PAPER – 1:

FINANCIAL REPORTING

QUESTIONS

Case Scenario I
ABC Ltd. is a dynamic company engaged in strategic acquisitions to expand
its business portfolio. As part of its growth strategy, the company has
recently acquired PQR Ltd. and RST Ltd. While these acquisitions present
growth opportunities, these acquisitions also include ongoing lawsuits
against the acquired companies. However, ABC Ltd. has secured indemnities
from the respective sellers to mitigate potential financial risks associated
with these legal matters. Following acquisitions took place during the year
(i) ABC Ltd. acquired a beverage company PQR Ltd. from XYZ Ltd. At the
time of acquisition, PQR Ltd. is the defendant in a court case whereby
certain customers of PQR Ltd. have alleged that products of PQR Ltd.
contain pesticides in excess of the permissible levels, which have caused
them health damage. PQR Ltd. is being sued for damages of ` 2 crores.
XYZ Ltd. has indemnified ABC Ltd. for the losses, if any, due to the case
for amount up to ` 1 crore. The fair value of the contingent liability for
the court case is ` 0.70 crore.
(ii) ABC Ltd. pays ` 50 crores to acquire RST Ltd. from MN Ltd. RST Ltd.
manufactured products containing fiber glass and has been named in 10
class actions concerning the effects of these fiber glass, MN Ltd. agrees
to indemnify ABC Ltd. for the adverse results of any court cases up to an
amount of ` 10 crores. The class actions have not specified amounts of
damages and past experience suggests that claims may be up to ` 1
crore each, but that they are often settled for small amounts. ABC Ltd.
makes an assessment of the court cases and decides that due to the
potential variance in outcomes, the contingent liability cannot be
REVISION TEST PAPER
FINAL EXAMINATION

measured reliably and accordingly no amount is recognised in respect of

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

2 MAY 2025 EXAMINATION

REVISION TEST PAPER
FINANCIAL REPORTING

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

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

Case Scenario II
Choose the most appropriate answer to Questions 6 to 10, based on below
mentioned facts:
Date Amount Event
(`)
1 st January, 20X6 7,500 Asset acquired with depreciation to be
charged based on useful life of 10 years
On 31 st December, 20X7 240 Indicators of impairment noted and
impairment allowance accounted
On 28 th February, 20X9 Assets has been classified as held for
sale
On 28 th February, 20X9 4,600 Fair value less costs to sell
On 30 th June, 20X9 5,300 Fair value less costs to sell

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

3 MAY 2025 EXAMINATION

REVISION TEST PAPER
FINAL EXAMINATION

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

4 MAY 2025 EXAMINATION

REVISION TEST PAPER
FINANCIAL REPORTING

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

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

Discount rate @7.75% Present value of ` 1 payable

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

5 MAY 2025 EXAMINATION

REVISION TEST PAPER
FINAL EXAMINATION

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

Share of profit or loss 700

Share of exchange difference in OCI 100
Share of revaluation reserve of PPE in OCI 50

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

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

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

6 MAY 2025 EXAMINATION

REVISION TEST PAPER
FINANCIAL REPORTING

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

Net assets acquired Book Tax Fair

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

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

based on the above information.

7 MAY 2025 EXAMINATION

REVISION TEST PAPER
FINAL EXAMINATION

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

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

(` in thousand)

Particulars S’s P’s share NCI

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

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

8 MAY 2025 EXAMINATION

REVISION TEST PAPER
FINANCIAL REPORTING

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

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

9 MAY 2025 EXAMINATION

REVISION TEST PAPER
FINAL EXAMINATION

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

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

10 MAY 2025 EXAMINATION

REVISION TEST PAPER
FINANCIAL REPORTING

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

ANSWERS

Answer to Case Scenario I

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

11 MAY 2025 EXAMINATION