Accounting Concepts, Conventions and

Standards – I (Module 2)
• Accounting Concepts: Income Statement Concepts and Balance Sheet
Concepts; Accounting Conventions.
• Accounting Standards: Accounting Standard IND AS 1 – Presentation of
financial statements, IND AS 2-Inventories, INDAS 8- Policies, Changes in
Accounting Estimates and Errors, IND AS -10 Events after the Reporting
Period, IND AS 16- Property, Plant and Equipment, IND AS 18- Revenue
(Revised IndAS 115 – Revenue from Contracts with Customers )
Accounting Concepts (I - GAAP) (AS)
IndAS 1 – Presentation of
financial Statements
 IndAS 1 – Presentation of financial
Statements
Objective
• This Standard prescribes the basis for presentation of general purpose
financial statements to ensure comparability both with the entity’s
financial statements of previous periods and with the financial
statements of other entities.
• It sets out overall requirements for the presentation of financial
statements, guidelines for their structure and minimum requirements for
their content.
Scope
• An entity shall apply this Standard in preparing and presenting
general purpose financial statements in accordance with Indian
Accounting Standards (Ind AS).
• Other Ind AS set out the recognition, measurement and disclosure
requirements for specific transactions and other events.
• Not applicable for Interim financial reporting
Purpose
• Financial statements are a structured representation of the financial
position and financial performance of an entity.
• The objective of financial statements is to provide information about
the financial position, financial performance and cash flows of an
entity that is useful to a wide range of users in making economic
decisions.
• Financial statements also show the results of the management’s
stewardship of the resources entrusted to it.
A complete set of financial statements
comprises:
• Balance sheet
• Statement of Profit and Loss
• Statement of Changes in Equity
• Cash flow Statement
• Notes to balance sheet
General Features
• Presentation of True and Fair view and compliance with IndAS
• Going concern
• Accrual Basis of Accounting
• Materiality and Aggregation
• Offsetting
• Frequency of reporting
• Comparative information
• Consistency of presentation
Elements of Financial Statements

Assets Liabilities Equity

Expenses Revenue
Meaning
• Asset – Entity has Control over it, future economic benefits, from a
past event, reliable value
• Liabilities – Present obligation, from a past event, result in outflow of
economic resources, reliable value
• Income – increases equity , decrease liability
• Expense – decreases equity , increase in liability
• Equity – Residual ( A – L)
Four Pillars of Accounting

P
R M
R D
E E
E I
C A
S S
O S
E C
G U
N L
N R
T O
I E
A S
T M
T U
I E
I R
O N
O E
N T
N
Examples for presentation
• True and Fair presentation
• Rent payable – presented where in SOFP ?
– Current liability
• Redeemable pref. shares
– Non current liability
• Loan given to employee – 5 years repayable, it is the last year ?
– Current asset
Recognition

Future Economic Reliable

Benefits Measurement
Measurement
Examples for cost measurement
• Asset A purchased for Rs.1,00,000 – Historical cost
• Replacing Asset A – purchase asset from market – Market value of
Asset b (Similar) (Replacement cost)
• Realisable value (Inventory) – if you want to sell the asset, for what
value it can be disposed
• Present value – (Intangible asset) – when you cannot find a value of
asset – discounted future cash flow from that asset
Presentation
• All appropriate information and disclosures regarding the company's
financial statement should be included in the statement, and all the
information presented in the statement is presented in a fair and
clear manner that facilitates ease of understanding the information
contained in the statement.
Disclosure
• A disclosure is additional information attached to an entity's financial
statements, usually as explanation for activities which have
significantly influenced the entity's financial results.
• It is the act of releasing all relevant information on a company that
may influence an investment decision.
IndAS 2 – Inventories
IndAS 2 – Inventories - Definition
Inventories—they are assets which are:
• held for resale in the ordinary course of business (e.g. merchandise
purchased by retailer);
• in the process of production for resale (e.g. finished goods, work in
progress, raw materials); or
• in the form of materials or supplies to be consumed in the
production process or rendering of services.
Cost of Inventories
The cost of inventories will consist of all costs of:
• Purchase cost
• Costs of conversion
• Other costs incurred in bringing the inventories to their present
location and condition
Purchase Cost
The standard lists the following as comprising the costs of purchase of
inventories:
• Purchase price plus
• Import duties and other taxes plus
• Transport, handling and any other cost directly attributable to the acquisition
of finished goods, services and materials less
• Trade discounts, rebates and other similar amounts
Costs of conversion
• Costs of conversion of inventories consist of two main parts.
(a) Costs directly related to the units of production, e.g. direct materials, direct
labour – Actual Cost
(b) Fixed and variable production overheads that are incurred in converting
materials into finished goods, allocated on a systematic basis.
• Fixed production overheads are those indirect costs of production
that remain relatively constant regardless of the volume of
production, eg the cost of factory management and administration.
• Variable production overheads are those indirect costs of production
that vary directly, or nearly directly, with the volume of production, eg
indirect materials and labour. (IndAS 2)
Conversion cost
• Direct materials + Direct labour + manufacturing Overheads
= Cloth + tailoring charges + (Electricity bill + factory rent)

• Manufacturing OH = Fixed OH + Variable OH

 Example : Conversion Cost
• The following costs relate to a unit of inventory:
Cost of raw materials Rs.1.00
Direct labour Rs.0.50
During the year Rs.60,000 of fixed production overheads were incurred. 8,000 units were produced
during the year, which is lower than the normal level of 10,000 units. This was as a result of a fault
with some machinery which resulted in 2,000 units having to be scrapped. At the year-end, 700 units
are in closing inventory. What is the cost of closing inventory?
Production overheads should be allocated based on the normal level of production, i.e. 10,000 units.
MOH per unit = OH / Normal capacity ( cost / units)
Rs.60,000/10,000 units = Rs.6.00 per unit.
• Cost per unit:
• Raw materials 1.00
• Direct labour 0.50
• Production overheads 6.00
• ––– >Total cost per unit 7.50
 NRV
• Net Realisable Value is the estimated selling price in the ordinary
course of business less the estimated costs of completion and the
estimated costs necessary to make the sale.
• NRV refers to the net amount that an entity expects to realize from
the sale of inventory in the ordinary course of business.
• NRV = Estimated Selling – Estimated Cost of disposal
Net Realizable Value (NRV)
• As a general rule, assets should not be carried at amounts greater
than those expected to be realized from their sale or use.
• In the case of inventories, this amount could fall below cost when
items are damaged or become obsolete, or where the costs to
completion have increased in order to make the sale.
Estimated Selling Price – XXX
Less : Estimated Cost of Completion – XXX
Less : Estimated Costs necessary to make the sale XXX
Net Realisable Value XXX
Measurement of inventories

Inventory

At the lower of

Net Realisable
Cost Value
Example: For NRV
• The following information relates to product J.
Cost 9.00
Expected selling price 12.50
Marketing & delivery cost 1.40
Replacement cost 9.50
• The net realizable value (NRV) of product J is ___________.
• Net Realisable Value= Expected selling price - Selling expenses
= Rs. 12.50 - 1.40
= Rs. 11.10
Example: For NRV
• Manufacturer – textile
• Cost of manufacturing a shirt – Rs.700
• Selling price in market – Rs.800 - realisable value
• For an added logo– tailor (to make the sale) - Rs.10
• Net realisable value = Realisable value – Cost of disposal
• =800 – 10 =NRV – Rs.790
• Value of closing stock = 700 or 790 = whichever is less – Rs.700
 Practical questions - Inventory
Computation of value of inventory:
Closing stock computed at the year end Rs.1,56,800, which included damaged
goods worth Rs.12,500. After incurring Rs.1300, we estimate that we will be able to
sell it for 9800, in the future. What is the value of closing stock to be recognised in
the balance sheet?

• Overall closing stock (normal/not damaged) = 156800 – 12500 = Rs.144300

• Cost of damaged goods = Rs.12,500
• NRV of damaged goods = 9800 – 1300 (Cost of disposal)= 8500
• Value of closing stock (damaged) – cost or NRV [Link] = Rs.8,500
• Total value of closing stock = 144300 + 8500 =Rs.1,52,800 – B/S
• 75% stock sold -> closing stock 25%
• 0.25*20 lakhs = 5lakhs
• NRV = 5.5 lakhs – 10% commission on 5.5 lakhs = 4,95,000
• Cost = 5 lakhs
• Ind AS 2 Stock valuation = 4.95 lakhs
 Techniques for the measurement of cost
• Standard cost method: take into account normal levels of materials and
supplies, labour, efficiency and capacity utilisation. They are regularly
reviewed and, if necessary, revised. DL + DM + other DC
• Specific Identification: The inventories that are not ordinarily
interchangeable and goods/services produced and segregated for specific
projects shall be assigned by using specific identification of their individual
costs.
• Retail method: Cost = Sale price of inventory - gross margin %. Used for
measuring inventories of large numbers of rapidly changing items with
similar margins for which it is impracticable to use other costing methods.
• Other inventories – FIFO or weighted average cost
Standard cost method
• The cost of Inventories are measured on the basis of pre-determined
standards
• Takes into account normal levels of consumption of materials and
supplies, labour, efficiency and capacity utilisation
• Standards are regularly reviewed and revised
• May be used for convenience if the results approximates the actual
cost
• Standard cost = Direct materials + Direct labour + Manufacturing
Overheads
Computation of Cost per unit: Standard
cost
• Direct materials (FIFO / AVCO)
• Direct labour
• Manufacturing OH
• Total = Cost per unit
• Manufacturing OH: ( if the actual production is less than normal and equal
to normal) = FOH / Normal capacity
• Manufacturing OH: (If the actual production is more than normal
capacity) = FOH / Actual capacity
=FOH / Normal or actual capacity (whichever is higher)
 Over absorption and under absorption of
OH
• Factory rent = Rs.1,00,000 p.m.
• Normal capacity – 10,000 units p.m.
• FOH absorbed = 100000 / 10000 = Rs.10 per unit
• If actual production is 10000 u, allocated OH is Rs.10 /unit
• IF actual production is 12000 u, what will be FOH per unit?
If actual production is more than the normal, FOH/actual capacity= 1,00,000 /
12000 units = Rs.8.33 per unit allocated cost – OVER ABSORPTION (20,000)
More we produce , less the cost per unit
• If actual production is 8000 units, what will be FOH per unit?
In this case, absorbed FOH will be 8000 units x 10/u = Rs.80,000, balance
Rs.20000 will be Charged to SOPL(Dr) – UNDER ABSORPTION
 Retail Method
• Applicable to :
• Retail Trade
• Inventory of large numbers of rapidly changing items
• Similar profit margins for various items
• Impracticable to use other costing methods
• Used for convenience, if approximates costs
• Cost of Inventory = Sales value of Inventory – Appropriate Gross Margin
percentages
 QUESTION
• Mars Fashions is a new luxury retail company. Advise the accountant of the company on the
necessary accounting treatment for the following items:
(a) One of Company’s product lines is beauty products, particularly cosmetics such as lipsticks,
moisturizers and compact make-up kits. The company sells hundreds of different brands of
these products. Each product is quite similar, is purchased at similar prices and has a short
lifecycle before a new similar product is introduced. The point of sale and inventory system is
not yet fully functioning in this department. The sales manager of the cosmetic department is
unsure of the cost of each product but is confident of the selling price and has reliably informed
you that the Company, on average, make a gross margin of 65% on each line.
(b) Mars Fashions also sells handbags. The Company manufactures their own handbags as they
wish to be assured of the quality and craftsmanship which goes into each handbag. The
handbags are manufactured in India in the head office factory which has made handbags for the
last fifty years. Normally, Mars manufactures 100,000 handbags a year in their handbag division
which uses 15% of the space and overheads of the head office factory. The division employs ten
people and is seen as being an efficient division within the overall company.
In accordance with Ind AS 2, explain how the items referred to in a) and b) should be measured.
• Solution –
• (a) The retail method can be used for measuring inventories of the
beauty products. The cost of the inventory is determined by taking
the selling price of the cosmetics and reducing it by the gross
margin of 65% to arrive at the cost.
• (b) The handbags can be measured using standard cost especially
if the results approximate cost. Given that the company has the
information reliably on hand in relation to direct materials, direct
labour, direct expenses and overheads, it would be the best
method to use to arrive at the cost of inventories.
Specific Identification Method
• When each unit of inventory is individually tracked.
• This method is used for low quantity, high value items, such as
jewellery, serialised electronic merchandise where inventory records
are kept by serial numbers
FIFO method
• It is a method of pricing and the issues of materials, in order in which
they are purchased
• The earliest prices at which materials were received are exhausted
first before subsequent prices are taken up
• Merits : simple to understand, easy to operate, better results during
deflation , represents closely at current prices/costs.
FIRST In FIRST Out Method
• Manufacturer of Tomato Ketch-up Purchase Ledger:
• Day 1 – 100 Kgs of Tomato – Rs.10 per kg
• Day 5 – 100 Kgs -Rs.12 per kg
• Day 10 – 100 kgs – Rs.15 per kg
• Day 15 – Remaining Kgs of tomato in warehouse = 120 Kgs of Tomato,
What is the value of inventory?
• 20 kgs from Day 5 + 100 kgs from Day 10
• = (20 x 12) + ( 100 x 15) = 240 + 1500 = 1740 – value of inventory
• Under FIFO, the closing stock will be from the latest purchased batch
Example – FIFO – First In First Out
• Manufacturer of Tropicana Juice – Mango
• 1/1 – 250 kgs of mango @ Rs.40 per kg
• 3/1 - 300 kgs – Rs.43 per kg
• 5/1 – 400 kgs – Rs.35 per kg
• 7/1 – closing stock – 450 kgs ,Compute closing stock and profit.
• Sales 500 Kgs @ Rs.48 per kg
• Out of 450 Kgs, 400 kgs are from last batch, 50 Kgs from the previous one
• Closing stock value=(400 x 35) + (50x 43) = 14000+2150=Rs.16150
• Gross Profit = Sales – Cost of sales = 24000 – 20750 = Rs.3250
• Cost of sales = Opening stock + Net Purchases + Direct exp – Closing stock
• = NIL + ( 250x40 ) + ( 300x43) + (400x35) – 16150 = Rs.20750
Compute a profit
• Gross profit = Sales – Cost of sales
• Cost of sales = Opening stock + Purchases – closing stock
• Closing stock (FIFO / AVCO)

• Net profit = Gross profit – Indirect expenses

Weighted average price method
• Gives due weightage to quantities purchased and their purchase price , to determine
the issue price
• Weighted average price = Total Cost of Materials purchased / Total Quantity purchased
• Merits : smoothens price fluctuations.
• Day 1 – 100 Kgs of Flour – Rs.10 per kg
• Day 5 – 100 Kgs -Rs.12 per kg
• Day 10 – 100 kgs – Rs.15 per kg, calculate valuation of closing stock (120 kgs).
• Average price = (100 x 10) + (100 x 12 ) +( 100 x 15 ) / 100 + 100 + 100
• = 3700 / 300 = 12.33 per kg
• Value of Closing stock = 120 Kg x 12.33 = Rs. 1480 approx
Weighted Average cost method
• Manufacturer of Tropicana Juice – Mango
• 1/1 – 250 kgs of mango @ Rs.40 per kg
• 3/1 - 300 kgs – Rs.43 per kg
• 5/1 – 400 kgs – Rs.35 per kg
• 7/1 – closing stock – 450 kgs
• Sales 500 Kgs @ Rs.48 per kg
• Average cost = Total cost / Total number of units
• = (250x40) + (300x43) + (400x35) / (250 + 300 + 400)
• = 36900/950= Rs.38.84 per Kg
• Closing stock will be 450 Kgs x 38.84 = Rs.17478
• Cost of sales = NIL + ( 250x40 ) + ( 300x43) + (400x35) – 17478 = Rs.19422
• Profit = 24000 – 19422 = Rs.4578
 Costs to be excluded
• The standard lists down types of cost which would not be included in cost of
inventories. Instead, they should be recognized as an expense in the period
they are incurred.
(a) Abnormal amounts of wasted materials, labour or other production costs
(b) Storage costs (except costs which are necessary in the production process
before a further production stage)
(c) Administrative overheads not incurred to bring inventories to their present
location and conditions
(d) Selling costs
 Inventory - Recognition as an expense
The following treatment is required when inventories are sold.
(a) The carrying amount is recognized as an expense in the period in which the related
revenue is recognized
(b) The amount of any write-down of inventories to NRV and all losses of inventories are
recognised as an expense in the period the write-down or loss occurs
(c) The amount of any reversal of any write-down of inventories, arising from an increase in
NRV, is recognised as a reduction in the amount of inventories recognised as an expense in
the period in which the reversal occurs
(Theory concept only for exam)
 Disclosure
1. Accounting policies: Entities should disclose the accounting policies adopted for
the measurement of inventory, including the method of inventory valuation used
(FIFO, LIFO, WAC), the cost formula used, and any change in the accounting policies.
2. Carrying amount: The carrying amount of inventory should be disclosed, classified
into appropriate categories such as raw materials, work-in-progress, finished goods,
and goods held for resale.
3. Write-down of inventories: The amount of any write-down of inventory that is
recognized as an expense in the income statement should be disclosed (inventories
to be w/off )
4. Reversal of write-down of inventories: The amount of any reversal of a write-
down of inventory should be disclosed.
5. Carrying amount of inventories pledged as security: The carrying amount of
inventory that is pledged as security for liabilities should be disclosed.
IndAS 8 – Accounting Policies,
Changes in Accounting
Estimates and Errors
IndAS 8 – Accounting Policies, Changes in
Accounting Estimates and Errors

• The Standard is intended to enhance the relevance and reliability of

an entity’s financial statements, and the comparability of those
financial statements over time and with the financial statements of
other entities.
Objectives
• How to select and apply accounting policies;
• How to account for the changes in accounting policies;
• How to account for changes in accounting estimates; and
• How to correct errors made in the previous reporting periods.
Accounting Policies
• Accounting policies are the specific principles, bases, conventions,
rules and practices applied by an entity in preparing and presenting
financial statements.
• This Standard requires that when an Ind AS specifically applies to a
transaction, other event or condition, the accounting policy or
policies applied to that item shall be determined by applying the Ind
AS.
Change in Accounting Policy
The accounting policy should be such as results in information that is:
• relevant to the economic decision-making needs of users;
• and reliable, in that the financial statements: represent faithfully the
financial position, financial performance and cash flows of the
entity;
• reflect the economic substance of transactions, other events and
conditions, and not merely the legal form;
• are neutral, i.e., free from bias;
• are prudent; and are complete in all material respects.
How To Select Accounting Policy?
• If there is some standard or interpretation, then you simply apply it
• When there is NO specific standard or interpretation dealing with your
transaction or item, then management needs to use judgement and
develop its own policy, but careful, the policy needs to provide as
reliable and relevant information as possible.
• you need to apply concepts from the Conceptual Framework for
Financial Reporting.
• you must apply every accounting policy consistently, to all
transactions within the same category or of the same type.
 When can Entity Change the Accounting
Policy?
• Only at 2 circumstances:

1. When it is required by another IndAS. This will be the case when new
IndAS is issued and you HAVE TO apply it mandatorily.
2. When new accounting policy provides better, more reliable and relevant
information. In this case, you apply new accounting policy voluntarily.
 Change in Policy - Retrospectively
• A change in accounting policy resulting from the initial application of an Ind
AS shall be applied as per the specific transitional provisions in that Ind AS. If
that Ind AS does not contain any transitional provisions, the change shall be
applied retrospectively.
• A voluntary change in accounting policy shall be applied retrospectively.
• “Retrospectively” means going back to the previous reporting periods and
restating every single component as if the new policy had always been in
place.
• Entity need to restate comparatives, too
Example: Change in Accounting Policy
• Valuation of Non-Current Asset
• From Cost Model to Revaluation Model
• 2020-21 – if the company is following cost model, but in 2021-22 they
apply revaluation model, in comparative statement, you apply the
change retrospectively (from the year entity purchased the asset)
Accounting Estimates
• A change in accounting estimate is an adjustment of the carrying
amount of an asset or a liability, or the amount of the periodic
consumption of an asset, that results from the assessment of the
present status of, and expected future benefits and obligations
associated with, assets and liabilities.
• Changes in accounting estimates result from new information or new
developments and, accordingly, are not corrections of errors.
• Example: Useful life of asset, Scrap value, Provisions
 How Can You Account For Change In Accounting
Estimate?
• Unlike accounting for change in accounting policy, we need to change our
accounting estimates prospectively, either:
• In the current reporting period, in form of so-called “catch-up adjustment”;
• In both the current and future reporting periods, if the change affects both
(for example, change in useful lives affects depreciation charges in both the
current and the future reporting periods).
• “Prospectively” means that you do NOT restate comparatives and equity. You
do NOT touch financial statements in the previous reporting periods; you
simply adjust calculations in the current and future reporting periods.
 Example
• Year 1 – Asset purchased – Rs.1,00,000, useful life estimated 5 years
Depreciation p.a. = Cost – scrap/useful life = 100000/5 = Rs.20,000 p.a.
• At the start of Year 3, useful life is re-estimated to total of 4 years
By this time, asset is at book value of Rs. 60,000
Year 3 depreciation = Book Value/Remaining useful life
=60,000/2 = Rs. 30,000 p.a.
After 4 years, total depreciation = 20,000 (for first two years) + 30,000 (for Y3
and Y4) = 40,000 + 60,000 = 1,00,000
Differences
 Example
• Year 1 – Asset purchased – Rs.1,00,000, useful life estimated 8 years
Depreciation p.a. = Cost – scrap/useful life = 100000/8 = Rs.12,500 p.a.
• At the start of Year 5, useful life is re-estimated to remaining 2 years
By this time, asset is at book value of Rs. 50,000
Year 5 depreciation = Book Value/Remaining useful life
=50,000/2 = Rs. 25,000 p.a.
After 5 years, total depreciation = 12,500 (for first four years) + 25,000 (for Y5
and Y6) = 50,000 + 50,000 = 1,00,000
 Prior Period Errors
• Prior period errors are omissions from, and misstatements in, the entity’s
financial statements for one or more prior periods arising from a failure to
use, or misuse of, reliable information that:
(a) was available when financial statements for those periods were approved
for issue; and
(b) could reasonably be expected to have been obtained and taken into
account in the preparation and presentation of those financial statements.
 Is the error material?
• The concept of materiality is explained in IAS 1 Presentation of Financial
Statements, but to simplify: anything that can affect the decisions of
users of financial statements is material. In other words – anything
significant.
• Do not forget that something can be material not only because of its
size, but also due to its nature: for example, bonuses paid to your
management are always significant, whether they amounted to a few
dollars or to millions.
Rectifying Errors
[Link] the error is NOT material, then you can correct it in the current
reporting period. Remember, if the error is NOT material, then your
financial statements still might be reliable and relevant.

[Link] the error is MATERIAL, then you always correct it retrospectively,

by going back and restating your figures in the previous periods.
• Let's say a company, ABC Ltd., prepared its financial statements for the year 2022. However, during the year
2023, it was identified that there was an error in the recognition of revenue related to a particular contract.
The revenue from the contract was initially recognized in 2022 based on an incorrect interpretation of the
contract terms, resulting in an overstatement of revenue by ₹1,00,000.
• Now, in accordance with IndAS 8, ABC Ltd. needs to rectify this prior period error in its financial statements
for the year 2023. Here's how it would be treated:
1. Restatement of Opening Retained Earnings: The prior period error of ₹1,00,000 will be adjusted against
the opening retained earnings of 2023. This adjustment reduces the opening retained earnings by the amount
of the error.
2. Correction of the Income Statement:
• The revenue for the year 2022 will be restated to reflect the correction of the error.
• The revenue will be reduced by ₹1,00,000, resulting in a decrease in the reported revenue for 2022.
3. Disclosure:
• ABC Ltd. will need to disclose the nature and amount of the prior period error in the notes to the
financial statements for the year 2023.
• The disclosure should provide an explanation of the error, its impact on the financial statements, and the
corrective measures taken.
• By rectifying the prior period error, ABC Ltd. ensures that its financial
statements for the year 2023 present the corrected and accurate information.
• This promotes the reliability and comparability of financial statements
over different periods and enhances the transparency of the company's
financial reporting.
IndAS 10 – Events after the
reporting period
IndAS 10 – Adjusting and Non Adjusting
Events
• IndAS 10 Events After the Reporting Period defines events after the
reporting period as 'those events, favourable and unfavourable, that
occur between the end of the reporting period and the date when the
financial statements are authorized for issue’.
Adjusting Events
• These events provide additional evidence of conditions existing at
the reporting date.
• For example, any receivables at the reporting date which are
subsequently regarded as possibly not being collectable may help to
quantify the allowance for receivables required as at the reporting
date.
• If a material adjusting event is identified, the financial statements
must be amended to reflect the relevant condition.
 Examples
• The settlement after the reporting period of a court case that confirms that the entity had a
present obligation at the end of the reporting period
• The receipt of information after the reporting date that indicates that an asset was
impaired at the reporting date.
• Amounts received or receivable in respect of insurance claims which were being negotiated
at the reporting date
• The bankruptcy of a customer after the reporting date that confirms that a year-end debt is
irrecoverable.
• the sale of inventories after the reporting period may give evidence about their net
realizable value at the end of the reporting period
• The determination after the reporting date of the cost of assets purchased, or proceeds
from assets sold, before the reporting date.
• The discovery of fraud or errors showing that the financial statements are incorrect.
• [Link]
 Non Adjusting Events
• These are events arising after the reporting date but which do not
concern conditions existing at the reporting date. Such events will not,
therefore, have any effect on items in the statement of profit or loss or
statement of financial position.
• However, in order to prevent the financial statements from presenting a
misleading position, some form of additional disclosure is required if the
events are material, by way of a note to the financial statements giving
details of the event.
Examples
• Decline in fair value of investments
• Announcing a plan to discontinue an operation.
• Major purchases of assets.
• The destruction of assets after the reporting date by fire or flood.
• Entering into significant commitments or contingent liabilities (e.g.
issuing guarantees).
• Commencing a court case/litigation arising out of events that took
place after the reporting date
Overview
IndAS 16 – Property, Plant,
Equipment
 IndAS 16 – Property, Plant, Equipment
• All Tangible Items that are held for the purpose of:
• Production or Supply of goods and services; or
• for rental to others; or
• for other administrative purposes; and
• Expected to be used during more than one period.
• Items such as spare parts, Stand-by & Servicing equipment are treated as
PPE, if they meet the definition above, or treated as Inventory
Bearer Plants is living plant that:
- is used in the production or supply of Agricultural Produce
- is expected to bear produce for more than one period and
- has a remote likelihood of being sold as Agricultural Produce, except for
incidental scrap sales
 Not Bearer Plants
• Plants cultivated to be harvested as Agricultural Produce
(Lumber)
• Plants cultivated to produce Agricultural Produce when there
is more than a remote likelihood that the Entity will also
harvest and sell the plant as Agricultural Produce, other than
as incidental scrap sales (Trees cultivated for fruit and lumber)
• Annual Crops (Maize , Wheat)
Definitions
Carrying Amount
• Amount at which an Asset is recognized after deducting any
Accumulated Depreciation and Accumulated Impairment Losses
Cost
• Amount of cash or cash equivalents paid
• or the fair value of the other consideration given to acquire an asset
at the time of its acquisition or construction
• Or Amount attributed to that Asset when initially recognized as per
other IndAS e.g Ind AS 102
 Definitions
• For example, if a company purchases a piece of machinery for a cash
payment of $50,000, the cost of the machinery would be recognized at
$50,000 in the financial statements.
• Similarly, if the company issues equity instruments as consideration for
acquiring an asset, the fair value of the equity instruments would be
used to determine the cost of the asset.
• If a company issues equity instruments (share-based payments) to
acquire or construct property, plant, and equipment, the cost of the
assets would be determined following the principles of IND AS 16, and
the impact of the share-based payment (cost) would be accounted for
in accordance with the requirements of IND AS 102.
 Definitions
Depreciable Amount (cost – scrap value)
• Depreciable amount is the cost of an asset, or other amount substituted for
cost, less its residual value.
Depreciation
• Systematic allocation of the depreciable amount of an asset over its useful
life.
Residual value
• Estimated amount that an entity would currently obtain from disposal of the
asset, after deducting the estimated costs of disposal.
 Recognition Criteria
• The cost of an item of PPE shall be recognized as asset, if and only
if –
◦ it is probable that future economic benefits associated with the item will
flow to the entity; and
◦ cost of the item can be measured reliably
• An Entity may decide to expense an item which could otherwise
have been included in PPE because the amount is not material
Recognition
• An Entity evaluates under this recognition principle all
its Costs on PPE at the time they are incurred.
• These costs include:
1. Initial Costs
2. Subsequent Costs
 Computation of Cost
• Purchase Price Add Import Duties and Non-refundable Purchase Taxes Less
Trade Discounts and Rebates

• Costs directly attributable to bringing the Assets to the location and condition
for operation

• Initial Estimate of Decommissioning, Restoration and Dismantling and

removing the item and restoring
 Discount on sales
• Trade discount – on list price, at point of sales/purchase, to encourage purchases,
1000 -100 = 900 paid, bill is also for 900
Cash a/c Dr 900
To Sales a/c 900
• Cash discount – on the sales price, at the point of settlement in future date,
manufacturer to retailers, encourage for early settlement
Receivable a/c Dr 1000
To Sales a/c 1000
Cash a/c Dr 900
Discount allowed a/c 100
To Receivable a/c 1000
Directly Attributable Costs
• Costs of Site preparation
• Initial Delivery and Handling Costs
• Installation and Assembly cost
• Costs of Testing (–) Net proceeds from sale of sample
• Professional fees
Not included in Costs
• Costs of opening a New Facility or Business (Inauguration Costs)
• Costs of Introducing a New Product or Service
• Costs of conducting business in a new location or with a new class of
customer (including costs of staff training)
• Costs of conducting business in a new location
• Administration and General Overhead Costs

• Once the asset is ready to use, capitalisation of expenses stops –

treated as expenditure - SOPL
 Future dismantling cost
• Cost incurred by an entity in respect of obligation for dismantling, removing
and restoring the site on which an item of property, plant and equipment is
located are recognised and measured in accordance with Ind AS 37, Provisions,
Contingent Liabilities and Contingent Assets.
• Provision to be created at present value of future expenses – balance sheet
• Example : Provision for dismantling : (Cost-Rs.5,00,000;10%; 5 years) =
Rs.500000 X 0.621 = Rs.3,10,500 [p.v = ( 1 / 1+r) n]
 Compute the cost
• List price – Rs.25,00,000
• Trade discount – Rs.2,00,000
• Transportation charges – Rs.50,000
• Installation charges – Rs.1,00,000
• Engineer’s fees for installation – Rs.70,000
• Training for employees to use the machine – Rs.50,000
• Ribbon cutting ceremony – Rs.5000
• After 5 years, dismantling cost Rs.5,00,000 ( PV factor = 0.621)
• Cost of machinery in B/S = (25,00,000 – 2,00,000) + 50000+100000+70000 +
310500 = Rs.28,30,500
• Asset a/c 3,10,500
To Prov for future dismantling cost (Year 0) 3,10,500
• P&L (Interest A/c)
To Prov for future dismantling cost (Year 1-5)
• Future Dismantling Expense – computation
• Year 1 – 310500 x 10% = 31050
• 310500 + 31050 = 341550
• Year 2 – 341550 x 10% = 34155
• 341550+34155 =
• Year 3 - 375705x10% = 37570
• 375705+37570 = 413275
• Year 4 - 413275 x 10% = 41327
• Year 5 = 454602 x 10% =45460

• End of 5th year = 454602 + 45460 = 500062 (total provision)

 Subsequent Cost
Repair and maintenance
• These costs are recognised in profit or loss as incurred. Costs of day-to-day
servicing are primarily the costs of labour and consumables and may include
the cost of small parts.
Replacement parts
• Recognizes the cost of replacing item and derecognize the cost of replaced item
Major inspections or overhauls
• When each major inspection is performed, its cost is recognised in the carrying
amount of the item of PPE as a replacement if the recognition criteria are
satisfied.
• Any remaining carrying amount of the cost of the previous inspection is
derecognised.
Subsequent cost - examples
• Asset – Truck 5 lakhs
• Regular monthly expenses – Rs.5000 p.m. – Indirect exp – SOPL
• Annual maintenance charges – Rs.50,000 – SOPL
• Replacement of Tyres after 2 years
=Cost of the truck – value of old tyres + replacement cost of new tyres
= 5,00,000 – 20,000 + 80,000 = 560000
• Metro railways – once in 5 years , major inspection cost – 50,00,000
• Added to the carrying amount of the metro connection
• 10 cr + 50 L
Initial Measurement
• At recognition: An item of PPE that qualifies for recognition
as an Asset should be measured at its cost
• After Recognition: Entity should choose any of the following
Models as its accounting Policy and should apply – Cost
Model or Revaluation Model
Subsequent recognition
Cost Model
• Carrying amount = Cost – Accumulated Depreciation – Accumulated
Impairment Loss

• Depreciate Cost over Useful Life

Depreciation a/c Dr - SOPL
To Accumulated Depreciation a/c - Non Current liability - reserve
Example – Carrying amount
• Axe Ltd. purchased a building worth Rs. 200,000 on January 1, 2008.
The building has a useful life of 20 years and the company
uses straight line depreciation.
• Yearly depreciation is hence Rs.200,000 – Scrap /20 years = Rs.10,000.
• Accumulated depreciation as at December 31, 2010 is Rs.10,000*3 or
Rs.30,000
• The carrying amount is Rs.200,000 - Rs.30,000 which equals
Rs.170,000.
 Revaluation Model
• Carry the asset at a revalued amount, being its fair value at the date of the
revaluation less any subsequent accumulated depreciation and subsequent
accumulated impairment losses.
• Revaluation model is available only if the fair value of the item can be
measured reliably.
• The market value of land and buildings -valuations are usually carried out by
professionally qualified valuers.
• Plant and equipment - market value /depreciated replacement cost should be
used
• The whole class of assets to which it belongs should be revalued. All the items
within a class should be revalued at the same time
• Frequency – Every 3 to 5 years
Example
• Book value of Building – 50,00,000
• Market value – 70,00,000
• Increase the value of building to 70,00,000

Building a/c Dr 20,00,000 - BS

To revaluation surplus a/c 20,00,000 – OCI
 Accounting Treatment
• Initial valuation : Increase in value
Debit : Asset a/c
Credit : Revaluation Reserve a/c
• Decrease in value :
Debit : P & L a/c ( Loss)
Credit : Asset a/c
Ex: Building was revalued on 31/12 to Rs.25,00,000. Carrying amount:Rs.20,00,000,
Cost Rs.22,00,000
Building a/c Dr 5,00,000
To revaluation surplus a/c 5,00,000
• If there is any accumulated depreciation,
Accumulated depreciation a/c Dr
To Revaluation surplus a/c

• Cost = Rs.10,00,000, Accumulated depreciation = Rs.3,00,000, Revalued to

Rs.8,00,000

• Accumulated depreciation a/c Dr 3,00,000

To Asset a/c 2,00,000(10 L – 8L) (cost and revalued a/c)
To Revaluation surplus a/c 1,00,000 (8L – 7L)(carrying amount
and revalued amount)
• Cost Rs.15,00,000, Accumulated depreciation a/c Dr – Rs.6,00,000, Asset
revalued to Rs.12,00,000
• Carrying amount =15,00,000 – 6,00,000 = 9,00,000 worth of asset revalued
to 12,00,000 – Rev sur = 300000
• Cost of asset 15,00,000 revalued to 1200000 = 300000

• Accumulated depreciation a/c 6,00,000

To Asset a/c 3,00,000
To Revaluation surplus a/c 3,00,000
 Depreciation
• Is a systematic allocation of depreciable amount of an asset over useful life
• Applied on component basis – Each part of an item of PPE with a cost that
is significant in relation with the total cost of the item should be
depreciated separately: Insignificant parts are depreciated together
• Residual value and useful life of an asset shall be reviewed at least at
each financial year end
• Depreciation of an asset begins when it is available for use
• It ceases at the earlier of the date that the asset is classified as held for sale
(Ind AS 105 ) and the date that the asset is derecognized
• Does not cease when the asset is idle or retired
Methods
• Shall reflect the pattern in which the asset’s future economic
benefits are expected to be consumed by the entity
• Should be reviewed at least each financial year end
1. Straight line method
2. Diminishing Balance method
3. Units of production method/ machine hour method
SLM & WDV
• SLM Depreciation : (Cost – Scrap value) / Useful life
Depreciation remains the same throughout the useful life, unless there
is any change in any of the given values
• Written down value Depreciation = Carrying amount x %
Ex: 1,00,000 Cost, Depreciation – 10%
Year 1: 100000 x 10% = Rs.10,000
Year 2: (100000 – 10000) CA = 90000 x 10% = Rs.9,000
Units method
• Machinery Total production = 1,00,000 units, Cost = 10,00,000
• Depreciation per unit = Cost/Total units
• Depreciation per unit = 10,00,000 / 1,00,000 = Rs.10 per unit
• Year 1 : Production is 5000 units
• Depreciation = 5000 units x Rs10 = Rs.50,000
 Example
• A lorry bought for a business cost Rs.17,000. It is expected to last for five years and
then be sold for scrap for Rs.2,000. Usage over the five years is expected to be:
Year 1 200 days
Year 2 100 days
Year 3 100 days
Year 4 150 days
Year 5 40 days
Calculate the depreciation to be charged each year under:
(a) The straight line method
(b) The reducing balance method (using a rate of 35%)
(c) The machine hour method / Per unit method
• SLM Method : Depreciation = ( Cost – Scrap value) / Useful life
= (17,000 – 2000) / 5 years
= Rs. 3,000 p.a.(remains same for 5 years)

• WDV Method : Depreciation : Cost or Carrying amount X Depreciation %

Year 1 : Depreciation = 17000 X 35% = Rs.5,950
Year 2 : Depreciation (17000 – 5950= 11050 ) X 35% = Rs.3,868
Year 3 : Depreciation ( 11,050 – 3868=7,182 ) X 35% = Rs.2,514
Year 4 : Depreciation ( 7,182 – 2514 = 4668) X 35% = Rs.1634
Year 5 : Depreciation ( 4,668 – 1634 = 3034) X 35% = Rs.1062
Year 5 – Closing balance = Rs.3034 – 1062 = Rs.1972 (Scrap sold for 2000)
 Machine hour
• Year 1- 200 days + Year 2- 100 days+ Year 3- 100 days +Year 4- 150 days+Year
5- 40 days = Total 590 days

Depreciation = (Cost – scrap ) / Total number of days

= 15000/590 = Rs.25.42 per day
Year 1 = 200 days x 25.42 = Rs.5,084
Year 2 = 100 days X 25.42 = Rs.2,542
Year 3 = 100 days X 25.42 = Rs.2,542
Year 4 = 150 days X 25.42 = Rs.3,813
Year 5 = 40 days X 25.42 = Rs.1,016.8
 Journal Entry
• Depreciation a/c Dr – Expense – Charge on Profits – debited – P/L
To Accumulated depreciation a/c – Provision created for replacement
of asset – Liability – balance sheet

• P/L a/c Dr
To depreciation a/c
 Impairment
• To determine whether an item of property, plant and equipment is
impaired, an entity applies Ind AS 36, Impairment of Assets.
• Ind AS 36 explains how an entity reviews the carrying amount of its
assets, how it determines the recoverable amount of an asset, and
when it recognises, or reverses the recognition of, an impairment loss.

For Example : Asset (CA) = 25,00,000 , but in the market same asset
20,00,000. Asset to be shown in books at Rs.20,00,000.
Rs.5,00,000 – Debited to P/L – loss – Impairment Loss
 De-recognition of PPE
• Eliminated from Balance Sheet
• When disposed of or withdrawn from use
• No future economic benefits expected from its disposal
Gain or loss in disposal = Sale value – Carrying amount (Gain: + value, Loss: – value)
• Gains/Losses arising from retirement/disposal of PPE = Recognized in Statement
of Profit & Loss in the period when the asset is sold / retired
• Asset sold for 30,000, book value of asset is 20,000
• Cash a/c Dr 30,000
To Asset a/c 20,000
To Profit in sales 10,000
 Disclosure
(a) Measurement bases for determining the gross carrying
amount (if more than one, the gross carrying amount for that
basis in each category)
(b) Depreciation methods used
(c) Useful lives or depreciation rates used
(d) Gross carrying amount and accumulated depreciation
(aggregated with accumulated impairment losses) at the beginning
and end of the period
 Disclosure
(e) Reconciliation of the carrying amount at the beginning and end of the period showing:
(i) Additions
(ii) Disposals
(iii) Acquisitions through business combinations
(iv) Increases/decreases during the period from revaluations and from impairment losses
(v) Impairment losses recognized in profit or loss
(vi) Impairment losses reversed in profit or loss
(vii) Depreciation
(viii) Net exchange differences (from translation of statements of a foreign entity)
(ix) Any other movements
Computation of Cost of PPE
• X Limited started construction on a building for its own use on 1st
April, 2020. The following costs are incurred:
Particulars Amount
Purchase price of land 30,00,000
Stamp duty & legal fee 2,00,000
Architect fee 2,00,000
Site preparation 50,000
Materials 10,00,000
Direct labour cost 4,00,000
General overheads 1,00,000
 Other relevant information :
• Material costing Rs.1,00,000 has been spoiled and therefore wasted and a further
Rs.1,50,000 was spent on account of faulty design work. As a result of these
problems, work on the building was stopped for two weeks during November 2020
and it is estimated that Rs.22,000 of the labour cost relate to that period.
• The building was completed on 1st January 2021 and brought in use 1st April 2021.
• X Limited had taken a loan of Rs.40,00,000 on 1st April 2020, for construction of he
building. The loan carried an interest rate of 8% pa. and is repayable on 1st April
2022.
• Calculate the cost of the building that will be included in tangible non-current
asset as an addition.
 Hints:
• Only those costs which are directly attributable to bringing the asset into working
condition for its intended use should be included.
• Administration and general costs cannot be included.
• Abnormal cost also should be excluded. The cost of spoilt materials and faulty
designs are abnormal costs. The labour cost incurred during the stoppage is an
abnormal cost and should not to be included.
• The interest on loan should be capitalised from April 1, 2020, and capitalisation of
interest on loan must cease when the asset is ready to use i.e., January 1, 2021.

• Answer: 48,18,000
IndAS 115 – Revenue From
Contracts With Customers
(This replaced IndAS 18)
 Definitions
• Contract : An agreement between two or more parties that creates enforceable
rights and obligations.
• Customer : A party that has contracted with an entity to obtain goods or services
that are an output of the entity’s ordinary activities in exchange for
consideration.
• Income : Increases in economic benefits during the accounting period in the
form of inflows or enhancements of assets or decreases of liabilities that result
in an increase in equity, other than those relating to contributions from equity
participants.
• Standalone price:The price at which an entity would sell a promised good or
service separately to a customer.
 Definitions
• Performance obligation: A promise in a contract with a customer to transfer to
the customer either:
a good or service (or a bundle of goods or services) that is distinct; or
a series of distinct goods or services that are substantially the same and that
have the same pattern of transfer to the customer.
• Revenue: Income arising in the course of an entity’s ordinary activities. The
amount of consideration to which an entity expects to be entitled in exchange
for transferring promised goods or services to a customer, excluding amounts
collected on behalf of third parties.
Meaning
 Example
• Suppose there's a fitness studio that offers various fitness classes to its customers, such as
yoga, Zumba, and spinning classes. Customers can purchase a monthly membership that
allows them to attend any of these classes during the month.
• The fitness studio also offers a pay-per-class option for those who don't want a monthly
membership. In this scenario, the performance obligations may be identified as follows:
[Link] Membership: The monthly membership represents a series of distinct goods or
services that are substantially the same (access to any fitness class) and have the same
pattern of transfer to the customer (unlimited access throughout the month). This would be
treated as a single performance obligation since the goods (fitness classes) are similar, and
the pattern of transfer (monthly access) is consistent.
[Link]-per-Class: For customers who choose the pay-per-class option, each individual class
they attend would be considered a separate performance obligation. Each class is distinct
and has its own specific transfer pattern (e.g., a single session for one hour).
 Example
• In this example, the fitness studio must account for the revenue from monthly
memberships and pay-per-class options separately.
• Revenue from monthly memberships would be recognized over the month, as customers are
provided access to classes throughout that period. On the other hand, revenue from pay-per-
class customers would be recognized as each class is delivered to the customer.
• The key point is that the goods or services in each performance obligation must be
distinct, and they should have the same pattern of transfer to be treated as a single
performance obligation.
• If the goods or services offered were significantly different in functionality or had
different patterns of delivery, they would likely be treated as separate performance
obligations for revenue recognition purposes.
Five Step Model Framework
St • Identify the contracts with the customer
ep
1

St • Identify the separate performance obligations

ep
2
St • Determine the transaction price
ep
3
St • Allocate the transaction price
ep
4

St
• Recognise revenue when a performance obligation
ep is satisfied
5
 Example - Overall
On 1 December 20X1, Wade receives an order from a customer for a computer as well
as 12 months of technical support. Wade delivers the computer (and transfers its
legal title) to the customer on the same day. The customer paid $420 on 1 December
20X1. The computer normally sells for $300 and the technical support for $120.
The 5 steps would be applied to this transaction as follows:
Step 1 – Identify the contract
• There is an agreement between Wade and its customer for the provision of goods
(the computer) and services (the technical support).
Step 2 – Identify the separate performance obligations within a contract
• There are two performance obligations within the contract:
1. The supply of a computer
2. The supply of technical support
Step 3 – Determine the transaction price
• The total transaction price is $420.
Step 4 – Allocate the transaction price to the performance obligations in the
contract
• Based on standalone sales prices, $300 should be allocated to the sale of the
computer and $120 should be allocated to the sale of technical support.
Step 5 – Recognise revenue when (or as) a performance obligation is satisfied
• Control over the computer has been passed to the customer so the full goods
revenue of $300 should be recognised on 1 December 20X1.
• The technical support is provided over time, so revenue from this should be
recognised over time. In the year ended 31 December 20X1, revenue of $10
(1/12 × $120) should be recognised from the provision of technical support.
 Step 1: Identify the contract with the customer
• A contract can be agreed in writing, orally, or through other customary
business practices.
• An entity can only account for revenue if the contract meets the following
criteria:
- the parties to the contract have approved the contract and are committed to perform
their respective obligations
- the entity can identify each party’s rights regarding the goods or services to be
transferred
- the entity can identify the payment terms for the goods or services to be transferred
- the contract has commercial substance, and
- it is probable that the entity will collect the consideration to which it will be entitled in
exchange for the goods or services that will be transferred to the customer
 Example:
• Aluna Co has a year end of 31 December 20X1.
• On 30 September 20X1, Aluna Co signed a contract with a customer to
provide them with an asset on 31 December 20X1. Control over the asset
passed to the customer on 31 December 20X1. The customer will pay $1m
on 30 June 20X2.
• By 31 December 20X1, Aluna Co did not believe that it was probable that it
would collect the consideration that it was entitled to.
• Therefore, the contract cannot be accounted for and no revenue should be
recognised.
Step 2: Identify the performance obligations in the
contract
• Performance obligation is any good or service that contract promises to transfer to
the customer.
• It can be either -
• A single good or service, or their bundle that is distinct; or
• A series of distinct goods or services that are substantially the same and have the same pattern
of transfer.
• The performance obligations can be both explicit (e.g. written in the contract)
and implicit (e.g. implied by some customary practices, published policies or
statements).
• Also, if there’s no transfer to customer, then there’s no performance obligation.
• Some contracts contain more than one performance obligation.
 Example: Performance obligation
delivered at a point of time and over a
period of time
• A delivers laptop , software, service package – Rs.1,00,000 on 1/1
• Laptop = Rs.50,000, Software – Rs.25,000 , Service – Rs.25,000
• Laptop and Software to be delivered immediately and Service to be delivered at
31/12 for 5 years
• For year 1 – How much revenue to be recognized?
50000 + 25000 +( 25000/5 yrs)
• 80000 – year 1 (75000 – 1/1 , 5000 – 31/12)
• 5000 year 2(31/12)
• 5000 year 3
• 5000 year 4
• 5000 year 5
 Step 3: Determining the transaction
price
• Transaction Price: The amount of consideration to which an
entity expects to be entitled in exchange for transferring
promised goods and services to a customer, excluding amounts
collected on behalf of third parties
• Includes :
• Variable consideration
• Significant financing component
• Non - cash consideration
• Consideration payable to a customer
Variable Consideration
• Discounts, rebates, refunds, credits, price concessions, incentives,
performance bonuses and similar items
• (Variable amounts are estimated and included in revenue to the
extent that it is highly probable that the revenue will not reverse.)
• Estimated on Expected value basis or Most likely amount
Example – Variable consideration
If the goods are delivered within 3 months, a bonus (additional) to be
given by customer to supplier = Rs.10,000. On the date of sales, it looks
highly probable that the goods will be delivered within 3 months. Sale
value - Rs.100000.
What value supplier should recognize? (Estimation based on Most Likely
method – Yes or No)
Then supplier will recognise = Rs.110000
 Significant financing component
The following may indicate the existence of a significant financing component
(IFRS 15, para 61):
• a difference between the amount of promised consideration and the cash
selling price of the promised goods or services
• a significant length of time between the transfer of the promised goods or
services to the customer and the payment date.
• If there is a significant financing component, then the consideration
receivable needs to be discounted to present value using the rate at which
the customer would be able to borrow.
 Example:
• Tata Ltd. sold passenger cars to various customers on instalment
payment system. In a particular sale of goods transaction on 1st April
2017, instalment payment price is fixed at Rs.10 lakhs with down
payment of 20% and balance in 2 equal instalments due on 31st March
2018 and 31st March 2019. Identify the transaction price and interest
income and also show the accounting entries. ( Discount rate @ 10%)
• The difference amount 8,00,000 – 6,94,000 = 1,06,000 will be recorded as
Interest
 Determination of Transaction price
Date Cash flow Discount factor Present
@ 10% value

1/4/17 2,00,000 1 2,00,000

(Down payment)
31/3/18 4,00,000 0.909 3,63,600
31/3/19 4,00,000 0.826 3,30,400
Transaction Price as 8,94,000
on 1/4/2017

Cash a/c Dr 2,00,000

Contract Asset a/c Dr (or receivables a/c) 6,94,000
To Sales revenue a/c 8,94,000
Interest calculation
Opening balance Interest income Payment made Closing balance

8,94,000 (2,00,000) 6,94,000

6,94,000 69,400 (4,00,000) 3,63,400

3,63,400 36,600 (B/F) (4,00,000) Nil

1,06,000
 Example:
• Croma Ltd. sells electronics to various customers on instalment
payment system. In a particular sale of goods transaction on 1st April
2020, instalment payment price is fixed at Rs.40 lakhs with down
payment of 25% and balance in 3 equal instalments due on 31st March
2021, 31st March 2022 and 31st March 2023.
• Identify the transaction price and interest income and also show the
accounting entries. (Discount rate @ 10%)
 Determination of Transaction price
Date Cash flow Discount factor Present
@ 10% value

1/4/20 10,00,000 1 10,00,000

(Down payment)
31/3/21 10,00,000 0.909 9,09,000
31/3/22 10,00,000 0.826 8,26,000
31/3/23 10,00,000 0.751 7,51,000
Transaction Price as 34,86,000
on 1/4/2020

Cash a/c Dr 10,00,000

Contract Asset a/c Dr (or receivables a/c) 24,86,000
To Sales revenue a/c 34,86,0000
Interest calculation
Opening balance Interest income Payment made Closing balance

34,86,000 -- (10,00,000) 24,86,000

24,86,000 2,48,600 (10,00,000) 17,34,600

17,34,600 1,73,460 (10,00,000) 9,08,060

9,08,060 91,940 (b/f) (10,00,000) Nil

5,14,000
 Non-cash consideration
• If a customer promises consideration in a form other than cash, an
entity measures the non-cash consideration at fair value in determining
the transaction price.
• If an entity is unable to reasonably measure the fair value
of non-cash consideration, it indirectly measures the consideration by
referring to the stand-alone selling price of the goods or services
promised under the contract.
Consideration payable to a customer
• If consideration is paid to a customer in exchange for a distinct good
or service, then reduce transaction price by total consideration owed
to the customer
• Lays chips , entered into contract with a retailer for Rs.10,00,000. He
also agreed for a sponsorship display set up to be put in the retail
shop (Rs.1,00,000).

• 10,00,000 – 1,00,000 = Rs.9,00,000

 Step 4: Allocate the transaction price
to the performance obligations
1. The total transaction price should be allocated to each performance obligation
in proportion to stand-alone selling prices. (Observable price)
2. When a contract contains more than one distinct performance obligation, the
transaction price is allocated in proportion to the stand-alone selling price of the
good or service underlying each performance obligation.
3. If a stand-alone selling price is not directly observable, then the entity estimates
the stand-alone selling price.
4. Discounts: In relation to a bundled sale, any discount should generally be
allocated across each component in the transaction. A discount should only be
allocated to a specific component of the transaction if that component is
regularly sold separately at a discount.
 Example – Allocation of Transaction price
• A delivers laptop , software, package – TP = Rs.80,000 on 1/1
Laptop = Rs.50,000, Software – Rs.25,000 , Installation – Rs.10,000
For year 1 – How much total revenue to be recognized ? For each product/service?
(round it off to nearest hundreds)
• Total price after discount = Rs.80,000
• Total of standalone selling price of three products = 50000 + 25000 + 10000 = Rs.85,000
• Discount = Rs.5000
• Revenue to be recognized for:
1. Laptop = 80,000 x (50000 / 85000)=Rs.47,100 Discount = 2900
2. Software = 80,000 x (25000/85000) = Rs.23,500 Discount = 1500
3. Installation = 80000 x (10000/85000) = Rs.9,400 Discount = 600
• Total price = Rs.80,000
 Step 5 : Recognize revenue
• A performance obligation is satisfied (and revenue is recognized)
when a promised good or service is transferred to a customer. This
happens when control is passed.
• A performance obligation can be satisfied either:
1. Over time – in this case, control is passed to the customer over some
period of time (e.g. contract term); or
2. At the point of time – in this case, control is retained by the supplier until
it is transferred at some moment.
 Satisfying a performance obligation
at a point in time
• Control of an asset refers to the ability to direct the use of, and obtain
substantially all of the remaining benefits (inflows or savings in outflows),
from the asset.
• Control includes the ability to prevent other entities from obtaining
benefits from an asset.
• The following are indicators of the transfer of control:
1. The entity has a present right to payment for the asset
2. The customer has legal title to the asset
3. The entity has transferred physical possession of the asset
4. The customer has the significant risks and rewards of ownership of the asset
5. The customer has accepted the asset.
 Performance obligations satisfied over
time
• Where performance obligations are satisfied over time, an entity must determine what
amounts to include as revenue and costs in each accounting period.
• This applies particularly to long-term infrastructure projects where payment is made
in stages as the contract progresses. Examples include the construction of ships and
buildings.
• Appropriate methods of measuring progress include:
1. OUTPUT METHODS such as surveys of performance (for example: the value of the
work certified as completed so far compared to the overall contract price), or time
elapsed (time spent on the contract compared to total duration)
2. INPUT METHODS such as costs incurred to date as a proportion of total expected
costs
• Revenue will be recognised based on the amount of progress made compared to the
total price.
 Example
Using the example of a construction contract, costs comprise:
• Costs relating directly to the contract
– Site labor costs
– Cost of materials used in construction
– Depreciation of plant and equipment used on the contract
– Cost of moving plant and equipment and materials to and from the
contract site
– Cost of hiring plant and equipment
– Estimated costs of rectification and guarantee work
– Claims from third parties
• Costs attributable to general contract activity which can be allocated to the
contract, for example:
– Insurance
– Cost of design and technical assistance not directly related to a specific
contract
– Construction overheads
• Any other costs which can be charged to the customer under the contract
• Note that general administration and development costs should not be
included unless they are to be reimbursed by the customer per the contract
• Where the outcome of a construction contract can be estimated reliably -
contract revenue and contract costs are recognized as revenue and expenses
according to the stage of completion of the contract at the end of the reporting
period. This will be equivalent to the amount of performance obligation satisfied.
• However any expected loss on the construction contract is recognized as an
expense immediately. (In Year 1 )
• Methods to determine the stage of completion include:
1. Input method
– Proportion of contract costs incurred
• Costs to date ÷ Total estimated costs
2. Output methods
– Surveys of work performed
• Work certified ÷ Contract price
– Physical proportion completed
 Example: Input Method - Computation of
revenue
Construction project of 2 years. Transaction price – 1 Cr. Total cost
incurred till now – 30 L. Total estimated future cost – 40 L. Raised invoice
and received Rs.50 L. How much revenue to be recognised at the end of
1st year?
Input method: (based on cost)
• % of progress = cost incurred / total project cost = (30 /70) x 100 = 43%
• Revenue = (% of progress x TP) = (43% x 1 Cr) = Rs.43 L
• Cost of sales = (% of progress x Total cost) = (43% x 70L)= Rs. 30.1L
• Profit = Revenue – Cost of Sales = 43 – 30.1 = Rs.12.9
Computation of Contract Asset or Liability -
SOFP
• Cost incurred till now – Rs. 30 L, Profit made in year 1 - Rs.12.9 L
Total amount supposed to be received = Rs.42.9 L
Compare with actual amount received = Rs.50 L
• Contract Liability = (50 – 42.9 ) = Rs.7.1 L (Received excess than we should
have, therefore it is a liability)

• If we had received Rs. 40 L:

then Contract Asset = (42.9 – 40) = Rs.2.9 L (Received less than we should
have, therefore it is an asset – accrued benefit – yet to be received)
 Example : When project is a loss project
TP = 50 L, Cost = 55 L, Overall Loss in the project = 5 L. The entire loss
has to be written off in the Year 1 itself. Cost incurred till now – 30 L.
• % of progress = 30/55 = 55%
• Revenue = 50 x 55% = 27.5 L
• COS = 55 x 55% = (30.25)
• Loss in Year 1 (2.75 L)
(+) Loss to be adjusted (2.25)
• Overall loss to be shown in the Year 1 = 5 L
 Input Method - Computation of revenue
Construction project of 2 years. Transaction price – 90 L. Total cost
incurred till now – 25 L. Total estimated future cost – 42 L. Raised invoice
and received Rs.40 L. How much revenue to be recognised at the end of
1st year?
Input method: (based on cost)
• % of progress = cost incurred / total project cost = (25 /67) x 100 = 37%
• Revenue = (% of progress x TP) = (37% x 90L) = Rs.33.3 L
• Cost of sales = (% of progress x Total cost) = (37% x 67L)= Rs. 24.79 L
• Profit = Revenue – Cost of Sales = 33.3 – 24.79 = Rs.8.51
Computation of Contract Asset or Liability -
SOFP
• Cost incurred till now – Rs. 25 L, Profit made in year 1 - Rs.8.51 L
Total amount supposed to be received = Rs.33.51 L
Compare with actual amount received = Rs.40 L
• Contract Liability = (40 – 33.51) = Rs.6.49 L (Received excess than we
should have, therefore it is a liability)

• If we had received Rs. 30 L:

then Contract Asset = (33.51 – 30) = Rs.3.51 L (Received less than we should
have, therefore it is an asset – accrued benefit – yet to be received)
Output method
Construction project of 2 years, Transaction price – 1 Cr, Total cost
incurred till now – 30 L, Total estimated future cost – 40 L, Work
certified till now – Rs.35 L, How much revenue to be recognised at the
end of 1st year?
• % of progress = (Work certified / TP ) x 100 = (35 L/ 100L) 100 = 35%
• Revenue = 100 x 35% = 35 L
• COS = (70 x 35%) = 24.5 L
• Profit = 10.5 L
If there is 2 year computation
nd

• At the end of second year, Total TP = 100 L – 35 l = 65 L

• COS (70 – 24.5 ) = 45.5 L
• Profit (for the 2nd year) = 19.5 L
(has to be adjusted against first year revenue, COS and profit
recognised )
• Overall profit = 10.5 L + 19.5 L = 30 L ( 100 – 70)
 Output Method - Computation of revenue
Construction project of 2 years. Transaction price – 90 L. Total cost
incurred till now – 25 L. Total estimated future cost – 42 L. Work
certified till now 27L. How much revenue to be recognised at the end of
1st year?
• % of progress = (Work certified / TP ) x 100 = (27L/90L) 100 = 30%
• Revenue = 90 x 30% = 27 L
• COS = (67 x 30%) = 20.1 L
• Profit = 6.9L
2nd year
• At the end of second year, Total TP = 90 L – 27L = 63 L
• COS (67 – 20.1 ) = 46.9 L
• Profit (for the 2nd year) = 16.1 L
(has to be adjusted against first year revenue, COS and profit recognised )
• Overall profit = 6.9 L + 16.1L = 23 L (90-67)
 Presentation
• The presentation requirements of IndAS 115 are important in relation
to contracts where performance obligations are satisfied over time.
• In the case of these contracts, there are likely to be contract assets
and liabilities to be accounted for at the end of the reporting period.
• A contract liability is recognised where consideration has been transferred in
excess of the performance obligation satisfied.
• A contract asset is recognised where performance obligation has been
satisfied but no consideration has yet been invoiced or received.
• Consideration which has been billed (invoiced) will be presented as an
amount receivable, not a contract asset.
Accounting treatment

• Statement of profit or loss and other comprehensive income:

$

Revenue (x% × Total contract revenue) X

Expenses (x% × Total contract costs) (X)

Expected loss (X)

Recognised profits/ losses X

Where x% is the stage of completion

Accounting treatment

• Statement of financial position:

Contract asset/liability $
Contract costs incurred to date X
Recognised profits less recognised losses X
X
Less invoices issued to date (X)
X/(X)
Trade receivables $
Invoices issued to date X
Less cash received (X)
X
Disclosure
The standard requires the following disclosures:
(a) Revenue from contracts separately disclosed
(b) Impairment losses on any contract assets or receivables
(c) Opening and closing balances of assets, liabilities and receivables
(d) Revenue recognised that was included in opening contract liability
(e) Revenue recognised from performance obligations satisfied in the
previous period