Accounting Concepts, Conventions and

Standards – II
(Module 3)
• (IND AS) 21- Effects of changes in Foreign Exchange, (IND AS) 23 Borrowing Costs,
(IND AS) 24- Related Party Disclosures, (IND AS) 116 Leases, (IND AS) 33- Earnings
Per Share, (IND AS) 12 Income Taxes, (IND AS) 34 – Interim Financial Reporting,
(IND AS) 38- Intangible assets, (IND AS) 36 - Impairment of assets, (IND AS) 37 -
Provisions, Contingent Liabilities and Contingent assets, (IND AS) 40 – Investment
Property
IndAS 21 – Effect of Changes
in Foreign Exchange
 Objective of IndAS 21
• The objective of IndAS 21 is to produce rules that an entity should follow
in the translation of foreign currency activities
• How to include foreign currency transactions and foreign operations in the
financial statements of an entity; and
• How to translate financial statements into a presentation currency.
In other words, IndAS 21 answers 2 basic questions:
1. What exchange rates shall we use?
2. How to report gains or losses from foreign exchange rates in the financial
statements?
Definitions
1. Historic rate: rate in place at the date the transaction takes place,
sometimes referred to as the spot rate.
2. Closing rate: rate at the reporting date.
3. Average rate: average rate throughout the accounting period.
4. Functional currency: 'the currency of the primary economic
environment in which an entity operates’. This will usually be the
currency in which the majority of an entity's transactions take
place.
5. Presentation currency: 'the currency in which the financial
statements are presented'.
• In most cases, functional and presentation currencies are the same.
• However, an entity can decide to present its financial statements in a
currency different from its functional currency – for example, when preparing
consolidation reporting package for its parent in a foreign country.
• Also, while an entity has only 1 functional currency, it can have 1 or more
presentation currencies, if an entity decides to present its financial
statements in more currencies.
• You also need to realize that an entity can actually choose its presentation
currency, but it CANNOT choose its functional currency.
• The functional currency needs to be determined by assessing several factors.
https://www.ifrsbox.com/ias21-foreign-exchange-rates/ -Source
 How to determine functional currency
IndAS 21 says that an entity should consider the following primary
factors when determining its functional currency:
• the currency that mainly influences sales prices for goods and services
• the currency of the country whose competitive forces and regulations mainly
determine the sales price of goods and services
• the currency that mainly influences labour, materials and other costs of
providing goods and services.
If the primary factors are inconclusive then the following secondary
factors should also be considered:
• the currency in which funds from financing activities are generated
• the currency in which receipts from operating activities are retained
https://www.ifrsbox.com/ias21-foreign-exchange-rates/ -Source (watch video)
 Mechanics of translation
Initial transactions
• Translate using the historic rate prevailing at the transaction date.
• The average rate can also be used if it does not fluctuate significantly during the
accounting period.
Settled transactions
If a transaction is settled (payment or receipt occurs) during the accounting period:
• Translate at the date of payment/receipt using the historic rate prevailing at that
date.
• As this may be different to the initial transaction, an exchange difference may arise,
this is posted to the statement of profit or loss
Example
On 1 April 20X8 Collins Co, a company that uses the dollar ($) as its
functional currency, buys goods from an overseas supplier, who uses
Krona (Kr) as its functional currency. The goods are priced at Kr54,000.
Payment is made 2 months later on 31 May 20X8.
The prevailing exchange rates are :
1 April 20X8 Kr1.80 : $1
31 May 20X8 Kr1.75 : $1
• Record the journal entries for these transactions.
Answer
Initial transaction
• 1$ 1.8 Kr
• X? 54,000 KR
• X = (54000 x 1) / 1.8
• Translate at historic rate on 1 April, Kr54,000/1.8 = $30,000
Purchases $30,000
To Payables $30,000
On settlement
• Translate at historic rate on 31 May, Kr54,000/1.75 = $30,857
Payables Dr $30,000
SPL – foreign exchange loss Dr $857 (as dollar has depreciated)
To Cash $30,857
Unsettled transactions
• If a transaction is still unsettled at the reporting date, there will be
an outstanding asset or liability on the statement of financial position.
• If the asset/liability is a monetary item, it should be retranslated at
the closing rate.
• If the asset/liability is a non-monetary item, it should remain at the
historic rate.
• Exchange differences will arise on the retranslation of the monetary
items, and these are posted to the statement of Other
Comprehensive Income.
Unsettled transactions
• Monetary items are those that are either a fixed amount of money or
a known amount of a foreign currency to be received or paid. For
example, cash, accounts receivable, accounts payable, loans, and
bonds fall under this category.

• Non-monetary items are items other than monetary items. These

could be assets like inventory, property, plant, and equipment, which
are valued at historical cost and not subject to potential changes in
their fair value due to changes in exchange rates.
Example
• On 1 April 20X8 Collins Co, a company that uses the dollar ($) as its
functional currency, buys goods from an overseas supplier, who uses
Krona (Kr) as its functional currency. The goods are priced at Kr54,000.
Payment is still outstanding at the reporting date of 30 June 20X8.
The prevailing exchange rates are:
• 1 April 20X8 Kr1.80 : $1
• 30 June 20X8 Kr1.70 : $1

Required: Record the journal entries for these transaction

Answer
Initial transaction
• Translate at historic rate on 1 April, Kr54,000/1.8 = $30,000
Purchases $30,000
To Payables $30,000
At the reporting date
• At the reporting date, Payables are monetary items, so retranslate at
the closing rate on 30 June (Kr54,000/1.70 = $31,765)
SPL (loss) $1,765 ($31,765 – $30,000)
To Payables $1,765
Example
• On 1 January 20X6 Wilkie Co, a company that uses the dollar ($) as its
functional currency, buys goods from an overseas supplier, who uses
Dinar (D) as its functional currency. The goods are priced at D35,000.
Payment is still outstanding at the reporting date of 31 March 20X6.
• The prevailing exchange rates are:
1 January 20X6 D1.75 : $1
31 March 20X6 D1.90 : $1
• Record the journal entries for these transactions.
Answer
Initial transaction
• Translate at historic rate on 1 January 20X6, D35,000/1.75 = $20,000
Purchases $20,000
To Payables $20,000
At the reporting date
• Payables are monetary items, so retranslate at the closing rate on 31
March 20X6, reducing the payables balance to D35,000/1.90 = $18,421
and recognising a gain of $1,579 ($20,000 – $18,421) in the SPL.
• Payables $1,579
To SPL Exchange gain $1,579
Treatment of exchange differences
• If the exchange difference relates to trading transactions, it is
disclosed within other operating income/operating expenses.
• If the exchange difference relates to non-trading transactions, it is
disclosed within interest receivable and similar income/finance costs.
 Example
• ABC Co has a year end of 31 December 20X1 and uses the dollar ($) as its functional
currency. On 25 October 20X1 ABC Co buys goods from a Swedish supplier for Swedish
Krona (SWK) 286,000.
• Rates of exchange:
25 October 20X1 $1 = SWK 11.16
16 November 20X1 $1 = SWK 10.87
31 December 20X1 $1 = SWK 11.02
• Required:
Show the accounting treatment for the above transactions if:
(a) A payment of SWK286,000 is made on 16 November 20X1.
(b) The amount owed remains outstanding at the year-end date.
(a) Original transaction
• 25 October 20X1 Value = 286,000/11.16 = $25,627
Purchases 25,627
To Payables 25,627
• 16 November 20X1 Payment 286,000/10.87 = $26,311
Payables 25,627
SPL 684 (Balancing figure: 26,311 – 25,627)
To Cash 26,311
(b) If the amount remains outstanding:
• 31 December 20X1 Retranslate payable 286,000/11.02 = $25,953
SPL 326 (25,953 – 25,627)
To Payables 326
• Note: The inventory would not be restated and would remain at the original
transaction price of $25,627. (non-monetary item)
Non-monetary Items
• Cost model
• Non-monetary items that are held at cost are initially translated at the
historic rate and carried forward at this value.
• They are not retranslated.
Activity 1
• An entity based in the US sold goods overseas for Kr200,000 on 28
March 20X3 when the exchange rate was Kr0.65:$1. The customer
paid in April 20X3 when the rate was Kr0.70:$1. The exchange rate at
the year ended 30 June 20X3 was Kr0.75:$1.
• Prepare the journal entries to record the sale of the goods by the US
entity.
• Show the journal entries to record the payment in April 20X3.
Solution
Activity 2
• If the amount was outstanding at the year-end, what would the gain
or loss in the statement of profit or loss be?
• $ __________
• $41,025. The monetary item must be retranslated at the reporting
date rate of exchange.
• Dollar value at the reporting date = Kr200,000/0.75 = $266,667
• This results in a reduction in the receivables (and therefore a foreign
exchange loss) of $41,025 (=307692-266667)
Activity 3
• An entity based in the US purchased goods for Kr200,000 on 28 March
20X3 when the exchange rate was Kr0.65: $1. The exchange rate at
the year ended 30 June 20X3 was Kr0.75:$1. If the goods were unsold
at the year-end, what should be the value of inventory?
• $ __________
• $307,692. At the reporting date:
No adjustment will be made at year-end to the inventory because
• Inventory is a non-monetary item.
Activity 4
• An entity bought land on credit for Kr100,000 when the exchange rate was
1Kr/$0.85. At the year end the entity had not paid its supplier. The exchange
rate at the year-end was 1Kr/$0.92. Which THREE of the following amounts
would be recorded in the financial statements at year end?
• A Property, plant and equipment - $85,000
• B Trade payable - $85,000
• C Foreign exchange loss - $7,000
• D Property, plant and equipment - $92,000
• E Trade payable - $92,000
• F Foreign exchange loss -$Nil
Solution
IndAS 23 – Borrowing Costs
Definitions
• Borrowing costs. Interest and other costs incurred by an entity in
connection with the borrowing of funds.
• Qualifying asset. An asset that necessarily takes a substantial period of
time to get ready for its intended use or sale.

(Borrowing costs that are directly attributable to the acquisition,

construction or production of a qualifying asset form part of the cost of
that asset. Other borrowing costs are recognised as an expense.
Borrowing cost paid on the qualifying asset only has to be capitalized –
added to the balance sheet value of asset)
 Borrowing Cost
The standard lists what may be included in borrowing costs:
• Interest on bank overdrafts and short-term and long-term borrowings
• Amortization of discounts or premiums relating to borrowings
• Amortization of ancillary costs incurred in connection with the arrangement of
borrowings
• Finance charges in respect of finance leases recognized in accordance with IndAS
17
• Exchange differences arising from foreign currency borrowings to the extent that
they are regarded as an adjustment to interest costs
Qualifying Asset
Depending on the circumstances, any of the following may be qualifying assets:
• Inventories
• Manufacturing plants
• Power generation facilities
• Intangible assets
• Investment properties

Financial assets and inventories that are manufactured, or otherwise produced over a
short period of time are not qualifying assets.
Assets that are ready for their intended use or sale when purchased are not qualifying
assets.
 Examples
Examples of qualifying assets:
• Inventories which require a substantial period of time to bring them to a saleable
condition (e.g. wine, cheese or whiskey that matures in bottle or cask for a long period
of time, large items of equipment, such as aircraft, ships; custom-made goods)
• Manufacturing plant, Power generation facilities, Investment properties.

Examples of assets which do not qualify:

• Inventories routinely manufactured or otherwise produced in large quantities on a
repetitive basis over a short period of time.
• Assets ready for their intended use or sale when acquired.
Examples
Identify which of the following is not a borrowing cost?
• Interest on loan taken
• Deferred loan interest
• Bank commission in loan taken
• Foreign exchange adjustments to interest, arising from borrowings
Deferred loan interest

Is this a qualifying asset?

• Customized plant as an inventory to be delivered - 7 months to manufacture and
deliver
NO
 Example : Specific Borrowings
On 1st May 2021, DEF took a loan of Rs.10,00,000 from a bank at the annual interest rate
of 5%. The purpose of this loan was to finance a construction of a production hall. The
construction started on 1 June 2021. DEF temporarily invested Rs. 8,00,000 borrowed
money during the months of June and July 2021 at the rate of 2% p.a. What borrowing
cost can be capitalized for the year ending Dec 2021? (Assume all interest was paid).
• Actual interest expense: Rs. 10,00,000 x 5% x 7/12
= Rs. 29,167
(-) temporary investment income: Rs. 8,00,000 x 2% x 2/12
= Rs.2,667
• Total borrowing cost to capitalize in 2021: Rs. 26,500
• (the borrowing cost in May 2021 is expensed in profit or loss, as the capitalization
criteria was not met in that period - the capitalization can start only from 1st June 2021
onwards when the construction had started)
 General Borrowings
KLM had the following loans in place at the beginning and end of 20X1:

Description 1 January 20X1 31 December 20X1

Bank loan, 6% p.a. 0 200 000
Bank loan, 8% p.a. 130 000 130 000

Debenture stock, 5.5% p.a. 50 000 50 000

• The bank loan at 6% p.a. was taken in July 20X1 to finance the construction of a new
production hall (construction began on 1 March 20X1).
• The bank loan at 8% p.a. and debenture stock were taken for no specific purpose, and
KLM used them to finance general spending and the construction of a new machinery.
• KLM used Rs. 60,000 for the construction of the machinery on 1 February 20X1 and Rs.
25,000 on 1 September 20X1. What borrowing cost should be capitalized for the new
machinery?
• You ignore bank loan at 6% p.a., because it is a specific borrowing for another asset.
Interest = 2,00,000 x 6% x 6/12 = Rs. 6,000 – to be capitalized in B/S.

• Only general borrowings relate to the financing of the new machinery and
therefore, we need to calculate the capitalization rate:
Capitalisation Rate = (Total interest paid on Loans) / Total loan taken
• Weighted average rate = (8% x 130,000 /(130,000+50,000)) + (5.5% x
50,000/(130,000 + 50,000)) = (10,400 + 2,750)/1,80,000 = 13,150/1,80,000 = 7.31%
• Borrowing costs for the new machinery in 20X1 = [60,000 x 7.31% x 11/12]+
[25,000 x 7.31% x 4/12]
= RS. 4,021 + Rs. 609
= Rs. 4630 (INTEREST TO BE CAPITALISED for new machinery)
 Rules for: Commencement of Capitalization
• An entity shall begin capitalizing borrowing costs, as part of the cost of a
qualifying asset on the commencement date. The commencement date for
capitalization is the date when the entity first meets all of the following
conditions:
• it incurs expenditures for the asset;
• it incurs borrowing costs;
• it undertakes activities that are necessary to prepare the asset for its
intended use or sale.
• Expenditures on a qualifying asset include only those which have resulted in:
- payments of cash;
- transfers of other assets; or
- the assumption of interest-bearing liabilities.
Rules for: Commencement of Capitalization
• Expenditures are reduced by any progress payments received and grants
received in connection with the asset.
• The average carrying amount of the asset during a period, including
borrowing costs previously capitalized, is normally a reasonable
approximation of the expenditures to which the capitalization rate is
applied in that period.
 Suspension of Capitalization
• Capitalization is suspended during extended periods in which active development is
interrupted.
• Capitalization is not normally suspended:
- during a period when substantial technical and administrative work is being carried out;
or
- when a temporary delay is a necessary part of the process of getting an asset ready for its
intended use or sale.

• Example : During pandemic, construction work stopped for 10 months, in such case,
interest on loan will be expensed in P/L (suspension of capitalization)
• Example : 20 days break after concrete work for a floor roofing – no suspension of
capitalization
Cessation of Capitalization
• Capitalization ceases when "substantially all" the activities necessary
to prepare the qualifying asset for its intended use or sale are
completed
• An asset is normally ready for its intended use or sale when the physical
construction of the asset is complete, even though routine
administrative work might still continue.
• If minor modifications are all that are outstanding (e.g. interior
decoration of a property to the purchaser’s/user's specification), this
indicates that substantially all the activities are complete.
 Cessation of Capitalization
• When a construction is completed in parts and each part is capable of being
used while construction continues on other parts, the entity shall cease
capitalizing borrowing costs when it completes substantially all the
activities necessary to prepare that part for its intended use or sale.
• A business park comprising several buildings, each of which can be used
individually, is an example of a qualifying asset for which each part is
capable of being usable while construction continues on other parts.
• An example of a qualifying asset that needs to be complete before any part
can be used is an industrial plant involving several processes which are
carried out in sequence at different parts of the plant within the same site,
such as a steel mill.
IndAS 24 – Related Party
Disclosures
Objective
To ensure that an Entity’s Financial Statements contain the disclosures
necessary to draw attention to the possibility that:
• its Financial Position and Profitability may have been affected by the
Existence of Related Parties
• By Transactions and Outstanding Balances, including Commitments,
with such parties
What is to be disclosed?
• Relationships
• Transactions
• Outstanding balances
• Commitments

Where it is to be disclosed ?
• Individual Financial Statements, Consolidated Financial Statements of
Parent, Investors with Joint Control, Signature influence over Investee
Purpose / Need for Disclosure
• Financial and Operating Policies – Entity has ability to affect the financial and
operating policies of the Investee through the presence of control or significant
influence or Joint control
• Effect on Financial Position and Profitability – Effected by the Relationship
• Transactions at Cost or Varying prices – Ex: An Entity sells goods to its parent at cost
might not sell on those terms to another customer.
• Influence on Other Transactions – Ex : Termination of Unrelated Party Transactions ,
Refraining from acting (a subsidiary may be instructed by its parent not to engage in
research and development)
• Impact on users of Financial statements- Knowledge of Entity’s Transactions may
affect the assessments of Entity’s Operations, risks and opportunities
Related Party
Can be - A Person or An Entity
A Person or a Close Member of that Person’s Family is related to a
Reporting Entity, if that Person –
• has Control or Joint control of the reporting entity
• has Significant influence over the reporting Entity
• is a Member of the Key Management Personnel of a reporting Entity
or a Parent of the reporting Entity
Close Member
Close members of the Family of a Person, are those Family Members
who may be expected to influence, or influenced by, that Person in
their dealings with the Entity including:
• That Person’s Children, Spouse or Domestic partner, Brother, Sister,
Father , Mother
• Children of that Person’s Spouse or Domestic Partner and
• Dependents of that Person or the Person’s Spouse or Domestic
Partner
Key Management Personnel
• KMP are those persons having authority and responsibility for
planning, directing and controlling the activities of the Entity,
directly or indirectly, including any Director (whether executive or
otherwise) of that Entity
Entity as Related party (Conditions)
An entity is related to a reporting entity, if any of the following
conditions applies:
• Entity and the Reporting entity are members of the same group
• One entity is an Associate or Joint Venture of the Other Entity
• Both entities are JVs of the same third party
• One Entity is a JV of a third Entity and the other Entity is an Associate of
the third Entity
• Entity is a Post–Employment Benefit Plan for the employees of
Reporting Entity. If Reporting Entity itself is a Plan, Sponsoring
Employers are related.
• The Entity is controlled or jointly controlled by a “ Person “
identified as Related Party
• A person having control or joint control of the Reporting Entity,
has significant influence over the Entity or is a member of KMP
• The Entity or any member of a Group, provides KMP Services to
the Reporting Entity or to the Parent of the Reporting Entity

• Substance over Form : in considering each possible Related

Party relationship, attention is directed to the substance of the
relationship and not merely the legal form.
Related Party Transactions
• A Related Party Transaction is a transfer of resources, services or
obligations between a Reporting Entity and a Related Party,
regardless of whether a price is charged.
• It is not necessary that Consideration/Price should be charged in a
Related Party Transaction
• The Consideration may be fixed at special rates, and sometimes at
arms’ length/ market terms also.
The following are examples of transactions that are disclosed if they are with a related party:
Disclosure Requirements of Related Party
• Type 1 : Disclosure of Related Party relationships, even if there are no
Related Party Transactions (Parent and Subsidiary)
• Type 2 : Disclosure of Related party transactions, only when there are
such transactions (a. Key Management Personnel Compensation b.
Other transactions )
• Type 3 : Disclosure by Government related Entities
 Type 1
• Relationship with Parent & Relationship with Subsidiary:
• Shall be disclosed irrespective of transactions happening
• Entity shall disclose Name of the Parent or the ultimate Controlling
Party or next Senior most Parent (who makes the Consolidated
Financial Statements )
• To enable users of Financial statements to form a view about the
effects of relationship, as such relationship may prevent reporting
Entity being independent – financial and operating decisions
 Disclosure of Key Management Personnel
Compensation
Compensation All Employee Benefits – Ind AS 19
Employee Benefits – IndAS 102, Share Based Payments
Employee Benefits All forms of considerations paid, payable, provided by Entity
in exchange of services rendered to the Entity. Also includes
consideration paid on behalf of the Parent of the Entity
Items include a. Short term – wages, salaries, paid leaves, Perquisites
b. Post Employment Benefit – Pensions, Life insurance
c. Long term benefits – disability benefits, Profit sharing,
Bonus, Deferred compensation
d. Termination benefits
e. Share based payment
Transactions during the year
• If Entity has Related party transactions, it should disclose – Nature of
Relationship and Information about those transactions and
Outstanding Balances, including commitments
• Amount of Transactions
• Provision for Doubtful Debts related to outstanding balances
• Expenses recognized in respect of Bad or Doubtful Debts due from
related parties
• KMP services provided
Category wise disclosure
Disclosures required by shall be separately for each of the following
categories :
• Parent
• Joint control and Significant Influence
• Subsidiaries
• Associates
• Joint ventures in which Entity is Joint venturer
• KMP of the Entity or its Parent
• Other related parties
Government Related Entities
A Government related Entity is an Entity that is –
• Controlled
• Jointly controlled
• Significantly influenced
by a Government.

• Government refers to Government, Government Agencies, and similar

bodies whether local, national or international
IndAS 116 – Leases
(earlier Ind AS 17)
 INDAS 116 (Effective from 1/4/19)
• A contract is or contains a lease if it conveys the right to control the use
of an identified asset for a period of time in exchange for consideration
 Definitions
• Lease: A contract for the right to use an asset for a period of time
• Lessee: The party to a lease that obtains the right to use an underlying asset
• Lessor: The party to a lease that provides the right to use an underlying asset
• Right of Use Asset: An asset that the lease has the right to use under the terms of
the lease
• Interest rate implicit in the lease: the rate of interest at which the present value of
the lease payments and any unguaranteed residual value equals the fair value of the
leased asset (including any initial direct costs of the lessor) (IRR of lessor’s cash flows)
• Fair value: the amount for which an asset could be exchanged, or liability settled,
between knowledgeable, willing parties in arm’s length transaction
Identification of Lease Elements
Identified Asset ?
NO
YES

Lessee obtains substantially all of

the economic benefits? NO
Contract does not
YES contain a lease

Lessee directs the use?

NO
YES

Contract is or contains a lease

 Identified Asset
• A contract contains a lease only if it relates to an identified asset. An
asset can be either explicitly specified in a contract or implicitly specified
at the time it is made available for use by the customer.
• Even if an asset is specified, a customer does not have the right to use an
identified asset if the supplier has the substantive right to substitute the
asset throughout the period of use.
• An Asset is not an identified asset, unless it represents substantially all
of the capacity of the asset and thereby provides the customer with the
right to obtain substantially all of the economic benefits from use of the
asset.
• A portion of an asset is an identified asset if it is physically distinct.
 Substantive Substitution Rights
A supplier’s right to substitute an asset is Substantive when both the
following conditions are met:
• if the supplier has the practical ability to substitute alternative assets
throughout the period of use and
• the economic benefits of substituting the asset would exceed the cost

The assessment of whether a supplier’s substitution right is substantive is

based on facts and circumstances present at inception of the contract.
 Right to Obtain Substantially
All of the Economic Benefits
• A customer can obtain economic benefits either directly or indirectly (for
e.g., by using, holding or subleasing the asset).
• The economic benefits result from use of the asset within the defined scope
of the customer’s right to use the asset.
• Economic benefits from use of an asset include:
 the asset’s primary outputs
 any by-products (including potential cash flows derived from these items)
 benefits from using the asset that could be realised from a commercial
transaction with a third party (for e.g., subleasing the asset)
Right to Control
To determine whether a contract conveys the right to control the use of
an identified asset, a company assesses whether the customer has the
rights to:
• obtain substantially all of the economic benefits from use of the
identified asset throughout the period of use; and
• direct the use of the identified asset.
 Right to direct the use
A customer has the right to direct the use of an identified asset in either
of the following situations:
- if the customer has the right to direct how and for what purpose the asset is used
throughout the period of use; or
- if the relevant decisions about how and for what purpose the asset is used are
predetermined
- the customer has the right to operate the asset
- the customer designed the asset in a way that predetermines how and for what
purpose the asset will be used throughout the period of use.
 Recognition Exemption
A lessee can elect not to apply Ind AS 116’s recognition and requirements
to:
a) Short-term leases; and
b) Leases for which the underlying asset is of low value (‘low value leases’)

If a lessee elects to apply the above recognition exemption, the lessee shall
recognise the lease payments associated with those leases as an expense
on either a straight-line basis over the lease term or another systematic
basis, if that basis is more representative of the pattern of the lessee’s
benefit.
Short term leases
• Short-term lease: A lease that, at the commencement date, has a lease term
of 12 months or less.
• The short-term lease exemption can be made by class of underlying asset to
which the right of use relates.
• If a lessee accounts for “short-term leases” as per the approach mentioned
above, it shall consider the lease to be a “new lease” for the purposes of Ind
AS 116 if:
(a) there is a lease modification; OR
(b) there is any change in the lease term
 Leases of low-value assets:
• An underlying asset can be of low value only if:
(a) the lessee can benefit from use of the underlying asset on its own or
together with other resources that are readily available to the lessee; and
(b) the underlying asset is not highly dependent on, or highly interrelated
with, other assets.
• The election for leases for which the underlying asset is of low value can be
made on a lease-by-lease basis
• If a lessee subleases an asset, or expects to sublease an asset, the head lease
does not qualify as a lease of a low-value asset.
Example
• Entity A leases office equipment for 5 years. The total value of the
equipment when new is Rs.5,000. Entity A elects to apply the low-
value asset exemption.
• Lease payments : Year 1 : Nil(rent free), Year 2 and 3 : Rs.1,750 p.a.
Year 4 and 5:Rs.1,500 p.a. In addition, lessor provides a lease
incentive with a value of Rs.500 (receipt in the hands of lessee)
• Show the accounting treatment.
Answer
• Lessee recognizes the lease payment as an EXPENSE on either
straight-line basis over the lease term period or other systematic basis
• Total payments : (1750 x 2)+(1,500 x 2) – 500 = Rs.6,000
• Expense recognized each year : 6000 / 5 = Rs.1,200 p.a.
Inception and Commencement of Lease
• Ind AS 116 requires customers and suppliers to determine whether a
contract is or contains a lease at the inception of the contract.
• The inception date is defined as the earlier of the following dates:
1. date of a lease agreement
2. date of commitment by the parties to the principal terms and
conditions of the lease
• The commencement date is defined as the date on which a lessor makes
an underlying asset available for use by a lessee.
• The timing of when lease payments begin under the contract does not
affect the commencement date of the lease.
 Lease Term
The lease term begins on the commencement date (i.e. the date on which the lessor
makes the underlying asset(s) available for use by the lessee) and includes any rent-
free or reduced rent periods.
• It comprises:
- the non-cancellable period of the lease;
- periods covered by an option to extend the lease if the lessee is reasonably certain to exercise
that option; and
- periods covered by an option to terminate the lease if the lessee is reasonably certain not to
exercise that option.
• A lease is no longer enforceable when the lessee and the lessor each have the right
to terminate the lease without permission from the other party with no more than
an insignificant penalty.
• An entity shall revise the lease term if there is a change in the non-cancellable period
of a lease.
 Books Of Lessee
• Lessees do NOT classify the leases as finance or operating anymore
• Initial recognition
On the commencement of the lease, lessee needs to recognise:
- the right-of-use asset and measure it at cost
-a lease liability and measure it at the present value of the future lease
payments .
The lease payments should be discounted using the interest rate implicit in
the lease, if readily determinable or else using the lessee’s incremental
borrowing rate.
Asset Measurement
Right of Use Asset is initially measured at cost which includes:
- initial amount of the liability recognized
- payments made before commencement less any incentives received
- direct costs incurred by the lessee
- decommissioning costs expected to be incurred in dismantling or
removing the asset at the end of its useful life
 Liability Measurement
Cash flows used in the present value calculation includes :
- Fixed payments less any lease incentives
- Variable payments that are based on a specified index or rate
- Value of any purchase option the lessee would like to exercise
- Penalties the lessee expects to pay to cancel the lease

(over the time, liability increases by interest on the outstanding liability and
decreased by lease payments )
 Activity 2
H entered into a lease agreement on 1 Jan to lease a machine for six
years. The contract requires an up-front payment of Rs.2000 on signing
the lease plus a further five payments of Rs.2000 at the end of each year.
H has an option to buy the asset at the end of six years for Rs.500, which
H expects to exercise. The rate of interest implicit in the lease is 10%.
Compute the liability to be recognized in books.
Computation of lease liability
Liability (each year) (contd..)
Period liability Interest @ 10% Rental payment Closing balance
(op bal+Int-
instalments)
1 7,860 786 (2000) 6,646
2 6,646 665 (2000) 5,311
3 5,311 531 (2000) 3,842
4 3,842 384 (2000) 2,226
5 2,226 223 (2000) 449
6 449 51 (diff) (500) -
 Activity 3 (continuing with previous
example)
•H incurs installation cost of Rs.600. Based on the expectation that H will exercise
the option to buy the asset, H will depreciate the asset over eight years on a SL
Basis. Compute the value of Right of use asset. (to be capitalized, interest rate 10%)

Amount
Initial Liability 7,860
Deposit 2,000
Installation cost 600
Total cost 10,460

• Annual depreciation = 10460 / 8 years = Rs.1,308 p.a.

• Value of Asset on 31 Dec = 10460 – 1308 = Rs.9152
• Value of Lease Liability = Rs.6646
 Journal Entries
• Lessee takes an asset under the lease:
• Debit Right-of-use asset
• Credit Lease liability (in the amount of the lease liability)
• Lessee pays the legal fees for negotiating the contract:
• Debit Right-of-use asset
• Credit Suppliers (Bank account, Cash, whatever is applicable)
• The estimated cost of removal, discounted to present value(lessee will
need to remove an asset and restore the site after the end of the lease
term):
• Debit Right-of-use asset
• Credit Provision for asset removal
Combined entry
Right of use A/c Dr (all components of asset)
To Cash or bank a/c (Down payment)
To Lease Liability a/c (Payable - Lessor)
To Provision for Future dismantling a/c
Subsequent measurement
• After commencement date, lessee needs to take care about both
elements recognized initially:
1. Right-of-use asset
Normally, a lessee needs to measure the right-of-use asset using a cost
model. It basically means to depreciate the asset over the lease term:
• Debit Profit or loss – Depreciation charge
• Credit Accumulated depreciation of right-of-use asset
• Depreciation is calculated as follows : If ownership of the asset transfers to the
lessee at the end of the lease term, then depreciation should be charged over
the asset’s useful life; otherwise depreciation is charged over the shorter of the
useful life or the lease term
 Subsequent measurement
2. Lease liability: A lessee needs to recognize an interest on the lease
liability:
Debit Profit or loss – Interest expense
Credit Lease liability
• Also, the lease payments are recognized as a reduction of the lease
liability:
Debit Lease liability
Credit Bank account (cash)
• If there is a change in the lease term, lease payments, discount rate or
anything else, then the lease liability must be re-measured to reflect all
the changes.
 Journal Entries – In Books of H (Activity
contd)
Date Particulars Debit Credit
1/1/Year 1 Right of use a/c Dr 10,460
To Cash a/c 2,600
To Lease Liability A/c 7,860
(For lease of asset, initial advance payment and direct cost
paid, initial lease liability – for next 5 yrs)
31/12 Finance cost a/c Dr 786
To Lease Liability a/c 786
(For interest charges on outstanding liability)
31/12 Depreciation ac Dr 1,308
To Right of use asset a/c 1,308
(For depreciation charge on asset)
31/12 Profit & Loss a/c Dr
To Finance Cost a/c 786
To Depreciation a/c 1,308
31/12 Lease Liability a/c Dr 2,000
To Cash / Bank a/c 2,000
(For payment of instalment(P+I))
 Presentation
• The right-of-use assets should be either presented separately from other assets
in the balance sheet or disclosed in the notes.
• The lease liabilities should be presented either separately from other liabilities in
the balance sheet or disclose in the notes, the line items which include the lease
liabilities.
• In the statement of profit and loss, interest expense on the lease liability is a
component of finance cost and Depreciation on Right to Use Asset
• In Cash Flow Statement, cash payments for the principal portion of the lease
liability and interest, within financing activities
• Short-term lease payments, payments for leases of low-value assets and variable
lease payments not included in the measurement of the lease liability within
operating activities.
Disclosure
• Depreciation of right of use assets
• Interest expense on lease liabilities
• Expense relating to short term leases/lease of low value costs
 Books of Lessor
• A lessor shall classify each of its leases as either an operating lease or a
finance lease.
• A lease is classified as a finance lease, if it transfers substantially all the risks
and rewards incidental to ownership of an underlying asset.
• A lease is classified as an operating lease, if it does not transfer substantially
all the risks and rewards incidental to ownership of an underlying asset.
 Finance Lease Indicators
• Underlying asset is transferred to lessee at the end of the contract
• Lessee has an option to purchase the underlying asset at a price below
fair value
• Lease term is for majority of the underlying asset’s useful life
• Present value of future lease payments is substantially equal to the fair
value of the underlying asset
• The underlying asset is of a specialized nature and can be used only by
the lessee
 Accounting for finance lease by lessors
Initial Recognition:
• At the commencement of the lease term, lessor should recognize lease
receivable in his statement of financial position.
• The amount of the receivable should be equal to the net investment in
the lease.
• Debit Lease receivable, Credit PPE (underlying asset)
Accounting for finance lease by lessors
Subsequent Measurement - The lessor should recognize:
• A finance income on the lease receivable:
Lease receivable Dr
To Interest Income
Interest income ac Dr
To P/L
• A reduction of the lease receivable by the cash received:
Debit Bank account (Cash)
Credit Lease receivable
Accounting for operating lease by lessors
• Lessor keeps recognizing the leased asset in his statement of financial
position and will provide depreciation
• Lease income from operating leases shall be recognized as an income
on a straight-line basis over the lease term, unless another
systematic basis is more appropriate.
Disclosures
• Profit or loss on the sale of an asset under a finance lease contract
• Finance income earned on a finance lease
• Operating lease income
• Maturity analysis for lease payments receivable
IndAS 33 – Earnings per Share
Ind AS 33 – Earnings per Share
• Earnings per share (EPS) is widely regarded as the most important
indicator of a company's performance.
• It is also used in the calculation of the price earnings ratio, a ratio
closely monitored by analysts for listed companies.
• The price earnings ratio is equal to market price per share divided by
earnings per share and gives an indicator of the level of confidence in
the company by the market.
Basic EPS
• The basic EPS calculation is:
EPS = Earnings / Number of shares
• This is expressed as Rs. per share.
• Earnings: Net profit attributable to ordinary equity shareholders of
the parent entity, i.e. group profit after tax less profit attributable to
non-controlling interests and irredeemable preference share
dividends.
• Number of shares: Weighted average number of ordinary shares on a
time weighted basis(When shares are issued during the year)
 Issue of shares at full market price
• An issue at full market price brings additional resources to the entity, but the
impact on earnings is only from the date of issue. Therefore the number of
shares are time apportioned.
Issue of shares at full market price
 Bonus issue/Scrip issue
• Bonus issues are issues of shares to current shareholders, based upon the
shareholder's current shareholding, for free (no cash is raised).
• Bonus issue may also be referred to as scrip issues.

A bonus issue:
• does not provide additional resources to the issuer.
• means that the shareholder owns the same proportion of the business
before and after the issue.
 Bonus issue/Scrip issue
• Under Ind AS 33, when a company issues bonus shares, it needs to adjust
the prior period's EPS figures to provide a meaningful comparison between
the two periods.
• The adjustment is made to consider the increase in the number of shares due
to the bonus issue and to present the EPS figures as if the bonus issue had
occurred in the prior period.
• The correct approach, as per Ind AS 33, is to adjust the comparative figures
for the bonus issue.
• The rationale is to reflect the proportionate increase in share capital caused
by the bonus issue in the prior year's EPS figure.
• In EPS calculation, comparative figures are restated to allow for
proportionate increase in share capital caused by bonus issue
 EPS calculation with Bonus issue
The EPS calculation becomes:
• EPS = Earnings / No. of shares before bonus × bonus fraction
Bonus fraction = No. of shares after bonus issue /No. of shares before
bonus issue
EPS = Earnings / No. of shares after bonus

E.g. Company B holds 100,000 shares and makes a 1 for 10 bonus issue.
100,000/10 = 10,000 new shares issued.
• Bonus fraction = 110,000 /100,000 = 11/10
To adjust the comparative figures, multiply the previous year's basic EPS
by the inverse of the bonus fraction, i.e. 100,000/110,000 or 10/11.
Question
• On 1 April 20X2, Dorabella had 7 million $1 ordinary shares in issue. It
made a bonus issue of one share for every seven held on 31 August
20X2. Its earnings for the year were $1,150,000. Dorabella's EPS for
the year ended 31 March 20X2 was 10.7c.
• Required: Calculate the EPS for the year ending 31 March 20X3,
together with the comparative EPS for 20X2 that would be presented
in the 20X3 accounts.
Solution
• The number of shares issued on 31 August 20X2 is 7,000,000 × 1/7 =
1,000,000.
• The EPS for 20X3 is 1,150,000/8,000,000 = $0.1437 =14.4c

• The bonus fraction is (7 + 1)/7 = 8/7

• 20X2 adjusted comparative = 10.7 × 7/8 (bonus fraction inverted) =
9.36c.
 Problems
• At 1 May 20X3, Rose had 900 million $1 ordinary shares in issue. It made a
bonus issue of one share for every 9 held on 1 September 20X3. Its profit
before tax for the year was $800m and the income tax expense for the year
was $350m. Required: Calculate the basic EPS for the year ended 30 April
20X4. Give your answer in cents.
• EPS (after bonus)= Earnings / No. of shares after bonus
Earnings= 800-350 = 450m
EPS = 450m/1000m = $0.45 = 45c
Calculate EPS as though the bonus shares had always been in issue by
multiplying the number of shares before the issue by the bonus fraction. The
comparative is multiplied by the inverse of the bonus fraction to adjust it for
comparison between the years.
Problems
• Also calculate EPS, if an issue of 50 million shares at full market price
took place on 1 December 20X3.
• EPS = 450m/(900*7/12 +950*5/12)
• =$ 0.488 = 48.8c
Rights Issue
Rights issues:
• contribute additional resources; and
• are normally priced below full market price.

Therefore, they combine the characteristics of issues at full market

price and bonus issues.
Calculation
• Determining the weighted average capital, therefore, involves two steps as
follows:
1. Adjust for the bonus element in the rights issue, by multiplying shares in
issue before the rights issue by the following fraction:
=Actual cum rights price (CRP)/ Theoretical ex rights price (TERP)
– The cum rights price will be given to you in the exam question. It is the share price
on the last trading day before the rights issue, i.e. the price of a share 'including' the
rights.
– The theoretical ex-rights price is the theoretical share price after the rights issue
has occurred. This must be calculated.
2. Calculate the weighted average capital in the issue on a time
apportioned basis.
Problem
• On 31 December 20X1, the issued share capital of a company
consisted of 4,000,000 ordinary shares of 25c each. On 1 July 20X2
the company made a rights issue in the proportion of 1 for 4 at 50c
per share when the shares were quoted at $1.15. The profit after tax
for the year ended 31 December 20X2 was $425,000. The reported
earnings per share for the year ended 31 December 20X1 was 8c.
• Required: Calculate the EPS for the year ended 31 December 20X2,
together with the comparative for 20X1 that would be presented in
the 20X2 financial statements.
EPS
Diluted EPS
• Equity share capital may change in the future owing to circumstances
which exist now. The provision of a diluted EPS figure attempts to alert
shareholders to the potential impact of these changes on the EPS
figure.
• Examples of transactions that may create such circumstances are:
o convertible bonds (or convertible preference shares)
o share options (or warrants).
• When the potential ordinary shares are issued the total number of
shares in issue will increase and this can have a dilutive effect on EPS
i.e. it may fall.
Calculation
• Diluted EPS is calculated as follows:
= Earnings + notional extra earnings/Number of shares + notional
extra shares
Convertible debt
• The principles of convertible bonds and convertible preference shares
are similar and will be dealt with together.
• If the convertible bonds/preference shares had been converted:
• the interest/dividend would be saved therefore earnings would be higher
• the number of shares would increase.
Note: Interest on bonds is tax deductible however preference dividends do
not attract tax relief.
Therefore, only convertible bonds consider the tax implications within
the diluted EPS calculation.
Options and warrants to subscribe for
shares
• An option or warrant gives the holder the right to buy shares at
some time in the future at a predetermined price.
• The cash received by the entity when the option is exercised will be
less than the market price of the shares, as the option will only be
exercised if the exercise price is lower than the market price.
• The increase in resources does not match the increase there would
have been if the issue of shares were at market value. The options
will therefore have a dilutive effect on EPS.
Problem
Solution
Note
• The weighted average number of shares issued and issuable for 20X1
would have been the issued 4,000,000 plus nine months’ worth of the
potential shares, i.e. 4,000,000 + (9/12 × 1,550,000) = 5,162,500.
IndAS 12 – Income Taxes
Types
IndAS 12 on Income Taxes states that there are two elements of tax
that will need to be accounted for:

1. Current tax (the amount of tax payable/recoverable in respect of

the taxable profit/loss for a period)
2. Deferred tax (an accounting adjustment aimed to match the tax
effects of transactions to the relevant accounting period)
Accounting Treatment- Current Tax
• The figure for tax on profits is an estimate of the amount that will be
eventually paid (or received) and will appear in current liabilities (or
assets) in the statement of financial position.

Income tax expense Dr (in statement of profit or loss)

To Income tax payable (in statement of financial position as
current liability)
Under/Over provisions
• Any under or over-provision from the prior year is dealt with in the
current year's tax charge. This does not affect the year-end tax
liability.
• All we need to do is take the under- or over-provided amount to the
statement of profit or loss.
• an under-provision increases the tax charge
• an over-provision decreases the tax charge.
Example
• Simple has estimated its income tax liability for the year ended
31 December 20X8 at $180,000. In the previous year the income tax
liability had been estimated as $150,000.
Required: Calculate the tax expense that will be shown in the statement of
profit and loss for the year ended 31 December 20X8 if the amount that was
actually agreed and settled with the tax authorities in respect of 20X7 was:
(a) $165,000
(b) $140,000
• Under Provision ($150,000 vs 165,000) :
Statement of profit or loss charge:
Year end estimate - 1,80,000
Under provision: 20X7 ($165,000 – 150,000) 15,000
Income tax Expense - PL 1,95,000

• Over provision($150,000 vs 140,000) :

Statement of profit or loss charge
Year end estimate 1,80,000
Over provision: 20X7 ($150,000 – 140,000) (10,000)
Income tax expense - P/L 1,70,000
Deferred tax
• Deferred Tax is the estimated future tax consequences of
transactions and events recognized in the financial statements of the
current and previous periods.
• Deferred taxation is a basis of allocating tax charges to particular
accounting periods.
• The key to deferred taxation lies in the two quite different concepts of
profit: Accounting Profit and Taxable Profit.
Accounting Profit and Taxable Profit
• Accounting profit (or the reported profit), which is the figure of profit
before tax, reported to the shareholders in the published accounts
• Taxable profit, which is the figure of profit on which the taxation
authorities base their tax calculations. (computed under Income Tax
Act 1961)
Accounting Profit and Taxable Profit
Example
• In year ending 31/12/20X1, an entity Zippy made an accounting
profit of $50,000. Profit included $3,500 of entertaining expenses
which are disallowable for tax purposes and $5,000 of income
exempt from taxation. Zippy has $70,000 of non-current assets
which were acquired on 01/01/20X0 and are depreciated at 10% on
cost. Tax depreciation rates are 20% reducing balance.
• Calculate the taxable profit for the year ended 31/12/X1.
Depreciation WDCV:
2010: 70000x 20% = 14000
2011: (70000 – 14000) = 56000 x 20% =11200
Solution
 Deferred Tax Effect

S.NO Entity Profit Status Entity - Current Entity- Future Effect

1 Book profit higher Pay less tax now Pay more tax in Creates
than the taxable future Deferred Tax
profit Liability
2 Book profit less Pay more tax now Pay less tax in Creates
than the taxable future Deferred Tax
profit Asset
• There is a difference between the book profit and taxable profit
because of certain items which are specifically allowed or disallowed
each year for tax purposes.
• This difference between the book and the taxable income or expense is
known as timing difference and it can be either of the following:
1. Permanent differences
2. Temporary differences
Differences
Example – Permanent difference
• Accounting profit: 1000, Fine to supplier: 100 = 900
• Final Acc profit = 900
• Tax = 900 x 30% = 270

• Taxable profit: 1000 x 30% = 300

• There is no Deferred Tax in case of permanent differences

Example – DTA (Book profit is less than the Taxable profit
• Suppose, book profit of an entity before taxes is Rs 1,000 and this includes provision for bad
debts of Rs.200. For the purpose of tax profit, bad debts will be allowed in future when it’s
actually written off.
• Hence taxable income after this disallowance will be Rs. 1200
• Let’s say income tax rate is 20%.
• Then the entity will pay taxes on Rs. 1200 i.e. (1200*20%) Rs. 240.

• If bad debts were not disallowed, entity would have paid tax:
• On Rs. 1000 - amounting Rs 200 i.e. 1000*20%.
• For the additional Rs. 40 which is already paid now, we have to create DTA. Entry for recording
the DTA is as under:
• Deferred Tax Asset Dr 40
To Deferred Tax Expense Cr 40
 DTL (Book profit is more than the Taxable profit)
• Common example of DTL would be depreciation.
• When the depreciation rate as per the Income tax act is higher than
the depreciation rate as per the Companies act (generally in the initial
years), entity will end up paying less tax for the current period.
• This will create deferred tax liability in the books.
 DTA/DTL
• There are no DTA or DTL provisions made for permanent differences. Eg.
Fines and penalties which are part of book profits but are not allowed for
tax purposes. Hence, this difference created will be a permanent
difference.
• DTA is presented under non-current assets and DTL under the head non-
current liability.
• Both DTA and DTL can be adjusted with each other provided they are
legally enforceable by law and there is an intention to settle the asset
and liability on a net basis.
Accounting Treatment
Increase in Deferred tax provision:
Income tax Expense A/C Dr
To Deferred Tax Provision (SOFP)

Decrease in Deferred tax provision:

Deferred Tax Provision a/c Dr (SOFP)
To Income tax expense a/c
Accounting Treatment
• Balance b/f ( as per Trial balance) - XXX
• Balance c/f (in SOFP) - XXX (temp diff X tax rate)
• Increase / Decrease in Def. Tax - X / (X)
• (SOPL / Equity )
Activity 1
Answer

It’s a DTL as book profit> tax profit

(depreciation in financial books lower than tax depreciation, making book profits higher than taxable profits)
Assignment: Problem - 1
Solution
2011 – PBT – 1,00,000 x 30% = 30,000
• Provision for tax payable – SOPL: 30,000
• Actual tax paid (in 2012)- $28,900 , over provision – 1,100 SOFP

2012 – 1,20,000 x 30% = $36,000 , SOPL - $34,900 (36000 – 1100)

• I Tax Exp a/c Dr 34900, Prov for IT payable - 34900
• Actual tax paid (in 2013) - $37,200 , under provision – 1,200

2013 – 110000 x 30% = 33,000 + 1200 (2012) = $34,200

• SOPL 34,200 – payable in 2014 + under provision 2012
• SOFP 33,000 – payable in 2014
Balance Sheet

2011 - Provision for tax payable 30,000 ( payable in 2012)

2012 - Provision for tax payable 36,000 (payable in 2013)
2013 - Provision for tax payable 33,000 (payable in 2014)

To Prov for IT payable 30,000 2011 (30000 – 28,900)

To Prov for IT payable 34,900 2012 (36000 – 1100)
To Prov for IT payable 34,200 2013 (33000 + 1200)
Problem 2
• A company's trial balance shows a debit balance of $2.1 million brought
forward on current tax account and a credit balance of $5.4 million on
deferred tax.
• The tax charge for the current year is estimated at $16.2 million and the
carrying amounts of net assets are $13 million in excess of their tax
base. The income tax rate is 30%. What amount will be shown as
income tax in the statement of profit or loss for the year?
• Prov. for Deferred Tax = Diff in asset values x tax rate (SOFP – Cl Bal)
• (Provision – B/Fd – is always a credit balance account, if they given it as
debit balance account – UNDER provision)
 Solution
Current Year tax
• Provision for Current tax (last year brought forward ) Under – 2.1 m
• Provision for Current tax (payable next year) - 16.2
• Total amount to be put into provision = 2.1 + 16.2= 18.3 SOPL

Deferred tax provision

• Prov for D Tax = 13m x 30% =SOFP 3.9 m
• But available already = 5.4 m, therefore the difference should be
credited in the SOPL (1.5 m)
• Net effect in SOPL = 16.8 m Debit (18.3 – 1.5)
Solution
• Current year tax provision = $16,200
• Under-provision (last year) - $2,100
• Deferred tax $(1500) **
• SOPL – Dr $16,800

• Deferred tax
• Provision needed – 13m x 30% = 3,900
• Op balance prov – (5,400)
• Adjust to P/L = (1,500) excess available
Problem 3
• A company's trial balance at 31 December 20X3 shows a debit
balance of $700,000 on current tax and a credit balance of
$8,400,000 on deferred tax.
• The directors have estimated the provision for income tax for the
year at $4.5 million and the required deferred tax provision is $5.6
million, $1.2 million of which relates to a property revaluation.
• What is the profit or loss income tax charge for the year ended 31
December 20X3?
 Solution
• SOPL Debit = Prov for Current year tax = $5.2m (current 4.5 + under 0.7)
• SOPL = Prov for Deferred tax = 5.6 – 1.2 (OCI) = 4.4 Closing balance, but
available = 8.4, withdraw excess ( 8.4 – 4.4 ) = $4m, credit it to SOPL
• Final Impact on SOPL = 5.2 – 4 = $1.2 m Debit
Problem 4
• The trial balance of Highwood at 31 March 20X6 showed credit
balances of $800,000 on current tax and $2.6 million on deferred tax.
• A property was revalued during the year giving rise to deferred tax of
$3.75 million. This has been included in the deferred tax provision of
$6.75 million at 31 March 20X6.
• The income tax charge for the year ended 31 March 20X6 is estimated
at $19.4 million.
• What will be shown as the income tax charge in the statement of profit
or loss of Highwood at 31 March 20X6?
 Solution
• SOPL – Current tax = 19.4 - 0.8 (over provision) = Debit 18.6
• SOPL – Deferred tax = Debit 4,00,000 ( Deferred tax = 6.75 includes 3.75
towards revaluation surplus, 6.75 – 3.75 = 3 will be the closing balance
provision , out of which already available 2.6 m , (3-2.6) = 0.4 m Debit
SOPL
• Final Impact Debit in SOPL = 19 m (18.6 + 0.4 )
IndAS 34 – Interim Financial
Reporting
 Definition
• Interim period is a financial reporting period shorter than a full financial
year.
• Interim financial report means a financial report containing either a complete
set of financial statements (as described in Ind AS 1, Presentation of Financial
Statements) or a set of condensed financial statements (as described in this
Standard) for an interim period.
Contents of IFR
An interim financial report shall include, at a minimum, the following
components:
(a) a condensed balance sheet ;
(b) a condensed statement of profit and loss;
(c) a condensed statement of changes in equity;
(d) a condensed statement of cash flows; and
(e) selected explanatory notes
Contents of IFR
Recognition & Measurement
• In preparation of interim financial statements, an entity should use the
same accounting policies which were applied in its annual financial
statements.
• In case of any change in accounting policies, it should use the new
policies.
• The principles for recognising assets, liabilities, income, and expenses for
interim periods are the same as in annual financial statements.
 Scope
• This Standard does not mandate which entities should be required to
publish interim financial reports, how frequently, or how soon after the
end of an interim period.
• However, governments, securities regulators, stock exchanges, and
accountancy bodies often require entities whose debt or equity securities
are publicly traded to publish interim financial reports.
• This Standard applies if an entity is required or elects to publish an interim
financial report in accordance with Indian Accounting Standards.
 Significant events and transactions
• An entity shall include in its interim financial report an explanation of
events and transactions that are significant to an understanding of the
changes in financial position and performance of the entity since the end
of the last annual reporting period.
• Information disclosed in relation to those events and transactions shall
update the relevant information presented in the most recent annual
financial report.
 Significant events and transactions
• An entity shall include in its interim financial report an explanation of
events and transactions that are significant to an understanding of the
changes in financial position and performance of the entity since the end
of the last annual reporting period.
• Information disclosed in relation to those events and transactions shall
update the relevant information presented in the most recent annual
financial report.
 Significant events and transactions
• An entity shall include in its interim financial report an explanation of
events and transactions that are significant to an understanding of the
changes in financial position and performance of the entity since the end
of the last annual reporting period.
• Information disclosed in relation to those events and transactions shall
update the relevant information presented in the most recent annual
financial report.
IndAS 38 – Intangible Assets
Definition
• An intangible asset is an identifiable non-monetary asset, without
physical substance. The asset must be:
(a) controlled by the entity as a result of events in the past
(b) something from which the entity expects future economic
benefits to flow

Example: computer software, patents, copyrights, motion picture

films, License, franchises and fishing rights.
Recognition criteria
• An intangible asset should be recognized when it complies
with the definition of an intangible asset; and meets the
recognition criteria set out in the standard.
• The recognition criteria are that:
• it is probable that future economic benefits specifically
attributable to the asset will flow to the entity; and
• the cost of the asset can be measured reliably.
"Identifiability"
An intangible asset, whether generated internally or acquired in a
business combination, is identifiable when it:
• Is separable; or
• Arises from contractual or other legal rights

These criteria distinguish intangible assets from goodwill acquired in a

business combination.
 "Control"
Control means:
• the power to obtain the future economic benefits from the underlying
resource; and
• the ability to restrict the access of others to those benefits.

These would fail the control test because an entity does not control them.
• Staff training. Staff training creates skills that could be seen as an asset for the
employer. However, staff could leave their employment at any time, taking with
them the skills they have acquired through training.
• Customer lists. Similarly, control is not achieved by the acquisition of a customer
list, since most customers have no obligation to make future purchases.
"Future Economic Benefits"
• These are net cash inflows and may include increased revenues
and/or cost savings.
 Different ways of acquisition and
measurement
• By separate acquisition – at cost
• As part of a Business Combination – at fair value
• By way of Government Grant – at fair value
• By Exchange of Other Assets
• By Internal Generation
 Initial measurement
• Intangible assets should be measured initially at cost.
• An intangible asset may be acquired: separately; as part of a business
combination; by way of a government grant; or by an exchange of assets.
• "Cost" is determined according to the same principles applied in
accounting for other assets. For example:
 purchase price + import duties + non-refundable purchase tax.
 Deferred payments are included at the cash price equivalent; the difference
between this amount and the payments made are treated as interest.
• It should not include: selling, administrative and other general overheads,
training costs, advertising expenditure.
Business Combination
• The cost of an intangible asset acquired in a business combination is
its fair value at the date of acquisition, irrespective of whether the
intangible asset had been recognized by the acquiree before the
business combination.
Government Grant
• In some cases, an intangible asset may be acquired free of charge,
or for nominal consideration, by way of a Government grant.
• This may happen when a Government transfers or allocates to an
entity intangible assets such as airport landing rights, licences to
operate radio or television stations, import licences or quotas or
rights to access other restricted resources
• Measured at fair value as per Ind AS -20
 Exchange of assets
If one intangible asset is exchanged for another, the cost of the intangible
asset is measured at fair value unless:
(a) the exchange transaction lacks commercial substance (there is a
significant difference between the risk, timing and amount of cash
flows from the asset received and those of the asset transferred.)
Or
(b) the fair value of neither the asset received, nor the asset given up can
be measured reliably.
If the acquired asset is not measured at fair value, its cost is measured at
the carrying amount of the asset given up.
Internally generated goodwill
• Internally generated goodwill may not be recognized as an asset.
• In particular, it is clearly inseparable. It only can be disposed of with the
business as a whole.
• You do not recognize an asset which is subjective and cannot be
measured reliably.
Other internally generated intangible assets
• The standard prohibits the recognition of internally generated brands,
mastheads, publishing titles and customer lists and similar items as
intangible assets.
• These all fail to meet one or more (in some cases all) the definition and
recognition criteria and in some cases are probably indistinguishable
from internally generated goodwill.
 Other internally generated intangible assets
• To assess whether an internally generated intangible asset meets the criteria
for recognition, an entity classifies the generation of the asset into:
(a) a research phase; and
(b) a development phase.

If an entity cannot distinguish the research phase from the development phase
of an internal project to create an intangible asset, the entity treats the
expenditure on that project as if it were incurred in the research phase only.
Research and Development Costs:
• Research is original and planned investigation undertaken with the
prospect of gaining new scientific or technical knowledge and
understanding.

• Development is the application of research findings or knowledge to a

plan or design for the production of new or substantially improved
materials, devices, products, processes, systems or services before the
start of commercial production or use.
 Research costs
IAS 38 states: ‘No intangible asset arising from research shall be recognised.
Expenditure on research shall be recognised as an expense when it is incurred.’
Examples of research costs:
(a) activities aimed at obtaining new knowledge
(b) the search for, evaluation and final selection of, applications of research
findings or other knowledge
(c) the search for alternatives for materials, devices, products, processes,
systems or services
(d) the formulation, design evaluation and final selection of possible alternatives
for new or improved materials, devices, products, systems or services
 Development costs
• Development costs may qualify for recognition as intangible assets
provided that the following strict criteria can be demonstrated:
(a) the technical feasibility of completing the intangible asset, so that it will
be available for use or sale
(b) its intention to complete the intangible asset and use or sell it
(c) its ability to use or sell the intangible asset
(D) how the intangible asset will generate probable future economic
benefits. Among other things, the entity should demonstrate the existence
of a market for the output of the intangible asset or the intangible asset
itself or, if it is to be used internally, the usefulness of the intangible asset.
(E) its ability to measure the expenditure attributable to the intangible
asset during its development reliably

• In contrast with research costs, development costs are incurred at a later

stage in a project, and the probability of success should be more
apparent.
• If any of these conditions is not met, the development expenditure
should be treated in the same way as research costs and recognised
in full as an expense when it is incurred, and cannot be treated as
an intangible asset.
• Once such expenditure has been written off as an expense, it cannot
subsequently be reinstated as an intangible asset.
Example
• Doug co is developing a new production process. During 20X3,
expenditure incurred was $100,000, of which $90,000 was incurred
before 1 December 20X3 and $10,000 between 1 December 20X3
and 31 December 20X3. Doug co can demonstrate that, at 1
December 20X3, the production process met the criteria for
recognition as an intangible asset. The recoverable amount of the
know-how embodied in the process is estimated to be $50,000.
• Required: How should the expenditure be treated?
Example
• At the end of 20X3, the production process is recognised as an
intangible asset at a cost of $10,000. This is the expenditure
incurred since the date when the recognition criteria were met, that is
1 December 20X3.
• The $90,000 expenditure incurred before 1 December 20X3 is
expensed, because the recognition criteria were not met. It will never
form part of the cost of the production process, recognised in the
statement of financial position.
 Amortization and impairment of intangible
assets
• The useful life of an intangible should be assessed as being either: finite, or
indefinite.
1. A finite useful life is a useful life that will come to an end, within a
foreseeable time.
2. An indefinite useful life is one where there is no foreseeable limit to the
asset’s useful life.
Intangibles with a finite useful life
Where the useful life is assessed as finite:
• the intangible should be amortized over its estimated useful life
• its residual value is usually assumed to be zero
• amortisation charges should be charged as an expense in each
period over the useful life of the asset
• if there are any indications of impairment, then an (IAS 36)
impairment review should be carried out.
• Amortisation should start when the asset is available for use/commercialization
starts
• Amortisation should cease at the earlier of the date that the asset is classified as
held for sale in accordance with IFRS 5 (non-current assets held for sale and
discontinued operations) and the date that the asset is derecognised.
• the amortisation method used should reflect the pattern in which the asset's
future economic benefits are consumed. If such a pattern cannot be predicted
reliably, the straight-line method should be used.
• the amortisation charge for each period should normally be recognised in profit
and loss statement.
• The amortisation period and the amortisation method used for an intangible asset
with a finite useful life should be reviewed at each financial year end.
Intangibles with an indefinite useful life
Where the useful life is assessed as indefinite:
• the intangible asset should not be amortized
• impairment reviews should be carried out annually (and even more
frequently if there are any indications of impairment).
IndAS 36 – Impairment of
Assets
 Impairment of Assets
• The objective of Ind AS 36 Impairment of assets is to ensure that assets are
‘carried’ (valued) in the financial statements at no more than their
recoverable amount.
• An asset is carried at more than its recoverable amount if its carrying
amount exceeds the amount to be recovered through use or sale of the
asset. If this is the case, the asset is described as impaired and the Standard
requires the entity to recognize an impairment loss.
• The Standard also specifies the circumstances and conditions for reversal of
Impairment Loss
 Definitions
• Cash Generating Unit (CGU): is the smallest identifiable group of assets that
generates Cash Inflows that are largely independent of the Cash flows from other
Assets or group of Assets
• Impaired Asset: an Asset is said to be impaired when its Carrying Amount exceeds
its Recoverable Amount
• Impairment Loss: refers to the excess of the Carrying Amount of an Asset or CGU,
over its Recoverable Amount
• Carrying Amount: amount at which an asset is recognized, after Accumulated
Depreciation and Accumulated Impairment Losses thereon
• Recoverable Amount: Fair value less Cost of Disposal or Value in Use, whichever is
higher
 Definitions
• Fair value: is the price that would be received to sell an Asset or paid to
transfer a Liability in an orderly transaction between Market Participants at
the Measurement Date
• Costs of Disposal: Incremental Costs directly attributable to the disposal of
an Asset/CGU excluding Finance Costs, valuers costs and Income tax
expenses
• Value in Use: Present value of Future Cash Flows, expected to be derived
from an Asset/CGU
 Measuring the recoverable amount of the asset
An asset's fair value less costs of disposal is the price that would be received to sell the
asset in an orderly transaction between market participants at the measurement date,
less direct disposal costs, such as legal expenses.
Fair Value Less Costs of Disposal
• X operates in leased premises. It owns a bottling plant which is situated in a single
factory unit. Bottling plants are sold periodically as complete assets.
• Professional valuers have estimated that the plant might be sold for $100,000. They
have charged a fee of $1,000 for providing this valuation.
• X would need to dismantle the asset and ship it to any buyer. Dismantling and shipping
would cost $5,000. Specialist packaging would cost $4,000 and legal fees $1,500.

• Ans: 89,500
 Value in use
Value in use is the present value of the future cash flows expected to be
derived from an asset. Estimating it involves:
• estimating the future cash inflows and outflows to be derived from
continuing use of the asset and from its ultimate disposal; and
• applying the appropriate discount rate
Calculate value in use of an asset, if cash inflows for 5
years are $20,000 each. Discount rate is 10%.
Year Cash inflow ($) P V factor @ 10% Discounted cash
flow ($)
1 20,000 0.909 18,180
2 20,000 0.826 16,520
3 20,000 0.751 15,020
4 20,000 0.683 13,660
5 20,000 0.621 12,420
Value in Use = 75,800
 Identifying a potentially impaired asset
• An entity should assess at the end of each reporting period whether there are
any indications of impairment to any assets.
• If there are indications of possible impairment, the entity is required to make a
formal estimate of the recoverable amount of the assets concerned.
• Even if there are no indications of impairment, the following assets must always
be tested for impairment annually:
(a) An intangible asset with an indefinite useful life
(b) Goodwill acquired in a business combination
(c) Intangible asset not yet available for use (capitalised development expenditure)
 Recognition and measurement of an
impairment loss
• When recoverable amount < carrying value of the asset, the entity should reduce
the asset’s carrying value = recoverable amount. The amount by which the value of
the asset is written down is an impairment loss.
• This impairment loss is recognised as a loss for the period.
• However, if the impairment loss relates to an asset that has previously been re-
valued upwards, it is first offset against any remaining revaluation surplus for that
asset. When this happens it is reported against other comprehensive income (OCI)
for the period (a negative value) and not charged against profit.
• Amortization charges for the impaired asset in future periods should be adjusted to
allocate the asset’s revised carrying amount, minus any residual value, over its
remaining useful life (revised if necessary).
 Reversal of an impairment loss
An impairment loss may be reversed when there is evidence that
this has happened. Any reversal:
• must be justifiable, by reference to an improvement in the indicators of
impairment, and
• should not lead to a carrying amount in excess of what the carrying
amount of the asset would have been without the recognition of the
original impairment loss.
• Asset 1,00,000
• Loss 20,000
• Carrying Amount = 80,000

• Fair Value 1,20,000

• CA – 1,00,000
• Fair Value 90000
• Revised Carrying Amount 90,000
• Residual Value at end of 8 years 500 lakhs
• Fair Value less Cost of Disposal 10,000 lakhs
Calculate CA (on 31.3.20x4), Impairment Loss, Revised Carrying Amount and Revised
Amortization.
 Ind AS 37 – Provisions,
Contingent Liabilities and
Contingent Assets
 Objectives
To ensure that:
• Appropriate recognition criteria and measurement bases are applied to
provisions, contingent liabilities and contingent assets
• Sufficient information is disclosed in the notes to the financial statements
to enable users to understand their nature, timing and amount.
 What is a provision?
• A provision is a liability of uncertain timing or amount
• A liability is a present obligation of the entity arising from past events, the
settlement of which is expected to result in an outflow from the entity of
resources embodying economic benefits
 Recognition Criteria
A provision shall be recognised when:
• an entity has a present obligation (legal or constructive) as a result of a
past event,
• a reliable estimate can be made of the amount of the obligation, and
• it is probable that an outflow of resources embodying economic benefits
will be required to settle the obligation

If these conditions are not met, no provision shall be recognised.

 (1) A present obligation as a result of a past event
• The obligation needs to exist because of events which have already
occurred and give rise to a potential outflow of economic resources.
• This obligation can either be:
(a) Legal/contractual
(b) Constructive – This is where the company establishes a valid
expectation through a course of past practice, regardless of whether
there is a legal requirement to perform the task or not.
Legal Obligation
• Legal obligation is an obligation which derives from:
a contract;
legislation; or
other operation of law.
• X Ltd. Entered into a contract with Y Ltd. for supply of material K. As
per the terms, in case of breach of contract, the party who breaches
has to pay Rs.50 lakhs to the other party.
• X Ltd. Breached the contract with Y Ltd.
• Obligating Event is Breach of Contract. (Legal)
 Constructive Obligation
Constructive obligation: an obligation which derives from an entity's
actions where:
• by an established pattern of past practice, published policies or a
sufficiently specific current statement, the entity has indicated to other
parties that it will accept certain responsibilities; and
• as a result, the entity has created a valid expectation on the part of those
other parties that it will discharge those responsibilities.
 Example
A retail store has a policy of refunding purchases by dissatisfied customers,
even though it is under no legal obligation to do so. Its policy of making
refunds is generally known. Should a provision be made at the year end?
• The policy is well known and creates a valid expectation.
• There is a constructive obligation.
• It is probable some refunds will be made.
• These can be measured using expected values.
Conclusion: A provision is required.
(2) A reliable estimate can be made
• Provisions should be recognised at the best estimate.
• If the provision relates to one event, such as the potential liability
from a court case, this should be measured using the most likely
outcome.
• If the provision is made up of numerous events, such as a provision to
make repairs on goods within a year of sale, then the provision should
be measured using expected values.
Example
An entity sells goods with a warranty covering customers for the cost of
repairs of any defects that are discovered within the first two months after
purchase. Past experience suggests that 88% of the goods sold will have no
defects, 7% will have minor defects and 5% will have major defects. If
minor defects were detected in all products sold, the cost of repairs would
be Rs.24,000. If major defects were detected in all products sold, the cost
would be Rs.200,000.
• What amount of provision should be made?

The expected value of the cost of repairs is Rs.11,680 [(7% × 24,000) + (5% ×
200,000)].
Example
An entity has to rectify a serious fault in an item of plant that it has
constructed for a customer. The individual most likely outcome is that
the repair will succeed at the first attempt at a cost of Rs.400,000, but
there is a chance that a further attempt will be necessary, increasing
the total cost to Rs.500,000.
What amount of provision should be recognised?

• A provision for Rs.400,000 is recognised.

• This is because the best estimate of the liability is its most likely
outcome, not the worst-case scenario.
(3) There is a probable outflow of economic resources
• If the likelihood of the event is not probable, no provision should be
made.
• If there is a possible liability, then the company should record a
contingent liability instead.
Accounting Treatment
Journal Entry
1. Compensation / Warranty / Damage Expense a/c Dr - SOPL
To Provision for Expense a/c – Liability in B/S
(For creation of provision)

2. Provision for Expense a/c Dr

To Cash / Bank a/c
(For settlement)
 Contingent Liability
• A possible obligation that arises from past events and whose existence will
be confirmed only by the occurrence or non-occurrence of one or more
uncertain future events not wholly within the control of the entity, or
• a present obligation that arises from past events but is not recognised
because:
it is not probable that an outflow of resources embodying economic benefits will
be required to settle the obligation, or
the amount of the obligation cannot be measured with sufficient reliability
Contingent Asset
• A contingent asset is a possible asset that arises from past events
and whose existence will be confirmed only by the occurrence or non-
occurrence of one or more uncertain future events not wholly within
the control of the entity
Recognition
• A contingent liability is disclosed as a note to the accounts only, no
entries are made into the financial statements other than this
disclosure.
• Similar to a contingent liability, a company may also have a
contingent asset to disclose
Different Scenarios
• Warranty provisions
• Guarantee
• Reimbursements
• Onerous Contracts
• Future Operating Losses
• Environmental provisions
• Restructuring Provisions
 Example
On 14 June 20X5 a decision was made by the board of an entity to close
down a division. The decision was not communicated at that time to any of
those affected and no other steps were taken to implement the decision by
the year end of 30 June 20X5. The division was closed in September 20X5.
Should a provision be made at 30 June 20X5 for the cost of closing down the
division?
• No constructive obligation exists.
• This is a board decision, which can be reversed.
• No provision can be made.
 Example
• A common example of contingencies arises in connection with legal
action.
If A Co (manufacturer of Liquid) sues B Co (Chemical solution) because
it believes that it has incurred losses as a result of B’s faulty products,
then B may be liable for damages. Whether or not the damages will
actually be paid depends on the outcome of the case. State the
disclosure as per Ind AS 37.
• Until the outcome of the case is known, B has a contingent liability and
A has a contingent asset.
 Example
• During the year ending 31 March 20X9, a customer commenced legal
proceedings against a company, claiming that one of the food products
that it manufactures had caused several members of his family to become
seriously ill. The company’s lawyers have advised that this action will
probably not succeed.
• Should the company disclose this in its financial statements?
 Solution
• Legal advice is that the claim is unlikely to succeed.
• It is unlikely that the company has a present obligation to compensate
the customer and therefore no provision should be recognised.
• There is, however, a contingent liability.
• Financial statements should disclose a brief description of the nature of
the contingent liability, an estimate of its financial effect and an
indication of the uncertainties relating to the amount or timing of any
outflow.
 Example
• On 1 January 20X1, KJC acquires a mine costing Rs.5 million and as part
of the licence granted by the government for operation of the mine, it
will be required to pay decommissioning costs at the end of the mine's
useful life of 20 years.
• The present value of these decommissioning costs is Rs.1 million and
the discount rate applied is 10%. (Hint: Cost of asset = 5m + 1m = 6m)
(Licence cost + PV of future decommissioning cost)
• KJC depreciate assets on a straight- line basis.
• Explain the effect of the above transaction on the financial statements
of KJC for the year ended 31 December 20X1.
 Journal Entries
1/1
• License a/c Dr 60,00,000 – Asset a/c
To Cash a/c 50,00,000
To Prov for decommissioning exp a/c 10,00,000 (PV of future exp)
31/12
• Interest/Finance cost a/c Dr (10,00,000 x 10%) 1,00,000 - SOPL
To Prov for decommissioning exp a/c 1,00,000
• Depreciation a/c Dr (60,00,000/20 years) 3,00,000
To Accumulated depreciation a/c 300000

SOPL = 3,00,000 (Dep) + 1,00,000 (F.C.)

SOFP Asset = (60,00,000 – 3,00,000), Liability = Provision = (10,00,000+1,00,000)
Example
Suppose future dismantling expense (after 2 years) – 10,00,000 and discounting factor 8%
(PV = 1/ (1+r)^n):
• 1/1 Year 1 – 10,00,000 x 0.857 = Rs.8,57,000
Asset (P.V. of Dismantling expenses) a/c Dr 8,57,000
To provision for dismantling a/c 8,57,000
• 31/12 Year 1
Finance cost a/c Dr 68,560
To Prov for dismantling (8,57,000 x 8%) 68,560
(For unwinding interest on provision)
• 31/12/Year 2
• Finance cost a/ Dr 74,045
• To Prov for dismantling a/c (8,57,000+68,560) x 8% 74,045
(857000+ 68560+74045 = 999605) – Prov a/c Dr 10,00,000
To Bank a/c 10,00,000
Reimbursements example
• Health and Glow (HG) cosmetics – retail business
• Supplier – Pantene Shampoo
• Complaint for damages, skin allergies
• HG pays compensation and get it reimbursed from Pantene

1. Virtually certain
Compensation Exp a/c Dr
To Cash a/c
Compensation receivable a/c Dr - Asset
To Compensation reimbursed a/c - Income
2. Not certain
• Do not recognize the income
• Show disclosure as Contingent Asset
IndAS 40 – Investment
Property
 What is investment property?
The investment property is a land, a building (or a part of it), or both, held by
the owner or the Lessee under a Finance Lease, for the following specific
purposes:
• To earn rentals;
• For capital appreciation; or
• Both.
Here, the strong impact in on purpose.
If you hold a building or a land for any of the following purposes, then
it cannot be classified as investment property:
• For production or supply of goods or services,
• For administrative purposes, or
• For sale in ordinary course of business.
 Owner occupied property
• Owner occupied property is property held by the owner or by the Lessee
(under a Finance Lease) for use in the production or supply of goods or
services or for administrative purposes.
• Ind AS 16 applies to Owner occupied Property. (PPE: Production/Admin/
Supply )

Ex : Warehouse, office building, guest house , factories, movie theatre

Examples of Investment Properties
• Land held for long-term capital appreciation rather than for short-term
sale in the ordinary course of business.
• Land held for a currently undetermined future use.
• A building owned by the entity (or held by the entity under a finance
lease) and leased out under one or more operating leases.
• A building that is vacant but is held to be leased out under one or more
operating leases.
• Property that is being constructed or developed for future use as
investment property.
 Multiple portions
Some properties comprise a portion that is held to earn rentals or for
capital appreciation and another portion that is held for use in the
production or supply of goods or services or for administrative purposes.
• Properties comprising a portion held to earn rentals and another portion
held for use – Treatment - If these portions could be sold separately or
leased out – Investment Property :
• If portions could not be sold separately and the portion held for use in
production, supply, use is insignificant – Investment property; If
Significant – Owner Occupied Property
Ancillary Services
• In some cases, an entity provides ancillary services to the occupants
of a property it holds.
• An entity treats such a property as investment property if the services
are insignificant to the arrangement as a whole. An example is when
the owner of an office building provides security and maintenance
services to the lessees who occupy the building
• If Significant Services – Property treated as Owner occupied Property
Ex: Entity owns and manages a Hotel – Owner occupied property
(if an entity owns and manages a hotel, services provided to guests are
significant to the arrangement as a whole.)
Recognition
• It is probable that future economic benefits associated with the item
will flow to the entity; and
• The cost of the item can be measured reliably.
 Measurement - Initial
• Investment property shall be initially measured at cost, including the
transaction cost.
• The cost of investment property includes:
• Its purchase price and
• Any directly attributable expenditure, such as legal fees or professional fees, property
taxes, etc.
• You should NOT include:
• Start-up expenses whatsoever. However, if these start-up expenses are directly
attributable to the item of investment property, then you can include them. But do NOT
include any general start-up expenses.
• Operating losses that you incur before planned occupancy level is achieved, and
• Abnormal waste of material, labor or other resources incurred at construction.
 Measurement - Initial
• When payment for investment property is deferred, then you need to
discount it to its present value in order to set the cash price equivalent.
• The difference between this amount and the total payments is
recognized as interest expense over the period of credit.
Subsequent measurement
• An Entity shall adopt as its accounting policy the COST MODEL to ALL
of its Investment Property.
• Fair Value Model (FVM) not permissible under IndAS 40 (only under
IFRS)
• FVM only for disclosure, they are required to follow Cost Model
 Examples
Which of the following is an investment property? Identify others
- Land owned by Real estate broker
Inventory
- Factory building used for production
– PPE Owner occupied
- Building used for restaurant business
– PPE
- Building given for running restaurant –
Investment property
- Purchased land for leasing purposes or sales
– Investment property
- Parent company has leased a building to subsidiary
– Investment property in P Co , PPE – in case of Consolidated statement