CMA FINAL MODULE II

PRACTICAL TOPICS
I, CA Avinash Sancheti, dedicate this work to my Grandfather Late Shri Nagraj Ji
Sancheti, my source of inspiration my Father Shri Rajendra Kumar Sancheti and my
Mother Shri Sarla Sancheti, my source of happiness my entire Family, my pillar of
strength my Wife Mrs. Pragati Sancheti, my Best Friend and Partner Mr. Navneet
Mundhra, the entire Navin Classes team and all my students. This book covers the
Accounting Standards of CMA Final Syllabus in full depth along with past exam
analysis and questions. This module covers 16-18 marks of your CMA Final exam
paper. After complete reading and understanding of the subject students will not be
required to read ICAI’s study module separately.

CA CS Avinash Sancheti
(AIR 1,3 & 5)
INTRODUCTION TO CFR
(PAPER – 18)
SYLLABUS & MARKS ALLOCATION
Marks
Section Content
Allocation

A Ind AS 25%

Valuation of Shares, Accounting and

B Reporting of Financial Instruments and 15%
NBFCs

Accounting for Business Combination and

C 20%
Restructuring (in Compliance with Ind ASs)

Consolidated Financial Statements and

D Separate Financial Statements (in 20%
Compliance with Ind Ass)

E Recent Development in Financial Reporting 10%

F Government Accounting in India 10%

 CONTENT – MODULE II
Sl No. Chapter Page No.

1 Share Based Payments 1 – 10

2 Valuation of Shares & Goodwill 11 – 34

3 Non-Banking Financial Companies 35 – 44

 Chapter 1
Share Based Payments
MULTIPLE CHOICE QUESTIONs
(i) Ind AS 102 applies in accounting for all share-based payment transactions including:
(a) transactions forming part of business combination under Ind AS 103,
(b) transactions forming part of joint venture under Ind AS 111,
(c) transactions where the entity cannot identify specifically some of the goods or
services received,
(d) transactions in which the entity incurs liability to transfer cash or other asset
based on the value of the debt instruments of the entity.
(ii) In a share-based payment transaction when the entity receives goods or services but
neither issues equity instruments nor incurs liability as parent or any other entity in the
group settles the transaction,
(a) It is called equity-settled share-based payment transaction.
(b) It is called cash-settled share-based payment transaction.
(c) It is not considered as a transaction.
(d) It is not considered as a share based payment transaction.
(iii) For share based payment transactions with employees the entity shall measure the
services received
(a) at the Fair Value of the services received.
(b) by reference to the fair value of the equity instruments granted on the grant date.
(c) at the negotiated value.
(d) at the market value of the equity instruments on the grant date.
(iv) In an employee share based payment transaction there may be a condition
(i) of completing a specified period of service only.
(ii) that is related to the market price of equity instruments
(iii) of meeting the target sales.
Which of the following is true?
(a) both (i) and (ii) are service conditions
(b) (i) is service condition and (ii) is market condition
(c) Only (iii) is performance condition

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(d) both (i) and (ii) are performance conditions

(v) A company granted 100 shares to an employee on the conditions:
(i) That the employee will complete 2 year’s service
(ii) That the company will make sales over ` 2 crore in each of the years in the two years
(iii) That the share price will not be below ` 50 at the end of the 2nd year
(iv) And that the employee will be issued shares 4 months after completion of 2 year
service (which has no impact on vesting right).
Which one of the following is true?
(a) all the conditions (i) to (iv) are vesting conditions
(b) (ii) and (iii) are market conditions
(c) (iv) is non-vesting condition and (ii) and (iii) are performance conditions
(d) (i) and (iv) are service conditions.
(vi) If the equity options are granted on a vesting condition that the employee shall complete
a specified period of service:
(a) Employee expenses will be recognized at the completion of the specified period of
service.
(b) Employee expenses will be recognized during the specified period of service.
(c) Employee expenses will be recognized at the grant date.
(d) Employee expenses will be recognized when options will be exercised.

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BASIC UNDERSTANDING
Q1. Z Ltd. grants 100 share options to each of its 400 employees conditional on their continu-
ing in service for 3 years. Fair value of share option on the grant date is ` 25.
i. Is there any share based payment transaction as per Ind AS 102?
ii. Is the transaction equity settled or cash settled?
iii. At what value the transaction will be recognized?
iv. When will the transaction be recognized?
Q2. D Ltd. grants 10 share appreciation rights to Q, an employee, entitling him to receive cash
payment for the increase in quoted price of D’s shares from the exercise price of ` 500 per
share after 3 years. How the transaction should be recognized if it is assumed for a) for his
past service, b) for his service in future 3 years?
Q3. On condition of completion of 3 years service an employee is granted the right to choose
either –
i) right to cash payment equal to the value of 3,000 shares, or
ii) 3600 shares with restriction to hold them for 3 years after vesting.
The share price (nominal value ₹10) at the grant date is ₹60 and after taking the effect of
the post-vesting transfer restriction the fair value is estimated at ₹54 per share. At the end
of the years 1, 2 and 3 the share price is ₹64, ₹68 and ₹72 respectively.
At the end of year 3, the employee chooses: (a) the cash alternative; (b) the equity alterna-
tive. Show the necessary workings and pass the journal entries.
Q4. Nice Ltd. grants 180 share options to each of its 690 employees. Each grant contains
condition on the employees working for Nice Ltd. over the next 4 years. On November,2016
Nice Ltd. has estimated that the fair value of option is `15. It has also estimated that 30%
of employees will leave during four periods and forfeit their rights to the share option.
If the above expectations are correct, what amount of expenses to be recognized during
vesting period?
Q5. King Ltd. brand grants 170 share options to each of its 600 employees. Each grant contain-
ing condition on the employees working for King Ltd. over the next 4 years. King Ltd. has
estimated that the fair value option is `15. King Ltd. also estimated that 25% of employees
will leave during four periods and hence forfeit their rights to share the option. If the
above expectations are correct, what amount of expenses to be recognised during vesting
period as per Ind AS 102?

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EQUITY SETTLED OPTIONS

Q6. Jal Agni Ltd. provides you the following particulars in respect of stock options grated:
Grant Date April 1, 2015
Number of Employees Covered 1050
Number of Options granted for Employees 50
Vesting Condition Continuous employment for 3 years
Nominal Value per share (`) 100
Exercise Price per share (`) 125
Market Price per share on Grant Date (`) 149
Vesting Date March 31, 2018
Exercise Date March 21, 2019
Fair Value of Options per share on Grant Date (`) 30

Particulars/Position on 31.03.2016 31.03.2017 31.03.2018

Estimated Annual Rate of Departure 2% 3%
Number of Employees Left 30 20 16
Number of Employees entitled to 984
exercise option
On 31st March, 2019, 960 Employees exercised the option and 24 Employees did not
exercise the option.
Required:
Compute Expenses to be recognised in each year and Value of Options Forfeited by Fair
Value Method.
Note

Q7. Z Ltd. grants 100 share options to each of its 400 employees conditional on their continuing
in service for 3 years. Fair value of share option on the grant date is ` 30. Z Ltd. estimates
that 20 per cent of employees will leave during the three-year period and therefore forfeit
their rights to the share options.
During year 1, 18 employees leave. The entity revises its estimate of total employee
departures over the three-year period from 20 per cent to 16 per cent.
During year 2, a further 20 employees leave. The entity revises its estimate of total
employee departures over the three-year period from 16 per cent to 13 per cent.
During year 3, a further 14 employees leave.
All the continuing employees exercised the option to subscribe in the equity shares of `10
each at ` 50 only, when market price stands at ` 80. The fair value of the option at the grant
date is taken at ` 30 only.

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Pass journal entries with working notes.

Note

Q8. Virtual Limited granted on 1st April, 2015, 1,00,000 Employees Stock Option at ` 40, when
the Market Price was ` 60. These options will vest at the end of Year 1, if the earning of
Virtual Limited is more than 15% or it will vest at the end of the year 2, if the average
earnings of two years is more than 12% or lastly it will vest at the end of third year, if
the average earnings of 3 years will be 9% or more. 6,000 unvested options lapsed on
31st March 2016. 5,500 unvested options lapsed on 31st March, 2017 and finally 3,000
unvested options lapsed on 31st March, 2018.
Year ended on Earnings in %
31.03.2016 13%
31.03.2017 9%
31.03.2018 7%
Employees exercised for 85,000 Stock Options which vested in them at the first opportu-
nity and the balance options were lapsed. Pass necessary journal entries and show the
necessary working.
Note

Q9. Pink Ltd. grants 50 stock options to each of its 1,000 employees on 01.04.2015 for `20,
depending upon the employees at the time of vesting options. The market price of the
share is ` 50. These options will vest at the end of year 1, if the earning of Pink Ltd. is 16%
or it will vest at the end of the year 2, if the average earning of two years is 13%, or lastly
it will vest at the end of the third year, if the average earning of 3 years will be 10%. 2,500
unvested options lapsed on 31.03.2016. 2,000 unvested options lapsed on 31.03.2017 and
finally 1,750 unvested options lapsed on 31.03.2018.
Following is earning of Diamond Ltd.:
Year ended on Earnings in %
31.03.2016 14%
31.03.2017 10%
31.03.2018 7%
850 employees exercised their vested options within a year and remaining options were

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unexercised at the end of the contractual life. Pass journal entries with proper narrations
for the above transactions.
Note

Q10. At the beginning of year 1, an entity grants to a senior executive 10,000 share options,
conditional upon the executive remaining in the entity’s employment until the end of year
3. However, the share options cannot be exercised unless the share price has increased
from ₹50 at the beginning of year 1 to above ₹65. If the share price is above ₹65 the share
options can be exercised at any time till the end of year 10. The entity applies a binomial
option pricing model, which takes into account the possibility that the share price will
exceed ₹65 (and hence the share options become exercisable) and the possibility that the
share price will not exceed ₹65 (and hence the options will be forfeited). It estimates the
fair value of the share options with this market condition to be ₹24 per option.
Find the Remunertion expenses to be recognised in each year.
Note

Q11. At the beginning of year 1, an enterprise grants 300 options to each of its 1000 employees.
The contractual life of option granted is 6 years.
Other relevant information is as follows:
Vesting Period 3 years Exercise Period 3 years
Expected Life 5 years Exercise Price ` 50
Market Price ` 50 Expected forfeitures per year 3%
The option granted vest according to a graded schedule of 25% at the end of the year 1,
25% at the end of the year 2 and the remaining 50% at the end of the year 3.
You are required to calculate total compensation expenses for the options expected to vest
and cost and cumulative cost to be recognised at the end of all the 3 years assuming that
expected forfeiture rate does not change during the vesting period when,
(i) The fair value of these options, computed based on their respective expected lives,
are `10, ` 13, ` 15 per options, respectively.
(ii) The intrinsic value of the options at the grant date is ` 6 per options.

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CASH SETTLED OPTIONS

Q12. MLL Ltd. grants 80 cash share appreciation rights (SARs) to each of its 400 employees, on
condition that the employees remain in its employment for the next three years. During
year 1, 30 employees leave. The entity estimates that a further 50 will leave during years
2 and 3. During year 2, 40 employees leave and the entity estimates that a further 30
will leave during year 3. During year 3, 40 employees leave. At the end of year 3, 100
employees exercise their SARs, another 120 employees exercise their SARs at the end of
year 4 and the remaining employees exercise their SARs at the end of year 5.
The entity estimates the fair value of the SARs at the end of each year in which a liability
exists as shown below.
At the end of year 3, all SARs held by the remaining employees vest. The intrinsic values
of the SARs at the date of exercise (which equal the cash paid out) at the end of years 3, 4
and 5 are also shown below.
At the end of Year Fair Value (`) Intrinsic Value (`)
1 15 -
2 16 -
3 18 15
4 21 20
5 - 24
Pass journal entries and working notes.
Note

Q13. Fresh Ltd. announced a Stock Appreciation Right (SAR) on 01.04.2014 for each of its
employees. The scheme gives the employees the right to claim cash payment equivalent
to an excess of market price of company shares on exercise date over the exercise price of
`125 per share in respect of 100 shares, subject to a condition of continuous employment
of 3 years. The SAR is exercisable after 31.03.2017 but before 30.06.2017.
The fair value of SAR was `21 in 2014-15, `23 2015-16 and `24 in 2016-17. In 2014-15
the company estimated that 2% of its employees shall leave the company annually. This
was revised to 3% in 2015-16. Actually 15 employees left the company in 2014-15, 10 left
in 2015-16 and 8 left in 2016-17. The SAR therefore actually vested in 492 employees on
30.06.2017; when SAR was exercised the intrinsic value was `25 per share.
Show the provision for SAR account by fair value method. Is this provision a liability or
equity?

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CORPORATE FINANCIAL REPORTING

Note

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SPECIAL CASES
Q14. At the beginning of year 1, X Ltd. grants options to 200 employees. The share options will
vest at the end of year 3, provided that the employees remain in the entity’s employment,
and provided that revenues of the company increases by at least at an average of 8 percent
per year. If the per cent of increase is 8 percent and above but below 10 per cent per
year, each employee will receive 120 share options, if 10 percent and above but below
15 percent each year, each employee will receive 240 share options and if on or above 15
percent, each employee will receive 360 share options. On grant date, X Ltd. estimates that
the share options have a fair value of ` 40 per option and also estimates that 16 per cent
of employees will leave before the end of year 3.
By the end of year 1, 12 employees have left and the entity still expects that a total of 32
employees will leave by the end of year 3. In year 1, revenue has increased by 12 per cent
and the company expects this rate of increase to continue over the next 2 years. By the end
of year 2, a further 10 employees have left, bringing the total to 22 to date. The entity now
expects only 5 more employees will leave during year 3, and therefore expects a total of
27 employees will have left during the three-year period. Revenue in year 2 increased by
18 per cent, resulting in an average of 15 per cent over the two years. By the end of year
3, a further 8 employees have left. The revenue increased by an average of 16 per cent per
year in the three year period.
Pass necessary journal entries and show the necessary working.
Note

Q15. At the beginning of year 1, an entity grants to a senior executive 10,000 share options,
conditional upon the executive’s remaining in the entity’s employment until the end of
year 3. The exercise price is ` 40. However, the exercise price drops to ` 30 if the entity’s
earnings increase by at least an average of 10 per cent per year over the three-year period.
On grant date, the entity estimates that the fair value of the share options, with an exercise
price of ` 30, is ` 16 per option. If the exercise price is ` 40, the entity estimates that the
share options have a fair value of ` 12 per option. During year 1, the entity’s earnings
increased by 12 per cent, and the entity expects that earnings will continue to increase at
this rate over the next two years. The entity therefore expects that the earnings target will
be achieved, and hence the share options will have an exercise price of ` 30. During year
2, the entity’s earnings increased by 13 per cent, and the entity continues to expect that
the earnings target will be achieved. During year 3, the entity’s earnings increased by only
3 per cent, and therefore the earnings target was not achieved. The executive completes
three years’ service, and therefore satisfies the service condition. Because the earnings
target was not achieved, the 10,000 vested share options have an exercise price of ` 40.
Pass necessary journal entries and show the necessary working.

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Note

Q16. At the beginning of year 1, X Ltd. grants 200 shares each to 400 employees, condition-
al upon the employees’ remaining in employment with the company during the vesting
period. The shares will vest at the end of year 1 if the entity’s earnings increase by more
than 15 per cent; at the end of year 2 if the entity’s earnings increase by more than an
average of 12 per cent per year over the two-year period; and at the end of year 3 if
the entity’s earnings increase by more than an average of 10 per cent per year over the
three-year period. The shares have a fair value of ` 40 per share at the start of year 1. No
dividends need be considered.
By the end of year 1, the entity’s earnings have increased by 13 per cent, and 32 employees
left. The entity expects further 30 employees to leave during year 2. By the end of year 2,
the entity’s earnings have increased by only 11 per cent and 27 employees left during the
year. The entity expects a further 25 employees to leave during year 3. By the end of year
3, 22 employees left and the company’s earnings increased by 9 per cent, resulting in an
average increase over 10 per cent per year.
Pass necessary journal entries and show the necessary working.
Note

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 Chapter 2
Valuation of Shares & Goodwill
MULTIPLE CHOICE QUESTIONs
(i) A firm values goodwill under ‘Capitalization of profits’ method. Its average profits for past
4 years has been determined at ` 72,000. Net assets and capital employed in the business
is ` 4,80,000 and ` 5,00,000 respectively and its normal rate of return is 12%. Value of
Goodwill based on capitalization of profit will be
(a) ` 1,60,000

(b) ` 1,32,000

(c) ` 1,20,000

(d) ` 1,00,000

(ii) A firm values goodwill under ‘Capitalization of profits’ method. Its average profits for past
4 years has been determined at ` 1,00,000 (before tax). Capital employed in the business
is ` 4,80,000 and its normal rate of return is 12%. Tax rate is 28% on average. Value of
Goodwill based on capitalisation of average profit will be :
(a) ` 1,20,000

(b) ` 6,00,000

(c) ` 5,00,000

(d) ` 4,80,000

(iii) Capital employed is `255 Lakhs; Annual average profits are ` 57 Lakhs; Normal rate of
return is 12%. The value of goodwill on the basis of Capitalization of super profits will be-
(a) ` 220 Lakhs

(b) ` 475 Lakhs

(c) ` 6.84 Lakhs

(d) ` 26.40 Lakhs

(iv) In a company net assets available for share holders is ` 1450 Lakhs; Equity share capital
60 Lakhs shares of ` 10 each; An average dividend is ` 3.20 per equity share and normal
rate of dividend for the company is 10%. The fair value of each share will be -
(a) 32
(b) ` 24.17

(c) ` 27.81

(d) ` 28.09

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(v) Super Profit of ABC Ltd. (Computed) : `18,00,000

Normal rate of return : 12%
Present value of annuity of `1 for 4 years @ 12% : 3.0374
Value of goodwill is:
A. `54,67,320
B. `2,16,000
C. `18,00,000
D. `5,92,612

FILL IN THE BLANKS

(i) Every firm in an industry is expected to earn a normal rate of return. If a particular firm
of the industry manages to earn a rate of return that happens to be more than the normal
industry rate of return, then such a firm is said to be earning ___________________.
(ii) ____________________ refers to a series of continuous cash flows (either cash inflows or cash
outflows) of equal amount that occur in every period, over a specified period of time.
(iii) __________ refers to the excess of current value of Total Assets (excluding Goodwill and
Fictitious assets) over the external liabilities.
(iv) The phrase _______________ refers to the expected number of future years for which the firm
is expected to earn the average profit from the year of purchase.
(v) _________ represents the capacity of the business to earn excess profit for a period of time
over normal profit.

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 CORPORATE FINANCIAL REPORTING

BASIC UNDERSTANDING OF GOODWILL VALUATION

Q1. XY Ltd, a partnership firm, earned profits during the past 4 years as follows:
Year 2012 2013 2014 2015
Profits (`) 42,000 46,000 52,000 46,500
Firm has total assets worth ` 82,000 and its current liability includes only creditors of `
12,800. The normal rate return is 10%. Determine the value of goodwill on the basis of 2½
year’s purchase of super profits.
Q2. A firm values goodwill under ‘Capitalisation of profits’ method. Its average profits for past
4 years has been determined at ` 72,000. Net Assets and Capital employed in the business
is `4,80,000 and ` 5,00,000 respectively; and its normal rate of return is 12%.
Determine value of goodwill based on:
(a) Capitalisation of Average Profits
(b) Capitalisation of Super Profits
Q3. The following details relate to M/s XYZ, a firm:
Average profit of last four years 7,00,000
Average capital employed by the firm ` 55,00,000
Normal rate of return 10%
Present value of annuity of `1 for 4 years @ 10% 3.1699
Determine the value of goodwill on the basis of annuity of super profit.
Q4. XY Ltd, a partnership firm, earned profits during the past 5 years as follows:
Year 2011 2012 2013 2014 2015
Profits (`) 27,000 36,000 37,200 42,000 46,800
Determine the value of goodwill in each of the following independent cases:
Case (a): It was decided to value the Goodwill on the basis of 2 years’ purchase of average
profit of last five years.
Case (b): It was decided to value the Goodwill on the basis of 3½ years’ purchase of average
profit of last five years after giving weights of 1, 2, 3, 6 and 8 to the profits chronologically.
Case (c): It was decided to value the Goodwill on the basis of 3 years’ purchase of weighted
average profit of last five years giving maximum weightage to the recent results.
Case (d): It was decided to value the Goodwill on the basis of 2½ years’ purchase of simple
average profit of last five years. In this regard the following were observed:
(i) an abnormal loss of ` 1,800 was charged against the profit of 2013;
(ii) Profit of 2014 included a non-recurring receipt of ` 2,500.
(iii) Closing stock of 2015 was over-valued by ` 2,400.
Note

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Q5. The following are the particulars about Koley & Co. a partnership firm:
(a) Average capital employed in the business is ` 7,00,000
(b) Net trading profit of the firm for the past three years : ` 1,07,600; ` 90,700; ` 1,12,500.
(c) Market rate of interest on investments 8%
(d) Rate of risk return on capital invested in business 2%
(e) Fair remuneration to the partners for their services ` 12,000 p.a.
(f) The profit included non-recurring profits on average basics of ` 1000 out of which
it was considered that even non-recurring profits had a tendency to recurring at an
average rate of ` 600 p.a.
(g) Sundry assets of the firm ` 7,50,000 and current liabilities is ` 30,000
Ascertain the value of goodwill of the firm under the following method for Koley & Co.
Three year purchase of super profit method and Capitalization method.
Note

Q6. From the following information, calculate the value of goodwill as on 31.03.19 of JK Ltd.
Equity share capital (`10) ` 5,00,000
10% Preference share capital ` 2,00,000
Other Equity ` 70,000
9% Debentures ` 1,00,000
Depreciation fund ` 60,000
Creditors ` 50,000
Assets side of balance sheet includes preliminary expenses ` 20,000
Market value of assets is ` 70,000 more than the book value
Profits for the last three years after 40% tax were: ` 75,000; ` 84,000 and ` 1,14,000
respectively.
Fair return on capital on capital employed in this type of business is estimated at 10%.
You are required to calculate the value of goodwill by capitalization of super profit. (Take
weighted average profit)
Note

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Q7. Find out the average capital employed of Magical Ltd. From its Balance Sheet (Draft) as at
31st March,2016:
Liabilities ` Assets `
5,00,000 Equity Shares of `10 50,00,000 Land and Buildings 25,00,000
each
10,000, 9% Preference Shares 10,00,000 Plant & Machinery 80,25,000
of `100 each
General Reserve 12,00,000 Furniture 5,50,000
Proft and Loss Account 20,00,000 Vehicles 5,00,000
16% Debentures 5,00,000 Investments 10,00,000
16% Term loans 18,00,000 Stock-in - trade 6,75,000
Cash Credit 13,30,000 Debtors 4,90,000
Creditors 2,70,000 Cash and Bank 10,40,000
Provision for tax 6,40,000 Preliminary expenses 50,000
Dividend Payable on Equity 10,00,000
Shares
Dividend Payable on Pref. 90,000
Shares
1,48,30,000 1,48,30,000
Non-trade investments were 20% of the total investments.
Balance as on 01.04.2015 to the following accounts were:
a) Profit and loss Account `8.70 lakhs
b) General reserve `6.50 lakhs.
Note

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ADVANCE PROBLEMS ON GOODWILL

Q8. The Following balances as on 31st March, 2017, are obtained from the account books of
Gunnu Ltd.:
Particulars ` in Lakhs
200 lakhs Equity Shares of `10 each 2,000
10 Lakhs, 10% Preference Shares of `100 each 1,000
General Reserve 1,600
Profit and Loss Account 1,400
12% Debentures 1,000
Creditors 800
Goodwill 1,000
Land and Buildings 2,500
Plant and Machinery 1,500
lnvestment in 10% Stock 500
Stock-in-trade 1,600
Debtors 400
Cash and Bank 220
Preliminary expenses 100
Additional information are given below:
(I) Nominal value of investment is `500 lakhs and its market value is `520 lakhs.
(II) Following assets are revalued:
Particulars ` in Lakhs
(i) Land and Building 3,200
(ii) Plant and Machinery 1,800
(iii) Stock-in-trade 1,450
(iv) Debtors 360
(III) Average profit before tax of the company is ` 2,400 lakhs, rate of taxation is 30%.
(IV) Fair return on closing capital employed is 12%.
(V) Goodwill may be valued at two year’s purchase of super profits.
You are required to calculate the value of goodwill.
Note

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Q9. The summarised Balance Sheet of TMI Ltd. for the year ended on 31st March, 2017, 2018
and 2019 are as follows :
` in thousand
Particulars 2017 2018 2019
1,60,000 equity shares of `10 each fully paid 1,600 1,600 1,600
General Reserve 1,200 1,400 1,600
Profit and Loss Account 140 160 240
Trade Payable 600 800 1,000
Total 3,540 3,960 4,440
Assets:
Goodwill 1,000 800 600
Building and machinery less depreciation 1,400 1,600 1,600
Inventory 1,000 1,200 1,400
Trade Receivable 20 160 440
Bank balance 120 200 400
Total 3,540 3,960 4,440
(i) Actual valuations were as under:
Particulars 2017 2018 2019
Building and machinery less depreciation 1,800 2,000 2,200
Inventory 1,200 1,400 1,600
Net profit (including opening balance after 420 620 820
writing off depreciation, goodwill, tax provision
and transfer to general reserve)
(ii) Capital employed in the business at market value at the beginning of 2016-2017 was
`3,66,000 which included the cost of goodwill. The normal annual return on average
capital employed in the line of business engaged by T Ltd. is 12.5%.
(iii) The balance in the general reserve on 1st April, 2016 was `10 lakhs.
(iv) The goodwill shown on 31st March, 2017 was purchased on 1st April, 2016 for `10
lakhs on which date the balance in the Profit and Loss Account was `1,20,000.
You are required to find out the average capital employed in each year. Also compute
goodwill to be valued at 5 years purchase of Super Profit (Simple average method).
Note

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Q10. Given below is the Balance Sheet of M Ltd as on 31.12.2014:

Particulars Amount
(` in lakhs)
Equity & Liabilities:
(1) Shareholders’ Fund:
Share Capital 50
Reserves & Surplus 35
(2) Current Liabilities:
(a) Trade payables 8.2
(b) Other Current liabilities - Dividend 10
payable
Total 103.20
Assets:
(1) Non Current Assets:
Fixed Assets 72
Non-Current Investments (Non-trade) 12
(2) Current Assets:
Inventories 7.8
Trade Receivables 6.2
Cash & Cash equivalents 5.2
Total 103.2
Other Information –
a) Profit Before Tax and other relevant information: (` lakhs)
Provision for Loss of unisured
Year PBT Gratuity paid
Gratuity required stock
2010 42.00 2.20 - -
2011 39.00 2.30 1.67 .62
2012 44.00 2.50 0.32 -
2013 42.00 2.60 1.42 -
2014 37.00 2.70 0.12 -
b) Past Tax rate is 51% while Expected Tax Rate is 45%
c) The Company wants to switch over towards maintaining gratuity provision on
actuarial calculation rather than accounting on payment basis. The company‘s non-Trade
investments fetched 11%
Find out value of Goodwill as per Super profit method. It may be assumed that Super Profit
,if any, is maintainable for 5 years. 20% should be the appropriate discount factor. Normal
Rate of return may be taken as 16%.

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VALUATION OF SHARES
Q11. The following abridged Balance Sheet as on 31st March, 2017 pertains to S Ltd.
Liabilities ` in lakhs Assets ` in lakhs
Share Capital : Goodwill, at cost 420
180 lakh Equity shares of `10 each, 1,800 Other Fixed Assets 11,166
fully paid up
90 lakh Equity shares of `10 each, `8 720 Current Assets 2,910
paid up
150 lakh Equity shares of `5 each, 750 Loans and Advances 933
fully paid-up
Reserves and Surplus 5,457
Secured Loans 4,500
Current Liabilities 1,242
Provisions 960
15,429 15,429
You are required to calculate the following for each one of three categories of equity shares
appearing in the above mentioned Balance Sheet:
(i) Intrinsic value on the basis of book values of Assets and Liabilities including goodwill;
(ii) Value per share on the basis of dividend yield.
Normal rate of dividend in the concerned industry is 15%, where as Glorious Ltd. has been
paying 20% dividend for the last four years and is expected to maintain it in the next few
years; and
(iii) Value per share on the basis of EPS.
For the year ended 31st March, 2017 the company has earned `1,371 lakh as profit after
tax, which can be considered to be normal for the company. Average EPS for a fully paid
share of `10 of a Company in the same industry is `2.
Note

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Q12. On 31st March, 2017 the balance sheet of IQ Ltd. was as follows:
Particulars Amount (`)
Equity & Liabilities:
(1) Shareholders’ Fund:
Share Capital 5,00,000
Reserves & Surplus 1,03,000
(2) Current Liabilities:
(a) Trade payables 77,000
(b) Other Current liabilities - Bank O/D 20,000
(c) Short-term provisions 45,000
Total 7,45,000
Assets:
(1) Non Current Assets:
Fixed Assets:
Land & Building 2,20,000
Plant & Machinery 95,000
(2) Current Assets:
Inventories 2,75,000
Trade Receivables 1,55,000
Total 7,45,000
The net profits of the company, after deducting all working charges and providing for
depreciation and taxation, were as under:
Year Amount (in `)
2012-2013 85,000
2013-2014 96,000
2014-2015 90,000
2015-2016 1,00,000
2016-2017 95,000
On 31st March,2017, Land and Buildings were valued at `2,50,000 and Plant and Machinery
`1,50,000.
In view of the nature of business, it is considered that 10% is a reasonable return on
tangible capital.
Compute the value of the company’s shares after taking into account the received values
of fixed assets and the valuation of goodwill based on five year’s purchase of the super
profit based on the average profit of the last five years.

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Q13. From the information supplied below compute the value of equity share of X Ltd. On the
“Assets – Backing Method”:
I. The summarised balance Sheet of X Ltd. (a manufacturing concern) as on 31.3.2019:
Balance Sheet of X Ltd. at 31.03. 2019
Particulars Note No. Amount (`)
(1) (2) (3)
I Assets
(1) Non Current Assets: (3)
a . PPE 4,80,000
b. Non–Current Investment–10% Government Securities 60,000
(2) Current Assets (4) 3,60,000
TOTAL 9,00,000
II Equity and liabilities
(1) Equity
a. Equity Share Capital 6,00,000
b. Other Equity–General reserve (1) 1,20,000
(2) Non-Current Liabilities (2) 1,20,000
(3) Current Liabilities
b. Trade Payable–Sundry Creditors 60,000
TOTAL 9,00,000
Note to Accounts:
(1) Equity Share Capital
Particulars (`)
Issued, Subscribed and Paid up Capital: 6,00,000
6000 Equity Shares of `100 each full paid 60,000
6,60,000
(2) Non-Current Liabilities:
Particulars (`)
600,10% Preference Shares of `100 each full paid 60,000
Long Term Borrowings–600,9% Debenture of `100 each 60,000
1,20,000
(3) PPE
Particulars (`)
Tangible building 2,40,000
Plant and Machinery 2,40,000
4,80,000

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(4) Current Assets

Particulars (`)
Inventories 1,20,000
Trade receivables–Sundry debtors 30,000
Cash and Cash equivalent–Cash at bank 2,10,000
3,60,000
(ii) Fair return on capital employed in this type of business in around 10% p.a.
(iii) Goodwill is to be taken at 5 years purchase of super profits.
(iv) Average of profits for the lasts even years is `120000.Profitis more or less stable
over years and the same treated is expected to be maintained in the future. Ignore
taxation.
Note

Q14. Following information is finished in respect of S.S. Ltd.

(1) Share capital: 2,00,000 equity shares of ` 10 each fully paid.
(2) Profit after tax, dividends declared and retained earnings:
Year Profit after tax (`) Dividend Declared (`) Retained Earnings (`)
2018 7,10,000 3,40,000 3,70,000
2017 6,00,000 3,00,000 3,00,000
2016 4,00,000 2,60,000 1,40,000
(3) Normal rate of return expected by Shareholders in the market is 12%
(4) The Normal earnings of similar companies in the fiber industry is 15%
You are required to calculate the value of shares if: (a) Only a few shares are to be sold (b)
Majority shares are to be sold.
Note

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Q15. Following is the Balance Sheet of Z Ltd. as on 31st March, 2017:

Liabilities ` in Lakh Assets ` in Lakh
1,00,000 Equity Shares of `10 10,00,000 Preliminary expenses 5,00,000
each
10,000 12% Preference 10,00,000 Goodwill 15,00,000
Shares of `100 each
General Reserve 6,00,000 Buildings Plant 10,00,000
Proft and Loss Account 4,00,000 Investment in 10% Stock 4,80,000
15% Debentures 10,00,000 Stock 6,00,000
Creditors 8,00,000 Stock-in - trade 4,00,000
Debtors 2,20,000
Cash 1,00,000
48,00,000 48,00,000
Additional information are given below:
(a) Nominal value of investment is ` 5,00,000 and its market value is ` 5,20,000.
(b) Following assets are revalued:
(i) Building ` 32,00,000
(ii) Plant ` 18,00,000
(iii) Stock-in-trade ` 4,50,000
(iv) Debtors ` 3,60,000

(c) Average profit before tax of the company is ` 12,00,000 and 12.50% of the profit is
transferred to general reserve, rate of taxation being 50%.
(d) Normal dividend expected on equity shares is 8% while fair return on closing capital
employed is10%.
(e) Goodwill may be valued at three year’s purchase of super profits.
(f) Ascertain the value of each equity share under fair value method.
Note

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Q16. From the following information, calculate the Fair Value of an Equity Share:
(i) 4,00,000 Equity Shares of `10 each (paid up `8 each).
(ii) 7,00,000. Equity Shares of `5 each fully called up (Call-in arrears @ `2 on 2,00,000
shares).
(iii) 10000, 9% Preference Shares of `100 each fully paid up.
(iv) Reserves and Surplus `73,76,000.
(v) Tangible Fixed Assets `3,00,000. 50% of total Tangible Fixed Assets are found
undervalued by 50% of market value and 50% of remaining are found overvalued
by 50% of market value. 10% Investments: [Face value `80,000] `1,00,000. Of the
Investments 10% is trade and the balance non-trade. All trade Investments are to be
valued at 10% below cost.
(vi) External Liabilities `10,00,000.
(vii) Expected Future Maintainable Profits before tax `25,59,000. .
(viii) Rate of Tax-30% (Ignore Corporate Dividend tax).
(ix) Normal Rate of Earnings - 9%.
Note

Q17. Following is the Balance Sheet of Rainbow Limited as on 31st March, 2018:
Liabilities ` Assets `
100000 equity shares of `10 each 10,00,000 Goodwill 5,00,000
10000, 12% preference shares of 10,00,000 Buildings 15,00,000
`100 each
General Reserve 6,00,000 Plant 10,00,000
Profit and Loss Account 4,00,000 Investment in 10% stock 4,80,000
15% Debentures 10,00,000 Stock-in-trade 6,00,000
Creditors 8,00,000 Debtors 4,00,000
Cash 1,00,000
Preliminary Expenses 2,20,000
48,00,000 48,00,000
Additional information:
(i) Normal value of investment is, 5,00,000 and its market value is 5,20,000.
(ii) Following assets are revalued:
Building 32,00,000
Plant 18,00,000

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Stock-in-trade 4,50,000
Debtors 3,60,000
(iii) Average profit before tax of the company is `12,00,000 and 12·50% of the profit is
transferred to general reserve, rate of taxation being 50%.
(iv) Normal dividend expected on equity shares is 8% while fair return on closing capital
employed is 10%.
(v) Goodwill may be valued at three year’s purchase of super profits.
Ascertain the value of each equity share under fair value method.
Note

Q18. The Balance Sheet of Q Limited as on 31.12.2017 is as follows :

Liabilities ` in Lakh Assets ` in Lakh
1,00,000 Equity shares of `10 10 Goodwill 5
each fully paid-up
1,00,000 equity shares of `6 each 6 Fixed Assets 15
fully paid-up
Reserves & Surplus 2 Other Tangible Assets 5
Liabilities 10 Intangible Assets (Market 3
Value)
Misc. Expenditure to the
extent
28 28
Fixed assets are worth `24 lakhs. Other tangible assets are valued at `3 lakhs. The company
is expected to settle the disputed bonus claim of `1 lakh, not provided for in the accounts.
Goodwill appearing in the Balance Sheet is purchased goodwill. It is considered reasona-
ble to increase the value of goodwill by an amount equal to average of the book value and
a valuation made at 3 years purchase of average super proft for the last 4 years.
After tax profts and dividend rates were as follows:
Year PAT (in lakhs) % Dividend
2014 3.00 11
2015 3.50 12
2016 4.00 13
2017 4.10 14
Normal expectation in the industry to which the company belongs to is 10%. Kamalesh
holds 20,000 equity shares of `10 each fully paid up and 10,000 equity shares of `4 each
fully paid up. He wants to sell away his holdings.

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(i) Determine the break-up value and market value of both kinds of shares.
(ii) What should be the fair value of shares, if controlling interest is being sold?
Note : Make necessary assumptions, wherever required.
Note

Q19. Balance Sheet of D Ltd as at 31.03.2019

Particulars Note No. Amount `
(1) (2) (3)
(I) ASSETS
(1) Non – Current Assets : (2)
PPE 2,40,000
Intangible Assets – Patent and Trade marks 20,000
(2) Current Assets :
Inventories 48,000
Trade Receivable – Debtors 88,000
Cash and cash equivalent – bank Balances 52,000
TOTAL 4,48,000
(II) Equity and liabilities
(1) Equity (1)
Equity Share Capital – 2000 equity Share of 2,00,000
` 100 each
Other Equity 1,20,000
(2) Share Application Money Pending Allotment -
(3) Non- Current Liabilities -
(4) Current Liabilities:
Trade payable – Sundry creditors 1,28,000
TOTAL 4,48,000
Note to Accounts:
(1) Other Equity
Particulars (`)
General Reserve 2,00,000
Profit and Loss Account 20,000
1,20,000

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(2) PPE
Particulars (`)
Land and Building 1,10,000
Plant and Machinery 1,30,000
2,40,000
The expect valuer valued the land and building at ` 2,40,000. Goodwill at `1,60,000; and
plant and machinery at `1,20,000. Out of the total debtors, it is found that debtors of
`8,000 are bad. The profit of Company has been as follows: 2016-17 – `80,000; 2017-18 –
`90,000; 2018-19 – `1,06,000.
Rate of depreciation on plant and machinery @15% and on land and building @ 10%.
The company follows the practice of transferring 25% of profit to general reserve. Similar
type of companies earn at 10% of the value of their shares.
Ascertain the value of shares of company under (i) Intrinsic value method. (ii) Yield value
method (iii) Fair value method. Ignore taxation.

Note

Q20. The following is the Balance Sheet of K Ltd. as on 31st March, 2018:
Balance Sheet
Liabilities ` in Lakh Assets ` in Lakh
3,00,000 Equity shares of `10 each 30,00,000 Goodwill 3,00,000
fully paid 12.5%
Redeemable preference shares of 19,00,000 Building 20,00,000
`100 each fully paid
General Reserve 15,00,000 Plant & Machinery 22,00,000
Proft & Loss A/c 3,00,000 Furniture 10,00,000
Secured Loan 10,00,000 Investments 16,00,000
Creditors 30,00,000 Stock 12,00,000
Debtors 20,00,000
Bank Balance 4,00,000
1,07,00,000 1,07,00,000

Additonal Informaton:
(i) Fixed assets are worth 20% more than book vaIue. Stock is overvalued by `1,00,000.
Debtors are to be reduced by `40,000. Trade investments, which constitute 10% of
the total investments are to be valued at 10% below cost.

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(ii) Trade investments were purchased on 1.4.2017. 50% of non-trade investments were
purchased on 1.4.2016 and the rest on 1.4.2017. Non-trade investments yielded
15% return on cost.
(iii) In 2016-2017Furniture with a book value of `1,00,000 was sold for `50,000. This
loss should be treated as non recurring or extraordinary item for the purpose of
calculating adjusted average profit.
(iv) In 2015-2016 new machinery costing `2,00,000 was purchased, but wrongly charged
to revenue. This amount should be adjusted taking depreciation at 10% on reducing
value method.
(v) Return on capital employed is 20% in similar business.
(vi) Goodwill is to be valued at two years purchase of super profits based on simple
average profits of last four years.
Profits of last four years are as under:
Year Amount (in `)
2014-2015 13,00,000
2015-2016 14,00,000
2016-2017 16,00,000
2017-2018 18,00,000
(vii) It is assumed that preference dividend has been paid till date.
(viii) Depreciation on the overall increased value of assets (worth 20% more than book
value) need not be considered. Depreciation on the additional value of only plant and
machinery to be considered taking depreciation at 10% on reducing value method
while calculating average adjusted profit.
Find out the intrinsic value of the equity share. Ignore income tax and dividend tax.
Note

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Q21. The following is the Balance Sheet (as on 31st December, 2017) of N Ltd.:
Liabilities ` in Lakh Assets ` in Lakh
Equity Share Capital: Fixed Assets:
80,000 Equity shares of `10 each 8,00,000 Goodwill 1,00,000
fully paid up
50,000 Equity shares of `10 each 8 4,00,000 Plant and Machinery 8,00,000
paid up
36,000 Equity shares of `5 each 1,80,000 Land and Building 10,00,000
fully paid up
30,000 Equity shares of `5 each 4 1,20,000 Furniture and Fixtures 1,00,000
paid-up
Other Equity: Vehicles 2,00,000
General reserve 1,40,000 Investments 3,00,000
Profit and Loss account 3,50,000
Non-current liabilities: Current Assets:
3,000, 10% Preference shares of 3,00,000 Stock 2,10,000
`100 each fully paid
12% debentures 2,00,000 Debtors 1,95,000
15% Term Loan 1,50,000 Prepaid Expenses 40,000
Deposits 1,00,000 Advances 45,000
Current Liabilities: Cash and Bank balance 2,00,000
Bank Loan 50,000
Creditors 1,50,000
Outstanding expenses 20,000
Provision for tax 2,00,000
Accrued Preference Dividend 30,000
31,90,000 31,90,000
Additional Information:
(1) In 2013 a new machinery costing `50,000 was purchased, but wrongly charged to
revenue (no rectifcation has yet been made for the same).
(2) Stock is overvalued by `10,000 in 2016. Debtors are to be reduced by `5,000 in 2017,
some old furniture (Book value `10,000) was disposed of for `6,000.
(3) Fixed assets are worth 5 per cent more than their actual book value. Depreciation
on appreciated value of Fixed assets except machinery is not to be considered for
valuation of goodwill.
(4) Of the investment 20 per cent is trading and the balance is non-trading. All trade
investments are to be valued at 20 per cent below cost. Trade investment were
purchased on 1st January, 2017. 50 per cent of the non-trade investments were
acquired on 1st January, 2016 and the rest on January, 2017. A uniform rate of
dividend of 10 percent is earned on all investments.
(5) Expected increase in expenditure without commensurate increase in selling price

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`20,000.

(6) Research and Development expenses anticipated in future `30,000 per annum.
(7) In a similar business a normal return on capital employed is10%.
(8) Proft (after tax) are as follows:
In 2015 — `2,10,000, in 2016 — `1,90,000 and in 2017 — `2,00,000.
(9) Current income tax rate is 50%, expected income tax rate will be 40%.
From the above, ascertain the intrinsic value for different categories of Equity shares. For
this purpose goodwill may be taken as 3 years purchase of super profts. Depreciation is
charged on machinery @10% on reducing system.

Note

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Q22. Following data are provided by a Company:

Forthcoming Year 1 ₹ in Lakh
Data provided:
EBIT 700
Depreciation 120
Capex 180
Interest 60
Increase in non-cash working capital 100
Debt Capital 3,000
Further information:
Tax rate 25%
WACC 10%
No of equity shares 50,00,000
Find:
(a) NOPAT
(b) CF
(c) FCFF
(d) Value of business based on:
i) CF
ii) FCFF
(e) Value of business when growth rate is 5% based on:
i) CF
ii) FCFF
(f) Value per share based on FCFF when growth rate id 5%; and
(g) Value per share based on FCFE when constant growth rate is 5%.
Note

Q23. Following data are provided by a Company:

Yr. 2018 2019 2020 2021 2022 ……….
CF (₹) 500 600 700 800 800 continued at 800
(a) Find value of the business on 01-01-2021, given that WACC = 10%.
(b) Find value of the business on 01-01-2020, given that WACC = 10%.
(c) Find value of the business on 01-01-2019, given that WACC = 10%.

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Note

Q24. X Ltd. has EPS ₹12 and no. of shares 1,000. Its CF ₹15,000 and Sales ₹80,000. Find value
per share of X Ltd. based on the data of similar other companies as provided below:
Companies PAT (₹) CF (₹) Sales (₹) MC (₹)
A 20,000 25,000 1,20,000 1,50,000
B 16,000 20,000 1,40,000 1,75,000
C 25,000 32,000 1,60,000 2,00,000
D 18,000 24,000 1,44,000 1,92,000

Note

Q25. Following data are provided by a Company:

Year 2018 2019 2020 2021
CF (₹ in Lakhs) 500 600 700 800
(a) Find value of the business on 01-01-2021, if CF remains constant from 2021 to infinity,
given that WACC = 10%.
(b) Find value of the business on 01-01-2020 if CF grows at 4% pa from 2022 to infinity,
given that WACC = 10%.
(c) Find value of the business on 01-01-2019 if CF remains constant from 2021 to infinity,
given that WACC = 10%.

Note

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Q26. Your client is willing to acquire a stake in equity of Desert Ltd. and asks you to find the
value per share giving equal importance to the future free cash flows, the net asset value
of the business and market price of the shares in peer group. Accordingly, you collected
following data about the company:
(a) EPS is ₹3.20
(b) FCFF for the last year was ₹40 lakhs. Management expects 4% growth pa for the
foreseeable future.
(c) Debt capital amounts to ₹66 lakhs.
(d) WACC is 14% and Ke is 17%.
(e) Number of equity shares outstanding is 10 lakhs.
(f) Net asset value of the business excluding goodwill is ₹300 lakhs.
(g) The peer group consists of 3 companies with P/E ratios of 11, 12 and 13.
(h) It earns super profit of ₹6 lakhs for forthcoming 5 years only. You calculated the
present value of annuity for 5 years is 3.43 at 14% rate of discounting and 3.2 at 17% rate
of discounting.
Note

Q27. Earth Ltd. has a peer group consisting of Jupitar Ltd., Neptune Ltd. and Mars Ltd. Market
capitalisation of the companies in peer group are ₹50 crores, ₹63 crores and ₹80 crores
respectively. Other relevant data are: (₹ in lakhs)
Companies Earth Ltd. Jupitar Ltd. Neptune Ltd. Mars Ltd.
Earnings 1,250 500 700 1,000
Sales 2,800 4,000 5,400 7,000
Cash Flows 1,500 625 900 1,600
No. of shares 2,00,00,000 1,60,00,000 2,50,00,000 3,00,00,000
As value driver Earnings has the weight of 60%, Sales 10% and Cash 30%. Find value per
share of Earth Ltd. under market approach.
Note

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SPACE FOR SELF NOTES

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 Chapter 3
Non-Banking Financial Companies
MULTIPLE CHOICE QUESTIONs
(i) Ind AS 102 is applicable to NBFCs on and from:
(a) 1.4.2016
(b) 1.4.2017
(c) 1.4.2015
(d) 1.4.2018
(ii) As per Sec. 45I(f)of RBI Act, 1934, a non-banking financial company means:
(a) a financial institution which is a company
(b) A non-banking institution which is a company and which has as its principal
business the receiving of deposits, under any scheme or arrangement or in any
other manner, or lending in any manner
(c) Such other non-banking institution or class of such institutions, as the Bank may,
with the previous approval of the Central Government and by notification in the
Official Gazette, specify
(d) All of the above
(iii) As per Prudential Regulations for NBFCs-ND, the NBFCs-ND with asset size of less than
₹500 crores shall be:
(a) Exempted from the requirement of maintaining CRAR
(b) Exempted from complying with Credit Concentration Norms
(c) Maintain a leverage ratio (Total Outside Liabilities Owned Funds) of 7 to link Asset
Growth with the Capital
(d) All of the above
(iv) Non-Performing Asset (NPA) in case of Lease Rental and Hire-Purchase Assets if
(a) Overdue for 9 Months as on 31st March 2016
(b) Overdue for 6 Months as on 31st March 2017
(c) Overdue for 3 Months as on 31st March 2018 and Onwards
(d) All of the above

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FILL IN THE BLANKS

(i) Commercial papers shall be valued at ___________________.
(ii) In addition to disclosure of all material items in financial statements, a note for every item
of Other Income or Other Expenditure should be given if it exceeds ___________________% of
the total income.
(iii) The provision towards standard assets need not be netted from gross advances but shall
be shown separately as ___________________ in the balance sheet.
(iv) Balance sheet items are to be classified as Financial and Non-financial and are allowed to
be arranged in order of ___________________.
(v) All NBFCs-ND which have an asset size of ₹500 crore and above and all NBFCs-D shall
maintain minimum Tier 1 Capital of ___________________.

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NET OWNED FUNDS

Q1. Templeton Finance Ltd. is a non-banking finance company. The extracts of its balance
sheet are given below:
Liabilities Amount Assets Amount
(` in ‘000) (` in ‘000)
Paid-up equity capital 100 Leased out assets 800
Free reserves 500 Investment:
Loans 400 In shares of subsidiaries and 100
group companies
Deposits 400 In debentures of subsidiaries 100
and group Companies
Cash and bank balances 200
Deferred expenditure 200
1,400 1,400
You are required to compute ‘Net owned Fund’ of Templeton Finance Ltd. as per Non-Bank-
ing Financial Company - Systemically Important Non-Deposit taking Company and Deposit
taking Company (Reserve Bank) Directions, 2016.
IDENTIFYING NPA
Q2. Bright Finance Ltd. is a non-banking financial company. It provides you with the following
information regarding its outstanding amount of ` 200 lakhs of which installments are
overdue on 200 accounts for last two months (amount overdue ` 40 lakhs), on 24 accounts
for three months (amount overdue ` 24 Iakhs), on 10 accounts for more than 30 months
(amount overdue ` 20 lakhs) and on 4 accounts for less than three years (amount overdue
` 20 lakhs-already identified as substandard assets) and one account of ` 10 lakhs which
has been identified as non-recoverable by the management. Out of 10 accounts overdue
for more than 30 months, 6 accounts are already identified as sub-standard (amount ` 6
lakhs) for more than twelve months and other are identified as sub-standard asset for a
period of less than twelve months.
Classify the assets of the company in line with Non-Banking Financial Company - Systemi-
cally Important Non-Deposit taking Company and Deposit taking Company (Reserve
Bank) Directions, 2016.
Note

NAVIN CLASSES 37
CA CS AVINASH SANCHETI
CORPORATE FINANCIAL REPORTING

PROVISION ON NPA
Q3. While closing its books of accounts on 31st March, a NBFC has its advances classifed as
follows:
Particulars ` Lakhs Particulars ` Lakhs
Standard Assets 8,400 Unsecured Portion of 87
Doubtful Debts
Sub-Standard Assets 910 Loss Assets 24
Secured Portions of Doubtful Debts:
- Up to one year 160
- One year to three years 70
- more than three years 20
Calculate the amount of provision which must be made against the advances.
Note

Q4. While closing its books of account on March 31* of a financial year, a Non-banking Finance
company has its advances classified as follows:
Particulars ` Lakhs
Standard Assets 16,800
Standard Assets 1,340
Secured Positions of Doubtful Debts:
- Up to one year 320
- one year to three years 90
- more than three years 30
Unsecured Portions of Doubtful debts 97
Loss Assets 48
Calculate the amount of provision which must be made against the advances.
Note

NAVIN CLASSES 38
CA CS AVINASH SANCHETI
 CORPORATE FINANCIAL REPORTING

Q5. While closing its books of accounts on 31st March, a NBFC has its advances classifed as
follows:
Particulars ` Lakhs
Standard Assets 10,000
Sub Standard Assets 1,000
Secured Positions of Doubtful Debts:
- Up to one year 160
- one year to three years 70
- more than three years 20
Unsecured Portions of Doubtful debts 90
Loss Assets 30
Calculate the amount of provision which must be made against the advances.
Note

NAVIN CLASSES 39
CA CS AVINASH SANCHETI
CORPORATE FINANCIAL REPORTING

PROVISION ON FOR HIRE PURCHASE/LEASING COs.

Q6. Peoples Financiers Ltd. is an NBFC providing Hire Purchase Solutions for acquiring
consumer durables. The following information is extracted from its books for the year
ended 31st March, 2017:
Interest Overdue but recognized in
Net Book Value of
Asset Funded Profit & loss
Assets outstanding
Period Overdue Interest Amount
(` in crore) (` in crore)
LCD Televisions Upto 12 months 480.00 20,123.00
Washing Machines For 24 months 102.00 2,410.00
Refrigerators For 30 months 50.50 1,280.00
Air Conditioners For 45 months 26.75 647.00
You are required to calculate the amount of provision to be made.
Note

Q7. Water Ltd. is a non-banking finance company. It accepts public deposit and also deals in the
hire purchase) business. It provides you with the following information regarding major
hire purchase deals as on 31.3.18. few machines were sold on hire-purchase basis. The hp
price was set as ₹200 lakhs as against cash price of ₹160 lakhs. The amount was payable as
₹20 lakhs down payment and balance in 5 equal installments. The Hire-vendor collected
first installment as on 31.3.19, but could not collect the second installment which was due
on 31.3.20. the company was finalizing accounts for the year ending 31.3.20. till 15.5.20,
the date on which the Board of Directors signed the accounts, the second installment was
not collected. Presume IRR to be 11.32%.
Required:
(a) What should be the principal outstanding on 1.4.19? Should the company recognise
finance charge for the year 2019-20 as income?
(b) What should be the amount of provision to be made as per prudential norms for NBFC
laid down by RBI?
(c) What should be the net book value of assets as on 31.3.20 so far Water Ltd. is concerned
as per NBFC prudential norms requirement for provisioning?

NAVIN CLASSES 40
CA CS AVINASH SANCHETI
 CORPORATE FINANCIAL REPORTING

Q8. Lake Ltd. is a non-banking finance company. It accepts public deposit and also deals in
the hire purchase) business. It provides you with the following information regarding
major hire purchase deals as on 31.03.2019. Few machines were sold on hire-purchase
basis. The hire purchase price was set as ₹80 lakhs as against cash price of ₹65 lakhs. The
amount was payable as ₹10 lakhs down payment and balance in 5 equal installments. The
Hire-vendor collected first installment as on 31.03.2020, but could not collect the second
installment which was due on 31.03.2021. The company was finalizing accounts for the
year ending 31.03.2021. Till the date on which the Board of Directors signed the accounts,
the second installment was not collected. Presume IRR to be 10%.
Required:
(a) What should be the principal outstanding on 1.4.20? Should the company recognise
finance charge for the year 2020-21 as income?
(b) What should be the net book value of assets as on 31.3.16 so far Lake Ltd. is concerned
as per NBFC prudential norms requirement for provisioning?
(c) What should be the amount of provision to be made as per prudential norms for NBFC
laid down by RBI?
Note

NAVIN CLASSES 41
CA CS AVINASH SANCHETI
CORPORATE FINANCIAL REPORTING

SPACE FOR SELF NOTES

NAVIN CLASSES 42
CA CS AVINASH SANCHETI
 CORPORATE FINANCIAL REPORTING

NAVIN CLASSES 43
CA CS AVINASH SANCHETI
CORPORATE FINANCIAL REPORTING

NAVIN CLASSES 44
CA CS AVINASH SANCHETI