Module-3

Index
Chapter
Particulars Page Range
No.
1 CHAPTER 01 FINANCIAL INSTRUMENTS
Part -1 1-3
Part -2 3-6
Part -3 6-9
Part -4 10-14
Part -5 14-17
Part -6 17-19
Part -7 19-27
Part -8 27-38
Part -9 38-44
Part -10 44-52
Part -11 52-56
Part -12 57-63
Part -13 64-70
Part -14 70-76
Part -15 76-80
Part -16 80-86
Part -17 87-93
Part -18 93-99
Part -19 99-105
Part -20 106-111
Part -21 111-116
Part -22 116-124

Thank You
Best of Luck…..!!!!!!
CA. Parveen Jindal
 Join us on
[Link]
[Link]
CA Parveen Jindal Classes
CA-Final Financial Instrument 1

Chapter-1
Financial Instruments *V.V. Imp

*Part 1*

Ind AS 32 = Presentation (Classification) -> IAS : 32

Ind AS 109 = Recognition & Measurement (Accounting) -> IFRS : 9
Ind AS 107 = Disclosures -> IFRS : 7

Unit I: Introduction to Financial Instruments (Ind AS 32)

Concept 1: Meaning of Financial Instruments

As per the Provisions of Ind AS 32, Financial Instrument is a contract

between 2 parties where It can be a Financial Asset for one Party &
Financial Liability or Equity Instrument for other Party.

(*Imp)
Concept 2: Meaning of Financial Assets

As per the Provisions of Ind AS-32, Financial Asset means:-

A) Contract to Receive Cash: Trade Receivables, Investment in
Redeemable Deb./Pref. shares/ Bonds,
Loans Receivables, Deposits with Bank
for more than one year, etc.
OR
B) Cash: Cash in Hand, Balances with Banks, Cash Equivalents (90days)
etc.
OR
C) Equity Instrument: Investment in Equity Shares
(i.e.; Equity holders have contract to receive
Cash/Shares in Residual Interest of Company on Pro
rata basis at the time of Liquidation of Company.)
CA-Final Financial Instrument 2

OR
D) Contract to receive other Financial Asset:
(i) Debtors B/R
(ii) Investment in Convertible Debenture/Pref. Equity Shares

OR

E) Contract to Exchange Financial Asset/Financial Liabilities under

Favourable conditions:
[Options, Futures or Forwards which are in Profit at Balance Sheet
date]

(*Imp)
Concept 3: Meaning of Financial Liabilities

As per the Provisions of Ind AS-32, Financial Liabilities means:

A) Obligation to deliver Cash: Trade Payables, Borrowings, Redeemable

Debentures/ Pref. Shares Capital, Deposits
Accepted but Refundable, overdrafts etc.
OR
B) Obligation to deliver any other Financial Assets:
*Endorsement of Bills Receivables to Creditors, Assignment of
Trade Receivables to Trade Payables etc.
*Payment of liability by transfer of Non-Financial Assets shall not be
considered under this category. i.e.; If Payment of Payables/Deb./PSC
is to be made by transferring Building then these payables are not
Financial Liability.
OR
C) Obligation to Exchange Financial Asset/Financial Liabilities in an
Unfavourable Situation
i.e.; i) Options, Futures or Forwards if all these contracts are in Loss
at Balance Sheet date
ii) Re-structuring of Loans at higher amount etc.
OR
CA-Final Financial Instrument 3

D) If Settlement of Derivatives/Non-Derivatives is to be made by

issuing Entity’s own Equity shares, but No. of Shares are VARIABLE
i.e.; Convertible Deb./PSC/Payables which are to be settled by issue of
own Equity shares

Concept 4: Meaning of Equity Instruments

As per the Provisions of Ind AS-32, Equity Instruments means:

A) No Obligation to deliver Cash, other Financial Assets: Irredeemable
PSC , Perpetual Debts etc.
OR
B) No Obligation to Exchange Financial Assets/Financial Liability in
Unfavourable situation.
OR
Own
C) FIXED No. of Shares shall be issued in settlement

Solution:
Question. 1, 2, 3, 12, 4, 5 (*Imp), 6, 8 : Discussed in Class

*Part 2*

(*V.V. Imp) Shares

Concept 5: Puttable Instruments Deb.

As per the Provisions of Ind AS-32, Puttable Instrument should always

be considered as “Financial Liability” because Holder of Puttable
Instrument can throw back it to company at any time & It will be the
obligation of Company to return money to its holder. It means that
Holder of Puttable Instrument has Contractual Right to receive cash
by throwing back Puttable Instrument to the company and company
has Contractual Obligation to deliver cash to holder if the holder
surrenders the Puttable Instrument.
CA-Final Financial Instrument 4

Exception
It may be Possible that classification of Puttable Instrument is
required to be made under “Equity Instruments” instead of treating
it as a financial liability. There should be the following 4 features if
Puttable Instrument is classified as an Equity Instrument:-

Puttable Instrument

Equity Instrument

Pro-Rata: No Priority Identical No other

Puttable Payment to Features: Contractual
Instrument Puttable Puttable holders obligation:
holder will get his holder will be have rights There should
Share in Residual made with Last which are not be any
Interest at the sub-ordinated identical to Promise with
time of Liquidation class ordinary shares Puttable
on Pro-rata basis i.e.; voting rights, holders
like an ordinary dividend rights etc. regarding
Equity shareholder Payment
other than
Pro-rata.
i.e.; Redemption
in Variable no.
of shares etc.

(*[Link])
EXCEPTION TO EXCEPTION

If company has any other contract with Puttable Instrument holder

regarding Professional Services or Supply of Materials at higher price
than Market Rates then we will classify such Instrument as “Financial
Liability” even if all features of Equity Instruments exist.
CA-Final Financial Instrument 5

Q.15
Solution:
Line to be added in notes:- But Class A has share in Residual Interest
without any limit due to which It should be classified as Equity
Instruments.

Question. 28 : Same to Same Q.16

Question. 16, 26, 27, 29 (Imp) : Discussed in Class

(*[Link])
Concept 6: Entity’s own Equity Instruments

If company has to issue its own Equity Shares under any contract
then It will be classified as Equity Instrument or Financial Liability on
the basis of following 2 different cases:-

Case I: Fixed To Fixed Test

If consideration which is to be settled is fixed on contract date as well
as fair value per share is also fixed on contract date then such
contract should be classified as Equity Instrument because there will
be no impact on Number of Shares due to change in fair value of
consideration or Equity Share.

Fixed
No. of shares to be issued (fixed)= Payable Amount
Fair Value per Share
Fixed
Case II: If Fixed To Fixed Test Fails
In case consideration or Fair value per share fluctuates according to
market position then Company will issue variable number of shares in
this case. Such contract shall be taken as “Financial Liability”
I II III
No. of shares to be issued = Payable Amount F V V
Fair Value per Share V F V
CA-Final Financial Instrument 6

Exception to Above Rule

In case variable number of shares are issued due to time factor then
It will be consider as a case of Equity Instrument Even if No. of
Shares are variable.

Question. 17, 18, 19, 20, 21, 22 (Imp), 23, 25, 30 : Discussed in Class

*Part 3*

(*Imp)
Concept 7: Preference Shares

If a Company issues Preference Shares then classification of

Preference Share Capital under the heading of Financial Liability or
Equity will be made on the basis of following Rules:-

Preference Share Capital

Irredeemable PSC Redeemable PSC

Equity
Redeemable after Redeemable at Redeemable at
a specified holder’ option Issuer’ option
period

Financial Financial Based on Issuer

Liability Liability Intention

Equity or Financial
Liab.

*Preference Dividend: i) Cumulative Feature leads to Financial Liability.

ii) Non-Cumulative Feature leads to Equity
CA-Final Financial Instrument 7

Note: It may be possible that Preference Share Capital has different

features of Financial Liability as well as Equity due to different nature
of Principal & Preference Dividend. Such type of Instrument is called
Compound Financial Instrument.

Concept 8: Debentures

I) Principal Amount: If a Company issues Debentures then its

classification under Financial Liability or Equity to the extent of its
Principal Amount will be made in the same way as we have discussed in
case of Preference Share Capital.

II) Interest on Debentures: a) If Payment of Interest is mandatory

then it will be Financial Liability.
b) If Payment of Interest is not
mandatory then It will be Equity.

Note: If any debt Instrument has multiple features then It will be

considered as a Compound Financial Instrument.

Question. 7, 10, 24 (Imp), 31, 32, 33 : Discussed in Class

Q.11
Solution:
Line to be added in solution at the end- The Second Component is not a
contractual Obligation to deliver cash because Interest is paid at
issuer discretion. So It should be classified as Compound Financial
Instrument (CFI).

Concept 9: PPE & Intangible Assets

As per the Provisions of Ind AS-32, Tangible & Intangible Assets shall
be considered as Non-Financial Assets because these Assets do not
satisfy the conditions of Financial Assets.
CA-Final Financial Instrument 8

Note: If settlement of a Liability is to be made by transferring Non-

Financial Assets then such liability will also be considered as Non-
Financial Liability.

Question. 14 : Discussed in Lecture

Concept 10: Provision for Tax/Current Tax & Deferred Tax

TAX

Current Tax DTL/DTA

These are Non-Financial Liabilities/Assets because there is no

Contract to Receive or Pay cash with I.T. Dept.

Concept 11: Prepaid Expenses/ Outstanding Expenses

Expenses

Prepaid Expenses Outstanding Expenses

Non-Financial Financial Liability

Asset

The Entity will receive The Entity will Pay its

Goods/services in obligation in cash in
Consideration of it Future.
CA-Final Financial Instrument 9

Concept 12: Lease Contracts

I) Lease Contract with Lessee

Lessee (Ind AS-116)

Exempted Lease Non Exempted Lease

No Asset ROU Asset Lease Liability

No Liability
Non-Financial Financial Liability
Assets [Contractual
obligation to Pay
in cash]

II) Lease Contracts with Lessor

Lease

Operating Lease Finance Lease

No Receivables Receivables

Financial Asset
(Contractual Right
to Receive cash)

Concept 13: Some Instruments which are out of Scope of Ind AS-
32, 109, 107

i) Insurance Liabilities: Ind AS-104

ii) Share Based Contracts: Ind AS-102
iii) Provisions: Ind AS-37
iv) Investments in Subsidiaries, Associates or Joint Venture: Ind AS-
110,111,28
CA-Final Financial Instrument 10

*Part 4*

(*[Link])
Unit II: Compound Financial Instruments (CFI)

As per the Provisions, It may be Possible that A Financial Instrument

has the features of Equity and Financial Liab. (Both). In the Given
case, we may need to split off the Specified Instrument under 2
headings as follows:- NCL
i) Liability Component [Financial Liab.] B/S CL
ii) Equity Component [Equity] B/S : Other Equity

As per the Provision, A CFI can be identified under 3 cases which are as
follows :-
Cases

Irredeemable Principal Redeemable Principal Optionally

with Mandatory Interest with Non Mandatory Convertible
Int. Instruments
(Deb./PSC)
Principal : No obligation Principal : obligation to
(Equity) to deliver cash (Liab.) deliver cash
Interest : obligation to Interest : No obligation
(Liab.) Deliver cash (Equity) to deliver cash

Option I: or Option II:

Payment Payment
in Shares in Cash
(Equity) (Liab.)

Explanation on Case I

Step I : Identify the Fair value of Liab. Component with the help of
Following Formula :-
CA-Final Financial Instrument 11

CFI : Liab. Component = Actual Interest

Market Rate

Step II : Calculate Equity Component by the difference of Proceeds

from Perpetual Debt and Liab. Component as follows :-

CFI : Equity Component = Proceeds from Debt – Liability Component

(Step I)

Disclosures

Liab. Component Equity Component

B/S NCL Financial Liab. B/S Other Equity

(SOCE)

Journal : Bank a/c Dr xxxx

To CFI : Liab. xxxx
To CFI : Equity xxxx
(Being Funds raised from Market)

Question. 37 Discussed in Class

Q.38
Solution:
Calculation of Liability & Equity Components

A. Liability Component= 12,00,000 x 8% = Rs.8,00,000

12%
B. Equity Component= Rs.12,00,000 – Rs.8,00,000 = Rs.4,00,000

Journal : Bank a/c…………Dr 12,00,0000

To CFI : Liab. 8,00,000
To CFI : Equity 4,00,000
(Being Funds raised)
CA-Final Financial Instrument 12

Explanation on Case II

Statement showing of Liab. & Equity in CFI

Proceeds from Financial Instrument (Deb./Loan/PSC) xxxx

Liability Component : (xxxx)
(Redeemable value x P.V.F @ Market Rate)

Present value of Contractual obligation to Deliver cash

_____
Equity Component (Bal. fig) xxxx

Explanation on Case III *Imp

Proceeds from Financial Instrument (Deb./PSC) xxxx

Liability Component :
i) Present value of Interest (Interest x Annuity at) xxxx
Market Rate
ii) Present value of Redeemable Value (R.V x PVF @) xxxx (xxxx)
Market
Rate _____
Equity Comp. (Bal. fig) xxxx

Important Points :-
(i) Equity Component can not be calculated Like Liab. Component
because PVF can be applied for certain Payments within Specified Period
of Time. So, Equity Component will always be computed as a Balancing
Figure.

(ii) If Conversion is mandatory then Principal Amount will not be

discounted as a Liab.

Q.42
Solution:
CA-Final Financial Instrument 13

Calculation of Equity & Debt Portion

Proceeds from Convertible Debentures Rs.30,00,000

Liability Portion :
i) Interest (30L x 6% x 3.169) 5,70,420
ii) Principal (33l x .683) 22,53,900 (Rs.28,24,320)
Equity Component (Bal. fig) Rs.1,75,680

Q.43
Solution:

Notes :
i) In the Given question, Debentures are not optionally convertible
because It is clearly mentioned that company will convert 50% of
Debentures into Shares due to which it will be considered as Mandatory
Conversion and we will not discount it, but the remaining 50% amount
is Payable in cash which will be discounted as a Liability.

ii) In this question, PVF @10% are already mentioned due to which we
will use the Given Factors.

Calculation of Liab. Component & Equity Component

Proceeds from Convertible Debentures Rs.50,00,000

Liability Component :
i) Present value of Interest
(50l x 6% x 3.17) Given 9,51,000
ii) Present value of 50% Principal 18,70,000 (Rs.28,21,000)
[(50L + 10%) x 50% x .68] ___________
Equity component (Bal. fig) Rs.2179000

Journal : Bank a/c Dr 50,00,000

(Initial Recognition) To Convt. Deb (Liab.) 28,21,000
To Convt. Deb (Equity) 21,79,000
(Being Deb. Issued)
CA-Final Financial Instrument 14

Q.39 Homework
Q.40 Homework
Q.36 Homework
Q.45 Self Reading
*Part 5*

Q. 44 *Imp
Solution:

Calculation of Liability Component in Convertible Debentures

Present Value of cash outflows during First 3years :-

I. Interest (10,00,000 x 9% x 6/12) x 5.076 2,28,420
II. Principle (10,00,000 x 50% x .747) 3,73,500

Present Value of cash outflows during Next 3years :-

I. Interest (5,00,000 x 9% x 6/12) x 3.787 85,208
II. Principal (5,00,000 + 10%) x .557 3,06,530
Liability Component 9,93,478

Equity Component (Not Required in = 10,00,000 – 993478 = 6522

question)

Q. 46 Unit I
Solution: Discussed in Class

Q. 47 Unit I
Solution: Discussed in Class

Q. 41 : Pending we will Discuss it ahead

Q. 150 Homework
CA-Final Financial Instrument 15

(*[Link])
Unit III: Classification & Measurement of ‘’Financial Assets’’

Part I: Classification of Financial Assets

As per the Provisions of Ind AS-109, ‘’Financial Assets’’ can be

classified under 3 headings as follows :-
Financial Assets

Debt Assets/ Equity Assets/ Derivatives

Instrument Instrument (Favourable Position)

v
e.g. Trade Receivable Investment in Equity Options, Futures,
B/R, Investment in shares Forwards etc.
Redeemable Debentures or (Refer Unit 6)
/PSC/Govt. Bonds, Convertible Deb./PSC
Investment in Loans/
Fixed Deposits or All There is no direct
other contractual Rights contract with Party
to Receive Cash to Receive cash, but
this Investments
can be Exchanged with
Financial Assets
i.e., Can be sold for
cash

Concept 1: Debt Assets

Debt Assets

BM I + CCFC or BM II + CCFC or BM III

SPPI SPPI

Amortisation FVOCI FVPL

methods Methods Methods
CA-Final Financial Instrument 16

*No CCFC is Tested under BM III

Business Model I :
If any Financial Asset is ‘’Hold to collect till its Maturity’’ then we will
Account it under Business model I which refers Application of
‘’Amortisation Method’’

Exceptions
As per the Provisions of Ind AS 109, the following situations do not
Impact on BM I even if funds are withdrawn before maturity :-

I. If Funds are withdrawn in insignificant volume to meet daily

requirements under Stress Scenario or Worst Scenario.

II. If Funds are withdrawn under Protective Rights to secure the

Principal

III. If Funds are withdrawn and reinvested to improve the returns by

Switching over

Business Model II :
If any Financial Asset is ‘’Hold to Collect & Sell’’ then It will be
Accounted for under BM II. Under BM II, Investments are Hold upto
a Specified Period of time to meet a specified objective of Holding
such Asset. It means that Investments are sold after some time and
these shall not go upto Maturity.

e.g. : These Investments may be made for replacement of Fixed

Assets or Redemption of Debentures etc. These Investments
are Generally made for Liquidity Arrangements for a specified
Propose

Business Model III

If any Asset is acquired ‘’to sell only’’ then It will be Accounted for
CA-Final Financial Instrument 17

under BM III. It means that these Assets are not Hold till Maturity
or for a specified time as in BM I or BM II.

e.g. : A Bank can follow Securitization model for its Loans & Advances
under which it sells its Assets to other Entity immediately at
Profit without Earning Interest Income

CCFC/SPPI : As per the Provisions of Ind AS 109, Test of CCFC is

mandatory under BM I and BM II. Under CCFC, It is
Tested that Interest Income from Financial Assets
should be a Normal Interest Income. It means that Normal
Interest should include only the 3 factors as follows :-
Time value of money
Interest is a matter Credit Risk of Instrument
of Passage of Time Transaction cost on Investment

Note : If Interest Rate is influenced by any *other factor then

Financial Asset will be Accounted under BM III.

*Other factor : Credit Risk of Entity or any Leverage impact

*Part 6*

Q. 48 (Solution)

In the Given case, we should consider the Investments under ‘’Hold to

Collect till Maturity’’ model and we should Apply Amortisation method
for Accounting of these Assets.
In the Given case, we should not consider ‘’Hold to collect
& sell’’ model because Period of Investments is matched with Time of
Need of funds from the Point of Company which indicates that company
will not sell these Assets before maturity. The Given reasons for sale
before maturity in the question do not impact on the selected model
because sales due to Protective rights or Stress Scenario are the
Exception for Selected model.
CA-Final Financial Instrument 18

Q. 49
Solution:

In the Given case, Company should Apply Amortisation method for

Investment in Loans because these Assets shall be hold to collect
contractual cash flows till maturity whether these Assets are credit
impaired or not. It is clearly mentioned that there is no Policy of
selling these Assets before maturity even if Collection is doubtful
from Assets. The Company’ Action on Interest swaping will not affect
the Selected Accounting model.

Question. 50 (BM I : Debtors), 51 : Discussed in Class

Q. 52 (Solution)

In this Given case, company is investing in Financial Assets to Fund

the Expected capital Expenditure in future. The company has Short
Term Financial Assets as well as Long Term Financial Assets. It means
that Short Term Financial Assets shall get matured before the
requirement of Funds for Purchase of Assets, but Long Term
Investment may require disposal before maturity.
So, the Entity should consider Amortisation cost method under
‘’Hold to collect model’’ for short term Financial Assets, but FVOCI
method for Long Term Financial Assets under ‘’Hold to collect & sell
model.’’
The sale of Investment to improve the returns on Assets do not
impact on selected model because It is an Exception. The Entity
should keep evaluating the Business model for different Assets until
the Purpose of Funding Expenditure is fulfilled.

Q. 53 (*Imp), 54 : Discussed in Class

Q. 55
Solution:
We can not Test CCFC/SPPI on Given Bond because Bond is convertible
into shares to which It Should be classified as Equity Instrument.
CA-Final Financial Instrument 19

Q. 56 (Exception of Protective Rights) : Discussed in Class

Q. 57 : Discussed in Class

Part D Unit III

Q. 79 Homework
Would meet ‘hold-to-collect’ business model test. The Entity should
Apply Amortised cost method.

Q. 80, 84 Homework
Q. 81, 82, 83 : Discussed in Class

*Part 7*

Concept 2 : Equity Instrument

(Investment in Equity Shares or other Equity Portions/
Instruments)
Cases

Sale in near future

If Equity Investments If Equity Investments
are held for Trading are not held for Trading

Accounting : FVPL Accounting : i) Irrevocable

model model OCI
(If OCI is
Opted)
Or
ii) FVPL
(If OCI
is not
Opted)

Concept 3 : Derivative Investments

(Option, Futures, Forwards etc.)
CA-Final Financial Instrument 20

Accounting model : FVPL

Note : We will discuss it in a Separate Unit
Part B : Measurement of Financial Assets

Initial Subsequent

Concept 1 : Debt Investments under *Amortisation cost method

Hold till maturity = BMI + CCFC

Amortisation Cost method

If Transaction is at If Transaction is at ‘’OFF

Market Terms Market Terms’’

Situation I Situation II

Situation I : Transaction is at Market Terms

If Interest Rate in the Given Transaction is equal to Market Rate of
Interest then It will be considered as Transaction is at Market Terms
The following steps should be applied while making initial measurement
and subsequent measurement :-

Step I : Initial Recognition will be made at ‘’Transaction Price’’

Transaction Price = Original + Transaction cost – Recoveries

Invested
Money Stamp Comm. Legal up Processing File
Paper fess Front fees charge
etc. fees etc.
Debt Invest. Dr i) Exp. Dr i) Bank Dr
to Bank to Bank to fees
ii) Debt Invest. Dr ii) fees Dr
to Exp. to Debt
Invest.
CA-Final Financial Instrument 21

Note : If means that Transaction cost or Recoveries shall not be

Transferred to P&L, but these Items shall be adjusted in
Transaction Price

Step II : Subsequent Measurement

(i) Calculated Effective Rate of Return due to difference between

Transaction Price & Original Invested Money.
*It means that Transaction cost/Recoveries shall be adjusted over
the Maturity Terms in ERR.

(ii) Interest will be accrued till Maturity by ERR

P&L Cash flow

Final view = Transaction Price + Interest at ERR – Actual collection

e.g.
i) Loan Given by A Ltd. to B Ltd. = 10,00,000
ii) Interest Rate : 10% P.a
iii) Term : 3years
iv) No Transaction cost/No fees
Assuming Interest Rate at Market Terms, Prepare Loan A/c by
Amortised Cost Method.

Solution
Note : Calculation of ERR is not required here because there is no
adjustment in Transaction Price.

______________________________Loan A/c____________________________
Ist year
To Bank P&L 10,00,000 By Bank 1,00,000
To Interest (10%) 1,00,000 By Bal. c/d 10,00,000

IInd year
To Bal. b/d 10,00,000 By Bank 1,00,000
CA-Final Financial Instrument 22

To Interest (10%) 1,00,000 By Bal. c/d 10,00,000

IIIrd year
To Bal. b/d 10,00,000 By Bank 11,00,000
To Int. (10%) 1,00,000

In the books of A Ltd.

Ist year
Loan to B Ltd. Dr 10,00,000
To Bank 10,00,000
(Being Loan Given to B Ltd. )

Loan to B Ltd. Dr 1,00,000

To Interest Income 1,00,000
(Being Interest made Accrued)

Bank a/c Dr 1,00,000

To Loan to B Ltd. 1,00,000
(Being Int. collected)

e.g. : With the help of Given information in Previous Example, Apply

Amortisation method if Transaction cost is 20,000 and Recovery
from Processing fees is 10,000

Solution
Step I : Transaction Price
10,00,000 + 20,000 – 10,000 = 10,10,000

Step II : Calculation of ERR

Period C. Inflow PVF 10% PVF 8% NPV 10% NPV

1 100,000 .909 .926 90900 92600
2 100,000 .826 .857 82600 85700
3 1100,000 .751 .794 826100 873400
PV of C.I 999600 1051700
CA-Final Financial Instrument 23

PV of C.O 1010000 1010000

-10400 41700

ERR = LR + LRNPV x Diff in Rate

LRNPV- HRNPV

= 8% + 41700 x2
41700 – (-10400)

= 8% + 1.6%

= 9.6%

Step III : Subsequent Measurement

_________________________Loan to B Ltd. A/c________________________

To Bank (T.P) 10,10,000 By Bank 100,000
To Int. (9.6%) 96960 By Bal. c/d 10,06,960

To Bal. b/d 10,06,960 By Bank 100,000

To Int. (9.6%) 96668 By Bal. c/d 1003628

To Bal. b/d 1003628 By Bank 11,00,000

To Int. (9.6%) 96372
(Bal. fig)

Ist year
i) Loan to B Ltd. Dr 10,10,000 (Refer [Link])
To Bank 10,10,000
(Being Initial Recognition at Transaction Price made)

ii) Loan to B Ltd. Dr 96960

To Int. 96960
(Being Interest made accrued at IRR)
CA-Final Financial Instrument 24

iii) Bank a/c Dr 100,000

To Loan to B Ltd. 100,000
(Being Actual collection of Interest made)

iv) Interest a/c Dr 96960

To P&L 96960
(Being Income Recognised)

(*V.V. Imp)
Situation II : If Debt Instrument is at ‘’Off Market Term’’

If Given Transaction is not at Market Terms (i.e., Market Rate of

Interest is not equal to Actual Rate) then the following Step should be
applied :-

Step I : Calculated Fair value of Debt Instrument as follows :-

Fair Value = Present value of Future cash flows at Market Rate

Step II : Calculate Diff. between Transaction Price & Fair value

CA-Final Financial Instrument 25

Transaction Price of Debt – Fair value of Debt = Difference

Inst. Inst.
Ind AS 113
If Market Rate If Market Rate
is based on Level is not based on
I Input Level I Input

Diff : ‘’It should be

Treated as an
Expense in
P&L A/c’’
Prepaid Invest. in
Exp. Equity

i) Staff Advances or Loans It will be Amortised It will be

at Concessional Rate over the Term on held as Equity
ii) Lease Deposits at Lower SLM Basis Investment
Rate with Lesser etc.
i) Investment in Interest
free Deb/PSC by a Holding
in Subsi.
ii) Loan Given by Holding to
its Sub. without Int.

*In the absence of any information, we will always assume that the
Given information is other than Level I input.

Step III : Subsequent Measurement

i) Fair value + Int. at Market Rate – Cash inflows

ii) Diff. = We will amortise Prepaid Exp. in PL on SLM Basis over the
Period of Asset
or
Apply Rules of Equity instruments if Diff. is Equity
Component
CA-Final Financial Instrument 26

e.g.
i) Loan Given by A Ltd. to B Ltd. = 10,00,000
ii) Transaction Cost = 20,000
iii) Term = 3Y
iv) Actual Rate = 10%, Market Rate = 12%
v) B Ltd. is a Subsidiary of A Ltd.
vi) Int. is Payable annually
Apply Amortisation method in the books of A Ltd.

Solution :

Step I : Initial Recognition

A. Fair value of Given Loan = Present value of F.C.F @ Market Rate

Period C.I. PVF 12% Present value

1 100,000 .893 89300
2 100,000 .797 79700
3 1100,000 .712 783200
952200

B. Diff. between T.P. & F.V = (10,00,000 + 20,000) – 952200 = 67800

Journal Entry = Loan to B Ltd. Dr 952200

Equity Invest. Dr 67800
To Bank 10,00,000
(Being Initial Recog. made)

Step II : Subsequent Measurement

(i) Amortisation Table

Period O. Balance Int. @12% Cash Flow Closing Bal.
1 952200 114264 (100,000) 966464
2 966464 115976 (100,000) 982440
3 982440 117560 1100,000 NIL
(Bal. fig)
CA-Final Financial Instrument 27

Entries for Ist year

1) Loan to B Ltd. Dr 114264

To Interest 114264
(Being Interest made due)

2) Bank a/c Dr 1,00,000

To Loan to B Ltd. 1,00,000
(Being Actual Int. Received)

3) Interest a/c Dr 114264

To P&L A/c 114264
(Being Income Recog.)

*Part 8*

Q. 65
Solution :

W.N # 1 Statement showing Initial Recognition

Principal Amount of Security Deposit 10,00,000

Fair value of S.D.
Present value of Cash Flows :
i) Interest Income NIL
ii) Principal 567427 (5,67,427)
(10,00,000 x .567427) _________
Prepaid Rent. (Bal. fig) 4,32,573

Note : In the Given question, Actual Rate is missing on Deposits due

to which we have assumed it as ‘’NIL’’ Rate.

W.N.#2 Statement showing Amortisation Table

CA-Final Financial Instrument 28

Period Opening Bal. Interest @12% Collection Closing Bal.

(I) (II) (III) (IV) (II+III-IV)
(IIx12%)
1 567427 68091 - 635518
2 6,35,518 76,262 - 7,11,780
3 711780 85414 - 7,97,194
4 7,97,194 95,663 - 8,92,857
5 8,92,857 107143 (1000,000) NIL

Journal
X1-X2
1.4.x1
Security Deposit a/c Dr 5,67,427
Prepaid Rent a/c Dr 4,32,573
To Bank 10,00,000
(Being Amt. Invested in Deposit)

31.3.x2
Security Deposit a/c Dr 68091
To Int. Income 68091
(Being Int. made Accrue @12%)

31.3.x2
Interest Income a/c Dr 68091
To P&L 68091
(Being Income credited in P&L)

31.3.x2
P&L a/c Dr 86515 (432573/5Y)
To Prepaid Rent 86515
(Being Prepaid Rent written off on SLM basis over Lease Period)

X5-X6
31.3.x6
(i) Security Deposit a/c Dr 107143
To Interest Income 107143
CA-Final Financial Instrument 29

(Being Int. made Accrue @12%)

(ii) Interest Income Dr 107143

To P&L 107143
(Being Income credited in P&L)

(iii) P&L a/c Dr 86515 (432573/5Y)

To Prepaid Rent 86515
(Being Prepaid Rent written off)

(iv) Bank a/c Dr 10,00,000

To S. Deposit 10,00,000
(Being Deposited Amt. Collected)

Q.66
Solution:

Important Note : In the Given case, Z Ltd. (Holding) has Invested in

‘’Non Cumulative Pref. Shares’’ of its Subsidiary A
Ltd. It means that there is no obligation to Pay
any Interest/Dividend of A Ltd. due to its Non
Cumulative Nature, but Principal is Redeemable after
5 year. So, we can discount only Principal Amt. at the
time of Initial Recognition.

I. Statement Showing Initial Recognition of ‘’Investment in Pref.

Shares’’
(In the books of Z Ltd.)
Transaction Price (Invested value) Rs.10,00,00,000
Fair Value of Investments (Rs.5,67,43,000)
(10,00,00,000 x .56743) _______________
Investment in Equity (Bal. fig) Rs.4,32,57,000

II. Amortisation Table for Investment in Pref. Shares

CA-Final Financial Instrument 30

Period Opening Bal. Int. Income Collection Closing Bal.

(I) (II) @12% (IV) (V) (II+III-
_______ ____________ (III) (II x 12%) _________ IV)___________
1 5,67,43,000 68,09,160 - 6,35,52,160
2 6,35,52,160 76,26,259 - 7,11,78,419
3 7,11,78,419 85,41,410 - 7,97,19,829
4 7,97,19,829 95,66,379 - 8,92,86,209
5 8,92,86,209 1,07,13,791 (1000,00, NIL
(Bal. fig) 000)

Journal

Ist year
(1.4.x1)
i) Investments in Pref. shares Dr 5,67,43,000
Investment in Equity Shares Dr 4,32,57,000
To Bank 10,00,00,000
(Being Investments made in A Ltd.)

(31.3.x2)
ii) Investment in Pref. shares Dr 68,09,160
To Interest Income 68,09,160
(Being Int. made due @ 12%)

iii) Interest Income a/c Dr 6809160

To P&L 6809160
(Being Income credited in P&L)

[II,III,IV] Homework

Vth year
i) Investment in Pref. shares Dr 1,07,13,791
To Interest Income 1,07,13,791
(Being Income made due @12%)
CA-Final Financial Instrument 31

ii) Interest Income a/c Dr 1,07,13,791

To P&L 1,07,13,791
(Being Income credited in P&L)

iii) Bank a/c Dr 10,00,00,000

To Invest. 10,00,00,000
(Being Investments Realised)

Q. 58
Solution :

In the Given question, Actual Rate is equal to Market Rate due to which
the Transaction can be considered ‘’At market Terms’’. So, Initial
Recog. will be made at ‘’Transaction Price’’ which will be as follows:-

Transaction Price = Invested Amt. + Transaction cost – Recoveries

= 100L + 0.4L – NIL
= 100.40L

Journal : Investment in Loan a/c Dr 100.40

To Bank 100.40
(Being Amt. Invested in Loan to another Co.)

Q.61 Homework

Q. 60 *Imp
Solution:

W.N #1
Calculation of Cash Flows during the Period of Invest.
CA-Final Financial Instrument 32

Year Instalment Interest on Total Cash

(Principal/5) Opening Balance Flows
(I) (Rs.16,00,000/5) (III) (IV) (II+III)
_____________ _____(II)_______ __________________ ______________
2015 3,20,000 16L x 5% = 80,000 4,00,000
2016 3,20,000 12.8L x 5% = 64,000 3,84,000
2017 3,20,000 9.6L x 5% = 48,000 3,68,000
2018 3,20,000 6.4L x 5% = 32,000 352000
2019 3,20,000 3.2L x 5% = 16,000 336000

I. Statement showing Initial Recognition

Amount Given to Employees as Loan Rs.16,00,000

Fair Value of Staff Loan :-
2015 4,00,000 .909 363600
2016 3,84,000 .827 317568
2017 3,68,000 .751 276368
2018 3,52,000 .683 240416
2019 3,36,000 .620 208320 (Rs.14,06,272)
Prepaid Salaries (Bal. fig) Rs.1,93,728

II. Amortisation Table

Period Opening Bal. Interest @ Collection Closing Bal.
(I) (II) 10%
(III) (II x (IV) (W.N (V) (II+III-
________ ____________ _____10%)____ ___#1)_____ ____ IV)_____
2015 14,06,272 1,40,627 (4,00,000) 11,46,899
2016 11,46,899 1,14,690 (384000) 8,77,589
2017 8,77,589 87759 (368000) 597348
2018 597348 59735 (352000) 305083
2019 3,05,083 30,508 (335591) -
(Bal. fig)
CA-Final Financial Instrument 33

III. Journal
1.1.2015
Investment in Staff Loan Dr 14,06,272
Prepaid Salaries Dr 1,93,728
To Bank 16,00,000
(Being Amt. invested in Staff Loan)

31.12.15
Investment in Loan Dr 1,40,627
To Interest Income 1,40,627
(Being Interest made Accrued on Invest @10% P.a.)

31.12.15
Bank a/c Dr 4,00,000
To Investment in Staff Loan A/c 4,00,000
(Being Invested Amt. recovered)

31.12.15
Interest Income a/c Dr 140627
To P&L A/c 140627
(Being Interest credited to P&L)

31.12.15
P&L a/c Dr 38746 (193728/5)
To Prepaid Salaries 38746
(Being Prepaid salaries written off on SLM Basis)
CA-Final Financial Instrument 34

Q. 59 *[Link]
Solution :

W.N #1
Calculation of Cash Flows over the Period of Loan
Period Principal (Amt. Accumulated Int. @ Total Cash Flows
Lent
/5Y) 4% on Reducing
_________ __________________ ___ Principal ______ ______________
15-16 2,00,000 (10,00,000/ 10L x 4% = 40,000 2,00,000
5Y)
16-17 2,00,000 8L x 4% = 32,000 2,00,000
17-18 2,00,000 6L x 4% = 24,000 2,00,000
18-19 2,00,000 4L x 4% = 16,000 2,00,000
19-20 2,00,000 2L x 4% = 8,000 2,00,000
1,20,000
20-21 60000 (120000/2) - 60,000
21-22 60000 (120000/2) - 60,000

W.N #2
Calculation of Fair value of Staff Loan & Prepaid Salaries

Amount Provided to Staff as Loan 10,00,000

Fair value of Staff Loan :-
@8% for 5years
Principal (2,00,000 x 3.993) 798600
Interest 60000 x .630 6th 37,800
60000 x .583 7th 34980 (871380)
Prepaid Salaries 128620

Journal (15-16)

1.4.15
Staff Loan a/c Dr 8,71,380
Prepaid Salaries a/c Dr 1,28,620
CA-Final Financial Instrument 35

To Bank 10,00,000
(Being Amt. Provided to staff as Loan)

31.3.16
Staff Loan a/c Dr 69710 (871380 x 8%)
To Interest Income 69710
(Being Income made due @8%)

31.3.16
Bank a/c Dr 2,00,000
To Staff Loan 2,00,000
(Being Loan recovered as per contract)

31.3.16
Interest Income a/c Dr 69710
To P&L 69710
(Being Income credited in P&L)

31.3.16
P&L a/c Dr 18374 (128620/7)
To Prepaid Salaries 18374
(Being Prepaid salaries written off over 7years of Contractual Period)

Q. 62, 145, 151, 156 Homework

Q. 63 Discussed in Class

Concept 2 : Debt Investments under ‘’FVOCI’’

(BM II + CCFC/SPPI)

Step I : Initial Recognition will be made directly at Transaction Price

[No need to check At Market Terms/off Market Terms]

Step II : Actual Income from Dividends/Interest on Investments will

be credited in P&L A/c Directly
[No need to check IRR/Market Rate]

Step III : At B/S date, the investment will be valued at Fair value and
CA-Final Financial Instrument 36

Fluctuations shall be transferred to ‘’OCI Reserve’’

Step IV : At the time of Sale of Investments, we will calculate Profit

or Loss on sale of Investments and It will be transferred to
P&L A/c.

*O/S Balance in ‘’OCI Reserve’’ will be recycled in P&L on the date of

Sale of Investments

Journal
Step I : Initial Recognition

Investments/F. Assets Dr xxxx ‘’Transaction Price’’

To Bank xxxx
(Being Investments made)

Step II : Income on Investments

i) Bank a/c Dr xxxx

To Income on Invest. xxxx
(Being Income received)

ii) Income on Invest. Dr xxxx

To P&L xxxx
(Being Income transferred to P&L)

Step III : Fair value Measurements : B/S date

F.V. Gain F.V. Loss

i) Investments Dr i) F.V. Loss Dr
To F.V. Gain To Investments

ii) F.V. Gain Dr ii) OCI Res. Dr

To OCI Res. To F.V. Loss

Step IV : Disposal of Investments

CA-Final Financial Instrument 37

a) Bank a/c Dr xxxx (SP)

To Invest. xxxx (Carrying Amt.)
*Diff. will be Profit/Loss an SOI and will be transferred to P&L)

b) OCI Res. Dr xxxx (F.V. Gain Balance)

To P&L xxxx

c) P&L Dr xxxx
To OCI Res. xxxx (F.V. Loss)

e.g.
1) Investment in Redeemable Deb. (15Y) : 10,00,000
2) Expected to be Sold after 2years for Purchase of F. Assets
3) Rate of Interest : 7% P.a.
4) Fair value : Ist year 11,00,000
IInd year 12,00,000
Pass Journal Entries for 2years.

Solution :
Journal
st
I year
Investment Dr 10,00,000
To Bank 10,00,000
(Being Invest. made)

Bank a/c Dr 70,000

To Income 70,000
(Being Income Received)

Income Dr 70,000
To P&L 70,000
(Being Income credited in P&L)

Invest. Dr 1,00,000
CA-Final Financial Instrument 38

To FV Gain 1,00,000
(Being Gain Booked)

F.V. Gain Dr 1,00,000

To OCI Res. 1,00,000
(Being OCI Res. created)

IInd year
Bank a/c Dr 70,000
To Income 70,000
(Being Income Received)

Income a/c Dr 70,000

To P&L 70,000
(Being Income credited in P&L)

Bank a/c Dr 12,00,000

To Invest. 11,00,000
To P&L (Gain) 1,00,000
(Being Invest. Sold)

OCI Res. Dr 1,00,000

To P&L 1,00,000
(Being OCI Res. Recycled)
*Part 9*

Concept 3 : Debt Investments under ‘’FVPL’’ model (BM III

Assets)

Step I : Initial Recognition

As per the Provisions, Initial Recognition will be made
at ‘’Purchase Price of Investments’’ instead of Transaction Price

Note : It means that Transaction cost or Recoveries can not be

Capitalised, but these Amounts shall be transferred to ‘’P&L
A/c’’ on the date of Investments.
CA-Final Financial Instrument 39

Journal : Investments/F. Assets Dr xxxx Purchase Price

To Bank xxxx
(Being Investments acquired under BM III)

Step II : Income from Investments

If any Interest/Dividend is received on Investments
then we will Transfer these Incomes to ‘’P&L A/c.’’

Journal : 1) Bank a/c Dr xxxx

To Int./Dividend xxxx
(Being income received)
2) Int./Dividend a/c Dr xxxx
To P&L xxxx
(Being income credited in P&L)

Step III : Valuation at B/S date

As per the Provisions, Investments shall be valued
at ‘’Fair value’’ at each B/S date until these are sold out. If any Gain
or Loss take Place at B/S date due to change in Fair value then It will
be transferred to ‘’P&L A/c.’’

If F.V. Appreciates at B/S date If F.V. Declines at B/S date

i) Investments a/c Dr xxxx (i) F.V. Loss a/c Dr xxxx

To F.V. Gain xxxx To Investments xxxx
(Being Appreciation recognised) (Being Decline in value recognised)
ii) F.V. Gain a/c Dr xxxx (ii) P&L a/c Dr xxxx
To P&L xxxx To F.V. Loss xxxx
(Being Gain credited to P&L) (Being Loss transferred to P&L)

Step IV : Disposal of Investments :-

At the time of Sale of Investments, Difference

between ‘’Carrying Amt. of Investments’’ and ‘’Selling Price of
Investments’’ will be transferred to P&L A/c as Gain or Loss on Sale
CA-Final Financial Instrument 40

of Invest.

Journal : Bank a/c Dr xxxx (SP)

Loss (Bal. fig) Dr xxxx
To Investments xxxx (Carrying Amt.)
To Gain (Bal. fig) xxxx
(Being Investments sold)

*[Link]
Concept 4 : Investments in Equity Shares’’

Investments in Equity Shares

Held for Trading Not Held for Trading

Expected to be Sold
FVPL model in Near Future

Option I: FVOCI OR Option II: FVPL

‘’Irrevocable’’
Or
‘’Not to be Recycled’’
in P&L

Important Notes :

A. Amortised cost method is not available under Equity Investments.

B. The option of FVOCI is available for Long Term Investments only
C. The Selection of FVPL or FVOCI will be made by management. If
question remains silent then FVPL should always be Preferred.

Option I : FVOCI Model

(Available for Long Term Invest.)

Step I : Initial Recognition

CA-Final Financial Instrument 41

As per the Provisions of Ind AS 109, Initial Recognition

of ‘’Investment in Equity Shares’’ shall be made at ‘’Transaction Price’’
(TP = PP + TC – Recoveries)

Journal : Investment in Equity Shares Dr xxxx

To Bank xxxx
(Being Investment made)

Step II : Income from Investments

As per the rules, Income on Investments will be
transferred to ‘’P&L A/c’’ as follows :-

i) Bank a/c Dr xxxx

To Dividends xxxx
(Being Dividend Received)

ii) Dividend a/c Dr xxxx

To P&L xxxx
(Being Income credited in P&L)

Step III : Fair Valuation at B/S date

F.V. Appreciation F.V Loss

a) Investment a/c Dr xxxx a) F.V. Loss a/c Dr xxxx

To F.V. Gain xxxx To Investments xxxx

b) F.V. Gain a/c Dr xxxx b) OCI Res. a/c Dr xxxx

To OCI Res. xxxx To F.V. Loss xxxx

Step IV : Sale of Investments

If Investments are sold out then Profit or Loss on

Sale of Investment will also be transferred to ‘’OCI Reserve’’ instead
of P&L.
CA-Final Financial Instrument 42

*OCI Reserve will not be transferred to P&L, but It will be held by the
Entity under ‘’other Equity’’

Option II : FVPL method

(Available for Short Term Investments as well as Long Term
Investments)
Refer all steps of BM III : Debt Investments

Q. 68
Solution :
Journal Entries

15.3.2015
Investment in Equity shares a/c Dr 10,000
Transaction cost (P&L) a/c Dr 200
To Bank 10,200
(Being Investments acquired)

31.3.2015
Investment in Equity shares a/c Dr 2000 (12,000-10,000)
To Fair value Gain (P&L) 2000
(Being valuation made at B/S date)

Q. 69
Solution :
Journal Entries

15.3.2015
Investment in Equity shares Dr 10,200
To Bank 10,200
(Being Initial Recognition made at Transaction Price)

31.3.2015
Investment in shares Dr 1,800 (12000-10200)
To F.V. Gain (OCI) 1,800
CA-Final Financial Instrument 43

(Being Investments valued at Fair value)

Q. 70,71 Homework

Q. 72
Solution:
Journal Entries

15.3.2015
Investment in Equity shares a/c Dr 10,000
Transaction cost (P&L) a/c Dr 500
To Bank 10,500
(Being Investments acquired)

31.3.2015
Investment in Equity shares a/c Dr 1200 (11,200-10,000)
To Fair value Gain (P&L) 1200
(Being valuation made at B/S date)

Q. 73
Solution :

Journal Entries
1.4.x1
Investment in Equity shares Dr 5,00,000
To Bank 5,00,000
(Being Initial Recognition made)

30.6.x1
F.V. Loss (OCI) Dr 50,000 (5,00,000 – 10,000 x 45)
To Investment in shares 50,000
(Being Investments valued at Fair value)
CA-Final Financial Instrument 44

Concept 5 : If Financial Assets are acquired under ‘’Regular way

contract’’

‘’Regular way contract’’ Where delivery of Financial Asset is

made within a Specified Period of Time
as per any Regulation or Market Tradition

SEBI : T+2

Transaction Date Delivery Date

In the above specified case, Trade Date and Settlement date may be
different. The Acquirer can recognise the Acquisition of Assets under
the following methods:-
i) Trade Date Accounting
ii) Settlement Date Accounting
*Selection of Method is the choice of Acquirer

*Part 10*

Financial Assets

Acquisition of Acquisition of
Debt Investments Equity Investments
Listed Debentures, (Listed Equity Shares)
Listed Pref. Shares

Held for Not for

BMI + CCFC BMI + CCFC BM III Trading Trading

Amortised FVOCI FVPL FVPL

cost FVOCI or FVPL
method (Irrevocable)
CA-Final Financial Instrument 45

Note : The Application of Trade date Accounting or Settlement date

Accounting will be considered according to Accounting models.
The Acquisition of Deb, Pref. shares or Equity shares do not
matter, but Accounting Model is relevant for Accounting under
Regular way contract

*Imp
Method I : Trade Date Accounting

I. Amortisation cost method :-

a) Trade Date : Financial Assets Dr xxxx ‘’Trade Date Prices’’
To Payables xxxx
(Being Assets Recognised on Contract Date)

b) Settlement Date : Payables a/c Dr xxxx

To Bank xxxx
(Being Payables Settled)

*On Settlement Date, we will not check Fair value of Financial Assets
because F. Assets are always carried at Carrying Amount under
Amortised cost method. No B/S valuation will also be required under
Amortisation method.

II. FVOCI method :

a) Trade Date : Financial Assets Dr xxxx Trade Date Prices
To Payables xxxx
(Being Assets recognised on Trade Date)

b) Settlement Date : i) Payables a/c Dr xxxx

To Bank xxxx
(Being Payables settled)
ii) Financial Asset Dr xxxx
If fair value To OCI Res. xxxx
Appreciates (Being Fair value changes recorded on Settlement
Date)
CA-Final Financial Instrument 46

OR

OCI Res. a/c Dr xxxx

If Fair value To Financial Assets xxxx
Declines (Being Fair value changes recorded on Settlement
Date)

Important Note
If B/S date falls in between Trade Date and Settlement Date
then Fair valuation of Financial Assets will be made at B/S date
as well in addition to Settlement Date valuation.

III. FVPL method.

All the Entries shall remain same as we have discussed under FVOCI
method Except we will write ‘’SOPL’’ in place of ‘’OCI Res’’ in Each &
Every Journal Entry

Q. 74 *Imp
Solution :
Trade Date Accounting method

I. Amortised cost method :

30.3.2015
Financial Asset a/c Dr 100
To Payables 100
(Being Asset recognised on Contract Date)

31.3.2015
No Entry

2.4.2015
Payables a/c Dr 100
To Bank 100
(Being Payables Settled)
CA-Final Financial Instrument 47

II. FVOCI method :

30.3.15
Financial Asset Dr 100
To Payables 100
(Being Assets recognised on Trade Date)

31.3.15
Financial Assets Dr 2 (102-100)
To Fair value Gain (OCI) 2
(Being valuation made at Fair value at B/S date)

2.4.15
i) Payables a/c Dr 100
To Bank 100
(Being Payables Settled)

ii) Financial Assets Dr 1 (103-102)

To F.V. Gain (OCI) 1
(Being valuation of Financial Assets made on Settlement Date)

III. FVPL method :

30.3.15
Financial Assets Dr 100
To Payables 100
(Being Assets recognised on Trade Date)

31.3.15
Financial Assets Dr 2
To F.V. Gain/changes (P&L) 2
(Being valuation made at B/S date)
CA-Final Financial Instrument 48

2.4.15
i) Payables a/c Dr 100
To Bank 100
(Being Payment made)

ii) Financial Assets Dr 1

To F.V. Gain/changes (P&L) 1
(Being valuation made on Settlement Date)

Method II : Settlement Date Accounting

I. Amortisation method :

a) Trade Date : No Entry

b) Settlement Date : Financial Asset Dr xxxx Contract Price
To Bank xxxx
(Being Assets Acquired)

Note : No Fair valuation is required on any Date under Amortisation

method

II. FVOCI method :

a) Trade Date : No Entry

b) B/S date : F.V. changes Dr xxxx If fair value
To OCI Res. xxxx Appreciates
(Being valuation of contract made at B/S date)
OR
OCI Res. a/c Dr xxxx If fair value
To F.V. changes xxxx Declines
(Being valuation of contract made at B/S date)

c) Settlement Date :
i) F.V. change Dr or OCI Res Dr
To OCI Res. To FV changes
(Being contract valued on Settlement Date)
CA-Final Financial Instrument 49

ii) Financial Asset Dr xxxx (Fair value)

To Bank xxxx (Contract Price)
To F.V. changes xxxx
(Being Assets acquired)

III. FVPL method :

-All Entries shall remain same as -

We have discussed in
FVOCI method Except
We will write P&L in place of OCI Res. in Each & Every Entry

Q. 74
Settlement Date Accounting method

I. Amortisation method :

2.4.15
Financial Assets Dr 100
To Bank 100
(Being Assets Acquired)

II. FVOCI :

31.3.15
F.V. changes a/c Dr 2
To OCI Res. 2
(Being contract valued at B/S date)

2.4.15
i) F.V. changes Dr 1
To OCI Res 1
(Being contract valued at Settlement Date)
CA-Final Financial Instrument 50

ii) Financial Asset Dr 103

To Bank 100
To F.V. changes 3
(Being Assets acquired)

III. FVPL method :

31.3.15
F.V. changes Dr 2
To PL 2
(Being contract valued at B/S date)

2.4.15
1) F.V. changes Dr 1
To PL 1
(Being Contract valued on Settlement Date)

2) F.A. Dr 103
To Bank 100
To FV changes 3
(Being Assets acquired)

(Same Q.74)
Q. 75,78 Homework
Q. 77, 76 85, 86, Discussed in class

Q. 87
Solution :

Treatment of Transaction cost

(i) At the time of Acquisition : Under FVOCI model, Initial Recognition

of A Financial Asset is made at
‘’Transaction Price’’ which includes
Transaction cost. In the Given case,
there is a Transaction cost of CU2 at
CA-Final Financial Instrument 51

the time of Purchase of Asset which

should be capitalised in the cost of
Acquisition.

(ii) At the time of Disposal : If any Transaction cost is Expected to

be Paid at the time of sale of Assets then
we will ignore it at the time of Valuation
of Assets. ‘’At B/S date’’. In the Given
question, Fair value at B/S date is 100 and
cost to sell is 3, but we will consider 100
directly for valuation. There is No concept
of Net fair value under 109.

Q. 88, 89 Discussed in class

Q. 91 Wrongly formed

Q. 90
Solution :

In the books of xyz Ltd.

I. Calculation of Fair value of Financial Asset

Amount Provided by xyz to ABC as Loan 10,00,000

Fair value of Given Loan :
Interest Income NIL
@10% for 3years
Principal (10L x 0.751) 751000 (751000)
Investment in Equity (Bal. fig) 249000

II. Amortisation Table

Period O. Balance Interest @10% Collective C. Balance
1 751000 75100 - 826100
2 826100 82610 - 908710
3 908710 91290 10,00,000 -
(Bal. fig)
CA-Final Financial Instrument 52

Journal

Ist year
Investment in Loan to ABC Dr 751000
Investment in Equity Dr 249000
To Bank 10,00,000

Investment in Loan Dr 75100

To Int. Income (P&L) 75100

IInd year
Investment in Loan Dr 82610
To Int. Income (P&L) 82610

IIIrd year
Invest. in Loan Dr 91290
To Int. Income (P&L) 91290

Bank a/c Dr 10,00,000

To Invest. in Loan 10,00,000

Note : While Preparing CFS, the Given Transaction will get Eliminated
because Holding & Subsidiary are shown in CFS as a Single Entity.

*Part 11*

Unit IV : Classification & Measurement of Financial Liab.

CA-Final Financial Instrument 53

Classification

Amortised cost method FVPL Model

All Liabilities under

Contractual obligations Derivation Contingent
are covered here other Liabilities Consideration
than those are covered (Options, Futures, under
under FVPL forwards etc) Business
(i.e., Debentures, PSC, (Refer Unit 6) Combination
Creditors, B/R, (Refer 103)
O/S Exp., Loans
etc.)

*There is no concept of ‘’FVOCI’’ for Financial Liabilities

Accounting Under Amortisation Model

Situations

If Transaction is at If Transaction is not

Market Term at Market Terms

Situation I : At Market Terms

If Actual Interest Rate is equal to Market Rate then It will be

assumed that Transaction is at Market Rate. In the Given case,
the following steps should be applied :-

Step I : Initial Recognition will be made at ‘’Transaction Price/Net

Proceeds’’
CA-Final Financial Instrument 54

Transaction Price = Original Borrowed funds – Transaction cost

(Comm./Brokerage/
Marketing cost/
Processing Fees/
Upfront Fees etc.)

Step II : Calculated IRR for the Given Transaction

Step III : After Initial Recognition, the following working will be done
in Financial Liab. A/c. :-

Transaction Price + Interest @ IRR – Actual Payments

e.g.
i) Borrowed Funds : 10,00,000
ii) Interest Rate : 10% P.a.
iii) Term : 3years
iv) Transaction cost : 1,00,000
Assuming that Market Rate of Interest is also 10%, show Amortisation
Table for all 3 years.

Solution

Step I : Initial Recognition

Transaction Price/ Net Proceeds = 10,00,000 – 1,00,000 = 9,00,000

Step II : Calculation of ERR/IRR

Period C.O PV @10% PVF @15% NPV (10%) NPV

1 1,00,000 .909 .870 90900 87000
2 1,00,000 .826 .756 82600 75600
3 11,00,000 .751 .658 826100 723800
PV of CO 999600 886400
PV of NP 900,000 (900,000)
99600 (13600)
CA-Final Financial Instrument 55

IRR = 10% + ____99600______ x 5

99600 – (-13600)

= 10% + 4.40%
= 14.40%

Step III : Amortisation Table

PL : Exp.
Period O. Balance Int. @ 14.40% Actual Payment C. Balance
1 9,00,000 129600 (1,00,000) 929600
2 9,29,600 133862 (1,00,000) 963462
3 963462 136538 (11,00,000) -
(Bal. fig)

Journal Entries

Ist year
i) Bank a/c Dr 9,00,000
To Financial Liab. 9,00,000
(Being Initial Recognition will be made at Transaction Price)

ii) Finance cost/Int. Dr 129600

To Financial Liab. 129600
(Being Interest made due)

iii) Financial Liab. Dr 1,00,000

To Bank 1,00,000
(Being Interest Paid at Actual Rate)

iv) P&L a/c Dr 129600

To Int. 129600
(Being Exp. written off)

Situation II : Off Market Terms

CA-Final Financial Instrument 56

If Actual Rate of Interest does not match with Market Rate of

Interest then It will be considered as F. Liability at off Market Terms.
The following steps should be applied in this concept :-

Step I : Calculate Fair value of F. Liab. as follows:

Fair Value = Present value of all Future cash outflows at

Market Rate

Step II : Calculate Diff. between Fair value & Transaction Price

Diff. = Transaction Price – Fair value

P&L (Assuming it as or Equity Component

a Loss) (If It is a
Compound Optionally conv.
Financial Deb.
Liab. Inst.) Optionally conv.
PSC
Convt. Deb/PSC
with mandatory
Int. or
Dividends etc.

Step III : Subsequent Measurement (FL)

Fair Value + Market Rate – Actual outflows

Payment option Conversion option

Last Entry : F. Liab. Dr F. Liab. Dr

To Bank Equity Comp. Dr
To ESC
To SPR

It will be used only if shares are issued in Settlement

CA-Final Financial Instrument 57

*Part 12*

Q. 92
Solution :

Important Note :
In the Given question, Market Rate of Interest is missing due to
which we should assume that the Given Transaction is at Market Terms
So, we need ERR/IRR for Accounting of Given Liability which is also
missing in this question. The Calculation of IRR/ERR will be as follows:-

Calculation of IRR
Period CF PVF PVF @15% P.V.@10% P.V.@15%
@10%
0 9,500 1 1 9,500 9,500
1 (1000) .909 .870 (909) (870)
2 (1000) .826 .756 (826) (756)
3 (1000) .751 .658 (751) (658)
4 (1000) .683 .572 (683) (572)
5 (11000) .621 .497 (6831) (5467)
NPV (500) 1177

IRR/ERR = Lower Rate + _____ LRNPV ___ x Diff in Rates

LRNPV – HRNPV

= 10% + _____(500)___ x 5
(500) – 1177

= 10% + (500) x 5
(1677)

= 10% + 1.49%
= 11.49%
CA-Final Financial Instrument 58

Amortisation Table
As per Contract
Period Opening Bal. Interest @ Payment Closing Bal.
11.49%
(I) (II) (III) (IIxIRR) (IV) (V) (II+III-IV)
I 9,500 (TP) 1092 (1000) 9592
II 9592 1102 (1000) 9694
III 9694 1114 (1000) 9808
IV 9808 1127 (1000) 9935
V 9935 1065 (11000) NIL
(Bal. fig)

Journal Entries
(In the books of A Ltd.)

Ist year
a) Bank a/c Dr 9,500 (10,000-500)
To Bank Loan 9,500
(Being Proceeds from Loan recorded Net of Transaction cost)

b) Interest a/c Dr 1092

To Bank Loan 1092
(Being Int. made due @ 11.49%)

c) Bank Loan a/c Dr 1000

To Bank 1000
(Being Payment made for Interest @ 10% on 10,000)

d) P&L a/c Dr 1092

To Interest 1092
(Being Exp. written off)

Vth year
i) Interest a/c Dr 1065
To Bank Loan 1065
(Being Int. made due @ 11.49%)
CA-Final Financial Instrument 59

ii) Bank Loan a/c Dr 11,000

To Bank 11,000
(Being Full settlement of Loan made)

iii) P&L a/c Dr 1065

To Interest 1065
(Being Exp. written off)

Q. 90
Solution :
In the books of Subsidiary
(Accounting for Loan taken from Holding)

A. Initial Recognition
Principal Amt. of Loan Taken 10,00,000
Fair value of Financial Liab. (7,51,000)
(10,00,000 x .751)

@10% for 3years _________

Equity Component (Bal. fig) 249000

B. Amortisation Table
Period Opening Bal. Interest @10% Payments Closing Bal.
1st year 7,51,000 75,100 - 8,26,100
2nd year 8,26,100 82,610 - 9,08,710
3rd year 9,08,710 91,290 (10,00,000) -
(Bal. fig)

Journal Entries

Ist year
Bank a/c Dr 10,00,000
To Loan from xyz Ltd. 7,51,000
To Equity Component 249000
(Capital Contribution)
(Being Interest Free Loan taken from xyz Ltd.)
CA-Final Financial Instrument 60

Interest a/c Dr 75100

To Loan from xyz Ltd. 75100
(Being Int. charged @ 10%)

P&L a/c Dr 75,100

To Interest 75,100
(Being Interest written off)

IInd year
Interest a/c Dr 82610
To Loan from xyz Ltd. 82610
(Being Int. charged)

P&L a/c Dr 82610

To Interest 82610
(Being Exp. written off)

IIIrd year
Interest a/c Dr 91290
To Loan from xyz Ltd. 91290
(Being Int. charged on O/S Bal. @ 10%)

Loan a/c Dr 10,00,000

To Bank 10,00,000
(Being Loan repaid)

P&L a/c Dr 91290

To Interest 91290
(Being Exp. written off)

Q. 155 Homework
CA-Final Financial Instrument 61

Q. 163
Solution:
In the books of Subsidiary (Week)
(Accounting for Loan taken from Holding)

A. Initial Recognition

Principal Amt. of Loan Taken 60,00,000

Fair value of Financial Liab. (47,62,800)
(60,00,000) x .7938)

Given _________
Equity Component (Bal. fig) 12,37,200

B. Amortisation Table
Period Opening Bal. Interest @8% Payments Closing Bal.
1st year 47,62,800 3,81,024 - 51,43,824
2nd year 51,43,824 4,11,506 - 55,55,330
3rd year 55,55,330 4,44,670 (60,00,000) -
(Bal. fig)

Journal Entries
st
I year
Bank a/c Dr 60,00,000
To Loan from strong 4762800
To Equity Component 1237200
(Capital Contribution)
(Being Interest Free Loan taken from strong)

Interest a/c Dr 381024

To Loan from strong 381024
(Being Int. charged @ 10%)

P&L a/c Dr 381024

To Interest 381024
(Being Interest written off)
CA-Final Financial Instrument 62

IInd year
Interest a/c Dr 411506
To Loan from strong 411506
(Being Int. charged)

P&L a/c Dr 4,11,506

To Interest 4,11,506
(Being Exp. written off)

IIIrd year
Interest a/c Dr 444670
To Loan from strong 444670
(Being Int. charged on O/S Bal. @ 10%)

Loan a/c Dr 60,00,000

To Bank 60,00,000
(Being Loan repaid)

P&L a/c Dr 444670

To Interest 444670
(Being Exp. written off)

Q. 94 *Imp
Solution:

I. Statement showing Initial Recognition of Bonds

Proceeds from Bonds (10,00,000 x 10) Rs.100,00,000

Liability Component :
@ 8% for 8years
i) Interest (1 crore x 6% x 5.746) 34,47,600
ii) Principal (1 crore x .540) 54,00,000 (Rs.88,47,600)

@ 8% at the end of 8th year _____________

Equity Component (Bal. fig) Rs.11,52,400
CA-Final Financial Instrument 63

Journal : Bank a/c Dr 1,00,00,000

To Bonds (Liability) 88,47,600
To Bonds (Equity) 11,52,400
(Being Initial Recognition made for optionally convertible Bonds)

II. Amortisation Table for Liab. Component

Period Opening Bal. Interest @ 8% Payment Closing Bal.

(Actual)
1 88,47,600 7,07,808 (6,00,000) 89,55,408
2 89,55,408 7,16,433 (6,00,000) 90,71,841
3 90,71,841 7,25,747 (6,00,000) 91,97,588
4 91,97,588 7,35,807 (6,00,000) 93,33,395
5 93,33,395 7,46,672 (6,00,000) 94,80,067
6 94,80,067 758405 (6,00,000) 96,38,472
7 96,38,472 7,71,078 (6,00,000) 98,09,550
8 98,09,550 790405 (1,06,00,000) NIL
(Bal. fig)

Carrying Amt. at the

end of 3rd year

III. If Conversion is made at the end of 3rd year

Bonds (Liability) Dr 91,97,588

Bonds (Equity) Dr 11,52,400
*Assumed
(10,00,000 Bonds x 1 x *10) To E.S. Capital 1,00,00,000
1 To Sec. Premium (Bal. fig) 3,49,988
rd
(Being Conversion of Bonds made at the end of 3 year)

Q. 148, 152, 157 : Homework

CA-Final Financial Instrument 64

*Part 13*

Q. 99 *V.V. Imp
Solution :
Important Notes

A. In the Given question, IRR is clearly mentioned which indicates that

the Given Transaction is at Market Terms. So, we will use IRR while
Preparing Amortisation Table.

B. In the Given question, Interest is to be charged on Quarterly Basis

due to which Payment of Interest has to be considered on Quarterly
Basis.

I. Amortisation Table
Due : IRR Actual
Period Opening Interest @ 16. Payment @ 3% Closing
Balance 6% P.a. or 4.15% Per Qtr Balance
Per Qtr Excluding
______ _____________ ______________ Installment ___________
Qtr 1 9,500 394 300 9,594
(10,000-500) (10,000 x 3%)

Qtr 2 9,594 398 2800 7192

[(10,000 x 3%)
+ 2500]

Qtr 3 7192 298 225 7265

(7500 x 3%)

Qtr 4 7265 301 2725 4841

[7500 x 3%) +
2500]

Qtr 5 4841 201 150 4892

CA-Final Financial Instrument 65

(5000 x 3%)

Qtr 6 4892 203 2650 2445

[(5000 x 3%) +
2500]

Qtr 7 2445 101 75 2471

(2500 x 3%)

Qtr 8 2471 104 2575 NIL

(Bal. fig)

II. Journal Entries

X1-X2
1.4.x1
Bank a/c Dr 9500 (10,000-500)
To Bank Loan 9500
(Being Initial Recognition made at Transaction Price)

30.6.x1
Interest a/c Dr 394
To Bank Loan 394
(Being Interest made due on Qtrly Basis @ 16.6% P.a.)

30.6.x1
Bank Loan a/c Dr 300
To Bank 300
(Being Actual Interest Paid @ 12% P.a. on 10,000)

30.9.x1
Interest a/c Dr 398
To Bank Loan 398
(Being Interest made due)
CA-Final Financial Instrument 66

30.9.x1
Bank Loan a/c Dr 2800
To Bank 2800
(Being Int. & Installment Paid)

31.12.x1
Interest a/c Dr 298
To Bank Loan 298
(Being Int. made due)

31.12.x1
Bank Loan Dr 225
To Bank 225
(Being Actual Interest Paid)

31.3.x2
Interest Dr 301
To Bank Loan 301
(Being Int. made due)

31..3.x2
Bank Loan Dr 2725
To Bank 2725
(Being Int. & Installment Paid)

31.3.x2
P&L Dr 1391
To Int. 1391
(Being Exp. written off)

Q. 153 : Homework
Q. 158 : Homework
Q. 95 *V.V. Imp (Disputed question)
CA-Final Financial Instrument 67

Statement showing Initial Recognition

(Transaction is at off Market Term)
Principal Amount of Issued Pref. shares Rs.15,00,000
Fair value of Liability Component (Rs.502950)
(15,00,000 x 10% x 3.353) ___________
Equity Component (Bal. fig) Rs.9,97,050

I am Following ICAI Solution whether it is Correct or Not

Statement showing Allocation of T. Cost

15.86 IRR
Liab. Component 502950 (10059) 492891
Equity Component 997050 (19941) 977109
15,00,000 30,000 14,70,000
(15L x 2%)

Amortisation Table
Period O. Balance Interest Actual C. Balance
@15.86% Payment
1 492891 78173 (1,50,000) 421064
2 421064 66781 (1,50,000) 337845
3 337845 53582 (1,50,000) 241427
4 241427 38290 (1,50,000) 129717
5 129717 20283 (1,50,000) -
(Bal. fig)

Journal Entries
Ist year
Bank a/c Dr 14,70,000
To 15% Pref. Shares (Liab.) 492891
To 15% Pref. Shares (Equity) 977109
(Being initial Recognition made net off Transaction cost)

Interest a/c Dr 78173

To 15% Pref. shares (Liab.) 78173
(Being Int. made due)
CA-Final Financial Instrument 68

15% Pref. Shares (Liab.) Dr 150000

To Bank 150000
(Being Actual Payment of Int. made)

P&L a/c Dr 78173

To Int. 78173
(Being Int. charged to P&L)

Vth year
Interest a/c Dr 20283
To 15% PSC (Liab.) 20283

15% PSC (Liab.) Dr 150000

To Bank 150000

P&L Dr 20283
To Int. 20283

15% PSC (Equity) Dr 977109

(5000 x 10) To SC 50000
(Bal.) To SPR 927109
(Being Conversion made)

Q. 97, 98, 100 : Homework

*V.V.V. Imp
Q. 96 (Zero Interest Bond/Interest at Maturity)
Solution :

Statement showing Initial Recognition

Principal value of Debentures Issued Rs.1,00,00,000
Fair value of Liability (Rs.1,12,65,000)
(1,50,00,000 x .751)

10% for 3rd year _______________

Loss on Issue (Bal. fig) 12,65,000
CA-Final Financial Instrument 69

Journal
Ist year
Bank a/c Dr 1,00,00,000
P&L (Loss) a/c Dr 12,65,000
To Debentures 1,12,65,000
(Being Initial Recog. made)

Interest a/c Dr 11,26,500 (1,12,65,000 x 10%)

To Debentures 11,26,500
(Being Int. made due @ 10%)

P&L a/c Dr 1126500

To Interest 1126500
(Being Int. charged to P&L)

At the end of 1st year Loan Amt. = 1,12,65,000 + 11,26,500 = 1,23,91,500

IInd year
Interest a/c Dr 12,39,150
To Debentures 12,39,150
(Being Int. made due)

P&L a/c Dr 1239150

To Interest 1239150
(Being Int. charged to P&L)

A. Loan Amt. at the end of 2nd year = 1,23,91,500 + 12,39,150 = 1,36,30,650

B. Required Liab. @ 10.5% at the end = 1,50,00,000 x 1 = 1,35,74,661

of 2nd year 1.105

Reduction in Liab. = 55989

Journal : Debentures a/c Dr 55989

To P&L 55989
(Being Reduction in Liab. made due to change in Rate)
CA-Final Financial Instrument 70

IIIrd year
Interest a/c Dr 1425339 (13574661 x 10. 5%)
To Debentures 1425339
(Being Int. made due @ 10.5%)

Debenture Dr 150,00,000
To ESC 150,00,000
(Being Liab. converted into Shares)

Note : In the Given question, we have considered Int. on Liab. each

year because the Given case is an Exceptional case of zero Int.
Bond. The Amt. of Bonds has to be increased from 100 to 150
over the Period of 3years.

*Part 14*

Unit 5 : Re-classification & Impairment of Financial Assets

PART A : Reclassification of Financial Assets

Re-classification & Impairment of Financial Liab. is not Possible

As per the Provisions of Ind AS 109, It may be Possible that

Financial Assets are reclassified from Original Business model to
Revised model due to change in intention of Holding of that Financial
Assets. There may be many Situations & cases under Re-classification
as follows :-

Situation I : Amortised cost method to FVPL OR VICE VERSA

(BM I to BM III or vice versa)

Case I : Amortised cost method to FVPL (BM I to BM III)

Step I : Re-classification will be made at Fair value which Prevails on the

date of Re-classification
CA-Final Financial Instrument 71

Step II : Loss/Profit on Re-classification due to difference between

Carrying Amt. and Fair value will be transferred to ‘’P&L A/c’’

Journal : Financial Assets (FVPL) Dr xxxx (Fair value)

Loss/Profit on
Re-classification
in P&L
To Financial Assets (Amort. cost) xxxx (Carrying)
(Being F.A. Re-classified)

Case II : FVPL to Amortised cost method (BM III to BM I)

All Accounting Steps are quite Similar as in Case I

Except

i) Journal : F. Asset (Amort. Cost) Dr xxxx (Fair value)

Diff. : PL
To F. Asset (FVPL) xxxx (Carrying Value)
(Being F. Assets Re-classified)

*Imp
ii) After Re-classification under Amortised method, the Entity will
check the features of Assets for Selection of ‘’At Market Terms : IRR’’
or ‘’off Market Term : Market Rate’’

Q. 121 (BM III to BM I)

Solution:

Journal

Bonds (Amortised cost) Dr 90,000 (Fair value)

Loss on Re-classification (P&L) Dr 10,000
To Bonds (FVPL) 1,00,000 (Carrying Amt.)
(Being Bonds Reclassified from FVPL to Amortised cost)
CA-Final Financial Instrument 72

Situation II : Amortised cost to FVOCI

or
VICE VERSA
(BM I to BM II or vice versa)

Case I : Amortised cost to FVOCI (BM I to BM II)

Financial Asset (FVOCI) Dr xxxx *(Fair value)

To Financial Asset (Amort.) xxxx *(Carrying Amt.)
(Being Asset reclassified)

*Difference in Fair value & Carrying Amt. will be considered as a Loss/

Profit on Reclassification and it will be transferred to ‘’OCI Res.’’

*Special case
Case II : FVOCI to Amortised cost (BM II to BM I)

Financial Asset (Amort.) Dr xxxx *(Fair value)

To Financial Asset (FVOCI) *xxxx (Carrying Amt.)
(Being Asset Re-classified)

*Difference in above Entry will be considered as a Profit or Loss on

Re-classification and It will be transferred to ‘’OCI Res.’’

**The Balance in OCI Reserve due to Previous valuations under FVOCI

model and New + in OCI Reserve due to Re-classification will be De-
Recognised and It will be added or deducted to Amortised cost of
Financial Assets.

OCI Res. : Profit OCI Res. : Loss

OCI Res. Dr xxxx F. Asset (Amort.) Dr xxxx
To F. Asset (Amort.) xxxx To OCI Res. xxxx
(Being OCI Res Derecognised) (Being Losses Capitalised)
CA-Final Financial Instrument 73

Q. 120
Solution :
Journal

Bonds (FVOCI) Dr 90,000 (FV)

Loss on Re-classification Dr 10,000
(OCI)
To Bonds (Amort.) 1,00,000 (C.A.)
(Being Asset Reclassified)

Q. 123
Solution :

Please follows Class Solution and Don’t Justify Class Book Solution on
Whatsapp

Journal

i) Bonds (Amort.) Dr 90,000 (FV)

Loss on Re-classification Dr 10,000
(OCI Res.)
To Bonds (FVOCI) 1,00,000 (CA)
(Being Assets Re-classified)

ii) Bonds (Amort.) Dr 20,000

To OCI Res. (Previous) 10,000
To OCI Res. (Re-class.) 10,000
(Being OCI Res. De recog.)

Situation III : FVPL TO FVOCI

or
VICE VERSA
(BM II to BM III or vice versa)

Case I : FVPL TO FVOCI

CA-Final Financial Instrument 74

Financial Asset (FVOCI) Dr xxxx Fair value

To Financial Asset (FVPL) xxxx Carrying Amt.
(Being Asset Re-classified)

*Loss or Profit on Re-classification will be transferred to OCI Res.

Case II : FVOCI TO FVPL

Financial Asset (FVPL) Dr xxxx Fair value

To Financial Asset (FVOCI) xxxx Carrying Amt.
(Being Assets Re-classified)

*Loss or Profit on Re-classification will be transferred to P&L

** The Balance in OCI Res. due to Previous valuation under FVOCI will
also be Re-cycled to P&L.

OCI Res. Dr or P&L Dr

To P&L To OCI Res.
(Being Accumulated OCI (Being Accumulated OCI
Derecognised) Derecognised)

Q. 124
Solution :

i) Financial Asset (FVPL) Dr 90,000

To Financial Asset (FVOCI) 90,000
(Being Asset Reclassification)

ii) P&L a/c Dr 1,00,000

To OCI Res. : Loss 1,00,000
(Being Accumulated OCI De-recognised)
CA-Final Financial Instrument 75

Q. 122
Solution :

Financial Asset (FVOCI) Dr 90,000

Loss an Reclass. (OCI) Dr 10000
To Financial Asset (FVPL) 1,00,000
(Being Asset Re-classified)

PART B : Impairment of Financial Assets

Impairment

Financial Assets

Debtors, B/R
If Financial Assets are If Financial Assets are in
in the Nature of Trade Receivable the form of Investments
Lessee A/c under FL in Deb/PSC/Equity shares
or Lease Receivable /Loans etc.

Impairment : Lifetime Expected

model Credit Loss model Impairment : 12 Months credit
(LECL model) model Loss method

Provision matrix is considered Provision is created for

for creating Provisions and changes in Fair value of
Provision matrix is based on Investments
Nature of Business
Exception
Lifetime Loss is booked only
*In Practical questions, it will if Significant Loss takes
always be Given Place in value of Assets

Journal in the Both cases : P&L Dr xxxx

To Prov. For Decline in FA xxxx
(Being Prov. Created for impairment)
CA-Final Financial Instrument 76

Q. 125, 161, 127, 126 : Discussed in class

*Part 15*

Unit 6 : Derivative & Embedded Derivative

PART A : Derivatives
(i.e., Option contracts, Future contracts, Forward contracts etc.)

As per the Provisions of Ind AS 109, A Derivative is a kind of

‘’Speculative contract’’ which has following 3 features :-

I. It will be Settled on a future date

+ e.g. Option Premium in
Option contract
II. It will required ‘’NIL Investments’’ or ‘’Negligible Investments’’
at the time of Initial Recognition
+
III. Its value changes as * Underlying Asset changes

Underlying Asset

Interest Currency Equity Commodity

Rate Rate Rate Rate

Interest Swap, Currency Swap, Equity Swap, Commodity

Interest options, Currency Futures, Equity Options, Swap,
Interest Futures Currency Options, Equity Futures Commodity
‘’Currency Forwards’’ Options,
Commodity
Futures
CA-Final Financial Instrument 77

Accounting Entries at the time of Settlement

I. Favourable Condition : a) Derivation Financial Asset Dr xxxx
To P&L xxxx
(Being Profit recorded from Derivative)

b) Bank a/c Dr xxxx

To Derivative Financial Asset xxxx
(Being collection made at the time of
Settlement)

II. Unfavourable Condition : a) P&L a/c Dr xxxx

To Derivative Financial Liab. xxxx
(Being Loss recognised at the of
Settlement of Derivative)

b) Derivative Financial Liab. Dr xxxx

To Bank xxxx
(Being Payment made for Settlement of
Derivative)

Note : 1. If Any Derivative Condition remains O/S at B/S date then Its
valuation will be made at B/S date. If it is in favourable
Condition then we will record Profit in P&L otherwise we will
debit P&L for Loss in Unfavourable valuation.
2. A Listed company should value its Derivatives while Preparing
‘’IFR’’ in same way.

Q. 102, 103, 109, 110, 112 : Discussed in class

Q. 111 Solution :
In the Given case, Company B Ltd. has sold a call option to
Company C Ltd. The option can be Exercised in 90 days Period anytime.
The Given contract will be Settled on a future date, requires No Initial
Investment and value of contract changes as Price of share changes.
So It should be considered as a Derivative .

Q. 118
CA-Final Financial Instrument 78

Solution :

Contract 1 : Yes, It should be considered as a Derivative contract

because Significant Portion of Transactions is Settled in
Cash instead of Delivery

Contract 2 : No, It should be considered as a Non Derivative contract

because Settlement is made through Delivery of Goods only
The Net Settlement is under taken for 1% Transactions
only which is not Significant. [own use]

Contract 3 : Yes, Its a derivative because Transactions are Settled in

Cash on a Stock Exchange.

Q. 105 (Practical ☺ )

Journal Entries

31.3.x1
P&L a/c Dr 25,000
To Derivative Financial Liab. A/c 25,000
(Being valuation of Currency Future made at the end of Q 1)

30.6.x1
Derivative Financial Liab. Dr 10,000
To P&L 10,000
(Being DFL valued from 25000 to 15000 at 5the end of 2nd Qtr )

30.9.x1
Derivative Financial Liab. Dr 15,000
Derivative Financial Asset Dr 12,000
To P&L 27,000
(Being valuation of Derivative made at the end of 3rd Qtr)

31.12.x1
CA-Final Financial Instrument 79

P&L a/c Dr 52000

To Derivative Financial Asset 12,000
To Derivative Financial Liab. 40000
[(68-66) x 20000]
(Being Loss booked on Settlement)

Derivative F. Liab. Dr 40000

To Bank 40000
(Being Liab. Paid)

Q. 107 (Practical ☺ )

Journal (In the books of Sam)

Option Seller

Sam has obligation to complete Transaction

31.3.x1
P&L a/c Dr 25000
To Derivative Financial Liab. 25000
(Being Currency Option valued at the end of Ist Qtr)

30.6.x1
Derivative F. Liab. Dr 10,000
To P&L 10,000
(Being Currency Option valued at the end of 2nd Qtr from 25000 to
15000)

30.9.x1
Derivative F. Liab. Dr 15000
To P&L 15000
(Being Currency Option valued at the end of 3rd Qtr)

31.12.x1
CA-Final Financial Instrument 80

P&L Dr 40000 [(68-61) x 20000]

To Derivative F. Liab. 40000
(Being Loss booked at the time of Settlement)

Derivative F. Liab. Dr 40000

To Bank 40000
(Being Payment made)

Q. 146 : Homework

Q. 101

Solution : The Given Contract is a Non Derivative contract because

there is an Initial Invest. of 50 crores.

*Part 16*

PABT B : Embedded Derivatives

e.g.
Inception Date

i) Contract Date for Import of Goods : 1.6.x1

ii) Delivery Date/Settlement Date : 1.8.x1
iii) Contract Value : USD 5,000
iv) Exchange Rates Fixed होता अगर Forward
2 Months Forward Rate on 1.6.x1 = 78 लेते
Spot Rate on 1.8.x1 = 81 3 Variable due to Derivative
Nature
Pass Journal Entries

Solution
Journal Entries

1.6.x1
CA-Final Financial Instrument 81

Contract Date : No Entry

1.8.x1
Settlement Date :
a) Purchases a/c Dr 3,90,000 (5000 x 78)
To Payables 3,90,000
(Being Purchase recorded at Forward Rate (Fixed Portion))

b) P&L a/c Dr 15,000 (81-78)

To Forward Cont. Liab. 15,000
(Being Loss Booked due to change in Exchange Rate for Derivative
Portion)

c) Payables a/c Dr 3,90,000

Forward Cont. Liab. Dr 15,000
To Bank 4,05,000
(Being Payment made for Import)

e.g. : With the help of Given information in above Example, Pass

Journal Entries assuming its a case of Export of Goods.
Solution :

1.6.x1
Contract Date : No Entry

1.8.x1
Settlement Date :
a) Trade Receivables Dr 3,90,000 (78x5000)
To Sales 3,90,000
(Being initial Recognition of sales made at Forward Rate for Non
Derivative Portion)

b) Forward Contract Asset Dr 15000

To P&L 15000
(Being Profit booked due to change in Exchange Rate)

c) Bank a/c Dr 4,05,000

CA-Final Financial Instrument 82

To Receivables 3,90,000
To Forward Asset 15,000
(Being Payment made)

e.g.
(B/S valuation)

i) Contract Date for Export of Goods : 1.2.x1

ii) Export Date : 30.4.x1 B/S 31.3.x1
iii) Contract value : 10,000 USD
iv) Exchange Rates :
a) Forward Rate for 3 months on 1.2.x1 : 75
b) Spot Rate on 30.4.x1 : 79
c) Forward Rate for 1 month on 31.3.x1 : 77

Solution :
Journal

1.2.x1
Contract Date : No Entry

31.3.x1
(Valuation of Forward contract) :-

Forward contract Asset Dr 20,000 [(77-75) x 10000]

To P&L 20,000
(Being Forward contract valued on B/S date for diff. in Forward Rates)

30.4.x1
(Settlement Date) :

Receivables a/c Dr 7,50,000 (10,000 x 75)

To Sales 7,50,000
(Being Revenue recognised @ Forward Rate on Inception Date for Non
Derivative Portion)

Forward Cont. Asset Dr 20,000 [(79-77) x 10,000]

CA-Final Financial Instrument 83

To P&L 20,000
(Being Gain booked due to valuation of forward for Derivative Portion)

Bank a/c Dr 7,90,000

To Receivables 7,50,000
To F.C. Asset 40,000 (20000 + 20000)
(Being Collection made)

Important Notes
If An Embedded Derivative contract is Given in the form of
Foreign currency Transaction then the following steps should be
be Applied while making Accounting Entries :-
Step I : There will be No Entry on Inception date because Entity has
Not taken any Forward contract for Hedging. [Refer Unit 7 if
Hedge is taken]

Step II : On Settlement date :

a) The Entity should recognise Purchase/Sale of Goods/Assets

At Forward Rate which was Prevailing on Inception date if
Hedge was taken.
b) The Difference between Spot Rate on Settlement date and
Inception date Forward Rate will be considered as Forward
Gain/Loss

Note : If B/S date falls in between before Settlement Date then

Derivative Gain or Loss will be booked at B/S date due to
Valuation of Forward contracts.

Forward Rate at – Forward Rate at B/S date = Gain/Loss

Inception Date
P&L
rd
(Refer 3 Example as Given in above)

Q. 104 *Imp
CA-Final Financial Instrument 84

Journal

1.1.x1
Contract Date : No Entry

30.6.x1
Settlement Date : [Crores]

i) Solar Panels (PPE) Dr 325 ($ 5 crore x 65)

To A & A Associates 325
(Being PPE recognised at Forward Rate which Prevails at Inception
Date)

ii) P&L a/c Dr 5 [$ 5 crore x (66-65)]

To Forward Cont. Liab. 5
(Being Loss Booked for Derivative Portion)

iii) A & A Associates Dr 325

Forward Cont. Liab. Dr 5
To Bank 330
(Being Settlement made)

Q. 119
Solution
Journal

9.9.x1
Contract Date : No Entry

31.12.x1
Settlement Date :

a) PPE a/c Dr 6,78,00,000 (10,00,000 x 67.8)

To B Ltd. 6,78,00,000
(Being PPE recognised on Forward Rate at Acquisition Date)

b) Forward Cont. Asset Dr 800000 [(67.8-67) x 10L]

CA-Final Financial Instrument 85

To P&L 8,00,000
(Being Gain Booked for Derivative Portion)

c) B Ltd. a/c Dr 6,78,00,000

To F.C. Asset 8,00,000
To Bank 6,70,00,000
(Being Settlement made)

Note : If the Given question is solved for Quarterly Reports then

valuation of Forward contract on 30.9.x1 would be required. The
Total Gain of Rs.8,00,000 would have been divided between 2 Qtrs
as follows :-
Qtr (30.9) = (67.8-67.5) x 10L = 3,00,000
Qtr (31.12) = (67.5-67) x 10L = 5,00,000

Q. 106 *Imp
Journal Entries
(Books of A)
1.1.x1
Contract Date : No Entry

31.3.x1
B/S date

P&L a/c Dr 10,00,000 [(55-45) x 100000]

To Forward Cont. Liab. 10,00,000
(Being Loss booked on valuation of Forward and decline in Forward
Rate)

30.6.x1
Settlement Date :

B Ltd. Dr 55,00,000 (100000 x 55)

To Assets 55,00,000
(Being Sale of Asset booked at Forward Rate of Inception date)

Forward C. Asset Dr 5,00,000

CA-Final Financial Instrument 86

Forward C. Liab. Dr 10,00,000

(Reversed)
To P&L 1500000
(Being Derivative valued)

Bank Dr 60,00,000
To B Ltd. 5500000
To F.C. Asset 500000
(Being Collection made)

Notes on Concept of Embedded Derivative

As per the Provisions of Ind AS 109, A Contract may be a Hybrid

Contract which may have both features of ‘’A Non Derivative Contract’’
or ‘’A Derivative Contract’’. In the Given case , the Entity should
segregate these Contracts under Non Derivative and Derivative
Portions

Hybrid Contract

Separation

Non Derivative Portion Derivative Portion

Fixed Amt. which is not Variable amt. which is

affected due to changes affected due to change in
in Underlying Asset Underlying Asset
CPI Int.
Commidity
Currency Equity
Cost Price Index

‘’For Identification of Embedded Derivative, refer the Given’’ , फालतू

questions in class book which are taken from Study Material’’.

Q. 113, 114, 115, 116 : Discussed in class

CA-Final Financial Instrument 87

*Part 17*

Hedge Accounting
(Ind AS : 109)

Types of Hedges

Cash Flow Hedge Fair Value Hedge

I. Cash Flow Hedge *Imp

(Hedge means Risk Management Activity)
(Best Example : Forward contracts to manage Risk from F.C.
Transactions)

Step I : At B/S date, We should value Monetary Items at Closing Rate

(Ind AS -21) for True & Fair Presentation even if we have taken
Forward contracts to manage the risk. It is relevant for
Presentation Purpose only because this Fluctuation can never
Hit P&L A/c after taking Hedge Contract. We should transfer all
Fluctuations on Hedged Items to a Separate A/c ‘’Cash Flow
Hedge Reserve A/c’’. The following Entries should be Passed in
books of A/c’s :-

Assumption : Foreign Currency Loans

Case I : If Liab. is increased Case II : If Liab. is decreased

(a) Exchange Fluct. Dr xxxx (a) FCL a/c Dr xxxx

To FCL xxxx To Exchange Fluct. xxxx
(Being Monetary Items valued at (Being Monetary Items valued at
Closing Rate under Ind AS 21) Closing Rate under Ind AS 21)
CA-Final Financial Instrument 88

(b) Cash Flow Hedge Res. Dr xxxx (b) Exchange Fluct. Dr xxxx
To Exchange Fluct. xxxx To CFHR xxxx
(Being Exchange Fluctuation (Being Exchange Fluct.
Transferred ) Transferred)

Step II : At B/S date, We should also value Forward contract at fair

value because It is a Derivative Contract which needs to be
Presented at Fair value as follows :-

(1) Favourable Valuation : Derivative Financial Asset Dr

To CFHR

(2) Unfavourable Valuation : CFHR Dr

To Derivative Financial Asset

Step III : At B/S date, we should amortised the amount of Premium on

Hedged Items on SLM basis over the Contract Life. It is our
Actual Loss and It will Hit our P&L A/c as follows :-

Amortisation :- (Forward Rate – Spot Rate ) x Units

Contract Period

P&L a/c Dr xxxx

To CFHR xxxx
(Being Loss on Hedged Items written off)

(At the end of Contract Period, there will be NIL Balance in CFHR
because all Entries shall have Perfect off Set.)

Step IV : At Settlement date, Liability will be Paid off at Current Rate,

but Derivative A/c will be settled as per its nature

Derivative Financial Derivative Financial

Asset = Collect Liab. = Pay
CA-Final Financial Instrument 89

Q. 95 *V.V. Imp (10 marks)

Journal Entries [GBP]

1.1.x1
Bank a/c Dr 9319500
To Bonds 9319500
(Being Bonds issued having value of USD 15 millions at Spot Rate of
.6213)

31.12.x1
Step I : Monetary Items

Bonds a/c Dr 942,000

To Exchange Fluct. 9,42,000
(.6213 - .5585) x 1,50,00,000 USD
(Being Monetary Liab. reported at Closing Rate)

Exchange Fluct. a/c Dr 942000

To CFHR A/c 942000
(Being Gain on Reduction in Liab. transferred)

Step II : Valuation of Derivatives

CFHR A/c Dr 957205

To Derivative Liab. 957205
(Being Derivative Liab. booked)

Step III : Amortisation

[9835389 – 9319500] = 515889 = 171963

3years 3

P&L a/c Dr 171963

To CFHR 171963
(Being Premium Paid on Hedge Contract Amortised)
CA-Final Financial Instrument 90

31.12.x2
(a) Bonds a/c Dr 564000
To Exchange Fluct. 564000
[(.5585 - .5209) x 1,50, 00,000]

(b) Exchange Fluct. Dr 564000

To CFHR 564000

(c) CFHR Dr 876141

To Derivative Liab. 876141 (1833346 – 957205)

(d) P&L Dr 171963

To CFHR 171963

31.12.x3
a) Exchange Fluct. Dr 924000
To Bonds 924000
(.5825 - .5209) x 1,50,00,000

b) CFHR Dr 924000
To Exchange Fluct. 924000

c) Derivative Liab. Dr 735557

To CFHR 735557
(1833346 – 1097789)

d) P&L Dr 171963
To CFHR 171963

Statement showing CFHR A/c

X1 X2 X3
Opening Balance NIL 156758 Cr 16580 Cr
Monetary Items 942000 Cr 564000 Cr 924000 Dr
Derivatives 957205 Dr 876141 Dr 735557 Cr
Amortisation 171963 Cr 171963 Cr 171963 Cr
Closing Bal. 156758 Cr 16580 Cr NIL
CA-Final Financial Instrument 91

Statement showing Current Value of Liab. & Derivative

(a) F.C. Loans
X1 X2 X3
OB 9319500 8377500 7813500
Exchange Fluct. (942000) (564000) 924000
CB 8377500 7813500 8737500

(b) Derivative Liab. = 9835389 – 8737500

= 1097889

Loan Dr 8737500
D. Liab. Dr 1097889
To Bank 9835389

Q. 96 (10 marks)
Case : Hedge A/c’s

31.12.x1
Bank a/c Dr 5,00,00,000
To Borrowings 5,00,00,000
(Being 10 Lacs USD @ 50 Borrowed)

31.3.x2
Exchange Fluct. Dr 20,00,000
To Borrowings 20,00,000
(52-50) x 10 Lacs USD

CFHR Dr 20,00,000
To Ex. Fluct. 20,00,000

Derivative Asset Dr 1500000 (25 – 10)

To CFHR 1500000

PL Dr 83333 (10 Lacs/12)

To CFHR 83333
Qtrs
CA-Final Financial Instrument 92

30.6.x2
Ex. Fluct. Dr 30,00,000
To Borrowings 30,00,000
(55-52) x 10L USD

CFHR Dr 30,00,000
To E. Fluct. 30,00,000

Derivative Asset Dr 40,00,000

To CFHR 40,00,000

PL Dr 83333
To CFHR 83333

Case II : If No Hedge has taken

If there will be no Hedge contract then Fluctuation in Borrowings and

Derivative will be written off in same year in P&L instead of
accumulating in CFHR.

II. Fair value Hedge

(Related with Commodities)

Stocks/Inventories

MCX

e.g.
i) Inventory : 1 Kg Silver
ii) Advance sale (2m) : 40,000
iii) Actual Rate after 2m : 38,000

Solution :
i) Physical Sale : Bank Dr 38000
(After 2m) To Sales 38000
(Being Goods sold at Current Rate)
CA-Final Financial Instrument 93

ii) Fair value Hedge : Bank Dr 2000

To F.V. H Res. 2000
(Being Profit realised)

F.V.H Res. Dr 2000

To P&L 2000
(Being income Recognised)

e.g. : What will happen if Rate is 41000 after 2m.

Solution :
i) Bank a/c Dr 41000
To Sales 41000

ii) FVHR Dr 1000

To Bank 1000

iii) P&L Dr 1000

To FVHR 1000

Under fair value Hedge, we manage our risk to avoid Fluctuation in

Prices of Commodities by Advance Sale or Purchase in MCX. The Fluct. in
Prices of Commodities will be transferred to P&L A/c.

*Part 18*

Unit 8 : De-Recognition of Financial Liabilities

De-Recognition

Full Settlement *Imp *Imp

(Simple) Strategic Debt Early Payment
Re-Structuring
(SDR)
CA-Final Financial Instrument 94

PART A : Full Settlement

As per the Provisions, Full Settlement is a Normal or Regular way for
De recognition of Financial Liabilities through timely Payments of
Interest & Principal in cash, in Goods or Services or in other Financial
Assets. After making Timely Payments, the Liability will be
derecognised Automatically as per the Terms of the Contracts.

*Imp
PABT B : Strategic Debt Restructuring

In case Terms & Conditions of a Financial Liability are revised by

Financers due to Decline in Market Rate of Interest in compare to
Contractual Rate of Interest or due to Financial Problems of the
Entity in repayments of Interest & Principal. The Accounting
Procedure will be followed as per the following Situations :-

SDR

Check : 10% condition

If it is Satisfied If it is not Satisfied

Method I : Extinguishment Method : Modification method

method

*Imp
Step I : How to test 10% Condition

Under this Test, We will compute Fluctuations in ‘’Carrying Amount

of Existing Liability’’. If Fluctuation in Existing Carrying Amount
becomes 10% or more then we will Apply Extinguishment model for
De-recognition of Liab. , but for Less than 10% changes we will consider
Modification model.
CA-Final Financial Instrument 95

Statement showing Calculation of % of Fluctuations

New Rate is not considered while doing 10% Test

*Present value of cash outflows under New Terms xxxx

‘’PVF@ original T. cost (if any)
Rate’’ Interest Principal

Existing Carrying Amt. of Financial Liab. (xxxx)

‘’Book value’’ _____
Fluctuations in Liab. xxxx

% of Fluctuations = Fluctuations (Rs.) x 100

(Changes) Existing Carrying Amt.

10% or more Less than 10%

Extinguishment Modification

Q. 130
Solution :

Calculation of Fluctuations in Carrying Amt. of Bonds

Present value of cash outflows under New Terms at original Rate :-

7years @10%
a) Interest (10,00,000 x 5% x 4.868) 2,43,400
b) Principal (15,00,000 x .513) 7,69,500
At the end of 7th year @ 10%
c) Transaction cost (1,00,000 x 1) 100000
11,12,900
Carrying Amt. of Existing Bonds as at 1.1.x5 (10,00,000)
Changes 1,12,900

% of Fluctuations = 112900 x 100 = 11.29%

10,00,000
CA-Final Financial Instrument 96

Comments : The Percentage of Fluctuations is more than 10% due to

which changes are to be assumed as Significant changes
and we will follow the Extinguishment Accounting method.

Q. 131 Same in 130

Calculation of % of changes

Present value of Cash outflows under New Terms :

a) Interest 0
b) Principal (16,00,000 x .621) 993600
c) Legal Fees (5,000 x 1) 50000
10,43,600
Carrying Amt. of Existing Liab. (10,00,000)
Changes 43600

% of changes = 43600 x 100 = 4.36%

10,00,000

Comments : The Percentage of Fluctuations in Carrying Amt. of Bonds

is Less than 10% due to which we will follow Modification
method of Accounting.

Q. 133 *V.V. Imp

Calculation of Carrying Amt. of Loan as at 31.12.x2

Period Opening Balance Interest @ Payment Closing Bal.

11.5% (IRR)
1.1.x1 50,00,00,000 - (58,70,096) 49,41,29,904
31.12.x1 49,41,29,904 5,68,24,939 (15,50,00,000) 39,59,54,843
31.12.x2 39,59,54,843 4,55,34,807 (4,40,00,000) 39,74,89,650

Only Interest
(Instalment के ललए पैसा नह ीं है )
CA-Final Financial Instrument 97

Calculation of Present value of Cash outflows under New Terms at old

Rate
Period Interest (II) Principal CF PVF@ [Link]
(I) (III) (IV) 11.5% (VI)
(40crore/ (II+ (V)
10 I) III)
1 6 (40 x 15%) 4 10 .897 8,97,00,000
2 5.4 (36 x 15%) 4 9.4 .804 7,55,76,000
3 4.8 (32 x 15%) 4 8.8 .721 6,34,48,000
4 4.2 (28 x 15%) 4 8.2 .647 5,30,54,000
5 3.6 4 7.6 .580 4,40,80,000
6 3 4 7 .520 3,64,00,000
7 2.4 4 6.4 .467 2,98,88,000
8 1.8 4 5.8 .419 2,43,02,000
9 1.2 4 5.2 .375 1,95,00,000
10 .6 4 4.6 .337 1,55,02,000
45,14,50,000

Changes = 45,14,50,000 – 39,74,89,650 = 5,39,60,350

% of Changes = 5,39,60,350 x 100 = 13.57%

39,74,89,650

Comments : The changes are more than 10% in Existing Carrying Amt.
So, we will follow Extinguishment model of Accounting.

Step II: Extinguishment Accounting

The following Accounting steps should be Applied while Applying

Extinguishment model:-

Step I: De-Recognise the Existing Carrying Amt of Existing Liability

Step II: Recognise New Liability at New Terms subject to following:

i) Fair value of New Liab. will be computed at “New Rate” which Prevails
on the date of SDR
CA-Final Financial Instrument 98

ii) Transaction cost will be written off in P&L A/c

Step III: Diff. between Step I Liab. & Step II will be considered as
Profit/Loss On Extinguishment and It will be transferred
to P&L A/c.
Question 130
Calculation of Fair value of New Liab. at New Rate
@11%
Interest (10,00,000 x 5% x 4.712) 235600
Principal (15,00,000 x .482) 723000
@11% 958600

Journal Entries

1) Bonds (Existing) Dr 10,00,000

To Bonds (New) 958600
To Gain on Extinguishment (P&L) 41400
(Being Liab Re-structured)

2) Legal fees (P&L) a/c Dr 100,000

To Bank 100,000
(Being Transaction Cost incurred on Re-structuring)

Net Impact on PL = 41400 + 100000 = 58600

Gain Exp Net Exp

Question 133
Calculation of Fair value of New Liab at New Rate

@15%
1 10 .870 87000000
2 9.4 .756 71064000
3 8.8 .658 57904000
4 8.2 .572 46904000
5 7.6 .497 37772000
6 7 .432 30240000
CA-Final Financial Instrument 99

7 6.4 .376 24064000

8 5.8 .327 18966000
9 5.2 .284 14768000
10 4.6 .247 11362000
400044000

Loan a/c Dr (Existing) 397489650

Loss on Extinguishment (P&L) 2554350 (Bal)
To Loan (New) 400044000
(Being Loan Re-structured)

Question 154 Homework

*Part 19*

Step III: Modification Accounting Model

Under Modification model, the following steps should be applied while

making Accounting Entries:-

Step I: We will not De-recognise the Carrying Amt. of Existing

Liability, but It will be continued in books. It means that we will
not recognise a New Liability under New Terms as we do in
Extinguishment model.

Step II: We will Compute “Revised ERR” as per outflows under New
Terms.
‘’Rate will absorb all changes’’
CA-Final Financial Instrument 100

Note on Transaction Cost

It will not be transferred to P&L A/c, but It will be recorded as

follows:-
i) Transaction Cost a/c Dr xxxx
To Bank xxxx
(Being Transaction Cost Paid)

ii) *Financial Liab. a/c Dr xxxx

To T. Cost xxxx
(Being T. Cost adjusted against C. Amt of Liab.)

*The Revised ERR will absorb it as well.

Question 131
Amortisation Table

Period O. Bal Interest @ 10.99% Payment C. Balance

1 *950,000104405 - 1054405
2 1054405 115879 - 1170284
3 1170284 128614 - 1298898
4 1298898 142749 - 1441647
5 1441647 158353 (1600000) Nil
(Bal. fig)
*Carrying Amount – T. Cost (10,00,000 – 50,000)
Question 132

Calculation of Changes in Carrying Amt of 1/3rd Liability

Present value of New Terms at old Rate 25 crores

Existing Carrying Amt (90 x 1/3rd ) 30 crores
Changes 5 crores

% of changes = 5 crores x 100 = 16.67%

30 crores
CA-Final Financial Instrument 101

Comment: We will follow Extinguishment method of Accounting.

Journal
rd
i) Settlement of 2/3 Loan

Bank Loan a/c Dr 60 crores

To E.S Capital 56 crores (80 x 70%)
To Gain on settlement (P&L) 4 crores
(Being 2/3rd of Liab. settled)

ii) Extinguishment of 1/3rd Loan:

Bank Loan (Existing) Dr 30 crores

To Bank Loan (New) 28 crores
To Gain on Extinguishment (P&L) 2 crores
(Being Extinguishment made)

PART C: Early Payment

If any Liability is Repaid before its Normal Repayment Period then It

will be a case of Early settlement. In the Given case, Difference
Between “Carrying Amt of Liablity” and “Amt Paid on Settlement” will
be considered as a Profit or Loss on Early Payment.

Journal : Financial Liab. a/c Dr xxxx *(Carrying Amt.)

To Bank xxxx *(Settlement Amt.)
(Being Early Repayment made)

*Paid Amt. – Carrying Amt. = Loss/Profit on Settlement in P&L A/c

*Imp
Special case of ‘’CFI’’ in Early Payment

Step I : We will split off the ‘’Early Payment’’ under Equity and
Liability as follows :-
CA-Final Financial Instrument 102

Early Payment required to be made xxxx

Present value of Remaining cash outflows at (xxxx)
Current Market Rate on the Date of Early
Redemption
Payment for Liab. Component ______
Payment for Equity Component xxxx
(Bal. fig)

Step II : Journal a) Financial Liab. a/c Dr *xxxx (Carrying Amt.)

To Bank *xxxx
(Being Liab. Component settled)

b) Equity Component Dr *xxxx (Carrying Amt.)

To Bank *xxxx
(Being Equity Component Settled)

*Difference between Carrying Amt. and Payment will be transferred to

P&L as Profit or Loss on Early Payment

Q. 41
Solution

Calculation of Separation of Early Payment

Early Redeemable Amount 11,00,000

Present value of Remaining cash outflows @5% (10,09,120)
(10,60,000 x .952) _________
Payment for Equity Component (Bal. fig) 90880

Journal

1) Financial Liab. a/c Dr 972476

Loss on Early Payment (P&L) Dr 36644 (Bal. fig)
To Bank 10,09,120
(Being Liab. Component Settled)
CA-Final Financial Instrument 103

2) Equity Component Dr 75939

Loss on Early Payment (P&L) Dr 14941
To Bank 90880
(Being Equity Comp. Settled)

Unit IX : De-Recognition of ‘’Financial Assets’’

As per the Provisions of Ind AS 109, De-Recognition of

Financial Assets should be made if :-

a) Cash Flows have been ceased from such Asset

OR
b) Contractual Right to Receive cash has been transferred to 3rd Party
[i.e., Control over Asset]

Journal : Bank a/c Dr xxxx *(Collection)

To Financial Asset xxxx *(Carrying Amt.)
(Being collection made)

*Difference in Collection and Carrying Amt. will be considered as a Loss

/Profit on De-recognition and It will be transferred to P&L A/c.

Special Case under Unit IX

Case I : Re-Purchase Agreement

If any Financial Asset is transferred to 3rd Party under Re-Purchase

Agreement then Such financial Asset should not be De-Recognised if :-

i) Re-Purchase Price and Return Rate have been fixed on contract date
in Re-Purchase Agreement +

ii) Re-Purchase Agreement has been Entered into for same Asset or
Similar Assets
CA-Final Financial Instrument 104

Note : If the above specified conditions are not satisfied then we can
de-recognise the transferred Asset even if Re-Purchase
Agreement has been entered into by Parties.

Case II : Sale of Financial Asset with Option Contracts

As per the Provision of Ind AS 109, De-recognition of a Financial Asset

can be avoided if It is sold in one contract and will be Purchase again
under Option Contract, but It should be certain that option will be
Excercised and F. Asset will be Purchased.

Note : In case, Option Contract is out of money/in Unfavourable

Condition then De-Recognition of Sold Asset can not be avoided.

Q. 138 : Homework (Simple De-Recognition)

[Q. 136 – Q. 141 : Discussed in class]

Not Important for Exams

*Imp
Case III: Involvement Asset with Associated Liab.

If Seller of Financial Asset has Guaranteed the Collection of Sold

Asset then Guaranteed value should be recorded in addition to De-
Recognition of Asset in the books of Seller as Follows :-

I. De-Recognition of Asset : Bank a/c Dr *xxxx (SP)

To F. Asset *xxxx (Carrying Amt.)
(Being Asset De-recognised)
*Diff. in P&L assuming Loss/Profit on
De-recognition
CA-Final Financial Instrument 105

Sure shot
II. Guarnteed Collection : Involvement Asset Dr xxxx Loss
Loss on Guarntee (P&L) Dr xxxx
To Associated Liab. xxxx + xxxx
(Being Guaranteed collection recorded) (Fair value)
of Guarantee)

“Subsequently”
If Buyer Fails to collect the If Buyer Successfully collected the
Guaranteed Amt. Guaranteed Amt.

i) Associated Liab. Dr xxxx Associated Liab. Dr xxxx

To Bank xxxx To Involvement Asset xxxx
(Being Guarantee met by (Being Guarantee reversed)
seller to Buyer)

ii) P&L a/c Dr xxxx

To Involvement Asset xxxx
(Being Loss booked)
अगर Buyer को पैसे नही मिले तो Seller को वापपस
Q. 142,143,144 करने पड़ेंगे

Journal

a) Bank a/c Dr 90 crores

Loss on De-recog. Dr 5 crores
Carrying Amt.
To F. Assets 95 crores
(Being Assets Sold)

b) Involvement Assets Dr 5 crores

Loss Guarntee (P&L) Dr .5 crores
To Associated Liab 5.5 crores
(Being Guarnteed booked for Collection of Debtors)
CA-Final Financial Instrument 106

*Part 20*

Case IV : Early Collection

Early Collection

Full Settlement Part Settlement *Imp

PART I : Full Settlement

Journal : Bank a/c Dr xxxx *(Collection)

To Financial Asset xxxx *(Carrying Amt.)
(Being Full Settlement made)
*Difference between Carrying Amt. & collection will be assumed
as Profit/Loss on Early collective & It will be transferred to
P&L A/c.

*V.V. Imp
PART II : Part Settlement (Q. 67)

As per the Provisions of Ind AS 109, Early collection in Part

Settlement will be Split off under 2 headings as follows :-

Early Collection

Collection for Financial Collection for Prepaid

Asset Exp.
(Bal. fig)
Carrying Amt. (Present) as
per Amortisation Table

(-) Carrying Amt. to be retained

as per Future Inflows
Reversal against Early
Collection
CA-Final Financial Instrument 107

Journal : Bank a/c Dr xxxx

To F. Assets xxxx
To Prepaid Exp. xxxx
(Being Early collection made)

Q. 67 (Early Collection : Unit IX)

Solution :
I. Statement showing Initial Recognition

Principal Amt. of Loan Provided to Staff 10,00,000

Fair value of Loan Given :
x1 258000 x .893 = 230394
x2 244000 x .797 = 194468
x3 230000 x .712 = 163760
x4 216000 x .636 = 137376
x5 208000 x .567 = 117936 (8,43,934)
Prepaid Exp. 1,56,066

II. Amortisation Table

Period OB Interest @ Collection C. Bal.
12%
x1 8,43,934 101272 (258000) 687206
x2 687206 82464 (244000) 525670

on the date
of Early
Collection

III. Balance in Prepaid Salaries A/c

Prepaid Salaries 156066

Written off during x1 & x2 (62426)
(156066 x 2Y)
5Y ________
Balance in Prepaid Salaries 93640 on the date of Early
Collection
CA-Final Financial Instrument 108

IV. Statement showing Calculation of Reversal of F. Asset against

Early Collection

Existing Carrying Amt. (31.12.x2) 525670

Carrying Amt. to be retained :-
x3 216000 x .893 = 192888
x4 20800 x .794 = 165152 (358040)
To be reversed 1,67,630

V. Journal (Early Collection)

Bank a/c Dr 2,00,0000

To Staff Loan (IV) 167630
To Prepaid Salaries 32370
(Bal. fig)
(Being Early Collection made)

VI. Revised Amortisation Table

Period OB Int. @12% Collection CB
x3 358040 42965 (216000) 185005
x4 185005 22995 (208000) -
(Bal. fig)

VII. Revised Prepaid Salaries to be written off

Revised Exp. = 93640 – 32370 = 30635 P.a.

2Y
X3 X4

Q. 93 Unit 8 : SDR Extinguishment model T. cost Treatment

Q. 135
Solution :
i. Yes for 90% De-recognition
ii. Yes for 90% De-recognition with Recognition of 8% involvement
Asset & Asset Liab.
CA-Final Financial Instrument 109

Q. 134
Solution :
i. De-recognition upto Interest collection
ii. De-recognition upto Dividend Right
iii. De-recognition upto 80% of CF

Ind AS 107 : Disclosures

Disclosures for Financial Instruments

➢ Balance Sheet
➢ Profit & Loss A/c
➢ Other Disclosures xxxx

Cash I : Disclosures in B/S

Concept 1 : Financial Assets

a) Disclosure of each Financial Asset should be made Separately for each

Category
F. Assets

Debt Instrument Equity Instruments Derivatives

FVPL
Amortised FVOCI FVPL For Not for 7
method (Recycling) 3 Trading Trading
1 2
FVPL
4 FVPL or FVOCI
5 (Irrevocable)
(Non Recycling)
6
CA-Final Financial Instrument 110

b) Cumulative changes in Fair value of Assets till current Financial year

c) Changes in Fair value of F. Assets for current Financial year
d) Re-classification in category of F. Assets
e) Credit Risk Allowance
f) De-recognition of F. Assets (Wholly or Partly)

Concept 2 : Financial Liab.

a) Disclosure for each Financial Liab. should be made Separately for

each Category

FL

Amortised method FVPL

(Contractual obligation) (Derivatives)

b) Cumulative changes in Fair value/Carrying Amt. till Current Financial

year
c) Changes in values in Current Financial year
d) De-recognition of FL (Partly/Wholly)

Case II : Disclosures in P&L A/c

i) Interest Expense/Interest Income at ERR [Market Terms]

ii) Interest Expense/Interest Income at Market Rate
[off Market Terms]
iii) Gain/Loss on Re-classification
iv) Gain/Loss on changes in Fair value on B/S date
v) Gain/Loss on De-recognition of FA & FL
vi) OCI if recycled in P&L on Disposal of Assets
vii) Credit Risk allowance if Provided
viii) Amortisation of Prepaid Exp. if Assets are not at Market Terms.
CA-Final Financial Instrument 111

OFF Set of FA & FL

As per Ind AS 32, FA & FL can be set off against each other if :

i) Balances are o/s between Same Parties

&
2) These Assets & Liab. are of Similar Nature.
i.e. : Debtors, Creditors But Fixed Rate Loan can not be set off against
Variable Loan Rate.

*Part 21*

Q. 164 (CFI)
Solution :

Statement showing Initial Recognition

Net Proceeds from Issued Debentures Rs.6,00,000

Fair value of Liab. Component :
Interest (6,00,000 x 8% x 3.17) 1,52,160
Principal (6,00,000 x .68) 4,08,000 (Rs.5,60,160)
Equity Component (Bal. fig) Rs.39840

Amortised Table
(1.4.18 – 31.3.19)

Period OB Int. @ 10% Payment C. Bal.

18-19 5,60,160 *56,016 (48000) 568176

Next year : Bal.

CL NCL
Conclusions :
a) The Company should have charged Finance cost of Rs.56016 as per
Amortisation Table, but Company has charged Rs.48000 only in P&L as
Finance cost. So, the Company should write off Rs.8016 (56016-48000) in
P&L A/c as additional Finance cost.
CA-Final Financial Instrument 112

b) The Company will report Equity Component in Issued Debentures

under the heading of ‘’Other Equity’’

c) The Company will report Closing Balance in Liab. Component of

Issued Debentures as a Liab. in B/S.

Q. 165
Solution :
Note : In the Give question, Investors’ Expected Effective Rate is
mentioned which should be assumed as Market Rate. For the
Application of IRR Concept, IRR should be Given for Entity, but
not from Point of view of Investor.

Statement showing Initial Recognition of Financial Liab.

Proceeds from Bonds Rs.10,00,000

Fair Value of Liability :
i) Interest (10L x 8% x 2.48685) Rs.1,98,948
ii) Principal (10L x .751315) Rs.751315 (950263)
Loss on issue of Bonds (Bal. fig) Rs.49737

Journal

(i) Bank a/c Dr Rs.10,00,000

To 8% Bonds Rs.950263
To Gain on Issue Rs.49737 (P&L)
(Bal. fig)
(Being Bonds Issued)

(ii) Interest a/c Dr 95026 (950263 x 10%)

To 8% Bonds 95026
(Being Interest made due)

(iii) 8% Bonds a/c Dr 80,000

To Bank 80,000
(Being Payment of Actual Int. made)
CA-Final Financial Instrument 113

*V.V. Imp
Q. 166 (Early Payment)
Solution :

I. Initial Recognition

Net Proceeds from Issue of Debentures Rs.5,00,000

Liability Component :
i) Interest (5,00,000 x 8% x 3.605) 1,44,200
ii) Principal (5,00,000) x .567) 283500 (Rs.4,27,700)
Equity Component (Bal. fig) Rs.72300

Journal : Bank a/c Dr 5,00,000

To 8% Debentures 4,27,700
(Liab.)
To 8% Debentures 72,300
(Equity)
(Being Initial Recog. made for 8% Convertible Bonds)

II. Amortisation Table

Period OB Interest @ Payment C. Bal.
12%
14-15 4,27,700 51,324 (40,000) 4,39,024
15-16 4,39,024 52683 (40000) 451707
16-17 451707 54205 (40000) 465912

III. Early Payment for Liab. & Equity Portion

Early Payment for Redemption of Debentures Rs.5,25,000

Payment for Liab. Component :
Present value of Remaining CF at Current Rate :
@ 9%
Fair value of 17-18 40,000 x .917 = 36680
Pending Cash 18-19 5,40,000 x .842 = 454680 (Rs.491360)
Flows @ 9%
Payment for Equity (Bal.) 33640
CA-Final Financial Instrument 114

IV. Journal (Early Payment)

(i) 8% Debentures (Liab.) Dr 465912 (C. Amt.)

Loss on Early Redemp. (P&L) Dr 25448
To Bank 4,91,360 (Payment)
(Being Liab. Comp. Settled)

(ii) 8% Debentures (Equity) Dr 72300

To Bank 33640
To Gain on Red. (P&L) 38660
(Being Equity Comp. Settled)

Q. 167 *Imp
Solution :

Extract of SOPL

Other Incomes :
i) Gain from Derivatives (A) 5250
ii) Finance Income (B) 12000

Extract of B/S

Non Current Assets :

Financial Assets :

i) Debt Investment (B) 1,53,000

ii) Equity Investment 1,87,500

Current Assets :
Financial Assets :

Derivative Financial Asset (A) 15,250

Accounting Treatment
CA-Final Financial Instrument 115

A. Derivatives :

Derivative Financial Asset Dr 5250

To P&L (15250-10000) 5250
(Being Derivatives valued at B/S date from 10,000 to 15,250)

B. Debt Investments till Maturity (Amortised cost method)

Period OB Int. @ 8% Collection @ 6% CB

x1-x2 1,50,000 12,000 (9000) 153000

i) Debt Invest. Dr 12000

To Finance Income 12000
(Being Income booked @ 8%)

ii) Bank a/c Dr 9000

To Debt Invest. 9000
(Being Actual Collection made)

(C) Equity Investment (OCI) :

1.4.x1
Investment in shares Dr 175000
To Bank 175000
(Being 50000 shares Purchased @ 3.5 per share)

31.3.x2
Investment a/c Dr 12500 [(3.75-3.5) x 50000]
To OCI Res. 12500
(Being Gain on Valuation booked on B/S date)
CA-Final Financial Instrument 116

Q. 169 (At Market Terms)

I. Amortisation Table
Period OB Interest @18% (IRR) Payment @ CB
4%

x5-x6 4,80,000 86,400 (19200) 547200

II. Adjustment Entry

4% P.S. capital (Equity) Dr 4,80,000

Interest Exp. (P&L) Dr 86,400
To Retained Earnings 19,200
To 4% P.S. cap. (Liab.) 5,47,200
(Being Rectification Entry made at the end of Ist year)

*Part 22*

Q. 175 (Impairment : ECL)

Accounting Treatment on Initial Recognition

Principal Amt. Provided to Staff as Loan Rs.5,00,000

Fair Value of Financial Asset :-
Interest 0
Principal 432000 (Rs.432000)
(5,00,000 x .864)

1 3
1.05 _________
Prepaid Salary (Bal. fig) Rs.68,000

Journal : Staff Loan a/c Dr 4,32,000

Prepaid Salary a/c Dr 68,000
To Bank 5,00,000
(Being Loan Provided to Staff)
CA-Final Financial Instrument 117

Amortisation Table
(Original Terms)

Period O. Bal. Interest @5% Collection C. Bal.

x1-x2 4,32,000 21,600 - 4,53,600
x2-x3 4,53,600 22,680 - 476280
x3-x4 4,76,280 23720 (5,00,000)
(Bal. fig)

Statement showing Impairment Loss in F. Asset

Carrying Amt. at the end of 20x3 4,76,280

Present value of Re-structured Asset (205750)
(2,50,000 x .823)

1 4
1.05 _______
Impairment Loss (Bal. fig) 270530

Journal : Impairment Loss (P&L) Dr 270530

To Staff Loan 270530
(Being Staff Loan impaired)

Amortisation Table
(Revised Terms)

Period OB Interest @5% Collection CB

x3-x4 2,05,750 10288 - 216037
x4-x5 216037 10802 - 226839
x5-x6 226839 11342 - 238181
x6-x7 238181 11819 (2,50,000) -
(Bal. fig)

Q. 174
Solution :
CA-Final Financial Instrument 118

Statement showing Initial Recognition of Compound Financial Inst.

Net Proceeds from Issue of OCPS Rs.1,00,00,0000

Liability Component :
Interest/Dividend NIL
Principal (1,00,00,000 x .713) 71,30,000 (Rs.71,30,000)

1 5
1.07 ___________
Equity Component (Bal. fig) Rs.28,70,000

Journal Entries

x1-x2

1.4.x1
Bank a/c Dr Rs.1,00,00,000
To 4% P.S. Cap. (Liab.) 71,30,000
To 4% P.S. Cap. (Equity) 28,70,000
(Being Initial Recog. made of 4% OCPS)

31.3.x2
Interest a/c Dr 499100 (71,30,000 x 7%)
To P.S. Cap. (Liab.) 499100
(Being Interest made due @ 7%)

31.3.x2
P&L a/c Dr 499100
To Interest 4,99,100
(Being Exp. written off)

Note : There will be no change in Initial Classification if Pref. share

holders opt for cash at Maturity date. The Liability Portion will
be Paid in cash and Equity Portion will be kept under other
Equity.
CA-Final Financial Instrument 119

Q. 173 (General question)

Solution :

Calculation of Loss due to change in offer

Number of shares offered at Revised Terms 25 share

(Rs.1000/Rs.40)
Number of shares offered at Maturity date (20 share)
(Rs.1000/Rs.50) _________
Extra Shares 5 share
Fair value Per share 80/-
Loss due to Extra 400/-
Shares (80x5)

*The Loss of Rs.400 will be off in P&L at the time of Issue of shares.

Q. 172 : Homework (Early Payment)

Q. 168 *Imp (Debt Invest + OCI + ECL)

Initial Recognition : Debt Invest. Dr 1000

To Bank 1000
(Being Investment made)

B/S Valuation : Impairment Loss (P&L) Dr 30

OCI Res (50-30) Dr 20 Fair value Fluctuation
To Debt Invest. 50 (1000-950)
(Being B/S valuation made)

Sale date : i) Bank Dr 950

To Invest. 950
(Being Invest. Sold)

ii) PL Dr 20
To OCI Res 20
(Being OCI Recycled)
CA-Final Financial Instrument 120

Q. 170
Solution :

Statement showing Closing Value in Bonds in USD

Period OB IRR @ 10% Collection @ 4.7% C. Bal.

on Face value
1 1,000 100 (59) 1,041
(1000 x 10%) (1250 x 4.7%)

_________________Investment in Bond A/c (Rs.)_____________________

at the end
To Bank By Bank (59 USD x 45) 2,655
(1000 USD x 40) 40,000

To Interest 4200 By Bal. c/d (1041 x 45) 46,845

(100 USD x 42)
Monetary Item
To Ex. Gain (Bal. fig) 5,300 ______
49,500 49,500

Fair value Gain/Loss

Fair value at year End (1060 USD x 45) 47700

Carrying Amt. at year end (46845)
Fair value Gain 855

Journal Entries

I. Investment in Bonds Dr 40,000

To Bank 40,000
(Being Invest. made for 1000 USD @ 40)

II. Investment in Bonds Dr 4200

To Interest 4200
(Being Income made Accrued @ 10%)
CA-Final Financial Instrument 121

III. Bank a/c Dr 2655

To Invest. A/c 2655
(Being Actual Int. Received at the end of year)

IV. Investment in Bonds Dr 6155

To Exchange Gain 5300
To Fair value Gain 855
(Being Exchange Gain/FV Gain recognised)

V. Exchange Gain Dr 5300

FV Gain Dr 855
To OCI Res.* 6155
(Being OCI Res. recognised for changes in Value)

VI. Interest Income Dr 4200

To P&L 4200
(Being Interest Income Recorded)

*Notes : 1) As per Ind AS 21, Exchange Fluctuation shall be routed

through OCI for those Items which are valued through OCI.
So, we have transferred Ex. Gain of Rs.5300 to OCI Res.
2) As per Ind AS 109, FVOCI Items are routed through OCI for
Fair value changes due to which F.V. Gain of Rs.855 has been
recognised in OCI Res.

Q. 171 *V.V. Imp

Solution :
Steps for Accounting of ‘’Financial Guarntee’’
(Given by Holding for its Subsidiary)

Step I : Calculation of Fair value of Guarntee

(At the time of Initial Recognition)

As per the Provision of Ind AS 109, Fair value of Guarantee should be

computed by Discounting the Savings in Interest to Subsidiary at
Market Rate. The Savings in Interest will be computed by difference in
CA-Final Financial Instrument 122

Interest Rates at which Loan was available to Subsidiary before

Guarantee and after Guarantee. The following Entry will be recorded in
the books of Holding for recognition of Financial Guarantee :-

Journal : Investment on Subsidiary Dr xxxx

To Financial Liab. xxxx
(Guarantee)
(Being Guarantee Provided)

Step II : Subsequent Measurement

At the end of Each year, Financial Liab. (Guarantee) will be reversed in

P&L A/c subject to following Calculation :-

Opening Balance of Guarantee – Balance in Liab. to be maintained

Amortised value as per or ECL

Amortisation Table

Higher

Journal : Financial Liab. Dr xxxx

To P&L xxxx
(Being Liab. Reversed)

Q. 171
Calculation of Fair value of Guarantee
(Initial Recognition)

Savings in Interest for 3years = (1,10,000 – 80,000) x 2.443 = 73,290

(10L x 11%) (10L x 8%)

Journal : Investment in Moon Ltd. Dr 73290

To Financial Liab. 73290
(Guarantee)
(Being Financial Guarantee recognised)
CA-Final Financial Instrument 123

Amortisation Table for Guarantee

Period OB Int. 11% Payment CB

1 73290 8062 (30000) 51352
2 51352 5649 (30000) 27001
3 27001 2999 (30000) -

At the end of Ist year (31.3.x2)

Calculation of Liab. to be reversed

Opening Balance 73290

Liab. to be maintained :
Amort. Value 51352
or ECL (10L x 1%) 10000
Whichever is higher (51352)
To be Reversed 21938

Journal : F. Liab. Dr 21938

To P&L 21938
(Being Liab. Reversed)

At the end of 2nd year (31.3.x3)

Opening Bal. 51352

Liab. to be maintained :
Amort. Value 27001
Or ECL (10L x 3%) 30000
Whichever is higher (30000)
To be reversed 21352

Journal : FL Dr 21352
To PL 21352
(Being Liab. Reversed)
CA-Final Financial Instrument 124

At the end of 3rd year (Assumption)

(सिजाने के लीये)
Option I : If Moon Ltd. defaults
FL Dr 30000
To Bank 30000

Option II : If Moon Ltd. does not default

FL Dr 30000
To PL 30000

Thank You
Best of Luck…..!!!!!!
CA. Parveen Jindal
 Module-4
Index
Chapter
Particulars Page Range
No.
1 CHAPTER 01 REVENUES FROM CONTRACTS IND AS 115
Part -1 1-1
Part -2 1-3
Part -3 3-7
Part -4 7-7
Part -5 7-10
Part -6 10-13
Part -7 13-13
Part -8 14-17
Part -9 17-20
Part -10 21-24
Part -11 25-30
Part -12 31-35
Part -13 35-38
Part -14 38-46
Part -15 46-48
Part -16 48-51
Part -17 52-52

Thank You
Best of Luck…..!!!!!!
CA. Parveen Jindal
 Join us on
[Link]
[Link]
CA Parveen Jindal Classes
CA-Final Financial Reporting 1

Chapter 1: Ind AS : 115

Revenue from Contracts with Customers (10-15 marks)

*Part 1*

*Message*

*Part 2*

Concept 1 : Scope of Ind AS 115

The following Aspects shall be discussed under the scope of Ind AS 115 in
Relation to “Revenues from customers” :-
A. Timing of Revenue
B. Nature of Revenue
C. Amount of Revenue
D. Uncertainties which are attached with Revenues
E. Accounting for revenues

Concept 2 : Important Definitions

1) Meaning of Contract :- As per the Provisions, A contract is an

agreement that creates “Enforceable Rights & Obligations” for the
Parties. It can be written, oral or Implied based on Customary
Practices in the market.
It is a matter of Law

*Imp
2) Meaning of Customer :- As per the Provisions, customer is a Party
who has Contracted with the Entity “to obtain Goods/Services” in
lieu of some consideration.
CA-Final Financial Reporting 2

Important Notes
Note 1 : Good or Service should be an an outcome of Oridinary
Course of Business

Note 2 : If any Consideration has been Received from any other

Transaction other than sale of oridinary Goods or Services
Then it will be dealt by other Ind-AS.
For Example:
i. Sale of PPE : Ind AS 16
ii. Sale of [Link] : Ind AS 38
iii. Interest /Dividend Income : Ind AS 109
iv. Rental Received : Ind AS 116

3) Meaning of Revenues :- As per the Provisions, Revenue means

*Income which arises during ordinary course of Business.
*Income means increase in Equity

Concept 3: Items out of scope

As per the Provisions of Ind As 115, the Following Items are out
of scope of this Statement :
1. Financial Instruments (109)
2. Contracts with subsidiaries, Associates or Joint ventures
(110,28,111)
3. Lease Contracts (116)
4. Insurance Contracts
* Imp
Concept 4 : Non-Monetary Exchanges

As per the Provisions of Ind AS 115, Non-Monetary Exchanges of similar

Goods between the Entities to facilitate the sales should not be
Considered as Revenue from customers.
CA-Final Financial Reporting 3

Note
These transactions can not be classified as Barter Transactions
because Barter Transactions are undertaken at fair value and we will
discuss it later in this topic.

Q.1, Q.2, Q.3: Homework

*Part 3*

Concept 5 : “5 Step Model”

As per the provisions of Ind AS 115, There are 5 steps which are to be
followed before the understanding of Revenue Recognition :-

Steps

Step I : Step II : Step III : Step IV : Step V :

Identifying Identifying Identifying Identifying Satisfying
the the the the the
Contract “Performance Transaction Allocation of Performance
Obligation” Price Transaction Obligation
Price

Step I : Identifying the Contract

As per the provisions of Ind AS 115, the following conditions should be

satisfied to Identify a contract with customer :-
CA-Final Financial Reporting 4

Condition I : It should be approved by all the concerned Parties (Seller &

Buyer) & Parties are committed to fulfil their Obligations.
+
Condition II: The Entity can identify each party’s rights in the
contract.
+
Condition III: The Entity can identify the Payment Terms.
+
Condition IV: The Entity can identify that the transaction has some
commercial Substance.
+
Condition V : The Entity can identify that ultimate collection will be
made from Customer.

Additional Points to be considered under “Step I” of Ind AS 115 :-

a) Combination of Contracts

As per the Provisions of Ind AS 115, we can combine multiple contracts

as a Single contract if the following conditions are satisfied :-
i. The contracts are negotiated as a Package in single commercial
Activity
+
ii. The Price of one contract affects the Price of other contract
+
iii. All the contracts are like a Single Performance Obligation

Solution of Q.4, Q.5, Q.6 (Discussed in Class)

*Imp
b) Duration of Contract :-

As per the Provisions if Ind AS 115, Revenue shall be recognised on the

basis of Duration of Contract. An Entity can identify the duration of
contract on the basis of Termination clause in the contract as follows :
CA-Final Financial Reporting 5

Termination

Case I Case II

If Both Parties have Unilateral right If customer can cancel

to terminate unformed Performance the contract
Obligation without any Penalty

Without penalty with Penalty

Prefer shorter Prefer Long

Duration Duration

Solution of Q.7, Q.8, Q.9, Q.10 (Discussed in Class)

*[Link]
c) Modification in contract :-

As per the Provisions of Ind AS 115, Modification in contract can be

made in the original contract . It can be made in the following ways :-

Modification : Type 1

If Additional Goods or Services are added in the original contract at

Stand Alone Selling Price “SSP” then It will be assumed as a Separate
contract and It will not be treated as Modification.

“SSP”= It is the Price at which Goods can be sold in the Open market and
It will be charged from new customer.

Solution of Q.11 (Discussed in class)

CA-Final Financial Reporting 6

Modification : Type 2
If Additional Goods or Services are added to the Original contract, but
at a Price other than Stand alone Price then It will be assumed that
Transaction has Negotiated as a Package. In the Given Case, we will
consider the accounting on Prospectively basis.

Prospectively : “Allocate remaining Revenue over the remaining

Performance obligation”

Solution of Q.14 (Discussed in Class)

Modification : Type 3

If Additional Goods/ Services are not added in Original Contract, but

Price is revised for Original Contract then “Cumulative catch up
adjustment” will be considered.

Cumulative catch up Adjustment :

Revenue will be adjusted with retrospectively Effect

Solution of Q.15, Q.13 (*Imp), Q.12 (Discussed in Class)

Step II : Identifying the Performance Obligation

As per the Provisions of Ind AS 115, Performance Obligation has been

defined as a Promise in the contract with customer to deliver :-
i. A Good or A Service which is “Distinct”
OR
ii. A Series of Goods or services which are same in nature

❖ Meaning of Distinct Good/Service :- As per the Provisions of

Distinct Good/Service is a Good/ Service which is separable from
other Goods or Services. The Following conditions should be satisfied
to identify distinct Goods or Services :-
CA-Final Financial Reporting 7

I. If Integration is not required then all Goods or Services are

distinct.
+
II. If Goods/Services are not highly inter related then All Goods or
Services are Distinct.
+
III. If Goods/Services are not Customised/ modified then all Goods
or Services are distinct.

Note : Identification of Separate Performance Obligation is mandatory

because Allocation of Transaction value over distinct
Goods/Services will be made for Adequate Presentation of
Revenues.

Solution of Q.18, Q.19, Q.20, Q.21, Q.22, Q.16, Q.17 (Discussed in Class)

*Part 4*

Solution of Q.12, Q.13, Q.11, Q.14, Q.18, Q.21, Q.19,Q.16 (Discussed in Class)

*Part 5*

*V.V. Imp
Step III : Identifying the ‘’Transaction Price’’

As per the Provision of Ind AS 115, Transaction Price is the

Price which an Entity Expects to be Entitled in Exchange of Goods/
Services, but Excluding Amount collected on behalf of 3rd Party (i.e., GST
or other Taxes which are collected from customer but Payable to Govt).

The Estimation of Transaction Price may Get Effected by the

following 4 Items as follows :-

I. Variable consideration
II. Financing component
CA-Final Financial Reporting 8

III. Non cash consideration

IV. Amount Payable to customer

*Imp
Case I : Variable consideration

If variable consideration is a Part of the Transaction Price

then we should estimate variable consideration while Estimating
Transaction Price. It may be in the form of Discounts, Rebates,
Refunds, Price concession, Performance Bonus, Incentives, Penalties
etc.

There are 2 methods to Estimate the value of variable consideration

as follows :-

Methods

Expected value method Most Likely Amount method

Apply Probability weight if Under this method, There

we have different Ranges will be 2 options only (i.e., Yes or
of Revenue NO). Either It will be a Revenue
or It will not be Revenue

Q. 23 (*Imp), 24, 25 (*V.V. Imp), 42, 43, 26: Discussed in class

*Imp
Case II : Financing Component

As per the Provisions of Ind AS 115, An Entity should find out financing
Component in the Transaction Price. It means that Ind AS 115
considers the Time value of money concept.

The following 3 Points should considered while computing Financing

Component :-
CA-Final Financial Reporting 9

I. The Difference between Transaction Price for Promised Goods & cash
Selling Price.
Hint : If Difference is insignificant then Financing component may be
ignored

II. The Duration between transfer of control of Goods/Services &

Actual Payment by customer.
Hint : If collection is made within 1 year then financing component
may be ignored

III. The Entity should consider Market Rate of Interest

Hint : IRR may also be considered if Market Rate is not available

Note : We Should not identify Interest in all contracts If customer

Pays Advance money or customer does not Pay according to
Nature of Transaction then we will ignore Financing component.

Q. 28, 29, 32, 33, 34, 35, 36, 37, 47 : Discussed in Class

Case III : Non Cash Consideration

If may be Possible that An Entity has received Non cash

Consideration in Exchange of Goods or Services. In the Given case,
Transaction Price will be computed as follows :-

(a) Fair value of Received consideration will be taken as Revenue on the

date of Exchange of consideration.
*Subsequent changes in Revenue will not be made after Initial
Recognition

(b) In the absence of fair value of Received consideration, we can

Consider fair value of Given Goods/Services.

Q. 38, 39, 40, 45 (*IMP): Discussed in Class

CA-Final Financial Reporting 10

Case IV : Consideration Payable to customer

As per the Provisions of Ind AS 115, consideration which is Paid to

Customer (i.e., voucher, coupon etc.) should be reduced from Transaction
Price.

Q. 44, 41 : Discussed in Class

*Part 6*

*Imp
Case V : Right to Return (Exceptional case)
If any sale has been made with Right to Return within a specified
Period of time then the following steps should be applied :-

Step I : At the time of sale of Goods

(i) Bank/Debtors a/c Dr xxxx (Units x SP)

To Revenue (P&L) xxxx (Bal. fig)
B/S : CL To Refunds Liab. xxxx (Expected to be Returned)
(Being Revenue Recognised and Liab. created)

(ii) Cost of Sales a/c Dr xxxx (Units Not to be x cost P.U)

(P&L) Returned
Returnable Stock a/c Dr xxxx (Units to be x cost P.U.)
returned
To finished Stock xxxx (Units x cost P.U.)
B/S : Inventory Sold
(Being Finished Stock Reduced due to Sold Goods)

Step II : At the time of Return of Goods

(i) Refund Liab. a/c Dr xxxx

To Bank xxxx
(Being Amt. Refunded)
CA-Final Financial Reporting 11

(ii) Finished stock a/c Dr xxxx

To Returnable Stock xxxx
(Being Goods returned)

OR
If Gods are not Returned within Specified time

(i) Refund Liab. a/c Dr xxxx

To Revenue (P&L) xxxx
(Being Returnable Goods not Returned)

(ii) Cost of Sales (P&L) Dr xxxx

To Returnable Stock xxxx
(Being Returnable Stock charged to cost)

Q. 27

Calculation of Required values

i) Revenue to be Recognised (970 x 50) 48,500

ii) Refund Liab. (30 x 50) 1,500
iii) Returnable Stock (30 x 30) 900

Explanation : As per the Provisions of Ind AS 115, the Entity can

recognise Revenue to the extent of sold Goods which are
not Expected to be Returned, but Entity should create a
Refund Liability equal to Goods which are Expected to be
Returned.

Journal

(i) Bank a/c Dr 50,000 (1000 x 50)

To Revenue 48500 (970 x 50)
To Refund Liab. 1500 (30 x 50)
(Being goods sold & Refund Liab. Recognised)
CA-Final Financial Reporting 12

(ii) Returnable Stock a/c Dr 900 (30 x 30)

Cost of Sales a/c Dr 29100 (970 x 30)
To Finished Stock 30,000
(Being Stock adjusted due to sale of Goods)

Q. 69 : Homework

*Imp
Step IV : Allocation of ‘’Transaction Price’’

It may be Possible that Transaction Price is a Single Price as a

Package for multiple Performance obligation in a single Contract. In the
Given case, we will Allocate Transaction Price over multiple Performance
Obligations in the following manner :-

I. The Allocation of Transaction Price over multiple performance

Obligation will be made in the ratio of ‘’SSP” of Each Performance
Obligation
Stand Alone Selling Price
‘’Directly observable’’

Note : It means that Discounted Price will be adsorbed by Each

obligation in the ratio of SSP

II. In case ‘’SSP’’ of any obligation is not directly observable then the
Entity can find our ‘’SSP” by any of following method :-

a) Market Assessment Approach Ist Pref.

(Check other Entity’ Price for Similar Goods or Service)
OR
IInd Pref.
b) Cost on P.O. + Expected % of margin Approach

*Imp (Cost option)

III. In case SSP is not identifiable by any Approach then we will follow
‘’Residual Approach’’.
CA-Final Financial Reporting 13

Residual Approach = Transaction Price – Identifiable SSP = T.P. will be

(whole) assumed for
Residual
Performance
obligation

Important Note
If any Performance obligation is not offered at discount then It will
be Accounted at full Price while making Allocation of T.P. It means that
such A Performance obligation will not share any Amount in Discount.

Q. 48, 49 (*Imp), 115, 66 (*Imp) : Discussed in Class

Q. 65, 68, 102, 114, 26 : Homework

Q. 105
Calculation of T.P.

Fixed Price 1,00,000

Bonus : 1) 50000 x 60% = 30,000
ii) 45000 x 30% = 13500
iii) 40000 x 10% = 7000 47500
TP 147500

Q. 110 (Same question : Q. 105)

*Part 7*

Q. 26, 47, 29, 28 : Discussed in class

Q. 31, 33, 34, 35, 30 : Discussed in class
CA-Final Financial Reporting 14

*Part 8*

*V.V. Imp
Q. 50

Case A :
In the Given case, Transaction Price is fixed for Licence A at
₹16,00,000 which will be received after one month. The Licence B has a
variable SSP of ₹20L which will be recovered in the from of Royalty @
3% on sales in future from customer. So, the following models should be
applied on Revenue Recognition of A&B :-

(i) The Revenue from Licence A will be recognised is full for ₹16,00,000
after one month when It will be delivered to the customer.

(ii) The Revenue from Licence B will be recognised equal to Royalty @ 3%

on Sales generated by customer. It means that Revenue from
Royalty income will be booked over the Period of time instead of
Recognition at once.

*Imp
Case B : Q.56 Study material (Left in class Book by mistake)

In the Given case, Price has been fixed for Licence A at ₹

6,00,000 which is not in Line with its SSP of ₹16,00,000. In addition,
SSP for Licence B is ₹20,00,000, but in Given contract it has been
₹30L. The Specified Prices for A & B are not SSP due to which we will
have to Distribute all collections in the ratio of SSP. The following
Entries may be considered :-

Journal Entries

A. On the date of Transaction of Licence B (NOW)

CA-Final Financial Reporting 15

Customer a/c Dr 3,33,333 (6,00,000 x 20/36)

To Revenue 3,33,333
(Being Revenue Recognised for Licence B)

B. Accounting for Royalty Income (first month)

Bank a/c Dr 4,00,000
(4L x 20/36) To Revenue (B) 2,22,222
(4L x 16/36) To Advance (A) 177778
(Being share in Royalty distributed)

C. At the time of Transfer of Licence A (After 3m)

Customer a/c Dr 266667 (600000 x 16/36)

To Revenue 266667
(Being Revenue from A Recognised)

Bank a/c Dr 600000

To Customer 600000 (333333 + 266667)
(Being Collection made)

Advance for A Dr 177778

To Revenue 177778
(Being Share in Royalty Recognition)

Step V : Revenue Recognition

As per the Provisions of Ind AS 115, An Entity can Recognise its

Revenue from contracts with customers if It has delivered the
Promised Goods or Services to its customer. The delivery of Promised
Goods or Services is assumed to be completed if the Entity has
transferred control over the Goods or Services to the customer. The
transfer of control can be identified by the following factor :-

I. The Customer has Accepted Goods or Services

+
II. The Goods/Services are under customer’ Possession
CA-Final Financial Reporting 16

+
III. The Legal title of Goods/Services is also with the customer
+
IV. The customer will enjoy all the benefit from transferred Good/

Services. It means that customer can stop anyone from taking

benefit from such Goods/Services.

*V.V. Imp
Additional Points to be considered under Step V.

Point 1 : Methods of transfer of control

Method I : Over the Period of contract

Method II : ‘’At A Point’’ of contract

Point 2 : Methods of Revenue Recognition

Methods

Input method Output method

It is Applied if control It is Applied if control

is transferred over the is transferred at a
Period of Time Point

Revenue is Recognised Revenue is Recognised

by % of completion method immediately at a Point of
Transfer of control

*% of completion = Actual cost x 100

Total Estimated cost

*Revenue = Contract Price x % of completion

CA-Final Financial Reporting 17

Point 3 : Identification of contracts ‘’Over the Period’’

A) If Entity is creating Assets on the Site of customer and site is

under control of customer
(i.e., construction contracts)

OR
B) If Entity is creating Assets on request of its customer and these
Assets have no alternative use other than sale to customer and It
has right to collect Amt. for completed work
OR
C) If service is Provided to customer over the specified Period, but
Benefit from transferred Service is received by customer
immediately.
[i.e., Tuition course, Gym membership etc.]

Q. 55, 52 : Discussed in class

*Part 9*

Q. 56 (Input & Output method)

Calculation of Contract Price for const. work

Transaction Price (Total) 50,00,000

Price for Elevators *(15,00,000)
Price for Const. work 35,00,000

*In the Given case, Entity is charging ₹15Lacs from customer for
Elevators which can not be Linked to Profit from contract because the
Elevator will be installed at Actual Price at which it will be delivered from
Lift manufacturer.

Calculation of Revenue Recognition under const. work

CA-Final Financial Reporting 18

i) % of Completion stage = Actual cost x 100

T.E. cost
= 500,000 x 100
25,00,000

= 20%

ii) Revenue Recog. = 35,00,000 x 20% = 7,00,000

(Contract Price x % of Completion)

Calculation of Total Billing to be made to customer

Billing for Lift/Elevator 15,00,000

(Already Delivered)
Billing for Completed work 700,000
Total Revenue to be Billed 22,00,000

Concept 6 : Various Issues

*Imp
Issue I : Revenue Recognition under ‘’Re-Purchase Agreements’’

If there is a Re-Purchase Agreement between seller and customer

for sold Goods then It can be Entered into in 3 ways as follows :-

Re-Purchase Agreement

Future Contract Call option Put option

Seller is bound to Buy Seller has a Right to Buyer has a Right

Back its sold Goods at Buy back its sold to Return the
fixed Price in future Goods at fixed Price Goods to seller at
in future a fixed Price in
future
CA-Final Financial Reporting 19

As per the Provision of Ind AS 115, Accounting Treatment is same

in all Given cases which is as follows :-

Situation I : If Re-Purchase Price is higher than original Selling Price

Step I : The Seller will recognise ‘’Financial Liability’’ equal to Re-

Purchase Price because this Amt. will be Paid in future as per
contract

Step II : Difference between selling Price and Re-Purchase Price will be

Considered as ‘’Finance charge/Int. Exp.’’ because the whole
contract will be considered as a Financing Agreement instead
of Sale of Goods contract.

Journal : Bank a/c Dr xxxx (Selling Price)

Finance charge Dr xxxx (Bal. fig)
To Financial Liab. xxxx (Re-Purchase Price)
(Exp. : PL)
(Being Financing Arrangement made)

Situation II : If Re-Purchase Price is Less than Selling Price

In the Given case, Difference between Re-Purchase Price and

Selling Price will be considered as ‘’Lease Income’’ and It will be credited
in SOPL on SLM Basis over the Contract Period.

Journal : Bank a/c Dr xxxx (Selling Price)

To Lease Income xxxx (Bal. fig)
To Financial Liab. xxxx (Re-Purchase Price)
(Being Lease Arrangements made)

Q. 57, 58 : Discussed in class

Issue II : Bill & Hold

CA-Final Financial Reporting 20

If any Delivery of Goods is Pending at Buyer’ Request then seller

Party can recognise its Revenue because there is no default from seller’
Point of view. In the Given case, the following conditions should be
Satisfied by seller before making Revenue Recognition :-

(i) The Invoice has been raised for the specified Goods
+
(ii) These Goods should be identifiable separately in the warehouse +
(iii) These Goods should not be transferred to any other Party Except
Buyer +
(iv) These Goods should be ready for delivery at any time at request of
Buyer

Q. 59 : Discussed in class

Issue III : Consignment Sales

If Goods are Sent by an Entity to its Sales Agent on Consignment

Basis then the entity can recognise the Revenue from sale of Goods
only when Goods are sold by Sales Agent to 3rd Party.

Consignee ‘’End customer’’

Q. 63 : Homework

Issue IV : Joining Fees or File charges or Upfront Fees

As per the Provisions, the Entity should follow Point of sale

method for collected Amt. by way of Joining fess or Registration fess
etc. It means that the Entity should recognise the Revenue from the
Specified heads immediately.

Q. 64, 54, 53 : Homework

CA-Final Financial Reporting 21

*Part 10*

*V.V. Imp
Issue V : Service Concession Arrangements
(Build – operate – Transfer)
or
(Private to Public) Govt. Properties

Under service concession arrangements, Public Properties are

Granted to Private companies to build and operate for Public Benefits.
These Public Properties may include management of Hospitals, Bridges,
Roads, Tunnels, Airports, Ports etc. The Private Companies can recover
their Invested money in Granted Properties by two method as follows:-

Method I : Fixed Guarantee by Govt.

Method II : Recovery from Public

Method I : Fixed Guarantee by Govt.

Under this method, Private Companies can recover their

Invested Amount from Government directly to the extent of fixed
Amount. The following Steps should be applied while making Accounting
Entries :-

Step I : During Construction Phase

Cost of Construction (P&L) Dr xxxx

To Bank xxxx
(Being Amt. incurred on const. of Public Property)

Step II : At the time of Completion of work

Financial Asset a/c Dr xxxx (Fair value)

To Revenue (P&L) xxxx (Fair value)
(Being Revenue Recognised at fair value) .
CA-Final Financial Reporting 22

Step III : Settlement

a) Financial Asset a/c Dr xxxx

To Finance Income (P&L) xxxx
(Being finance Income made due on financial Asset)

b) Bank a/c Dr xxxx (Guaranteed Amt.)

To Financial Asset xxxx (Fair value + Int.)
To Revenue (P&L) xxxx (Bal. fig)
(Being collective made on Settlement)

*Imp
Q. 62
Accounting for Bhilwara to Jabalpur Toll

(i) Cost of Construction (P&L) Dr 100 crores

To Bank 100 crores
(Being Expense incurred on construction of Road)

(ii) Financial Asset a/c Dr 110 crore

To Revenue (P&L) 110 crore
(Being Financial Asset recognised at fair value)

(iii) Financial Asset a/c Dr 15

To finance Income(P&L) 15
(Being Int. Income recorded till Settlement)

(iv) Bank a/c Dr 200 crores

To Financial Asset 125 crore (110 + 15)
To Revenues (P&L) 75 crore (Bal. fig)
(Being Settlement made)
CA-Final Financial Reporting 23

Method II : Recovery from Public

Under this method, companies recover their Invested Amount in

Public Properties from Public directly at the time of use of Assets. The
following Entries shall be recorded under method II :-

Step I : During Construction Phase

Cost of Construction (P&L) Dr xxxx

To Bank xxxx
(Being Exp. incurred on const. of Assets)

Step II : At the time of Completion of work

PPE can not *Intangible Asset Dr xxxx (Fair value)

be recognised To Revenue (P&L) xxxx
for const. (Being Licence recognised to operate the Asset)
Assets

Step III : Recovery from Public

Bank a/c Dr xxxx

To Revenue (P&L) xxxx
(Being collection made from Public)

*Note : I. Asset will be amortised over the Period of Licence granted by

Govt.
Journal : Amortisation Exp. (P&L) Dr xxxx
To I. Asset xxxx
CA-Final Financial Reporting 24

Q. 62
Kohlapur to Nagpur Toll Road
(In crores)

(i) Cost of Construction a/c Dr (P&L) 100

To Bank 100
(Being Exp. incurred on const.)

(ii) Intangible Asset a/c Dr 200

To Revenue (P&L) 200
(Being I. Asset recognised at fair value)

(iii) Bank a/c Dr ?

To Revenue (P&L) ?
(Being collection made from Public)

(iv) Amortisation Exp. (P&L) Dr ?

To I. Asset ?
(Being I. Asset amortised)

Note : We have Left Last two Entries blank because Relevant Amount
are not available.

Comment on wrong Accounting Treatment in Jabalpur Toll Road :-

The Said Project is Guaranteed by Govt. due to which financial

Asset will require to be recorded but company has recorded an
Intangible Asset of 50 crores which is incorrect as per Ind AS 115. So,
the company should reverse the wrong Entries.

Q. 118 : Homework
CA-Final Financial Reporting 25

*Part 11*

*[Link]
Concept 7 : Accounting Issue in a Const. Contract for Contractors

Issue I : B/S (Extracts) in a Const. Contract in the books of

contractor

Statement showing calculation of Amt. Due from customer or Due to

Customer

Actual cost incurred till date xxxx

(+) Profit/Loss to be Recognised xxxx
Amt. to be Billed xxxx
Amt. Received from customer (xxxx)
Due to/from customer xxxx

Note : The Specified Extract will be Prepared by the contractor at the

end of Each year until the work is completed.

Q. 71 (B/S Extracts)

Accounting for 2015

(i) % of Completion = A. Cost till date x 100

Total Estimated cost

= 2750 x 100
2750 + 7750

= 26.19%

(ii) Contract Revenue = Contract Price x % of Completion

= 12,000 x 26.19%
= 3143
CA-Final Financial Reporting 26

(iii) Contract Profit = Revenue – Cost

= 3143 – 2750
= 393

(iv) Due to/From customer :

Actual cost till date 2,750

(+) Profit to be Recognised 393
Amt. to be Billed 3143
Received from customer (3000)
Due from customer 143

Accounting for 2016

(i) % of Completion = Actual cost till date x 100

T.E. cost
= (2750 + 3000) 5750 x 100 = 42.60%
(5750 + 7750) 13500

Already Recognised
(ii) Contract Revenue = (12000 x 42.60%) – 3143
= 1969

(iii) Contract Loss = Revenue – Exp.

= 1969 - 3000
= (1031)

(iv) Amt. Due to/From customer :-

Actual Loss till date (2750 + 3000) 5,750

(+) Profit or Loss to be Recog. (638)
(393 – 1031)
Profit Loss _____
To be Billed 5112
Received Amt. till date (5000)
Due from customer 112
CA-Final Financial Reporting 27

Accounting for 2017

(i) % of Completion = (2750 + 3000 + 4200) 9950 x 100 = 86.50%

(9950 + 1550) 11500
2015 2016

(ii) Contract Rev. = (12000 x 86.50%) – 3143 – 1969 = 5268

(iii) Contract Profit = 5268 – 4200 = 1068

(iv) Due to/From customer :

Actual cost till date (2750 + 3000 + 4200) 9950

Profit/Loss to be Recognised (393 – 1031 + 1068) 430
To be Billed Amt. 10380
Amt. Received till date (11000)
Due to customer 620

Accounting for 2018

3143 1969 5268

i) Contract Revenue = (12000 x 100%) – 10380 = 1,620

ii) Contract Profit = 1620 – 1150 = 470

iii) Due to/from customer :

Cost incurred till date 11100

(2750 + 3000 + 4200 + 1150)
Profit to be Recognised 900
(393 - 1031 + 1068 + 470) _____
To be Billed Amt. 12000
Receiving till date (12000)
Due to/from customer NIL
CA-Final Financial Reporting 28

*[Link]
Issue II : Application of Cumulative Catch up Adjustment

In case Total Estimated cost and contract Price are revised

without adding any distinct Goods or Services then cumulative catch up
Adjustment will be made on Recognised Revenue with Retrospective
Effect as follows :-

Step I : Calculate Revised % of completion on the basis of Revised

Estimated cost as follows :-

Revised % of Completion = Actual cost till date x 100

Total Revised Estimated cost

Step II : Calculate cumulative catch up on Recognised Revenue

Revised contract x Revised % of - Earlier Already booked Revenue

Price Completion

*Difference will be Recognised or Reversed

i) Revised Revenue > Earlier = Additional Rev.
ii) Revised Revenue < Earlier = Reversal

Q. 73 (CCM)

At the beginning of 2nd year

A. Revised contract Price :

Original Transaction Price 80,00,000
Increase in Price 15,00,000
Expected Bonus due to timely Completion 5,00,000
Revised Price 1,00,00,000
CA-Final Financial Reporting 29

B. Revised contract cost :

Original T.E. cost 60,00,000
Increase in cost 10,00,000
Revised cost 70,00,000

C. Revised % of completion :
% of completion = A. Cost x 100
Revised cost

= 45,00,000 x 100
70,00,000

= 64.29%

D. Revised Revenue = Revise CP c Revised %

= 1,00,00,000 x 64.29%
= 64,29,000

E. Additional Rev. to be Recognised = 6429000 – 60,00,000

= 429000

Q. 77 (CCM)
Assumption : We have assumed that BOD Ltd. was not Expecting Bonus
at inception date, but It is Expecting revenue Bonus in
Revised Terms due to increase in Time Period.

I. As At 31.3.18

A. Calculation of Actual Cost Incurred

% of Completion = A. Cost x 100

T.E. cost
60% = x x 100
14,00,000
CA-Final Financial Reporting 30

x = 840000

B. Contract Revenue (original)

Contract Rev. = Contract Price x %

= 20,00,000 x 60%
= 12,00,000

II. As at June 18
(i) Calculation of Revised contract Price

Original Price 20,00,000

Bonus Estimated due to timely Completion 4,00,000
Increase in Price 3,00,000
27,00,000

(ii) Calculation of Revised Contract Cost

Original Estimated cost 14,00,000

Increase in Estimation 240,000
16,40,000

(iii) Revised % of Completion = 84000 x 100 = 51.22%

1640000

(iv) CCA on Revenue = (27,00,000 x 51.22%) – 12,00,000

= 1382940 – 1200,000
= 182940 (Additional Rev.)
CA-Final Financial Reporting 31

*Part 12*

Issue III : Survey method/Sales method

If any dispute arises between Contractor and customer regarding

% of completion of work then work can be certified by surveyor to
resolve the dispute. The following Steps should be considered under
Survey method :-

Step I : Contract Revenue = Contract Price x % of work certified by

Surveyor

Step II : As per matching concept, we will charge ‘’cost Incurred on

work certified’’ in P&L A/c instead of Actual cost incurred as
follows :-

Cost to be charged in P&L = Total Estimated cost x % of W.C.

by Surveyor

Step III : The Contract should recognise ‘’WIP’’ for difference between
Actual cost incurred during the year & cost charged in P&L.

Work in Progress = Actual cost incurred – Cost charged in P&L

in C.Y. (Step II)
It is also known as
‘’Uncertified cost’’

Q. 76 (Survey method/Sales method)

I. Application of Survey method/Sales method

(i) % of work certified = 1800 x 100 = 56.25%

3200
CA-Final Financial Reporting 32

(ii) Calculation of Profit/Loss in current year

Work certified for C.y. (1,800 – 1,200) 600

Cost to be recognised in C.y. (456)
[(2500 x 56.25%) – 950]

Total Est. cost _____

Contract Profit in C.Y. 144

(iii) Calculation of WIP

Total Actual cost till date 1,500

Certified cost : Ist year 950
IInd year 456 (1406)
WIP/Uncertified cost 94

II. Application of Input method

(i) % of completion = A. cost x 100

T.E. cost
To date
= 1500 x 100
(1500 + 1000)
To date
= 60%

(ii) Calculation of Profit/Loss in C.Y.

Contract Revenue (3200 x 60%) – 1,200 720

Actual cost till date (1500 - 950) (550)
Profit 170

*[Link]
Q. 72 (Survey method)
CA-Final Financial Reporting 33

Accounting for Ist contract

In the Given question, these is an additional cost of ₹1Lac due

to Rectification work during current Financial year. We should not
recognise it as a contract cost because % of completion can not be
applied on it as it has been incurred in full in current year. This cost will
be written off fully in C.y.

(i) Calculation of Profit or Loss from contract

Contract Revenue (36,00,000 x 40%) 14,40,000

Contract cost :
(i) Normal (30,00,000 x 40%) (12,00,000)
(ii) Additional cost (1,00,000)
Profit 1,40,000

(ii) Calculation of WIP

Actual cost to date (Assumed : Normal) 15,00,000

Certified cost (12,00,000)
WIP/Uncertified cost 3,00,000

(iii) Calculation of Amt. due to/from customer

Actual cost till date : Certified 12,00,000

Additional cost 1,00,000
Profit Recognised 140,000
To be Billed 14,40,000
Received Amt. (12,00,000)
Due from customer 240,000

Accounting for Second contract

In the Given case, A machine of ₹8000 has been used in const.
work and It has become obsolete in C. year. It means that we should
write off full cost of machine in current year itself instead of Applying
% of Completion on it.
CA-Final Financial Reporting 34

(i) Calculation of Profit/Loss

Contract Revenue (60,000 x 30%) 18,000

Contract Cost :
i) Normal (48000 – 8000) x 30% (12000)
ii) Machine to be written off (8000)
Loss (2000)

(ii) Calculation of Amt. due to/from customer

Actual cost till date (12000 + 8000) 20000

Loss recognised (2000)
To be Billed Amt. 18000
Received Amt. (21000)
Amt. due to customer 3000

Accounting for 3rd Case

I. Calculation of Profit/Loss

Contract Revenue (24,00,000 x 25%) 6,00,000

Contract Cost (20,00,000 x 25%) (5,00,000)
Profit 1,00,000

II. Calculation of WIP

Actual cost till date 700000

Certified cost (500000)
WIP 200000

III. Calculation of Amt. due to/from customer

Actual Cost certified 5,00,000
Profit 1,00,000
To be Billed 6,00,000
Received (10,00,000)
Due to customer 4,00,000
CA-Final Financial Reporting 35

Q. 74

Yes, Sun Ltd. can recognise a Revenue of 12.5Lacs on Actual cost

of 10Lacs because Sun Ltd. Earns 25% on its cost. The contract Price is
of ₹100Lacs, but Total Estimated cost is of ₹80Lacs which indicates
that company Earns 25% on its cost (100 – 80 = 20/80 x 100 = 25%). So,
Company can book a Profit of ₹2.5 Lacs @ 25% on Actual cost of 10Lac
which is demolished by the customer.

*Part 13*

Q. 120 (Const. Contract) (CCA)

I. Accounting for the Period ending 31.3.22

Contract Revenue (30,00,000 x 65%) 19,50,000

Actual cost till date (16,50,000 x 65%) (10,72,500)
A. cost x 100 = 65% ________
TEC Contract Profit 8,77,500
X x 100 = 65%
16.5L

*We have left Incentive of ₹3.75 Lacs in contract Revenue because

Entity is Estimating that work will not get completed on specified
Time.

II. Accounting for Price Revision on 15.4.2022

(i) Revised Contract Price :

Original Contract Price 30,00,000

Increase in Price 225,000
Incentives due to timely completion 375,000
36,00,000
CA-Final Financial Reporting 36

(ii) Revised Total Estimated cost :

Original Cost Estimation 16,50,000

Increase in Cost 120,000
17,70,000

(iii) Revised % of Completion :

Revised % = A. cost till date x 100

Revised T.E. cost

= 10,72,500 x 100
17,70,000

= 60.60%

(iv) Cumulative catch up Revenue :-

= (36,00,000 x 60.60%) – 19,50,000

= 21,81,600 – 19,50,000

= 231600 Amt.

Q. 121

Calculation of Contract Price for construction of Building

Total Contract Price 40,00,000

Price for Air- Conditioners (12,00,000)
Contract Price for construction 28,00,000

Notes : We will consider output method/Point of sale for Air

conditioners because these Assets shall not be constructed by
Contractor, but these Assets shall be Purchased from 3rd
Party.
CA-Final Financial Reporting 37

Calculation of % of Completion of Const.

% of Completion = A. cost x 100

T.E. cost

= 4,00,000 x 100
20,00,000

= 20%

Calculation of Contract Revenue to be Recognised

i) Contract Rev. from const. (28,00,000 x 20%) 5,60,000

ii) Revenue from A.C 12,00,000
Total Rev. to be Recognised 17,60,000

Q. 101 (Expected value method : Variable consideration)

Calculation of Price Per Unit on Given Range (Expected value method)

A. (5000 – 0) x 70% = 3500

B. (5000 – 500) x 20% = 900
C. (5000 – 1000) x 10% = 400
P.U. Price 4800

Comments : The Entity M Limited should recognised Revenue @ 4800 P.U.

and It should create on Refund Liab. @ 200 P.U. which is
Expected to be Refunded to R for difference in Prices.

Journal : Bank a/c Dr ₹50,00,000 (1000 x 5000)

To Revenue ₹48,00,000 (1000 x 48000)
To Refund Liab. ₹2,00,000 (1000 x 200)
(Being sales made to R)

Option I: or Option II:

CA-Final Financial Reporting 38

Refund Dr Refund Dr
To Bank To Rev.

Q. 98 (Expected value method : Variable consideration)

In the Given case, It is Estimated that customer will Purchase

28,00,000 containers in current calendar year due to which Transaction
Price should be charged @ 90 Per Unit. The customer has Purchased
700,000 Units only in first 3 months due to which J Ltd. will charge 100
P.U., but 10 P.U. will be refunded to customer as Purchase quantity
Exceeds 10,00,000 in Next Qtr. So, the Company should recognise Revenue
of ₹90 P.U. and should create a Liability @ 10 P.U.

Journal

Bank a/c Dr 7,00,00,000 (7,00,000 x 100)

To Revenues 6,30,00,000 (7,00,000 x 90)
To Refund Liab. 70,00,000 (700000 x 10)
(Being Goods Sold to customer)

Q. 99, 97 (Variable consideration : TP) : Discussed in class

Q. 100 : Discussed in class
Q. 109 : Homework
Q. 119 (Expected value : Variable consideration) : Discussed in class

*Part 14*
Q. 117
I. Accounting for Car Locks

As per the Provisions, Card Ltd. should not recognise Revenue from
Expected Returnable Stock. In the Given case, company has 2000 Units
in a Contract out of which 4% can be returned by customer. So, company
Should consider Revenue from 19200 Units only (20000 – 4%). The
Company should also recognise returnable stock of 800 Units. The
following Entries may be recorded :-
CA-Final Financial Reporting 39

Journal Entries

(i) Bank a/c Dr 3,60,00,000 (20,000 x 1800)

To Revenue 3,45,60,000 (19200 x 1800)
To Refund Liab. 14,40,000 (800 x 1800)
(Being Goods sold to customer)

(ii) Cost of Sales a/c (P&L) Dr 2,88,00,000 (19200 x 1500)

Returnable Stock a/c Dr 12,00,000 (800 x 1500)
To finished Stock 3,00,00,000 (20,000 x 1500)
(Being cost charged for sold Goods)

Accounting for Nut Bolts

In the Given case, company should recognise a rebate Liab. @ 10 P.U.

because company has Promised a Price of 190 for Purchase Level
between 50,001 – 1,00,000 Units and company is Expecting Purchase of
90,000 Units in the Given contract. The Company will charge 200 P.U. for
initial Purchases, but will record revenue @ 190 only.

Journal

Bank a/c Dr 48,00,000 (24000 x 200)

To Revenue 45,60,000 (24000 x 190)
To Rebate Liab. 240,000 (24000 x 10)
(Being Goods Sold & Liab. Recognised)

Q. 116 (Bill & Held : Q. 59)

*Imp
Q. 113 (Identification of Different Performance obligation)

(i) Identification of Components in the Given Contract

In the Given case, There are 3 different Components which are as

follows :-
CA-Final Financial Reporting 40

(i) Sale of machine

(ii) Sale of maintenance
(iii) Financing component

Comments : The company offers Sale of machine and sale of maintenance

Service separately in market which clearly indicates that
these are different Performance obligations. In addition,
Sale consideration from machine and maintenance will be
Collected after 1 year due to which finance component will be
a Separate obligation.

II. Allocation of Transaction Price

i) Sale of machine ( cash Price) 251927

ii) Sale of maintenance 120000
(45000 + 75000)
iii) Financing component (Bal. fig) 28073
TP 400000

III. Journal Entries

A. Amortisation Table

Dates OB Interest @ 5% Service Collection CB

1.4.2021 251927 - - - 251927
30.9.2021 251927 12596 45000 - 309523
31.3.2021 309523 15477 - - 325000
1.4.2022 325000 - 75000 (400000) NIL

B. Journal

1.4.21
Anik a/c Dr 251927
To Revenue from machines (P&L) 251927
(Being Goods sold to Anik)
CA-Final Financial Reporting 41

Cost of Sale Dr 160000 (P&L)

To Finished stock 160000
(Being Goods Delivered)

30.9.21
Anik a/c Dr 12591
To Int. Income 12591
(Being Int. made due)

Anik a/c Dr 45000

To Service Income 45000
(Being Service Rev. Recog.)

Cost of Service Dr 30000

To Bank 30000
(Being cost of Service incurred)

31.3.x1
Anik a/c Dr 15477
To Int. Income 15477
(Being Int. made Less)

Int. Income Dr 28073

To PL 28073
(Being Income Recog.)

1.4.22
Anik Dr 75000 P&L
To Service Income 75000
(Being Service Income Recog.)

Cost of Service Dr 50000

To Bank 50000
(Being cost of Service Incurred)
CA-Final Financial Reporting 42

Bank Dr 400000
To Anik 400000
(Being collection made)

(iv) Extracts : SOPL

Revenue : 2021-22 2022-23
Revenue from machine 251927 -
Revenue from Service 45000 75000
Revenue from finance Income 28073 -

*Imp
Q. 112 (Allocation of TP)

In the Given case, company is offering Rewards on spent Amount

in its resorts by the customers and Each Point has a Separate SSP of
5 Per Unit which indicates it is a Separate Performance obligation. So,
the Company should allocate Transaction Price between Revenue from
Resort and Reward Liab. We will create full Liab. for Points because
Company is expecting that redemption of points will be by 100%
customers
I. Allocation of TP

Performance obligation SSP Rating Allocation of TP

Resorts 10,000 20 9524
Reward Points 500 1 476
1000 x 1 Point @ 5
100_________ ___ _____
10500 21 10000

Journal : Bank a/c Dr 10000

To Revenue 9524
*To Reward Liab. 476
(Being Sales and Liab. Recog.)

*It will be considered as Revenue in future if Points remain

undiscounted.
CA-Final Financial Reporting 43

*Imp
Q. 108 (Identification of contract : Step I)

As per the Provision of Ind AS 115, Revenue from contract with

customer can be booked only if there is a reasonable certainty that
Ultimate collection will be complete. In case collection is doubtful at
inception date then Entity should not Recognise Revenue.
In the Given case, collection from P Ltd. is doubtful
because P Ltd. will pay its instalments from Income if It Earns from
Food Processing Unit which is highly competitive and It also does not
have any other source of Income.
So, G Ltd. Should not recognise revenue from P Ltd. until
Certainty of collection arises. The Amount of Deposit (₹100000) and
Collection from Installments (in future : if any) should be transferred
to Liability. The company G Ltd. should Evaluate the said contract
Regularly to establish the certainty of Collection.

Q. 106 (Discount voucher)

In the Given case, there are two Performance obligation as follows :-

i) Sale of Goods
ii) Discount voucher
The Entity should allocate Transaction Price of ₹1000 among the
Specified Performance Obligations in the ratio of SSP. The following
Statement may be Prepared :-

P.O. SSP Ratio of SSP Allocation of TP

Sale of Goods 1,000 1000/1120 893
Discount voucher 120 120/1120 107
(5000 x 80% x 30%) _____
1120 1000

Journal : Bank a/c Dr 1000

To Revenue 893
To Discount 107
(Being Goods Sold to customer)
CA-Final Financial Reporting 44

*[Link]
Q. 107 (Reward Point)

A. Revenue Recognition on Sale of ₹10L

Allocation of TP

P.O. SSP Ratio Allocation of TP

Sale of Goods 10,00,000 100 990100
Reward Points 10,000 1 9900
(10Lacs x10Ptsx0.5)
500 ____ _________
1010000 101 10,00,000

Comments : The Entity will recognise the revenue of 990100 from sale
of Goods, but It will create a Reward Liab. of 9900 which will
be recognised in future when Points shall be redeemed by
Customers.

(ii) Allocation of TP on sale of 50 crores

P.O. TP
Sales 50,00,00,000 100 49,50,49,505
Rewards 50,00,000 1 49,50,495
(50,00,00,000 x 10 x 0.5)
_______500 _________ _________ _____________
50,50,00,000 101 50,00,00,000

Journal : Bank a/c Dr 50,00,00,000

To Revenue 49,50,49,505
To Reward Liab. 49,50,495
(Being Sales made and Reward Liab. booked)

Reward Liab. a/c Dr 4211002

*To Revenues 4211002
(Being Revenue booked on Redeemed Points)
CA-Final Financial Reporting 45

*Calculation of Revenue from Redeemed Points :-

Redeemed Points 82,00,000

Undiscounted 14,40,000
(18,00,000 x 80%) 96,40,000

Revenue from Redeemed Points = 4950495 x 8200000 Redeemed

9640000
Point Redeemable

= 4211002

Retained Liab. = 4950495 – 4211002 = 739493

III. Accounting for reward Liab. 18-19

Revenue to be Recognised = 4950495 x *1080,000

9640000 Points

(*18,00,000 x 60% = 10,80,000)

= 554620

Retained Liab. = 739493 – 554620 = 184873

Reward Liab. Dr 554620

To Revenue 554620
(Being Rev. Recog. on Redeemed Points)

Accounting for Reward in 19-20

Revenue from Redeemed Points = 4950495 x 300000 = 154061

9640000

Retained Liab. = 184873 – 154061 = 30812

CA-Final Financial Reporting 46

1) Reward Liab. Dr 154061

Revenue from To Revenue 154061
operation (Being Revenue booked on Redeemed Points)

2) Reward Liab. Dr 30812

Other Income To Revenue 30812
(Being Points Lapsed)

Q. 104 : Homework

*Part 15*

Q. 78 (Identification of Contract) : Discussed in class

Q. 79, 81, 82 (Identification of Performance obligations) : Discussed in
class
Q. 81
Note book line : If updates are not critical for continued use of
Software then there shall be 2 different PO

Q. 84 : Discussed in class
Q. 85 (Transaction Price : variable consideration)

Calculation of Revenue to be Recognised from membership

(i) Avg. Price for 3 year = (7500 x 100) + (6000 x 50) + (6000 x 25)
membership 175

= 6857 P.a.

(ii) Contract Liab./Rebate Liab. = 7500 – 6857 = 643

(iii) Journal : Bank a/c Dr 7,50,000 (7500 x 100)

To Revenue 685700 (6857 x 100)
To Liab.* 64300 (643 x 100)
(Being Revenue Recognised)
CA-Final Financial Reporting 47

*This Liability will be booked in Revenue as the membership will be

renewed by customer.

Q. 89 : Discussed in class

*Imp
Concept 8 : Warranty concept under Revenue Recog.

Warranty

If warranty is Provided If Expended warranty is

‘’Free’’ with sale of Goods sold by company for some
Consideration
Create Provision for warranty
as per Ind AS 37 on the basis If should be treated as a
of Past Experience separate Performance
obligation and Recognise
Revenue under 115 to the
extent of its share in
Transaction Price.

Q. 87

Journal Entries

1) Bank a/c Dr 36000

To Revenue from computer 32000
To contract Liab. 4000 (Ind AS 115)
(Paid warranty)
(Being Goods & Warranty Sold)

2) Cost of Sales Dr 14400

To Financed Goods 14400
(Being cost of Goods sold recorded)
CA-Final Financial Reporting 48

3) P&L a/c Dr 2000

To Prov. For warranty 2000 (Ind AS 37)
(Being Provision created for Free Warranty)

Q. 88 : Homework

*Part 16*

*Imp
Concept 9 : Revenue from Sale of Intellectual Property Rights
(IPR) (IPR = Agency, franchise, Software etc.)

As per the Provisions of Ind AS 115, Revenue from sale off “IPR’’
is recognised on different rules than Normal Rules which are followed
for Normal Goods/Services. The following method can be considered for
Revenue Recognition from Sale of IPR :-

Revenue

Sale of IPR

Option I: Over the Time of Option II: At a Point of

Contract Sale

*Imp
Rules for option I : Over the Time of Contract
In case, the following conditions are Satisfied then we will
Recognise revenue from Sale of IPR over the time of contract :-

‘’Involvement by Condition I : The Entity has to Undertake Activities

Entity during that Significantly Effect IPR
Contract Period’’ +
Condition II : The Activities Exposes customer
to the effect on IPR
CA-Final Financial Reporting 49

+
Condition III : The Activities are not for any new Performance
Obligation

Rules for option II : At A Point of Sale

We will consider option II if conditions in option I do not meet.

Q. 92 (Sale of (IPR)

In the Given case, the music company is not required to conduct

any Activities that Effect its Licence of Selling Classical music. On the
basis of Given condition, the transfer of Right should be assumed at a
Point of Time. The Entity should recognised the whole revenue of ₹12
Lacs at a Point of time.

Customer Dr 12 L Bank a/c Dr 5000 P.m.

To Rev. 12 L to customer 5000 P.m.

Q. 93, 94, 95 : Discussed in class

Q. 103 (Sale of IPR) : Discussed in class

*Imp
Concept 10 : Principal VS Agent Comparison for Revenue

Revenue Recognition

If Entity is a If Entity is an
‘’Principal Seller’’ ‘’Agent Seller’’

It will recognise It will Recognise

‘’’Gross Revenue’’ Revenue from
‘’Commission’’ only
CA-Final Financial Reporting 50

A Seller Entity can be recognised as a Principal if the following

Condition are Satisfied :-
a) If Entity is bound to deliver its Promised Goods or Services

b) If Entity has inventory Risk (i.e., Returns by customer etc.)

*Imp
c) If Entity can decide its Prices at its own

Q. 86 : Homework

Q. 90, 91 (Variable consideration) : Discussed in class

Concept 11 : Accounting for contract cost

Contract cost

Contract Acquisition cost Contract fulfil cost

A. Contract Acquisition cost

Acquisition cost

To be capitalised in the To be Expensed

cost of contract

It will be Amortised over It will be written off

the Period of contract Immediately

It is incurred after Signing It is incurred before

of contract by the Parties Signing the contract
by the Parties

Example : Commission, Brokerage Example : Travel Exp.,

or Bonus Legal fess, Stamp duty
etc.
CA-Final Financial Reporting 51

B. Contract fulfil cost

Fulfil cost

Amount Incurred to complete the contract

Amt. Incurred Amt. Incurred Amt. Incurred Any other

on Goods on Acquisition of on Acquisition cost
(material + PPE which will be of I. Assets
Labour + OH) used in fulfilling which shall be will be
cost used in Accounted
will be recoded fulfilling cost as per Ind
as per Ind AS 2 will be Accounted AS 115
as per Ind AS 16 will be Accounted
as per Ind AS 38 Amortisation
over the
contract

Q. 60, 61 : Discussed in class

Q. 51
Solution : but Entity will recognise full Revenue from completed
Performance obligations which are due diligence and
valuation of ₹80L & salary.

Q. 111 : Discussed in class

CA-Final Financial Reporting 52

*Part 17*

Ind AS 115 VS As-7 & AS-9

Ind AS 115 AS-7 & AS-9

1) It does not cover Revenue 1) AS-9 covers Interest & dividend
from Int. & Dividend. Income.
2) It deals with Transaction 2) It deals with Gross inflows
Price & its allocation over whether Received or Receivable
Performance obligations
3) It Explains Revenue 3) It Explains different Rules for
Recognition on the basis of different Revenues
Transfer of control in Steps
4) It Explains Service 4) It does not deal with service
concession arrangements concession arrangement

Thank You 😊
Best of Luck…..!!!!!!
CA. Parveen Jindal