
10. ` 3,000 (W.N.11) carrying amount ÷ 5 years remaining useful life = ` 600
depreciation per year.
11. [` 6,000 cost minus (` 1,500 depreciation x 2 years)] = ` 3,000 carrying amount
at 31st March, 20X2.
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12. (` 18,000 fair value of investment in associates at 31 st March, 20X1 minus
` 3,000 carrying amount based on the cost model at the same date) x 0.7 (to
reflect 30% income tax rate) = ` 10,500 (effect of a change in accounting policy
(from cost model to fair value model)).
13. ` 10,500 (W.N.12) + [` 2,000 (W.N.5) x 0.7 (to reflect 30% income tax rate)] =
` 11,900.
7. Since there is no change to the estimated residual value of zero, or to the useful life of
the building after revaluation, at the end of the 2nd year i.e. 31st March 20X3, the
building will be depreciated over the next 9 years at ` 15,000 per year.
Following the revaluation, the temporary difference associated with the building is
` 1,35,000. Of this amount, only ` 90,000 arose on initial recognition, since ` 10,000
of the original temporary difference of ` 1,00,000 arising on initial recognition of the
asset has been eliminated through depreciation of the asset. The carrying amount
(which equals the temporary difference, since the tax base is zero) and depreciation
during the year ended 31st March, 20X3 and thereafter may then be analysed as
follows:

Year Carrying Tax Gross Unrecognised Recognised Deferred

amount base temporary temporary temporary tax
difference difference difference liability
a b (c= a-b) d (e=c-d) f=e@
30%
0 1,00,000 - 1,00,000 1,00,000 - -
1 90,000 - 90,000 90,000 - -
Reval 1,35,000 - 1,35,000 90,000 45,000 13,500
2 1,20,000 - 1,20,000 80,000 40,000 12,000
3 1,05,000 - 1,05,000 70,000 35,000 10,500
4 90,000 - 90,000 60,000 30,000 9,000
5 75,000 - 75,000 50,000 25,000 7,500
6 60,000 - 60,000 40,000 20,000 6,000
7 45,000 - 45,000 60,000 15,000 4,500
8 30,000 - 30,000 20,000 10,000 3,000
9 15,000 - 15,000 10,000 5,000 1,500
10 - - - - - -
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Note: The depreciation is allocated pro rata to the cost element and revalued
element of the total carrying amount.
On 31st March, 20X3, the entity recognises a deferred tax liability based on the
temporary difference of ` 45,000 arising on the revaluation (i.e., after initial
recognition) giving a deferred tax expense of ` 13,500 (` 45,000 @ 30%) recognised in
Other Comprehensive Income (OCI).
This has the result that the effective tax rate shown in the financial statements for the
revaluation is 30% (` 45,000 gain with deferred tax expense of ` 13,500).
As can be seen from the table above, as at 31st March, 20X4 (year 3), ` 40,000 of the
total temporary difference arose after initial recognition. The entity, therefore, provides
for deferred tax of ` 12,000 (` 40,000 @ 30%), and a deferred tax credit of ` 1,500
(the reduction in the liability from ` 13,500 to ` 12,000) is recognised in profit or loss.
The deferred tax credit can be explained as the tax effect at 30% of the additional
` 5,000 depreciation relating to the revalued element of the building.
8. In the given fact pattern, the entity should apply the recognition and measurement
principles relevant for an internally generated intangible asset. The entity has to
ensure compliance with additional requirements relating to internally generated
intangible assets in addition to general recognition criteria and initial measurement of
intangible asset. In the instant case, for the measurement of software development
cost, entity must evaluate the costs incurred for recognition of an intangible asset
arising from development phase with reference to paragraphs 65 to 67 of Ind AS 38.
According to the said paragraphs, the initial carrying amount of the software will be
computed as follows:
Particulars Amount Amount to be Remarks
(`in capitalised as
thousands) Intangible Assets
(` in thousands)
Purchase price of 600 600 The cost of materials or / and
imported software services used or consumed
in generating the intangible
asset and any directly
attributable cost of preparing
the asset for its intended use.
Employment costs 1,200 900 Employment costs for the
(Note 1) period of nine months are
directly attributable costs.
Therefore, the cost to be
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capitalized is ` 900 thousand
(i.e., 9/12 x ` 1,200
thousand) for nine months as
the asset was ready for its
intended use by that time. It
is assumed that ` 100
thousand is equally incurred
each month. Capitalisation
of eligible costs should cease
when the asset is capable of
operating in the manner
intended by management.
Testing costs 1,800 1,800 The cost of testing whether
the asset is functioning
properly is a directly
attributable cost. (Refer
paragraph 59 of Ind AS 38)
Other costs directly 450 400 Cost of identified
related to inefficiencies deducted, i.e.,
development (Note ` 450 thousand –
2) ` 50 thousand.
Professional fees 220 220 The cost of materials or/and
paid for bringing services used or consumed
the software to its in generating the intangible
working condition asset
Costs of training 195 Nil Expenditure on training staff
provided to staff to operate the asset cannot
be capitalised. (Refer
paragraph 67 of Ind AS 38)
Costs of 1,560 Nil Selling, administrative and
advertising in other general overhead
market expenditure cannot be
Administrative and 825 Nil capitalised. (Refer paragraph
general overheads 67 of Ind AS 38)
Total 6,850 3,920

Accordingly, the initial carrying value of the software is ` 39,20,000. The remaining
costs will be charged to profit or loss.
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9. Since the interest was initially set at the market rate, on 1st April, 20X1 the entity on
initial recognition will measure the loan at the transaction price, less transaction costs
i.e. at ` 4,900.
The following is the original amortised cost calculation at 1st April, 20X1:

Time Carrying Effective Cash Carrying amount

amount at Interest @ outflow at 31st March
1st April 8.612%

(a) (b=ax8.612%) (c=5000x8%) (d = a + b - c)

20X1-20X2 4,900.00 421.99 (400.00) 4,921.99

20X2-20X3 4,921.99 423.88 (400.00) 4,945.87
20X3-20X4 4,945.87 425.94 (400.00) 4,971.81
20X4-20X5 4,971.81 428.19 (5,400.00) –

At 31st March, 20X2:

1. The present value of the remaining cash flows of the original financial liability is
` 4,921.99 discounted at the original effective interest rate of 8.612%.
2. The present value of the cash flows under the new terms discounted using the
original effective interest rate is ` 4,537.25 (Refer W.N.). Including the ` 50 fee,
the present value of the total cash flows is ` 4,587.25.
3. The difference between ` 4,921.99 and ` 4,587.25 is ` 334.74 which is only 6.8%
(` 334.74 ÷ ` 4,921.99) of the present value of the remaining cash flows of the
original financial liability.
The entity applies its judgement to decide whether the terms of the instruments
exchanged are substantially different. Since the difference of the discounted present
value of the cash flows under the new terms, including any fees paid net of any fees
received and discounted using the original effective interest rate, is less than 10% of
the present value of the remaining cash flows of the original financial liability, this
modification should not be considered a substantial modification of the terms of the
existing loan. Therefore, the modification would not be accounted for as an
extinguishment of the original financial liability.
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Working Note:
The calculation of the present value of the cash flows under the new terms discounted
using the original effective interest rate is as follows:
Time Cash Discounting factor Present value at
outflow @ 8.612% 31st March
31st March, 20X3 250.00 0.921 230.25
31st March, 20X4 250.00 0.848 212.00
31st March, 20X5 5,250.00 0.780 4,095.00
Total present value 4,537.25

10. Statement of Cash Flows for the year ended 31st March, 20X3 (Indirect method)

Particulars ` `
Cash flow from operating activities:
Net Profit before taxes and extraordinary items 16,00,000
(7,20,000 + 8,80,000)
Add: Depreciation 6,00,000
Operating profit before working capital changes 22,00,000
Increase in inventories (1,80,000)
Decrease in trade receivables 16,80,000
Advances (12,000)
Decrease in trade payables (60,000)
Increase in outstanding expenses 2,40,000
Cash generated from operations 38,68,000
Less: Income tax paid (Refer W.N.4) (8,68,000)
Net cash from operations 30,00,000
Cash from investing activities:
Purchase of land (4,80,000)
Purchase of building & equipment (Refer W.N.2) (28,80,000)
Sale of equipment (Refer W.N.3) 3,60,000
Net cash used for investment activities (30,00,000)
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Cash flows from financing activities:

Issue of share capital 8,40,000
Dividends paid (7,20,000)
Net cash from financing activities: 1,20,000
Net increase in cash and cash equivalents 1,20,000
Cash and cash equivalents at the beginning 6,00,000
Cash and cash equivalents at the end 7,20,000

Working Notes:
1. Building & Equipment Account
Particulars ` Particulars `
To Balance b/d 36,00,000 By Sale of assets 7,20,000
To Cash / bank By Balance c/d 57,60,000
(purchases)(bal. fig) 28,80,000
64,80,000 64,80,000

2. Building & Equipment Accumulated Depreciation Account

Particulars ` Particulars `
To Sale of asset (acc. By Balance b/d 12,00,000
depreciation) 4,80,000
To Balance c/d 13,20,000 By Profit & Loss A/c
(provisional) 6,00,000
18,00,000 18,00,000

3. Computation of sale price of Equipment

Particulars `
Original cost 7,20,000
Less: Accumulated Depreciation (4,80,000)
Net cost 2,40,000
Profit on sale of assets 1,20,000
Sale proceeds from sale of assets 3,60,000
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4. Provision for tax Account

Particulars ` Particulars `
To Bank A/c 8,68,000 By Balance b/d 1,20,000
To Balance c/d 1,32,000 By Profit & Loss A/c
(provisional) 8,80,000
10,00,000 10,00,000

11. Paragraph 15 of Ind AS 105 states that an entity shall measure a non-current asset (or
disposal group) classified as held for sale at the lower of its carrying amount and fair
value less costs to sell.
Further, paragraph 17 of Ind AS 105 states that when the sale is expected to occur
beyond one year, the entity shall measure the costs to sell at their present value. Any
increase in the present value of the costs to sell that arises from the passage of time
shall be presented in profit or loss as a financing cost.
Company X has identified a disposal group and is committed to sell the same. The
sale is expected to be completed after a period of one year hence, it will measure the
costs to sell such disposal group at present value as per paragraph 17 of Ind AS 105.
A. On 30th September, 20X1
The disposal group will be measured at fair value less costs to sell which will be
as follows:
Fair value: ` 400.00 crores
PV of costs to sell: (` 8.67 crores) (` 10 crores x 0.867)
Total: ` 391.33 crores

B. On 31st March, 20X1

The disposal group will be measured at fair value less costs to sell which will be
as follows:
Fair value: ` 400.00 crores
PV of costs to sell: (` 9.09 crores) (10 x 0.909)
Total: ` 390.91 crores

The increase in costs to sell the division by ` 0.42 crore (` 9.09 crores – ` 8.67 crores)
will be recognised in profit and loss as financing cost in accordance with paragraph 17
of Ind AS 105.
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12. Journal Entries for the year 20X1-20X2

` `
Inventory A/c (W.N.1) Dr. 42,490
To Cash/Bank A/c 42,490
(To recognise the cost of raw materials purchased)
Inventory A/c (W.N.2) Dr. 11,240
To Cash/Bank A/c (cost of direct labour) 5,000
To Property, plant and equipment (accumulated
depreciation-factory equipment) 600
To Property, plant and equipment (accumulated
depreciation-raw-materials delivery vehicle) 400
To Cash/Bank A/c (cost of electricity used) 300
To Property, plant and equipment (accumulated
depreciation-factory supervisor’s vehicle) 200
To Cash/Bank A/c (factory management’s
salaries) 3,000
To Cash/Bank A/c (factory rental) 1,000
To Cash/Bank A/c (administrative salaries
attributable to the factory) 610
To Property, plant and equipment (attributable
portion of accumulated depreciation-
administration building) 100
To Property, plant and equipment (attributable
portion of accumulated depreciation-
administration vehicles) 30
(To recognise the costs of conversion)
Inventory A/c (W.N.2) Dr. 200
To Inventory A/c (consumable stores) 200
(To recognise the costs of consumable stores inventory
consumed)
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The total cost of inventories = Costs of purchase + Costs of conversion
= ` 42,490 + ` 11,240 + ` 200
= ` 53,930
Working Notes:
1. Computation of costs of purchase
Description `
Purchase price 30,000
Import duty and other non-refundable purchase taxes 8,000
Freight costs for bringing the goods to the factory storeroom 3,000
Cost of unloading the raw materials into the storeroom 20
Packaging 2,000
Less: Trade discounts, rebates and subsidies (530)
Cost of purchase 42,490

Note: Refundable taxes do not form part of the cost of inventories.

2. Computation of costs of conversion
Description `
Direct labour 5,000
Fixed production overheads
Depreciation and maintenance of factory equipment 600
Depreciation of vehicle used for transporting the goods 400
Depreciation of vehicle used by factory supervisor 200
Factory electricity usage 300
Factory management 3,000
Factory rental 1,000
Other costs of administering the factory
20% of depreciation of administration building 100
20% of depreciation of administration vehicles 30
20% of administrative staff costs 610
Variable production overheads
Indirect material—consumables 200
Cost of conversion 11,440
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13.
Property Classification of properties not held for operational purpose
A Ltd.’s office Excess portion of office space has been given on lease to
building (registered earn rental income. Out of 15 storey building, only 3 floors
office) are occupied by A Ltd. Such excess office space was
constructed for the purpose of letting it out. According to
A Ltd., such excess office space will continue to be let out on
lease to external parties and have no plans to occupy it, at
least in near future. Further, office space given on rent,
although in same building, is separately identifiable from
another owner-occupied portion and hence can be sold
separately (if required). Hence, the excess space will qualify
to be an investment property.
Flats in Township Excess flats have been given on lease to earn rental income.
located in location According to A Ltd., there is no intention of selling such
1 excess flats or allotting it to its employees. Further, flats
given on rent, can be sold separately from flats occupied by
A Ltd.’s employees as they are separately identifiable. A Ltd.
also charges its lessees on account of ancillary services, i.e.,
water, electricity, cable connection, etc., but the monthly
charges in such cases are generally not significant as
compared to rental payments. Hence, flats given on rent
should qualify to be an ‘investment property’.
With regards to the flats kept vacant, A Ltd. has to evaluate
the purpose of holding these flats, i.e., whether these would
be kept for earning rentals or will it be allotted to its future
employees. In case they are held for earning rentals, it
would be classified as an investment property; and if they are
held for allotment to future employees, it would form part of
property, plant and equipment.
Flats in township 350 flats are given on lease to earn rental income and
located in location assuming that management intends to let out these flats on
2 rent in future, such flats should be classified as an
‘investment property.
With regards to the flats kept vacant, A Ltd. has to evaluate
the purpose of holding these flats, i.e., whether these would
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be kept for earning rentals or will it be allotted to its future
employees. In case they are held for earning rentals, it
would be classified as an investment property; and if they are
held for allotment to future employees, it would form part of
property, plant and equipment.
Hostel located in Rooms in a hostel have been let out to G Ltd. to be used by
location 1 its personnel. A Ltd. also charges G Ltd. on account of
ancillary services, i.e., water, electricity, cable connection,
etc., but the monthly charges in such cases are generally not
significant as compared to rental payments. Hence, it should
be classified as an ‘Investment property’.
Land in location 1 Although management has not determined use for property
after the development of park, yet in the medium-term the
land is held for capital appreciation. As per Ind AS 40, if an
entity has not determined that it will use the land either as
owner-occupied property or for short term sale in the ordinary
course of business, then it will be considered as land held for
capital appreciation. Therefore, management should classify
the property as an investment property.
Land in location 1 Since the land is held with an intention of giving it on lease
and earning capital appreciation over a period, it should be
classified as an ‘Investment property’.
Land in location 2 Since the land is held with an intention of giving it on lease
and earning capital appreciation over a period, it should be
classified as ‘Investment property’.

14. Paragraph B34 of Ind AS 111 states that when an entity enters into a transaction with a
joint operation in which it is a joint operator, such as a sale or contribution of assets, it
is conducting the transaction with the other parties to the joint operation and, as such,
the joint operator shall recognise gains and losses resulting from such a transaction
only to the extent of the other parties’ interests in the joint operation.
The amount of gain or loss to be recognised by Entity A in its separate financial
statements as well as consolidated financial statements will be computed as below:
(All amounts are ` in lakhs)
A’s share of fair value of asset contributed by Entity B 60
(50% x ` 120 lakhs)
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Less: Asset contributed by Entity A to the joint operation – carrying

amount of proportion ceded to Entity B (50% x ` 100 lakhs) (50)
Gain to be recognised by Entity A 10
The gain can alternatively be calculated as:
Share acquired in fair value of net assets of joint operation 120
(50% x ` 240 lakhs)
Less: Carrying amount of asset contributed (100)
Less: Unrealised portion of gain on asset contributed (10)
(50% × (` 120 lakhs – ` 100 lakhs))
Gain to be recognised by Entity A 10
The amount of gain or loss to be recognised by Entity B in its separate financial
statements as well as consolidated financial statements will be computed as below:
(All amounts are ` in lakhs)
B’s share of fair value of asset contributed by Entity A 60
(50% x ` 120 lakhs)
Less: Asset contributed by Entity B to the joint operation – carrying
amount of proportion ceded to Entity A (50% x ` 80 lakhs) (40)
Gain to be recognised by Entity B 20
The gain can alternatively be calculated as:
Share acquired in fair value of net assets of joint operation 120
(50% x ` 240 lakhs)
Less: Carrying amount of asset contributed (80)
Less: Unrealised portion of gain on asset contributed (20)
(50% × (` 120 lakhs – ` 80 lakhs))
Gain to be recognised by Entity B 20
15. The goodwill on consolidation of Kaplan Ltd. that is recognized in the consolidated
balance sheet of Jackson Ltd. is ` 30 million (` 190 million – 80% x ` 200 million).
This can only be reviewed for impairment as part of the cash generating units to which
it relates. Since here the goodwill cannot be meaningfully allocated to the units, the
impairment review is in two parts.
Units A and C have values in use that are more than their carrying values. However,
the value in use of Unit B is less than its carrying amount. This means that the assets
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of unit B are impaired by ` 24 million (` 90 million – ` 66 million). This impairment
loss will be charged to the Statement of Profit and Loss.
Assets will be written down on a pro-rata basis as shown in the table below:
` in million
Asset Impact on carrying value
Existing Impairment Revised
Intangible assets 10 (4) 6
Property, plant and equipment 50 (20) 30
Current assets 30 Nil* 30
Total 90 (24) 66
*The current assets are not impaired because they are expected to realize at least their
carrying value when disposed of.
Following this review, the three units plus the goodwill are reviewed together. The
impact of this is shown in the following table, given that the recoverable amount of the
business as a whole is ` 350 million. ` in million
Component Impact of impairment review on carrying value
Existing Impairment Revised
Goodwill (see below) 37.50 (23.50) 14.00
Unit A 170.00 Nil 170.00
Unit B (revised) 66.00 Nil 66.00
Unit C 100.00 Nil 100.00
Total 373.50 (23.50) 350.00
As per Appendix C of Ind AS 36, given that the subsidiary is 80% owned the goodwill
must first be grossed up to reflect a notional 100% investment. Therefore, the goodwill
will be grossed up to ` 37.50 million (` 30 million x 100/80). The impairment loss of
` 23.50 million is all allocated to goodwill, leaving the carrying values of the individual
units of the business as shown in the table immediately above.
The table shows that the notional goodwill that relates to a 100% interest is written
down by ` 23.50 million to ` 14.00 million. However, in the consolidated financial
statements the goodwill that is recognized is based on an 80% interest so the loss that
is actually recognized is ` 18.80 million (` 23.50 million x 80%) and the closing
consolidated goodwill figure is ` 11.20 million (` 14.00 million x 80%) or (` 30 million –
` 18.80 million).
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16. 1. Extract of Balance Sheet (Net Amount in the Balance Sheet) (` in lakhs)
31.3.20X2 1.4.20X1
PV of Defined Benefit Obligation (given) (1,700.00) (1,500.00)
FV of Plan Assets (given) 1,400.00 1,300.00
Net Defined Benefit Liability (under Long-term
Provision) (300.00) (200.00)

2. Extract of Statement of Profit and Loss

(` in lakhs)
Current service cost (given) 155.00
Past service cost (given) 37.50
Gain on settlement (` 200 lakhs – ` 187.50 lakhs) (12.50)
Net interest on net defined benefit liability
[` 75 lakhs - ` 65 lakhs] 10.00
Total to Statement of Profit and Loss 190.00

3. Extract of Other Comprehensive Income (Remeasurements)

(` in lakhs)
Actuarial loss on defined benefit obligation (W.N.1) (237.50)
Return on plan assets other than expected return (W.N.2) 152.50
Total (85.00)

Working Notes:
1. Defined Benefit Obligation Account
Particulars ` Particulars `
in lakhs in lakhs
To Plan Assets (benefits 105.00 By Balance b/f (given) 1,500.00
paid) [balance as on 1.4.20X1]
To Curtailment and 200.00 By Current Service Cost 155.00
Settlement
By Interest Cost 75.00
[5% on Opening
balance]
By Past service cost 37.50
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To Balance c/d (given) By Actuarial Loss
[balance as on (balancing figure) 237.50
31.3.20X2] 1,700.00
2,005.00 2,005.00
2. Plan Assets Account
Particulars ` Particulars `
in lakhs in lakhs
To Balance b/f (given) 1,300.00 By Defined Benefit Obligation 105.00
[balance as on [benefits paid]
1.4.20X1]
To Expected Return 65.00 By Payments on curtailment 187.50
[5% on Opening and settlement
balance]
To Bank (contributions 175.00 By Balance c/d (given) 1,400.00
paid) [balance as on 31.3.20X2]
To Actuarial Gain
(balancing figure) 152.50
1,692.50 1,692.50

The above Defined Benefit Obligation Account and Plan Assets Account can
alternatively be presented in a statement form as follows:
Defined Benefit Obligation Plan Assets
Particulars ` in lakhs Particulars ` in lakhs
PV of Obligation b/f. 1,500.00 FV of Plan Assets b/f. 1,300.00
Interest Cost [` 1,500 x Interest Income [` 1,300 x
5%] 75.00 5%] 65.00
Current Service Cost 155.00 Contribution during 20X1-
20X2 175.00
Benefits paid during Benefits paid during 20X1-
20X1-20X2 (105.00) 20X2 (105.00)
Plan Curtailment and Payment towards settlement (187.50)
Settlement (200.00)
Past Service Cost 37.50
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Remeasurement Loss Remeasurement Gain
(balancing figure) 237.50 (balancing figure) 152.50
PV of Obligation c/f. 1,700.00 FV of Plan Assets c/f. 1,400.00

17. Paragraph 56 of Ind AS 115 states that an entity shall include in the transaction price
some or all of an amount of variable consideration estimated in accordance with
paragraph 53 only to the extent that it is highly probable that a significant reversal in
the amount of cumulative revenue recognised will not occur when the uncertainty
associated with the variable consideration is subsequently resolved.
Further, paragraph 57 of Ind AS 115 state that in assessing whether it is highly
probable that a significant reversal in the amount of cumulative revenue recognised will
not occur once the uncertainty related to the variable consideration is subsequently
resolved, an entity shall consider both the likelihood and the magnitude of the revenue
reversal. Factors that could increase the likelihood or the magnitude of a revenue
reversal include, but are not limited to, any of the following:
(a) the amount of consideration is highly susceptible to factors outside the entity’s
influence. Those factors may include volatility in a market, the judgement or
actions of third parties, weather conditions and a high risk of obsolescence of the
promised good or service.
(b) the uncertainty about the amount of consideration is not expected to be resolved
for a long period of time.
(c) the entity’s experience (or other evidence) with similar types of contracts is
limited, or that experience (or other evidence) has limited predictive value.
(d) the entity has a practice of either offering a broad range of price concessions or
changing the payment terms and conditions of similar contracts in similar
circumstances.
(e) the contract has a large number and broad range of possible consideration
amounts.
Entity X estimates that the consideration in the above contract is variable. Therefore,
in accordance with paragraphs 56 and 57 of Ind AS 115, Entity X is required to
consider the constraints in estimating variable consideration. Entity X determines that
it has significant experience with this product and with the purchasing pattern of the
Entity Y. Thus, if Entity X concludes that it is highly probable that a significant reversal
in the cumulative amount of revenue recognised (i.e. ` 100 per unit) will not occur
when the uncertainty is resolved (i.e. when the total amount of purchases is known),
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REVISION TEST PAPER

FINANCIAL REPORTING
then the Entity X will recognise revenue of ` 9,500 (95 chargers x ` 100 per charger)
for the half year ended 30th September, 20X1.
Further, paragraphs 87 and 88 of Ind AS 115 that after contract inception, the
transaction price can change for various reasons, including the resolution of uncertain
events or other changes in circumstances that change the amount of consideration to
which an entity expects to be entitled in exchange for the promised goods or services.
An entity shall allocate to the performance obligations in the contract any subsequent
changes in the transaction price on the same basis as at contract inception.
Consequently, an entity shall not reallocate the transaction price to reflect changes in
stand-alone selling prices after contract inception. Amounts allocated to a satisfied
performance obligation shall be recognised as revenue, or as a reduction of revenue,
in the period in which the transaction price changes.”
In accordance with the above, in the month of October 20X1, due to change in
circumstances on account of Entity Y acquiring Entity C and consequential increase in
sale of chargers to Entity Y, Entity X estimates that Entity Y's purchases will exceed
the 1,000 chargers threshold till March 20X2 for the period and therefore, it will be
required to retrospectively reduce the price per charger to ` 90.
Consequently, the Entity X will recognise revenue of ` 53,050 for the quarter ended
December 20X1 which is calculated as follows:

Particulars Amount in `
Sale of 600 chargers (600 chargers x ` 90 per charger) 54,000
Less: Change in transaction price (95 chargers x ` 10 price
reduction) for the reduction of revenue relating to units
sold till September 20X1. (950)
Revenue recognised for the quarter ended December 20X1 53,050

18. Para 16 of Ind AS 41 says that entities often enter into contracts to sell their biological
assets or agricultural produce at a future date. Contract prices are not necessarily
relevant in measuring fair value, because fair value reflects the current market
conditions in which buyers and sellers would enter into a transaction. As a result, the
fair value of a biological asset or agricultural produce is not adjusted because of the
existence of a contract.
Moreover, the OHA contract represents just 7.5% [(15,000 / 2,00,000) x 100] of t he
total number of palms in the farm. Hence, the contract price can’t be considered for
fair valuation of the entire inventory of bearer plants.
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FINANCIAL REPORTING
The valuation in this case would be as follows:
Adding the fair value for 15,000 coconut palm (15,000 palm x 80 nuts x ` 15 x 5 times)
and 1,85,000 coconut palm (1,85,000 palm x 80 nuts x ` 30 x 5 times), we get
total valuation of 2,00,000 coconut palm as ` 231 crore.
19. As per Ind AS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’ , closure of
a division is a restructuring exercise. Ind AS 37 states that a constructive obligation to
proceed with the restructuring arises when at the reporting date the entity has:
– Commenced activities connected with the restructuring; or
– Made a public announcement of the main features of the restructuring to those
affected by it. In this case a public announcement has been made and so a
provision will be necessary at 31st March, 20X2.
This will result in the following charges to the Statement of Profit and Loss:
(i) Estimate of redundancy costs of ` 1.9 million is the best estimate of the
expenditure at the date the financial statements are authorized for issue.
Changes in estimates after the reporting date are taken into account for this
purpose as an adjusting event after the reporting date. No charge is necessary
for the retraining costs as these are not incurred in 20X1 -20X2 and cannot form
part of a restructuring provision as they are related to the ongoing activities of the
entity.
(ii) Impairment of plant and equipment of ` 6.5 million is although not strictly part of
the restructuring provision the decision to restructure before the year-end means
that related assets need to be reviewed for impairment. In this case the
recoverable amount of the plant and equipment is only ` 1.5 million. As per
Ind AS 36 ‘Impairment of Assets’, property, plant and equipment should be written
down to this amount, resulting in a charge of ` 6.5 million to the income
statement.
(iii) For compensation for breach of contract of ` 0.55 million, same principle applies
here as applied to the redundancy costs.
(iv) No charge is recognized in 20X1-20X2 with respect to future operating losses of
20X2-20X3. Future operating losses relate to future events and provisions are
made only for the consequences of past events.
(v) Ind AS 37 states that an onerous contract is one for which the expected cost of
fulfilling the contract exceeds the benefits expected from the contract. Provision
is made for the lower of the expected net cost of fulfilling the contract and the cost
of early termination (not available in this case).
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FINANCIAL REPORTING
The net cost of fulfilling the contract is ` 4.51 million [` 1.5 million x 4.32 –
` 0.3 million x 0.95 – ` 0.5 million x (4.32 – 0.95)].
20. Paragraphs B21 of Ind AS 116 states that to control the use of an identified asset, a
customer is required to have the right to obtain substantially all of the economic
benefits from use of the asset throughout the period of use (for example, by having
exclusive use of the asset throughout that period). A customer can obtain economic
benefits from use of an asset directly or indirectly in many ways, such as by using,
holding or subleasing the asset. The economic benefits from use of an asset include
its primary output and by-products (including potential cash flows derived from these
items), and other economic benefits from using the asset that could be realised from a
commercial transaction with third party.
In the given case, Entity X has the right to obtain substantially all of the economic
benefits from the use of the solar power station over the 20 -year period because it
obtains:
– electricity produced by the power station i.e. the primary product from use of the
asset over the lease term and
– renewable energy credits – i.e. the by-product from use of the asset.
Although Entity Y will receive economic benefits from the solar power station in the
form of tax credits, those economic benefits relate to the ownership of the solar power
station rather than the use of the power station. Thus, these credits are not considered
in this assessment.
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FINAL PAPER 1: FINANCIAL REPORTING

Part I : Amendments applicable for May, 2023 Examination

I. Amendments to the Companies (Corporate Social Responsibility) Rules, 2014

(issued on 20th September, 2022) applicable for May, 2023 Examination
The Ministry of Corporate Affairs (MCA), vide a notification dated 20 th September 2022
issued the Companies (Corporate Social Responsibility) Amendment Rules, 2022.
These amendments are effective from the date of their publication in the official gazette
i.e., 20th September 2022. Some of the significant amendments notified therein are:
 Constitution of a CSR Committee by a company having any amount in its
unspent CSR account
As per the amendment, a proviso has been added under Rule 3(1), stating that a
company that has any amount outstanding in its unspent CSR account should
constitute a CSR Committee and comply with the relevant provisions of Section
135 of the Companies Act, 2013.
 Omission of Rule 3(2) of the Companies (Corporate Social Responsibility)
Rules, 2014
Rule 3(2) required that every company that ceases to fulfil the criteria prescribed
under Section 135(1) of the Companies Act, 2013 for three consecutive financial
years is not required to constitute a CSR Committee. Now as per the amendment,
this Rule 3(2) of the Companies (Corporate Social Responsibility) Rules, 2014
has been omitted.
 Inclusion in the list of entities that can be engaged as implementation
agencies
Rule 4(1) of the Companies (Corporate Social Responsibility) Rules, 2014
provides that the Board of Directors must ensure that CSR activities can be
undertaken by a company itself or through certain implementation agencies which
were listed therein. As per the amendment, in addition to the class of companies
listed under Rule 4(1) of the Companies (Corporate Social Responsibility) Rules,
2014, new class of entities exempted under Section 10 of Clause (23C), which
may be approved by the Principal Commissioner or Commissioner, have been
included as implementation agencies. These entities are:
➢ Any fund or institution established for charitable purposes having regard to
the objects of the fund or institution and its importance throughout India, or
throughout any State or States,
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➢ Any trust (including any other legal obligation), or institution wholly for public
religious purposes, or wholly for public religious and charitable purposes,
having regard to the manner in which the affairs of the trust or institution are
administered and supervised for ensuring that the income accruing thereto is
properly applied for the objects thereof,
➢ Any university or other educational institution existing solely for educational
purposes and not for purposes of profit, other than those mentioned in sub-
clause (iiiab) or sub-clause (iiiad) of Clause 23(C) of the Income Tax Act,
1961, and
➢ Any hospital or other institution for the reception and treatment of persons
suffering from illness or mental defectiveness, or for the reception and
treatment of persons during convalescence, or of persons requiring medical
attention or rehabilitation, existing solely for philanthropic purposes and not
for purposes of profit, other than those mentioned in sub-clause (iiiac) or
sub-clause (iiiae) of Clause 23(C) of the Income Tax Act, 1961.
 Change in the limits of expenses incurred towards impact assessment
Earlier Rule 8 of the Companies (Corporate Social Responsibility) Rules, 2014
provides that every company having an average CSR obligation of ` 10 crore or
more in pursuance of Section 135(5) of the Companies Act, 2013 in the three
immediately preceding financial years, should undertake an impact assessment,
through an independent agency, of their CSR projects having outlays of ` 1 crore
or more, and which have been completed not less than one year before
undertaking the impact study.
Such a company may book an expenditure towards CSR for that financial year,
which should not exceed five per cent of the total CSR expenditure for that
financial year or ` 50 lakh, whichever is less.
As per the amendment, the limit to book expenditure towards impact assessment
has now been reduced to two per cent (earlier five percent) of the total CSR
expenditure for that financial year or ` 50 lakh, whichever is higher (earlier
whichever is lower).
 Revision in Annexure II and e-form of the Companies (Corporate Social
Responsibility) Rules, 2014.
Annexure II of the Companies (Corporate Social Responsibility) Rules, 2014
prescribes a format for the annual report on CSR activities included in the
company’s board report. Some of the significant amendments in the format are:
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➢ Executive summary: As per the amendment in the Annexure II, companies

are required to provide an executive summary along with the weblinks of
impact assessment of CSR projects, which have been carried out.
➢ Disclosure on CSR spent: As per the amendment, companies are required
to disclose only the total amount spent on on-going and other CSR projects.
Earlier, the format required disclosures of details of each project undertaken
by the company (both ongoing projects as well as other projects).
➢ Additional disclosure on unspent CSR amount: In disclosure of unspent
CSR amount for the preceding three financial years, companies are also
required to disclose the balance amount in unspent CSR account, and
deficiency, if any, in accordance with Section 135(6) of the Companies Act,
2013.
II. 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
1st 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’.
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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, Para 17(e) of Ind AS 16 has been amended by adding a clarification
‘Property, Plant that the excess of net proceeds from sale of items produced during
and Equipment’ 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.
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 needs to
‘Provisions, be considered in the costs to fulfil a contract while determining
Contingent whether the contract as onerous.
Liabilities and
As per the amendment made in 2022, both the incremental costs to
Contingent
fulfil a contract and allocation of directly attributable costs will form
Assets’
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 1st April, 2022 with
cumulative effect recognised in the opening balance of retained
earnings or other component of equity, as appropriate on
1st April, 2022. Comparative period financials not to be restated.

Ind AS 103 In March, 2018, IASB revised Conceptual Framework for Financial
‘Business Reporting.
Combinations’ Accordingly, ICAI in August, 2020 came out with the revised
Conceptual Framework for Financial Reporting (the Conceptual
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Ind AS Significant amendment made in 2022

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 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.
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Ind AS Significant amendment made in 2022

Ind AS 101 Para D13 of Ind AS 101 provides an exemption to a first -time
‘First time adopter of Ind AS with regard to cumulative translation differences
adoption of on the date of transition to Ind AS. According to it, first time adopter
Indian of Ind AS are permitted to deem all cumulative translation
Accounting differences for all foreign operations to be zero on the date of
Standards’ 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 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 As per Ind AS 109, a financial liability is derecognised when it is

‘Financial extinguished, which includes exchange between an existing
Instruments’ 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
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Ind AS Significant amendment made in 2022

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 would
‘Agriculture’ 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.
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PART II : QUESTIONS AND ANSWERS

QUESTIONS
Ind AS 110
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 at
1st 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
Trade Trade
1,50,000 1,50,000 50,000 50,000
payables 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
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measured by the entity at fair value. Provide working notes, Ignore deferred tax
implication; and
(ii) Prepare a consolidated balance sheet of High Speed Limited as at
1st January, 20X2.
Ind AS 2
2. An entity has following details regarding cost and retail price of the goods purchased
and unsold at the beginning of the year:
Cost Retail Price
Opening inventory 6,250 8,000
Purchases 19,500 34,000
Inventory on hand (23,000)
Sales for the period 19,000

Applying the retail method, compute the following:

(a) Percentage of cost price over retail price;
(b) Cost of closing inventory;
(c) Value of cost of sales (at cost); and
(d) Profit earned during the year on sale of inventory
Ignore the impact of mark-ups or mark-downs on the selling price.
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.
20X2 20X1 20X2 20X1
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 demographic 0.62 1.86 - -
assumptions
Changes in financial assumptions 3.58 1.93 - -
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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)

Ind AS 102
4. Entity A runs a copper-mining business. Entity A has a year-end of 31st March.
Dividends declared on the shares accrue to the employees during the three-year
period. If the condition is met, the employees will receive the shares together with the
dividends that have been declared on those shares during the three years upto
31st March, 20X3.
The entity estimates that on 1st April, 20X0 its shares are valued at ` 10 each. The
grant date fair amount of each share is ` 10.
Entity A prepares annual financial statements for the year ended 31 st March and:
 on 1st April, 20X0 it estimates that 800 shares will vest;
 at the end of the first year (31st March, 20X1) it has revised this estimate to 780;
 at 31st March, 20X2 it has further revised this estimate to 750; and
 750 shares vest on 31st March, 20X3 based on the number of employees still
employed on that date.
On 1st April, 20X0 as part of a long-term incentive scheme, Entity A provisionally
awards its sales employees 1,000 Entity A’s shares receivable on 31st March, 20X3.
Explain the accounting treatment for the above share-based awards based on
satisfaction of the condition that the sales employees must remain in employment until
31st March, 20X3. The requirement to remain in employment is a service condition and
would not be reflected in the fair value of the share awards.
Ind AS 101
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, 20X1. However, it has adopted Indian Accounting Standards (Ind AS) with
effect from 1st April, 20X1.
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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 20X0-20X1, 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.
Ind AS 23
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
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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.
Ind AS 115
7. Company X enters into an agreement on 1st January, 20X1 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, 20X1, 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, 20X1?
Ind AS 16
8. Company X built a new plant that was brought into use on 1st April, 20X1. The cost to
construct the plant was ` 1.5 crore. The estimated useful life of the plant is 20 years
and Company X accounts for the plant using the cost model.
The initial carrying amount of the plant included an amount of ` 10 lakh for
decommissioning, which was determined using a discount rate of 10%. On
31st March, 20X2, Company X remeasures the provision for decommissioning to
` 13 lakh.
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Provide necessary journal entries at the end of the year i.e. 31 st March, 20X2 for
recording of depreciation and decommissioning provision.
Ind AS 20
9. A Ltd. received a government grant of ` 10,00,000 to defray expenses for
environmental protection. Expected environmental costs to be incurred is ` 3,00,000
per annum for the next 5 years. How should A Ltd. present such grant related to
income in its financial statements?
Ind AS 116
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
Ind AS 103
11. In October 20X1, 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.
Ind AS 41
12. Fisheries Ltd. practices pisciculture in sweet waters (ponds, tanks and dams). The
fishing activity of Fisheries Ltd. in such sweet waters consists only of catching the
fishes. Comment whether such fishing activity will be covered within the scope of
Ind AS 41?
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Ind AS 32
13. State whether the following items meet the definition of Financial Asset or Financial
Liability for an entity:
(i) A bank advances an entity a five-year loan. The bank also provides the entity
with an overdraft facility for a number of years.
(ii) Entity A owns preference shares in Entity B. The preference shares entitle Entity
A to dividends, but not to any voting rights.
(iii) An entity has a present obligation in respect of income tax due for the prior year.
(iv) In a lawsuit brought against an entity, a group of people is seeking compensation
for damage to their health as a result of land contamination believed to be caused
by waste from the entity’s production process. It is unclear whether the entity is
the source of the contamination since many entities operate in the same area and
produce similar waste.
Ind AS 33
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.
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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.
Ind AS 8
15. In 20X3-20X4, after the entity’s 31st March, 20X3 annual financial statements were
approved for issue, a latent defect in the composition of a new product manufactured
by the entity was discovered (that is, a defect that was not discoverable by reasonable
or customary inspection). As a result of the latent defect, the entity incurred
` 1,00,000 in unanticipated costs for fulfilling its warranty obligation in respect of sales
made before 31st March, 20X3. An additional ` 20,000 was incurred to rectify the
latent defect in products sold during 20X3-20X4 before the defect was detected and
the production process rectified, ` 5,000 of which relates to items of inventory at
31st March, 20X3. The defective inventory was reported at cost (` 15,000) in the
financial statements of 20X2-20X3 when its selling price less costs to complete and
sell was estimated at ` 18,000. The accounting estimates made in preparing the
31st March, 20X3 financial statements were appropriately made using all reliable
information that the entity could reasonably be expected to have been obtained and
taken into account in the preparation and presentation of those financial statements.
Analyse the above situation in accordance with Ind AS 8.
Ind AS 109
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 loan
to the entity would be 6%.
Explain the accounting treatment for the said transaction.
Ind AS 24 / Ind AS 109
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?
Ind AS 38 / Ind AS 103
18. An entity acquired two trade secrets (secret recipes) in a business combination.
Recipe A is patented. Recipe B is not legally protected.
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How the acquisition of Recipe A and Recipe B would be accounted for by the entity as
per relevant Ind AS.
Ind AS 34
19. The entity’s financial year ends on 31st March. What are the “reporting periods” for
which financial statements (condensed or complete) in the interim financial report of
the entity as on 30th September, 20X1 are required to be presented, if:
(i) Entity publishes interim financial reports quarterly
(ii) Entity publishes interim financial reports half-yearly.
Ind AS 105
20. On 1st January, 20X1, the carrying amounts of the relevant assets of the division of an
entity, Star Ltd. were as follows:
• Purchased goodwill ` 1.2 lakhs;
• Property, plant and equipment (average remaining estimated useful life two years)
` 4 lakhs;
• Inventories ` 2 lakhs.
From 1st January, 20X1, Star Ltd. began to actively market the division and has
received a number of serious enquiries.
On 1st January, 20X1, the directors estimated that they would receive ` 6.4 lakhs from
the sale of the division. Since 1st January, 20X1, market conditions have improved and
on 30th April, 20X1, Star Ltd. received and accepted a firm offer to purchase the
division for ` 6.6 lakhs. The sale is expected to be completed on 30th June, 20X1.
` 6.6 lakhs can be assumed to be a reasonable estimate of the value of the division on
31st March, 20X1.
During the period from 1st January 20X1 to 31st March, 20X1, inventories of the division
costing ` 1.6 lakhs were sold for ` 2.4 lakhs. At 31st March, 20X1, the total cost of the
inventories of the division was ` 1.8 lakhs. All of these inventories have an estimated
net realizable value that is in excess of their cost.
Explain the disclosure requirement related to sale of division and provide the
accounting treatment of property held for sale and discontinued operations.
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ANSWERS

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
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
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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
(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
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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

2. Table showing application of Retail method for calculation of the goods sold
during the year and unsold inventory

S. No. Particulars `
Cost price of goods 6,250 + 19,500 25,750
Retail price of goods 8,000 + 34,000 42,000
(a) Cost percentage of retail price 25,750 / 42,000 61%
(b) Closing inventory (at cost) 23,000 x 61% 14,030
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(c) Cost of sales for the period [(6,250 + 19,500) - 14,030] 11,720
Sales for the period 19,000
(d) Profit earned on sale of goods 19,000 – 11,720 7,280
during the year

3. 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
20X2 20X1 20X2 20X1
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:

Net defined liability to be recognised for the period ending 31 st December, 20X1:
= ` 41.44 lakhs (` 63.25 lakhs - ` 21.81 lakhs)

Net defined liability to be recognised for the period ending 31 st December, 20X2:
= ` 41.68 lakhs (` 75.07 lakhs - ` 33.39 lakhs)
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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.,
20X2 20X1 20X2 20X1
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, 20X1 = ` 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, 20X2 = ` 8.64 lakhs (` 10.11 lakhs - ` 1.47 lakhs).
4. The grant date fair value amount would be recognised as an expense over the three
year service period adjusted by the number of shares expected to vest. Consequently,
for each period, Entity A estimates how many eligible employees are expected to be
employed on 31st March, 20X3 and this forms the basis for that adjustment. The journal
entries would be:
Year 1 (Year ended 31st March, 20X1)
Employee benefit expenses A/c Dr. ` 2,600
To Share-based payment reserve ` 2,600
(To recognise the receipt of employee services in exchange for shares)
Year 2 (Year ended 31st March, 20X2)
Employee benefit expenses A/c Dr. ` 2,400
To Share-based payment reserve ` 2,400
(To recognise the receipt of employee services in exchange for shares)
Year 3 (Year ended 31st March, 20X3)
Employee benefit expenses A/c Dr. ` 2,500
To Share-based payment reserve ` 2,500
(To recognise the receipt of employee services in exchange for shares)
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Working Notes:
1. Year 1
780 shares expected to vest x ` 10 grant date fair value of each share x 1/3 of
vesting period elapsed = ` 2,600 recognised in Year 1.
2. Year 2
(750 shares expected to vest x ` 10 grant date fair value of each share x 2/3 of
vesting period elapsed) less ` 2,600 recognised in Year 1 = ` 2,400 recognised in
Year 2.
3. Year 3
(750 shares x ` 10 grant date fair value of each share) less ` 5,000 recognised in
Years 1 and 2 = ` 2,500 recognised in Year 3.
5. Point (g) of para C4 of 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 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
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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.
6. 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).
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.
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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.
7. Paragraph B19 of 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 in paragraph 39, 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 paragraph B19 of 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, 20X1, 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.
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Consequently, as at 31st March, 20X1, Company X recognises the following:

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

8. Journal Entries in the books of Company X

for the year ending ended 31st March, 20X2
` in ` in
lakh lakh
Depreciation (profit or loss) Dr. 7.5
To Accumulated depreciation (plant) 7.5
(Being depreciation on plant recognised under straight-line method
(1,50,00,000 x 1/20))
Interest expense (profit or loss) Dr. 1.0
To Provision for decommissioning 1.0
(Being unwinding of decommissioning provision @10% recognised
in the books)
Plant Dr. 2.0
To Provision for decommissioning 2.0
(Being increase in decommissioning provision recognised
[13,00,000 – (10,00,000 +1,00,000)] at the end of the year)

9. As per paragraph 29 of Ind AS 20 ‘Accounting for Government Grants and Disclosure

of Government Assistance’, grants related to income are presented as part of profit or
loss, either separately or under a general heading such as ‘Other income’.
Alternatively, they are deducted in reporting the related expense.
In accordance with the above, presentation of grants related to income under both the
methods would be as follows:
Method 1: Credit in the Statement of Profit and Loss
The entity can recognise the grant as income on a straight-line basis i.e., ` 2,00,000
per year in the statement of profit and loss either separately or under the head “Other
Income”.
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This method considered on the contention that it would be inappropriate to present

income and expense items on a net basis and that separation of the grant from the
expense would facilitate comparison with other expenses not affected by a grant.
Method 2: As a deduction in reporting the related expense
Since the grant relates to environmental expenses incurred/to be incurred by the entity,
it can present the grant by reducing the grant amount every year from the related
expense i.e., environmental expense of ` 1,00,000 (i.e., net expense ` 3,00,000 –
` 2,00,000).
This method is considered based on the contention that the expenses might well not
have been incurred by the entity if the grant had not been available and presentation of
the expense without offsetting the grant might therefore be misleading.
The Standard regards both the methods as acceptable for the presentation of grants
related to income. However, method 2 may be more appropriate when the company
can relate the grant to a specific expenditure.
The Standard also provides that disclosure of the grant may be necessary for a proper
understanding of the financial statements. Disclosure of the effect of the grants on any
item of income or expense which is required to be separately disclosed is usually
appropriate.
10. 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.
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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 incentive
over the lease term
Cash Dr. ` 1,10,000
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
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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. ` 10,000
To Accumulated Depreciation ` 10,000
11. (a) When NCI is measured as per fair value method
` 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

` 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

12. Paragraph 5 of Ind AS 41, defines agricultural activity 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.”
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For fishing to qualify as agricultural activity, it must satisfy both of the below mentioned
conditions:
a) management of biological transformation of a biological asset; and
b) harvesting of biological assets for sale or for conversion into agricultural produce
or into additional biological assets.
Therefore, when fishing involves managed activity to grow and procreate fishes in
designated areas, such fishing is an agricultural activity as per the above definition.
Managing the growth of fish for subsequent sale is an agricultural activity as per
Ind AS 41.
In the aforementioned scenario, only fish harvesting is managed by Fisheries Ltd.
Therefore, mere fish harvesting without management of biological transformation
cannot be termed as an agricultural activity as per Ind AS 41.
Hence, fishing in sweet waters (pond, tanks and dams) where only fishing (harvesting)
is carried out without any management of biological transformation is outside the scope
of Ind AS 41.
13. (i) The entity has two financial liabilities namely (a) the obligation to repay the five-
year loan and (b) the obligation to repay the bank overdraft to the extent that it
has borrowed using the overdraft facility. Both the loan and the overdraft result in
contractual obligations for the entity to pay cash to the bank for the interest
incurred and for the return of the principal.
(ii) For Entity B: The preference shares may be equity instruments or financial
liabilities of Entity B, depending on their terms and conditions.
For Entity A: Irrespective of Entity B’s treatment, the preference shares are a
financial asset because the investment satisfies the definition of a financial asset.
(iii) An income tax liability is created as a result of statutory requirements imposed by
the government. The rights and obligations are not created by a contract. Hence,
the liability for income-tax dues is not a financial liability.
(iv) The fact that a lawsuit may result in the payment of cash does not create a
financial liability for the entity because there is no contract between the entity and
the affected group. The entity will need to consider providing for the payment as
per Ind AS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’.
14. 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.
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Non-cumulative dividends paid on equity-classified preference shares are not deducted

in arriving at net profit or loss for the period, but they are not returns to ordinary
shareholders. Accordingly, these dividends are deducted from net profit or loss for the
period in arriving at the numerator.

(`)
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.).
15. The defect was neither known nor reasonably possible to detect at 31 st March, 20X3 or
before the financial statements were approved for issue, hence ` 1,00,000
understatement of the warranty provision and ` 2,000 [refer Working Note]
overstatement of inventory in the 31st March, 20X3 financial statements is not a prior
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period error. The effects of the latent defect that relate to the entity’s financial position
at 31st March, 20X3 are changes in accounting estimates. In preparing its
31st March, 20X3 financial statements the entity made the warranty provision and
inventory valuation appropriately using all reliable information that the entity could
reasonably be expected to have obtained and taken into account in the preparation and
presentation of those financial statements. Consequently, the additional costs will be
expensed in calculating profit or loss for 20X3-20X4.
Working Note:
Inventory is measured at the lower of cost (ie ` 15,000) and net realisable value (ie
` 18,000 originally estimated minus ` 5,000 costs to rectify latent defect =
` 13,000). Therefore, defective inventory was overstated by ` 2,000 (` 15,000 –
` 13,000) in the year 20X2-20X3.
16. 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.
17. 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.
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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 beneficiary
of 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 financial
statements 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
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.
18. Para 11 and 12 of 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.
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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.
19. Paragraph 20 of Ind AS 34, Interim Financial Reporting states as follows:
“Interim reports shall include interim financial statements (condensed or complete) for
periods as follows:
a) balance sheet as of the end of the current interim period and a comparative
balance sheet as of the end of the immediately preceding financial year.
b) statements of profit and loss for the current interim period and cumulatively for the
current financial year to date, with comparative statements of profit and loss for
the comparable interim periods (current and year-to-date) of the immediately
preceding financial year.
c) statement of changes in equity cumulatively for the current financial year to date,
with a comparative statement for the comparable year-to-date period of the
immediately preceding financial year.
d) statement of cash flows cumulatively for the current financial year to date, with a
comparative statement for the comparable year-to-date period of the immediately
preceding financial year.
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Accordingly, periods for which interim financial statements are required to be

presented are provided herein below:
(i) Entity publishes interim financial reports quarterly
The entity will present the following financial statements (condensed or complete) in
its interim financial report of 30th September, 20X1:
Balance 30th September 31st March - -
sheet at 20X1 20X1
Statement of 3 months ended 3 months 6 months ended 6 months
profit and 30th September ended 30th 30th September ended 30th
loss for 20X1 September 20X1 September
20X0 20X0
Statement of 6 months ended 6 months
changes in 30th September ended 30th
equity for 20X1 September
20X0
Statement of 6 months ended 6 months - -
cash flows for 30th September ended 30th
20X1 September
20X0

(ii) Entity publishes interim financial reports half-yearly

The entity’s financial year ends 31st March. The entity will present the following
financial statements (condensed or complete) in its half-yearly interim financial
report of 30th September, 20X1:
Balance sheet at 30th September, 20X1 31st March, 20X1
Statement of profit and loss for 6 months ending 6 months ending
30th September, 20X1 30th September, 20X0
Statement of changes in equity 6 months ending 6 months ending
for 30th September 20X1 30th September 20X0
Statement of cash flows for 6 months ending 6 months ending
30th September 20X1 30th September 20X0

20. The decision to offer the division for sale on 1st January, 20X1 means that from that
date the division is classified as held for sale. The division available for immediate
sale, is being actively marketed at a reasonable price, and the sale is expected to be
completed within one year.
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The consequence of this classification is that the assets of the division will be
measured at the lower of their existing carrying amounts ( ` 7.20 lakhs i.e. Goodwill
` 1.2 lakh + PPE ` 4 lakhs + Inventory ` 2 lakhs) and their fair value less costs to sell
(` 6.40 lakhs). This implies that the assets of the division will be measured at
` 6.40 lakhs on 1st January, 20X1.
The reduction in carrying value of the assets of ` 0.80 lakhs (` 7.20 lakhs –
` 6.40 lakhs) will be treated as an impairment loss and allocated to goodwill, leaving a
carrying amount for goodwill of ` 0.40 lakhs (` 1.20 lakhs – ` 0.80 lakhs).
The increased expectation of the selling price of ` 0.20 lakhs (` 6.60 lakhs –
` 6.40 lakhs) will be treated as a reversal of an impairment loss. However, since this
reversal relates to goodwill, it cannot be recognised.
The assets of the division need to be presented separately from other assets in the
balance sheet. Their major classes of assets classified as held for sale should be
separately disclosed, either in the balance sheet or in the notes.
The property, plant and equipment should not be depreciated after 1 st January, 20X1,
so it’s carrying value at 31st March, 20X1 will be ` 4 lakhs. The inventories of the
division will be shown at their year-end cost of ` 1.80 lakhs.
The division will be regarded as a discontinued operation for the year ended
31st March, 20X1. It will represent a separate line of business and will be held for sale
at the year end.
The statement of profit and loss should disclose, as a single amount, the post-tax profit
or loss of the division and the impairment loss arising on the re-measurement of the
division on classification as held for sale. Further analysis of this single amount may
be presented in the notes or in the statement of profit and loss. If it is presented in the
statement of profit and loss it shall be presented in a section identified as relating to
discontinued operations, i.e. separately from continuing operations.
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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 1st 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.
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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 1st April, 2022 with
cumulative effect recognised in the opening balance of retained
earnings or other component of equity, as appropriate on
1st 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
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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
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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.
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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 : 31st March 20X2 - 80,000 share options (1-year vesting period since
grant date)
• Vesting date : 31st March 20X5 - 40,000 share options (4-year vesting period since
grant date)
Each option can be converted into one equity share of Nuogen Ltd. The fair value of the
options on grant date, i.e., on 1st April 20X1 was ` 20.
Nuogen Ltd. is required to prepare financial statements in Ind AS for the financial year
ending 31st March 20X4. The transition date for Ind AS being 1st April 20X2.
The entity has disclosed publicly the fair value of both these equity instruments as
determined at the measurement date, as defined in Ind AS 102.
The previous applicable GAAP for the entity was IGAAP (AS) and therein, the entity had
not adopted intrinsic method of valuation.
The share options have not been yet exercised by the employees of Nuogen Ltd.
How the share based payment should be reflected in, the books of Nuogen Ltd. as on
31st March 20X4, assuming that the entity has erred by not passing any entry for the
aforementioned transactions in the books of Nuogen Ltd. on grant date, i.e.
1st April 20X1?
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 1st April, 20X1 and lasts for three years.
(ii) The lessee is required to make three annual rentals payable in arrears of
` 57,500.
(iii) The leased machinery is returned to the lessor at the end of the lease.
(iv) The fair value of the machinery is ` 1,50,000, which is equivalent to the selling price
of the machinery
(v) The machinery cost ` 1,00,000 to manufacture. The lessor incurred costs of
` 2,500 to negotiate and arrange the lease.
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(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 31st March 20X1:
Particulars ` in Crore
Revenue from operations 1,160.00
Other income 56.00
Total Income (A) 1,216.00
Purchase of stock-in-trade 40.00
Changes in inventories of stock-in-trade 6.00
Employee benefits expense 116.00
Finance costs 130.00
Depreciation and amortization expense 30.00
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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.
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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 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?
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.
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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 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 1st 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 31st March, 20X2, the profit before interest and tax of B Ltd.
exceeded ` 1 crore. As on 31st 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.
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• 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
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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 by A Ltd.?
Ind AS 105
14. Company A has financial year ending 31st March, 20X0. On 1st June, 20X0, the Company
has classified its Division B as held for sale in accordance with Ind AS 105. How
property, plant and equipment (PPE) for which the company has adopted cost model
shall be measured immediately before the classification as held for sale on
1st June, 20X0?
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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?
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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.
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On 31st March, 20X3, because of financial difficulties, the employee asked to extend the
interest-free loan for further three years. The entity agreed. Under the restructured
terms, repayment will take place on 31st March, 20X7. However, the entity only expects
to receive a payment of ` 2,50,000, given the financial difficulty of the employee.
Explain the accounting treatment on initial recognition of loan and after giving effect of
the changes in the terms of the loan as per Ind AS 109. Support your answer with Journal
entries and amortised cost calculation, as on the date of initial recognition and on the
date of change in terms of loan.
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 need
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.
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While preparing the financial statements for the financial year 20X3 -20X4, an error has
been discovered which occurred in the year 20X1 -20X2, i.e., for the period which was
earlier than earliest prior period presented. The error should be corrected by restating
the opening balances of relevant assets and/or liabilities and relevant component of
equity for the year 20X2-20X3. This will result in consequential restatement of balances
as at 1st April, 20X2 (i.e, opening balance sheet as at 1st April, 20X2).
Accordingly, on retrospective calculation of Share based options with respect to 80,000
options, Nuogen Ltd. will create ‘Share based payment reserve (equity)’ by ` 16,00,000
and correspondingly adjust the same though Retained earnings.
For 40,000 share based options to be vested on 31st March, 20X5:
Since share-based options have not been vested before transition date, no option as per
Ind AS 101 is available to Nuogen Ltd. The entity will apply Ind AS 102 retrospectively.
However, Nuogen Ltd. did not account for the same at the grant date. This will result in
consequential restatement of balances as at 1st April, 20X2 (i.e, opening balance sheet
as at 1st April, 20X2). Adjustment is to be made by recognising the ‘ Share based
payment reserve (equity)’ and adjusting the retained earnings by ` 2,00,000.
Further, expenses for the year ended 31st March, 20X3 and share based payment
reserve (equity) as at 31st March, 20X3 were understated because of non-recognition of
‘employee benefits expense’ and related reserve. To correct the above errors in the
annual financial statements for the year ended 31st March, 20X4, the entity should
restate the comparative amounts (i.e., those for the year ended 31 st March, 20X3) in the
statement of profit and loss. In the given case, ‘Share based payment reserve (equity)’
would be credited by ` 2,00,000 and ‘employee benefits expense’ would be debited by
` 2,00,000
For the year ending 31st March, 20X4, ‘Share based payment reserve (equity)’ would be
credited by ` 2,00,000 and ‘employee benefits expense’ would be debited by ` 2,00,000.
Working Note:
Period Lot Proportion Fair value Cumulative Expenses
expenses
a b d= b x a e = d-
previous
period d
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)
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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
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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)
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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
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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 31st March, 20X1
Particulars ` in crore
Accounting profit 594.00
Tax at the applicable tax rate of 30% 178.20
Tax effect of expenses that are not deductible in determining
taxable profits:
Penalties (1.00 x 30%) 0.30
Impairment of goodwill (44.00 x 30%) 13.20
Corporate social responsibility expense (6.00 x 30%) 1.80 15.30
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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.
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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
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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
Loan amount = 2,21,00,000
7. Interest on loan used for Phases III & IV, based on 16,69,683
30,00,000
1,23,00,00 0 (approx.)
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.
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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.
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As per paragraph 58 of Ind AS 103, contingent consideration not classified 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 31st 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
=
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(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
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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
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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
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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 useful life of the asset
is 5 years.
For residual value, paragraphs 100-102 of Ind AS 38 states that the residual value of an
intangible asset with a finite useful life shall be assumed to be zero unless:
(a) there is a commitment by a third party to purchase the asset at the end of its useful
life; or
(b) there is an active market (as defined in Ind AS 113) for the asset and:
(i) residual value can be determined by reference to that market; and
(ii) it is probable that such a market will exist at the end of the asset’s useful life.
The depreciable amount of an asset with a finite useful life is determined after deducting
its residual value. A residual value other than zero implies that an entity expects to
dispose of the intangible asset before the end of its economic life.
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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
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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 31st 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
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(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).
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(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
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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.
Prepaid employee cost (asset) Dr.
To Cash / Bank (financial asset) 5,00,000
(Being loan granted to the employee recognised)
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The amortised cost calculation at 1st April, 20X1 is as follows:

Period Carrying Interest at Cash inflow Carrying
amount at 5% amount at
1st April 31st March
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 31st March, 20X3, the carrying amount of the loan receivable is ` 4,76,280.
As a result of that modification, on 31st 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 31st March, 20X3.
The revised amortised cost calculation at 1st April, 20X3 is as follows:
Period Carrying Interest at 5% (the Cash Carrying
amount at original effective inflow amount at
1st April interest rate) 31st 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.
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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, financial 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.
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PAPER –1: FINANCIAL REPORTING

QUESTIONS
Conceptual Framework for Financial Reporting
1. Defense Innovators Limited is a public sector undertaking and is engaged in the
construction of warships and submarines. XYZ Private Limited approached Defense
Innovators Limited for construction of "specially designed" ships for it, which will be used
by XYZ Private Limited for transportation of specific goods. The offer was accepted by
the Defense Innovators Limited and both the companies entered into an agreement for
the construction and delivery of 3 specially designed ships on 'Fixed Price' basis with
variable component in respect to certain items.
Base and depot (B & D) spares for all three ships shall be procured by Defense
Innovators Limited and will be paid on the cost of the item with certain percentage.
The contract states that "certain equipment" out of variable cost items, will be supplied
by XYZ Private Limited at 'free of cost' for installation on board of ship. It is, therefore,
to be noted as under:
(i) Some equipment are procured by Defense Innovators Limited in the presence of
the XYZ Private Limited's representative for technical scrutiny as well as negotiating
the prices. The vendors of these equipment are paid by Defense Innovators
Limited. The cost of the equipment along with the cost of installation and profit
thereon is claimed and reimbursed by XYZ Private Limited to Defense Innovators
Limited.
(ii) There are certain other equipment for which orders are directly placed and also paid
by the XYZ Private Limited. These equipment are known as 'Buyer Furnished
Equipment (BFE)' and are delivered to the company 'free of cost' for installing in
the ship. The labour cost of Installation of these are already included in the price
component of the contract. BFEs are returned to the buyer after completion of the
ship.
The period required for construction of one ship was approximately four years.
Whether the cost of Buyer Furnished Equipment's (BFE's) supplied by XYZ Private
Limited to Defense Innovators Limited for-installing the same in the ships can be
considered as 'inventory' by Defense Innovators Limited and then on delivery of ship will
be recognised as revenue in its books of account? Elaborate.
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Ind AS 1
2. An entity manufactures passenger vehicles. The time between purchasing of underlying
raw materials to manufacture the passenger vehicles and the date the entity completes
the production and delivers to its customers is 11 months. Customers settle the dues
after a period of 8 months from the date of sale.
(a) Will the inventory and the trade receivables be current in nature?
(b) Assuming that the production time was say 15 months and the time lag between
the date of sale and collection from customers is 13 months, will the answer be
different?
Applicability of Ind AS
3. Fresh Vegetables Limited (FVL) was incorporated on 2nd April, 20X1 under the provisions
of the Companies Act, 2013 to carry on the wholesale trading business in vegetables.
As per the audited accounts of the financial year ended 31st March, 20X7 approved in its
annual general meeting held on 31st August, 20X7 its net worth, for the first time since
incorporation, exceeded ₹ 250 crore. The financial statements since inception till
financial year ended 31st March, 20X6 were prepared in accordance with the Companies
(Accounting Standards) Rules 2006. It has been advised that henceforth it should
prepare its financial statements in accordance with the Companies (Indian Accounting
Standards) Rules, 2015.
The following additional information is provided by the Company:
– FVL has in the financial year 20X2-20X3 entered into a 60:40 partnership with
Logistics Limited and incorporated a partnership firm 'Vegetable Logistics
Associates' (VLA) to carry on the logistics business of vegetables from farm to
market.
– FVL also has an associate company Social Welfare Limited (SWL) that was
incorporated in July, 20X5 as a charitable organization and registered under section
8 of the Companies Act, 2013. Social Welfare Limited has been the associate
company of FVL since its incorporation.
Examine the applicability of Ind AS on VLA & SWL.
Ind AS 115
4. On 1st April, 20X1, S Limited enters into a contract with Corp Limited to construct heavy-
duty equipment for a promised consideration of ₹ 20,00,000 with a bonus of ₹ 2,50,000
if the equipment is completed within 24 months. At the inception of the contract,
S Limited correctly accounts for the promised bundle of goods and services as a single
performance obligation in accordance with Ind AS 115. At the inception of the contract,
the Company expects the costs to be ₹ 11,00,000 and concludes that it is highly probable
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that a significant reversal in the amount of cumulative revenue recognised will occur.
Completion of the heavy-duty equipment is highly susceptible to factors outside of the
Company’s influence, mainly due to difficulties with the supply of components.
At 31st March, 20X2, S Limited has satisfied 65% of its performance obligation on the
basis of costs incurred to date and concludes that the variable consideration is still
constrained in accordance with Ind AS 115. However, on 4 June 20X2, the contract is
modified with the result that the fixed consideration and expected costs increase by
₹ 1,50,000 and ₹ 80,000 respectively. The time allowable for achieving the bonus is
extended by six months with the result that S Limited concludes that it is highly probable
that the bonus will be achieved and that the contract remains a single performance
obligation.
S Limited wants your opinion on the accounting treatment of contract with Corp Limited in
light of Ind AS 115, for the year 20X1-20X2 and 20X2-20X3.
Ind AS 37
5. XYZ Ltd. offers a six-month warranty on its small to medium sized equipment, which can
be put to use by the customer with no installation support. The warranty comes with the
equipment and the customer cannot purchase it separately. This equipment is typically
sold at a gross margin of 40%. XYZ Ltd. has made a provision of ₹ 30,000 during the
year ended 31st March, 20X2, which is approximately 1% of its gross margin on the sale
of these equipment. Based on past experience, it is expected that 1% of equipment sold
have been returned as faulty within the warranty period. Faulty equipment returned to
XYZ Ltd. during the warranty period are scrapped and the sale value is fully refunded to
the customer.
Assuming that sales occurred evenly during the year, how should XYZ Ltd. evaluate
whether any additional warranty provision is required on equipment sold in the past as
at 31st March, 20X2? Had the warranty period been 2 years instead of six months, what
additional criteria would XYZ Ltd. need to consider?
Ind AS 32
6. On 1st April, 2X01, Entity X issued a 10% convertible debenture with a face value of
₹ 1,000 maturing on 31st March, 2X11. The debenture is convertible into ordinary shares
of Entity X at a conversion price of ₹ 50 per share. Interest is payable yearly in cash.
On 1st April, 2X02, to induce the holder to convert the convertible debenture promptly,
Entity X reduces the conversion price to ₹ 40 if the debenture is converted before
1st June, 2X02 (ie, within 60 days). The market price of Entity X’s ordinary shares on
the date the terms are amended is ₹ 80 per share. How will the revised terms be
accounted?
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Ind AS 23
7. X Ltd. commenced the construction of a plant (qualifying asset) on 1st September, 20X1,
estimated to cost ₹ 10 crores. For this purpose, X has not raised any specific borrowings,
rather it intends to use general borrowings, which have a weighted average cost of 11%.
Total borrowing costs incurred during the period, viz., 1st September, 20X1 to
31st March, 20X2 were ₹ 0.5 crore.
The other relevant details are as follows: (₹ in crore)
Month Cost of construction Cash outflows (paid in advance
Accrued at the start of each month)
September 1.50 3.00
October 0.50 1.70
November 1.50 2.50
December 0.50 -
January 1.80 1.00
February 0.70 -
March 3.00 1.50

Based on the above information, discuss the treatment of borrowing cost as per cash
outflow basis and accrual basis and also suggest the appropriate amount of interest that
should be capitalised to the cost of the plant in the financial statements for the year
ended 31st March, 20X2?
Ind AS 116
8. Case I
Scenario 1: The ‘last mile’ is a dedicated cable that connects Entity Y’s network with the
end customer’s device. The use of this cable is at the discretion of the customer. Entity
Y decides the location of end points and has right to replace the lines (dedicated cable),
however it is not practical to replace the lines, since replacement would require additional
costs to be incurred without any corresponding benefit. Whether the arrangement would
be within the scope of Ind AS 116?
Scenario 2: If it is practical for the Entity Y to replace the lines and Entity Y would benefit
from this replacement, would the answer be different?
Case II
Customer X enters into a 10-year contract with a utility company, Entity Y, for the right
to use three specified, physically distinct fibers within a larger cable connecting Mumbai
to Delhi. Customer makes the decisions about the use of the fibers by connecting each
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end of the fibers to its electronic equipment. Entity Y owns extra fibers but can substitute
those for Customer’s fibers only for reasons of repairs, maintenance or malfunction. The
useful life of the fiber is 15 years. Whether this arrangement is covered under
Ind AS 116?
Case III
Customer X enters into a 10-year contract with Entity Y for the right to use a specified
amount of capacity within a cable connecting Mumbai to Delhi. The specified amount is
equivalent to Customer X having the use of the full capacity of three fiber strands within
the cable (the cable contains multiple fibers with similar capacities). Entity Y makes
decisions about the transmission of data (i.e., Entity Y lights the fibers, makes decisions
about which fibers are used to transmit Customer’s traffic). The useful life of the fiber is
15 years. Whether this arrangement is covered under Ind AS 116?
Ind AS 103
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.
Ind AS 105
10. X Ltd. acquires B Ltd. exclusively with a view to sale and it meets the criteria to be
classified as discontinued operation as per Ind AS 105. Further, following information is
available about B Ltd.:
Fair value of total assets excluding liabilities on acquisition – ₹ 360
Costs to sell as on acquisition and on reporting date – ₹ 10
Fair value of liabilities on acquisition and reporting date – ₹ 80
Fair value of total assets excluding liabilities on the reporting date – ₹ 340
How discontinued operation pertaining to B Ltd. should be measured in consolidated
financial statements of X Ltd. on acquisition date and reporting date?
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Ind AS 24
11. Entity A owns 30% of the share capital of entity B and has the ability to exercise
significant influence over it.
Entity B holds the following investments:
• 70% of the share capital of its subsidiary, entity C; and
• 30% of the share capital of entity D, with the ability to exercise significant influence.
Entity A transacts with entities C and D. Should entity A disclose these transactions as
related party transactions in its separate financial statements? Also explain the
disclosure of such transactions in the financial statements of C and D as related party
transaction.
Ind AS 111
12. 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 Ltd
is 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?
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(vi) Assume that in (iv) above, the contractual terms of the arrangement were modified
so 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.
Ind AS 20 and Ind AS 109
13. A Limited is engaged in the manufacturing of certain specialized chemicals. During the
manufacturing process, certain wastewater is produced which is released by A Limited
in the nearby river. To reduce pollution of the rivers, the state government has
introduced a scheme with the following salient features:
• If a manufacturer installs certain pre-approved wastewater treatment plant, the
government will provide an interest free loan equal to 50% of the cost of the plant;
• Such loan will be repayable to the government in 5 years from the date of disbursal;
• The manufacturer availing the benefit of this scheme must treat the wastewater of
its factory using the specified plant before releasing it to the river. If this condition
is violated, the entire loan shall become immediately repayable to the government
along with a penalty of ₹ 10 lakh.
Cost of the wastewater treatment plant to be installed to avail the benefit of the scheme
is ₹ 50 lakh. A Limited decided to utilise this scheme because, if it were to obtain the
similar loan from a bank, it would be available at a market interest rate of 12% per
annum. Accordingly, A Limited applied for and obtained the government loan of
₹ 25 lakh on 1st April, 20X1. A Limited purchased and installed the plant such that it
became ready for use on the same date.
A Limited has an accounting policy of recognising government grant in relation to
depreciable assets in the proportion of depreciation expense. It has determined that the
plant will be depreciated over a period of 5 years using straight-line method. In the
month of March, 20X3, government officials conducted a surprise audit, and it was found
that A Limited was not using the wastewater treatment plant as prescribed. Accordingly,
on 31st March, 20X3, the government ordered A Limited to repay the entire loan along
with penalty. A Limited repaid the loan with interest and penalty as per the order on
31st March, 20X3.
Measure the amount of government grant as on 1st April, 20X1. Determine the nature of
the government grant and its accounting treatment (principally) for the year ended
31st March, 20X2. Also determine the impact on profit or loss if any, on account of
revocation of government grant as on 31st March, 20X3.
Ind AS 32 and Ind AS 109
14. ABC Ltd. issues 4% 1,00,000 OCPS at a face value of ₹ 100 per share on 1st April, 20X1
and these are redeemable after 5 years, ie, on 31st March, 20X6. Dividend is non-
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cumulative. Each preference shares entitles the holders to 10 equity shares and the
preference shares are optionally convertible by the holder at any time until maturity.
How will the preference shares be classified at initial recognition assuming that a
comparable instrument carries a market interest rate of 7%? Provide journal entries for
year 1. Will this classification be changed subsequently in case there is likelihood that
OCPS will be encashed at the end of the maturity period?
Ind AS 101
15. GG Ltd., a listed company, prepares its first Ind AS financial statements for the year
ending 31st March, 20X3. The date of transition is 1st April, 20X1. The functional and
presentation currency is Rupee. The financial statements as at and for the year ended
31st March, 20X3 contain an explicit and unreserved statement of compliance with
Ind AS. Previously it was using Indian GAAP (AS) as base.
It has already published its first interim results of quarter 1, quarter 2 and quarter 3 of
20X2- 20X3 in accordance with Ind AS 34 and Ind AS 101. The interim financial report
included the reconciliations both of total comprehensive income and of equity that are
required by Ind AS 101.
Since issuing the interim financial report, its management has concluded that one of
accounting policy choices applied at the interim should be changed for the full year.
How should GG Ltd. deal with the change in accounting policy under Ind AS framework?
Ind AS 102
16. New Age Technology Limited has entered into following Share Based payment
transactions:
(i) On 1st April, 20X1, New Age Technology Limited decided to grant share options to
its employees. The scheme was approved by the employees on 30th June, 20X1.
New Age Technology Limited determined the fair value of the share options to be
the value of the equity shares on 1st April, 20X1.
(ii) On 1st April, 20X1, New Age Technology Limited entered into a contract to purchase
IT equipment from Bombay Software Limited and agreed that the contract will be
settled by issuing equity instruments of New Age Technology Limited. New Age
Technology Limited received the IT equipment on 30th July, 20X1. The share-based
payment transaction was measured based on the fair value of the equity
instruments as on 1st April, 20X1.
(iii) On 1st April, 20X1, New Age Technology Limited decided to grant the share options
to its employees. The scheme was approved by the employees on 30th June, 20X1.
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The issue of the share options was however subject to the same being approved by
the shareholders in a general meeting. The scheme was approved in the general
meeting held on 30th September, 20X1. The fair value of the equity instruments for
measuring the share-based payment transaction was taken on 30th September, 20X1.
Identify the grant date and measurement date in all the 3 cases of Share based payment
transactions entered into by New Age Technology Limited, supported by appropriate
rationale for the determination?
Ind AS 108
17. XYZ Ltd. has eight segments namely A, B, C, D, E, F, G and H. The information
regarding respective segments for the year ended 31st March, 20X1 is as follows:
Segments A B C D E F G H
External sales 0 255 15 10 15 50 25 35
Inter-segment sales 100 60 30 5
Total 100 315 45 15 15 50 25 35
Segment result Profit/(Loss) 5 (90) 15 (5) 8 (5) 5 7
Segment assets 15 47 5 11 3 5 5 9

Identify which of the above segments out of A to H would be considered as reportable

segments of XYZ Ltd. for the year ending 31st March, 20X1?
Ind AS 38
18. D Ltd. a leading publishing house, purchased copyright of a book from its author for
publishing the same. As per the terms of the contract, if D Ltd. chooses to make the
payment upfront then, copyright consideration of ₹ 80,00,000 is to be paid (which is in
line with general practice in such arrangements). However, the contract also provided
that, in case D Ltd. chooses to pay the consideration after 2 years, then it will be required
to pay ₹ 1,00,00,000. At what value should the intangible asset be recognised as per
Ind AS 38?
Ind AS 10
19. XYZ Ltd. sells goods to its customer with a promise to give discount of 5% on list price
of the goods provided that the payments are received from customer within 15 days.
XYZ Ltd. sold goods of ₹ 5 lakhs to ABC Ltd. between 17th March, 20X1 and
31st March, 20X1. ABC Ltd. paid the dues by 15th April, 20X1 with respect to sales made
between 17th March, 20X1 and 31st March, 20X1. Financial statements were approved
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for issue by Board of Directors on 31st May, 20X1. State whether discount will be
adjusted from the sales at the end of the reporting period.
Ind AS 16
20. On 1st January, 20X1 an entity purchased an item of equipment for ₹ 600,000, including
₹ 50,000 refundable purchase taxes. The purchase price was funded by raising a loan
of ₹ 605,000. In addition, the entity has to pay ₹ 5,000 in loan raising fees to the Bank.
The loan is secured against the equipment.
In January 20X1 the entity incurred costs of ₹ 20,000 in transporting the equipment to
the entity’s site and ₹ 100,000 in installing the equipment at the site. At the end of the
equipment’s 10-year useful life the entity is required to dismantle the equipment and
restore the building housing the equipment. The present value of the cost of dismantling
the equipment and restoring the building is estimated to be ₹ 100,000.
In January 20X1 the entity’s engineer incurred the following costs in modifying the
equipment so that it can produce the products manufactured by the entity:
• Materials – ₹ 55,000
• Labour – ₹ 65,000
• Depreciation of plant and equipment used to perform the modifications – ₹ 15,000
In January 20X1, the entity’s production staff were trained in how to operate the new
item of equipment. Training costs included:
• Cost of an expert external instructor – ₹ 7,000
• Labour – ₹ 3,000
In February 20X1 the entity’s production team tested the equipment and the engineering
team made further modifications necessary to get the equipment to function as intended
by management. The following costs were incurred in the testing phase:
• Materials, net of ₹ 3,000 recovered from the sale of the scrapped output –
₹ 21,000
• Labour – ₹ 16,000
The equipment was ready for use on 1st March, 20X1. However, because of low initial
order levels the entity incurred a loss of ₹ 23,000 on operating the equipment during
March. Thereafter the equipment operated profitably.
What is the cost of the equipment at initial recognition?
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ANSWERS

1. Before any item can be recognised as an inventory, it should meet the definition of ‘asset’
as given in the Conceptual Framework for Financial Reporting under Ind AS, issued by
the Institute of Chartered Accountants of India as follows:
“An asset is a present economic resource controlled by the entity as a result of past
events and economic resource is a right that has the potential to produce economic
benefits”.
The orders in respect of Buyer Furnished Equipment’s (BFEs) are directly placed by the
buyer and payment in respect of them is made by the buyer. These are then supplied to
the company for installing in the ship and the buyer pays installation charges which are
included in the contract price. Thus, the company has neither incurred any cost on BFEs
nor any amount is recoverable on account of such equipment except installation charges.
Accordingly, such equipment are not ‘assets’ that may be considered as a part of its
contract work-in progress.
In fact, after installation in the ship, BFEs are returned to the buyer after completion of
the ship. Thus, these are only held by the company in the capacity of a bailee. Since,
it cannot be considered as an ‘asset’, therefore, it can neither be considered as
‘inventory’ nor as ‘work-in-progress’.
Further, it can also not be considered as a part of sale value or revenue of the company
as no consideration would be receivable with respect to the cost of such equipment.
On the basis of the above, it can be concluded that:
(i) The BFEs cannot be considered as inventories / Work-in-progress for
Defense Innovators Limited.
(ii) The BFE’s cost cannot be considered as part of sales value / contract revenue to
Defense Innovators Limited.
2. Inventory and debtors need to be classified in accordance with the requirement of
paragraph 66(a) of Ind AS 1, which provides that an asset shall be classified as current
if an entity expects to realise the same or intends to sell or consume it in its normal
operating cycle.
(a) In this case, time lag between the purchase of inventory and its realisation into cash
is 19 months [11 months + 8 months]. Both inventory and the debtors would be
classified as current if the entity expects to realise these assets in its normal
operating cycle.
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(b) No, the answer will be the same as the classification of debtors and inventory
depends on the expectation of the entity to realise the same in the normal operating
cycle. In this case, time lag between the purchase of inventory and its realisation
into cash is 28 months [15 months + 13 months]. Both inventory and debtors would
be classified as current if the entity expects to realise these assets in the normal
operating cycle.
Additional information as required by paragraph 61 of Ind AS 1 will be required to
be made by the entity, which provides “Whichever method of presentation is
adopted, an entity shall disclose the amount expected to be recovered or settled
after more than twelve months for each asset and liability line item that combines
amounts expected to be recovered or settled:
(a) No more than twelve months after the reporting period, and
(b) More than twelve months after the reporting period.”
3. Applicability of Ind AS in general:
• Currently Ind AS is applicable to the following companies except for companies other
than banks and Insurance Companies, on mandatory basis:
(a) All companies which are listed or in process of listing in or outside India on
Stock Exchanges.
(b) Unlisted companies having net worth of ₹ 250 crore or more but less than
₹ 500 crore.
(c) Holding, Subsidiary, Associate and Joint venture of above.
• Companies listed on SME exchange are not required to apply Ind AS on mandatory
basis.
• Once a company starts following Ind AS either voluntarily or mandatorily on the
basis of criteria specified, it shall be required to follow Ind AS for all the subsequent
financial statements even if any of the criteria specified does not subsequently
apply to it.
• Application of Ind AS is for both standalone as well as consolidated financial
statements if threshold criteria met or adopted voluntarily.
• Companies meeting the thresholds for the first time at the end of an accounting
year shall apply Ind AS from the immediate next accounting year with comparatives.
• Companies not covered by the above roadmap shall continue to apply existing
Accounting Standards notified in the Companies (Accounting Standards) Rules,
2006.
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Since the net worth of FVL in immediately preceding year exceeded ₹ 250 crore, Ind AS
is applicable to it. The entity VLA and SWL have to be examined as they may fall in
criteria (c) above.
Applicability of Ind AS on VLA
Joint arrangement can be either joint operation or joint venture. However, for the
purpose of identifying the applicability of Ind AS, the Act defines Joint venture (as an
explanation to section 2(6) of the Companies Act, 2013), as follows:
“The expression "joint venture" means a joint arrangement whereby the parties that have
joint control of the arrangement have rights to the net assets of the arrangement”.
Accordingly, if an entity is classified as joint operation and not joint venture, then Ind AS
would not be applicable to such entity.
In the case of VLA, if partners conclude that they have rights in the assets and obligations
for the liabilities relating to the partnership firm then this would be a joint operation.
However, Ind AS would not be applicable on VLA in such a case since it is the case of
joint operation (and not a joint venture).
Alternatively, if partners conclude that they have joint control of the arrangement and
have rights to the net assets of the arrangement relating to the partnership firm, then this
would be a joint venture. In such a case, Ind AS would be applicable to them.
Applicability of Ind AS on SWL
Social Welfare Limited (SWL) is the associate company of FVL. Accordingly, Ind AS
would be applicable on SWL too irrespective of the fact that SWL has been incorporated
as a charitable organisation.
4. For the year 20X1-20X2
S Limited accounts for the promised bundle of goods and services as a single
performance obligation satisfied over time in accordance with Ind AS 115. At the
inception of the contract, S Limited expects the following:
Transaction price – ₹ 20,00,000
Expected costs – ₹ 11,00,000
Expected profit (45%) – ₹ 9,00,000
At contract inception, S Limited excludes the ₹ 2,50,000 bonus from the transaction price
because it cannot conclude that it is highly probable that a significant reversal in the
amount of cumulative revenue recognised will not occur. Completion of the heavy-duty
equipment is highly susceptible to factors outside the entity’s influence.
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By the end of the first year, the entity has satisfied 65% of its performance obligation on
the basis of costs incurred to date. Costs incurred to date are therefore ₹ 7,15,000 and
S Limited reassesses the variable consideration and concludes that the amount is still
constrained. Therefore at 31st March, 20X2, the following would be recognised:
Revenue (A) – ₹ 13,00,000 (₹ 20,00,000 x 65%)
Costs (B) – ₹ 7,15,000 (₹ 11,00,000 x 65%)
Gross profit (C) i.e.(A-B) – ₹ 5,85,000
For the year 20X2-20X3
On 4th June, 20X2, the contract is modified. As a result, the fixed consideration and
expected costs increase by ₹ 1,50,000 and ₹ 80,000, respectively.
The total potential consideration after the modification is ₹ 24,00,000 which is ₹ 21,50,000
fixed consideration + ₹ 2,50,000 completion bonus. In addition, the allowable time for
achieving the bonus is extended by six months with the result that S Limited concludes
that it is highly probable that including the bonus in the transaction price will not result in
a significant reversal in the amount of cumulative revenue recognised in accordance with
Ind AS 115. Therefore, the bonus of ₹ 2,50,000 can be included in the transaction price.
S Limited also concludes that the contract remains a single performance obligation.
Thus, S Limited accounts for the contract modification as if it were part of the original
contract. Therefore, S Limited updates its estimates of costs and revenue as follows:
S Limited has satisfied 60.60% of its performance obligation (₹ 7,15,000 actual costs
incurred compared to ₹ 11,80,000 total expected costs). The entity recognises additional
revenue of ₹ 1,54,400 [(60.60% of ₹ 24,00,000) – ₹ 13,00,000 revenue recognised to
date] at the date of modification i.e. on 4th June, 20X2 as a cumulative catch-up
adjustment.
5. Calculation of additional warranty provisions:
Warranty claim covers 1% of gross margin, whereas customers are refunded the full
selling price. As the goods are scrapped it is assumed XYZ Ltd has no potential for re-
imbursement from its supplier regarding the faulty goods.
A calculation of warranty provision is set out below:
1% of annual gross margin is ₹ 30,000 therefore 100% of annual gross margin must be
₹ 30,00,000. Since gross margin is 40%, sales should be ₹ 75,00,000. As provide in
the question that the sales are evenly spread during the year and given the six month
warranty, half of the sales occurred in the second half of the year is still covered within
the warranty period as follows.
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% age Annual Product under Percentage Warranty

sales warranty at expected to provision
31st March, 20X2 be returned
₹ ₹ ₹ ₹
Gross margin 40% 30,00,000
Selling price 100% 75,00,000 37,50,000 1% 37,500
The warranty provision should therefore be increased by ₹ 7,500 (₹ 37,500 – ₹ 30,000).
As the provision is expected to be used in the next 6 months no discounting is required.
If the warranty period is 2 years:
Since the outstanding period of warranties is 6 months (i.e. less than a year), no
discounting is required. However, if a longer warranty period is to be given, the entity
will have to take into account the effect of the time value of money. The amount of
provision shall be the present value of the expenditures expected to be required to settle
the warranty obligation. (Refer Para 45 of Ind AS 37)
The discount rate shall be a pre-tax rate that reflects current market assessments of the
time value of money and the risks specific to the liability. The discount rate shall not
reflect risks for which future cash flow estimates have been adjusted. (Refer Para 47 of
Ind AS 37)
% age Annual Product under Percentage Warranty
sales warranty at expected to provision
31st March, 20X2 be returned
₹ ₹ ₹ ₹
Gross margin 40% 30,00,000
Selling price 100% 75,00,000 75,00,000 1% 75,000

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

Further discounting of provision would be required.
6. The fair value of the incremental consideration paid by Entity X is calculated as follows:
Number of ordinary shares to be issued to debenture holders under amended
terms
Particulars
Face value ₹ 1,000
New conversion price ₹ 40 per share
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Number of ordinary shares to be issued to 1,000 / ₹ 40 25 Shares

debenture holders under amended terms
Number of ordinary shares to be issued to debenture holders under original
terms
Face value ₹ 1,000
Original conversion price ₹ 50 per share
Number of ordinary shares to be issued to 1,000 / ₹ 50 20 Shares
debenture holders under original terms
Number of additional shares to be issued to 5 Shares
debenture holders under amended terms
Value of additional shares upon conversion (to be recognised as loss in P&L)
5 shares x ₹ 80 per share ₹ 400

7. Paragraph 14 of Ind AS 23, inter-alia, states that to the extent that an entity borrows
funds generally and uses them for the purpose of obtaining a qualifying asset, the entity
shall determine the amount of borrowing costs eligible for capitalisation by applying a
capitalisation rate to the expenditures on that asset. The capitalisation rate shall be the
weighted average of the borrowing costs applicable to all borrowings of the entity that
are outstanding during the period. However, an entity shall exclude from this calculation
borrowing costs applicable to borrowings made specifically for the purpose of obtaining
a qualifying asset until substantially all the activities necessary to prepare that asset for
its intended use or sale are complete. The amount of borrowing costs that an entity
capitalises during a period shall not exceed the amount of borrowing costs it incurred
during that period.
In this context, a question arises whether such expenditure should be based on costs
accrued or actual cash outflows. To contrast these two alternatives, presented below is
the computation of borrowing costs based on both the alternatives:
Month Cost of Average capital Cash outflows Average capital
construction expenditure (paid in advance expenditure
Accrued at the start of
each month)
September 1.50 1.50 x 7/12 = 0.875 3.00 3.00 x 7/12 = 1.75
October 0.50 0.50 x 6/12 = 0.25 1.70 1.70 x 6/12 = 0.85
November 1.50 1.50 x 5/12 = 0.625 2.50 2.50 x 5/12 = 1.04
December 0.50 0.50 x 4/12 = 0.17 - -
January 1.80 1.80 x 3/12 = 0.45 1.00 1 x 3/12 = 0.25
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February 0.70 0.70 x 2/12 = 0.12 - -

March 3.00 3.00 x 1/12 = 0.25 1.50 1.50 x 1/12 = 0.125
9.50 2.74 9.70 4.02

If the average capital expenditure on the basis of costs accrued is taken, the borrowing
costs eligible to be capitalised would be ₹ 2.74 crore x 11% = 0.30 crore. Whereas, if
average capital expenditure on the basis of cash flows is taken, the borrowing costs
eligible to be capitalised would be ₹ 4.02 crore x 11% = 0.44 crore. Thus, there is a wide
variance in the amount of borrowing cost to be capitalised, based on the accrual basis
and on actual cash flows basis. This divergence is often experienced during the
implementation of large projects, for example, an advance given to a supplier involves
an upfront cash outflow while the actual expenditure accrues in later periods (with the
receipt of goods and services).
As per paragraph 18 of Ind AS 23, expenditures on a qualifying asset include only those
expenditures that have resulted in payments of cash, transfers of other assets or the
assumption of interest-bearing liabilities. Expenditures are reduced by any progress
payments received and grants received in connection with the asset (see Ind AS 20,
Accounting for Government Grants and Disclosure of Government Assistance). The
average carrying amount of the asset during a period, including borrowing costs
previously capitalised, is normally a reasonable approximation of the expenditures to
which the capitalization rate is applied in that period.
Where cash has been paid but the corresponding cost has not yet accrued interest
becomes payable on payment of cash. Therefore, the amount so paid should be
considered for determining the amount of interest eligible for capitalisation, subject to
the fulfillment of other conditions prescribed in paragraph 16 of Ind AS 23. Accordingly,
in the present case, interest should be computed on the basis of the cash flows rather
than on the basis of costs accrued. Therefore, the amount of interest eligible for
capitalisation would be ₹ 0.44 crore.
Another important factor to be noted is that paragraph 14 requires, inter alia, that the
amount of borrowing costs that an entity capitalises during a period shall not exceed the
amount of borrowing costs it incurred during that period. Thus, the amount of borrowing
costs to be capitalised should not exceed the total borrowing costs incurred during the
period, that is ₹ 0.5 crore.
8. Paragraph 9, B9, B13 and B14 of Ind AS 116 state the following:
“9 At inception of a contract, an entity shall assess whether the contract is, or contains,
a lease. A contract is, or contains, a lease if the contract conveys the right to control
the use of an identified asset for a period of time in exchange for consideration.”
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“B9 To assess whether a contract conveys the right to control the use of an identified
asset for a period of time, an entity shall assess whether, throughout the period of use,
the customer has both of the following:
(a) the right to obtain substantially all of the economic benefits from use of the identified
asset; and
(b) the right to direct the use of the identified asset.”
“B13 An asset is typically identified by being explicitly specified in a contract. However,
an asset can also be identified by being implicitly specified at the time that the asset is
made available for use by the customer.”
“B14 Even if an asset is specified, a customer does not have the right to use an identified
asset if the supplier has the substantive right to substitute the asset throughout the
period of use. A supplier’s right to substitute an asset is substantive only if both of the
following conditions exist:
(a) the supplier has the practical ability to substitute alternative assets throughout the
period of use (for example, the customer cannot prevent the supplier from
substituting the asset and alternative assets are readily available to the supplier or
could be sourced by the supplier within a reasonable period of time); and
(b) the supplier would benefit economically from the exercise of its right to substitute
the asset (i.e., the economic benefits associated with substituting the asset are
expected to exceed the costs associated with substituting the asset).”
Paragraph B20 of Ind AS 116 which provides guidance regarding identified asset in case
of portion of assets states that a capacity portion of an asset is an identified asset if it is
physically distinct (for example, a floor of a building). A capacity or other portion of an
asset that is not physically distinct (for example, a capacity portion of a fibre optic cable)
is not an identified asset, unless it represents substantially all of the capacity of the asset
and thereby provides the customer with the right to obtain substantially all of the
economic benefits from use of the asset.
Paragraph B21 of Ind AS 116, inter alia, states that to control the use of an identified
asset, a customer is required to have the right to obtain substantially all of the economic
benefits from use of the asset throughout the period of use (for example, by having
exclusive use of the asset throughout that period). A customer can obtain economic
benefits from use of an asset directly or indirectly in many ways, such as by using,
holding or subleasing the asset.
Further, paragraph B24 of Ind AS 116 provides that a customer has the right to direct
the use of an identified asset throughout the period of use if the customer has the right
to direct how and for what purpose the asset is used throughout the period of use.
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Paragraph B25 of Ind AS 116 states that a customer has the right to direct how and for
what purpose the asset is used if, within the scope of its right of use defined in the
contract, it can change how and for what purpose the asset is used throughout the period
of use. In making this assessment, an entity considers the decision-making rights that
are most relevant to changing how and for what purpose the asset is used throughout
the period of use. Decision-making rights are relevant when they affect the economic
benefits to be derived from use. The decision-making rights that are most relevant are
likely to be different for different contracts, depending on the nature of the asset and the
terms and conditions of the contract.
Case I
Scenario 1:
(i) As per paragraph B13 of Ind AS 116, ‘Last mile’ which is a dedicated cable is an
identified asset since it is physically distinct.
(ii) There are no substantive substitution rights with Entity Y, as it does not have the
practical ability to substitute alternative assets throughout the period of use.
Thus, this arrangement is within the scope of Ind AS 116.
Scenario 2:
If Entity Y has the practical ability to replace the lines and it would benefit from such
replacement, Entity Y has substantive substitution rights. In such case, this arrangement
for the ‘last mile cable’ will not be within the scope of Ind AS 116.
Case II
The fibers are specified in the contract and are physically distinct. Hence, in accordance
with paragraph B13 and B20, the said three fibers are identified asset.
Paragraph B18, inter alia, states that the supplier’s right or obligation to substitute the
asset for repairs and maintenance, if the asset is not operating properly or if a technical
upgrade becomes available does not preclude the customer from having the right to use
an identified asset.
Further, paragraph B27 provides that although rights such as those to operate or
maintain an asset are often essential to the efficient use of an asset, they are not rights
to direct how and for what purpose the asset is used and can actually be dependent on
the decisions about how and for what purpose the asset is used.
In accordance with the above, as Entity Y can substitute these three distinct fibers only
for reasons of repairs, maintenance or malfunction, it does not preclude them from being
an identified asset.
Further, the Customer X has right to control the use of the identified fibers for 10 year
since it has –
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(a) the right to obtain substantially all of the economic benefits from use of the identified
fibers throughout the period of use, i.e., 10 years; and
(b) the right to direct the use of the fibers as it makes the decisions about the use of
the fibers, i.e., it has right to direct how and for what purpose the fibers are used
throughout the period of use.
Hence, this arrangement is within the scope of Ind AS 116.
Case III
Paragraph B20 specifically provides that a capacity or other portion of an asset that is
not physically distinct (for example, a capacity portion of a fiber optic cable) is not an
identified asset, unless it represents substantially all of the capacity of the asset and
thereby provides the customer with the right to obtain substantially all of the economic
benefits from use of the asset. In the given case, the capacity portion that will be
provided to Customer X is not physically distinct from the remaining capacity of the cable
and does not represent substantially all of the capacity of the cable, thus, it is not an
identified asset. Further, Entity Y makes all decisions about the transmission of data,
(i.e., supplier lights the fibers, makes decisions about which fibers are used to transmit
customer’s traffic).
Thus, the contract does not contain a lease and is therefore not within the scope of
Ind AS 116.
9. The impact on the financial position and results of classifying the payments as
remuneration and contingent consideration is tabulated as follows:
Additional Payment is
classified as
Remuneration Contingent
consideration
Consideration 900 900
Fair value of additional payment 0 200
Total consideration 900 1,100
Fair value of net assets (850) (850)
Goodwill at acquisition date 50 250
Subsequent changes in additional payment 0 0
Total Goodwill 50 250
Cumulative earnings (before considering 1,050 1,050
additional payment)
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Impact of additional payment (500) (300)

Reported results across three years 550 750

10. Ind AS 105 defines a disposal group as a group of assets to be disposed of, by sale or
otherwise, together as a group in a single transaction, and liabilities directly associated
with those assets that will be transferred in the transaction. The group includes goodwill
acquired in a business combination if the group is a cash-generating unit to which
goodwill has been allocated in accordance with the requirements of paragraphs 80–87
of Ind AS 36, Impairment of Assets, or if it is an operation within such a cash- generating
unit.
In the given case, B Ltd. is acquired exclusively with a view to sell and meets the criteria
to be classified as discontinued operation.
The discontinued operation would be measured in accordance with paragraphs 15 and
16 of Ind AS 105
As per para 15, an entity shall measure a non-current asset (or disposal group) classified
as held for sale at the lower of its carrying amount and fair value less costs to sell.
As per para 16, if a newly acquired asset (or disposal group) meets the criteria to be
classified as held for sale (see paragraph 11), applying paragraph 15 will result in the
asset (or disposal group) being measured on initial recognition at the lower of its carrying
amount had it not been so classified (for example, cost) and fair value less costs to sell.
Hence, if the asset (or disposal group) is acquired as part of a business combination, it
shall be measured at fair value less costs to sell.
Therefore, on acquisition date, in line with paragraph 16, X Ltd. will measure B Ltd. as a
disposal group at fair value less costs to sell which will be calculated as Fair value of
total assets excluding liabilities on acquisition – Costs to sell = ₹ 360 – ₹ 10 = ₹ 350.
Fair value of liabilities on acquisition = ₹ 80.
At the reporting date, in line with paragraph 15, X Ltd. will remeasure the disposal group
at the lower of its cost and fair value less costs to sell which will be calculated as:
Fair value of total assets excluding liabilities on subsequent reporting date – Costs to
sell
= ₹ 340 – ₹ 10 = ₹ 330
Fair value of liabilities on reporting date = ₹ 80.
At the reporting date, X Ltd. shall present these assets and liabilities separately from
other assets and liabilities in its consolidated financial statements.
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In the statement of profit and loss, X Ltd. shall recognise loss on subsequent
measurement (of net assets at fair value) of B Ltd. which equals to ₹ 20 (₹ 270 – ₹ 250).
11. Entity A should disclose its transactions with entity C in entity A’s separate financial
statements. Entity C is a related party of entity A, because entity C is the subsidiary of
entity A’s associate, entity B.
Entity A’s management is not required to disclose entity A’s transactions with entity D in
its financial statements. Entity D is not a related party of entity A, because entity A has
no ability to exercise control or significant influence over entity D.
Entity C is required to disclose its transactions with entity A in its financial statements,
because entity A is a related partly.
Entity D is not required to disclose transactions with entity A, because they are not
related parties.
12. 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 solely
controlled 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:
(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, and
the 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 be
in the nature of a joint venture.
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(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.
13. As per the principles of Ind AS 20 “Accounting for Government Grants and Disclosure of
Government Assistance”, the benefits of a government loan at a below market rate of
interest is treated as a government grant. The loan shall be recognized and measured
in accordance with Ind AS 109 “Financial Instruments”. The benefit of the below market
rate of interest shall be measured as the difference between the initial carrying value of
the loan determined in accordance with Ind AS 109 and the proceeds received. The
benefit is accounted for in accordance with Ind AS 20. As per Ind AS 109, the loan
should be initially measured at its fair value.
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Initial recognition of grant as on 1st April, 20X1

Fair value of loan = ₹ 25,00,000 x 0.567 (PVF @ 12%, 5th year) = ₹ 14,17,500
A Limited will recognize ₹ 10,82,500 (25,00,000 – 14,17,500) as the government grant
and will make the following entry on receipt of loan:
Date Particulars Dr. (₹) Cr. (₹)
1.4.20X1 Bank account Dr. 25,00,000
To Deferred Grant Income 10,82,500
To Loan account 14,17,500
(Being grant initially recorded at fair value)

Accounting treatment for year ending 31st March, 20X2

As per para 3 of Ind AS 20, grants related to assets are government grants whose
primary condition is that an entity qualifying for them should purchase, construct or
otherwise acquire long-term assets.
As per para 24-27 of Ind AS 20, Government grants related to assets, including non-
monetary grants at fair value, shall be presented in the balance sheet either by setting
up the grant as deferred income or by deducting the grant in arriving at the carrying
amount of the asset.
One method recognises the grant as deferred income that is recognised in profit or loss
on a systematic basis over the useful life of the asset.
The other method deducts the grant in calculating the carrying amount of the asset. The
grant is recognised in profit or loss over the life of a depreciable asset as a reduced
depreciation expense.
A Ltd. has adopted first method of recognising the grant as deferred income that is
recognised in profit or loss on a systematic basis over the useful life of the asset. Here,
deferred income is recognised in profit or loss in the proportion in which depreciation
expense on the asset is recognised.
Depreciation for the year (20X1-20X2) = ₹ 50,00,000 / 5 years = ₹ 10,00,000
As the loan is to finance a depreciable asset, ₹ 10,82,500 will be recognized in Profit or
Loss on the same basis as depreciation.
Since the depreciation is provided on straight line basis by A Limited, it will credit
₹ 2,16,500 (10,82,500 / 5) equally to its statement of profit and loss over the 5 years.
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Journal Entries
Date Particulars Dr. (₹) Cr. (₹)
31.3.20X2 Depreciation (Profit or Loss A/c) Dr. 10,00,000
To Property, Plant & Equipment 10,00,000
(Being depreciation provided for the year)
Deferred grant income Dr. 2,16,500
To Profit or Loss 2,16,500
(Being deferred income adjusted)

Impact on profit or loss due to revocation of government grant as on

31st March 20X3
As per para 32 of Ind AS 20, a government grant that becomes repayable shall be
accounted for as a change in accounting estimate. Repayment of a grant related to
income shall be applied first against any unamortised deferred credit recognised in
respect of the grant. To the extent that the repayment exceeds any such deferred credit,
or when no deferred credit exists, the repayment shall be recognised immediately in
profit or loss.
Amount payable to Government on account of principal loan = ₹ 25,00,000
Amount payable to Government on account of penalty = ₹ 10,00,000
Journal Entries
Date Particulars Dr. (₹) Cr. (₹)
31.3.20X3 Deferred grant income Dr. 2,16,500
To Profit or Loss 2,16,500
(Being deferred income adjusted)
Loan account (W.N.1) Dr. 17,78,112
Deferred grant income (W.N.2) Dr. 6,49,500
Profit or Loss Dr. 72,388
To Government grant payable 25,00,000
(Being refund of government grant)
Profit or Loss Dr. 10,00,000
To Government grant payable 10,00,000
(Being penalty payable to government)
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Therefore, total impact on profit or loss on account of revocation of government grant as

on 31st March, 20X3 will be ₹ 10,72,388 (10,00,000 + 72,388).
Circumstances giving rise to repayment of a grant related to an asset may require
consideration to be given to the possible impairment of the new carrying amount of the
asset.
Working Notes:
1. Amortisation Schedule of Loan
Year Opening balance Interest @ 12% Closing balance
of Loan of Loan
31.03.20X2 14,17,500 1,70,100 15,87,600
31.03.20X3 15,87,600 1,90,512 17,78,112

2. Deferred Grant Income

Year Opening balance Adjustment Closing balance
31.03.20X2 10,82,500 2,16,500 8,66,000
31.03.20X3 8,66,000 2,16,500 6,49,500

14. The OCPS is redeemable at the end of the 5th year. Hence, the preference share
contains a liability component. Further the dividend payable on the preference shares
is non-cumulative. The holder may also be able to convert the preference shares at his
option any time until maturity.
Paragraph AG 37 of Ind AS 32, Financial Instruments: Presentation states that non-
cumulative dividends paid at the discretion of the issuer entity is part of equity element.
Paragraph 29 of Ind AS 32, Financial Instruments: Presentation, requires separate
recognition of components of a financial instrument that (a) creates a financial liability of
the entity; and (b) grants an option to the holder of the instrument to convert it into fixed
number of equity instruments of the entity.
From the above paragraphs it is clear that OCPS issued by ABC Ltd. has a financial
liability component as well as an equity component, making it a compound financial
instrument.
As per paragraph 32, in case of compound financial instruments, the issuer first
determines the carrying amount of the financial liability component by measuring the fair
value of a similar liability that does not have an associated equity component. The
carrying amount of the equity represented by (a) non-cumulative dividend feature and
(b) option to convert the preference shares for fixed number of pre-determined ordinary
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shares is then determined by deducting the fair value of the financial liability component
from the fair value of the compound financial instrument as a whole.
Measurement and recognition (Calculations have been done at full scale):
At 7% market rate of interest, the fair value of the financial liability component of the
OCPS is ₹ 71,29,862 [100,000 OCPS x ₹ 100 x (1/ (1+7%))5]
The fair value of the equity component is (residual value) ₹ 28,70,138
[₹ 1,00,00,000 - ₹ 71,29,862]
Journal Entries
1st April, 20X1 On Initial recognition
Bank Dr. 1,00,00,000
To OCPS (Financial liability) 71,29,862
To OCPS (Equity) 28,70,138
(Being OCPS issued and
recognised)
31st March, 20X2 Interest expense – unwinding of
discount
Interest expense@7% (Refer Dr. 4,99,090
W.N.)
To OCPS (Financial liability) 4,99,090
(Being interest recorded as per
EIR)
Interest entry will be passed
every year till conversion option
is not exercised
Whenever the option is
exercised by the holder to
convert to equity shares
OCPS (Financial liability) Dr. Balance on date of
To OCPS (Equity) exercise of the option

As per paragraph 30, in case of a convertible financial instrument, the classification of

the liability and equity components is not revised as a result of change in the likelihood
that a conversion option will be exercised.
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In other words, the amount attributable to equity component on initial recognition shall
remain in equity and will not be reclassified even if the OCPS are ultimately redeemed
in cash by the issuer.
31st March, If redeemed in cash on maturity
20X6
OCPS (financial liability) (Refer W.N.) Dr. 1,00,00,000
To Bank 1,00,00,000
(Being OCPS redeemed on maturity)

Working Note:
Calculation of the amortised cost of the financial liability (at full scale):
Year Opening Balance Interest @ 7% Repayment Closing
(₹) Balance (₹)
1 71,29,862 4,99,090 - 76,28,952
2 76,28,952 5,34,027 81,62,979
3 81,62,979 5,71,409 87,34,388
4 87,34,388 6,11,407 93,45,795
5 93,45,795 6,54,206 10,000,000 -

15. The first annual Ind AS financial statements are prepared in accordance with the specific
requirements of Ind AS 101. Subject to certain specified exemptions and exceptions,
paragraph 7 of Ind AS 101 requires the entity to use the same accounting policies in its
opening Ind AS balance sheet and throughout all periods presented. This override
Ind AS 8’s requirements for disclosures about changes in accounting policies do not
apply in an entity’s first Ind AS financial statements.
GG Ltd. should include an explanation of the change in policy that it has made since the
interim financial report, in the notes to the annual financial statements, in accordance
with paragraph 27A of Ind AS 101. The disclosure note is likely to include information,
similar to what Ind AS 8 would otherwise require, to help users of the financial statements
to understand the changes that have been made. The entity should also ensure that the
reconciliations of total comprehensive income and of equity, presented in the first Ind AS
financial statements in accordance with paragraph 24 of Ind AS 101 are updated from
those included in the interim financial report to reflect the amended accounting policy
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16. Ind AS 102 defines grant date and measurement dates as follows:
(a) Grant date: The date at which the entity and another party (including an employee)
agree to a share-based payment arrangement, being when the entity and the
counterparty have a shared understanding of the terms and conditions of the
arrangement. At grant date the entity confers on the counterparty the right to cash,
other assets, or equity instruments of the entity, provided the specified vesting
conditions, if any, are met. If that agreement is subject to an approval process (for
example, by shareholders), grant date is the date when that approval is obtained.
(b) Measurement date: The date at which the fair value of the equity instruments
granted is measured for the purposes of this Ind AS. For transactions with
employees and others providing similar services, the measurement date is grant
date. For transactions with parties other than employees (and those providing
similar services), the measurement date is the date the entity obtains the goods or
the counterparty renders service.
Applying the above definitions in the given scenarios following would be the conclusion
based on the assumption that the approvals have been received prospectively:

Scenario Grant date Measurement Base for grant Base for

date date measurement
date
(i) 30th June, 20X1 30th June, 20X1 The date on which For employees,
the scheme was the measurement
approved by the date is grant date
employees
(ii) 1st April, 20X1 30th July, 20X1 The date when the The date when
entity and the the entity obtains
counterparty the goods from
entered a contract the counterparty
and agreed for
settlement by
equity instruments
(iii) 30th September, 30th September, The date when the For employees,
20X1 20X1 approval by the measurement
shareholders was date is grant date
obtained
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17. An entity has eight segments and the relevant information is as follows:
Criterial 1: Segment revenue is 10% or more of total external + intersegment sales
Segments A B C D E F G H Total
Total sales 100 315 45 15 15 50 25 35 600
% to total sales 16.7 52.5 7.5 2.5 2.5 8.3 4.2 5.8
Reportable segments A B - - - - - -

Criteria 2: 10% or more of segment result

Consider segment profit and loss separately in absolute terms
Segments A B C D E F G H Total
Profit 5 - 15 - 8 - 5 7 40
Segments loss - 90 - 5 - 5 - - 100

Since segment loss is greater, we select 100 as evaluating the segment percentage
Segments A B C D E F G H Total
% to segment loss 5 90 15 5 8 5 5 7
Reportable segments - B C - - - - -

Criteria 2: 10% or more of segment assets

Segments A B C D E F G H Total
Assets 15 47 5 11 3 5 5 9 100
% 15 47 5 11 3 5 5 9 100
Reportable segments A B - D - - - -

Based on the above 3 criteria, the Reportable Segments are A, B, C & D

However, 75% test for external sales should also be checked.
Reportable Segments A B C D TOTAL
External sales 0 255 15 10 280
Total entity’s sales (external) 405
% of reportable segments external sales to entity’s sales 69.14%
Required percentage 75%
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Hence, in the above scenario, additional operating segments need to be identified as

reportable segments, till the 75% test is satisfied, even if those segments do not satisfy
the quantitative threshold limits.
18. As per paragraph 32 of Ind AS 38, “If payment for an intangible asset is deferred beyond
normal credit terms, its cost is the cash price equivalent. The difference between this
amount and the total payments is recognized as interest expense over the period of
credit unless it is capitalized in accordance with Ind AS 23, Borrowing Costs.”
In the given case, if the payment for an intangible asset i.e. copyright is deferred beyond
normal credit terms, the cash price equivalent ₹ 80,00,000 should be considered as its
cost and the intangible asset will be recorded initially at this value.
The difference of ₹ 20,00,000 between cash price equivalent (i.e. ₹ 80,00,000) and the
total payment (i.e. ₹ 1,00,00,000) should be recognised as interest expense over the
period of credit (i.e. 2 years in this case), unless it is eligible for capitalisation in
accordance with Ind AS 23, Borrowing Costs.
19. As per Ind AS 115, if the consideration promised in a contract includes a variable amount,
an entity shall estimate the amount of consideration to which the entity will be entitled in
exchange for transferring the promised goods or services to a customer.
In the instant case, the condition that sales have been made exists at the end of the
reporting period and the receipt of payment within 15 days’ time after the end of the
reporting period and before the approval of the financial statements confirms that the
discount is to be provided on those sales. Therefore, it is an adjusting event.
Accordingly, XYZ Ltd. should adjust the sales made to ABC Ltd. With respect to discount
of 5% on the list price of the goods.
20.
Description Calculation or reason ₹
Purchase price ₹ 600,000 purchase price minus ₹ 50,000 550,000
refundable purchase taxes
Loan raising fee Offset against the measurement of the -
liability
Transport cost Directly attributable expenditure 20,000
Installation costs Directly attributable expenditure 100,000
Environmental restoration The obligation to dismantle and restore the 100,000
costs environment arose from the installation of
the equipment
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Preparation costs ₹ 55,000 materials + ₹ 65,000 labour + 135,000

₹ 15,000 depreciation
Training costs Recognised as expenses in profit and loss -
account. The equipment was capable of
operating in the manner intended by
management without incurring the training
costs.
Cost of testing ₹ 21,000 materials (ie net of the ₹ 3,000 37,000
recovered from the sale of the scrapped
output) + ₹ 16,000 labour
Operating loss Recognised as expenses in profit and loss -
account
Borrowing costs Recognised as expenses in profit and loss -
account
Cost of equipment 9,42,000