Now Learn with confidence

MUST DO QUESTIONS

(EXPECTED LIST)
SEP 2025 EXAM

CA FINAL – PAPER 1
FINANCIAL
REPORTING
 ABOUT THE FACULTY
CA Chiranjeev Jain, qualified Chartered Accountancy course in 2005 and completed all the levels of
this course in his very first attempt. He was among the top rank holders in Delhi University and did
his graduation from Sri Ram College of Commerce. He scored more than 90% in Accounts at all levels
of CA and University examinations. He has done Diploma in Information System Audit conducted by
the ICAI. He has also done Masters in Business Administration (MBA) with specialization in Finance.

Career

After completing Academic & Professional Education, he worked with Deloitte Haskin & Sells as a
Chartered Accountant and developed immense skills in the practical application of various
Accounting Standards. Later he set up his own practice as Chartered Accountant and started teaching
Accounts (subject he is passionate about the most). He Has mentored more than 50,000 CA/CMA
Students.

Teaching

He possesses vast experience in teaching accountancy to students of CA IPCC & Final. He has
conducted face to face classes at Hyderabad, Chennai, Bangalore, Kolkata and Ahmedabad. His easy
way of teaching Accountancy from the very basic and his motivational lectures are very famous
among CA students' fraternity.

Skills:

He is an expert in both Indian Accounting Standards and International Financial Reporting

Standard.

He has published as book on IND AS named “IND AS Saaransh” which is highly appreciated by CA
final students.

He is also into Corporate Training in the industry and has addressed a number of courses and
seminars organized by Professional.

FOR MORE DETAILS WHATSAPP AT 7731007722

 FR REVISION PLANNER
Hrs 120 - 200 Hrs
120 HRS 100 HRs
Part 1 15 12.5
Part 2 8 7
Part 3 19 16
Part 4 16 13
Part 5 35 29
Part 6 10 8.5
Part 7 10 8.5
Part 8 7 5.5
Required 120 100
Part 1
IND AS 2 1 1

IND AS 16 2.5 1.5

IND AS 38 1.5 1

IND AS 40 1 1

IND AS 23 1 1

IND AS 20 1 1

IND AS 36 3.5 2.5

IND AS 37 1 1

IND AS 10 1 1

IND AS 41 1.5 1.5

Part 2 15 12.5

1ND AS 102 5 4
IND AS 19 3 3
Part 3 8 7

Financial Intrumenst 19 16
Part 4 19 16

IND AS 115 6 5

IND AS 116 5 4

IND AS 12 5 4

Part 5 16 13

Business Combination 14 11
 CFS 21 18

Part 6 35 29

IND AS 101 2.5 2

IND AS 1 2.5 2

IND AS 7 2.5 2

IND AS 34 1 1

IND AS 8 1 1

IND AS 113 0.5 0.5

Part 7 10 8.5

IND AS 21 2 2

IND AS 105 2 1.5

IND AS 24 1 1

IND AS 33 4 3

IND AS 108 1 1

Part 8 10 8.5

Analysis of FS 3 2.5

Acc & tech 1 1

Ethical Duties 2 1

Conceptual 0.5 0.5

Framework
IND AS Introduction 0.5 0.5
7 5.5
Required 120 100
 A B C Category
Name of Chapter
A Category
Shares based Payment (IND AS 102)
Financial instruments (IND AS 32, 107 & 109)
Business Combination (IND AS 103)
Consolidated Financial Statement as per IND AS (IND AS 110; 111; 28; 27)
Revenue from contract with Customers (IND AS 115)
Leases (IND AS 116)
B Category
Statement of Cash Flows (IND AS 7)
Accounting for Income Tax (IND AS 12)
Property, Plant and Equipment (IND AS 16)
Employee Benefits (IND AS 19)
The Effects of Changes in Foreign Exchange Rates (Ind AS 21)
Earnings Per Share (IND AS 33)
Impairment of Assets (IND As 36)
Agriculture (IND AS 41)
Non-current Assets Held for Sale and Discontinued Operations (Ind AS 105)
Operating Segments (IND AS 108)
Professional & Ethical Duties
Borrowing Costs (IND AS 23)
ANALYSIS OF FINANCIAL STATEMENTS
C Category
FIRST-TIME ADOPTION OF IND AS (Ind AS 101)
Presentation of Financial Statements (IND AS 1)
Valuation of Inventories (IND AS 2)
Accounting Policies, Changes in Accounting Estimates and Errors Ind AS 8
Events occurring after the Balance Sheet Date (IND AS 10)
Government Grant (IND AS 20)
Related Party Disclosures (IND AS 24)
Interim Financials Reporting (IND AS 34)
Provisions, Contingent Liabilities and Contingent Assets (IND AS 37)
Intangible Assets (IND AS 38)
Investment Property (IND AS 40)
FAIR VALUE MEASUREMENT (IND AS 113)
Accounting and Technology
Conceptual Framework
 INDEX of MUST DO & EXPECTED QUESTIIONs
Page Name of Chapter Nos Question No
No (Question Bank – Edition 11-13)
1.1 Conceptual Framework 3 3, 7 ,10
2.1 IND AS – Introduction 2 1, 7
3.1 IND AS 1 4 15,16, 18, 34
4.1 Ind AS 8 4 2, 13, 18, 25
5.1 IND AS 37 7 20, 23, 24, 26, 30, 32, 33
6.1 IND AS 10 3 12, 24, 25
7.1 IND AS 2 6 16, 20, 25, 26, 31, 32
8.1 IND AS 16 12 1, 8, 9, 11, 19, 22, 23, 26, 27, 28,
32
9.1 IND AS 38 7 6, 8, 21, 25, 28, 31, 35
10.1 IND AS 40 3 10, 12, 14
11.1 IND AS 23 7 7, 14, 17, 22, 23, 24, 25
12.1 IND AS 20 6 10, 17, 18, 19, 21, 24
13.1 IND AS 41 6 7, 8, 9, 10, 12, 15
14.1 IND AS 36 10 13, 17, 28, 29, 31, 33, 36, 42, 43,
45
15.1 IND AS 105 5 5, 8, 9, 11, 16
16.1 IND AS 108 5 10, 11, 12, 15, 16
17.1 IND AS 102 11 5, 6, 7, 14, 16, 18, 23, 36, 39, 42,
43,
18.2 IND AS 19 7 6, 16, 29, 30, 32, 36, 37
19.1 IND AS 32, 107 & 109 15 14, 18, 19, 26, 28, 29, 30, 55, 56,
57, 60, 61, 74, 84, 85
20.1 IND AS 115 19 26, 31, 43, 49, 58, 61, 62, 66, 68,
69, 75, 79, 89, 92, 93, 98, 99, 103,
108
21.1 IND AS 116 11 31, 35, 37, 45, 54, 55, 56, 58, 59,
61, 62
22.1 IND AS 12 9 5, 7, 12, 14, 15, 20, 22, 36, 37
23.1.1 IND AS 110 10 20, 23, 24, 25, 27, 30, 39, 40, 41,
61
23.2.1 IND AS 111 3 3, 4, 8
23.3.1 IND AS 28 3 5, 7, 14
23.4.1 IND AS 27
24.1 IND AS 24 6 3, 11, 13, 14, 15, 16
25.1 Ind AS 21 8 8, 12, 14, 15, 16, 17, 19, 21
26.1 IND AS 103 11 1, 9, 17, 21, 23, 24, 32, 40, 41, 42,
43
27.1 IND AS 7 6 12, 16, 17, 21, 24, 27
28.1 IND AS 34 7 2, 5, 6, 7, 10, 12, 14
29.1 IND AS 33 9 10, 11, 12, 13, 14, 18, 20, 25, 26
30.1 Ind AS 101 5 20, 27, 29, 31, 35
31.1 IND AS 113 5 6, 7, 9, 10, 11
32.1 Duty of a CA 5 1, 2, 4, 9, 11
33.1 Accounting & Tech 2 Illustration 3, Q2
34.1 ANALYSIS OF FS 4 1, 7, 8, 15,
Total 246
 CA FINAL FR - Sep 25 Exams
TOP G5 Ǫuestions (By CA Chiranjeev Jain Sir)
From Expected List (Download from Telegram Channel)
Framework 1 Ǫ3
IND AS 1 1 Ǫ 34
IND AS 8 1 Ǫ25
IND AS 37 2 Ǫ 32 Ǫ 33
IND AS 10 1 Ǫ 24
IND AS 2 2 Ǫ 20 Ǫ 31
IND AS 16 3 Ǫ1 Ǫ9 Ǫ 32
IND AS 38 2 Ǫ25 Ǫ 31
IND AS 40 2 Ǫ 12 Ǫ 14
IND AS 23 2 Ǫ 23 Ǫ 24
IND AS 20 2 Ǫ 18 Ǫ 21
IND AS 41 3 Ǫ7 Ǫ8 Ǫ9
IND AS 36 4 Ǫ 29 Ǫ 36 Ǫ 43 Ǫ 45
IND AS 105 2 Ǫ8 Ǫ 16
IND AS 108 2 Ǫ 11 Ǫ 15
IND AS 102 6 Ǫ6 Ǫ7 Ǫ 16 Ǫ 18 Ǫ 23 Ǫ 39
IND AS 19 3 Ǫ6 Ǫ 32 Ǫ 36
IND AS 109 7 Ǫ 14 Ǫ 18 Ǫ 26 Ǫ 29 Ǫ 49 Ǫ 56 Ǫ 60
IND AS 115 7 Ǫ 26 Ǫ 49 Ǫ 58 Ǫ 62 Ǫ 89 Ǫ 92 Ǫ 93
IND AS 116 5 Ǫ 37 Ǫ 45 Ǫ 55 Ǫ 58 Ǫ 62
IND AS 12 5 Ǫ 12 Ǫ 14 Ǫ 20 Ǫ 36 Ǫ 37
IND AS 110 5 Ǫ 24 Ǫ 25 Ǫ 27 Ǫ 40 Ǫ 41
IND AS 111 1 Ǫ8
IND S 28 2 Ǫ5 Ǫ 61
IND AS 24 0
IND AS 21 2 Ǫ8 Ǫ 17
IND AS 103 5 Ǫ 17 Ǫ 21 Ǫ 41 Ǫ 42 Ǫ 43
IND AS 7 2 Ǫ 17 Ǫ 24
IND AS 34 2 Ǫ5 Ǫ7
IND AS 33 5 Ǫ 11 Ǫ 12 Ǫ 18 Ǫ 20 Ǫ 26
IND AS 101 3 Ǫ 27 Ǫ 29 Ǫ 31
IND AS 113 2 Ǫ7 Ǫ9
PED 1 Ǫ 11
AT 0
AOFS 2 Ǫ7 Ǫ8
95
“CA IS NOT HARD” IF U
“WORK HARD”
Chapter 1 : Conceptual Framework

CHAPTER 1
CONCEPTUAL FRAMEWORK FOR
FINANCIAL REPORTING UNDER IND AS
Q3. Mr. Unique commenced business on 1/04/17 with ₹ 20,000 represented by 5,000 units of the
product @ ₹ 4 per unit. During the year 2017-18, he sold 5,000 units @ ₹ 5 per unit. During 2017-
18, he withdraw ₹ 4.000.
- 31/03/18: Price of the product @ ₹ 4.60 per unit
- Average price indices: 1/4/17: 100 & 31/3/18: 120
Find out:
a) Financial capital maintenance at Historical Cost
b) Financial capital maintenance at Current Purchasing Power
c) Physical Capital Maintenance [Exam May 2019]

Ans: Financial Capital Maintenance at historical costs

₹ ₹
Closing capital (₹ 25,000 – ₹ 4,000) 21,000
Less: Capital to be maintained
Opening capital (At historical cost) -
Introduction (At historical cost) 20,000 (20,000)
Retained profit 1,000

Financial Capital Maintenance at current purchasing power

₹ ₹
Closing capital (₹ 25,000 – ₹ 4,000) 21,000
Less: Capital to be maintained
Opening capital (At closing price) (5,000 x ₹ 4.80) 24,000
Introduction (At closing price) ___ Nil (24,000)
Retained profit (3,000)
Physical Capital Maintenance

₹ ₹
Closing capital (At current cost) [₹ (5,000 x 4.6) – ₹ 19,000

P a g e | 1.1
 Chapter 1 : Conceptual Framework

4,000]
Less: Capital to be maintained
Opening capital (At current cost) (5,000 x ₹ 4.60) 23,000
Introduction (At current cost) Nil (23,000)
Retained profit (4,000)

Q10: How can one enhance the usefulness of financial information by applying four enhancing
qualitative characteristics? [MTP May 2024]

Ans: The usefulness of financial information can be enhanced by applying four enhancing qualitative
characteristics as follows:

Comparability: Users’ decisions involve choosing between alternatives. Information about a

reporting entity is more useful if it can be compared with similar information about other entities
and with similar information about the same entity for another period or another date.
Comparability refers to the use of the same methods for the same items, and uniformity implies
that like things must look alike and different things must look different.

Verifiability: Verifiability means that different knowledgeable and independent observers could
reach consensus, although not necessarily complete agreement, that a particular depiction is a
faithful representation. Verification can be direct or indirect.

Timeliness: Timeliness means having information available to decision-makers in time to be

capable of influencing their decisions. Generally, the older the information is the less useful it is.
However, some information may continue to be timely long after the end of a reporting period
because, for example, some users may need to identify and assess trends.

Understandability: Classifying, characterising and presenting information clearly and concisely

makes it understandable. Some phenomena are inherently complex and cannot be made easy
to understand. Financial reports are prepared for users who have a reasonable knowledge of
business and economic activities and who review and analyse the information diligently. At times,
even well-informed and diligent users may need to seek the aid of an adviser to understand
information about complex economic phenomena.

Q7: Explain the criteria in the Conceptual Framework for Financial Reporting for the recognition of
an asset and discuss whether there are inconsistencies with the criteria in Ind AS 38.

[Exam Nov 22 (6 Marks)]

Ans: The Conceptual Framework defines an asset as a present economic resource controlled by the
entity as a result of past events. An economic resource is a right that has the potential to produce
economic benefits. Assets should be recognized if they meet the Conceptual Framework
definition of an asset and such recognition provides users of financial statements with
information that is useful i.e. it is relevant as well as results in faithful representation. However,
the criteria of a cost-benefit analysis always exists i.e. the benefits of the information must be
sufficient to justify the costs of providing such information. The recognition criteria outlined in
the Conceptual Framework allows for flexibility in the application in amending or developing the
standards.

P a g e | 1.2
Chapter 1 : Conceptual Framework

Para 8 of Ind AS 38 ‘Intangible Assets’, defines an intangible asset as an identifiable non-monetary

asset without physical substance. Further, Ind AS 38 defines an asset as a resource:

 controlled by an entity as a result of past events; and

 from which future economic benefits are expected to flow to the entity.
Furthermore, Para 21 of Ind AS 38 states that an intangible asset shall be recognised if, and only
if:

 it is probable that the expected future economic benefits that are attributable t o the
asset will flow to the entity; and

 the cost of the asset can be measured reliably.

This requirement is applicable both in case of an externally acquired intangible asset or an

internally generated intangible asset. The probability of expected future economic benefits must
be based on reasonable and supportable assumptions that represent management’s best
estimate of the set of economic conditions that will exist over the useful life of the asset. Further,
as per Para 33 of Ind AS 38, the probability recognition criterion is always considered to be
satisfied for intangible assets acquired in business combinations. If the recognition criteria are
not satisfied, Ind AS 38 requires the expenditure to be expensed as and when it is incurred.

It is notable that the Conceptual Framework does not prescribe a ‘probability criterion’. As long
as there is a potential to produce economic benefits, even with a low probability, an item can be
recognized as an asset according to the Conceptual Framework. However, in terms of intangible
assets, it could be argued that recognizing an intangible asset having low probability of
generating economic benefits would not be useful to the users of financial statements given that
the asset has no physical substance.

The recognition criteria and definition of an asset under Ind AS 38 are different as compared to
those outlined in the Conceptual Framework. To put in simple words, the criteria in Ind AS 38 are
more specific, but definitely do provide information that is relevant and a faithful representation.
When viewed from the prism of relevance and faithful representation, the requirements of Ind
AS 38 in terms of recognition appear to be consistent with the Conceptual Framework.

P a g e | 1.3
Chapter 2 : IND AS - Introduction

CHAPTER 2
IND AS - INTRODUCTION

QUESTIONS FROM ICAI SM

Q1: Following is a snapshot of audited balance sheet of company A as on 31st March 2014.
Company A’s equity shares are listed on Bombay Stock Exchange since 2010.

Liabilities ₹ in crores Assets ₹ in crores

Equity Share Capital 160 Fixed Assets 455
Securities Premium 200 Investments 200
General Reserve 150 Current Assets 50
Revaluation Reserve 40 Miscellaneous Expenditure not 80
written off
Profit and Loss A/c 75
Liabilities 160
Total 785 Total 785

a) As per roadmap, which Phase company A fall into?

b) Will your answer change if Company A is an unlisted company?
Ans: Calculation of Net Worth:

Particulars ₹ in crores
Equity Share Capital 160
Securities Premium 200
General Reserve 150
Profit and Loss A/c 75
Miscellaneous Expenditure not written off (80)
Net Worth as per Section 2(57) of The Companies Act, 2013 505

Note – Revaluation Reserve would not be included in the calculation of net worth as per
definition mentioned in section 2(57) of The Companies Act, 2013
The company is a listed company and it does meet the net worth threshold of ₹ 500 Crores.
Hence it would be covered under phase I. Hence Ind AS would be applicable to the company for
accounting periods beginning on or after 1st April 2016.

P a g e | 2.1
 Chapter 2 : IND AS - Introduction

Even if Company A is an unlisted company as company A’s net worth is more than 500 Crores, it
would be covered under Phase I of the road map and hence Ind AS would be applicable for the
accounting periods beginning on or after 1st April 2016
Q7: ABC Inc., incorporated in a foreign country has a net worth of ₹ 700 Crores. It has two
subsidiaries Company X whose net worth as on 31st March 2014 is ₹ 600 Crores and Company Y
whose net worth is ₹ 150 Crores. Whether Company X and Y would be required to follow Ind AS
from accounting periods commencing on or after 1st April 2016 on the basis of their own net
worth or on the basis of the net worth of ABC Inc.?
Ans: Similar issue has been dealt in ITFG Clarification Bulletin 2, Issue 2. ITFG noted that as per Rule
4(1)(ii)(a) of the Companies (Indian Accounting Standards) Rules, 2015, Company X having net
worth of ₹ 600 crores at the end of the financial year 2015-16, would be required to prepare its
financial statements for the accounting periods commencing from 1st April, 2016, as per the
Companies (Indian Accounting Standards) Rules, 2015. While Company Y Ltd. having net worth
of ₹ 150 crores in the year 2015-16, would be required to prepare its financial statements as
per the Companies (Accounting Standards) Rules, 2006
Since, the foreign company ABC Inc., is not a company incorporated under the Companies Act,
2013 or the earlier Companies Act, 1956, it is not required to prepare its financial statements as
per the Companies (Indian Accounting Standards) Rules, 2015. As the foreign company is not
required to prepare financial statements based on Ind AS, the net worth of foreign company
ABC would not be the basis for deciding whether Indian Subsidiary Company X Ltd. and
Company Y Ltd. are required to prepare financial statements based on Ind AS.

P a g e | 2.2
Chapter 3 : Presentation of Financial Statement (IND AS 1)

CHAPTER 3
PRESENTATION OF FINANCIAL STATEMENT (IND AS 1)
Q15: An entity has taken a loan facility from a bank that is to be repaid within a period of 9 months
from the end of the reporting period. Prior to the end of the reporting period, the entity and
the bank enter into an arrangement, whereby the existing outstanding loan will,
unconditionally, roll into the new facility which expires after a period of 5 years.

(a) How should such loan be classified in the balance sheet of the entity?

(b) Will the answer be different if the new facility is agreed upon after the end of the
reporting period?

(c) Will the answer to (a) be different if the existing facility is from one bank and the new
facility is from another bank?

(d) Will the answer to (a) be different if the new facility is not yet tied up with the existing
bank, but the entity has the potential to refinance the obligation?

[Exam May 23 (5 Marks)]

Ans: (a) The loan is not due for payment at the end of the reporting period. The entity and the
bank have agreed for the said roll over prior to the end of the reporting period for a
period of 5 years. Since the entity has an unconditional right to defer the settlement of
the liability for at least twelve months after the reporting period, the loan should be
classified as non-current.

(b) Yes, the answer will be different if the arrangement for roll over is agreed upon after the
end of the reporting period, since assessment is required to be made based on terms of
the existing loan facility. As at the end of the reporting period, the entity does not have
an unconditional right to defer settlement of the liability for at least twelve months
after the reporting period. Hence the loan is to be classified as current.

(c) Yes, loan facility arranged with new bank cannot be treated as refinancing, as the loan
with the earlier bank would have to be settled which may coincide with loan facility
arranged with a new bank. In this case, loan has to be repaid within a period of 9
months from the end of the reporting period, therefore, it will be classified as current
liability.

(d) Yes, the answer will be different and the loan should be classified as current. This is
because, as per paragraph 73 of Ind AS 1, when refinancing or rolling over the obligation
is not at the discretion of the entity (for example, there is no arrangement for
refinancing), the entity does not consider the potential to refinance the obligation and
classifies the obligation as current.

Q16: In December 2XX1 an entity entered into a loan agreement with a bank. The loan is repayable in
three equal annual instalments starting from December 2XX5. One of the loan covenants is that
an amount equivalent to the loan amount should be contributed by promoters by March 24

P a g e | 3.1
 Chapter 3 : Presentation of Financial Statement (IND AS 1)

2XX2, failing which the loan becomes payable on demand. As on March 24, 2XX2, the entity has
not been able to get the promoter’s contribution. On March 25, 2XX2, the entity approached
the bank and obtained a grace period upto June 30, 2XX2 to get the promoter’s contribution.
The bank cannot demand immediate repayment during the grace period. The annual reporting
period of the entity ends on March 31, 2XX2.

(a) As on March 31, 2XX2, how should the entity classify the loan?

(b) Assume that in anticipation that it may not be able to get the promoter’s contribution
by due date, in February 2XX2, the entity approached the bank and got the compliance
date extended upto June 30, 2XX2 for getting promoter’s contribution. In this case will
the loan classification as on March 31, 2XX2 be different from (a) above?

[Exam May 22 (5 Marks); MTP May 24; May 25]

Ans: (a) Ind AS 1, inter alia, provides, “An entity classifies the liability as non-current if the lender
agreed by the end of the reporting period to provide a period of grace ending at least
twelve months after the reporting period, within which the entity can rectify the breach
and during which the lender cannot demand immediate repayment.” In the present
case, following the default, grace period within which an entity can rectify the breach is
less than twelve months after the reporting period. Hence as on March 31, 2XX2, the
loan will be classified as current.

(b) Ind AS 1 deals with classification of liability as current or non-current in case of breach
of a loan covenant and does not deal with the classification in case of expectation of
breach. In this case, whether actual breach has taken place or not is to be assessed on
June 30, 2XX2, i.e., after the reporting date. Consequently, in the absence of actual
breach of the loan covenant as on March 31, 2XX2, the loan will retain its classification
as non-current.

Q18: An entity manufactures passenger vehicles. The time between purchasing of underlying raw
materials to manufacture the passenger vehicles and the date the entity completes the
production and delivers to its customers is 11 months. Customers settle the dues after a period
of 8 months from the date of sale.

(a) Will the inventory and the trade receivables be current in nature?

(b) Assuming that the production time was say 15 months and the time lag between the
date of sale and collection from customers is 13 months, will the answer be different?

[RTP May 2022; MTP Nov 24; IBS (Nov24 Exam)]

Ans: Inventory and debtors need to be classified in accordance with the requirement of Ind AS 1,
which provides that an asset shall be classified as current if an entity expects to realise the
same, or intends to sell or consume it in its normal operating cycle.

(a) In this case, time lag between the purchase of inventory and its realisation into cash is
19 months [11 months + 8 months]. Both inventory and the debtors would be classified
as current if the entity expects to realise these assets in its normal operating cycle.

P a g e | 3.2
Chapter 3 : Presentation of Financial Statement (IND AS 1)

(b) No, the answer will be the same as the classification of debtors and inventory depends
on the expectation of the entity to realise the same in the normal operating cycle. In this
case, time lag between the purchase of inventory and its realisation into cash is 28
months [15 months + 13 months]. Both inventory and debtors would be classified as
current if the entity expects to realise these assets in the normal operating cycle.

Additional information as required by paragraph 61 of Ind AS 1 will be required to be

made by the entity, which provides “Whichever method of presentation is adopted, an
entity shall disclose the amount expected to be recovered or settled after more than
twelve months for each asset and liability line item that combines amounts expected to
be recovered or settled:

(a) No more than twelve months after the reporting period, and

(b) More than twelve months after the reporting period.”

Q34: Charm Limited (the 'Company') is a manufacturing company, which is into manufacturing of
wires and cables and has assessed its operating cycle to be 15 months. The Company has some
trade receivables which are receivable within a period of 12 months from the reporting date i.e.
31st March 2021.
With respect to the following transactions, which took place during the financial year 2020-
2021, give your opinion based on relevant Ind AS:
 The Company has received a contract of ₹ 10 crore on 31st March 2021. The terms of the
contract require the Company to make a security deposit of 20% of the contract value with
the customer. The Company made a security deposit of ₹ 2 crore on 31st March 2021. This
contract will be completed in about 14 months. 70% of the deposit will be refunded
immediately and the balance 30% of the deposit will be refunded after 3 months from the
completion of the contract. The Company wants to present the security deposit of ₹ 2 crore
as non-current. Is the management's decision correct?
 The Company has some trade receivables that are due after 14 months from the date of the
balance sheet; the management of the Company expects to receive the amount within the
period of the operating cycle. Despite the fact that these are receivables in 14 months, the
management would like to present these as current. Is the management's decision correct?
 In the normal course of business, the Company has given 2 contracts and received a total
security deposit of ₹ 4 crore. ₹ 3 crore is received from X Limited and ₹ 1 crore is received
from Y Limited on 31st March 2021. These are repayable on completion of the contract.
However, if the contract is cancelled within the contract term of 18 months, then the
deposit becomes payable immediately. The Company is positive about the contract with X
Limited but is in doubt about the contract received from Y Limited. The Company wants to
present the amount of ₹ 3 crore as non-current and ₹ 1 crore as current in the balance
sheet. Is the management's decision correct?
 The Company is planning to replace a machinery. It has given an advance of ₹ 1 crore for
purchase of new machinery which will be delivered in 6 months from the date of the
balance sheet. It has sold the old machinery for ₹ 0.5 crore, the payment of which is due in
10 months from the date of the balance sheet. The Company wants to present both these

P a g e | 3.3
 Chapter 3 : Presentation of Financial Statement (IND AS 1)

amounts as current since they will be settled within twelve months from the end of the
reporting period. Is the management's decision correct? [Exam JULY 2021 (4 Marks)]
Ans: Operating cycle of Charm Limited = 15 months
 The security deposit made by the Company with the customers be classified as current
assets to the extent of 70% (₹ 2 crore x 70% = ₹ 1.40 crore) as it will be refunded
immediately on completion of 14 months of contract i.e. within the operating cycle of 15
months.
However, 30% of the security deposit will be refunded after 3 months of completion of the
contract (14+3 = 17 months) i.e. after 2 months of operating cycle (Operating cycle of the
Company is 15 months). Hence, it will be classified as non-current. Therefore,
management’s decision is not correct. (Refer Para 66 of Ind AS 1)
 Yes, the Company’s decision of presenting the trade receivables as Current Assets is correct
despite the fact that these are receivables in 14 months’ time since the operating cycle of
the company is 15 months and any event arising due to trade will be considered as current
if its settlement is within the tenure of operating cycle. Additionally, the Company also need
to disclose amounts that are receivable within a period of 12 months and after 12 months
from the reporting date. (Refer Para 60 and 61 of Ind AS 1)
 Paragraph 69(d) of Ind AS 1 states that an entity shall classify a liability as current when it
does not have an unconditional right to defer settlement of the liability for at least twelve
months after the reporting period.
Although it is expected that X Limited will fulfil the contract and the deposit will not be
refunded, but in case of cancellation within the contract term, refund of security deposit is
a condition that is not within the control of the entity. Hence, Charm Limited does not have
an unconditional right to defer settlement of the liability for at least twelve months after
the reporting period. Accordingly, the deposit will have to be classified as current liability in
case of both X and Y Limited.
 Yes, the management decision to classify the payment of ₹ 0.5 crore as a current asset is
correct since the payment will be realised in less than twelve months from the end of the
reporting period.
Capital advances are advances given for procurement of Property, Plant and Equipment etc.
Typically, companies do not expect to realize them in cash. Rather, over the period, these
get converted into non-current assets. Hence, capital advances should be treated as other
non-current assets irrespective of when the Property, Plant and Equipment is expected to
be received.
Under Ind AS Schedule III, Capital Advances are not to be classified under Capital Work in
Progress since they are specifically to be disclosed under other non-current assets.
Accordingly, advance of ₹ 1 crore given for purchase of machinery is ‘Capital advance’ which
will be classified as non-current as it relates to acquisition of non-current item i.e.,
machinery. Hence, management decision to classify it as current is incorrect.

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IND AS 8
Chapter 4 : IND AS 8

CHAPTER 4
ACCOUNTING POLICIES, CHANGES IN ACCOUNTING
ESTIMATES AND ERRORS (IND AS 8)
QUESTIONS FROM ICAI STUDY MATERIAL
Q2: Entity ABC acquired a building for its administrative purposes and presented the same as
property, plant and equipment (PPE) in the financial year 2011- 12. During the financial year
2012- 13, it relocated the office to a new building and leased the said building to a third party.
Following the change in the usage of the building, Entity ABC reclassified it from PPE to
investment property in the financial year 2012- 13. Should Entity ABC account for the change as
a change in accounting policy? [MTP May 2024; IBS Exam May 24]

Ans: Paragraph 16(a) of Ind AS 8 provides that the application of an accounting policy for
transactions, other events or conditions that differ in substance from those previously
occurring are not changes in accounting policies.
As per Ind AS 16, ‘property, plant and equipment’ are tangible items that:
(a) are held for use in the production or supply of goods or services, for rental to others, or
for administrative purposes; and
(b) are expected to be used during more than one period.”
As per Ind AS 40, ‘investment property’ is property (land or a building—or part of a building—or
both) held (by the owner or by the lessee as a right-of-use asset) to earn rentals or for capital
appreciation or both, rather than for:
(a) use in the production or supply of goods or services or for administrative purposes; or
(b) sale in the ordinary course of business.”
As per the above definitions, whether a building is an item of property, plant and equipment
(PPE) or an investment property for an entity depends on the purpose for which it is held by the
entity. It is thus possible that due to a change in the purpose for which it is held, a building that
was previously classified as an item of property, plant and equipment may warrant
reclassification as an investment property, or vice versa. Whether a building is in the nature of
PPE or investment property is determined by applying the definitions of these terms from the
perspective of that entity. Thus, the classification of a building as an item of property, plant and
equipment or as an investment property is not a matter of an accounting policy choice.
Accordingly, a change in classification of a building from property, plant and equipment to
investment property due to change in the purpose for which it is held by the entity is not a
change in an accounting policy.
Q13: While preparing the annual financial statements for the year ended 31 st March, 2013, an entity
discovers that a provision for constructive obligation for payment of bonus to selected
employees in corporate office (material in amount) which was required to be recognised in

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 Chapter 4 : IND AS 8

the annual financial statements for the year ended 31st March, 2011 was not recognised due to
oversight of facts. The bonus was paid during the financial year ended 31 st March, 2012 and
was recognised as an expense in the annual financial statements for the said year. Would this
situation require retrospective restatement of comparatives considering that the error was
material? [Exam Nov 22 (5 Marks)]
Ans: As per paragraph 41 of Ind AS 8, errors can arise in respect of the recognition, measurement,
presentation or disclosure of elements of financial statements. Financial statements do not
comply with Ind AS if they contain either material errors or immaterial errors made
intentionally to achieve a particular presentation of an entity’s financial position, financial
performance or cash flows. Potential current period errors discovered in that period are
corrected before the financial statements are approved for issue. However, material errors are
sometimes not discovered until a subsequent period, and these prior period errors are
corrected in the comparative information presented in the financial statements for that
subsequent period.
As per paragraph 40A of Ind AS 1, an entity shall present a third balance sheet as at the
beginning of the preceding period in addition to the minimum comparative financial statements
if, inter alia, it makes a retrospective restatement of items in its financial statements and the
retrospective restatement has a material effect on the information in the balance sheet at the
beginning of the preceding period.
In the given case, expenses for the year ended 31st March, 2011 and liabilities as at 31st
March, 2011 were understated because of non-recognition of bonus expense and related
provision.
Expenses for the year ended 31st March, 2012, on the other hand, were overstated to the same
extent because of recognition of the aforesaid bonus as expense for the year. To correct
the above errors in the annual financial statements for theyear ended 31st March, 2013, the
entity should:
(a) restate the comparative amounts (i.e., those for the year ended 31st March, 2012) in
the statement of profit and loss; and
(b) present a third balance sheet as at the beginning of the preceding period (i.e., as at 1st
April, 2011) wherein it should recognise the provision for bonus and restate the retained
earnings.

Q18: In 20X3-20X4, after the entity’s 31 March 20X3 annual financial statements were approved for
issue, a latent defect in the composition of a new product manufactured by the entity was
discovered (that is, a defect that could not be discovered by reasonable or customary
inspection). As a result of the latent defect the entity incurred ₹100,000 in unanticipated costs
for fulfilling its warranty obligation in respect of sales made before 31 March 20X3. An
additional ₹20,000 was incurred to rectify the latent defect in products sold during 20X3-20X4
before the defect was detected and the production process rectified, ₹5,000 of which relates to
items of inventory at 31 March 20X3. The defective inventory was reported at cost ₹ 15,000 in
the 20X2-20X3 financial statements when its selling price less costs to complete and sell was
estimated at ₹18,000. The accounting estimates made in preparing the 31 March 20X3 financial
statements were appropriately made using all reliable information that the entity could

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Chapter 4 : IND AS 8

reasonably be expected to have been obtained and taken into account in the preparation and
presentation of those financial statements. Analyse the above situation in accordance with
relevant Ind AS. [RTP May 2021; May 2023]

Ans: Ind AS 8 is applied in selecting and applying accounting policies, and accounting for changes in
accounting policies, changes in accounting estimates and corrections of prior period errors.

A change in accounting estimate is an adjustment of the carrying amount of an asset or a

liability, or the amount of the periodic consumption of an asset. This change in accounting
estimate is an outcome of the assessment of the present status of, and expected future
benefits and obligations associated with, assets and liabilities. Changes in accounting estimates
result from new information or new developments and, accordingly, are not corrections of
errors.

Further, the effect of change in an accounting estimate, shall be recognised prospectively by

including it in profit or loss in: (a) the period of the change, if the change affects that period
only; or (b) the period of the change and future periods, if the change affects both.

Prior period errors are omissions from, and misstatements in, the entity’s financial statements
for one or more prior periods arising from a failure to use, or misuse of, reliable information
that:

(a) was available when financial statements for those periods were approved for issue; and

(b) could reasonably be expected to have been obtained and taken into account in the
preparation and presentation of those financial statements.

Such errors include the effects of mathematical mistakes, mistakes in applying accounting
policies, oversights or misinterpretations of facts, and fraud.

On the basis of above provisions, the given situation would be dealt as follows:

The defect was neither known nor reasonably possible to detect at 31 March 20X3 or before
the financial statements were approved for issue, so understatement of the warranty provision
₹ 1,00,000 and overstatement of inventory ₹ 2,000 (Note 1) in the 31 March 20X3 financial
statements are not a prior period errors.

The effects of the latent defect that relate to the entity’s financial position at 31 March 20X3
are changes in accounting estimates.

In preparing its financial statements for 31 March 20X3, the entity made the warranty provision
and inventory valuation appropriately using all reliable information that the entity could
reasonably be expected to have obtained and had taken into account the same in the
preparation and presentation of those financial statements.

Consequently, the additional costs are expensed in calculating profit or loss for 20X3-20X4.

Working Note: Inventory is measured at the lower of cost (ie ₹ 15,000) and fair value less costs
to complete and sell (ie ₹ 18,000 originally estimated minus ₹ 5,000 costs to rectify latent
defect) = ₹ 13,000.

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 Chapter 4 : IND AS 8

Q25. In its financial statements for the year ended 31st March, 20X2, Y Ltd. Reported ₹ 73,500
revenue (sales), ₹ 53,500 cost of sales, ₹ 6,000 income tax expense, ₹ 20,000 retained earnings
at 1st April, 20X1 and ₹ 34,000 retained earnings at 31st March, 20X2.

In 20X2-20X3, after the 20X1-20X2 financial statements were approved for issue, Y Ltd.
discovered that some products sold in 20X1-20X2 were incorrectly included in inventories at
31st March, 20X2 at their cost of ₹ 6,500.

In 20X2-20X3, Y Ltd. changed its accounting policy for the measurement of investments in
associates after initial recognition from cost model to the fair value model as per Ind AS 109. It
acquired its only investment in an associate for ₹ 3,000 many years ago. The associate’s equity
is not traded on a securities exchange (that is, a published price quotation is not available). The
fair value of the investment was determined reliably using an appropriate equity valuation
model on 31 st March, 20X3 at ₹ 25,000 (20X1-20X2: ₹ 20,000 and 20X0-20X1: ₹ 18,000).

At 31st March, 20X3, as a result of usage of improved lubricants, Y Ltd. reassessed the useful
life of Machine A from four years to seven years. Machine A is depreciated on the straight-line
method to a Nil residual value. It was acquired for ₹ 6,000 on 1st April, 20X0.

Inventories of the type manufactured by Machine A were immaterial at the end of each
reporting period.

Y Ltd.’s accounting records for the year ended 31st March, 20X3, before accounting for change
in accounting policy and change in accounting estimate, record ₹ 1,04,000 revenue (sales), ₹
86,500 cost of sales (including ₹ 6,500 for the error in opening inventory and ₹ 1,500
depreciation for Machine A) and ₹ 5,250 income tax expense.

Y Ltd. presents financial statements with one year of comparative information.

For simplicity, the tax effect of all items of income and expenses should be assumed to be 30%
of the gross amount.

Draft an extract showing how the correction of the prior period error, change in accounting
policy and change in accounting estimate could be presented in the Statement of Profit and
Loss and Statement of Changes in Equity (Retained Earnings) and disclosed in the Notes of Y
Ltd. for the year ended 31st March, 20X3. [RTP Nov 2023]

Ans. Extract of Y Ltd.’s Statement of Profit and Loss for the year ended 31st March, 20X3
20X2-20X3 Reference to 20X1- Reference to
W.N. 20X2 W.N.
Restated
₹ ₹
Revenue 1,04,000 73,500
Cost of sales (20X1-20X2
previously ₹ 53,500) (79,100) 1 (60,000) 4
Gross profit 24,900 13,500

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Chapter 4 : IND AS 8

Other income — change

in the measurement
policy i.e. the value of
investment in associate at
FVTPL 5,000 2 2,000 5

Profit before tax 29,900 15,500

Income tax expense (8,970) 3 (4,650) 6
Profit for the year 20,930 10,850

Extract of Y Ltd.’s Statement of Changes in Equity (Retained Earnings) for the year ended 31st
March, 20X3
20X2-20X3 Reference 20X1-20X2 Reference to
to W.N. Restated W.N.

₹ ₹
Retained earnings, as restated, at
the beginning of the year
- as previously stated 34,000 20,000
- effect of the correction of a -
prior period error (4,550) 7
- effect of a change in
accounting policy 11,900 13 10,500 12
41,350 30,500
Profit for the year 20,930 10,850
Retained earnings at the end of
the year 62,280 41,350

Y Ltd.

Extract of Notes to the Financial Statements for the year ended 31st March, 20X3

Note X : Change in Accounting Estimates

Due to usage of improved lubricants the estimated useful life of the machine used for
production was increased from four years to seven years. The effect of the change in the useful
life of the machine is to reduce the depreciation allocation by ₹ 900 in 20X2-20X3 and 20X3-
20X4. The after-tax effect is an increase in profit for the year of ₹ 630 for each of the two years.

Depreciation expense in 20X4-20X5 to 20X6-20X7 is increased by ₹ 600 because of revision in

the useful life of machinery, as under the initial estimate, the asset would have been fully
depreciated at the end of 20X3-20X4. The after-tax effect for these three years is a decrease in
profit for the year by ₹ 420 per year.

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 Chapter 4 : IND AS 8

Note Y : Correction of Prior Period Error

In 20X2-20X3 the entity identified that ₹ 6,500 products that had been sold in 20X1-20X2 were
included erroneously in inventory at 31st March, 20X2. The financial statements of 20X1-20X2
have been restated to correct this error. The effect of the restatement is ₹ 6,500 increase in the
cost of sales and ₹ 4,550 decrease in profit for the year ended 31st March, 20X2 after
decreasing income tax expense by ₹ 1,950. This resulted in ₹ 4,550 (decrease) restatement of
retained earnings at 31st March, 20X2.

Note Z : Change in Accounting Policy

In 20X2-20X3 the entity changed its accounting policy for the measurement of investments in
associates from cost model to fair value model as per Ind AS 109. Management judged that this
policy provides reliable and more relevant information because dividend income and changes
in fair value are inextricably linked as integral components of the financial performance of an
investment in an associate and measurement at fair value is necessary if that financial
performance is to be reported in a more meaningful way. This change in accounting policy has
been accounted for retrospectively. The comparative information has been restated. A new line
item, ‘Other income — change in the fair value of investment in associate’, has been added in
the Statement of Profit and Loss and Retained Earnings. The effect of the restatement has been
to add income of ₹ 2,000 as a result of the increase in value of the associate during the year
ended 31st March, 20X2 which resulted in ₹ 1,400 increase in profit for the year (after including
a resulting increase in income tax expense of ₹ 600). This, together with ₹ 10,500 (increase)
restatement of retained earnings at 31st March, 20X1, resulted in a ₹ 11,900 increase in
retained earnings at 31st March, 20X2. Furthermore, profit for the year ended 31st March,
20X3 was ₹ 3,500 higher (after deducting ₹ 1,500 tax effect) as a result of recording a further ₹
5,000 (W.N.2) increase in the fair value of the investment in an associate.

Working Notes:

1. ₹ 86,500 (given) minus ₹ 6,500 correction of error (now recognised as an expense in

20X1-20X2) minus ₹ 900 (W.N.9) effect of the change in accounting estimate.

2. ₹ 25,000 fair value (20X2-20X3) minus ₹ 20,000 fair value (20X1-20X2) = ₹ 5,000 (the
effect of applying the new accounting policy (fair value model) in 20X2-20X3).

3. ₹ 5,250 + ₹ 1,950 (W.N.8) + 30% (₹ 900 (W.N.9) reduction in depreciation resulting from
the change in accounting estimate) + 30% (₹ 5,000 increase in the fair value of
investment property — change in accounting policy) = ₹ 8,970.

4. ₹ 53,500 as previously stated + ₹ 6,500 (products sold and incorrectly included in closing
inventory in 20X1-20X2) = ₹ 60,000 (that is, the prior period error is corrected
retrospectively by restating the comparative amounts).

5. ₹ 20,000 fair value (20X1-20X2) minus ₹ 18,000 fair value (20X0-20X1) = ₹ 2,000 (the
effect in 20X1-20X2 of the change in accounting policy for investments in associates
from the cost model to the fair value model).

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Chapter 4 : IND AS 8

6. ₹ 6,000 as previously stated minus ₹ 1,950 (W.N.8) correction of prior period error +
30% (₹ 2,000 change in accounting policy) = ₹ 4,650.

7. ₹ 6,500 (products sold and incorrectly included in inventory in 20X1 -20X2) – ₹ 1,950
(W.N.8) (tax overstated in 20X1-20X2) = ₹ 4,550.

8. ₹ 6,500 (products sold and incorrectly included in inventory in 20X1 -20X2) x 30%
(income tax rate) = ₹ 1,950.

9. ₹ 1,500 depreciation (using old estimate, that is, ₹ 6,000 cost ÷ 4 years) minus ₹ 600
(W.N.10) (using new estimate of useful life) = ₹ 900.

10. ₹ 3,000 (W.N.11) carrying amount ÷ 5 years remaining useful life = ₹ 600 depreciation
per year.

11. [₹ 6,000 cost minus (₹ 1,500 depreciation x 2 years)] = ₹ 3,000 carrying amount at 31st
March, 20X2.

12. (₹ 18,000 fair value of investment in associates at 31 st March, 20X1 minus ₹ 3,000
carrying amount based on the cost model at the same date) x 0.7 (to reflect 30% income
tax rate) = ₹ 10,500 (effect of a change in accounting policy (from cost model to fair
value model)).

13. ₹ 10,500 (W.N.12) + [₹ 2,000 (W.N.5) x 0.7 (to reflect 30% income tax rate)] = ₹ 11,900.

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Chapter 5 : IND AS 37

CHAPTER 5
PROVISIONS, CONTINGENT LIABILITIES AND
CONTINGENT ASSETS (IND AS 37)
Q20: Marico has an obligation to restore environmental damage in the area surrounding its factory.
Expert advice indicates that the restoration will be carried out in two distinct phases; the first
phase requiring expenditure of ₹ 2 million to remove the contaminated soil from the area and
the second phase, commencing three years later from the end of first phase, to replant the area
with suitable trees and vegetation. The estimated cost of replanting is ₹ 3.5 million. Marico uses
a cost of capital (before taxation) of 10% and the expenditure, when incurred, will attract tax
relief at the company’s marginal tax rate of 30%. Marico has not recognised any provision for
such costs in the past and today’s date is 31 March 20X2. The first phase of the clean up will
commence in a few months time and will be completed on 31 March 20X3 when the first payment
of ₹ 2 million will be made. Phase 2 costs will be paid three years later from the end of first phase.
Calculate the amount to be provided at 31 March 20X2 for the restoration costs.
Ans:

Year Cash Flow 10% Discount factor Present Value

20X2-20X3 20,00,000 0.909 18,18,000
20X5-20X6 35,00,000 0.683 23,90,500
Provision required at 31 March 20X2 42,08,500
The provision is calculated using the pre-tax costs and a pre-tax cost of capital. The fact that the
eventual payment will attract tax relief will be reflected in the recognition of a deferred tax asset
for the deductible temporary difference (assuming that the recognition criteria for deferred tax
assets are met.)
Q23: During the year, QA Ltd. delivered manufactured products to customer K. The products were
faulty and on 1st October, 2016 customer K commenced legal action against the Company
claiming damages in respect of losses due to the supply of faulty product. Upon investigating the
matter, QA Ltd. discovered that the products were faulty due to defective raw material procured
from supplier F. Therefore, on 1st December, 2016, the Company commenced legal action
against F claiming damages in respect of the supply of defective raw materials.
QA Ltd. has estimated that it's probability of success of both legal actions, the action of K against
QA Ltd. and action of QA Ltd. against F, is very high.
On 1st October, 2016, QA Ltd. has estimated that the damages it would have to pay K would be
₹ 5 crores. This estimate was revised to ₹ 5.2 crores as on 31st March, 2017 and ₹ 5.25 crores as
at 15th May, 2017. This case was eventually settled on 1st June, 2017, when the Company paid
damages of ₹ 5.3 crores to K.

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 Chapter 5 : IND AS 37

On 1st December, 2016, QA Ltd. had estimated that it would receive damages of ₹ 3.5 crores
from F. This estimate was revised to ₹ 3.6 crores as at 31st March, 2017 and ₹ 3.7 crores as on
15th May, 2017. This case was eventually settled on 1st June, 2017 when F paid ₹ 3.75 crores to
QA Ltd. QA Ltd. had, in its financial statements for the year ended 31st March, 2017, provided ₹
3.6 crores as the financial statements were approved by the Board of Directors on 26th April,
2017.
(i) Whether the Company is required to make provision for the claim from customer K as per
applicable Ind AS? If yes, please give the rationale for the same.
(ii) If the answer to (a) above is yes, what is the entry to be passed in the books of account as
on 31st March, 2017? Give brief reasoning for your choice.
(A) Statement of Profit and Loss A/c Dr. ₹ 5.2 crores
To Current Liability A/c ₹ 5.2 crores
(B) Statement of Profit and Loss A/c Dr. ₹ 5.3 crores
To Non-Current Liability A/c ₹ 5.3 crores
(C) Statement of Profit and Loss A/c Dr. ₹ 5.25 crores
To Current Liability A/c ₹ 5.25 crores
(iii) What will the accounting treatment of the action of QA Ltd. against supplier F as per
applicable Ind AS?
Ans : (i) Yes, QA Ltd. is required to make provision for the claim from customer K as per Ind AS 37
since the claim is a present obligation as a result of delivery of faulty goods manufactured.
Also, it is probable that an outflow of resources embodying economic benefits will be
required to settle the obligations. Further, a reliable estimate of ₹ 5.2 crore can be made of
the amount of the obligation while preparing the financial statements as on 31st March,
2017.
(ii) Option (A) : Statement of Profit and Loss A/c Dr. ₹ 5.2 crore
To Current Liability A/c ₹ 5.2 crore
(iii) As per para 31 of Ind AS 37, QA Ltd. shall not recognise a contingent asset. Here the
probability of success of legal action is very high but there is no concrete evidence which
makes the inflow virtually certain. Hence, it will be considered as contingent asset only
and shall not be recognized.
Q24: Sun Limited has entered into a binding agreement with Moon Limited to buy a custom-made
machine for ₹ 4,00,000. At the end of 2017-18, before delivery of the machine, Sun Limited had
to change its method of production. The new method will not require the machine ordered which
is to be scrapped after delivery. The expected scrap value is nil. Given that the asset is yet to be
delivered, should any liability be recognized for the potential loss? If so, give reasons for the
same, the amount of liability as well as the accounting entry. [Nov 2018]
Ans: As per Ind AS 37, Executory contracts are contracts under which
 neither party has performed any of its obligations; or

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Chapter 5 : IND AS 37

 both parties have partially performed their obligations to an equal extent.

The contract entered by Sun Ltd. is an executory contract, since the delivery has not yet taken
place.
Ind AS 37 is applied to executory contracts only if they are onerous.
Ind AS 37 defines an onerous contract as a contract in which the unavoidable costs of meeting
the obligations under the contract exceed the economic benefits expected to be received under
it.
As per the facts given in the question, Sun Ltd. will not require the machine ordered. However,
since it is a binding agreement, the entity cannot exit / cancel the agreement. Further, Sun Ltd.
has to scrap the machine after delivery at nil scrap value.
These circumstances do indicate that the agreement/contract is an onerous contract. Therefore,
a provision should be made for the onerous element of ₹ 4,00,000 ie the full cost of the machine.
Onerous Contract Provision Expense A/c Dr. 4,00,000
To Provision for Onerous Contract Liability A/c 4,00,000
(Being asset to be received due to binding agreement recognized)
Profit and Loss Account (Loss due to onerous contract) Dr. 4,00,000
To Onerous Contract Provision Expense A/c 4,00,000
(Being loss due to onerous contract recognized and asset derecognsied)
Q26: Assume that the firm has not been operating its warranty for five years, and reliable data exists
to suggest the following:
• If minor defects occur in all products sold, repair costs of ₹ 20,00,000 would result.
• If major defects are detected in all products, costs of ₹ 50,00,000 would result.
• The manufacturer’s past experience and future expectations indicate that each year
80% of the goods sold will have no defects. 15% of the goods sold will have minor
defects, and 5% of the goods sold will have major defects.
Calculate the expected value of the cost of repairs in accordance with the requirements of Ind
AS 37, if any. Ignore both income tax and the effect of discounting. [Exam Nov 2019]
Ans: The expected value of cost of repairs in accordance with Ind AS 37 is:
(80% x nil) + (15% x ₹ 20,00,000) + (5% x ₹ 50,00,000) = 3,00,000 + 2,50,000 = 5,50,000

Q30: XYZ Ltd. offers a six-month warranty on its small to medium sized equipment, which can be put
to use by the customer with no installation support. The warranty comes with the equipment
and the customer cannot purchase it separately. This equipment is typically sold at a gross margin
of 40%. XYZ Ltd. has made a provision of ₹ 30,000 during the year ended 31st March, 20X2, which
is approximately 1% of its gross margin on the sale of these equipment. Based on past experience,
it is expected that 1% of equipment sold have been returned as faulty within the warranty period.

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 Chapter 5 : IND AS 37

Faulty equipment returned to XYZ Ltd. during the warranty period are scrapped and the sale
value is fully refunded to the customer.

Assuming that sales occurred evenly during the year, how should XYZ Ltd. evaluate whether any
additional warranty provision is required on equipment sold in the past as at 31st March, 20X2?
Had the warranty period been 2 years instead of six months, what additional criteria would XYZ
Ltd. need to consider? [RTP May 2022]

Ans: Calculation of additional warranty provisions:

Warranty claim covers 1% of gross margin, whereas customers are refunded the full selling price.
As the goods are scrapped it is assumed XYZ Ltd has no potential for re- imbursement from its
supplier regarding the faulty goods.

A calculation of warranty provision is set out below:

1% of annual gross margin is ₹ 30,000 therefore 100% of annual gross margin must be ₹
30,00,000. Since gross margin is 40%, sales should be ₹ 75,00,000. As provide in the question
that the sales are evenly spread during the year and given the six month warranty, half of the
sales occurred in the second half of the year is still covered within the warranty period as follows.
% age Annual Product under Percentage Warranty
sales warranty at expected to provision
31st March, 20X2 be returned
₹ ₹ ₹ ₹
Gross margin 40% 30,00,000
Selling price 100% 75,00,000 37,50,000 1% 37,500

The warranty provision should therefore be increased by ₹ 7,500 (₹ 37,500 – ₹ 30,000). As the
provision is expected to be used in the next 6 months no discounting is required.

If the warranty period is 2 years:

Since the outstanding period of warranties is 6 months (i.e. less than a year), no discounting is
required. However, if a longer warranty period is to be given, the entity will have to take into
account the effect of the time value of money. The amount of provision shall be the present value
of the expenditures expected to be required to settle the warranty obligation. (Refer Para 45 of
Ind AS 37)

The discount rate shall be a pre-tax rate that reflects current market assessments of the time
value of money and the risks specific to the liability. The discount rate shall not reflect risks for
which future cash flow estimates have been adjusted. (Refer Para 47 of Ind AS 37)
% age Annual sales Product under Percentage Warranty
warranty at expected to provision
31st March, 20X2 be returned
₹ ₹ ₹ ₹
Gross margin 40% 30,00,000
Selling price 100% 75,00,000 75,00,000 1% 75,000

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Chapter 5 : IND AS 37

The warranty provision should therefore be increased by ₹ 45,000 (₹ 75,000 – ₹ 30,000). Further
discounting of provision would be required.

Q32. On 1st January, 20X2, the directors of Johansen Ltd. decided to terminate production at one of
the company’s divisions. This decision was publicly announced on 31st January, 20X2. The
activities of the division were gradually reduced from 1st April, 20X2 and closure is expected to
be complete by 30th September, 20X2.

At 31st January, 20X2, the directors prepared the following estimates of the financial implications
of the closure:

(i) Redundancy costs were initially estimated at ₹ 2 million. Further expenditure of ₹

8,00,000 will be necessary to retrain employees who will be affected by the closure but
remained with Johansen Ltd. in different divisions. This retraining will begin in early July
20X2. Latest estimates are that redundancy costs will be ₹ 1.9 million, with retraining
costs of ₹ 8,50,000.

(ii) Plant and equipment having an expected carrying value at 31 st March, 20X2 of ₹ 8 million
will have a recoverable amount ₹ 1.5 million. These estimates remain valid.

(iii) The division is under contract to supply goods to a customer for the next three years at a
pre- determined price. It will be necessary to pay compensation of ₹ 6,00,000 to this
customer. The compensation actually paid, on 31st May, 20X2, was ₹ 5,50,000.

(iv) The division will make operating losses of ₹ 3,00,000 per month in the first three months
of 20X2-20X3 and ₹ 2,00,000 per month in the next three months of 20X2-20X3. This
estimate proved accurate for April, 20X2 and May, 20X2.

(v) The division operates from a leasehold premise. The lease is a non-cancellable operating
lease with an unexpired term of five years from 31 st March, 20X2. The annual lease
rentals (payable on 31st March in arrears) are ₹ 1.5 million. The landlord is not prepared
to discuss an early termination payment.

Following the closure of the division it is estimated that Johansen Ltd. would be able to sub-let
the property from 1st October, 20X2.

Johansen Ltd. could expect to receive a rental of ₹ 3,00,000 for the six-month period from 1st
October, 20X2 to 31st March, 20X3 and then annual rentals of ₹ 5,00,000 for each period ending
31st March, 20X4 to 31st March, 20X7. All rentals will be received in arrears.

Any discounting calculations should be performed using a discount rate of 5% per annum. You
are given the following data for discounting at 5% per annum:

Present value of ₹ 1 received at the end of year 1 = ₹ 0.95

Present value of ₹ 1 received at the end of year 1–2 inclusive = ₹ 1.86

Present value of ₹ 1 received at the end of year 1–3 inclusive = ₹ 2.72

Present value of ₹ 1 received at the end of year 1–4 inclusive = ₹ 3.54

P a g e | 5.5
 Chapter 5 : IND AS 37

Present value of ₹ 1 received at the end of year 1–5 inclusive = ₹ 4.32

Compute the amounts that will be included in the Statement of Profit and Loss for the year ended
31st March, 20X2 in respect of the decision to close the division of Johansen Ltd.

[RTP Nov 2023]

Ans. As per Ind AS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’ , closure of a division
is a restructuring exercise. Ind AS 37 states that a constructive obligation to proceed with the
restructuring arises when at the reporting date the entity has:

– Commenced activities connected with the restructuring; or

– Made a public announcement of the main features of the restructuring to those affected
by it. In this case a public announcement has been made and so a provision will be
necessary at 31st March, 20X2.

This will result in the following charges to the Statement of Profit and Loss:

(i) Estimate of redundancy costs of ₹ 1.9 million is the best estimate of the expenditure at
the date the financial statements are authorized for issue. Changes in estimates after the
reporting date are taken into account for this purpose as an adjusting event after the
reporting date. No charge is necessary for the retraining costs as these are not incurred
in 20X1 -20X2 and cannot form part of a restructuring provision as they are related to the
ongoing activities of the entity.

(ii) Impairment of plant and equipment of ₹ 6.5 million is although not strictly part of the
restructuring provision the decision to restructure before the year-end means that
related assets need to be reviewed for impairment. In this case the recoverable amount
of the plant and equipment is only ₹ 1.5 million. As per Ind AS 36 ‘Impairment of Assets’,
property, plant and equipment should be written down to this amount, resulting in a
charge of ₹ 6.5 million to the income statement.

(iii) For compensation for breach of contract of ₹ 0.55 million, same principle applies here as
applied to the redundancy costs.

(iv) No charge is recognized in 20X1-20X2 with respect to future operating losses of 20X2-
20X3. Future operating losses relate to future events and provisions are made only for
the consequences of past events.

(v) Ind AS 37 states that an onerous contract is one for which the expected cost of fulfilling
the contract exceeds the benefits expected from the contract. Provision is made for the
lower of the expected net cost of fulfilling the contract and the cost of early termination
(not available in this case).

The net cost of fulfilling the contract is ₹ 4.51 million [₹ 1.5 million x 4.32 – ₹ 0.3 million x
0.95 – ₹ 0.5 million x (4.32 – 0.95)].

Q33: An entity has a contract to purchase one million units of gas at 23p per unit, giving a contract
price of ₹ 2,30,000. The current market price for a similar contract is 16p per unit, giving a price

P a g e | 5.6
Chapter 5 : IND AS 37

of ₹ 1,60,000. All of the gas purchased by the entity is used to generate electricity using dedicated
assets.

Determine in the following situations whether the contract is onerous and provision is to be
made when:

(a) The electricity is sold at a profit. The electricity is sold to a wide range of customers.

(b) The electricity is sold at a loss, and the entity makes an overall operating loss. The
electricity is sold to a wide range of customers.

(c) The entity sells the gas under contract, which it no longer needs, to a third party for 18p
per unit (5p below cost). The entity determines that it would have to pay ₹ 55,000 to exit
the purchase contract. [MTP May 2024]

Ans:

(i) The gas will be used to generate electricity, which will be sold at a profit. The economic
benefits from the contract include the benefits to the entity of using the gas in its business
and, because the electricity will be sold at a profit, the contract is not onerous.

(ii) The electricity is sold to a wide range of customers. The entity first considers whether the
assets used to generate electricity are impaired. To the extent that there is still a loss after
the assets have been written down, a provision for an onerous contract should be
recorded.

(iii) The only economic benefit from the purchase contract costing ₹ 2,30,000 are the
proceeds from the sales contract, which are ₹ 1,80,000. Therefore, a provision should be
made for the onerous element of ₹ 50,000, being the lower of the cost of fulfilling the
contract and the penalty cost of cancellation (₹ 55,000).

P a g e | 5.7
Chapter 6 : Events After the Reporting Period (IND AS 10)

CHAPTER 6
EVENTS AFTER THE REPORTING PERIOD (IND AS 10)
Q12: The AGM of ABC Ltd for the year ended 31st March, 20X2 was held on 10th July, 20X2 and Board
Meeting has been conducted on 15th May, 20X2. Meanwhile, the company had to disclose
certain financial information pertaining to the year ended 31st March, 20X2 to SEBI as per SEBI
regulations on 20th April, 20X2. Since, certain financial information pertaining to the year ended
31st March, 20X2 is submitted to SEBI before approval of financial statements by the Board, the
management is suggesting that 20th April 20X2 shall be considered as ‘after the reporting
period’. Whether the management view is correct in accordance with the guidance given in Ind
AS 10? [MTP May 2024]
Ans: As per Ind AS 10, even if partial information has already been published, the reporting period will
be considered as the period between the end of the reporting period and the date of approval
of financial statements. In the above case, the financial statements for the year 20X1-20X2 were
approved on 15th May, 20X2. Therefore, for the purposes of Ind AS 10, ‘after the reporting
period’ would be the period between 31st March, 20X2 and 15th May, 20X2.
Q24: Discuss with reasons whether these events are in nature of adjusting or non -adjusting and the
treatment needed in light of accounting standard Ind AS 10.
(a) Moon Ltd. won an arbitration award on 25th April, 2019 for ₹ 1 crore. From the arbitration
proceeding, it was evident that the Company is most likely to win the arbitration award.
The directors approved the financial statements for the year ending 31.03.2019 on 1st
May, 2019. The management did not consider the effect of the above transaction in
Financial Year 2018-2019, as it was favourable to the Company and the award came after
the end of the financial year.
(b) Zoom Ltd. has a trading business of Mobile telephones. The Company has purchased 1000
mobiles phones at ₹ 5,000 each on 15th March, 2019. The manufacturers of phone had
announced the release of the new version on 1st March, 2019 but had not announced
the price. Zoom Ltd. has valued inventory at cost of ₹ 5,000 each at the year ending 31st
March, 2019.
Due to arrival of new advance version of Mobile Phone on 8 th April, 2019, the selling
prices of the mobile stocks remaining with Company was dropped at ₹ 4,000 each.
The financial statements of the company valued mobile phones @ ₹ 5,000 each and not
at the value @ ₹ 4,000 less expenses on sales, as the price reduction in selling price was
effected after 31.03.2019.
(c) There as an old due from a debtor amounting to ₹ 15 lakh against whom insolvency
proceedings was instituted prior to the financial year ending 31st March, 2019. The
debtor was declared insolvent on 15th April, 2019.
(d) Assume that subsequent to the year end and before the financial statements are
approved, Company’s management announces that it will restructure the operation of
the company. Management plans to make significant redundancies and to close a few

P a g e | 6.1
 Chapter 6 : Events After the Reporting Period (IND AS 10)

divisions of company’s business; however, there is no formal plan yet. Should

management recognise a provision in the books, if the company decides subsequent to
end of the accounting year to restructure its operations?
[Exam Nov 2019; MTP NOV 2021]
Ans: As per Ind AS 10, the treatment of stated issues would be as under:
a) Adjusting event: It is an adjusting event as it is the settlement after the reporting period
of a court case that confirms that the entity had a present obligation at the end of the
reporting period. Even though winning of award is favorable to the company, it should
be accounted in its books as receivable since it is an adjusting event.
b) Adjusting event: The sale of inventories after the reporting period may give evidence
about their net realizable value at the end of the reporting period, hence it is an adjusting
event as per Ind AS 10. Zoom Limited should value its inventory at ₹ 40,00,000. Hence,
appropriate provision must be made for ₹ 10 lakh.
c) Adjusting event: As per Ind AS 10, the receipt of information after the reporting period
indicating that an asset was impaired at the end of the reporting period, or that the
amount of a previously recognised impairment loss for that asset needs to be adjusted.
The bankruptcy of a customer that occurs after the reporting period usually confirms that
the customer was credit-impaired at the end of the reporting period.
d) Non–adjusting event: Announcing or commencing the implementation of a major
restructuring after reporting period is a non-adjusting event as per Ind AS 10. Though this
is a non- adjusting event occurred after the reporting period, yet it would result in
disclosure of the event in the financial statements, if restructuring is material.
This would not require provision since as per Ind AS 37, decision to restructure was not
taken before or on the reporting date. Hence, it does not give rise to a constructive
obligation at the end of the reporting period to create a provision.

Q25: Discuss the following situations as per Ind AS 10:

(i) The financial statements of a Company for the year 2021-2022 are approved by the
management and were sent on 5th June, 2022 for review and approval to its supervisory
board i.e., Board of Directors. The supervisory board approves the financial statements on
26th June, 2022. The financial statements are then made available to shareholders on 4th
July, 2022. The financial statements are approved by shareholders in their annual general
meeting on 18th August, 2022 and then filed with Ministry of Corporate Affairs (MCA) on
19th August, 2022. Determine & discuss the date on which financial statements were
approved.

(ii) A Company is in litigation with Income Tax Department with respect to allowability of certain
exemptions for financial year 2018-2019. No provision for tax has been made for
disallowances of exemptions as the Company was under bonafide belief based on a legal
opinion that it will succeed in litigation. On 21st April, 2023, the Hon'ble Supreme Court
rejected the Company's claim. The Order is received on 30th April, 2023. The financial
statements for the financial year 2022-2023 of the Company are yet to be approved. The

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Chapter 6 : Events After the Reporting Period (IND AS 10)

earlier year’s financial statements stands approved. Advise in financial statements of which
financial year the impact of the Order of the Hon'ble Supreme Court should be recognized.

(iii) Z Limited while preparing its financial statements on 31st March, 2023 made a provision for
doubtful debts @ 6% on accounts receivables. In the last week of January, 2023, a debtor for
₹ 3 lakhs had suffered heavy loss due to fire; the loss was not covered by any insurance
policy. Z Limited, considering the event of fire made a provision @ 60% of the amount
receivables from that debtor apart from the general provision @ 6% on remaining debtors.
The same debtor was declared insolvent on 10th April, 2023. The financial statements have
not yet been approved. You are required to suggest whether the company should provide
for the full loss arising out of insolvency of the debtor in the financial statements for the year
ended 31st March, 2023.

(iv) D Limited acquired equity shares of another company on 1st March, 2023 at a cost of ₹ 28
lakhs. The fair market value of these shares on 31st March, 2023 was ₹ 35 lakhs and the
company measured it at ₹ 35 lakhs (assume that it is classified as FVTOCI as per Ind AS 109
and change in fair value is transferred to 'fair value fluctuation reserve'). Due to market
conditions subsequent to the reporting date, the value of investments drastically came down
to ₹ 20 lakhs. The financial statements have not yet been approved. You are required to
suggest whether D Limited should value the investments at ₹ 35 lakhs or ₹ 20 lakhs as on
31st March, 2023.

(v) Tanmay Limited was in negotiation with Varun Limited from 1st December, 2022 to acquire
land for ₹ 5.00 crores. The negotiations were concluded in the first week of April 2023. The
transaction was completed by last week of April, 2023. In which financial year, the purchase
of land should be recognized? [Exam May 2023 (5 Marks)]

Ans:
i. As per Ind AS 10, in the case of a company, the financial statements will be treated as approved
when board of directors approves the same. Hence in the given case, the financial statements
are approved for issue on 26th June, 2022 (date of approval by the Board of Directors for issue
of financial statements to the shareholders).
ii) An event after the reporting period is an adjusting event if it provides evidence of a condition
existing at the end of the reporting period. Court order received after the reporting period (but
before the financial statements are approved) provides evidence of the liability existing at the
end of the reporting period. Therefore, the event will be considered as an adjusting event and,
accordingly, the amount will be adjusted in financial statements for the financial year 2022-2023.
iii) In the instant case, the fire took place in January, 2023 (i.e. before the end of the reporting
period). Therefore, the condition existed at the end of the reporting date though the debtor is
declared insolvent after the reporting period. Accordingly, full provision for bad debt amounting
to ₹ 3 lakhs should be made to cover the loss arising due to the bankruptcy of the debtor in the
financial statements for the year ended 31st March, 2023.
iv) A decline in fair value of investments between the end of the reporting period and the date when
the financial statements are approved for issue is a non-adjusting event. The decline in fair value
does not normally relate to the condition of the investments at the end of the reporting period

P a g e | 6.3
 Chapter 6 : Events After the Reporting Period (IND AS 10)

but reflects circumstances that have arisen subsequently. Therefore, D Limited should value the
investments at ₹ 35 lakhs as on 31st March, 2023.
v) As per Ind AS 10, an entity should adjust the financial statements for the events that occurred
after the reporting period, but before the financial statements are approved for issue, if those
events provide evidence of conditions that existed at the end of the reporting period.
In this case, negotiations continued with Varun Limited to acquire land from 1st December, 2022
till first week of April, 2023. Since on the reporting date, the condition was only on proposal state
and transaction was completed on 1st week of April 2023, the event will be considered as a non-
adjusting event as per Ind AS 10. Purchase of land should be recognized in the financial year 2023-
2024.
However, the same may be disclosed in the Notes to Accounts for due information to the users
of the financial statements.

P a g e | 6.4
Chapter 7 : Valuation of Inventories (IND AS 2)

CHAPTER 7
VALUATION OF INVENTORIES (IND AS 2)
Q16:

Particulars Kg. ₹
Opening Inventory: Finished Goods 1,000 25,000
Raw Materials 1,100 11,000
Purchases 10,000 1,00,000
Labour 76,500
Overheads (Fixed) 75,000
Sales 10,000 2,80,000
Closing Inventory: Raw Materials 900
Finished Goods 1200
The expected production for the year was 15,000 kg of the finished product. Due to fall in
market demand the sales price for the finished goods was ₹ 20 per kg and the replacement cost
for the raw material was ₹ 9.50 per kg on the closing day. You are required to calculate the
closing inventory as on that date.
Ans: Calculation of cost for closing inventory

Particulars ₹
Cost of Purchase (10,200* x 10) 1,02,000
Direct Labour 76,500
Fixed Overhead 75,000 x 10,200 51,000
15,000
Cost of Production 2,29,500
Cost of closing inventory per unit (2,29,500/10,200) ₹ 22.50
Net Realisable Value per unit ₹ 20.00
* (OS Of Raw Material + Purchase of Raw Material - CS Of Raw Material) = 1,100+10,000 – 900 =
10,200
Since net realisable value is less than cost, closing inventory will be valued at ₹ 20.
As NRV of the finished goods is less than its cost, relevant raw materials will be valued at
replacement cost i.e. ₹ 9.50.
Therefore, value of closing inventory:
Finished Goods (1,200 x 20) ₹ 24,000
Raw Materials (900 x 9.50) ₹ 8,550

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 Chapter 7 : Valuation of Inventories (IND AS 2)

₹ 32,550
Q20: On 31 March 20X1, the inventory of ABC includes spare parts which it had been supplying to a
number of different customers for some years. The cost of the spare parts was ₹ 10 million and
based on retail prices at 31 March 20X1, the expected selling price of the spare parts is ₹ 12
million. On 15 April 20X1, due to market fluctuations, expected selling price of the spare parts
in stock reduced to ₹ 8 million. The estimated selling expense required to make the sales would
₹ 0.5 million. Financial statements were authorised by Board of Directors on 20th April 20X1.
As at 31st March 20X2, Directors noted that such inventory is still unsold and lying in the
warehouse of the company. Directors believe that inventory is in a saleable condition and
active marketing would result in an immediate sale. Since the market conditions have
improved, estimated selling price of inventory is ₹ 11 million and estimated selling expenses are
same ₹ 0.5 million.
What will be the value inventory at the following dates:
(a) 31st March 20X1
(b) 31st March 20X2 [RTP May 2018; MTP Nov 2023]
Ans: As per Ind AS 2 ‘Inventories’, inventory is measured at lower of ‘cost’ or ‘net realisable value’.
Further, as per Ind AS 10: ‘Events after Balance Sheet Date’, decline in net realisable value
below cost provides additional evidence of events occurring at the balance sheet date and
hence shall be considered as ‘adjusting events’.
(a) In the given case, for valuation of inventory as on 31 March 20X1, cost of inventory
would be ₹10 million and net realisable value would be ₹7.5 million (i.e. Expected selling
price ₹8 million- estimated selling expenses ₹ 0.5 million). Accordingly, inventory shall
be measured at ₹7.5 million i.e. lower of cost and net realisable value. Therefore,
inventory write down of ₹2.5 million would be recorded in income statement of that
year.
(b) As per para 33 of Ind AS 2, a new assessment is made of net realizable value in each
subsequent period. It Inter alia states that if there is increase in net realizable value
because of changed economic circumstances, the amount of write down is reversed so
that new carrying amount is the lower of the cost and the revised net realizable value.
Accordingly, as at 31 March 20X2, again inventory would be valued at cost or net
realisable value whichever is lower. In the present case, cost is ₹10 million and net
realisable value would be ₹10.5 million (i.e. expected selling price ₹11 million –
estimated selling expense ₹0.5 million). Accordingly, inventory would be recorded at ₹
10 million and inventory write down carried out in previous year for ₹2.5 million shall be
reversed.
Q25: On 5th April, 20X2, fire damaged a consignment of inventory at one of the Jupiter’s Ltd.’s
warehouse. This inventory had been manufactured prior to 31st March 20X2 costing ₹ 8 lakhs.
The net realisable value of the inventory prior to the damage was estimated at ₹ 9.60 lakhs.
Because of the damage caused to the consignment of inventory, the company was required to
spend an additional amount of ₹ 2 lakhs on repairing and re- packaging of the inventory. The
inventory was sold on 15th May, 20X2 for proceeds of ₹ 9 lakhs.

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Chapter 7 : Valuation of Inventories (IND AS 2)

The accountant of Jupiter Ltd. treats this event as an adjusting event and adjusted this event of
causing the damage to the inventory in its financial statement and accordingly re-measures the
inventories as follows: ₹ lakhs
Cost 8.00
Net realisable value (9.6 -2) 7.60
Inventories (lower of cost and net realisable value) 7.60
Analyse whether the above accounting treatment made by the accountant in regard to financial
year ending on 31.0.20X2 is in compliance of the Ind AS. If not, advise the correct treatment
along with working for the same.
Ans: The above treatment needs to be examined in the light of the provisions given in Ind AS 10
‘Events after the Reporting Period’ and Ind AS 2 ‘Inventories’.
Para 3 of Ind AS 10 ‘Events after the Reporting Period’ defines “Events after the reporting
period are those events, favourable and unfavourable, that occur between the end of the
reporting period and the date when the financial statements are approved by the Board of
Directors in case of a company, and, by the corresponding approving authority in case of any
other entity for issue. Two types of events can be identified:
(a) those that provide evidence of conditions that existed at the end of the reporting period
(adjusting events after the reporting period); and
(b) those that are indicative of conditions that arose after the reporting period (non- adjusting
events after the reporting period).
Further, paragraph 10 of Ind AS 10 states that:
“An entity shall not adjust the amounts recognised in its financial statements to reflect non-
adjusting events after the reporting period”.
Further, paragraph 6 of Ind AS 2 defines:
“Net realisable value is the estimated selling price in the ordinary course of business less the
estimated costs of completion and the estimated costs necessary to make the sale”.
Further, paragraph 9 of Ind AS 2 states that:
“Inventories shall be measured at the lower of cost and net realisable value”.
Accountant of Jupiter Ltd. has re-measured the inventories after adjusting the event in its
financial statement which is not correct and nor in accordance with provision of Ind AS 2 and
Ind AS 10.
Accordingly, the event causing the damage to the inventory occurred after the reporting date
and as per the principles laid down under Ind AS 10 ‘Events After the Reporting Date’ is a non-
adjusting event as it does not affect conditions at the reporting date. Non-adjusting events are
not recognised in the financial statements, but are disclosed where their effect is material.
Therefore, as per the provisions of Ind AS 2 and Ind AS 10, the consignment of inventories shall
be recorded in the Balance Sheet at a value of ₹ 8 lakhs calculated below:

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 Chapter 7 : Valuation of Inventories (IND AS 2)

₹’ lakhs
Cost 8.00
Net realisable value 9.60
Inventories (lower of cost and net realisable value) 8.00
Q26: XYZ Limited has a plant with the normal capacity to produce 10,00,000 units of a product per
annum and the expected fixed overhead is ₹ 30,00,000, Fixed overhead, therefore based on
normal capacity is ₹ 3 per unit. Determine Fixed overhead as per Ind AS 2 'Inventories' if
(i) Actual production is 7,50,000 units.
(ii) Actual production is 15,00,000 units. [Exam May 2018]
Ans: Actual production is 7,50,000 units: Fixed overhead is not going to change with the change in
output and will remain constant at ₹ 30,00,000, therefore, overheads on actual basis is ₹ 4 per
unit (30,00,000 / 7,50,000).
Hence, by valuing inventory at ₹ 4 each for fixed overhead purpose, it will be overvalued and
the losses of ₹ 7,50,000 will also be included in closing inventory leading to a higher gross profit
then actually earned.
Therefore, it is advisable to include fixed overhead per unit on normal capacity to actual
production (7,50,000 x 3) ₹ 22,50,000 and balance ₹ 7,50,000 shall be transferred to Profit &
Loss Account.
Actual production is 15,00,000 units: Fixed overhead is not going to change with the change in
output and will remain constant at ₹ 30,00,000, therefore, overheads on actual basis is ₹ 2
(30,00,000 / 15,00,000).
Hence by valuing inventory at ₹ 3 each for fixed overhead purpose, we will be adding the
element of cost to inventory which actually has not been incurred. At ₹ 3 per unit, total fixed
overhead comes to ₹ 45,00,000 whereas, actual fixed overhead expense is only ₹ 30,00,000.
Therefore, it is advisable to include fixed overhead on actual basis (15,00,000 x 2) ₹ 30,00,000.
Q31. A Ltd. began operations in the year 20X1-20X2. In 20X1-20X2, it incurred the following
expenditures on purchasing the raw materials for its product:

a. Purchase price of the raw materials = ₹ 30,000;

b. Import duty and other non-refundable purchase taxes = ₹ 8,000;

c. Refundable purchase taxes = ₹ 1,000;

d. Freight costs for bringing the goods from the supplier to the factory’s storeroom for raw
materials = ₹ 3,000;

e. Costs of unloading the materials into the storeroom for raw materials = ₹ 20; and

f. Packaging = ₹ 2,000.

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Chapter 7 : Valuation of Inventories (IND AS 2)

On 31st March, 20X2, A Ltd. received ₹ 530 volume rebate from a supplier for purchasing more
than ₹ 15,000 from the supplier during the year.

A Ltd. incurred the following additional costs in the production run:

i. Salary of the machine workers in the factory = ₹ 5,000;

ii. Salary of factory supervisor = ₹ 3,000;

iii. Depreciation of the factory building and equipment used for production process = ₹
600;

iv. Consumables used in the production process = ₹ 200;

v. Depreciation of vehicle used to transport the goods from the storeroom for raw
materials to the machine floor = ₹ 400;

vi. Factory electricity usage = ₹ 300;

vii. Factory rental = ₹ 1,000; and

viii. Depreciation of the entity’s vehicle used by the factory supervisor is ₹ 200.

During 20X1-20X2, A Ltd. incurred the following administrative expenses:

1. Depreciation of the administration building = ₹ 500;

2. Depreciation and maintenance of vehicles used by the administrative staff = ₹ 150; and

3. Salaries of the administrative personnel = ₹ 3,050.

Of the administrative expenses, 20% is attributable to administering the factory. Remaining

expenses are attributable, in equal proportion, to the sales and other non- production
operations (eg financing, tax and corporate secretarial functions).

In 20X1-20X2, A Ltd. incurred the following selling expenses:

a) Advertising costs = ₹ 300;

b) Depreciation and maintenance of vehicles used by the sales staff = ₹ 100; and

c) Salaries of the administrative personnel = ₹ 6,000.

Pass necessary journal entries to record the cost of inventory in the books of A Ltd.

[RTP Nov 2023]

Ans. Journal Entries for the year 20X1-20X2

₹ ₹
Inventory A/c (W.N.1) Dr. 42,490

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 Chapter 7 : Valuation of Inventories (IND AS 2)

To Cash/Bank A/c 42,490

(To recognise the cost of raw materials purchased)
Inventory A/c (W.N.2) Dr. 11,240
To Cash/Bank A/c (cost of direct labour) 5,000
To Property, plant and equipment (accumulated 600
depreciation-factory equipment)
To Property, plant and equipment (accumulated 400
depreciation-raw-materials delivery vehicle)
To Cash/Bank A/c (cost of electricity used) 300
To Property, plant and equipment (accumulated 200
depreciation-factory supervisor’s vehicle)
To Cash/Bank A/c (factory management’s 3,000
salaries)
To Cash/Bank A/c (factory rental) 1,000
To Cash/Bank A/c (administrative salaries attributable to 610
the factory)
To Property, plant and equipment (attributable portion of 100
accumulated depreciation- administration building)
To Property, plant and equipment (attributable portion of 30
accumulated depreciation- administration vehicles)
(To recognise the costs of conversion)
Inventory A/c (W.N.2) Dr. 200
To Inventory A/c (consumable stores) 200
(To recognise the costs of consumable stores inventory
consumed)

The total cost of inventories = Costs of purchase + Costs of conversion

= ₹ 42,490 + ₹ 11,240 + ₹ 200

= ₹ 53,930

Working Notes:

1. Computation of costs of purchase

Description ₹
Purchase price 30,000
Import duty and other non-refundable purchase taxes 8,000
Freight costs for bringing the goods to the factory storeroom 3,000

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Chapter 7 : Valuation of Inventories (IND AS 2)

Cost of unloading the raw materials into the storeroom 20

Packaging 2,000
Less: Trade discounts, rebates and subsidies (530)
Cost of purchase 42,490

Note: Refundable taxes do not form part of the cost of inventories.

2. Computation of costs of conversion

Description ₹
Direct labour 5,000
Fixed production overheads
Depreciation and maintenance of factory equipment 600
Depreciation of vehicle used for transporting the goods 400
Depreciation of vehicle used by factory supervisor 200
Factory electricity usage 300
Factory management 3,000
Factory rental 1,000
Other costs of administering the factory
20% of depreciation of administration building 100
20% of depreciation of administration vehicles 30
20% of administrative staff costs 610
Variable production overheads
Indirect material—consumables 200
Cost of conversion 11,440

Q32: On March 31, 2024 it imported its first batch of 100 professional cycles from a company in
France. The details of expenses incurred at the dealership in Mumbai are given below:

Sr. No. Details Amount (₹ )

1 Cost of purchases (based on supplier’s invoice) 50,00,000

2 Handling costs relating to imports 6,00,000

3 Salaries of accounting staff at the dealership 5,00,000

4 Sales commission paid to sales agents 8,00,000

5 After sales warranty costs 4,00,000

6 Import duties 2,50,000

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 Chapter 7 : Valuation of Inventories (IND AS 2)

7 Freight expenses 2,50,000

8 Insurance of purchases 1,00,000

9 Brokerage commission paid to indenting agents 1,00,000

These 100 professional cycles are held in stock as on March 31,2024 which is the end of the
financial year. The current market price for these cycles is ₹64,000 per unit. CIL also has a firm
sales contract with a smaller cycle dealership for 30 cycles at ₹65,000 per unit, which cannot be
settled yet. Estimated incremental selling cost is ₹2,000 per unit for all cycles.

a) Evaluate which of the costs pertaining to the 100 imported cycles are allowed to be
included in the cost of inventory in the books of CIL.

b) Calculate the Net Realizable Value (NRV) of the inventory of CIL relating to these 100
imported cycles?

c) Calculate the value of inventory of the 100 imported cycles as of March 31, 2024.

[IBS CS 21]
Ans: (i) As per Ind AS 2, the following costs pertaining to the 100 imported cycles are includable
in the cost of inventory of books of CIL:

Details Amount (₹ )
Cost of purchases (based on supplier’s invoice) 50,00,000
Handling costs relating to imports 6,00,000
Import duties 2,50,000
Freight expenses 2,50,000
Insurance of purchases 1,00,000
Brokerage commission paid to indenting agents 1,00,000
Total cost to be included in inventory 63,00,000
Hence, the total cost includable in the cost of inventory of the 100 imported cycles is ₹
63,00,000. Per unit cost would therefore be ₹ 63,000 per cycle.

Salaries of accounts department, sales commission, and after sale warranty costs are not
considered to be the cost of inventory. Therefore, they are not allowed by Ind AS 2 for
inclusion in cost of inventory and are expensed off in the profit and loss account.

(ii) Calculation of NRV of the inventory of CIL relating to these 100 imported cycles

While performing the NRV test, the NRV of 30 cycles to be sold to the other cycle
dealership under a firm contract will be ₹ 63,000 per cycle (Selling price per cycle
₹65,000 per cycle less additional selling expenses ₹ 2,000 per cycle). The cost of

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Chapter 7 : Valuation of Inventories (IND AS 2)

inventory per cycle as calculated in (i) above is also ₹ 63,000 per cycle. Therefore, no
adjustment is required for the value of the 30 cycles under firm contract.

NRV of the remaining 70 cycles is ₹ 62,000 per cycle (market price of ₹ 64,000 per cycle
less additional selling expenses ₹ 2,000 per cycle).

(iii) The cost of inventory per cycle as calculated in (i) above is ₹ 63,000 per cycle for 30
cycles. Therefore, these 70 cycles have to be valued at NRV of ₹ 62,000 per cycle which
is lower than the cost of ₹ 63,000 by ₹ 1,000 per cycle. Therefore, CIL has to write down
the value of inventory for these 70 cycles by ₹ 70,000 (70 cycles x write down of ₹ 1,000
per cycle).

Value of inventory of 100 cycles on March 31,2024 lower of cost or NRV

Sr. Details Amount (₹ )

No.
1 Value of 30 cycles under firm contract 18,90,000
30 cycles x ₹63,000 per cycle)
2 Value of balance 70 cycles at NRV
70 cycles x ₹ 62,000 per cycle) 43,40,000
3 Total inventory value 62,30,000
The cost of the imported cycles is ₹ 63,00,000 whereas the NRV is ₹ 62,30,000. Hence, the
inventory will be valued at ₹ 62,30,000.

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Chapter 8 : Property, Plant and Equipment (IND AS 16)

CHAPTER 8
PROPERTY, PLANT AND EQUIPMENT (IND AS 16)
Q1: On 1st April 20X1, an item of property is offered for sale at ₹ 10 million, with payment terms
being three equal installments of ₹ 33,33,333 over a two years period (payments are made on
1st April 20X1, 31st March 20X2 and 31st March 20X3).
The property developer is offering a discount of 5 percent (i.e. ₹0.5 million) if payment is made
in full at the time of completion of sale. Implicit interest rate of 5.36 percent p.a.
Show how the property will be recorded in accordance of Ind AS 16.
Ans: Ind AS 16 requires that the cost of an item of PPE is the cash price equivalent at the recognition
date. Hence, the purchaser that takes up the deferred payment terms will recognise the
acquisition of the asset as follows:
On 1st April 20X1 (INR) (INR)
Property, Plant and Equipment Dr. 95,00,000
To Cash 33,33,333
To Accounts Payable 61,66,667
(Initial recognition of property)
On 31st March 20X2
Interest Expense Dr. 3,30,533
Accounts payable Dr. 30,02,800
To Cash 33,33,333
(Recognition of interest expense and payment of second
installment)
On 31st March 20X3
Interest Expense Dr. 1,69,467
Accounts payable Dr. 31,63,867
To Cash 33,33,334
(Recognition of interest expense and payment of final
installment)
Working Notes:
1) Calculation of cash price equivalent at initial recognition

Year Payment Discounting factor Present value

@ 5.36%

1.4.20X1 33,33,333 1.000 33,33,333

31.3.20X2 33,33,333 0.949 31,63,333
31.3.20X3 33,33,334 0.901 30,03,334
Initial date cash price equivalent 1,00,00,000 95,00,000

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 Chapter 8 : Property, Plant and Equipment (IND AS 16)

2) Calculation of interest expenses

Year Opening Interest @ Total Principal Closing

balance 5.36% paymentat amount in the balance
(a) (b) = (a) x year instalment (e) = (a) -
5.36% beginning (d) = (c) – (b) (d)
(c)
1.4.20X1 95,00,000 - 33,33,333 33,33,333 61,66,667
31.3.20X2 61,66,667 3,30,533 33,33,333 30,02,800 31,63,867
31.3.20X3 31,63,867 1,69,467* 33,33,334 31,63,867 Nil
*Difference of116 [(31,63,867 x 5.36%) – (33,33,334 - 31,63,867)] is due to approximation.
Q8: MS Ltd. has acquired a heavy machinery at a cost of ₹ 1,00,00,000 (with no breakdown of the
component parts). The estimated useful life is 10 years. At the end of the sixth year, one of the
major components, the turbine requires replacement, as further maintenance is uneconomical.
The remainder of the machine is perfect and is expected to last for the next four years. The cost
of a new turbine is ₹ 45,00,000. The discount rate is assumed to be 5%.
Can the cost of the new turbine be recognised as an asset, and, if so, what treatment should be
used? [MTP Nov 2023]
Ans: The new turbine will produce economic benefits to MS Ltd., and the cost is measurable. Hence,
the item should be recognised as an asset. The original invoice for the machine did not specify
the cost of the turbine; however, the cost of the replacement — ₹ 45,00,000 — can be used as
an indication (usually by discounting) of the likely cost, six years previously.
If an appropriate discount rate is 5% per annum, ₹ 45,00,000 discounted back six years
amounts to ₹ 33,57,900 [₹ 45,00,000/(1.05)6], i.e., the approximate cost of turbine before 6
years.
The current carrying amount of the turbine which is required to be replaced of ₹ 13,43,160
would be derecognised from the books of account, (i.e., Original Cost ₹ 33,57,900 as reduced by
accumulated depreciation for past 6 years ₹ 20,14,740, assuming depreciation is charged on
straight-line basis.)
The cost of the new turbine, ₹ 45,00,000 would be added to the cost of machine, resulting in a
revision of carrying amount of machine to ₹ 71,56,840. (i.e., ₹ 40,00,000* – ₹ 13,43,160 + ₹
45,00,000).
*Original cost of machine ₹ 1,00,00,000 reduced by accumulated depreciation (till the end of 6
years) ₹ 60,00,000.
Q9: Flywing Airways Ltd is a company which manufactures aircraft parts and engines and sells them
to large multinational companies like Boeing and Airbus Industries.
On 1 April 20X1, the company began the construction of a new production line in its aircraft
parts manufacturing shed.

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Chapter 8 : Property, Plant and Equipment (IND AS 16)

Costs relating to the production line are as follows:

Details Amount ₹’000

Costs of the basic materials (list price ₹12.5 million less a 20% trade
10,000
discount)
Recoverable goods and services taxes incurred not included in the
1,000
purchase cost
Employment costs of the construction staff for the three months to 30
1,200
June 20X1
Other overheads directly related to the construction 900
Payments to external advisors relating to the construction 500
Expected dismantling and restoration costs 2,000

Additional Information
The construction staff was engaged in the production line, which took two months to make
ready for use and was brought into use on 31 May 20X1.
The other overheads were incurred in the two months period ended on 31 May 20X1. They
included an abnormal cost of ₹3,00,000 caused by a major electrical fault.
The production line is expected to have a useful economic life of eight years. At the end of
that time Flywing Airways Ltd is legally required to dismantle the plant in a specified manner
and restore its location to an acceptable standard. The amount of ₹2 million mentioned above
is the amount that is expected to be incurred at the end of the useful life of the production line.
The appropriate rate to use in any discounting calculations is 5%. The present value of Re.1
payable in eight years at a discount rate of 5% is approximately Re.0·68.
Four years after being brought into use, the production line will require a major overhaul to
ensure that it generates economic benefits for the second half of its useful life. The estimated
cost of the overhaul, at current prices, is ₹3 million.
The Company computes its depreciation charge on a monthly basis. No impairment of the plant
had occurred by 31 March 20X2.
Analyze the accounting implications of costs related to production line to be recognized in the
balance sheet and profit and loss for the year ended 31 March, 20X2. [MTP May 2020]
Ans: Statement showing Cost of production line:
Amount
Particulars
₹’000

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 Chapter 8 : Property, Plant and Equipment (IND AS 16)

Purchase cost 10,000

Goods and services tax – recoverable goods and services tax not
included -
Employment costs during the period of getting the production line
ready for use (1,200 x 2 months / 3 months) 800
Other overheads – abnormal costs 600
Payment to external advisors – directly attributable cost 500
Dismantling costs – recognized at present value where an obligation
exists (2,000 x 0.68) 1,360
Total 13,260

Carrying value of production line as on 31st March, 20X2:

Amount ₹
Particulars
’000
Cost of Production line 13,260
Less: Depreciation (W.N.1) (1,694)
Net carrying value carried to Balance Sheet 11,566

Provision for dismantling cost:

Amount ₹
Particulars
’000
Non-current liabilities 1,360
Add: Finance cost (WN3) 57
Net book value carried to Balance Sheet 1,417

Extract of Statement of Profit & Loss

Amount ₹
Particulars
’000
Depreciation (W.N.1) 1,694
Finance cost (W.N.2) 57
Amounts carried to Statement of Profit & Loss 1,751

Extract of Balance Sheet

Amount
Particulars
₹ ’000
Assets
Non-current assets
Property, plant and equipment 11,566
Equity and liabilities
Non-current liabilities
Other liabilities

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Chapter 8 : Property, Plant and Equipment (IND AS 16)

Provision for dismantling cost 1417

1. Calculation of depreciation charge

Amount ₹
Particulars
’000
In accordance with Ind AS 16 the asset is split into two depreciable
components: Out of the total capitalization amount of 13,260,
Depreciation for 3,000 with a useful economic life (UEL) of four
years (3,000x ¼ x10/12). 625
This is related to a major overhaul to ensure that it generates
economic benefits for the second half of its useful life
For balance amount, depreciation for 10,260 with an useful 1,069
economic life (UEL) of eight years will be : 10,260 x 1/8 x 10/12
Total (To Statement of Profit & Loss for the year ended 31st March 1,694
20X2)
2. Finance costs
Amount ₹
Particulars
’000
Unwinding of discount (Statement of Profit and Loss – finance 57
cost)
1,360 x 5% x 10/12
To Statement of Profit & Loss for the year ended 31st March 20X2 57

Q11: X Limited started construction on a building for its own use on April 1, 20X0. The following costs
are incurred:
₹
Purchase price of land 30,00,000
Stamp duty & legal fee 2,00,000
Architect fee 2,00,000
Site preparation 50,000
Materials 10,00,000
Direct labour cost 4,00,000
General overheads 1,00,000
Other relevant information: Material costing ₹ 1,00,000 had been spoiled and therefore wasted
and a further ₹ 1,50,000 was spent on account of faulty design work. As a result of these
problems, work on the building was stopped for two weeks during November 20X0 and it is
estimated that ₹ 22,000 of the labour cost relate to that period. The building was completed on
January 1, 20X1 and brought in use April 1, 20X1. X Limited had taken a loan of ₹ 40,00,000 on
April 1, 20X0 for construction of the building. The loan carried an interest rate of 8% per annum
and is repayable on April 1, 20X2.
Calculate the cost of the building that will be included in tangible non-current asset as an
addition?

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 Chapter 8 : Property, Plant and Equipment (IND AS 16)

Ans: Only those costs which are directly attributable to bringing the asset into working condition for
its intended use should be included. Administration and general costs cannot be included.
Abnormal cost also should be excluded. The cost of spoilt materials and faulty designs are
abnormal costs. The labour cost incurred during the stoppage is an abnormal cost and should
not to be included.
Amount to be included in Property, Plant and Equipment (PPE):

Purchase price of land 30,00,000

Stamp duty & legal fee 2,00,000
Architect fee 2,00,000
Site preparation 50,000
Material (10,00,000 – 2,50,000) 7,50,000
Direct labour cost (4,00,000 – 22,000) 3,78,000
General overheads Nil
Interest Nil
Total to be capitalized 45,78,000
*Period for Construction of building is not a substantial period (i.e. 9 months), borrowing cost
are not eligible for capitalisation.
Q19: An entity has a nuclear power plant and a related decommissioning liability. The nuclear power
plant started operating on April 1, 20X1. The plant has a useful life of 40 years. Its initial cost
was ₹ 1,20,000.; This included an amount for decommissioning costs of ₹ 10,000, which
represented ₹ 70,400 in estimated cash flows payable in 40 years discounted at a risk-adjusted
rate of 5 per cent. The entity’s financial year ends on March 31. Assume that a market-based
discounted cash flow valuation of ₹ 1,15,000 is obtained at March 31, 20X4. This valuation is
after deduction of an allowance of ₹ 11,600 for decommissioning costs, which represents no
change to the original estimate, after the unwinding of three years’ discount. On March 31,
20X5, the entity estimates that, as a result of technological advances, the present value of the
decommissioning liability has decreased by ₹ 5,000. The entity decides that a full valuation of
the asset is needed at March 31, 20X5, in order to ensure that the carrying amount does not
differ materially from fair value. The asset is now valued at ₹ 1,07,000, which is net of an
allowance for the reduced decommissioning obligation.
How the entity will account for the above changes in decommissioning liability if it adopts
revaluation model? [MTP May 2019]
Ans: At March 31, 20X4: ₹
Asset at valuation (1) 1,26,600
Accumulated depreciation Nil
Decommissioning liability (11,600)
Net assets 1,15,000
Retained earnings (2) (10,600)

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Chapter 8 : Property, Plant and Equipment (IND AS 16)

Revaluation surplus (3) 15,600

Notes:
(1) Valuation obtained of ₹ 1,15,000 plus decommissioning costs of ₹ 11,600, allowed for in
the valuation but recognised as a separate liability = ₹ 1,26,600.
(2) Three years’ depreciation on original cost ₹ 1,20,000 × 3/40 = ₹ 9,000 plus cumulative
discount on ₹ 10,000 at 5 per cent compound = ₹ 1,600; total ₹ 10,600.
(3) Revalued amount ₹ 1,26,600 less previous net book value of ₹ 1,11,000 (cost ₹ 120,000
less accumulated depreciation ₹ 9,000).
The depreciation expense for 20X4-20X5 is therefore ₹ 3,420 (₹ 1,26,600 × 1/37) and the
discount expense for 20X5 is ₹ 600. On March 31, 20X5, the decommissioning liability (before
any adjustment) is ₹ 12,200. However, as per estimate of the entity, the present value of the
decommissioning liability has decreased by ₹ 5,000. Accordingly, the entity adjusts the
decommissioning liability from ₹ 12,200 to ₹ 7,200.
The whole of this adjustment is taken to revaluation surplus, because it does not exceed the
carrying amount that would have been recognised had the asset been carried under the cost
model. If it had done, the excess would have been taken to profit or loss. The entity makes the
following journal entry to reflect the change:
₹ ₹
Decommissioning liability Dr. 5,000
To Revaluation surplus 5,000
As at March 31, 20X5, the entity revalued its asset at ₹ 1,07,000, which is net of an allowance of
₹ 7,200 for the reduced decommissioning obligation that should be recognised as a separate
liability. The valuation of the asset for financial reporting purposes, before deducting this
allowance, is therefore ₹ 1,14,200. The following additional journal entry is needed:
Notes:
₹ ₹
Accumulated depreciation (1) Dr. 3,420
To Asset at valuation 3,420
Revaluation surplus (2) Dr. 8,980
To Asset at valuation (3) 8,980
Note:
(1) Eliminating accumulated depreciation of ₹ 3,420 in accordance with the entity’s
accounting policy.
(2) The debit is to revaluation surplus because the deficit arising on the revaluation does
not exceed the credit balance existing in the revaluation surplus in respect of the asset.

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 Chapter 8 : Property, Plant and Equipment (IND AS 16)

(3) Previous valuation (before allowance for decommissioning costs) ₹ 1,26,600, less
cumulative depreciation ₹ 3,420, less new valuation (before allowance for
decommissioning costs) ₹ 1,14,200.
Following this valuation, the amounts included in the balance sheet are:
Asset at valuation 1,14,200
Accumulated depreciation Nil
Decommissioning liability (7,200)
Net assets 1,07,000
Retained earnings (1) (14,620)
Revaluation surplus (2) 11,620
Notes:
(1) ₹ 10,600 at March 31, 20X4, plus depreciation expense of ₹ 3,420 and discount expense
of ₹ 600 = ₹ 14,620.
(2) ₹ 15,600 at March 31, 20X4, plus ₹ 5,000 arising on the decrease in the liability, less ₹
8,980 deficit on revaluation = ₹ 11,620.

Q23: An entity has the following items of property, plant and equipment:

• Property A — a vacant plot of land on which it intends to construct its new

administration headquarters;

• Property B — a plot of land that it operates as a landfill site;

• Property C — a plot of land on which its existing administration headquarters are built;

• Property D — a plot of land on which its direct sales office is built;

• Properties E1–E10 — ten separate retail outlets and the land on which they are built;
• Equipment A — computer systems at its headquarters and direct sales office that are
integrated with the point of sale computer systems in the retail outlets;

• Equipment B — point of sale computer systems in each of its retail outlets;

• Furniture and fittings in its administrative headquarters and its sales office;

• Shop fixtures and fittings in its retail outlets.

How many classes of property, plant and equipment must the entity disclose? [RTP May 2021]

Ans: To answer this question one must make a materiality judgement.

Class of assets is defined as a grouping of assets of a similar nature and use in an entity’s
operations.

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Chapter 8 : Property, Plant and Equipment (IND AS 16)

The nature of land without a building is different to the nature of land with a building.
Consequently, land without a building is a separate class of asset from land and buildings.
Furthermore, the nature and use of land operated as a landfill site is different from vacant land.
Hence, the entity should disclose Property A separately. The entity must apply judgement to
determine whether the entity’s retail outlets are sufficiently different in nature and use from its
office buildings, and thus constitute a separate class of land and buildings.

The computer equipment is integrated across the organisation and would probably be classified
as a single separate class of asset.

Furniture and fittings used for administrative purposes could be sufficiently different to shop
fixtures and fittings in retail outlets. Hence, they should be classified in two separate classes of
assets.
Q26: ABC Ltd is setting up a new refinery outside the city limits. In order to facilitate the construction
of the refinery and its operations, ABC Ltd. is required to incur expenditure on the
construction/development of railway siding, road and bridge. Though ABC Ltd. incurs (or
contributes to) the expenditure on the construction/development, it will not have ownership
rights on these items and they are also available for use to other entities and public at large.
Whether ABC Ltd. can capitalise expenditure incurred on these items as property, plant and
equipment (PPE)?
If yes, how should these items be depreciated and presented in the financial statements of ABC
Ltd. as per Ind AS? [RTP Nov 2018; Exam Nov 2019]
Ans: Paragraph 7 of Ind AS 16 states that the cost of an item of property, plant and equipment shall
be recognised as an asset if, and only if:
(a) it is probable that future economic benefits associated with the item will flow to the
entity; and
(b) the cost of the item can be measured reliably.
Further, paragraph 9 provides that the standard does not prescribe the unit of measure for
recognition, i.e., what constitutes an item of property, plant and equipment. Thus, judgement is
required in applying the recognition criteria to an entity’s specific circumstances.
Paragraph 16, inter alia, states that the cost of an item of property, plant and equipment
comprise any costs directly attributable to bringing the asset to the location and condition
necessary for it to be capable of operating in the manner intended by management.
In the given case, railway siding, road and bridge are required to facilitate the construction of
the refinery and for its operations. Expenditure on these items is required to be incurred in
order to get future economic benefits from the project as a whole which can be considered as
the unit of measure for the purpose of capitalisation of the said expenditure even though the
company cannot restrict the access of others for using the assets individually. It is apparent that
the aforesaid expenditure is directly attributable to bringing the asset to the location and
condition necessary for it to be capable of operating in the manner intended by management.
In view of this, even though ABC Ltd. may not be able to recognize expenditure incurred on
these assets as an individual item of property, plant and equipment in many cases (where it

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 Chapter 8 : Property, Plant and Equipment (IND AS 16)

cannot restrict others from using the asset), expenditure incurred may be capitalised as a part
of overall cost of the project. From this, it can be concluded that, in the extant case the
expenditure incurred on these assets, i.e., railway siding, road and bridge, should be considered
as the cost of constructing the refinery and accordingly, expenditure incurred on these items
should be allocated and capitalised as part of the items of property, plant and equipment of
the refinery.
Depreciation
As per paragraph 43 and 47 of Ind AS 16, if these assets have a useful life which is different
from the useful life of the item of property, plant and equipment to which they relate, it should
be depreciated separately. However, if these assets have a useful life and the depreciation
method that are the same as the useful life and the depreciation method of the item of
property, plant and equipment to which they relate, these assets may be grouped in
determining the depreciation charge. Nevertheless, if it has been included in the cost of
property, plant and equipment as a directly attributable cost, it will be depreciated over the
useful lives of the said property, plant and equipment.
The useful lives of these assets should not exceed that of the asset to which it relates.
Presentation
These assets should be presented within the class of asset to which they relate.
Q27: Entity X has a warehouse which is closer to factory of Entity Y and vice versa. The factories are
located in the same vicinity. Entity X and Entity Y agree to exchange their warehouses. The
carrying value of warehouse of Entity X is ₹ 1,00,000 and its fair value is ₹ 1,25,000. It
exchanges its warehouse with that of Entity Y, the fair value of which is ₹ 1,20,000. It also
receives cash amounting to ₹ 5,000. How should Entity X account for the exchange of
warehouses? [RTP Nov 2020]
Ans: Paragraph 24 of Ind AS 16, inter alia, provides that when an item of property, plant and
equipment is acquired in exchange for a non-monetary asset or assets, or a combination of
monetary and non-monetary assets, the cost of such an item of property, plant and equipment
is measured at fair value unless (a) the exchange transaction lacks commercial substance or (b)
the fair value of neither the asset received nor the asset given up is reliably measurable. If the
acquired item is not measured at fair value, its cost is measured at the carrying amount of the
asset given up.
Further as per paragraph 25 of Ind AS 16, an entity determines whether an exchange
transaction has commercial substance by considering the extent to which its future cash flows
are expected to change as a result of the transaction. An exchange transaction has commercial
substance if:
a) the configuration (risk, timing and amount) of the cash flows of the asset received differs
from the configuration of the cash flows of the asset transferred; or
b) the entity-specific value of the portion of the entity’s operations affected by the
transaction changes as a result of the exchange; and
c) the difference in (a) or (b) is significant relative to the fair value of the assets exchanged.

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Chapter 8 : Property, Plant and Equipment (IND AS 16)

In the given case, the transaction lacks commercial substance as the company’s cash flows are
not expected to significantly change as a result of the exchange because the factories are
located in the same vicinity i.e. it is in the same position as it was before the transaction. Hence,
Entity X will have to recognise the assets received at the carrying amount of asset given up, i.e.,
₹ 1,00,000 being carrying amount of existing warehouse of Entity X and ₹ 5,000 received will
be deducted from the cost of property, plant and equipment.
Therefore, the warehouse of Entity Y is recognised as property, plant and equipment with a
carrying value of ₹ 95,000 in the books of Entity X.

Q29: On 1st January, 20X1 an entity purchased an item of equipment for ₹ 600,000, including ₹
50,000 refundable purchase taxes. The purchase price was funded by raising a loan of ₹
605,000. In addition, the entity has to pay ₹ 5,000 in loan raising fees to the Bank. The loan is
secured against the equipment.

In January 20X1 the entity incurred costs of ₹ 20,000 in transporting the equipment to the
entity’s site and ₹ 100,000 in installing the equipment at the site. At the end of the equipment’s
10-year useful life the entity is required to dismantle the equipment and restore the building
housing the equipment. The present value of the cost of dismantling the equipment and
restoring the building is estimated to be ₹ 100,000.

In January 20X1 the entity’s engineer incurred the following costs in modifying the equipment
so that it can produce the products manufactured by the entity:

• Materials – ₹ 55,000

• Labour – ₹ 65,000

• Depreciation of plant and equipment used to perform the modifications – ₹ 15,000

In January 20X1, the entity’s production staff were trained in how to operate the new item of
equipment. Training costs included:

• Cost of an expert external instructor – ₹ 7,000

• Labour – ₹ 3,000
In February 20X1 the entity’s production team tested the equipment and the engineering team
made further modifications necessary to get the equipment to function as intended by
management. The following costs were incurred in the testing phase:

• Materials, net of ₹ 3,000 recovered from the sale of the scrapped output – ₹ 21,000

• Labour – ₹ 16,000

The equipment was ready for use on 1st March, 20X1. However, because of low initial order
levels the entity incurred a loss of ₹ 23,000 on operating the equipment during March.
Thereafter the equipment operated profitably.

What is the cost of the equipment at initial recognition? [RTP May 2022]

Ans:

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 Chapter 8 : Property, Plant and Equipment (IND AS 16)

Description Calculation or reason ₹

Purchase price ₹ 600,000 purchase price minus ₹ 50,000 refundable 5,50,000
purchase taxes
Loan raising fee Offset against the measurement of the liability -
Transport cost Directly attributable expenditure 20,000
Installation costs Directly attributable expenditure 1,00,000
Environmental The obligation to dismantle and restore the 1,00,000
restoration costs environment arose from the installation of the
equipment
Preparation costs ₹ 55,000 materials + ₹ 65,000 labour + ₹ 15,000 1,35,000
depreciation
Training costs Recognised as expenses in profit and loss account. The
equipment was capable of operating in the manner
intended by management without incurring the
training costs.
Cost of testing ₹ 21,000 materials (ie net of the ₹ 3,000 recovered 37,000
from the sale of the scrapped output) + ₹ 16,000 labour
Operating loss Recognised as expenses in profit and loss account
Borrowing costs Recognised as expenses in profit and loss account
Cost of equipment 9,42,000

Q32: On 1st May, 2022, Sanskar Limited purchased ₹ 42,00,000 worth of land for construction of a
new warehouse for stocking new products.
The land purchased had an old temporary structure which was to be demolished for the
purpose of construction of warehouse. The salvaged material from the demolition was to be
sold as scrap. The company started the construction work of the warehouse on 1st June, 2022.
Following costs were incurred by the company with regard to purchase of land and
construction of warehouse:
Particulars Amount (₹)
Legal fees for purchase contract of land and recording ownership 1,50,000
Architect and consultant's fee 2,70,000
Cost of demolishing existing structure on the purchased land 1,35,000
Site preparation charges for the warehouse 1,00,000
Purchase of cement and other materials for the construction
(including GST of ₹ 1,00,000 and GST credit is 50% of the payment) 15,00,000
Employment costs of the construction workers 8,00,000
General overhead costs allocated to the construction work per month 30,000
Overhead costs incurred directly on the construction of warehouse per month 35,000
Income received from land used as temporary parking during construction phase 80,000

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Additional Information:

a) Receipt of ₹ 35,000 being proceeds from sale of salvaged and scrapped materials from
demolition of existing structure.

b) Materials costing ₹ 40,000 was wasted and further ₹ 1,20,000 was spent to rectify the
wrong design work.

c) The employment costs are for 10 months i.e. from 1st June 2022 till 31st March, 2023.
d) The construction of factory was completed on 28th February, 2023 (which is considered
as substantial period of time as per Ind AS 23)

e) The use of warehouse commenced on 1st March, 2023.

f) The overall useful life of factory building was estimated at 25 years from the date of
completion; however, it is estimated that the roof of the warehouse will need to be
replaced 15 years after the date of completion and that the cost of replacing the roof at
current prices would be 25% of the total cost of the building.

g) At the end of the 25-year period, Sanskar Limited is legally bound to demolish the
factory and restore the site to its original condition. The directors of the company
estimate that the cost of demolition in 25 years' time (based on prices prevailing at that
time) will be ₹ 80,00,000. An annual risk adjusted discount rate which is appropriate to
this project is 10% per annum. The present value of ₹ 1 payable in 25 years' time at an
annual discount rate of 10% per annum is ₹ 0.092.

h) Sanskar Limited raised a loan of ₹ 60 lakhs @ 10% per annum rate of interest on 1st
June, 2022. The building of warehouse meets the definition of a qualifying asset in
accordance with Ind AS 23 Borrowing Costs. Sanskar Limited received an investment
income of ₹ 25,000 on the temporary investment of the proceeds.

i) Assume that cost of demolition of old structure is directly attributable to the cost of
land.

j) The company follows straight line method of depreciation.

You are required to compute:

a) Cost of construction of the warehouse

b) Depreciation charge for the year ended 31st March, 2023

c) Carrying value of warehouse to be taken to Balance Sheet of the Company on 31st

March, 2023.

You should explain your treatment of all the amounts referred to in this question as part of your
answer. [Exam May 2023 (8 Marks)]

Ans:
i) Computation of the cost of construction of the warehouse

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 Chapter 8 : Property, Plant and Equipment (IND AS 16)

Description Included in Explanation

P.P.E. ₹
Purchase of land 42,00,000 Separately capitalised as cost of land and do
not form part of cost of construction of
warehouse
Legal fee for purchase of 1,50,000 Associated legal costs are direct costs for
contract of land purchasing the land. Hence, separately
capitalised as cost of land and do not form part
of cost of construction of warehouse

Net cost of 1,00,000 Given in the question to assume it as directly

demolishing the attributable to the cost of land. However, it will
existing structure be adjusted with the proceeds from sale of
salvaged material from demolition (1,35,000 –
35,000). Further, it will be separately capitalised
as cost of land and do not form part of
cost of construction of warehouse.
Total cost of land 44,50,000
Architect and 2,70,000
consultant’s fee
Site preparation 1,00,000 A direct cost of constructing the warehouse
charges
Cement and other 14,10,000* A direct cost of constructing the warehouse net
materials GST credit and wastage (15,00,000 – 50,000 –
40,000)
Expense to rectify the wrong Nil Assumed to be abnormal cost
design work
Employment costs of the 7,20,000 A direct cost of constructing the warehouse for
construction workers a nine-month period till 28th February, 2023
[(8,00,000/10) x 9]
Direct overhead costs 3,15,000 A direct cost of constructing the
warehouse for a nine-month period (35,000 x
9)
Allocated overhead costs Nil Not a direct cost of construction

Income from temporary use of Nil Not essential to the construction so recognised
land as car parking area directly in profit or loss

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Chapter 8 : Property, Plant and Equipment (IND AS 16)

Finance costs 4,50,000 Capitalise the interest cost incurred in a nine-

month period (from 1st June, 2022 to 28th
February, 2023)
Investment income on (25,000) Offset against the interest amount capitalised
temporary investment of the
loan proceeds
Demolition cost recognised Recognised as part of the initial cost at present
as a provision value (i.e 80,00,000 x 0.092)
7,36,000
Total cost of
construction of a
warehouse 39,76,000
ii) Computation of depreciation charges for the year ended 31 st March, 2023
Note: Land is not depreciated as per Ind AS 16. Hence, only cost of warehouse is
subject to depreciation.

Total depreciable amount as on

1st March, 2023 39,76,000
Depreciation for 1 month must
be in two parts:
(a) Depreciation on roof
component 5,522 39,76,000 x 25% x 1/15 x 1/12
(b) Depreciation of remaining
Item 9,940 39,76,000 x 75% x 1/25 x 1/12
Total depreciation for the year
2022-2023 15,462
iii) Computation of carrying value of the warehouse on 31 st March, 2023 ₹

Cost of the warehouse as on 1st March, 2023 [computed in (i) above] 39,76,000

Less: Depreciation for 1 month as computed in (ii) above (15,462)

Carrying value of the warehouse as on 31st March, 2023 39,60,538
*Note: In the above solution, it has been assumed that amount spent for rectifying the faulty design is not
included in the cement and other material cost. However, alternatively, it may be considered as part of
gross cement and material cost and in such a case, the cost of material will further be reduced with the
amount of rectifying the faulty design as follows:

i) Computation of the cost of construction of the warehouse

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 Chapter 8 : Property, Plant and Equipment (IND AS 16)

Description Included in Explanation

P.P.E. ₹
Purchase of land 42,00,000 Separately capitalised as cost of land and do not form
part of cost of construction of warehouse

Legal fee for 1,50,000 Associated legal costs are direct costs for purchasing
purchase of contract the land. Hence, separately capitalised as cost of land
of land and do not form part of cost of construction of
warehouse
Net cost of 1,00,000 Given in the question to assume it as directly
demolishing attributable to the cost of land. However, it will be
th adjusted with the proceeds from sale of salvaged
e existing structure material from demolition (1,35,000 – 35,000).
Further, it will be separately capitalised as cost of land
and do not form part of cost of construction of
warehouse.
Total cost of land 44,50,000
Architect and 2,70,000 A direct cost of constructing the warehouse
consultant’s fee
Site preparation 1,00,000 A direct cost of constructing the warehouse
charges
Cement and other 12,90,000* A direct cost of constructing the warehouse net GST credit,
materials wastage and rectification cost (15,00,000 – 50,000
– 40,000 – 1,20,000)

Employment costs 7,20,000 A direct cost of constructing the warehouse for a nine-
of the construction month period till 28th February, 2023 [(8,00,000/10)
workers x 9]
Direct overhead 3,15,000 A direct cost of constructing the warehouse for a nine-
costs month period (35,000 x 9)
Allocated overhead Nil Not a direct cost of construction
costs
Income from Nil Not essential to the construction so recognised directly in
temporary use of profit or loss
land as car parking
area
Finance costs 4,50,000 Capitalise the interest cost incurred in a nine-month period
(from 1st June, 2022 to 28th February, 2023)
Investment income Offset against the interest amount capitalised
on temporary
investment of the
loan proceeds (25,000)

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Chapter 8 : Property, Plant and Equipment (IND AS 16)

Demolition cost Recognised as part of the initial cost at present value (i.e
recognised as a 80,00,000 x 0.092)
provision 7,36,000
Total cost of
construction of a
warehouse 38,56,000
ii) Computation of depreciation charges for the year ended 31 st March, 2023
Note: Land is not depreciated as per Ind AS 16. Hence, only cost of warehouse is
subject to depreciation.
Total depreciable amount as on
1st March, 2023 38,56,000
Depreciation for 1 month must be
in two parts:
(a) Depreciation on roof
component 5,356 38,56,000 x 25% x 1/15 x 1/12
(b) Depreciation of remaining
item 9,640 38,56,000 x 75% x 1/25 x 1/12
Total depreciation for the year
2022-2023 14,996
iii) Computation of carrying value of the warehouse on 31st March, 2023 ₹

Cost of the warehouse as on 1st March, 2023 [computed in (i) above] 38,56,000
Less: Depreciation for 1 month as computed in (ii) above (14,996)
Carrying value of the warehouse as on 31st March, 2023 38,41,004

Q22: Company X performed a revaluation of all of its plant and machinery at the beginning of 2018-
2019. The following information relates to one of the machinery:
Amount (‘000)
Gross carrying amount ₹ 200
Accumulated depreciation (straight-line method) ₹ 80
Net carrying amount ₹ 120
Fair value ₹ 150
The useful life of the machinery is 10 years and the company uses Straight line method of
depreciation. The revaluation was performed at the end of the 4th year.
How should the Company account for revaluation of plant and machinery and depreciation
subsequent to revaluation? Also pass journal entries in relation to the above.

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 Chapter 8 : Property, Plant and Equipment (IND AS 16)

[RTP May 2019; Nov 24 Exams (5 Marks)]

Ans: According to paragraph 35 of Ind AS 16, when an item of property, plant and equipment is
revalued, the carrying amount of that asset is adjusted to the revalued amount. At the date of
the revaluation, the asset is treated in one of the following ways:
(a) The gross carrying amount is adjusted in a manner that is consistent with the revaluation
of the carrying amount of the asset. For example, the gross carrying amount may be
restated by reference to observable market data or it may be restated proportionately to
the change in the carrying amount. The accumulated depreciation at the date of the
revaluation is adjusted to equal the difference between the gross carrying amount and the
carrying amount of the asset after taking into account accumulated impairment losses; or
(b) The accumulated depreciation is eliminated against the gross carrying amount of the asset.
The amount of the adjustment of accumulated depreciation forms part of the increase or
decrease in carrying amount that is accounted for in accordance with the paragraphs 39 and 40
of Ind AS 16.
If the Company opts for the treatment as per option (a), then the revised carrying amount of
the machinery will be:
Gross carrying amount ₹ 250 [(200/120) x 150]
Net carrying amount ₹150
Accumulated depreciation ₹ 100 (₹ 250 – ₹ 150)
Journal entry
Plant and Machinery A/c (Gross Block) Dr. ₹ 50
To Accumulated Depreciation ₹ 20
To Revaluation Reserve ₹ 30
If the balance of accumulated depreciation is eliminated as per option (b), then the revised
carrying amount of the machinery will be as follows:
Gross carrying amount is restated to ₹150 to reflect the fair value and Accumulated
depreciation is set at zero.
Journal entry
Accumulated Depreciation Dr. ₹ 80
To Plant and Machinery A/c (Gross Block) ₹ 80
Plant and Machinery A/c (Gross Block) Dr. ₹30
To Revaluation Reserve ₹ 30
Depreciation
Option (a) –Since the Gross Block has been restated, the depreciation charge will be ₹ 25 per
annum (₹ 250 / 10 years).

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Option (b) – Since the Revalued amount is the revised Gross Block, the useful life to be
considered is the remaining useful life of the asset which results in the same depreciation
charge of ₹ 25 per annum as per Option A (₹ 150 / 6 years).

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Chapter 9 : Intangible Assets (IND AS 38)

CHAPTER 9
INTANGIBLE ASSETS (IND AS 38)
Q6: Sun Ltd acquired a software from Earth Ltd. in exchange for a telecommunication license. The
telecommunication license is carried at ₹ 5,00,000 in the books of Sun Ltd. The Software is
carried at ₹ 10,000 in the books of the Earth Ltd which is not the fair value.
Advise journal entries in the following situations in the books of Sun Ltd and Earth Ltd:
1) Fair value of software is ₹ 5,20,000 and fair value of telecommunication license is ₹
5,00,000.
2) Fair Value of Software is not measurable. However similar Telecommunication license is
transacted by another company at ₹ 4,90,000.
3) Neither Fair Value of Software nor Telecommunication license could be reliably
measured.
Ans: INR in ‘000
Situation Sun Ltd. Earth Ltd.
1. Dr. Software 500 Dr. Telecommunication license 520
Cr. Telecommunication license 500 Cr. Software 10
Cr. Profit on Exchange Nil Cr. Profit on Exchange 510
2. Dr. Software 490 Dr. Telecommunication license 490
Dr. Loss on Exchange 10 Cr. Software 10
Cr. Telecommunication license 500 Cr. Profit on Exchange 480
Note: The company may first recognise
Impairment loss and then pass an
entry. The effect is the same as
impairment loss will also be charged to
Income Statement.
3. Dr. Software 500 Cr. Software 10
Cr. Telecommunication license 500 Dr. Telecommunication license 10

Q8: Expenditure on a new production process in 20X1-20X2: INR

1st April to 31st December 2,700
1st January to 31st March 900
3,600
The production process met the intangible asset recognition criteria for development on 1st
January 20X2. The amount estimated to be recoverable from the process is ₹ 1,000.
What is the carrying amount of the intangible asset at 31st March 20X2 and the charge to profit
or loss for 20X1-20X2?

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 Chapter 9 : Intangible Assets (IND AS 38)

Expenditure incurred in FY 20X2-20X3 is ₹ 6,000.

At 31st March 20X3, the amount estimated to be recoverable from the process (including
future cash outflows to complete the process before it is available for use) is ₹ 5,000.
What is the carrying amount of the intangible asset at 31st March 20X3 and the charge to profit
or loss for 20X2-X3?
Ans: Expenditure to be transfer to profit or loss in 20X1-20X2 INR
Total Expenditure 3,600
Less. Expenditure during Development phase 900
Expenditure to be transfer to profit or loss 2,700
1) Carrying Amount of Intangible Asset on 31st March 20X2
Expenditure during Development Phase will be capitalised ₹ 900
(Recoverable amount is higher being ₹ 1,000, hence no impairment)
2) Expenditure to be charged to profit or loss in 20X2-20X3 INR
Opening balance of Intangible Asset 900
Add. Further expenditure during development phase 6,000
Expenditure for development phase 6,900
Recoverable Amount 5,000
Amount charged to profit or loss (Impairment Loss) 1,900
3) Carrying Amount of Intangible Asset on 31st March 20X3
Value of Intangible Asset will be recoverable amount i.e. ₹ 5,000
Q10: X Limited engaged in the business of manufacturing fertilisers entered into a technical
collabaration agreement with a foreign company Y Limited. As a result, Y Limited would provide
the technical know-how enabling X Limited to manufacture fertiliser in a more efficient way. X
Limited paid ₹ 10,00,00,000 for the use of know-how for a period of 5 years. X Limited
estimates the production of fertiliser as follows:
Year (in metric tons)
1 50,000
2 70,000
3 1,00,000
4 1,20,000
5 1,10,000
At the end of the 1st year, it achieved its targeted production. At the end of 2nd year, 65,000
metric tons of fertiliser was being manufactured, and X Limited considered to revise the

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estimates for the next 3 years. The revised figures are 85,000, 1,05,000 and 1,15,000 metric
tons for year 3, 4 & 5 respectively.
How will X Limited amortise the technical know-how fees as per Ind AS 38?
Ans: Based on the above data, it may be suitable for X Ltd. to use unit of production method for
amortisation of technical know-how.
The total estimated unit to be produced 4,50,00 MT. The technical know-how will be amortised
on the basis of the ratio of yearly production to total production.
The first-year charge should be a proportion of 50,000/4,50,000 on ₹ 10,00,00,000 = ₹
1,11,11,111.
At the end of 2nd year, as per revised estimate the total number of units to be produced in
future are 3,70,000 MT (ie 65,000 + 85,000 + 1,05,000 + 1,15,000).
The amortisation for second year will be 65,000 / 3,70,000 on (10,00,00,000 – 1,11,11,111) ie
1,56,15,615.
Amortisation for remaining years (unless the estimates are again revised):
Year 3 = 85,000 / 3,70,000 on (10,00,00,000 – 1,11,11,111) ie. 2,04,20,420
Year 4 = 1,05,000 / 3,70,000 on (10,00,00,000 – 1,11,11,111) ie. 2,52,25,225
Year 5 = 1,15,000 / 3,70,000 on (10,00,00,000 – 1,11,11,111) ie. 2,76,27,628
Q21: X Ltd. acquired Y Ltd. on April 30, 20X1. The purchase consideration is ₹ 50,00,000. The fair
value of the tangible assets is ₹ 45,00,000. The company estimates the fair value of “in-process
research projects” at ₹ 10,00,000. No other Intangible asset is acquired by X Ltd. in the
transaction. Further, cost incurred by X Ltd. in relation to that research project is as follows:
(a) ₹ 5,00,000 – as research expenses
(b) ₹ 2,00,000 – to establish technological feasibility
(c) ₹ 7,00,000 – for further development cost after technological feasibility is established.
At what amount the intangible asset should be measured under Ind AS 38?
Ans: X Ltd. should initially recognise the acquired “in house research project’’ at its fair value i.e., ₹
10,00,000. Research cost of ₹ 5,00,000 and cost of ₹ 2,00,000 for establishing technical
feasibility should be charged to profit & loss. Costs incurred from the point of technological
feasibility/asset recognition criteria until the time when development costs are incurred are
capitalised.
So the intangible asset should be recognised at ₹ 17,00,000 (₹ 10,00,000 + ₹ 7,00,000).
Q25: X Ltd. is engaged is developing computer software. The expenditures incurred by X Ltd. in
pursuance of its development of software is given below:
(a) Paid ₹ 2,00,000 towards salaries of the program designers.
(b) Incurred ₹ 5,00,000 towards other cost of completion of program design.
(c) Incurred ₹ 2,00,000 towards cost of coding and establishing technical feasibility.

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(d) Paid ₹ 7,00,000 for other direct cost after establishment of technical feasibility.
(e) Incurred ₹ 2,00,000 towards other testing costs.
(f) Cost of producing product masters for training material is ₹ 3,00,000.
(g) A focus group of other software developers was invited to a conference for the
introduction of this new software. Cost of the conference aggregated to ₹ 70,000.
(h) On March 15, 20X0, the development phase was completed and a cash flow budget was
prepared.
Net profit for the year was estimated to be equal ₹ 40,00,000. How X Ltd. should account for
the above mentioned cost?
Ans: Costs incurred in creating computer software, should be charged to research & development
expenses when incurred until technical feasibility/asset recognition criteria have been
established for the product. Here, technical feasibility is established after completion of
detailed program design.
In this case, ₹ 9,00,000 (salary cost of ₹ 2,00,000, program design cost of ₹ 5,00,000 and coding
and technical feasibility cost of ₹ 2,00,000) would be recorded as expense.
Cost incurred from the point of technical feasibility are capitalised as software costs. But the
conference cost of ₹ 70,000 would be expensed off.
In this situation, direct cost after establishment of technical feasibility of ₹ 7,00,000, testing
cost of ₹ 2,00,000 and cost of producing product masters for training material of ₹ 3,00,000 will
be capitalised.
The cost of software capitalised is = ₹ (7,00,000 + 2,00,000 + 3,00,000) = ₹ 12,00,000.
Q28: A Ltd. intends to open a new retail store in a new location in the next few weeks. It has spent a
substantial sum on a series of television advertisements to promote this new store. It has paid
for advertisements costing ₹ 8,00,000 before 31st March, 2018. ₹ 7,00,000 of this sum relates
to advertisements shown before 31st March, 2018 and ₹ 1,00,000 to advertisements shown in
April, 2018. Since 31st March, 2018, A Ltd. has paid for further advertisements costing ₹
4,00,000. The accountant charged all these costs as expenses in the year to 31 March 2018.
However, CFO of A Ltd. does not want to charge ₹12,00,000 against 2017-2018 profits. He
believes that these costs can be carried forward as intangible assets because the company’s
market research indicates that this new store is likely to be highly successful.
Examine and justify the treatment of these costs of ₹ 12,00,000 in the financial statements for
the year ended 31st March, 2018 as per Ind AS. [RTP Nov 2018]
Ans: Ind AS 38 specifically prohibits recognising advertising expenditure as an intangible asset.
Irrespective of success probability in future, such expenses have to be recognized in profit or
loss. Therefore, the treatment given by the accountant is correct since such costs should be
recognised as expenses.
However, the costs should be recognised on an accruals basis.

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Therefore, of the advertisements paid for before 31st March, 2018, ₹ 7,00,000 would be
recognised as an expense and ₹ 1,00,000 as a pre-payment in the year ended 31st
March 2018.
₹ 4,00,000 cost of advertisements paid for since 31st March, 2018 would be charged as
expenses in the year ended 31st March, 2019.

Q31 Super Sounds Limited had the following transactions during the Financial Year 2019-2020.
(i) On 1st April 2019, Super Sounds Limited purchased the net assets of Music Limited for ₹
13,20,000. The fair value of Music Limited's identifiable net assets was ₹ 10,00,000.
Super Sounds Limited is of the view that due to popularity of Music Limited's product,
the life of goodwill is 10 years.
(ii) On 4th May 2019, Super Sounds Limited purchased a Franchisee to organize musical
shows from Armaan TV for ₹ 80,00,000 and at an annual fee of 2% of musical shows
revenue. The Franchisee expires after 5 years. Musical shows revenue were ₹ 10,00,000
for financial year 2019-2020. The projected future revenues for financial year 2020-2021
is ₹ 25,00,000 and ₹ 30,00,000 p.a. for remaining 3 years thereafter.
(iii) On 4th July 2019, Super Sounds Limited was granted a Copyright that had been applied
for by Music Limited. During financial year 2019-2020, Super Sound Limited incurred ₹
2,50,000 on legal cost to register the Patent and ₹ 7,00,000 additional cost to
successfully prosecute a copyright infringement suit against a competitor. The life of the
Copyright is for 10 years. Super Sound Limited follows an accounting policy to amortize
all intangible on SLM (Straight Line Method) basis or any appropriate basis over a
maximum period permitted by relevant Ind AS, taking a full year amortization in the
year of acquisition.
You are required to prepare:
(i) A Schedule showing the intangible section in Super Sound Limited Balance Sheet as on
31st March 2020, and
(ii) A Schedule showing the related expenses that would appear in the Statement of Profit
and Loss of Super Sound Limited for the year ended 2019-2020.

[Exam JAN 21 (10 Marks); MTP Nov 22]

Ans: (i) Super Sounds Limited

Balance Sheet (Extract relating to intangible asset) as at 31st March 2020

Note No. ₹
Assets
(1) Non- current asset
Intangible assets 1 69,45,000

(ii) Super Sounds Limited

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Statement of Profit and Loss (Extract)

for the year ended 31st March 2020
Note No. ₹
Revenue from Operations 10,00,000
Total Revenue Expenses:
Amortization expenses Other
expenses 2 16,25,000
Total Expenses 3 7,20,000

Notes to Accounts (Extract)

1. Intangible Assets
Gross Block (Cost) Accumulated amortization Net Block
Opening Additions Closing Opening Additions Closing Opening Closing
Balance Balance Balance Balance Balance Balance
₹ ₹ ₹ ₹ ₹ ₹ ₹ ₹ ₹
1. Goodwill* - 3,20,000 3,20,000 - - - - 3,20,000
(W.N.1)

2. Franchise** - 80,00,000 80,00,000 - 16,00,000 16,00,000 - 64,00,000

(W.N.2)

3. Copyright
(W.N.3) - 2,50,000 2,50,000 - 25,000 25,000 - 2,25,000
- 85,70,000 85,70,000 - 16,25,000 16,25,000 - 69,45,000

* As per Ind AS 36, irrespective of whether there is any indication of impairment,

an entity shall test goodwill acquired in a business combination for impairment
annually. This implies that goodwill is not amortised annually but is subject to
annual impairment, if any.

** As per the information in the question, the limiting factor in the contract for the
use is time i.e., 5 years and not the fixed total amount of revenue to be
generated. Therefore, an amortisation method that is based on the revenue
generated by an activity that includes the use of an intangible asset is
inappropriate and amortisation based on time can only be applied.

2. Amortization expenses
Franchise (W.N.2.) 16,00,000
Copyright (W.N.3.) 25,000 16,25,000

3. Other Expenses
Legal cost on copyright 7,00,000

P a g e | 9.6
Chapter 9 : Intangible Assets (IND AS 38)

Fee for Franchise (10,00,000 × 2%) 20,000 7,20,000

Working Notes:
₹
(1) Goodwill on acquisition of business
Cash paid for acquiring the business 13,20,000
Less: Fair value of net assets acquired (10,00,000)
Goodwill 3,20,000
(2) Franchise 80,00,000
Less: Amortisation (over 5 years) (16,00,000)
Balance to be shown in the balance sheet 64,00,000
(3) Copyright 2,50,000
Less: Amortisation (over 10 years as per SLM) (25,000)
Balance to be shown in the balance sheet 2,25,000

Q35. A company engaged in the provision of Information Technology Products and Services incurred
following expenditure during the development phase of its software product that is to be
offered to its customers. The entity also purchases software from third parties for incorporating
into its end software product offered to its customers. The company is in the process of
launching it in the market for licensing to customers. The company also takes services of
external professional software developers for such software development purpose. Costs
incurred in relation to the development of its software product for the year ended 31st March,
20X2 are as follows:
Particulars Amount
(₹ thousands)
Purchase price of imported software 600
Employment costs (Note 1) 1,200
Testing costs 1,800
Other costs directly related to customization (Note 2) 450
Professional fees paid for external software developers 220
Costs of training provided to staff to operate the asset 195
Costs of advertising in market 1,560
Administrative and general overheads 825

Note 1: The software was developed in nine months ended 31st December, 20X1 and was
capable of operating in the manner intended by the entity. It was brought into use on 31st

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 Chapter 9 : Intangible Assets (IND AS 38)

March, 20X2. The employment costs are for the period of twelve months (i.e. up to 31st March,
20X2). The employees were engaged in developing the software and related activities.

Note 2: Other costs directly related to development include an abnormal cost of ₹ 50,000 in
respect of repairing the damage which resulted from a security breach.

What will be the amount of the software development costs that can be capitalized by
explaining the reason for each element of cost? [RTP Nov 2023]

Ans. In the given fact pattern, the entity should apply the recognition and measurement principles
relevant for an internally generated intangible asset. The entity has to ensure compliance with
additional requirements relating to internally generated intangible assets in addition to general
recognition criteria and initial measurement of intangible asset. In the instant case, for the
measurement of software development cost, entity must evaluate the costs incurred for
recognition of an intangible asset arising from development phase with reference to
paragraphs 65 to 67 of Ind AS 38.

According to the said paragraphs, the initial carrying amount of the software will be computed
as follows:
Particulars Amount Amount to be Remarks
(₹ in capitalised as
thousands) Intangible Assets (₹
in thousands)
Purchase price of 600 600 The cost of materials or / and
imported software services used or consumed in
generating the intangible asset
and any directly attributable
cost of preparing the asset for
its intended use.
Employment costs 1,200 900 Employment costs for the
(Note 1) period of nine months are
directly attributable costs.
Therefore, the cost to be
capitalized is ₹ 900 thousand
(i.e., 9/12 x ₹ 1,200 thousand)
for nine months as the asset
was ready for its intended use
by that time. It is assumed that
₹ 100 thousand is equally
incurred each month.
Capitalisation of eligible costs
should cease when the asset is
capable of operating in the
manner intended by
management.

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Chapter 9 : Intangible Assets (IND AS 38)

Testing costs 1,800 1,800 The cost of testing whether the

asset is functioning properly is a
directly attributable cost. (Refer
paragraph 59 of Ind AS 38)
Other costs directly 450 400 Cost of identified
related to inefficiencies deducted, i.e., ₹
development (Note 2) 450 thousand – ₹ 50 thousand.
Professional fees paid 220 220 The cost of materials or/and
for bringing the services used or consumed in
software to its working generating the intangible asset
condition
Costs of training 195 Nil Expenditure on training staff to
provided to staff operate the asset cannot be
capitalised. (Refer paragraph 67
of Ind AS 38)
Costs of advertising in 1,560 Nil Selling, administrative and other
market general overhead expenditure
cannot be capitalised. (Refer
paragraph 67 of Ind AS 38)
Administrative and 825 Nil
general overheads

Total 6,850 3,920

Accordingly, the initial carrying value of the software is ₹ 39,20,000. The remaining costs will be
charged to profit or loss.

P a g e | 9.9
Chapter 10 : Investment Property (IND AS 40)

CHAPTER 10
INVESTMENT PROPERTY (IND AS 40)
Q10: X Ltd. is engaged in the construction industry and prepares its financial statements up to 31st
March each year. On 1st April, 2013, X Ltd. purchased a large property (consisting of land) for ₹
2,00,00,000 and immediately began to lease the property to Y Ltd. on an operating lease.
Annual rentals were ₹ 20,00,000. On 31st March, 2017, the fair value of the property was ₹
2,60,00,000. Under the terms of the lease, Y Ltd. was able to cancel the lease by giving six
months’ notice in writing to X Ltd. Y Ltd. gave this notice on 31st March, 2017 and vacated the
property on 30th September, 2017. On 30th September, 2017, the fair value of the property
was ₹ 2,90,00,000. On 1st October, 2017, X Ltd. immediately began to convert the property into
ten separate flats of equal size which X Ltd. intended to sell in the ordinary course of its
business. X Ltd. spent a total of ₹ 60,00,000 on this conversion project between 30th
September, 2017 to 31st March, 2018. The project was incomplete at 31st March, 2018 and the
directors of X Ltd. estimate that they need to spend a further ₹ 40,00,000 to complete the
project, after which each flat could be sold for ₹ 50,00,000.
Examine and show how the three events would be reported in the financial statements of X Ltd.
for the year ended 31st March, 2018. as per Ind AS. [RTP Nov 2018]
Ans: From 1st April, 2013, the property would be regarded as an investment property since it is
being held for its investment potential rather than being owner occupied or developed for sale.
The property would be measured under the cost model. This means it will be measured at
₹ 2,00,00,000 at each year end.
On 30th September, 2017, the property ceases to be an investment property. X Ltd. begins to
develop it for sale as flats. The increase in the fair value of the property from 31st March, 2017
to 30th September, 2017 of ₹ 30,00,000 (₹ 29,00,000 – ₹ 26,00,000) would not be recognised
for the year ended 31st March, 2018.
As per para 59 of Ind AS 40, transfers between investment property, owner-occupied property
and inventories do not change the carrying amount of the property transferred and they do not
change the cost of that property for measurement or disclosure purposes. When the property
ceases to be an investment property, it is transferred into inventory at its then carrying amount
of ₹ 2,00,00,000. This becomes the initial ‘cost’ of the inventory.
Since the lease of the property is an operating lease, rental income of ₹ 10,00,000
(₹ 20,00,000 x 6/12) would be recognised in P/L for the year ended 31st March, 2018.
The additional costs of ₹ 60,00,000 for developing the flats which were incurred up to and
including 31st March, 2018 would be added to the ‘cost’ of inventory to give a closing cost of
₹ 2,60,00,000.
The total selling price of the flats is expected to be ₹ 5,00,00,000 (10 x ₹ 50,00,000). Since the
further costs to develop the flats total ₹ 40,00,000, their net realisable value is
₹ 4,60,00,000 (₹ 5,00,00,000 – ₹ 40,00,000), so the flats will be measured at a cost of
₹ 2,60,00,000.

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 Chapter 10 : Investment Property (IND AS 40)

The flats will be shown in inventory as a current asset

Q12: X Ltd owned a land property whose future use was not determined as at 31 March 20X1. How
should the property be classified in the books of X Ltd as at 31 March 20X1?

During June 20X1, X Ltd commenced construction of office building on it for own use.
Presuming that the construction of the office building will still be in progress as at 31 March
20X2

(a) How should the land property be classified by X Ltd in its financial statements as at 31
March 20X2?

(b) Will there be a change in the carrying amount of the property resulting from any change
in use of the investment property?

(c) Whether the change in classification to, or from, investment properties is a change in
accounting policy to be accounted for in accordance with Ind AS 8, Accounting Policies,
Changes in Accounting Estimates and Errors?

(d) Would your answer to (a) above be different if there were to be a management
intention to commence construction of an office building for own use; however, no
construction activity was planned by 31 March 20X2?

[RTP May 2021; Exam May 22 (5 Marks); MTP May 2023]

Ans: As per paragraph 8(b) of Ind AS 40, any land held for currently undetermined future use, should
be classified as an investment property. Hence, in this case, the land would be regarded as held
for capital appreciation. Hence the land property should be classified by X Ltd as investment
property in the financial statements as at 31 March 20X1.

As per Para 57 of the Standard, an entity can change the classification of any property to, and
from, an investment property when and only when evidenced by a change in use. A change
occurs when the property meets or ceases to meet the definition of investment property and
there is evidence of the change in use. Mere management’s intention for use of the property
does not provide evidence of a change in use.

(a) Since X Ltd has commenced construction of office building on it for own use, the
property should be reclassified from investment property to owner occupied as at 31
March 20X2.

(b) As per Para 59, transfers between investment property, owner occupied and inventories
do not change the carrying amount of the property transferred and they do not change
the cost of the property for measurement or disclosure purposes.

(c) No. The change in classification to, or from, investment properties is due to change in
use of the property. No retrospective application is required and prior period’s financial
statements need not be re-stated.

(d) Mere management intentions for use of the property do not evidence change in use.
Since X Ltd has no plans to commence construction of the office building during 20X1-

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Chapter 10 : Investment Property (IND AS 40)

20X2, the property should continue to be classified as an investment property by X Ltd

in its financial statements as at 31 March 20X2.
Q14: Venus Ltd. is a multinational entity that owns three properties. All three properties were
purchased on April 1, 20X1. The details of purchase price and market values of the properties
are given as follows:
Particulars Property 1 Property 2 Property 3
Factory Factory Let-Out
Purchase price 15,000 10,000 12,000
Market value 31.03.20X2 16,000 11,000 13,500
Life s 10 Years 10 Years 10 Years
Subsequent Measurement Cost Model Revaluation Revaluation
Model Model
Property 1 and 2 are used by Venus Ltd. as factory building whilst property 3 is let-out to a non-
related party at a market rent. The management presents all three properties in balance sheet
as ‘property, plant and equipment’.
The Company does not depreciate any of the properties on the basis that the fair values are
exceeding their carrying amount and recognise the difference between purchase price and fair
value in Statement of Profit and Loss.
Required:
Analyse whether the accounting policies adopted by the Venus Ltd. in relation to these
properties is in accordance of Indian Accounting Standards (Ind AS). If not, advise the correct
treatment along with working for the same. [Exam May 2018; MTP May 2023]
Ans: The above issue needs to be examined in the umbrella of the provisions given in Ind AS 1
‘Presentation of Financial Statements’, Ind AS 16 ‘Property, Plant and Equipment’ in relation to
property ‘1’ and ‘2’ and Ind AS 40 ‘Investment Property’ in relation to property ‘3’.
Property ‘1’ and ‘2’
Para 6 of Ind AS 16 ‘Property, Plant and Equipment’ defines:
“Property, plant and equipment are tangible items that:
(a) are held for use in the production or supply of goods or services, for rental to others, or
for administrative purposes; and
(b) are expected to be used during more than one period.”
Paragraph 29 of Ind AS 16 states that:
“An entity shall choose either the cost model or the revaluation model as its accounting policy
and shall apply that policy to an entire class of property, plant and equipment”.
Further, paragraph 36 of Ind AS 16 states that:
“If an item of property, plant and equipment is revalued, the entire class of property, plant and
equipment to which that asset belongs shall be revalued”.

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 Chapter 10 : Investment Property (IND AS 40)

Further, paragraph 39 of Ind AS 16 states that:

“If an asset’s carrying amount is increased as a result of a revaluation, the increase shall be
recognised in other comprehensive income and accumulated in equity under the heading of
revaluation surplus. However, the increase shall be recognised in profit or loss to the extent
that it reverses a revaluation decrease of the same asset previously recognised in profit or
loss”.
Further, paragraph 52 of Ind AS 16 states that:
“Depreciation is recognised even if the fair value of the asset exceeds its carrying amount, as
long as the asset’s residual value does not exceed its carrying amount”.
Property ‘3’
Para 6 of Ind AS 40 ‘Investment property’ defines:
“Investment property is property (land or a building—or part of a building—or both) held (by
the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or
both, rather than for:
(a) use in the production or supply of goods or services or for administrative purposes; or
(b) sale in the ordinary course of business”.
Further, paragraph 30 of Ind AS 40 states that:
“An entity shall adopt as its accounting policy the cost model to all of its investment property”.
Further, paragraph 79 (e) of Ind AS 40 requires that:
“An entity shall disclose the fair value of investment property”.
Further, paragraph 54 (2) of Ind AS 1 ‘Presentation of Financial Statements’ requires that:
“As a minimum, the balance sheet shall include line items that present the following amounts:
(a) property, plant and equipment;
(b) investment property;
As per the facts given in the question, Venus Ltd. has
(a) presented all three properties in balance sheet as ‘property, plant and equipment’;
(b) applied different accounting policies to Property ‘1’ and ‘2’;
(c) revaluation is charged in statement of profit and loss as profit; and
(d) applied revaluation model to Property ‘3’ being classified as Investment Property.
These accounting treatment is neither correct nor in accordance with provision of Ind AS 1, Ind
AS 16 and Ind AS 40.
Accordingly, Venus Ltd. shall apply the same accounting policy (i.e. either revaluation or cost
model) to entire class of property being property ‘1’ and ‘2”. It also required to depreciate
these properties irrespective of that, their fair value exceeds the carrying amount. The

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Chapter 10 : Investment Property (IND AS 40)

revaluation gain shall be recognised in other comprehensive income and accumulated in equity
under the heading of revaluation surplus.
There is no alternative of revaluation model in respect to property ‘3’ being classified as
Investment Property and only cost model is permitted for subsequent measurement. However,
Venus ltd. is required to disclose the fair value of the property in the Notes to Accounts. Also
the property ‘3’ shall be presented as separate line item as Investment Property.
Therefore, as per the provisions of Ind AS 1, Ind AS 16 and Ind AS 40, the presentation of these
three properties in the balance sheet is as follows:
Case 1: Venus Ltd. has applied the Cost Model to an entire class of property, plant and
equipment.
Balance Sheet extracts as at 31st March 20X2
Assets INR
Non-Current Assets
Property, Plant and Equipment
Property ‘1’ 13,500
Property ‘2’ 9,000 22,500
Investment Properties
Property ‘3’ 10,800
Case 2: Venus Ltd. has applied the Revaluation Model to an entire class of property, plant and
equipment.
Balance Sheet extracts as at 31st March 20X2
Assets INR
Non-Current Assets
Property, Plant and Equipment
Property ‘1’ 16,000
Property ‘2’ 11,000 27,000
Investment Properties
Property ‘3’ 10,800
Equity and Liabilities
Other Equity
Revaluation Reserve
Property ‘1’ 2,500
Property ‘2’ 2,000 4,500
The revaluation reserve should be routed through Other Comprehensive Income (subsequently
not reclassified to Profit and Loss) in Statement of Profit and Loss and Shown as a separate
column in Statement of Changes in Equity.

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 Chapter 10 : Investment Property (IND AS 40)

Q28: On 1st April 2019, an entity purchased an office block (building) for ₹ 50,00,000 and paid a non-
refundable property transfer tax and direct legal cost of ₹ 2,50,000 and ₹ 50,000 respectively
while acquiring the building.

During 2019, the entity redeveloped the building into two -story building. Expenditures on re-
development were:

• ₹ 1,00,000 Building plan approval;

• ₹ 10,00,000 construction costs (including ₹ 60,000 refundable purchase taxes); and

• ₹ 40,000 due to abnormal wastage of material and labour.

When the re-development of the building was completed on 1st October 2019, the entity rents
out Ground Floor of the building to its subsidiary under an operating lease in return for rental
payment. The subsidiary uses the building as a retail outlet for its products. The entity kept first
floor for its own administration and maintenance staff usage. Equal value can be attributed to
each floor.

How will the entity account for all the above-mentioned expenses in the books of account?

Also, discuss how the above building will be shown in Consolidated financial statement of the
entity as a group and in its separate financial statements as per relevant Ind AS]

[Exam JAN 2021 (5 Marks); IBS CS 16]

Ans: In accordance with Ind AS 16, all costs required to bring an asset to its present location and
condition for its intended use should be capitalised. Therefore, the initial purchase price of the
building would be:
Particulars Amount (₹)
Purchase amount 50,00,000
Non-refundable property tax 2,50,000
Direct legal cost 50,000
53,00,000
Expenditures on redevelopment:
Building plan approval 1,00,000
Construction costs (10,00,000 – 60,000) 9,40,000

Total amount to be capitalised at 1 st October 2019 63,40,000

Treatment of abnormal wastage of material and labour:

As per Ind AS 16, the cost of abnormal amounts of wasted material, labour, or other resources
incurred in self-constructing an asset is not included in the cost of the asset. It will be charged
to Profit and Loss in the year it is incurred. Hence, abnormal wastage of ₹ 40,000 will be
expensed off in Profit & Loss in the financial year 2019 -2020.

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Chapter 10 : Investment Property (IND AS 40)

Accounting of property- Building

When the property is used as an administrative centre, it is not an investment property, rather
it is an ‘owner occupied property’. Hence, Ind AS 16 will be applicable.

When the property (land and/or buildings) is held to earn rentals or for capital appreciation (or
both), it is an Investment property. Ind AS 40 prescribes the cost model for accounting of such
investment property.

Since equal value can be attributed to each floor, Ground Floor of the building will be
considered as Investment Property and accounted as per Ind AS 40 and First Floor would be
considered as Property, Plant and Equipment and accounted as per Ind AS 16.

Cost of each floor = ₹ 63,40,000 / 2 = ₹ 31,70,000

As on 1st October 2019, the carrying value of building vis-à-vis its classification would be as
follows:
(i) In Separate Financial Statements: The Ground Floor of the building will be classified as
investment property for ₹ 31,70,000, as it is property held to earn rentals. While First
Floor of the building will be classified as item of property, plant and equipment for ₹
31,70,000.
(ii) In Consolidated Financial Statements: The consolidated financial statements present
the parent and its subsidiary as a single entity. The consolidated entity uses the building
for the supply of goods. Therefore, the leased-out property to a subsidiary does not
qualify as investment property in the consolidated financial statements. Hence, the
whole building will be classified as an item of Property, Plant and Equipment for ₹
63,40,000.

P a g e | 10.7
Chapter 11 : Borrowing Costs (IND AS 23)

CHAPTER 11
BORROWING COSTS (IND AS 23)
Q7: Alpha Ltd on 1St April 20X1 borrowed 9% ₹ 30,00,000 to finance the construction of two
qualifying assets. Construction started on 1st April 20X1. The loan facility was availed on 1st
April 20X1 and was utilized as follows with remaining funds invested temporarily at 7%.
Factory Building Office Building
1st April 20X1 5,00,000 10,00,000
1st October 20X1 5,00,000 10,00,000
Calculate the cost of the asset and the borrowing cost to be capitalized.
Ans: The cost of the asset and the borrowing cost to be capitalized is calculated as under:
Particulars Factory Building Office Building
Borrowing Costs (10,00,000*9%) 90,000 (20,00,000*9%) 1,80,000
Less: Investment Income (5,00,000*7%*6/12) (17,500) (10,00,000*7%*6/12) (35,000)
72,500 1,45,000
Cost of the asset:
Expenditure incurred 10,00,000 20,00,000
Borrowing Costs 72,500 1,45,000
Total 10,72,500 21,45,000
Q17: In a group with Parent Company “P” there are 3 subsidiaries with following business:
“A” – Real Estate Company
“B” – Construction Company
“C” – Finance Company
 Parent Company has no operating activities of its own but performs management
functions for its subsidiaries.
 Financing activities and cash management in the group are coordinated centrally.
 Finance Company is a vehicle used by the group solely for raising finance.
 All entities in the group prepare Ind AS financial statements.
The following information is relevant for the current reporting period 20X1-20X2:
Real Estate Company
 Borrowings of ₹ 10,00,000 with an interest rate of 7% p.a.
 Expenditures on qualifying assets during the period amounted to ₹ 15,40,000.
 All construction works were performed by Construction Company. Amounts invoiced to
Real Estate Company included 10% profit margin.

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 Chapter 11 : Borrowing Costs (IND AS 23)

Construction Company
 No borrowings during the period.
 Financed ₹ 10,00,000 of expenditures on qualifying assets using its own cash resources.
Finance Company
 Raised ₹ 20,00,000 at 7% p.a. externally and issued a loan to Parent Company for
general corporate purposes at the rate of 8%.
Parent Company
 Used loan from Finance Company to acquire a new subsidiary.
 No qualifying assets apart from those in Real Estate Company and Construction
Company.
 Parent Company did not issue any loans to other entities during the period.
What is the amount of borrowing costs eligible for capitalisation in the financial statements of
each of the four entities for the current reporting period 20X1-20X2?
Ans: Following is the treatment as per Ind AS 23:
Finance Company
No expenditure on qualifying assets have been incurred, so Finance Company cannot capitalise
anything.
Real Estate Company
Total interest costs in the financial statements of Real Estate Company is ₹ 70,000.
Expenditures on qualifying assets exceed total borrowings, so the total amount of interest can
be capitalised.
Construction Company
No interest expense has been incurred, so Construction Company cannot capitalise anything.
Consolidated financial statements of Parent Company:
Total general borrowings of the group: ₹ 10,00,000 + ₹ 20,00,000 = ₹ 30,00,000
Although Parent Company used proceeds from loan to acquire a subsidiary, this loan cannot be
excluded from the pool of general borrowings.
Total interest expenditures for the group = ₹ 30,00,000 x 7% = ₹ 2,10,000
Total expenditures on qualifying assets for the group are added up. Profit margin charged by
Construction Company to Real Estate Company is eliminated:
Real Estate Company – ₹ 15,40,000/1.1 = ₹ 14,00,000 Construction Co – ₹ 10,00,000
Total consolidated expenditures on qualifying assets:
₹ (14,00,000 + 10,00,000) = ₹ 24,00,000

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Chapter 11 : Borrowing Costs (IND AS 23)

Capitalisation rate = 7%
Borrowing costs eligible for capitalisation = ₹ 24,00,000 x 7% = ₹ 1,68,000
Total interest expenditures of the group are higher than borrowing costs eligible for
capitalisation calculated based on the actual expenditures incurred on the qualifying assets.
Therefore, only ₹ 1,68,000 can be capitalised.

Q22: Harish Construction Company is constructing a huge building project consisting of four
phases. It is expected that the full building will be constructed over several years but Phase I
and Phase II of the building will be operational as soon as they are completed.

Following is the detail of the work done on different phases of the building during the current
year:

(₹ in lakh)
Phase I Phase II Phase III Phase IV
₹ ₹ ₹ ₹
Cash expenditure 10 30 25 30
Building purchased 24 34 30 38
Total expenditure 34 64 55 68
Total expenditure of all phases 221
Loan taken @ 15% at the beginning of the 200
year

After taking substantial period of construction, at the mid of the current year, Phase I and
Phase II have become operational. Find out the total amount to be capitalized and to be
expensed during the year. [RTP Nov 2022]

Ans:
Particulars ₹
1. Interest expense on loan ₹ 2,00,00,000 at 15% 30,00,000
2. Total cost of Phases I and II (₹ 34,00,000 +64,00,000) 98,00,000
3. Total cost of Phases III and IV (₹ 55,00,000 + ₹ 68,00,000) 1,23,00,000
4. Total cost of all 4 phases 2,21,00,000
5. Total loan 2,00,00,000
6. Interest on loan used for Phases I & II, based on proportionate 13,30,317
30,00,000
Loan amount = 2,21,00,000 × 98,00,000
7. Interest on loan used for Phases III & IV, based on proportionate Loan 16,69,683
30,00,000
amount = 2,21,00,000 × 1,23,00,000

Accounting treatment:

1. For Phase I and Phase II

Since Phase I and Phase II have become operational at mid of the year, half of the
interest amount of ₹ 6,65,158.50 (i.e. ₹ 13,30,317/2) relating to Phase I and Phase II

P a g e | 11.3
 Chapter 11 : Borrowing Costs (IND AS 23)

should be capitalized (in the ratio of asset costs 34:64) and added to respective assets in
Phase I and Phase II and remaining half of the interest amount of ₹ 6,65,158.50 (i.e. ₹
13,30,317/2) relating to Phase I and Phase II should be expensed off during the year.

2. For Phase III and Phase IV

Interest of ₹ 16,69,683 relating to Phase III and Phase IV should be held in Capital Work-
in-Progress till assets construction work is completed, and thereafter capitalized in the
ratio of cost of assets. No part of this interest amount should be charged/expensed off
during the year since the work on these phases has not been completed yet.
Q23: LT Ltd. is in the process of constructing a building. The construction process is expected to take
about 18 months from 1st January 20X1 to 30th June 20X2. The building meets the definition of
a qualifying asset. LT Ltd. incurs the following expenditure for the construction:
1st January, 20X1 ₹ 5 crores
30th June, 20X1 ₹ 20 crores
st
31 March, 20X2 ₹ 20 crores
30th June, 20X2 ₹ 5 crores

On 1st July 20X1, LT Ltd. issued 10% Redeemable Debentures of ₹ 50 crores. The proceeds from
the debentures form part of the company's general borrowings, which it uses to finance the
construction of the qualifying asset, ie, the building. LT Ltd. had no borrowings (general or
specific) before 1st July 20X1 and did not incur any borrowing costs before that date. LT Ltd.
incurred ₹ 25 crores of construction costs before obtaining general borrowings on 1st July 20X1
(pre-borrowing expenditure) and ₹ 25 crores after obtaining the general borrowings (post-
borrowing expenditure).
For each of the financial years ended 31st March 20X1, 20X2 and 20X3, calculate the borrowing
cost that LT Ltd. is permitted to capitalize as a part of the building cost.
[RTP May 2023; MTP May 2024]
Ans: Applying paragraph 17 of Ind AS 23 to the fact pattern, the entity would not begin capitalising
borrowing costs until it incurs borrowing costs (i.e. from 1st July, 20X1). In determining the
expenditures on a qualifying asset to which an entity applies the capitalisation rate (paragraph
14 of Ind AS 23), the entity does not disregard expenditures on the qualifying asset incurred
before the entity obtains the general borrowings. Once the entity incurs borrowing costs and
therefore satisfies all three conditions in para 17 of Ind AS 23, it then applies paragraph 14 of
Ind AS 23 to determine the expenditures on the qualifying asset to which it applies the
capitalisation rate.
Calculation of borrowing cost for financial year 20X0-20X1
Expenditure Capitalization Period Weighted average
(current year) Accumulated Exp

Date Amount
1st January 20X1 ₹ 5 crore 0/3 Nil

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Chapter 11 : Borrowing Costs (IND AS 23)

Borrowing Costs eligible for capitalisation = NIL. LT Ltd. cannot capitalise borrowing costs
before 1st July, 20X1 (the day it starts to incur borrowing costs).
Calculation of borrowing cost for financial year 20X1-20X2
Expenditure Capitalization Period Weighted average
(current year) Accumulated
Expenditure
Date Amount
1st January, 20X1 ₹ 5 crore 9/12* ₹ 3.75 crore
th
30 June, 20X1 ₹ 20 crore 9/12 ₹ 15 crore
31st March, 20X2 ₹ 20 crore 0/12 Nil
Total ₹ 18.75 crore

Borrowing Costs eligible for capitalisation = 18.75 cr. x 10% = ₹ 1.875 cr.
*LT Ltd. cannot capitalise borrowing costs before 1st July, 20X1 (the day it starts to incur
borrowing costs). Accordingly, this calculation uses a capitalization period from 1 st July, 20X1 to
31st March, 20X2 for this expenditure.
Calculation of borrowing cost for financial year 20X2-20X3
Expenditure Capitalization Period Weighted average
(current Accumulated
year) Expenditure
Date Amount
1st January, 20X1 ₹ 5 crore 3/12 ₹ 1.25 crore
th
30 June, 20X1 ₹ 20 crore 3/12 ₹ 5 crore
31st March, 20X2 ₹ 20 crore 3/12 ₹ 5 crore
st
31 March, 20X2 ₹ 1.875crore 3/12 ₹ 0.47 crore
30th June, 20X2 ₹ 5 crore 0/12 Nil
Total ₹ 11.72 crore

Borrowing costs eligible for capitalisation = ₹ 11.72 cr. x 10% = ₹ 1.172 cr.
Q24: PQR Limited is engaged in Tourism business in India. The company has planned to construct a
Holiday Resort (Qualifying Asset) at Shimla. The cost of the project has been met out of
borrowed funds of ₹ 100 lakhs at the rate of 12% p.a. ₹ 40 lakhs were disbursed on 1st April
20X2 and the balance of ₹ 60 lakhs were disbursed on 1st June 20X2. The site planning work
commenced on 1st June 20X2, since the Chief engineer of the project was on medical leave.
The company commenced physical construction on 1st July 20X2 and the work of construction
continued till 30th September 20X2 and thereafter the construction activities stopped due to
landslide on the road which leads to construction site. The road blockages have been cleared by
the government machinery by 31st December 20X2. Construction activities have resumed on
1st January 20X3 and has completed on 28th February 20X3.

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 Chapter 11 : Borrowing Costs (IND AS 23)

The date of opening has been scheduled for 1st March 20X3, but unfortunately, the District
Administration gave permission for opening on 16th March 20X3, due to lack of safety
measures like fire extinguishers which had not been installed by then.
Determine the amount of borrowing cost to be capitalized towards construction of the resort
when
(a) Landslide is not common in Shimla and delay in approval from District Administration
Office is minor administrative work leftover.
(b) Landslide is common in Shimla and delay in approval from District Administration Office
is major administrative work leftover.
[RTP May 2024]
Ans: As per Ind AS 23 ‘Borrowing Costs’, the commencement date for capitalisation of borrowing
cost on qualifying asset is the date when the entity first meets all of the following conditions:
(a) it incurs expenditures for the asset;
(b) it incurs borrowing costs; and
(c) it undertakes activities that are necessary to prepare the asset for its intended use or
sale.
Further, an entity also does not suspend capitalising borrowing costs when a temporary delay is
a necessary part of the process of getting an asset ready for its intended use or sale. For
example, capitalisation continues during the extended period that high water levels delay
construction of a bridge, if such high-water levels are common during the construction period
in the geographical region involved.
An entity shall cease capitalising borrowing costs when substantially all the activities necessary
to prepare the qualifying asset for its intended use or sale are complete.
Further, paragraph 23 explains that 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, such as the decoration of a property to the
purchaser’s or user’s specification, are all that are outstanding, this indicates that substantially
all the activities are complete.
In the given case since the site planning work started for the project on 1st June, 20X2, the
commencement of capitalisation of borrowing cost will begin from 1st June, 20X2.
a) When landslide is not common in Shimla and delay in approval from District
Administration Office is minor administrative work leftover
In such a situation, suspension of capitalisation of borrowing cost on construction work
will be considered for 3 months i.e. from October, 20X2 to December, 20X2 and
cessation of capitalisation of borrowing cost shall stop at the time of completion of
physical activities.
Accordingly, the borrowing cost to be capitalized will be effectively for 6 months i.e.
from 1st June, 20X2 to 30th September, 20X2 and then from 1st January, 20X3

P a g e | 11.6
Chapter 11 : Borrowing Costs (IND AS 23)

to 28th February, 20X3 i.e. total 6 months. The amount of borrowing cost will be ₹
6,00,000 (1,00,00,000 x 6/12 x 12%).
b) When landslide is common in Shimla and delay in approval from District
Administration Office is major administrative work leftover
Since landslides are common in Shimla during monsoon period, there shall be no
suspension of capitalisation of borrowing cost during that period.
Further, an asset can be considered to be ready for its intended use only on receipt of
approvals and after compliance with regulatory requirements such as “Fire Clearances”
etc. These are very important to declare the asset as ready for its scheduled operation.
In the given case, obtaining the safety approval is a necessary condition that needs to be
complied with strictly and before obtaining the same the entity will not be able to use
the building. Accordingly, it is appropriate to continue capitalisation until the said
approvals are obtained.
Hence, the capitalisation of the borrowing cost will be for 9.5 months i.e. from 1st June,
20X2 till 15th March, 20X3. The amount of borrowing cost will be ₹9,50,000 (1,00,00,000
x 9.5/12 x 12%).
Q25: An entity can borrow funds in its functional currency (₹) @ 12%. It borrows $ 1,000 @ 4% on 1
st April, 20X1 when $ 1 = ₹ 40. The equivalent amount in functional currency is ₹ 40,000.
Interest is payable on 31st March, 20X2. On 31st March, 20X2, exchange rate is $ 1 = ₹ 50. The
loan is not due for repayment.
Compute exchange loss and borrowing cost to be capitalized as on 31st March, 20X2. What will
be exchange loss and borrowing cost to be capitalized as on 31st March, 20X2 if the exchange
rate on 31st March, 20X2, is $ 1 = ₹ 41? [MTP Nov 2023]
Ans: When the exchange rate on 31st March, 20X2, is $ 1 = ₹ 50.
The exchange loss in this case is ₹ 10,000 [$ 1,000 x (₹ 50 - ₹ 40)]. The borrowing cost is ₹ 2,000
($ 1,000 x 4% x ₹ 50).
Had the entity borrowed funds in functional currency the borrowing cost would have been ₹
4,800 (₹ 40,000 x 12%).
The entity will treat exchange difference upto ₹ 2,800 (₹ 4,800 – ₹ 2,000) as a borrowing cost
that may be eligible for capitalisation under this Standard.
Thus, the total eligible borrowing cost is ₹ 4,800 (₹ 2,000 + ₹ 2,800) equivalent to the cost of
borrowing cost in functional currency.
When the exchange rate on 31st March, 20X2, is $ 1 = ₹ 41.
The exchange loss would be ₹ 1,000 [$ 1,000 – (₹ 41 – ₹ 40)].
The entity will treat the entire exchange loss as an eligible borrowing cost as total borrowing
cost i.e. ₹ 2,640 [(₹ 1,000 x 4% x 41) + ₹ 1,000] since exchange loss in foreign currency does not
exceed the cost of borrowings in functional currency, i.e., ₹ 4,800

P a g e | 11.7
 Chapter 11 : Borrowing Costs (IND AS 23)

Q14: An entity constructs a new head office building commencing on 1st September 20X1, which
continues till 31st December 20X1 (and is expected to go beyond a year). Directly attributable
expenditure at the beginning of the month on this asset are ₹ 100,000 in September 20X1 and ₹
250,000 in each of the months of October to December 20X1.
The entity has not taken any specific borrowings to finance the construction of the asset, but
has incurred finance costs on its general borrowings during the construction period. During the
year, the entity had issued 10% debentures with a face value of ₹ 20 lacs and had an overdraft
of ₹ 500,000, which increased to ₹ 750,000 in December 20X1. Interest was paid on the
overdraft at 15% until 1 October 20X1, then the rate was increased to 16%.
Calculate the capitalization rate for computation of borrowing cost in accordance with Ind AS
23 ‘Borrowing Costs’. [RTP May 2018; Exam Nov 2019]

Ans: Since the entity has only general borrowing hence first step will be to compute the
capitalisation rate. The capitalisation rate of the general borrowings of the entity during the
period of construction is calculated as follows:
Finance cost on ₹ 20 lacs 10% debentures during September – December ₹ 66,667
20X1
Interest @ 15% on overdraft of ₹ 5,00,000 in September 20X1 ₹ 6,250
Interest @ 16% on overdraft of ₹ 5,00,000 in October and November 20X1 ₹ 13,333
Interest @ 16% on overdraft of ₹ 750,000 in December 20X1 ₹ 10,000
Total finance costs in September – December 20X1 ₹ 96,250
Weighted average borrowings during period
= (20,00,000 x 4) + (500,000 x 3) +(750,000 x 1) /4 = ₹ 25,62,500
Capitalisation rate = Total finance costs during the construction period / Weighted average
borrowings during the construction period
= 96,250 / 25,62,500 = 3.756% for capitalization period i.e., 4 Months
Alternative Solution
Calculation of capitalization rate on borrowings other than specific borrowings
Period of Weighted average
Nature of general Amount of loan Rate of
outstanding amount of interest
borrowings (₹) interest p.a.
balance (₹)
a B c d = [(b x c) x (a/12)]
10% Debentures 12 months 20,00,000 10% 2,00,000
Bank overdraft 9 months 5,00,000 15% 56,250
2 months 5,00,000 16% 13,333
1 month 7,50,000 16% 10,000
46,00,000 2,79,583

Weighted average cost of borrowings

P a g e | 11.8
Chapter 11 : Borrowing Costs (IND AS 23)

= {20,00,000 x(12/12)} + {5,00,000 x (11/12)} + {7,50,000 x (1/12)}

= 25,20,833
Capitalisation Rate = (Weighted average amount of interest / Weighted average of general
borrowings) x 100
= (2,79,583 / 25,20,833) x 100 = 11.09% p.a.

P a g e | 11.9
IND AS 20
Chapter 12 : IND AS 20

CHAPTER 12
ACCOUNTING FOR GOVERNMENT GRANTS AND
DISCLOSURE OF GOVERNMENT ASSISTANCE
(IND AS 20)
Q10: A Ltd. has received a grant of ₹10,00,00,000 in the year 20X1-20X2 from local government in
the form of subsidy for selling goods at lower price to lower income group population in a
particular area for two years. A Ltd. had accounted for the grant as income in the year 20X1-
20X2. While accounting for the grant in the year 20X1-20X2, A Ltd. was reasonably assured that
all the conditions attached to the grant will be complied with. However, in the year 20X5-20X6,
it was found that A Ltd. has not complied with the above condition and therefore notice of
refund of grant has been served to it. A Ltd. has contested but lost in court in 20X5-20X6 and
now grant is fully repayable. How should A Ltd. reflect repayable grant in its financial
statements ending 20X5-20X6?
Ans: Note: It is being assumed that the accounting done in previous years was not incorrect and was
not in error as per Ind AS 8.
Paragraph 32 of Ind AS 20, states that a Government grant that becomes repayable shall be
accounted for as a change in accounting estimate (see Ind AS 8, Accounting Policies, Changes in
Accounting Estimates and Errors).
Repayment of a grant related to income shall be applied first against any unamortised deferred
credit recognised in respect of the grant. To the extent that the repayment exceeds any such
deferred credit, or when no deferred credit exists, the repayment shall be recognised
immediately in profit or loss.
Repayment of a grant related to an asset shall be recognised by increasing the carrying amount
of the asset or reducing the deferred income balance by the amount repayable. The cumulative
additional depreciation that would have been recognised in profit or loss to date in the absence
of the grant shall be recognised immediately in profit or loss.
The following journal entries should be passed:

S. Particulars Nature of Account Dr./Cr. Amount

No. (₹ in crores)
(i) Repayment of Government Grant Expense (P/L) Dr. 10
To Grant repayable Balance sheet (Liability) 10
(Being recognition of repayment
of grant in statement of profit
or loss)
(ii) Grant repayable Balance sheet (Liability) Dr. 10

P a g e | 12.1
 Chapter 12 : IND AS 20

To Bank Balance sheet (Asset) 10

(Being grant refunded)
Assuming that no deferred credit balance exists in the year 20 X5-20X6, therefore repayment
recognised in P&L.
It may also be noted that the standard also provides that circumstances giving rise to
repayment of a grant related to an asset may require consideration to be given to the possible
impairment of the new carrying amount of the asset

Q17: A company receives a cash grant of ₹ 30,000 on 31 March 20X1. The grant is towards the cost
of training young apprentices. Training programme is expected to last for 18 months starting
from 1 April 20X1. Actual costs of the training incurred in 20X1-20X2 was ₹ 50,000 and in 20X2-
20X3 ₹ 25,000. State, how this grant should be accounted for? [Exam May 22 (4 Marks)]

Ans: At 31st March 20X1 the grant would be recognised as a liability and presented in the balance
sheet as a split between current and non-current amounts.
₹ 20,000 [(12 months / 18 months) x 30,000] is current and would be recognised in profit and
loss for the year ended 31st March, 20X1. The balance amount of ₹10,000 will be shown as
non-current.
At the end of year 20X1-20X2, there would be a current balance of 10,000 (being the non-
current balance at the end of year 20X1-20X1 reclassified as current) in the balance sheet. This
would be recognised in profit in the year 20X2-20X3.
Extracts from the financial statements are as follows: Balance Sheet (extracts)

31 March 31 March 31 March

20X1 20X2 20X3
Current liabilities
Deferred income 20,000 10,000 -
Non-current liabilities
Deferred income 10,000 - -
Statement of profit and loss (extracts)

31 March 20X2 31 March 20X3

Method 1
Other Income - Government grant 20,000 10,000
received
Training costs (50,000) (25,000)
Method 2
Training costs (50,000 – 20,000) 30,000
Training costs (25,000 – 10,000) 15,000

P a g e | 12.2
Chapter 12 : IND AS 20

Q18: Entity A is awarded a government grant of ₹60,000 receivable over three years (₹40,000 in year
1 and ₹10,000 in each of years 2 and 3), contingent on creating 10 new jobs and maintaining
them for three years. The employees are recruited at a total cost of ₹30,000, and the wage bill
for the first year is ₹1,00,000, rising by ₹10,000 in each of the subsequent years. Calculate the
grant income and deferred income to be accounted for in the books for year 1, 2 and 3.
Calculate the grant income and deferred income to be accounted for in the books for the years
1, 2 and 3 under the following two situations:
a) There is reasonable assurance that the entity will comply with the conditions attaching
to them and the grant will be received
b) There is no reasonable assurance that the grant will be received.
[RTP Nov 2020; Exam May 22 (4 Marks); Exam May 2024]

Ans. a) When there is reasonable assurance

The grant of 60,000 should be recognised at the beginning of the first year as receivable and
will be compensated for the related costs over three years.
The initial journal entry would be:
Grant Receivable Ac Dr. 60,000
To Deferred Income A/c 60,000
Calculation of grant income and deferred income:

Year Labour Grant Computation of Deferred Computation of

Cost Income Grant Income Income at the end deferred income at the
of the year end of the year

1 1,30,000 21,667 60,000 x (130/360) 38,333 (60,000 – 21,667)

2 1,10,000 18,333 60,000 x (110/360) 20,000 (38,333 – 18,333)
3 1,20,000 20,000 60,000 x (120/360) - (20,000 – 20,000)
3,60,000 60,000

Therefore, grant income to be recognised in the Statement of Profit and Loss for the years 1, 2
and 3 would be 21,667, 18,333 and20,000 respectively.
The amount of grant that has not yet been credited to the statement of profit and loss i.e.
deferred income is to be shown in the balance sheet. Hence deferred income balance as at end
of year 1, 2 and 3 are 38,333, 20,000 and Nil respectively.
b) When reasonable assurance is not there
The grant of 60,000 should be recognised over three years to compensate for the related costs.
The journal entry on receipt of grant at year 1 would be:
Grant Receivable Ac Dr. 40,000

P a g e | 12.3
 Chapter 12 : IND AS 20

To Deferred Income A/c 40,000

Calculation of Grant Income and Deferred Income:
Year Labour Grant Grant Grant Deferred Computation of deferred
Cost Income wrt Income wrt Income wrt Income at income at the end of the
1st receipt 2nd receipt 3rd receipt the end of year
of 40,000 of 10,000 of 10,000 the year
₹ ₹ ₹
1 1,30,000 14,445 NA NA 25,555 (40,000 – 14,445)
2 1,10,000 12,222 4,783 NA 18,550 (50,000 – 14,445 – 12,222 –
4,783)
3 1,20,000 13,333 5,217 10,000 - (60,000 – 14,445 – 12,222 –
4,783 – 13,333 – 5,217 –
10,000)
3,60,000 40,000* 10,000** 10,000***

*40,000 bifurcated into three years in the ratio of 130:110:120

**10,000 bifurcated into two years in the ratio of 110:120
***10,000 credited entirely in the third year
Therefore, Grant income to be recognised in the statement of Profit and Loss for the years 1, 2
and 3 would be 14,445, 17,005 and 28,550 respectively.
Amount of grant that has not yet been credited to the statement of profit and loss i.e; deferred
income is to be shown in the balance sheet. Hence, deferred income balance as at the end of
year 1, 2 and 3 are 25,555, 18,550 and Nil respectively.

Q19: How will you recognize and present the grants received from the Government in the following
cases as per Ind AS 20?
(i) A Ltd. received one acre of land to setup a plant in backward area (fair value of land ₹ 12
lakh and acquired value by Government is ₹ 8 Iakhs).
(ii) B Ltd. received an amount of loan for setting up a plant at concessional rate of interest
from the Government.
(iii) D Ltd. received an amount of ₹ 25 lakh for immediate start-up of a business without any
condition.
(iv) S Ltd. received ₹ 10 lakh for purchase of machinery costing ₹ 80 lakh. Useful life of
machinery is 10 years. Depreciation on this machinery is to be charged on straight line
basis.
(v) Government gives a grant of ₹ 25 lakh to U Limited for research and development of
medicine for breast cancer, even though similar medicines are available in the market
but are expensive. The company is to ensure by developing a manufacturing process
over a period of two years so that the cost comes down at least to 50%. [Nov 2018]

Ans:

P a g e | 12.4
Chapter 12 : IND AS 20

(i) The land and government grant should be recognized by A Ltd. at fair value of ₹ 12,00,000
and this government grant should be presented in the books as deferred income. (Refer
footnote 1)
(ii) As per para 10A of Ind AS 20 ‘Accounting for Government Grants and Disclosure of
Government Assistance’, loan at concessional rates of interest is to be measured at fair
value and recognised as per Ind AS 109. Value of concession is the difference between the
initial carrying value of the loan determined in accordance with Ind AS 109, and the
proceeds received. The benefit is accounted for as Government grant.
(iii) ₹ 25 lakh has been received by D Ltd. for immediate start-up of business. Since this grant is
given to provide immediate financial support to an entity, it should be recognised in the
Statement of Profit and Loss immediately with disclosure to ensure that its effect is clearly
understood, as per para 21 of Ind AS 20.
(iv) ₹ 10 lakh should be recognized by S Ltd. as deferred income and will be transferred to
profit and loss over the useful life of the asset. In this case, ₹ 1,00,000 [₹ 10 lakh / 10 years]
should be credited to profit and loss each year over period of 10 years. (Refer footnote 2)
(v) As per para 12 of Ind AS 20, the entire grant of ₹ 25 lakh should be recognized immediately
as deferred income and charged to profit and loss over a period of two years based on the
related costs for which the grants are intended to compensate provided that there is
reasonable assurance that U Ltd. will comply with the conditions attached to the grant.
Note 1: Alternatively, if the company is following the policy of recognising non-monetary grants
at nominal value, the company will not recognise any government grant. Land will be shown in
the financial statements at ₹ 1.
Note 2: Alternatively, company can deduct grant from cost price of asset.
Q21: A Limited is engaged in the manufacturing of certain specialized chemicals. During the
manufacturing process, certain wastewater is produced which is released by A Limited in the
nearby river. To reduce pollution of the rivers, the state government has introduced a scheme
with the following salient features:
 If a manufacturer installs certain pre-approved wastewater treatment plant, the
government will provide an interest free loan equal to 50% of the cost of the plant;
 Such loan will be repayable to the government in 5 years from the date of disbursal;
 The manufacturer availing the benefit of this scheme must treat the wastewater of its
factory using the specified plant before releasing it to the river. If this condition is
violated, the entire loan shall become immediately repayable to the government along
with a penalty of ₹ 10 lakh.
Cost of the wastewater treatment plant to be installed to avail the benefit of the scheme is ₹ 50
lakh. A Limited decided to utilise this scheme because, if it were to obtain the similar loan from
a bank, it would be available at a market interest rate of 12% per annum. Accordingly, A Limited
applied for and obtained the government loan of ₹ 25 lakh on 1st April, 20X1. A Limited
purchased and installed the plant such that it became ready for use on the same date.

P a g e | 12.5
 Chapter 12 : IND AS 20

A Limited has an accounting policy of recognising government grant in relation to depreciable

assets in the proportion of depreciation expense. It has determined that the plant will be
depreciated over a period of 5 years using straight-line method. In the month of March, 20X3,
government officials conducted a surprise audit, and it was found that A Limited was not using
the wastewater treatment plant as prescribed. Accordingly, on 31st March, 20X3, the
government ordered A Limited to repay the entire loan along with penalty. A Limited repaid the
loan with interest and penalty as per the order on 31st March, 20X3.
Measure the amount of government grant as on 1st April, 20X1. Determine the nature of the
government grant and its accounting treatment (principally) for the year ended 31 st March,
20X2. Also determine the impact on profit or loss if any, on account of revocation of
government grant as on 31st March, 20X3. [RTP May 2022; MTP Nov 2022]
Ans: As per the principles of Ind AS 20 “Accounting for Government Grants and Disclosure of
Government Assistance”, the benefits of a government loan at a below market rate of interest
is treated as a government grant. The loan shall be recognized and measured in accordance
with Ind AS 109 “Financial Instruments”. The benefit of the below market rate of interest shall
be measured as the difference between the initial carrying value of the loan determined in
accordance with Ind AS 109 and the proceeds received. The benefit is accounted for in
accordance with Ind AS 20. As per Ind AS 109, the loan should be initially measured at its fair
value.
Initial recognition of grant as on 1st April, 20X1
Fair value of loan = ₹ 25,00,000 x 0.567 (PVF @ 12%, 5th year) = ₹ 14,17,500
A Limited will recognize ₹ 10,82,500 (25,00,000 – 14,17,500) as the government grant and will
make the following entry on receipt of loan:
Date Particulars Dr. (₹) Cr. (₹)
1.4.20X1 Bank account Dr. 25,00,000
To Deferred Grant Income 10,82,500
To Loan account 14,17,500
(Being grant initially recorded at fair value)

Accounting treatment for year ending 31st March, 20X2

As per para 3 of Ind AS 20, grants related to assets are government grants whose primary
condition is that an entity qualifying for them should purchase, construct or otherwise acquire
long-term assets.
As per para 24-27 of Ind AS 20, Government grants related to assets, including non-monetary
grants at fair value, shall be presented in the balance sheet either by setting up the grant as
deferred income or by deducting the grant in arriving at the carrying amount of the asset.
One method recognises the grant as deferred income that is recognised in profit or loss on a
systematic basis over the useful life of the asset.

P a g e | 12.6
Chapter 12 : IND AS 20

The other method deducts the grant in calculating the carrying amount of the asset. The grant
is recognised in profit or loss over the life of a depreciable asset as a reduced depreciation
expense.
A Ltd. has adopted first method of recognising the grant as deferred income that is recognised
in profit or loss on a systematic basis over the useful life of the asset. Here, deferred income is
recognised in profit or loss in the proportion in which depreciation expense on the asset is
recognised.
Depreciation for the year (20X1-20X2) = ₹ 50,00,000 / 5 years = ₹ 10,00,000
As the loan is to finance a depreciable asset, ₹ 10,82,500 will be recognized in Profit or Loss on
the same basis as depreciation.
Since the depreciation is provided on straight line basis by A Limited, it will credit ₹ 2,16,500
(10,82,500 / 5) equally to its statement of profit and loss over the 5 years.
Journal Entries
Date Particulars Dr. (₹) Cr. (₹)
31.3.20X2 Depreciation (Profit or Loss A/c) Dr. 10,00,000
To Property, Plant & Equipment 10,00,000
(Being depreciation provided for the year)
Deferred grant income Dr. 2,16,500
To Profit or Loss 2,16,500
(Being deferred income adjusted)

Impact on profit or loss due to revocation of government grant as on 31st March 20X3
As per para 32 of Ind AS 20, a government grant that becomes repayable shall be accounted for
as a change in accounting estimate. Repayment of a grant related to income shall be applied
first against any unamortised deferred credit recognised in respect of the grant. To the extent
that the repayment exceeds any such deferred credit, or when no deferred credit exists, the
repayment shall be recognised immediately in profit or loss.

Amount payable to Government on account of principal loan = ₹ 25,00,000

Amount payable to Government on account of penalty = ₹ 10,00,000

Journal Entries
Date Particulars Dr. (₹) Cr. (₹)
31.3.20X3 Deferred grant income Dr. 2,16,500
To Profit or Loss 2,16,500
(Being deferred income adjusted)
Loan account (W.N.1) Dr. 17,78,112

P a g e | 12.7
 Chapter 12 : IND AS 20

Deferred grant income (W.N.2) Dr. 6,49,500

Profit or Loss Dr. 72,388
To Government grant payable 25,00,000
(Being refund of government grant)
Profit or Loss Dr. 10,00,000
To Government grant payable 10,00,000
(Being penalty payable to government)
Therefore, total impact on profit or loss on account of revocation of government grant as on
31st March, 20X3 will be ₹ 10,72,388 (10,00,000 + 72,388).
Circumstances giving rise to repayment of a grant related to an asset may require consideration
to be given to the possible impairment of the new carrying amount of the asset.
Working Notes:
1. Amortisation Schedule of Loan
Year Opening balance of Loan Interest @ 12% Closing balance of Loan
31.03.20X2 14,17,500 1,70,100 15,87,600
31.03.20X3 15,87,600 1,90,512 17,78,112

2. Deferred Grant Income

Year Opening balance Adjustment Closing balance
31.03.20X2 10,82,500 2,16,500 8,66,000
31.03.20X3 8,66,000 2,16,500 6,49,500

Q24: M Limited had constructed another factory few years ago with the assistance of yet another
government grant, 'Innovative Product'. The grant is non-repayable and, following the
construction of the factory, cannot be clawed back by the government. There are no further
conditions attached to the grant that the Company is required to satisfy. The grant received has
been treated as deferred income and is being credited to the income statement over the same
period as the factory is being depreciated. Following an adverse change in the demand of the
product the factory manufactures, during the year at the reporting date, the directors have
concluded that the factory's carrying value is no longer recoverable in full and that a write
down for impairment is required. The write down is more than covered by the amortized
deferred income balance related to the grant.

Discuss, in the context of Ind AS framework and Ind AS 20, the impairment of the factory for
which 'Innovative Product' government grant, has been received. Would your answer be
different, if there are further conditions attached to grant beyond construction of factory?

[MTP May 2022]

Ans: Accounting treatment for Government Grant:

P a g e | 12.8
Chapter 12 : IND AS 20

Government grants, related to assets, including non-monetary grants at fair value should be
presented in the Balance Sheet either by setting up the grant as deferred income or by
deducting the grant in arriving at the asset’s carrying amount. (Para 24 of Ind AS 20)

Government grants should be recognised as income over the periods in which the entity
recognises as expenses the related costs that they are intended to compensate, on a systematic
basis. The outcome should be same in the Profit and Loss account statement regardless of
whether grants are netted or deferred.

In case the grant had been offset against the acquisition cost of the factory and net carrying
value is less than the recoverable amount, there would be no need for an impairment write-
down. The Profit and Loss account would be charged with annual depreciation on the net
acquisition cost.

Government grant relating to ‘Innovative Product’:

To match the same result for the grant ‘Innovative Product’ which has been shown as deferred
income and the factory is initially recorded at its cost, it is reasonable to release an amount of
deferred income to the Profit and Loss account to compensate for the impairment write-down.

Treatment in case of further conditions attached:

If there are further conditions attached to the grant beyond construction of the factory, it may
not be appropriate to release an amount of the deferred income to compensate for the
impairment write down. An entity would need to assess those further conditions to determine
the amount, if any, of deferred income to release.

P a g e | 12.9
Chapter 13 : Agriculture (Ind AS 41)

CHAPTER 13
AGRICULTURE (IND AS 41)
Q7: XY Ltd. is a farming entity where cows are milked on a daily basis. Milk is kept in cold storage
immediately after milking and sold to retail distributors on a weekly basis. On 1 April 20X1, XY
Ltd. had a herd of 500 cows which were all three years old.
During the year, some of the cows became sick and on 30 September 20X1, 20 cows died. On 1
October 20X1, XY Ltd. purchased 20 replacement cows at the market for ₹ 21,000 each. These
20 cows were all one year old when they were purchased.
On 31 March 20X2, XY Ltd. had 1,000 litres of milk in cold storage which had not been sold to
retail distributors. The market price of milk at 31 March 20X2 was ₹ 20 per litre. When selling
the milk to distributors, XY Ltd. incurs selling costs of ₹ 1 per litre. These amounts did not
change during March 20X2 and are not expected to change during April 20X2.
Information relating to fair value and costs to sell is given below:

Date Fair value of a dairy cow (aged) Costs to sell a cow

1 year 1.5 years 3 years 4 years

1st April 20X1 20,000 22,000 27,000 25,000 1,000

1st October 20X1 21,000 23,000 28,000 26,000 1,000
31st March 20X2 21,500 23,500 29,000 26,500 1,100

You can assume that fair value of a 3.5 years old cow on 1st October 20X1 is ₹ 27,000.
Pass necessary journal entries of above transactions with respect to cows in the financial
statements of XY Ltd. for the year ended 31st March, 20X2? Also show the amount lying in
inventory if any. [Exam May 2023 (8 Marks)]
Ans: Journal Entries on 1st October, 20X1 (All figures in ₹)

Loss (on death of 20 cows) (Refer W.N.) Dr. 5,20,000

To Biological asset 5,20,000
(Loss booked on death of 20 cows)
Biological Asset (purchase of 20 new cows) (Refer Dr. 4,00,000
W.N.)
Loss on initial Recognition (of 20 new cows) Dr. 20,000
To Bank 4,20,000
(Initial recognition of 20 new purchased cows at fair
value less costs to sell)
Journal Entries on 31st March, 20X2

P a g e | 13.1
 Chapter 13 : Agriculture (Ind AS 41)

Loss on remeasurement of old cows Dr. 2,88,000

To Biological asset [(1,30,00,000 – 2,88,000
5,20,000) – 1,21,92,000]
(Subsequent measurement of cows at fair value less
costs to sell)
Biological Asset (4,48,000 – 4,00,000) Dr. 48,000
To Gain on remeasurement of new cows 48,000
(Subsequent measurement of cows at fair value less
costs to sell)
Inventory (Milk) as at 31st March,20X2 =₹ 19,000 (1,000 x (20 – 1))
Working Note:
Calculation of Biological asset at various dates

Date Num Age Fair Value Cost to Net (₹ Biological

ber (₹ ) Sell (₹ ) ) asset (₹ )
1st April 20X1 500 3 years 27,000 1,000 26,000 1,30,00,000
1st October 20X1 (20) 3.5 years 27,000 1,000 26,000 (5,20,000)
1st October 20X1 20 1 year 21,000 1,000 20,000 4,00,000
1,28,80,000
31st March 20X2 480 4 years 26,500 1,100 25,400 1,21,92,000
20 1.5 years 23,500 1,100 22,400 4,48,000
1,26,40,000
Q8: Company X purchased 100 beef cattle at an auction for ₹ 1,00,000 on 30 September 20X1.
Subsequent transportation costs were ₹ 1,000 that is similar to the cost X would have to incur
to sell the cattle at the auction. Additionally, there would be a 2% selling fee on the market
price of the cattle to be incurred by the seller.
On 31 March 20X2, the market value of the cattle in the most relevant market increases to ₹
1,10,000. Transportation costs of ₹ 1,000 would have to be incurred by the seller to get the
cattle to the relevant market. An auctioneer’s fee of 2% on the market price of the cattle would
be payable by the seller.
On 1 June 20X2, X sold 18 cattle for ₹ 20,000 and incurred transportation charges of ₹ 150. In
addition, there was a 2% auctioneer’s fee on the market price of the cattle paid by the seller.
On 15 September 20X2, the fair value of the remaining cattle was ₹ 82,820. 42 cattle were
slaughtered on that day, with a total slaughter cost of ₹ 4,200. The total market price of the
carcasses on that day was ₹ 48,300, and the expected transportation cost to sell the carcasses is
₹ 420. No other costs are expected.

P a g e | 13.2
Chapter 13 : Agriculture (Ind AS 41)

On 30 September 20X2, the market price of the remaining 40 cattle was ₹ 44,800. The expected
transportation cost is ₹ 400. Also, there would be a 2% auctioneer’s fee on the market price of
the cattle payable by the seller.
Pass Journal entries so as to provide the initial and subsequent measurement for all above
transactions. Interim reporting periods are of 30 September and 31 March and the company
determines the fair values on these dates for reporting.
Ans: Value of cattle at initial recognition (30 September 20X1) (All figures are in ₹)

Biological asset (cattle) Dr. 97,000*

Loss on initial recognition Dr. 4,000
To Bank (Purchase and cost of transportation) 1,01,000
(Initial recognition of cattle at fair value less costs to
sell)
*Fair value of cattle = 1,00,000 – 1,000 – 2,000 (2% of 1,00,000) = 97,000
Subsequent measurement at 31 March 20X2 (All figures are in ₹)

Biological Assets (Cattle) Dr. 9,800

To Gain on Sale (Profit & Loss) 9,800
(Subsequent measurement of Cattle at fair value less
costs to sell (1,06,800** – 97,000))

** Fair value of cattle = 1,10,0000 – 1,000 – 2,200 (2% of 1,10,000) = 1,06,800

Sale of cattle on 1 June 20X2 (All figures are in ₹)

Biological Assets (Cattle) Dr. 226

To Gain on Sale (Profit & Loss) 226
(Subsequent re-measurement of 18 Cattle at
fair value less costs to sell just prior to the
point at which they are sold [19,450 -
{(1,06,800/100) x 18}]
Cost to Sales Dr. 19,450
To Biological Assets (Cattle) 19,450
(Recording a cost of sales figure separately
with a corresponding reduction in the value of
the biological assets)
Bank Dr. 19,450
Selling expenses (150 + 400) Dr. 550
To Revenue 20,000
(Recognition of revenue from sale of cattle)

P a g e | 13.3
 Chapter 13 : Agriculture (Ind AS 41)

Transfer of Cattle to Inventory on 15 September 20X2 (All figures are in ₹ )

Inventory (48,300 - 420) Dr. 47,880

Loss on remeasurement Dr. 1,176
To Biological Asset (Cattle) 44,856#
To Bank (Slaughtering cost) 4,200
(Transfer of cattle to inventory)
#Note: 44,856 is calculated as the proportion of cattle sold using the fair value (1,06,800+ 226 –
19,450) x 42/82)
Subsequent measurement of cattle at 30 September 20X2 (All figures are in ₹ )

Biological Asset (Cattle) Dr. 784

To Gain on remeasurement 784
(Subsequent measurement of Cattle at fair value
less costs to sell [43,504## – {(1,06,800 + 226 –
19,450)– 44,856}]
##Fair value of cattle = 44,800 – 400 – 896 (2% of 44,800) = 43,504
Q9: On 1st November, 20X1, C Agro Ltd. purchased 100 goats of special breed from a market for ₹
10,00,000 with a transaction cost of 2%. Goats fair value decreased from ₹ 10,00,000 to ₹
9,00,000 as on 31st March, 20X2.
Determine the fair value on the date of purchase and as on financial year ended 31st March,
20X2 under both the cases viz-
a. the transaction costs are borne by the seller and
b. the transaction costs are incurred by the seller and purchaser both. Also pass journal
entries under both the situations on both dates.

Ans: As per para 12 of Ind AS 41, a biological asset shall be measured on initial recognition and at the
end of each reporting period at its fair value less costs to sell. Therefore, regardless of who
bears the transaction costs, the transaction costs of 2% are the costs to sell the goats on 1st
November 20X1, and therefore, the goats should be measured at their fair value less costs to
sell on initial recognition date, i.e., ₹ 9,80,000.

Journal Entry

As on 1st November 20X1:

(i) Where transaction costs are borne by the seller:

Biological assets (Goats) A/c Dr. 9,80,000

Loss on purchase of biological assets (Goats) A/c Dr. 20,000

To Bank A/c 10,00,000

P a g e | 13.4
Chapter 13 : Agriculture (Ind AS 41)

(ii) Where transaction costs are borne by the buyer:

Biological assets (Goats) A/c Dr. 9,80,000

Loss on purchase of biological asset (Goats) A/c Dr. 40,000

To Bank A/c 10,20,000

As on 31 March 20X2 – under both the scenarios:

Loss on fair valuation of biological assets A/c Dr. 98,000

To Biological assets (Goats) A/c 98,000

[9,80,000 - (9,00,000 - 18,000)]

Q10: Analyse whether the following activities fall within the scope of Ind AS 41 with proper
reasoning:
▪ Managing animal-related recreational activities like Zoo
▪ Fishing in the ocean
▪ Fish farming
▪ Development of living organisms such as cells, bacteria and viruses
▪ Growing of plants to be used in the production of drugs
▪ Purchase of 25 dogs for security purpose of the company’s premises.
[RTP May 2021; MTP Nov 2022; MTP Nov 2023]

Ans:
Activity Whether in the Remarks
scope of Ind AS
41?
Managing animal- No Since the primary purpose is to show the
related animals to public for recreational purposes,
recreational there is no management of biological
activities like Zoo transformation but simply control of the
number of animals. Hence it will not fall in
the purview of considered in the definition
of agricultural activity.
Fishing in the No Fishing in ocean is harvesting biological assets
ocean from unmanaged sources. There is no
management of biological transformation
since fish grow naturally in the ocean. Hence,
it will not fall in the scope of the definition of
agricultural activity.

Fish farming Yes Managing the growth of fish and then

P a g e | 13.5
 Chapter 13 : Agriculture (Ind AS 41)

harvest for sale is agricultural activity within

the scope of Ind AS 41 since there is
management of biological transformation of
biological assets for sale or additional
biological assets.
Development of Analysis required The development of living organisms for research
living organisms purposes does not qualify as agricultural activity,
such as cells, as those organisms are not being developed for
bacteria viruses sale, or for conversion into agricultural produce
or into additional biological assets. Hence,
development of such organisms for the said
purposes does not fall under the scope of Ind AS
41.
However, if the organisms are being developed
for sale or use in dairy products, the activity will
be considered as agricultural activity under the
scope of Ind AS 41.
Growing of plants Yes If an entity grows plants for using it in production
to be used in the of drugs, the activity will be agricultural activity.
production of Hence it will come under the scope of Ind AS 41.
drugs
Purchase of 25 No Ind AS 41 is applied to account for the biological
dogs for security assets when they relate to agricultural activity.
purposes of the Guard dogs for security purposes do not qualify
company’s as agricultural activity, since they are not being
premises kept for sale, or for conversion into agricultural
produce or into additional biological assets.
Hence, they are outside the scope of Ind AS 41.

Q12: Arun Ltd. is an entity engaged in plantation and farming on a large scale and diversified across
India. On 1st April, 2018, the company has received a government grant for ₹ 20 lakh subject·
to a condition that it will continue to engage in plantation of eucalyptus tree for a coming
period of five years.
The management has a reasonable assurance that the entity will comply with condition of
engaging in the plantation of eucalyptus trees for specified period of five years and accordingly
it recognizes proportionate grant for ₹4 lakh in Statement of Profit and Loss as income
following the principles laid down under Ind AS 20.
Accounting for Government Grants and Disclosure of Government Assistance.
Required:
Evaluate whether the above accounting treatment made by the management is in compliance
with the applicable Ind AS. If not, advise the correct treatment. [Exam NOV 19]

P a g e | 13.6
Chapter 13 : Agriculture (Ind AS 41)

Ans: Arun Ltd. is engaged in plantation and farming on a large scale. This implies that it has
agriculture business. Hence, Ind AS 41 will be applicable.
Further, the government grant has been given subject to a condition that it will continue to
engage in plantation of eucalyptus tree for a coming period of five years. This implies that it is
a conditional grant.
In the absence of the measurement base of biological asset, it is assumed that “Arun Ltd
measures its Biological Asset at fair value less cost to sell”:
As per Ind AS 41, the government grant should be recognised in profit or loss when, and only
when, the conditions attaching to the government grant are met i.e., continuous plantation of
eucalyptus tree for coming period of 5 years. In this case, the grant shall not be recognised in
profit or loss until the five years have passed. The entity has recognised the grant in profit and
loss on proportionate basis, which is incorrect.
However, if the terms of the grant allow part of it to be retained according to the time elapsed,
the entity recognises that part in profit or loss as time passes. Accordingly, the entity can
recognise the proportionate grant for ₹ 4 lakh in the statement of Profit and Loss based on the
terms of the grant.
Alternatively, it may be assumed that Arun Ltd. measures its Biological Asset at its cost less any
accumulated depreciation and any accumulated impairment losses (as per para 30 of Ind AS
41):
In such a situation, principles of Ind AS 20 (with respect to conditional grant will apply).
According to Ind AS 20, the conditional grant should be recognised in the Statement of Profit
and Loss over the periods and in the proportions in which depreciation expense on those assets
is recognised. Hence the proportionate recognition of grant ₹ 4 lakh (20 lakh / 5) as
income is correct since the entity has reasonable assurance that the entity will comply with the
conditions attached to the grant.
Note: In case eucalyptus tree is considered as bearer plant by Arun Ltd., then Ind AS 20
will be applicable and not Ind AS 41.

Q15: A herd of 15, 4 year old cows valued at ₹ 500 thousands per cow were held in 'M Dairy Farm' as
at 1st April 2021. The following transactions took place on 1st October, 2021:
A. One cow aged 4.5 years was purchased for ₹ 520 thousands.
B. One calf was born.
No cow was sold or disposed off during the year.
The per cow/calf fair value less cost to sell was as follows: ₹ in thousands
4 year old cow on 1st April 2021 500
New born calf on 1st October 2021 400
4.5 year old cow on 1st October 2021 520
New born calf on 31st March, 2022 410

P a g e | 13.7
 Chapter 13 : Agriculture (Ind AS 41)

0.5 year old calf on 31st March, 2022 440

4 year old cow on 31st March, 2022 516
4.5 year old cow on 31st March, 2022 540
5 year old cow on 31st March, 2022 560
You are required to:
a) Calculate change in fair value less costs to sell showing:
i) The portion attributable to physical changes
ii) The portion attributable to price changes.
b) Calculate the carrying cost of the herd as on 31st March, 2022.
c) Prepare an extract of the livestock account for the year ended 31st March, 2022.
[Exam Nov 22 (6 Marks)]

Ans:
(i) Change in fair value less costs to sell, due to physical change and price change:
₹ in thousand

Fair value less costs to sell of herd at 1st April 2021 (15 × 500) 7,500

Purchase on 1st October 2021 (1 x 520) 520

(a) Increase in fair value less costs to sell due to price change:
15 cows x (516 – 500) 240
1 cows x (540 – 520) 20
1 calf x (410 – 400) 10 270
(b) Increase in fair value less costs to sell due to physicalchange:

15 cows x (560 – 516) 660

1 cows x (560 – 540) 20
1 calf x (440 – 410) 30
1 calf x 400 (Gain on initial recognition) 400 1,110

9,400
(ii) Calculation of carrying cost of herd as on 31st March 2022 i.e.
Fair value less costs to sell of herd at 31st March 2022
16 × 560 8,960
1 × 440 440 9,400
(iii) Extract of Livestock Account for the year 31st March 2022

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Chapter 13 : Agriculture (Ind AS 41)

Particulars Amount Particulars Amount

(₹ in 000) (₹ in 000)
To Opening Stock 7500 By Closing Balance 9,400
To Purchases (1x520) 520
To Increase in fair value 270
(Price Changes)
To Increase in fair value
(Physical Changes) 1,110
Total 9,400 Total 9,400

P a g e | 13.9
Chapter 14 : Impairment of Assets (IND AS 36)

CHAPTER 14
IMPAIRMENT OF ASSETS (IND AS 36)
Q13: On March 31, 20X1, XYZ Ltd. makes following estimate of cash flows for one of its asset located
in USA:
Year
Cash flows
20X1-20X2 US $ 80
20X2-20X3 US $ 100
20X3-20X4 US $ 20
Following information has been provided:
Particulars India USA
Applicable discount rate 15% 10%
Exchange rates are as follows:
As on Exchange rate
March 31, 20X1 ₹ 45/US $
Expected Exchange rate
March 31, 20X2 ₹ 48/US $
March 31, 20X3 ₹ 51/US $
March 31, 20X4 ₹ 55/US $
Calculate value in use as on March 31, 20X1.
Ans:
Year Cash flows Present value Discounted cash
(US $) factor @ 10% flows (US $)
20X1-20X2 80 0.9091 72.73
20X2-20X3 100 0.8264 82.64
20X3-20X4 20 0.7513 15.03
Total Discounted cash flows in US $ 170.40
Exchange rate as on March 31, 20X1, i.e., date of calculating value in use ₹ 45/US $
Value in use as on March 31, 20X1 ₹ 7,668
Q17: A company operates a mine in a country where legislation requires that the owner must restore
the site on completion of its mining operations. The cost of restoration includes the
replacement of the overburden, which must be removed before mining operations commence.
A provision for the costs to replace the overburden was recognised as soon as the overburden
was removed. The amount provided was recognised as part of the cost of the mine and is being
depreciated over the mine’s useful life. The carrying amount of the provision for restoration
costs is ₹ 500, which is equal to the present value of the restoration costs.

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 Chapter 14 : Impairment of Assets (IND AS 36)

The entity is testing the mine for impairment. The cash-generating unit for the mine is the mine
as a whole. The entity has received various offers to buy the mine at a price of around ₹ 800.
This price reflects the fact that the buyer will assume the obligation to restore the overburden.
Disposal costs for the mine are negligible. The value in use of the mine is approximately ₹ 1,200,
excluding restoration costs. The carrying amount of the mine is ₹ 1,000.
Ans: The cash-generating unit’s fair value less costs of disposal is ₹ 800. This amount considers
restoration costs that have already been provided for. As a consequence, the value in use for
the cash-generating unit is determined after consideration of the restoration costs and is
estimated to be ₹ 700 (₹ 1,200 less ₹ 500). The carrying amount of the cash-generating unit is ₹
500, which is the carrying amount of the mine (₹ 1,000) less the carrying amount of the
provision for restoration costs (₹ 500). Therefore, the recoverable amount of the cash-
generating unit exceeds its carrying amount.
Q28: A Ltd. purchased an asset of ₹ 100 lakh on April 1, 20X0. It has useful life of 4 years with no
residual value. Recoverable amount of the asset is as follows:
As on Recoverable amount
March 31, 20X1 ₹ 60 lakh
March 31, 20X2 ₹ 40 lakh
March 31, 20X3 ₹ 28 lakh
Calculate the amount of impairment loss or its reversal, if any, on March 31, 20X1, March 31,
20X2 and March 31, 20X3. [Exam JULY 2021 (6 Marks)]
Ans: As on March 31, 20X1
Carrying amount of the asset (opening balance) ₹ 100 lakh
Depreciation (₹ 100 lakh /4 years) ₹ 25 lakh
Carrying amount of the asset (closing balance) ₹ 75 lakh
Recoverable amount (given) ₹ 60 lakh
Therefore, an impairment loss of ₹ 15 lakh should be recognised as on March 31, 20X1.
Depreciation for subsequent years should be charged on the carrying amount of the asset (after
providing for impairment loss), i.e., ₹ 60 lakh.
As on March 31, 20X2
Carrying amount of the asset (opening balance) ₹ 60 lakh
Depreciation (₹ 60 lakh /3 years) ₹ 20 lakh
Carrying amount of the asset (closing balance) ₹ 40 lakh
Therefore, no impairment loss should be recognised as on March 31, 20X2.
As on March 31, 20X3
Carrying amount of the asset (opening balance) ₹ 40 lakh
Depreciation (₹ 40 lakh / 2 years) ₹ 20 lakh

P a g e | 14.2
Chapter 14 : Impairment of Assets (IND AS 36)

Carrying amount of the asset (closing balance) ₹ 20 lakh

Recoverable amount (given) ₹ 28 lakh
Since, the recoverable amount of the asset exceeds the carrying amount of the asset by ₹ 8
lakh, impairment loss recognised earlier should be reversed. However, reversal of an
impairment loss should not exceed the carrying amount that would have been determined (net
of amortisation or depreciation) had no impairment loss been recognised for the asset in prior
years.
Carrying amount as on March 31, 20X3 had no impairment loss being recognised would have
been ₹ 25 lakh. Therefore, the reversal of an impairment loss of ₹ 5 lakh should be done as on
March 31, 20X3.
Q29: Elia limited is a manufacturing company which deals in to manufacturing of cold drinks and
beverages. It is having various plants across India. There is a Machinery A in the Baroda plant
which is used for the purpose of bottling. There is one more machinery which is Machinery B
clubbed with Machinery A. Machinery A can individually have an output and also sold
independently in the open market. Machinery B cannot be sold in isolation and without
clubbing with Machine A it cannot produce output as well. The Company considers this group
of assets as a Cash Generating Unit and an Inventory amounting to ₹ 2 Lakh and Goodwill
amounting to ₹ 1.50 Lakhs is included in such CGU.
Machinery A was purchased on 1st April 2013 for ₹ 10 Lakhs and residual value is ₹ 50
thousands. Machinery B was purchased on 1st April, 2015 for ₹ 5 Lakhs with no residual value.
The useful life of both Machine A and B is 10 years. The Company expects following cash flows
in the next 5 years pertaining to Machinery A. The incremental borrowing rate of the company
is 10%.
Year Cash Flows from Machinery A
1 1,50,000
2 1,00,000
3 1,00,000
4 1,50,000
5 1,00,000
(excluding Residual Value)
Total 6,00,000
On 31st March, 2018, the professional valuers have estimated that the current market value of
Machinery A is ₹ 7 lakhs. The valuation fee was ₹ 1 lakh. There is a need to dismantle the
machinery before delivering it to the buyer. Dismantling cost is ₹ 1.50 lakhs. Specialised
packaging cost would be ₹ 25 thousand and legal fees would be ₹ 75 thousand.
The Inventory has been valued in accordance with Ind AS 2. The recoverable value of CGU is ₹
10 Lakh as on 31st March, 2018. In the next year, the company has done the assessment of
recoverability of the CGU and found that the value of such CGU is ₹ 11 Lakhs ie on 31st March,
2019. The Recoverable value of Machine A is ₹ 4,50,000 and combined Machine A and B is ₹
7,60,000 as on 31st March, 2019.
Required:

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 Chapter 14 : Impairment of Assets (IND AS 36)

a) Compute the impairment loss on CGU and carrying value of each asset after charging
impairment loss for the year ending 31st March, 2018 by providing all the relevant working
notes to arrive at such calculation.
b) Compute the prospective depreciation for the year 2018-2019 on the above assets.
c) Compute the carrying value of CGU as at 31st March, 2019.
[RTP May 2019; Exam Nov 22 (8 Marks)]
Ans:
(a) Computation of impairment loss and carrying value of each of the asset in CGU after
impairment loss
(i) Calculation of carrying value of Machinery A and B before impairment
Machinery A
Cost (A) ₹ 10,00,000
Residual Value ₹ 50,000
Useful life 10 years
Useful life already elapsed 5 years
Yearly depreciation (B) ₹ 95,000
WDV as at 31st March, 2018 [A- (B x 5)] ₹ 5,25,000
Machinery B
Cost (C) ₹ 5,00,000
Residual Value -
Useful life 10 years
Useful life already elapsed 3 years
Yearly depreciation (D) ₹ 50,000
WDV as at 31st March, 2018 [C- (D x 3)] ₹ 3,50,000
(ii) Calculation of Value-in-use of Machinery A
Period Cash Flows (₹) PVF PV
1 1,50,000 0.909 1,36,350
2 1,00,000 0.826 82,600
3 1,00,000 0.751 75,100
4 1,50,000 0.683 1,02,450
5 1,00,000 0.621 62,100
5 50,000 0.621 31,050

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Value in use 4,89,650

(iii) Calculation of Fair Value less cost of disposal of Machinery A
₹
Fair Value 7,00,000
Less: Dismantling cost (1,50,000)
Packaging cost (25,000)
Legal Fees (75,000)
Fair value less cost of disposal 4,50,000
(iv) Calculation of Impairment loss on Machinery A
₹
Carrying Value 5,25,000
Less: Recoverable Value ie higher of Value-in-use and
Fair value less cost of disposal 4,89,650
Impairment Loss 35,350
(v) Calculation of Impairment loss of CGU
1. First goodwill will be impaired fully and then the remaining impairment loss of ₹
75,000 will be allocated to Machinery A and B.
2. If we allocate remaining impairment loss to Machinery A and B on pro-rata basis, it
would come to ₹ 45,000 on Machinery A. However, the impairment loss of
Machinery A cannot exceed ₹ 35,350.Hence, impairment to CGU will be as follows:
Carrying value Impairment loss Carrying value after
before impairment impairment loss
loss
₹ ₹ ₹
Machinery A 5,25,000 35,350 4,89,650
Machinery B 3,50,000 39,650* 3,10,350
Inventory 2,00,000 - 2,00,000
Goodwill 1,50,000 1,50,000 -
Total 12,25,000 2,25,000 10,00,000
* Balancing figure.
(b) Carrying value after adjustment of depreciation
₹
Machinery A [4,89,650 – {(4,89,650-50,000)/5}] 4,01,720
Machinery B [3,10,350 – (3,10,350/7)] 2,66,014

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Inventory 2,00,000
Goodwill -
Total 8,67,734
(c) Calculation of carrying value of CGU as on 31st March, 2019
The revised value of CGU is ₹ 11 Lakh. However, impaired goodwill cannot be reversed.
Further, the individual assets cannot be increased by lower of recoverable value or Carrying
Value as if the assets were never impaired.
Accordingly, the carrying value as on 31st March, 2019 assuming that the impairment loss
had never incurred, will be:
Carrying Value Recoverable Value Final CV as at
31st Mar 2019
Machinery A 4,30,000 4,50,000 4,30,000
Machinery B 3,00,000 (7,60,000 – 4,50,000) 3,00,000
3,10,000
Inventory 2,00,000 2,00,000 2,00,000
Goodwill -
Total 9,30,000 9,60,000 9,30,000
Hence the impairment loss to be reversed will be limited to ₹62,266 only (₹
9,30,000 – ₹ 8,67,734).
Q31: PQR Ltd. is the company which has performed well in the past but one of its major assets, an
item of equipment, suffered a significant and unexpected deterioration in performance.
Management expects to use the machine for a further four years after 31 st March 20X6, but
at a reduced level. The equipment will be scrapped after four years. The financial accountant
for PQR Ltd. has produced a set of cash-flow projections for the equipment for the next four
years, ranging from optimistic to pessimistic. CFO thought that the projections were too
conservative, and he intended to use the highest figures each year. These were as follows:
₹ ʼ000
Year ended 31st March 20X7 276
Year ended 31st March 20X8 192
Year ended 31st March 20X9 120
Year ended 31st March 20Y0 114
The above cash inflows should be assumed to occur on the last day of each financial year. The
pre-tax discount rate is 9%. The machine could have been sold at 31st March 20X6 for ₹
6,00,000 and related selling expenses in this regard could have been ₹ 96,000. The machine had
been revalued previously, and at 31st March 20X6 an amount of ₹ 36,000 was held in
revaluation surplus in respect of the asset. The carrying value of the asset at 31st March 20X6
was ₹ 660,000. The Indian government has indicated that it may compensate the company for
any loss in value of the assets up to its recoverable amount.

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Calculate impairment loss, if any and revised depreciation of asset. Also suggest how
Impairment loss, if any would be set off and how compensation from government be accounted
for? [RTP May 2020]
Ans: Carrying amount of asset on 31st March 20X6 =₹ 6,60,000
Calculation of Value in Use:
Cash flow Discount factor @ Amount
Year ended
₹ 9% ₹
31st March, 20X7 2,76,000 0.9174 2,53,202
31st March, 20X8 1,92,000 0.8417 1,61,606
31st March, 20X9 1,20,000 0.7722 92,664
31st March, 20Y0 1,14,000 0.7084 80,758
Total (Value in Use) 5,88,230

Calculation of Recoverable amount:

Particulars Amount (₹)
Value in use 5,88,230
Fair value less costs of disposal (6,00,000 – 96,000) 5,04,000
Recoverable amount 5,88,230
(Higher of value in use and fair value less costs of disposal)

Calculation of Impairment loss:

Particulars Amount (₹)
Carrying amount 6,60,000
Less: Recoverable amount (5,88,230)
Impairment loss 71,770

Calculation of Revised carrying amount:

Amount (₹)
Carrying amount 6,60,000
Less: Impairment loss (71,770)
Revised carrying amount 5,88,230

Calculation of Revised Depreciation:

Revised carrying amount – Residual value
Remaining life = (5,88,230 - 0) / 4 = ₹ 1,47,058 per annum
Set off of Impairment loss:
The impairment loss of ₹ 71,770 must first be set off against any revaluation surplus in relation
to the same asset. Therefore, the revaluation surplus of ₹ 36,000 is eliminated against
impairment loss, and the remainder of the impairment loss ₹ 35,770 (₹ 71,770 –

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₹ 36,000) is charged to profit and loss.

Treatment of Government compensation:
Any compensation by government would be accounted for as such when it becomes receivable.
At this time, the government has only stated that it may reimburse the company and therefore
credit should not be taken for any potential government receipt.
Q33: Sun ltd is an entity with various subsidiaries. The entity closes its books of account at every year
ended on 31st March. On 1st July 20X1 Sun ltd acquired an 80% interest in Pluto ltd. Details of
the acquisition were as follows:
– Sun ltd acquired 800,000 shares in Pluto ltd by issuing two equity shares for every five
acquired. The fair value of Sun Ltd’s share on 1st July 20X1 was ₹ 4 per share and the fair
value of a Pluto’s share was ₹ 1·40 per share. The costs of issue were 5% per share.
– Sun ltd incurred further legal and professional costs of ₹ 100,000 that directly related to
the acquisition.
– The fair values of the identifiable net assets of Pluto Ltd at 1st July 20X1 were measured
at ₹ 1·3 million. Sun ltd initially measured the non-controlling interest in Pluto ltd at fair
value. They used the market value of a Pluto ltd share for this purpose. No impairment of
goodwill arising on the acquisition of Pluto ltd was required at 31st March 20X2 or 20X3.
Pluto ltd comprises three cash generating units A, B and C. When Pluto ltd was acquired the
directors of Sun ltd estimated that the goodwill arising on acquisition could reasonably be
allocated to units A:B:C on a 2:2:1 basis. The carrying values of the assets in these cash
generating units and their recoverable amounts are as follows:
Unit Carrying value (before goodwill allocation) Recoverable amount
₹ ’000 ₹ ’000
A 600 740
B 550 650
C 450 400
Required:
(i) Compute the carrying value of the goodwill arising on acquisition of Pluto Ltd in the
consolidated Balance Sheet of Sun ltd at 31st March 20X4 following the impairment
review.
(ii) Compute the total impairment loss arising as a result of the impairment review,
identifying how much of this loss would be allocated to the non-controlling interests in
Pluto ltd.
Ans:
1. Computation of goodwill on acquisition
Particular Amount
(₹‘000)
Cost of investment (8,00,000 x 2/5 x ₹4) 1,280

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Chapter 14 : Impairment of Assets (IND AS 36)

Fair value of non-controlling interest (2,00,000 x ₹1·4) 280

Fair value of identifiable net assets at date of acquisition (1,300)
So goodwill equals 260
Acquisition costs are not included as part of the fair value of the consideration given
under Ind AS 103, Business Combination.
2. Calculation of impairment loss
Unit Carrying value Recoverable Impairme
Amount nt Loss
Before Allocation After
Allocation of goodwill Allocation
(2:2:1)
A 600 104 704 740 Nil
B 550 104 654 650 4
C 400* 52 452 400 52
* After writing down assets in the individual CGU to recoverable amount
3. Calculation of closing goodwill
Goodwill arising on acquisition (W1) 260
Impairment loss (W2) (56)
So closing goodwill equals 204
4. Calculation of overall impairment loss
on goodwill (W3) 56
on assets in unit C (450 – 400) 50
So total loss equals 106
₹ 21·2 (20%) of the above is allocated to the NCI with the balance allocated to the
shareholders of Sun ltd.

Q36: On 31 March 20X1, Vision Ltd acquired 80% of the equity shares of Mission Ltd for ₹ 190
million. The fair values of the net assets of Mission Ltd that were included in the consolidated
statement of financial position of Vision Ltd at 31 March 20X1 were ₹ 200 million. It is the
Group’s policy to value the non-controlling interest in subsidiaries at the date of acquisition at
its proportionate share of the fair value of the subsidiaries’ identifiable net assets.

On 31 March 20X4, Vision Ltd carried out its annual review of the goodwill on consolidation of
Mission Ltd and found evidence of impairment. No impairment had been evident when the
reviews were carried out at 31 March 20X2 and 31 March 20X3. The review involved allocating
the assets of Mission Ltd into three cash- generating units and computing the value in use of
each unit. The carrying values of the individual units before any impairment adjustments are
given below:
Unit A Unit B Unit C
₹ in million ₹ in million ₹ in million

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 Chapter 14 : Impairment of Assets (IND AS 36)

Intangible assets 30 10 -
Property, Plant and 80 50 60
Equipment
Current Assets 60 30 40
Total 170 90 100
Value in use of unit 180 66 104

It was not possible to meaningfully allocate the goodwill on consolidation to the individual cash
generating units but all the other net assets of Mission Ltd are allocated in the table shown
above.

The intangible assets of Mission Ltd have no ascertainable market value but all the current
assets have a market value that is at least equal to their carrying value. The value in use of
Mission Ltd as a single cash-generating unit on 31 March 20X4 is ₹ 350 million.

Discuss and compute the accounting treatment of impairment of goodwill as per Ind AS 36?

[RTP May 2021; Nov 2023]

Ans: The goodwill on consolidation of Mission Ltd that is recognized in the consolidated balance
sheet of Vision Ltd is ₹ 30 million (₹ 190 million – 80% x ₹ 200 million). This can only be
reviewed for impairment as part of the cash generating units to which it relates. Since here the
goodwill cannot be meaningfully allocated to the units, the impairment review is in two parts.

Units A and C have values in use that are more than their carrying values. However, the value in
use of Unit B is less than its carrying amount. This means that the assets of unit B are impaired
by ₹ 24 million (₹ 90 million – ₹ 66 million). This impairment loss will be charged to the
statement of profit and loss.

Assets of Unit B will be written down on a pro-rata basis as shown in the table below:

(₹ in million)
Asset Impact on carrying value
Existing Impairment Revised
Intangible assets 10 (4) 6
Property, plant and equipment 50 (20) 30
Current assets 30 Nil* 30
Total 90 (24) 66

* The current assets are not impaired because they are expected to realize at least their
carrying value when disposed of.

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Chapter 14 : Impairment of Assets (IND AS 36)

Following this review, the three units plus the goodwill are reviewed together i.e. treating
Mission Limited as single cash generating Unit. The impact of this is shown in the following
table, given that the recoverable amount of the business as a whole is ₹ 350 million:

(₹ in million)
Component Impact of impairment review on carrying value
Existing Impairment Revised
Goodwill (see note below) 37.50 (23.50) 14.00
Unit A 170.00 Nil 170.00
Unit B (revised) 66.00 Nil 66.00
Unit C 100.00 Nil 100.00
Total 373.50 (23.50) 350.00

Note: As per Appendix C of Ind AS 36, given that the subsidiary is 80% owned the goodwill must
first be grossed up to reflect a notional 100% investment. Therefore, the goodwill will be
grossed up to ₹ 37.50 million (₹ 30 million x 100/80).

The impairment loss of ₹ 23.50 million is all allocated to goodwill, leaving the carrying values of
the individual units of the business as shown in the table immediately above.

The table shows that the notional goodwill that relates to a 100% interest is written down by ₹
23.50 million to ₹ 14.00 million. However, in the consolidated financial statements the goodwill
that is recognized is based on an 80% interest so the loss that is actually recognized is ₹ 18.80
million (₹ 23.50 million x 80%) and the closing consolidated goodwill figure is ₹ 11.20 million (₹
14.00 million x 80%) or (₹ 30 million – ₹ 18.80 million).

Q42: One of the senior engineers at XYZ has been working on a process to improve manufacturing
efficiency and, consequently, reduce manufacturing costs. This is a major project and has the
full support of XYZʼs board of directors. The senior engineer believes that the cost reductions
will exceed the project costs within twenty four months of their implementation. Regulatory
testing and health and safety approval was obtained on 1 June 20X5. This removed
uncertainties concerning the project, which was finally completed on 20 April 20X6. Costs of ₹
18,00,000, incurred during the year till 31st March 20X6, have been recognized as an intangible
asset. An offer of ₹ 7,80,000 for the new developed technology has been received by potential
buyer but it has been rejected by XYZ. Utkarsh believes that the project will be a major success
and has the potential to save the company ₹ 12,00,000 in perpetuity. Director of research at
XYZ, Neha, who is a qualified electronic engineer, is seriously concerned about the long term
prospects of the new process and she is of the opinion that competitors would have developed
new technology at some time which would require to replace the new process within four
years. She estimates that the present value of future cost savings will be ₹ 9,60,000 over this
period. After that, she thinks that there is no certainty about its future. What would be the
appropriate accounting treatment of aforesaid issue? [RTP May 2020: IBS CS 46; MTP May 25]

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 Chapter 14 : Impairment of Assets (IND AS 36)

Ans: Ind AS 38 ‘Intangible Assets’ requires an intangible asset to be recognised if, and only if, certain
criteria are met. Regulatory approval on 1 June 20X5 was the last criterion to be met, the other
criteria have been met as follows:
• Intention to complete the asset is apparent as it is a major project with full support from
board
• Finance is available as resources are focused on project
• Costs can be reliably measured
• Benefits are expected to exceed costs – (in 2 years)
Amount of ₹ 15,00,000 (₹ 18,00,000 x 10/12) should be capitalised in the Balance sheet of
year ending 20X5-20X6 representing expenditure since 1 June 20X5.
The expenditure incurred prior to 1 June 20X5 which is ₹ 3,00,000 (2/12 x ₹ 18,00,000) should
be recognised as an expense, retrospective recognition of expense as an asset is not allowed.
Ind AS 36 ‘Impairment of assets’ requires an intangible asset not yet available for use to be
tested for impairment annually.
Cash flow of ₹ 12,00,000 in perpetuity would clearly have a present value in excess of ₹
12,00,000 and hence there would be no impairment. However, the research director is
technically qualified, so impairment tests should be based on her estimate of a four-year
remaining life and so present value of the future cost savings of ₹ 9,60,000 should be
considered in that case.
₹ 9,60,000 is greater than the offer received (fair value less costs to sell) of ₹ 7,80,000 and so ₹
9,60,000 should be used as the recoverable amount.
So, the carrying amount should be consequently reduced to ₹ 9,60,000.
Calculation of Impairment loss:
Particulars Amount ₹
Carrying amount (Restated) 15,00,000
Less: Recoverable amount 9,60,000
Impairment loss 5,40,000
Impairment loss of ₹ 5,40,000 is to be recognised in the profit and loss for the year 20X5-20X6.
Necessary adjusting entry to correct books of account will be:
₹ ₹
Operating expenses- Development expenditure Dr. 3,00,000
Operating expenses–Impairment loss of intangible assets Dr. 5,40,000
8,40,000
To Intangible assets – Development expenditure

Q43: Pacific Ocean Railway Ltd. has three Cash Generating units namely Train, Railway station and
Railway tracks, the carrying amounts of which as on 31 March 2020 are as follows:

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Chapter 14 : Impairment of Assets (IND AS 36)

Cash Generating units Carrying amount Remaining useful life

(₹ in crore)
Train 1,500 10
Railway station 2,250 20
Railway tracks 3,300 20

Pacific Ocean Railway Ltd. also has two Corporate Assets having a remaining useful life of 20
years.
(₹ in crore)
Corporate Carrying Remarks
Assets amount
Land 1,800 The carrying amount of Land can be allocated on a
reasonable basis (i.e., pro rata basis) to the
individual cash generating units.
Buildings 600 The carrying amount of Buildings cannot be allocated
on a reasonable basis to the individual cash-
generating units.

Recoverable amount as on 31 March 2020 is as follows:

Cash Generating units Recoverable Amount
(₹ in crore)
Train 1,800
Railway station 2,700
Railway tracks 4,200
Company as a whole 9,600

Calculate the impairment loss, if any. Ignore decimals.

[Exam NOV 2020 (8 Marks); MTP May 22]

Ans: Allocation of corporate assets

The carrying amount of land is allocated to the carrying amount of each individual cash
generating unit. A weighted allocation basis is used because the estimated remaining useful life
of Train’s cash-generating unit is 10 years, whereas the estimated remaining useful lives of
Railway station and Railway tracks’s cash-generating units are 20 years.
(₹ in crore)
Particulars Train Railway station Railway tracks Total
Carrying amount (a) 1,500 2,250 3,300 7,050
Useful life 10 years 20 years 20 years -

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 Chapter 14 : Impairment of Assets (IND AS 36)

Weight based on useful life 1 2 2 -

Carrying amount 1,500 4,500 6,600 12,600
(after assigning weight)
Pro-rata allocation of Land 12% 36% 52% 100%
(1,500/12,600) (4,500/12,600) (6,600/12,600)
Allocation of carrying amount of 216 648 936 1,800
Land (b)
Carrying amount (after allocation 1,716 2,898 4,236 8,850
of Land) (a+b)

Calculation of impairment loss

Step I: Impairment losses for individual cash-generating units and its allocation:

(a) Impairment loss of each cash-generating units

(₹ in crore)
Particulars Train Railway Railway
station tracks
Carrying amount (after allocation of 1,716 2,898 4,236
land)
Recoverable amount 1,800 2,700 4,200
Impairment loss - 198 36

(b) Allocation of the impairment loss

(₹ in crore)
Allocation to Railway Railway
station tracks
Land 44 [198 x (648 / 8 [36 x (936 /
2,898)] 4,236)]
Other assets in cash- [198 x 2,250 / [36 x (3,300/
generating units 154 2,898)] 28 4,236)]

Impairment loss 198 36

Step II: Impairment losses for the larger cash-generating unit, i.e., Pacific Ocean Railway Ltd.
as a whole
(₹ in crore)
Particulars Train Railway Railway Land Building Pacific
Ocean

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Chapter 14 : Impairment of Assets (IND AS 36)

station tracks Railway Ltd.

Carrying 1,500 2,250 3,300 1,800 600 9,450
amount
Impairment - (154) (28) (52) - (234)
loss (Step I)
Carrying 1,500 2,096 3,272 1,748 600 9,216
amount (after
Step I)
Recoverable 9,600
amount
Impairment loss for the ‘larger’ cash-generating unit Nil

Q45. At 31st March, 20X1, the assets of a CGU are being reviewed for impairment. The carrying value
of the CGU’s net assets is Rs.65 lakhs (excluding any restructuring provision), and remaining
useful economic life of recognised asset is eight years.

Management’s approved budgets at 31st March, 20X1 include restructuring costs of Rs.3,50,000
to be incurred in 20X2; the restructuring is expected to generate cost savings of Rs.1,00,000 per
annum from 20X3 onwards. Formal budgets have been prepared for the three years to 31st
March, 20X4. A zero-growth rate is assumed, because market conditions are extremely
competitive, and this is expected to continue for the foreseeable future. The future cash flow
estimates are as follows:

Year With restructuring consideration Without restructuring consideration

20X1-20X2 5,20,000 8,70,000

20X2-20X3 10,00,000 9,00,000

20X3-20X4 10,50,000 9,50,000

20X4-20X5 10,50,000 9,50,000

20X5-20X6 10,50,000 9,50,000

20X6-20X7 10,50,000 9,50,000

20X7-20X8 10,50,000 9,50,000

20X8-20X9 10,50,000 9,50,000

In 20X2, the net cash flows without restructuring (Rs.8,70,000) exceed the net cash flows with
restructuring (Rs.5,20,000) by the amount of the restructuring costs (Rs.3,50,000).

The future cash flows (which exclude inflation) have been discounted at a rate of 4%. For
simplicity, it has been assumed that the cash flows arise at the end of each year.

Compute Impairment Loss at 31st March, 20X1 when-

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 Chapter 14 : Impairment of Assets (IND AS 36)

(i) Restructuring costs is recognised in the financial statements at 31st March, 20X1

(Ii) Restructuring costs is not recognised in the financial statements at 31st March, 20X1

[RTP Nov 2024]

Ans: Computation of present value of cash flows under both the following conditions:

(Amount in Rs.)
Year Discountfactor With restructuring consideration Without restructuringconsideration
.

Future netcash Presentvalue Future net Presentvalue

flows cash flows

(a) (b) (c)=(a)x(b) (d) (e)=(a)x(d)

20X1-20X2 0.962 5,20,000 5,00,000 8,70,000 8,36,000

20X2-20X3 0.925 10,00,000 9,25,000 9,00,000 8,32,000

20X3-20X4 0.889 10,50,000 9,33,000 9,50,000 8,45,000

20X4-20X5 0.855 10,50,000 8,98,000 9,50,000 8,12,000

20X5-20X6 0.822 10,50,000 8,63,000 9,50,000 7,81,000

20X6-20X7 0.790 10,50,000 8,30,000 9,50,000 7,51,000

20X7-20X8 0.760 10,50,000 7,98,000 9,50,000 7,22,000

20X8-20X9 0.730 10,50,000 7,67,000 9,50,000 6,94,000

Value in use 65,14,000 62,73,000

The impairment calculations at 31st March, 20X1 differ according to whether or not provision
for the restructuring costs is recognised in the financial statements. This will depend on
whether the requirements of Ind AS 37 have been met for recognition.

(i) Provision for restructuring costs recognised at 31st March, 20X1

If provision has been made for restructuring costs, the costs and benefits of the
restructuring are taken into account in determining the CGU’s value in use. Here, the
post – restructuring value in use (Rs.6,514,000) exceeds the CGU’s carrying value
(Rs.6,500,000 less restructuring provision of Rs.350,000). Hence, there is no impairment
of the CGU’s assets.

In the year to 31st March, 20X1, the financial statements reflect the following charges.

Restructuring provision Rs. 350,000

Impairment loss Nil

(ii) No provision for restructuring costs recognised at 31st March, 20X1

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Chapter 14 : Impairment of Assets (IND AS 36)

If no provision for restructuring costs is permitted by Ind AS 37, the costs and benefits of
the restructuring have to be stripped out of the projections in determining the CGU’s
value in use. Here, the CGU’s carrying value (Rs.65,00,000) exceeds its pre- restructuring
value in use (Rs.62,73,000). Therefore, there is an impairment loss of Rs.2,27,000.

In the year to 31st March, 20X1, the financial statements reflect the following charges:

Restructuring provisions Nil

Impairment loss Rs.2,27,000

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IND AS 105
Chapter 15 : IND AS 105

CHAPTER 15
NON-CURRENT ASSETS HELD FOR SALE AND
DISCONTINUED OPERATIONS (IND AS 105)
Q5: S Ltd purchased a property for ₹ 6,00,000 on 1 April 20X1. The useful life of the property is 15
years. On 31 March 20X3 S ltd classify the property as held for sale. The impairment testing
provides the estimated recoverable amount of ₹ 4,70,000.
The fair value less cost to sell on 31 March 20X3 was ₹ 4,60,000. On 31 March 20X4
management change the plan as property no longer met the criteria of held for sale. The
recoverable amount as at 31 March 20X4 is ₹ 5,00,000.
Value the property at the end of 20X3 and 20X4. {MTP Nov 2023]
Ans: (a) Value of property immediately before the classification as held for sale as per Ind AS 16
as on 31 March 20X3 ₹
Purchase Price 6,00,000
Less: Accumulated Depreciation (for two years) 80,000
Less: Impairment loss (5,20,000-4,70,000) 50,000
Carrying Amount 4,70,000
On initial classification as held for sale on 31 March 20X3, the value will be lower of:
Carrying amount ₹ 4,70,000
Fair Value less Cost to sell ₹ 4,60,000
On 31 March 20X3 Non-current classified as held for sale will be recorded at ₹ 4,60,000.
Depreciation of ₹ 40,000 and Impairment Loss of ₹ 60,000 (50,000 +10,000) is charged in
profit or loss for the year ended 31 March 20X3.
(b) On 31 March 20X4 held for sale property is reclassified as criteria doesn’t met. The value
will be lower of:
Carrying amount had the asset is not classified as held for sale
Carrying amount immediately before classification
on 31 March 20X3 ₹ 4,70,000
Less Depreciation based on 13 years balance life ₹ 36,154 ₹ 4,33,846
Recoverable Amount ₹ 5,00,000
Property will be valued at ₹ 4,33,846 on 31 March 20X4

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 Chapter 15 : IND AS 105

Adjustment to the carrying amount of ₹ 26,154 (₹ 4,60,000 - 4,33,846) is charged to the

profit or loss.
Q8: Following is the extract of the consolidated financial statements of A Ltd. for the year ended on:
Asset/(liability) Carry amount as on 31st
March, 20X1 (In ₹ ‘000)
Attributed goodwill 200
Intangible assets 950
Financial asset measured at fair value through other 300
comprehensive income
Property, plant & equipment 1100
Deferred tax asset 250
Current assets – inventory, receivables and cash balances 600
Current liabilities (850)
Non-current liabilities – provisions (300)
Total 2,250
On 15th September 20X1, Entity A decided to sell the business. It noted that the business meets
the condition of disposal group classified as held for sale on that date in accordance with Ind AS
105. However, it does not meet the conditions to be classified as discontinued operations in
accordance with that standard.
The disposal group is stated at the following amounts immediately prior to reclassification as
held for sale.
Asset/ (liability) Carry amount as on
15th September 20X1
(In ₹ ‘000)
Attributed goodwill 200
Intangible assets 930
Financial asset measured at fair value through other comprehensive 360
income
Property, plant & equipment 1,020
Deferred tax asset 250
Current assets – inventory, receivables and cash balances 520
Current liabilities (870)
Non-current liabilities – provisions (250)
Total 2,160
Entity A proposed to sell the disposal group at ₹ 19,00,000. It estimates that the costs to sell
will be ₹ 70,000. This cost consists of professional fee to be paid to external lawyers and
accountants.
As at 31st March 20X2, there has been no change to the plan to sell the disposal group and
entity A still expects to sell it within one year of initial classification. Mr. X, an accountant of

P a g e | 15.2
Chapter 15 : IND AS 105

Entity A remeasured the following assets/ liabilities in accordance with respective standards as
on 31st March 20X2:
Available for sale: (In ₹ ‘000)
Financial assets 410
Deferred tax assets 230
Current assets- Inventory, receivables and cash balances 400
Current liabilities 900
Non- current liabilities- provisions 250
The disposal group has not been trading well and its fair value less costs to sell has fallen to ₹
16,50,000.
Required:
What would be the value of all assets/ liabilities within the disposal group as on the following
dates in accordance with Ind AS 105?
(a) 15th September, 20X1 and
(b) 31st March, 20X2 [RTP Nov 2018]
Ans: (a) As at 15 September, 20X1
The disposal group should be measured at ₹ 18,30,000 (19,00,000-70,000). The
impairment write down of ₹ 3,30,000 (₹ 21,60,000 – ₹ 18,30,000) should be recorded
within profit from continuing operations.
The impairment of ₹ 3,30,000 should be allocated to the carrying values of the
appropriate non-current assets.
Asset/ (liability) Carrying value as at Impairment Revised carrying
15 June 2004 value as per IND AS
105
Attributed goodwill 200 (200) -
Intangible assets 930 (62) 868
Financial asset measured 360 - 360
at fair value through other
comprehensive income
Property, plant & 1,020 (68) 952
equipment
Deferred tax asset 250 - 250
Current assets – 520 - 520
inventory, receivables and
cash balances
Current liabilities (870) - (870)
Non-current liabilities – (250) - (250)
provisions
Total 2,160 (330) 1,830

P a g e | 15.3
 Chapter 15 : IND AS 105

The impairment loss is allocated first to goodwill and then pro rata to the other assets of
the disposal group within Ind AS 105 measurement scope. Following assets are not in the
measurement scope of the standard- financial asset measured at other comprehensive
income, the deferred tax asset or the current assets. In addition, the impairment
allocation can only be made against assets and is not allocated to liabilities.
(b) As on 31 March. 20X2:
All of the assets and liabilities, outside the scope of measurement under IFRS 5, are
remeasured in accordance with the relevant standards. The assets that are remeasured in
this case under the relevant standards are the Financial asset measured at fair value
through other comprehensive income (Ind AS 109), the deferred tax asset (Ind AS 12), the
current assets and liabilities (various standards) and the non-current liabilities (Ind AS 37).
Asset/ (liability) Carrying Change in Impairme Revised
amount as value to nt carrying
on 15 31st value as
September, March per Ind
20X1 20X2 AS 105
Attributed goodwill - - - -
Intangible assets 868 - (29) 839
Financial asset measured at fair 360 50 - 410
value through other
comprehensive income
Property, plant & equipment 952 - (31) 921
Deferred tax asset 250 (20) - 230
Current assets – inventory, 520 (120) - 400
receivables and cash balances
Current liabilities (870) (30) - (900)
Non-current liabilities – provisions (250) - - (250)
Total 1,830 (120) (60) 1,650
PB Limited purchased a plastic bottle manufacturing plant for ₹ 24 lakh on 1st April, 2015.
The useful life of the plant is 8 years. On 30th September, 2017, PB Limited temporarily
stops using the manufacturing plant because demand has declined. However, the plant is
maintained in a workable condition and it will be used in future when demand picks up.
Q9: CK Ltd. prepares the financial statement under Ind AS for the quarter year ended 30th June,
2018. During the 3 months ended 30th June, 2018 following events occurred:
On 1st April, 2018, the Company has decided to sell one of its divisions as a going concern
following a recent change in its geographical focus. The proposed sale would involve the buyer
acquiring the non-monetary assets (including goodwill) of the division, with the Company
collecting any outstanding trade receivables relating to the division and settling any current
liabilities.
On 1st April, 2018, the carrying amount of the assets of the division were as follows:
- Purchased Goodwill ₹ 60,000

P a g e | 15.4
Chapter 15 : IND AS 105

- Property, Plant & Equipment (Average remaining estimated useful

life two years) ₹ 20,00,000
- Inventories ₹ 10,00,000
From 1st April, 2018, the Company has started to actively market the division and has received
number of serious enquiries. On 1st April, 2018 the directors estimated that they would receive
₹ 32,00,000 from the sale of the division. Since 1st April, 2018, market condition has improved
and as on 1st August, 2018 the Company received and accepted a firm offer to purchase the
division for ₹ 33,00,000.
The sale is expected to be completed on 30th September, 2018 and ₹ 33,00,000 can be
assumed to be a reasonable estimate of the value of the division as on 30th June, 2018. During
the period from 1st April to 30th June inventories of the division costing ₹ 8,00,000 were sold
for ₹ 12,00,000. At 30th June, 2018, the total cost of the inventories of the division was ₹
9,00,000. All of these inventories have an estimated net realisable value that is in excess of
their cost.
The Company has approached you to suggest how the proposed sale will be reported in the
interim financial statements for the quarter ended 30th June, 2018 giving relevant
explanations. [RTP May 2019; May 2023]
Ans: The decision to offer the division for sale on 1st April, 2018 means that from that date the
division has been classified as held for sale. The division available for immediate sale, is being
actively marketed at a reasonable price and the sale is expected to be completed within one
year.
The consequence of this classification is that the assets of the division will be measured at the
lower of their existing carrying amounts and their fair value less cost to sell. Here the
division shall be measured at their existing carrying amount ie ₹ 30,60,000 since it is less
than the fair value less cost to sell ₹ 32,00,000.
The increase in expected selling price will not be accounted for since earlier there was no
impairment to division held for sale.
The assets of the division need to be presented separately from other assets in the balance
sheet. Their major classes should be separately disclosed either on the face of the balance
sheet or in the notes.
The Property, Plant and Equipment shall not be depreciated after 1st April, 2018 so its carrying
value at 30th June, 2018 will be ₹ 20,00,000 only. The inventories of the division will be shown
at ₹ 9,00,000.
The division will be regarded as discontinued operation for the quarter ended 30th June, 2018.
It represents a separate line of business and is held for sale at the year end.
The Statement of Profit and Loss should disclose, as a single amount, the post-tax profit or loss
of the division on classification as held for sale.
Further, as per Ind AS 33, EPS will also be disclosed separately for the discontinued operation.

P a g e | 15.5
 Chapter 15 : IND AS 105

Q11: The accountant of PB Limited decided to treat the plant as held for sale until the demand picks
up and accordingly measures the plant at lower of carrying amount and fair value less cost to
sell. The accountant has also stopped charging depreciation for rest of the period considering
the plant as held for sale. The fair value less cost to sell on 30th September, 2017 and 31st
March, 2018 was ₹ 13.5 lakh and ₹ 12 lakh respectively.
The accountant has made the following working:
Carrying amount on initial classification as held for sale ₹ ₹
Purchase price of Plant 24,00,000
Less: Accumulated Depreciation [(₹ 24,00,000/8)x2.5 7,50,000 16,50,000
years]
Fair value less cost to sell as on 31st March, 2017 12,00,000
The value lower of the above two 12,00,000
Balance Sheet extracts as on 31st March, 2018
Particulars ₹
Assets
Current Assets
Other Current Assets
Assets classified as held for sale 12,00,000
Required:
Analyze whether the above accounting treatment is in compliance with the Ind AS. If not,
advise the correct treatment showing necessary workings. [Exams Nov 2018; May 23 (8 Marks)]
Ans: As per Ind AS 105 ‘Non-current Assets Held for Sale and Discontinued Operations’, an entity
shall classify a non-current asset as held for sale if its carrying amount will be recovered
principally through a sale transaction rather than through continuing use.
For asset to be classified as held for sale, it must be available for immediate sale in its present
condition subject only to terms that are usual and customary for sales of such assets and its
sale must be highly probable. In such a situation, an asset cannot be classified as a non-current
asset held for sale, if the entity intends to sell it in a distant future.
For the sale to be highly probable, the appropriate level of management must be committed to
a plan to sell the asset, and an active programme to locate a buyer and complete the plan must
have been initiated. Further, the asset must be actively marketed for sale at a price that is
reasonable in relation to its current fair value. In addition, the sale should be expected to
qualify for recognition as a completed sale within one year from the date of classification and
actions required to complete the plan should indicate that it is unlikely that significant changes
to the plan will be made or that the plan will be withdrawn.
Further Ind AS 105 also states that an entity shall not classify as held for sale a non-current
asset that is to be abandoned. This is because its carrying amount will be recovered principally
through continuing use.

P a g e | 15.6
Chapter 15 : IND AS 105

An entity shall not account for a non-current asset that has been temporarily taken out of use
as if it had been abandoned.
In addition to Ind AS 105, Ind AS 16 states that depreciation does not cease when the asset
becomes idle or is retired from active use unless the asset is fully depreciated.
The Accountant of PB Ltd. has treated the plant as held for sale and measured it at the fair
value less cost to sell. Also, the depreciation has not been charged thereon since the date of
classification as held for sale which is not correct and not in accordance with Ind AS 105 and Ind
AS 16.
Accordingly, the manufacturing plant should neither be treated as abandoned asset nor as held
for sale because its carrying amount will be principally recovered through continuous use. PB
Ltd. shall not stop charging depreciation or treat the plant as held for sale because its carrying
amount will be recovered principally through continuing use to the end of their economic life.
The working of the same for presenting in the balance sheet will be as follows:
Calculation of carrying amount as on 31stMarch, 2018 ₹
Purchase Price of Plant 24,00,000
Less: Accumulated depreciation (24,00,000/ 8 years) x 3 years (9,00,000)
Carrying amount before impairment 15,00,000
Less: Impairment loss (Refer Working Note) (3,00,000)
Revised carrying amount after impairment 12,00,000
Balance Sheet extracts as on 31stMarch 2018
Assets ₹
Non-Current Assets
Property, Plant and Equipment 12,00,000
Working Note:
Fair value less cost to sell of the Plant = ₹ 12,00,000
Value in Use (not given) or = Nil (since plant has temporarily not been used for manufacturing
due to decline in demand)
Recoverable amount = higher of above i.e. ₹ 12,00,000
Impairment loss = Carrying amount – Recoverable amount
Impairment loss = ₹ 15,00,000 - ₹ 12,00,000 = ₹ 3,00,000.

Q16: Company X has identified one of its division (disposal group) to be sold to a prospective buyer
and the Board has approved the plan to sell the division on 30th September, 20X1. The sale is
expected to complete after one year but it still qualifies to be held for sale under Appendix B of
Ind AS 105. Costs to sell the division is estimated to be ₹ 10 crores (to be incurred in March,
20X3). The fair value of the division is ₹ 400 crores (on 30th September, 20X1 and 31st March,
20X2) and carrying value is ₹ 500 crores.

P a g e | 15.7
 Chapter 15 : IND AS 105

How shall such a division (disposal group) be measured under Ind AS 105 on following reporting
dates:

A. 30th September, 20X1

B. 31st March, 20X2

Consider the discounting factor @ 10% for 1 year to 0.909 and fo r 1.5 years to be 0.867.

[RTP Nov 2023]

Ans. Paragraph 15 of Ind AS 105 states that an entity shall measure a non-current asset (or disposal
group) classified as held for sale at the lower of its carrying amount and fair value less costs to
sell.

Further, paragraph 17 of Ind AS 105 states that when the sale is expected to occur beyond one
year, the entity shall measure the costs to sell at their present value. Any increase in the
present value of the costs to sell that arises from the passage of time shall be presented in
profit or loss as a financing cost.

Company X has identified a disposal group and is committed to sell the same. The sale is
expected to be completed after a period of one year hence, it will measure the costs to sell
such disposal group at present value as per paragraph 17 of Ind AS 105.

A. On 30th September, 20X1

The disposal group will be measured at fair value less costs to sell which will be as
follows:
Fair value: ₹ 400.00 crores
PV of costs to sell: (₹ 8.67 crores) (₹ 10 crores x 0.867)
Total: ₹ 391.33 crores

B. On 31st March, 20X1

The disposal group will be measured at fair value less costs to sell which will be as
follows:
Fair value: ₹ 400.00 crores
PV of costs to sell: (₹ 9.09 crores) (10 x 0.909)
Total: ₹ 390.91 crores

The increase in costs to sell the division by ₹ 0.42 crore (₹ 9.09 crores – ₹ 8.67 crores)
will be recognised in profit and loss as financing cost in accordance with paragraph 17 of
Ind AS 105.

P a g e | 15.8
Chapter 16 : Operating Segments (IND AS 108)

CHAPTER 16
OPERATING SEGMENTS (IND AS 108)
Q10: X Ltd. has identified 4 operating segments for which revenue data is given below:
External Sale (₹) Internal Sale (₹) Total (₹)
Segment A 30,00,000 Nil 30,00,000
Segment B 6,50,000 Nil 6,50,000
Segment C 8,50,000 1,00,000 9,50,000
Segment D 5,00,000 49,00,000 54,00,000
Total Sales 50,00,000 50,00,000 1,00,00,000
Additional information:
Segment C is a new business unit and management expect this segment to make a significant
contribution to external revenue in coming years.
Which of the segments would be reportable under the criteria identified in Ind AS 108?
Ans: Threshold amount is ₹ 10,00,000 (₹ 1,00,00,000 × 10%).
Segment A exceeds the quantitative threshold (₹ 30,00,000>₹ 10,00,000) and hence reportable
segment.
Segment D exceeds the quantitative threshold (₹ 54,00,000>₹ 10,00,000) and hence reportable
segment.
Segment B & C do not meet the quantitative threshold amount and may not be classified as
reportable segment.
However, the total external revenue generated by these two segments A & D represent only
70% (₹ 35,000/50,000 x 100) of the entity’s total external revenue. If the total external revenue
reported by operating segments constitutes less than 75% of the entity total external revenue,
additional operating segments should be identified as reportable segments until at least 75% of
the revenue is included in reportable segments.
In case of X Ltd., it is given that Segment C is a new business unit and management expect this
segment to make a significant contribution to external revenue in coming years. In accordance
with the requirement of Ind AS 108, X Ltd. designates this start-up segment C as a reportable
segment, making the total external revenue attributable to reportable segments 87% (₹
43,50,000/ 50,00,000 x 100) of total entity revenues .
Alternatively, segment B can be considered as a reportable segment as well as it meets the
definition of operating segment. If Segment B is considered as reportable segment:
External revenue reported: ₹ 30,00,000 + ₹ 6,50,000 + ₹ 5,00,000 = ₹ 41,50,000
% of Total External Revenue = ₹ 41,50,000 / ₹ 50,00,000 = 83%

P a g e | 16.1
 Chapter 16 : Operating Segments (IND AS 108)

Accordingly, Segments A, B and D will be reportable segments and Segment C will be shown as
other segment.
Q11: X Ltd. is operating in coating industry. Its business segment comprises coating and others
consisting of chemicals, polymers and related activities. Certain information for financial year
20X1-20X2 is given below: (₹ in lakhs)
Segments External GST Other Result Asset Liabilities
Revenue operating
(Including income
GST)
Coating 2,00,000 5,000 40,000 10,000 50,000 30,000
Others 70,000 3,000 15,000 4,000 30,000 10,000
Additional information:
1. Unallocated revenue net of expenses is ₹ 30,00,00,000
2. Interest and bank charges is ₹ 20,00,00,000
3. Income tax expenses is ₹ 20,00,00,000 (current tax ₹ 19,50,00,000 and deferred tax ₹
50,00,000)
4. Investments ₹ 1,00,00,00,000 and unallocated assets ₹ 1,00,00,00,000.
5. Unallocated liabilities, Reserve & surplus and share capital are ₹ 2,00,00,00,000, ₹
3,00,00,00,000 & ₹ 1,00,00,00,000 respectively.
6. Depreciation amounts for coating & others are ₹ 10,00,00,000 and ₹ 3,00,00,000
respectively.
7. Capital expenditure for coating and others are ₹ 50,00,00,000 and ₹ 20,00,00,000
respectively.
8. Revenue from outside India is ₹ 3,00,00,00,000 and segment asset outside India ₹
1,00,00,00,000.
Based on the above information, how X Ltd. would disclose information about reportable
segment revenue, profit or loss, assets and liabilities for financial year 20X1-20X2?
[Exam MAY 2018; Exam JULY 2021 (8 Marks); May 2023 (16 Marks)]
Ans: Segment information
(A) Information about operating segment
(1) the company’s operating segments comprise :
Coatings: consisting of decorative, automotive, industrial paints and related activities.
Others: consisting of chemicals, polymers and related activities.
(2) Segment revenues, results and other information.
(₹ in Lakhs)

P a g e | 16.2
Chapter 16 : Operating Segments (IND AS 108)

Revenue Coating Others Total

1 External Revenue (gross) 2,00,000 70,000 2,70,000
GST (5,000) (3,000) (8,000)
External Revenue (net) 1,95,000 67,000 2,62,000
Other operating income 40,000 15,000 55,000
Total Revenue 2,35,000 82,000 3,17,000
2 Results
Segment results 10,000 4,000 14,000
Unallocated income (net of 3,000
unallocated expenses)
Profit from operation before 17,000
interest, taxation and exceptional
items
Interest and bank charges 2,000
Profit before exceptional items 15,000
Exceptional items Nil
Profit before taxation 15,000
Income Taxes
-Current taxes 1,950
-Deferred taxes 50
Profit after taxation 13,000
3 Other Information
(a) Assets
Segment Assets 50,000 30,000 80,000
Investments 10,000
Unallocated assets 10,000
Total Assets 1,00,000
(b) Liabilities/Shareholder’s funds
Segment liabilities 30,000 10,000 40,000
Unallocated liabilities 20,000
Share capital 10,000
Reserves and surplus 30,000
Total liabilities/shareholder’s funds 1,00,000
(c) Others
Capital Expenditure 5,000 2,000
Depreciation 1,000 300
Geographical Information
India (₹ ) Outside Total (₹ )
India (₹ )
Revenue 2,87,000 30,000 3,17,000
Segment assets 90,000 10,000 1,00,000
Capital expenditure 7,000 7,000

P a g e | 16.3
 Chapter 16 : Operating Segments (IND AS 108)

Notes:
(i) The operating segments have been identified in line with the Ind AS 108, taking into
account the nature of product, organisation structure, economic environment and
internal reporting system.
(ii) Segment revenue, results, assets and liabilities include the respective amounts
identifiable to each of the segments. Unallocable assets include unallocable fixed assets
and other current assets. Unallocable liabilities include unallocable current liabilities and
net deferred tax liability.
(iii) Corresponding figures for previous year have not been provided. However, in practical
scenario the corresponding figures would need to be given.
Q12: An entity uses the weighted average cost formula to assign costs to inventories and cost of
goods sold for financial reporting purposes, but the reports provided to the chief operating
decision maker use the First-In, First-Out (FIFO) method for evaluating the performance of
segment operations. Which cost formula should be used for Ind AS 108 disclosure purposes?

[RTP May 2019]

Ans: The entity should use First-In, First-Out (FIFO) method for its Ind AS 108 disclosures, even
though it uses the weighted average cost formula for measuring inventories for inclusion in its
financial statements. Where chief operating decision maker uses only one measure of segment
asset, same measure should be used to report segment information. Accordingly, in the given
case, the method used in preparing the financial information for the chief operating
decision maker should be used for reporting under Ind AS 108.
However, reconciliation between the segment results and results as per financial statements
needs to be given by the entity in its segment report.
Q13: ABC Limited has 5 operating segments namely A, B, C, D and E. The profit/ loss of respective
segments for the year ended March 31, 20X1 are as follows:

Profit/(Loss)
Segment
(₹ in crore)
A 780
B 1,500
C (2,300)
D (4,500)
E 6,000
Total 1,480

Based on the quantitative thresholds, which of the above segments A to E would be considered
as reportable segments for the year ending March 31, 20X1?
[RTP May 2020; Exam Nov 22 (5 Marks)]
Ans: With regard to quantitative thresholds to determine reportable segment relevant in context of
instant case, paragraph 13(b) of Ind AS 108 may be noted which provides as follows:

P a g e | 16.4
Chapter 16 : Operating Segments (IND AS 108)

“The absolute amount of its reported profit or loss is 10 per cent or more of the greater, in
absolute amount, of (i) the combined reported profit of all operating segments that did not
report a loss and (ii) the combined reported loss of all operating segments that reported a loss.”
In compliance with Ind AS 108, the segment profit/loss of respective segment will be compared
with the greater of the following:
(i) All segments in profit, i.e., A, B and E – Total profit ₹ 8,280 crores.
(ii) All segments in loss, i.e., C and D – Total loss ₹ 6,800 crores. Greater of the above – ₹
8,280 crores.
Based on the above, reportable segments will be determined as follows:
Profit/(Loss) As absolute % of
Segment Reportable segment
(₹in crore) ₹ 8,280 crore
A 780 9% No
B 1,500 18% Yes
C (2,300) 28% Yes
D (4,500) 54% Yes
E 6,000 72% Yes
Total 1,480

Hence B, C, D, E are reportable segments.

Q15: XYZ Ltd. has eight segments namely A, B, C, D, E, F, G and H. The information regarding
respective segments for the year ended 31st March, 20X1 is as follows:
Segments A B C D E F G H
External sales 0 255 15 10 15 50 25 35
Inter-segment sales 100 60 30 5
Total 100 315 45 15 15 50 25 35
Segment result Profit/(Loss) 5 (90) 15 (5) 8 (5) 5 7
Segment assets 15 47 5 11 3 5 5 9

Identify which of the above segments out of A to H would be considered as reportable

segments of XYZ Ltd. for the year ending 31st March, 20X1 [RTP May 2022; MTP May 2023]

Ans: An entity has eight segments and the relevant information is as follows:

Criterial 1: Segment revenue is 10% or more of total external + intersegment sales

Segments A B C D E F G H Total
Total sales 100 315 45 15 15 50 25 35 600
% to total sales 16.7 52.5 7.5 2.5 2.5 8.3 4.2 5.8
Reportable segments A B - - - - - -

Criteria 2: 10% or more of segment result

Consider segment profit and loss separately in absolute terms

Segments A B C D E F G H Total

P a g e | 16.5
 Chapter 16 : Operating Segments (IND AS 108)

Profit 5 - 15 - 8 - 5 7 40
Segments loss - 90 - 5 - 5 - - 100

Since segment loss is greater, we select 100 as evaluating the segment percentage
Segments A B C D E F G H Total
% to segment loss 5 90 15 5 8 5 5 7
Reportable segments - B C - - - - -

Criteria 2: 10% or more of segment assets

Segments A B C D E F G H Total
Assets 15 47 5 11 3 5 5 9 100
% 15 47 5 11 3 5 5 9 100
Reportable segments A B - D - - - -

Based on the above 3 criteria, the Reportable Segments are A, B, C & D

However, 75% test for external sales should also be checked.

Reportable Segments A B C D TOTAL
External sales 0 255 15 10 280
Total entity’s sales (external) 405
% of reportable segments external sales to entity’s sales 69.14%
Required percentage 75%

Hence, in the above scenario, additional operating segments need to be identified as reportable
segments, till the 75% test is satisfied, even if those segments do not satisfy the quantitative
threshold limits.

Q16: Haymond Limited has three segments H, M & D. The following information is provided for the
year ending 31st March, 2023: All amounts are in ₹ Lakhs
Particulars Segments Head Office
H M D
Sales to M 500 - -
Sales to D - 5 -
Other Sales (Domestic) 10 - -
Sales (Export) 680 170 40
Operating Profit /(Loss) before tax 30 5 (8)
Reallocated cost from Head Office 4 2 2
Interest cost 2 3 1
Fixed Assets 20 4 12 5
Net Current Assets 12 4 9 3
Long Term Liabilities 2 1 12 2

P a g e | 16.6
Chapter 16 : Operating Segments (IND AS 108)

Other Information:

a. Share Capital amounts to ₹ 40,00,000

b. Reserve & Surplus amounts to ₹ 12,00,000

Prepare segment information as per Ind AS 108. [Exam Nov 2023 (8 Marks)]

Ans: (A) Information about operating segment

1) The company’s operating segment comprise: H, M & D

2) Segment revenue, results and other information

Haymond Ltd.

Segment Information / Report

(All amounts are ₹ in lakhs)

Particulars Reportable Segments Head Office/ Total
Unallocated
H M D items
1. Segment Revenue
Sales:
Domestic 10 - - - 10
Export 680 170 40 - 890
External Sales 690 170 40 900
Inter-segment sales 500 5 - - 505
Total Sales 1,190 175 40 1,405
Less: Inter-segment sales (500) (5) - - (505)
Total Sales / Revenue 690 170 40 900
2. Results
Segment result 30 5 (8) 27
Reallocated cost (4) (2) (2) (8)
Profit from operation before interest, taxation 26 3 (10) 19
and Exceptional items

Finance cost (Interest expense) (2) (3) (1) (6)

Profit before tax and exceptionalitems 24 0 (11) 13
3. Information in relation toassets and
liabilities
Reportable segment non-currentassets 20 4 12 5 41

P a g e | 16.7
 Chapter 16 : Operating Segments (IND AS 108)

Reportable segment net currentassets 12 4 9 3 28

Total Assets 32 8 21 8 69
Non-current liabilities 2 1 12 2 17

(B) Geographical Information

₹ in lakhs
Domestic Sales Export Sales Total

External sales 10 890 900

P a g e | 16.8
Share Based Payments (Ind AS 102)
Chapter 17 : Share Based Payments (Ind AS 102)

CHAPTER 17
ACCOUNTING FOR SHARE BASED PAYMENTS
(IND AS 102)
Q5: MINDA issued 11,000 share appreciation rights (SAR) that vest immediately to its employees on
1 April 20X0. The SAR will be settled in cash. Using an option pricing model, at that date it is
estimated that the fair value of a SAR is INR 100. SAR can be exercised any time up until 31 March
20X3. At the end of period on 31 March 20X1 it is expected exercise the option 95% of total
employees, 92% at the end of next year and finally it was exercised only 89% at the end of the
3rd year.
Fair value of SAR INR
31-Mar-20X1 132
31-Mar-20X2 139
31-Mar-20X3 141
Pass the Journal entries?

Ans:
Period Fair value To be vested Cumulative Expense
Start 100 100% 11,00,000 11,00,000
Period 1 132 95% 13,79,400 2,79,400
Period 2 139 92% 14,06,680 27,280
Period 3 141 89% 13,80,390 (26,290)
13,80,390

Journal Entries
1st April, 20X0
Employee benefits expenses Dr. 11,00,000
To Share based payment liability 11,00,000
(Fair value of the SAR recognised)

31st March, 20X1

Employee benefits expenses Dr. 2,79,400
To Share based payment liability 2,79,400
(Fair value of the SAR re-measured)
31st March, 20X2
Employee benefits expenses Dr. 27,280
To Share based payment liability 27,280
(Fair value of the SAR re-measured)

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31st March, 20X3

Share based payment liability Dr. 26,290
To Employee benefits expenses 26,290
(Fair value of the SAR reversed)
Share based payment liability Dr. 13,80,390
To Cash 13,80,390
(Settlement of SAR)

Q6: An entity which follows its financial year as per the calendar year grants 1,000 share appreciation
rights (SAR) to each of its 40 management employees as on 1st January 20X5. The SAR provide
the employees with the right to receive (at the date when the rights are exercised) cash equal to
the appreciation in the entity’s share price since the grant date. All of the rights vest on 31st
December 20X6; and they can be exercised during 20X7 and 20X8. Management estimates that,
at grant date, the fair value of each SAR is ₹ 11; and it estimates that overall 10% of the employees
will leave during the two-year period. The fair values of the SAR at each year end are shown
below:

Year Fair value at year end

31 December 20X5 12

31 December 20X6 8

31 December 20X7 13

31 December 20X8 12
10% of employees left before the end of 20X6. On 31st December 20X7 (when the intrinsic value
of each SAR was ₹ 10), six employees exercised their options; and the remaining 30 employees
exercised their options at the end of 20X8 (when the intrinsic value of each SAR was equal to the
fair value of ₹ 12).

How much expense and liability is to be recognized at the end of each year? Pass Journal entries.
[MTP Nov 2020; MTP Nov 2023]

Ans: The amount recognized as an expense in each year and as a liability at each year end) is as follows:
Expense Liability
Year Calculation of Liability
₹ ₹
31 December 20X5 2,16,000 2,16,000 = 36 x 1,000 x 12 x ½
31 December 20X6 72,000 2,88,000 = 36 x 1,000 x 8
31 December 20X7 1,62,000* 3,90,000 = 30 x 1,000 x 13
31 December 20X8 (30,000)** 0 Liability extinguished

* Expense comprises an increase in the liability of ₹ 102,000 and cash paid to those exercising
their SAR of ₹ 60,000 (6 x 1,000 x 10).

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Chapter 17 : Share Based Payments (Ind AS 102)

** Difference of opening liability (₹ 3,90,000) and actual liability paid [₹ 3,60,000 (30 x 1,000 x
12)] is recognised to Profit and loss ie ₹ 30,000.

Journal Entries
31 December 20X5
Employee benefits expenses Dr. 2,16,000
To Share based payment liability 2,16,000
(Fair value of the SAR recognized)
31 December 20 X 6
Employee benefits expenses Dr.
To Share based payment liability 72,000
(Fair value of the SAR re-measured)
31 December 20 X 772,000
Employee benefits expenses Dr. 1,62,000
To Share based payment liability 1,62,000
(Fair value of the SAR recognized)
Share based payment liability Dr. 60,000
To Cash 60,000
(Settlement of SAR)
31 December 20 X 8
Share based payment liability Dr. 30,000
To Employee benefits expenses 30,000
(Fair value of the SAR recognized)
Share based payment liability Dr. 3,60,000
To Cash 3,60,000
(Settlement of SAR)

Note: Last two entries can be combined.

Q7: On 1 January 20X1, ABC limited gives options to its key management employees to take either
cash equivalent to 1,000 shares or 1,500 shares. The minimum service requirement is 2 years and
shares being taken must be kept for 3 years.

Fair values of the shares are as follows: INR

Share alternative fair value (with restrictions) 102

Grant date fair value on 1 Jan 20X1 113

Fair value on 31 Dec 20X1 120

Fair Value on 31 Dec 20X2 132

The key management exercises his cash option at the end of 20X2. Pass the journal entries.

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 Chapter 17 : Share Based Payments (Ind AS 102)

[Exam Dec 21 (6 Marks); MTP May 2023]

Ans:
1-Jan-20X1 31-Dec-20X1 31-Dec-20X2

INR INR INR

Equity alternative (1,500 x 102) 1,53,000

Cash alternative (1,000 x 113) 1,13,000

Equity option (1,53,000 - 1,13,000) 40,000

Cash Option (cumulative) (using period end (1,000 x 120 x

fair value) ½)

60,000 1,32,000

Equity Option (cumulative) (40,000 x ½) 40,000

20,000

Expense for the period

Equity option 20,000 20,000

Cash Option 60,000 72,000

Total 80,000 92,000

Journal Entries

31st December, 20X1 ₹

Employee benefits expenses Dr. 80,000
To Share based payment reserve (equity)* 20,000
To Share based payment liability 60,000
(Recognition of Equity option and cash settlement option)
31st December, 20X2
Employee benefits expenses Dr. 92,000
To Share based payment reserve (equity)* 20,000
To Share based payment liability 72,000
(Recognition of Equity option and cash settlement option)
Share based payment liability Dr. 1,32,000
To Bank/ Cash 1,32,000
(Settlement in cash)

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Share-based payment reserve (equity) Dr. 40,000

To Retained Earnings 40,000
(Transfer of SBP reserve)

*The equity component recognized (₹ 40,000) shall remain within equity. By electing to receive
cash on settlement, the employees forfeited the right to receive equity instruments.

However, ABC Limited may transfer the share based payment reserve within equity, i.e. a transfer
from one component of equity to another.

Q14: An Entity P issues Share based payment to its employees based on the below details –
No. of employees 100 nos.
Fair value at Grant date INR 25
Market condition Share price to reach at INR 30
Service condition To remain in service until market condition meets
Expected completion of market condition 4 years

Define expenses related to such Share based payment in each year subject to the below
scenarios-

a) Market condition meets in the year 3, OR

b) Market condition meets in the year 5

Ans: Market conditions are required to be considered while calculating fair value at grant date.
However, service conditions will be considered as per the expected vesting right to be exercised
by the employees and would be re-estimated during vesting period. However, if the market
related condition is fulfilled before it is expected then all remaining expenses would immediately
be charged off. If market related condition takes longer than the expected period then original
expected period will be followed.

Market condition is fulfilled in year 3:

Year 1 2,500/4 = 625

Year 2 2,500/4 = 625
Year 3 2,500-625-625=1,250
Year 4 NIL

Market condition is fulfilled in year 5:

Year 1 2,500/4 = 625
Year 2 2,500/4 = 625
Year 3 2,500/4 = 625
Year 4 2,500/4 = 625

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Year 5 NIL

Q16: QA Ltd. had on 1st April, 2015 granted 1,000 share options each to 2,000 employees. The options
are due to vest on 31st March, 2018 provided the employee remains in employment till 31st
March, 2018.

On 1st April, 2015, the Directors of Company estimated that 1,800 employees would qualify for
the option on 31st March, 2018. This estimate was amended to 1,850 employees on 31st March,
2016 and further amended to 1,840 employees on 31st March, 2017.

On 1st April, 2015, the fair value of an option was ₹ 1.20. The fair value increased to ₹1.30 as on
31st March, 2016 but due to challenging business conditions, the fair value declined thereafter.
In September 2016, when the fair value of an option was ₹ 0.90, the Directors repriced the option
and this caused the fair value to increase to ₹ 1.05. Trading conditions improved in the second
half of the year and by 31st March, 2017 the fair value of an option was ₹1.25. QA Ltd. decided
that additional cost incurred due to repricing of the options on 30th September, 2016 should be
spread over the remaining vesting period from 30th September, 2016 to 31 st March, 2018.

The Company has requested you to suggest the suitable accounting treatment for these
transaction as on 31st March, 2017. [MTP May 19; MTP Nov 22]

Ans: Paragraph 27 of Ind AS 102 requires the entity to recognise the effects of repricing that increase
the total fair value of the share-based payment arrangement or are otherwise beneficial to the
employee.

If the repricing increases the fair value of the equity instruments granted paragraph B43(a) of
Appendix B requires the entity to include the incremental fair value granted (ie the difference
between the fair value of the repriced equity instrument and that of the original equity
instrument, both estimated as at the date of the modification) in the measurement of the
amount recognised for services received as consideration for the equity instruments granted.

If the repricing occurs during the vesting period, the incremental fair value granted is included
in the measurement of the amount recognised for services received over the period from the
repricing date until the date when the repriced equity instruments vest, in addition to the amount
based on the grant date fair value of the original equity instruments, which is recognised over
the remainder of the original vesting period. Accordingly, the amounts recognised in years 1 and
2 are as follows:

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Year Calculation Compensation Cumulative

expense for compensation
period expense
1 [1,850 employees× 1,000 options × ₹ 1.20] × 7,40,000 7,40,000
1/3

2 (1,840 employees× 1,000 options × [(₹1.20 8,24,000 15,64,000

× 2/3)+ {(₹1.05 - 0.90) ×0.5/1.5}] – 7,40,000

Q18: Anara Fertilisers limited has issued 2000 Share options to its 10 directors for an exercise price of
INR 100.The directors are required to stay with the company for next 3 years.

Fair value of the option estimated 130

Expected Directors to vest the option 8

During the year 2, there was a crisis in the company and Management decided to cancel the such
scheme immediately, it was estimated further as below-

Fair value of option at the time of cancellation was 90

Market price of the share at the cancellation date was 99

There was a compensation which was paid to directors and since only 9 directors were currently
in employment. During the date of cancellation of such scheme hence amount of 95 per option
has been given to each of 9 directors.

How the cancellation would be recorded?

Ans:
A) Year 1 Year 2
Expected directors to vest 8 9
Fair value of option 130 130
No. of options 2,000 2,000
Total 20,80,000 23,40,000
Expense weightage 1/3 Full, as it is cancelled
Expense for the year 6,93,333 16,46,667
Remaining amount since cancelled
B) Cancellation compensation
No. of directors 9
Amount agreed to pay 95
No. of options/ director 2,000
Compensation amount Refer W-1 & W-2 (9 x 95 x 2,000) 17,10,000
Working Notes:
1. Amount to be deducted from Equity
No. of directors 9

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Fair value of option (at the date of cancellation) 90

No. of options/ director 2,000
Total 16,20,000
2. Amount transferred to Profit and Loss
Total cancellation compensation 17,10,000
Less: To deduct from Equity (16,20,000)
Balance transferred to Profit and Loss 90,000
Q23: A parent, Company P, grants 30 shares to 100 employees each of its subsidiary, Company S, on
condition that the employees remain employed by Company S for three years. Assume that at
the outset, and at the end of Years 1 and 2, it is expected that all the
employees will remain employed for all the three years. At the end of Year 3, none of the
employees has left. The fair value of the shares on grant date is ₹ 5 per share.
Company S agrees to reimburse Company P over the term of the arrangement for 75 percent
of the final expense recognised by Company S. What would be the accounting treatment in the
books of Company P and Company S?
Ans: Company S expects to recognise an expense totalling ₹ 15,000 (30 shares x 100 employees x ₹
5 per share) and, therefore, expects the total reimbursement to be ₹ 11,250 (₹ 15,000 x 75%).
Company S therefore reimburses Company P ₹ 3,750 (₹ 11,250 x 1/3) each year.
Accounting by Company S:
In each of Years 1 to 3, Company S recognises an expense in profit or loss, the cash paid to
Company P, and the balance of the capital contribution it has received from Company P.

Journal Entry ₹
Employee benefits expenses Dr. 5,000
To Cash/Bank 3,750
To Equity (Contribution from the parent) 1,250
(To recognise the share-based payment expense and partial
reimbursement to parent)
Accounting by Company P:
In each of Years 1 to 3, Company P recognises an increase in equity for the instruments being
granted, the cash reimbursed by Company S, and the balance as investment for the capital
contribution it has made to Company S.

Journal Entry ₹
Investment in Company S Dr. 1,250
Cash/Bank Dr. 3,750
5,000
To Equity

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(To recognise the grant of equity instruments to

employees of subsidiary less partial reimbursement from
subsidiary)

Q36: New Age Technology Limited has entered into following Share Based payment transactions:

(i) On 1st April, 20X1, New Age Technology Limited decided to grant share options to its
employees. The scheme was approved by the employees on 30th June, 20X1. New Age
Technology Limited determined the fair value of the share options to be the value of the
equity shares on 1st April, 20X1.

(ii) On 1st April, 20X1, New Age Technology Limited entered into a contract to purchase IT
equipment from Bombay Software Limited and agreed that the contract will be settled
by issuing equity instruments of New Age Technology Limited. New Age Technology
Limited received the IT equipment on 30th July, 20X1. The share-based payment
transaction was measured based on the fair value of 'the equity instruments as on 1 st
April, 20X1.

(iii) On 1st April, 20X1, New Age Technology Limited decided to grant the share options to its
employees. The scheme was approved by the employees on 30th June, 20X1. The issue
of the share options was however subject to the same being approved by the
shareholders in a general meeting. The scheme was approved in the general meeting held
on 30th September, 20X1. The fair value of the equity instruments for measuring the
share- based payment transaction was taken on 30th September, 20X1.

Identify the grant date and measurement date in all the 3 cases of Share based payment
transactions entered into by New Age Technology Limited, supported by appropriate rationale
for the determination? [MTP May 2021; RTP May 2022; MTP May 2023]

Ans: Ind AS 102 defines grant date and measurement dates as follows:
Grant date: The date at which the entity and another party (including an employee) agree to a
share-based payment arrangement, being when the entity and the counterparty have a shared
understanding of the terms and conditions of the arrangement. At grant date the entity confers
on the counterparty the right to cash, other assets, or equity instruments of the entity, provided
the specified vesting conditions, if any, are met. If that agreement is subject to an approval
process (for example, by shareholders), grant date is the date when that approval is obtained.

Measurement date: The date at which the fair value of the equity instruments granted is
measured for the purposes of this Ind AS. For transactions with employees and others providing
similar services, the measurement date is grant date. For transactions with parties other than
employees (and those providing similar services), the measurement date is the date the entity
obtains the goods or the counterparty renders service.

Applying the above definitions in the given scenarios following would be the conclusion based on
the assumption that the approvals have been received prospectively:

Scenario Grant date Measurement Base for grant date Base for measurement
date date

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(i) 30th June, 30th June, The date on which the For employees, the
20X1 20X1 scheme was approved measurement date is
by the employees grant date
(ii) 1st April, 30th July, The date when the The date when the entity
20X1 20X1 entity and the obtains the goods from
counterparty entered a the counterparty
contract and agreed for
settlement by equity
instruments
(iii) 30th 30th The date when For employees, the
September September, approval by the measurement date is
, 20X1 20X1 shareholders was grant date
obtained

Q39: The following particulars in respect of stock options granted by a company are available:
No. of Employees covered 400 Nominal Value per share ₹ 100
No. of options per Employee 60 Exercise price per share ₹ 125

Shares offered were put in three groups. Group 1 was for 20% of shares offered with vesting
period one-year. Group II was for 40% of shares offered with vesting period two- years. Group III
was for 40% of shares offered with vesting period three-years. Fair value of option per share on
grant date was ₹ 10 for Group I, ₹ 12.50 for Group II and ₹ 14 for Group III.
Position on 1st Year Position on 2nd Year Position on 3rd Year
- No. of employees left = - Employees left = 35 - Employees left = 28
40
- Estimate of employees - Estimate of employees to - Employees exercising
to leave in Year 2 = 36 leave in Year 3 = 30 Options in Group III = 295
- Estimate of employees - Employees exercising
to leave in Year 3 = 34 Options in Group II = 319
- Employees exercising
Options in Group I =
350

Options not exercised immediately on vesting, were forfeited. Compute expenses to recognise
in each year and show important accounts in the books of the company. [RTP Nov 2022]

Ans: Total number of Options per employee = 60

Group I - 20% vesting in Year 1 Group II - 40% vesting in Group III - 40% vesting
Year 2 in Yr. 3
= 12 options, Vesting period = 24 options, Vesting = 24 options, Vesting
= 1 Yr. period = 2 Yrs. period = 3 Yrs.

Computation of Expenses for all the years

Group = No. of Options Group I = Group II = 24 Options Group III = 24 Options
12 Options

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Year 1 Year 1 Year 2 Year 1 Year 2 Year 3

(a) Employees at year end = 400 - 40 = 400 - 40 = 360 - 35 = 400 - 40 = 360 - 35 = 325 - 28 =
[Opening
No. of Employees - 360 360 325 360 325 297
Forfeiture]
(b) Expected to leave in NA 36 NA 36 + 34 = 30 NA
future 70
(c) No. of employees eligible 360 324 325 290 295 297
(a - b)
(d) Options expected to Vest (360 x 12 (324 x 24 (325 x 24 (290 x 24 (295 x 24 (297 x 24
= sh.) sh.) sh.) sh.) sh.) sh.)
[(c) x No. of Shares] 4,320 7,776 7,800 6,960 7,080 7,128
(e) FV per option = ₹ 10 ₹ 12.50 ₹ 12.50 ₹ 14 ₹ 14 ₹ 14
(f) Value of Total Options = [d ₹ 43,200 ₹ 97,200 ₹ 97,500 ₹ 97,440 ₹ 99,120 ₹ 99,792
x e]
(g) Total ₹ 43,200 [(f) x 1/2] [(f) x 2/2] [(f) x 1/3] [(f) x 2/3] [(f) x 3/3]
Cumulative Cost of
Options
= [(f) x Completed Yrs/ ₹ 48,600 ₹ 97,500 ₹32,480 ₹66,080 ₹ 99,792
Total Yrs)
(h) Less: 0 0 ₹ 48,600 0 ₹32,480 ₹ 66,080
Recognized in last years
(i) Expenses to be recognized ₹ 43,200 ₹ 48,600 ₹ 48,900 ₹32,480 ₹33,600 ₹ 33,712
(j) Employees not exercising 10 325 - 319 = 6 Employees 297 - 295 = 2 Employees
ESOP Employees
(k) Total
Expenses for-
Year 1 ₹ 43,200 (Gr. 1) + ₹ 48,600 (Gr. 2) + ₹ 32,480 (Gr. 3) = ₹ 1,24,280

Year 2 ₹ 48,900 (Gr. 2) + ₹ 33,600 (Gr. 3) = ₹ 82,500

Year 3 ₹ 33,712 (Gr. 3 only)

Employees Benefit Expenses A/c

Year 1
₹ ₹
To Share-based Payment Reserve A/c 1,24,280 By Profit and Loss A/c 1,24,280
1,24,280 1,24,280
Year 2
To Share-based Payment Reserve A/c 82,500 By Profit and Loss A/c 82,500
82,500 82,500

Year 3

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To Share-based Payment Reserve A/c 33,712 By Profit and Loss A/c 33,712
33,712 33,712

Share-based Payment Reserve A/c

Year 1
₹ ₹
To Retained Earnings 1,200 By Employees Benefit 1,24,280
[(360 - 350) Emp x 12 Expenses A/c
Options x ₹ 10]
To Share Capital (350 Emp x 12 By Bank A/c (350 Emp x 12
Options x ₹ 100) 4,20,000 Options x ₹ 125) 5,25,000
To Securities Premium (350
Emp x 12 Options x ₹ 35) 1,47,000
To Balance c/d 81,080
6,49,280 6,49,280
Year 2
To Retained Earnings 1,800 By Balance b/d 81,080
[(325 - 319) Emp x 24 By Employees Benefit Expenses
Options x ₹ 12.50] A/c 82,500
To Share Capital (319 Emp x 24 By Bank A/c (319 Emp x 24
Options x ₹ 100) 7,65,600 Options x ₹ 125) 9,57,000
To Securities Premium 2,87,100
(319 Emp x 24 Options x
₹ 37.50)
To Balance c/d 66,080
11,20,580 11,20,580
Year 3
To Retained Earnings 672 By Balance b/d 66,080
[(297 - 295) Emp x 24 By Employees Benefit Expenses
Options x ₹ 14] A/c 33,712
To Share Capital (295 Emp x 24 By Bank A/c (295 Emp x 24
Options x ₹ 100) 7,08,000 Options x ₹ 125) 8,85,000
To Securities Premium (295
Emp x 24 Options x ₹ 39) 2,76,120
9,84,792 9,84,792

Working Note:
Calculation of Securities Premium
Group I Group II Group III
Year 1 Year 2 Year 3
Exercise Price received per share 125.00 125.00 125.00
Value of service received per share, being the FV of
the Options 10.00 12.50 14.00

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Total Consideration received per share 135.00 137.50 139.00

Less: Nominal Value per share (100.00) (100.00) (100.00)
Securities Premium per share 35.00 37.50 39.00
Q42: Fashion India Ltd. (FIL) entered into an agreement with RFD Ltd. on 10th August, 20X2 for
purchasing a machinery. The agreement has a clause that FIL will have to settle the consideration
of machinery purchased by issuing its equity shares. FIL agreed to the clause and the order was
confirmed. Machinery was supplied vide invoice dated 25th October, 20X2 and delivered on 1st
November, 20X2. Agreed purchase consideration was ₹ 150 Lakhs and the fair value of the
machinery supplied was estimated to be ₹ 160 Lakhs. As agreed, FIL issued 1,00,000 equity shares
of face value ₹ 100 each to RFD Ltd. As per Ind AS 102 ‘Share Based Payment’, what should be
the price and the date for recording the machinery purchased from RFD Ltd.? [RTP May 2024]
Ans: As per para 10 of Ind AS 102, for equity settled share-based payment transactions, the entity
shall measure the goods or services received, and the corresponding increase in equity, directly,
at the fair value of the goods or services received, unless that fair value cannot be estimated
reliably. If the entity cannot estimate reliably the fair value of the goods or services received, the
entity shall measure their value, and the corresponding increase in equity, indirectly, by
reference to the fair value of the equity instruments granted. Here, since the fair value of the
asset received can be estimated reliably, the price for recording the machinery would be ₹ 160
lakhs.
Further the control is assumed to be transferred on the date the delivery is received which is 1st
November, 20X2. Therefore, this will be the date for recognizing the machinery in the books.

Q43: At 1st 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, ignoring the probability that an IPO will happen
within the five years, is as follows:
 ₹ 50 at the end of year 1;
 ₹ 500 at the end of year 2;

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 ₹ 100 at the end of year 3; and

 ₹ 50 at the end of year 4.
Required: How the entity would account for this transaction? [RTP May 2025]

Ans: At the end of first and second year, the entity would not record a charge for the equity-settled
award; this is because the vesting conditions are not expected to be met (that is, a successful IPO
is not probable).
Hence, a liability is recognised, because cash settlement is probable until year 3. (Refer para 42
of Ind AS 102)

Dr. (₹) Cr. (₹)

Year-end 31st March, 20X2

Employee benefits expense (₹ 50 / 5years) Dr. 10
To Share-based payment liability 10

(Cash settled award recognised over the vesting period)

Yearend 31st March, 20X3
Employee benefits expense {(₹ 500 x 2/5)- ₹10} Dr. 190
To Share-based payment liability 190

(Cash-settled award recognised over the vesting period)

At the end of year 3, a successful IPO becomes probable; so the entity would record a charge for
an equity-settled award.
There should also be a reversal of the SBP liability, because this award is now deemed not
probable.

Year end 31st March, 20X4 Dr. Cr.

Share-based payment Liability Dr. 200
To Share-based Payment Reserve 200
(Reversal of cash -settled share-based payment, because IPO deemed
probable)
Employee benefits expense {(₹ 1,000 x ¾) - ₹ 200} Dr. 550
To Share-based Payment Reserve 550

(Equity -Settled award measured at grant date fair value of ₹ 550, because
IPO is now deemed probable)
Year-end 31st March, 20X5
Employee Benefits Expenses Dr. 250
To Share-based Payment Reserve 250
(Equity settled award recognised over the vesting period)

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Share-based Payment Reserve Dr. 1,000

To Equity share capital 1,000
(Settlement of share-based payment award through issuance of free
shares)

Equity-settled award measured at fair value of ₹ 1,000. All of the vesting conditions for this ward
have been met in year 4; so the award has vested, and the remaining charge of ₹ 250 (₹ 1,000 –
₹ 750) is recognised in the Statement of profit and loss.

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Chapter 18 : Employee Benefits (IND AS 19)

CHAPTER 18
EMPLOYEE BENEFITS (IND AS 19)
Q6: Acer Ltd. has 350 employees (same as a year ago). The average staff attrition rates observed
during past 10 years represents 6% per annum. Acer Ltd. provides the following benefits to all
its employees:
Paid vacation - 10 days per year regardless of date of hiring. Compensation for paid vacation is
100% of employee's salary and unused vacation can be carried forward for 1 year. As of 31st
March, 20X1, unused vacation carried forward was 3 days per employee, average salary was ₹
15,000 per day and accrued expense for unused vacation in 20X0-20X1 was ₹ 65,00,000. During
20X1-20X2, employees took 9 days of vacation in average. Salary increase in 20X1-20X2 was
10%.
How would Acer Ltd. recognize liabilities and expenses for these benefits as of 31st
March, 20X2?. Pass the journal entry to show the accounting treatment.
Ans: Paid Vacation:
Step 1: Calculation of Unused Vacation in man-days as on 31st March, 20X2:
No. of Employees in service for the whole year (94%):

Particulars Man-days

Unused vacation as on 31st March, 20X1 3 days per employee

Entitlement to vacation for 20X1-20X2 10 days per employee

Average vacation availed in 20X1-20X2 (9) days per employee

Unused vacation as on 31st March, 20X2 4 days per employee

(being unused leaves of 20X1-20X2 on FIFO basis)
Total Unused vacation as on 31st March, 20X2 - (A) 1,316 man-days
(350 employees x 94% x 4 days per employee)

Newcomers (6%):

Particulars Man-days
Entitlement to vacation for 20X1-20X2 10 days per employee
Average vacation availed in 20X1-20X2 (9) days per employee

Unused vacation as on 31st March, 20X2 1 day per employee

(being unused leaves of 20X1-20X2 on FIFO basis)

Total Unused vacation as on 31st March, 20X2 - (B) 21 man-days

(350 employees x 6% x 1 day per employee)

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 Chapter 18 : Employee Benefits (IND AS 19)

Total unused vacation as on 31st March, 20X2 (A + B) 1,337 man-days

Step 2: Calculation of average salary per day:

Particulars Amount (₹)

Average salary per day as on 31st March, 20X1 15,000

Salary increase in 20X1-20X2 10%

Average salary per day as on 31st March, 20X2 16,500

Step 3: Calculation of provision for unused paid vacation:

Particulars Amount (₹)

Calculation of provision for unused paid vacation 20X1-20X2: 2,20,60,500
(1,337 man-days x ₹ 16,500)
Provision for unused paid vacation 20X0-20X1 65,00,000

Step 4: Accounting treatment

Provision for 20X1-20X2
Employee Benefits Expenses A/c Dr. 2,20,60,500
To Provision for Leave Encashment 2,20,60,500
Settlement of Liability of 20X0-20X1
Provision for Leave Encashment A/c Dr. 65,00,000
To Employee Benefits Expenses A/c 65,00,000
Q16: AJ Ltd is engaged in the business of trading of chemicals having a net worth of ₹ 150 crores. The
company’s profitability is good and hence the company has introduced various benefits for its
employees to keep them motivated and to ensure that they stay with the organization. The
company is an associate of RJ Ltd which is listed on Bombay Stock Exchange in India.
The company initially did not have any HR function but over the last 2 years, the management
set up that function and now HR department takes care of all the benefits related to the
employees and how they can be structured in a manner beneficial to both the employees and
the objectives of the company.
One of the employee benefits involves a lump sum payment to employee on termination of
service and that is equal to 1 per cent of final salary for each year of service. Consider the salary
in year 1 is ₹ 10,000 and is assumed to increase at 7 per cent (compound) each year.
Taking a discount rate at 10 per cent per year, you are required to show
(a) benefits attributed (year on year) and
(b) the obligation in respect of this benefit (year on year)

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Chapter 18 : Employee Benefits (IND AS 19)

For and employee who is expected to leave at the end of year 5 Following assumptions may be
taken to solve this:
● There are no changes in actuarial assumptions.
● No additional adjustments are needed to reflect the probability that the employee may
leave the entity at an earlier or later date. [MTP May 2024]
Ans:
a) Computation of benefit attributed to prior years and current year:
Amount in ₹

Year 1 2 3 4 5
Benefit attributed to:
- Prior years - 131 262 393 524
- Current year (Refer W.N.1) 131 131 131 131 131
Total (i.e. current and prior years) 131 262 393 524 655

b) Computation of the obligation for an employee who is expected to leave at the end of year
5 (taking discount rate of 10% p.a.)
Amount in ₹

Year 1 2 3 4 5
Opening obligation (A) - 89 196 324 475
Interest at 10% (B = A X 10%) - 9 20 32 47
Current service cost (C) (Refer WN 2) 89 98 108 119 131
Closing obligation D = (A+B+C) 89 196 324 475 653

Figures have been rounded off in the table.

Working Notes
1. A lump sum benefit is payable on termination of service and equal to 1 per cent of final
salary for each year of service. The salary in year 1 is ₹ 10,000 and is assumed to increase
at 7 per cent (compound) each year.
The year on year salary would be as follows: Amount in ₹

Year 1 2 3 4 5
Salary 10,000 10,700 11,449 12,250 13,108
(10,000 x (10,700 x (11,449 x (12,250 x
107%) 107%) 107%) 107%)

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 Chapter 18 : Employee Benefits (IND AS 19)

Accordingly, for the purpose of above mentioned employee benefit, 1% of final

salary to be considered for each year of service would be ₹ 131.
2. Computation of current service cost:

Year 1 2 3 4 5
1% salary at the end of year 5 - - - - 131
PV factor at the end of eachyear to be 0.683 0.751 0.826 0.909 1.000
considered at 10%
p.a. (E)
PV at the end of each year 89 98 108 119 131
(131 x (131 x (131 x (131 x (131 x
E) E) E) E) E)

Accordingly, for the purpose of above mentioned employee benefit, 1% of final

salary to be considered for each year of service would be ₹ 131.
Q29: Cisca Pvt. Ltd. has a headcount of around 1,000 employees in the organisation in 2010-11. As
per the company policy, the employees are given 35 days of privilege leave (PL), 15 days of sick
leave (SL) and 10 days of casual leave. Out of the total PL and sick leave, 10 and 5 can be carried
forward to next year. On the basis of past trends, it has been noted that 200 employees will
take 5 days of PL and 2 days of SL and 800 employees will avail 10 as PL and 5 as SL.
Also the company has been incurring profits since 2009. It has decided in 2010-11 to distribute
profits to its employees @ 4% during the year. However, due to the employee turnover in the
organisation, the expected pay-out of the Cisca Pvt. Ltd. is expected to be around 3.5%. The
profits earned during 2010-11 is ₹ 2,000 crores.
Cisca Pvt. Ltd. has a post-employment benefit plan also available which is the nature of defined
contribution plan where contribution to this fund amounts to ₹ 100 crores which will fall due
within 12 months from the end of accounting period.
The company has paid ₹ 20 crores to its employees in 2010-11.
What is the treatment for the short-term compensating absences, profit-sharing plan and the
defined contribution plan by Cisca Pvt. Ltd? [MTP May 2022]
Ans: (i) Cisca Pvt. Ltd. will recognise a liability in its books to the extent of 5 days of PL for 200
employees and 10 days of PL for remaining 800 employees and 2 days of SL for 200
employees and 5 days of SL for remaining 800 employees in its books as an unused
entitlement that has accumulated in 2010-11.
(ii) Cisca Pvt. Ltd. will recognise ₹ 70 crores (2,000 x 3.5%) as a liability and expense it books
of account.
(iii) When an employee has rendered service to an entity during a period, the entity shall
recognise the contribution payable to a defined contribution plan in exchange for that
service:

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Chapter 18 : Employee Benefits (IND AS 19)

(a) Under Ind AS 19, the amount of ₹ 80 crores may be recognised as a liability
(accrued expense), after deducting any contribution already paid (100-20).
However, if the contribution already paid would have exceeded the contribution
due for service before the end of the reporting period, an entity shall recognise
that excess as an asset (prepaid expense); and
(b) Also, ₹ 80 crores will be recognised as an expense in this case study which will be
disclosed as an expense in the statement of profit or loss.
It can also be seen that the contributions are payable within 12 months from the end of
the year in which the employees render the related service, they will not be discounted.
However, where contributions to a defined contribution plan do not fall due wholly
within twelve months after the end of the period in which the employees render the
related service, they shall be discounted using the discount rate.
Q30: OPQ Ltd is a listed company having its corporate office at Nagpur. The company has a branch
office at Chennai. The company has been operating in Indian market for the last 10 years.
The company operates a pension plan that provides a pension of 2.5% of the final salary for
each year of service. The benefits become vested after seven years of service.
On 1st April, 2018, the company increased the pension to 3% of the final salary for each year of
service starting from 1st April, 2011. On the date of the improvement, the present value of the
additional benefits for service from 1April, 2011 to 1st April 218 was as follows:
● Employees with more than seven years’ service on 1 January 2018 – ₹ 2,75,000
● Employees with less than 7 years of service – ₹ 2,21,000 (average 4 years to go). What
would be the accounting treatment in this case?
Ans: OPQ Ltd increased the pension to 3% of the final salary for each year of service starting from 1st
April, 2011 to 1st April, 2018.
The company would recognize the total amount of ₹ 4,96,000 (i.e. ₹ 2,75,000 + ₹ 2,21,000)
immediately, as for the purpose of recognition it does not make any difference as to whether
the benefits are already vested or not.
Q32: A Ltd. prepares its financial statements to 31st March each year. It operates a defined benefit
retirement benefits plan on behalf of current and former employees. A Ltd. receives advice
from actuaries regarding contribution levels and overall liabilities of the plan to pay benefits.
On 1st April, 2017, the actuaries advised that the present value of the defined benefit
obligation was ₹ 6,00,00,000. On the same date, the fair value of the assets of the defined
benefit plan was ₹ 5,20,00,000. On 1st April, 2017, the annual market yield on government
bonds was 5%. During the year ended 31st March, 2018, A Ltd. made contributions of ₹
70,00,000 into the plan and the plan paid out benefits of ₹ 42,00,000 to retired members. Both
these payments were made on 31st March, 2018.
The actuaries advised that the current service cost for the year ended 31st March, 2018 was ₹
62,00,000. On 28th February, 2018, the rules of the plan were amended with retrospective
effect. These amendments meant that the present value of the defined benefit obligation was
increased by ₹ 15,00,000 from that date.

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 Chapter 18 : Employee Benefits (IND AS 19)

During the year ended 31st March, 2018, A Ltd. was in negotiation with employee
representatives regarding planned redundancies. The negotiations were completed shortly
before the year end and redundancy packages were agreed. The impact of these redundancies
was to reduce the present value of the defined benefit obligation by ₹ 80,00,000. Before 31st
March, 2018, A Ltd. made payments of ₹ 75,00,000 to the employees affected by the
redundancies in compensation for the curtailment of their benefits. These payments were
made out of the assets of the retirement benefits plan.
On 31st March, 2018, the actuaries advised that the present value of the defined benefit
obligation was ₹ 6,80,00,000. On the same date, the fair value of the assets of the defined
benefit plan were ₹ 5,60,00,000.
Examine and present how the above event would be reported in the financial statements of A
Ltd. for the year ended 31st March, 2018 as per Ind AS. [RTP Nov 2018]
Ans: All figures are ₹ in ’000.
On 31st March, 2018, A Ltd. will report a net pension liability in the statement of financial
position. The amount of the liability will be 12,000 (68,000 – 56,000).
For the year ended 31st March, 2018, A Ltd. will report the current service cost as an operating
cost in the statement of profit or loss. The amount reported will be 6,200. The same treatment
applies to the past service cost of 1,500.
For the year ended 31st March, 2018, A Ltd. will report a finance cost in profit or loss based on
the net pension liability at the start of the year of 8,000 (60,000 – 52,000). The amount of the
finance cost will be 400 (8,000 x 5%).
The redundancy programme represents the partial settlement of the curtailment of a defined
benefit obligation. The gain on settlement of 500 (8,000 – 7,500) will be reported in the
statement of profit or loss.
Other movements in the net pension liability will be reported as remeasurement gains or losses
in other comprehensive income.
For the year ended 31st March, 2018, the remeasurement loss will be 3,400 (Refer W. N.).
Working Note:
Remeasurement of gain or loss
₹ in ’000
Liability at the start of the year (60,000 – 52,000) 8,000
Current service cost 6,200
Past service cost 1,500
Net finance cost 400
Gain on settlement (500)
Contributions to plan (7,000)
Remeasurement loss (balancing figure) 3,400

P a g e | 18.6
Chapter 18 : Employee Benefits (IND AS 19)

Liability at the end of the year (68,000 – 56,000) 12,000

Q36: At 1 April, 20X0, the fair value of the Plan Assets was ₹ 10,00,000. The Plan paid benefits of ₹
1,90,000 and received contributions of ₹ 4,90,000 on 30 September, 20X0. The company
computes the Fair Value of Plan Assets to be ₹ 15,00,000 as on 31 March, 20X1 and the Present
Value of the Defined Benefit Obligation to amount to ₹ 14,79,200 on the same date. Actuarial
losses on defined benefit obligation were ₹ 6,000.

Compounding happens half-yearly. The normal interest rate for 6 months period is 10% per
annum, while the effective interest rate for 12 months period is based on the following data:

At 1 April, 20X0, the company made the following estimates based on market prices at that
date:
Particulars %
Interest and Dividend Income, after tax payable by the fund 9.25
Add: Realized and Unrealized Gains on Plan Assets (after tax) 2.00
Less: Administration Costs (1.00)
Expected Rate of Return 10.25

Determine actual return and expected return on plan asset. Also compute amount to be
recognized in ‘Other Comprehensive Income’ in this case. [RTP May 2021]

Ans: Computation of Expected Return on Plan Assets

Particulars ₹
Return on ₹ 10,00,000 for 20X0-20X1 at 10.25% = ₹ 10,00,000 x 10.25% 1,02,500

Add: Return on ₹ 3,00,000 for 6 months at 10% Normal Rate = [3,00,000

(Inflow ₹ 4,90,000 less Payments ₹ 1,90,000) x 10% x 6/12]
15,000
Expected Return on Plan Assets 1,17,500

Computation of Actual Return on Plan Assets

Particulars ₹
Fair Value of Plan Assets at the year-end – 31 March 20X1 15,00,000
Less: Fair Value of Plan Assets at the beginning – 1 April 20X0 (10,00,000)
Less: Contributions received during the year 20X0-20X1 (4,90,000)
Add: Benefits paid during the year 20X0-20X1 1,90,000
Actual Return on Plan Assets 2,00,000

Computation of Net Actuarial Gain

Particulars ₹

P a g e | 18.7
 Chapter 18 : Employee Benefits (IND AS 19)

Actual Return on Plan Assets 2,00,000

Less: Expected Return on Plan Assets (1,17,500)
Actuarial Gain on Plan Assets 82,500
Less: Actuarial Loss on Defined Benefit Obligation (given) (6,000)
Net Actuarial Gain to be recognized in ‘Other Comprehensive Income’ 76,500

Q37: From the following particulars, compute the net defined benefit liability and expense to be
recognized in Profit and Loss account. (₹ in lakhs)
Particulars Defined benefit obligation Plan Assets
31st Dec. 31st Dec. 31st Dec. 31st Dec.
20X2 20X1 20X2 20X1
Balance at the beginning of the year 63.25 47.08 21.80 14.65
Current service cost 5.84 4.97 - -
Interest cost 4.27 3.56 - -
Changes in demographic assumptions 0.62 1.86 - -
Changes in financial assumptions 3.58 1.93 - -
Experience variance (2.49) 4.46 - -
Benefits paid - (0.61) - (0.61)
Investment income - - 1.47 1.12
Employers’ contribution - - 8.00 7.00
Actuarial Return on plan assets - - 2.12 (0.35)
[RTP May 2023]
Ans: Computation of defined benefit liability and expenses to be charged to Statement of Profit and
Loss:
Defined benefit obligation Plan Assets (₹ in lakhs)
(₹ in lakhs)
31st Dec 31st Dec 31st Dec 31st Dec
20X2 20X1 20X2 20X1
Balance at the beginning of year 63.25 47.08 21.80* 14.65
Current service cost 5.84 4.97 - -
Interest cost 4.27 3.56 - -
Changes in demographic assumptions 0.62 1.86 - -
Changes in financial assumptions 3.58 1.93 - -
Experience variance (2.49) 4.46 - -
Benefits paid - (0.61) - (0.61)
Investment income - - 1.47 1.12
Employers’ contribution - - 8.00 7.00
Actuarial Return on plan assets - - 2.12 (0.35)
Balance at the end of year 75.07 63.25 33.39 21.81*

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Chapter 18 : Employee Benefits (IND AS 19)

*Difference is due to appr,oximation.

In the BALANCE SHEET, the following will be recognised:
Net defined liability to be recognised for the period ending 31 st December, 20X1:
= ₹ 41.44 lakhs (₹ 63.25 lakhs - ₹ 21.81 lakhs)
Net defined liability to be recognised for the period ending 31 st December, 20X2:
= ₹ 41.68 lakhs (₹ 75.07 lakhs - ₹ 33.39 lakhs)
In the STATEMENT OF PROFIT AND LOSS, the following will be recognised:

Defined benefit obligation Plan Assets (₹ in lakhs)

(₹ in lakhs)
31st Dec., 31st Dec., 31st Dec., 31st Dec.,
20X2 20X1 20X2 20X1
Current service cost 5.84 4.97 - -
Interest cost 4.27 3.56 - -
Investment income - - (1.47) (1.12)
Total 10.11 8.53 (1.47) (1.12)
Expense to be recognised in the Statement of Profit and Loss for the period ending 31st
December, 20X1 = ₹ 7.41 lakhs (₹ 8.53 lakhs - ₹ 1.12 lakhs)
Expense to be recognised in the Statement of Profit and Loss for the period ending 31st
December, 20X2 = ₹ 8.64 lakhs (₹ 10.11 lakhs - ₹ 1.47 lakhs).

P a g e | 18.9
 Financial Instrument
Chapter 19 : Financial Instrument

CHAPTER 19
FINANCIAL INSTRUMENTS (IND AS 32/107/109)
Q14: ABC Company issued 10,000 compulsory cumulative convertible preference shares (CCCPS) as
on 1 April 20X1 @ ₹ 150 each. The rate of dividend is 10% payable every year. The preference
shares are convertible into 5,000 equity shares of the company at the end of 5th year from the
date of allotment. When the CCCPS are issued, the prevailing market interest rate for similar debt
without conversion options is 15% per annum. Transaction cost on the date of issuance is 2% of
the value of the proceeds.
Key terms:

Date of Allotment 01-Apr-20X1

Date of Conversion 01-Apr-20X6
Number of Preference Shares 10,000
Face Value of Preference Shares 150
Total Proceeds 15,00,000
Rate Of dividend 10%
Market Rate for Similar Instrument 15%
Transaction Cost 30,000
Face value of equity share after conversion 10
Number of equity shares to be issued 5,000
The effective interest rate for liability component 15.86%

Calculate the value of the liability and equity components. [MTP NOV 2021; May 2023]
Ans: This is a compound financial instrument with two components – liability representing present
value of future cash outflows and balance represents equity component.
a. Computation of Liability & Equity Component

Date Particulars Cash Flow Discount Factor Net present Value

01-Apr-20X1 0 1 0.00
31-Mar-20X2 Dividend 150,000 0.869565 130,434.75
31-Mar-20X3 Dividend 150,000 0.756144 113,421.6
31-Mar-20X4 Dividend 150,000 0.657516 98,627.4
31-Mar-20X5 Dividend 150,000 0.571753 85,762.95
31-Mar-20X6 Dividend 150,000 0.497177 74,576.55

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 Chapter 19 : Financial Instrument

Total Liability Component 502,823.25

Total Proceeds 1,500,000.00
Total Equity Component (Bal fig) 997,176.75

b. Allocation of transaction costs

Particulars Amount Allocation Net Amount

Liability Component 502,823 10,056 492,767
Equity Component 997,177 19,944 977,233
Total Proceeds 1,500,000 30,000 1,470,000

c. Accounting for liability at amortised cost:

- Initial accounting = Present value of cash outflows less transaction costs
- Subsequent accounting = At amortised cost, ie, initial fair value adjusted for interest and
repayments of the liability.

Opening Financial Interest Cash Flow Closing Financial

Liability B C Liability
A A+B-C
01-Apr-20X1 492,767 - - 4,92,767
31-Mar-20X2 492,767 78,153 150,000 4,20,920
31-Mar-20X3 420,920 66,758 150,000 3,37,678
31-Mar-20X4 337,678 53,556 150,000 2,41,234
31-Mar-20X5 241,234 38,260 150,000 1,29,494
31-Mar-20X6 129,494 20,506 150,000 -

d. Journal Entries to be recorded for entire term of arrangement are as follows:

Date Particulars Debit Credit

01-Apr-20X1 Bank A/c Dr. 1,470,000
To Preference Shares Liability A/c 492,767

To Equity Component of Preference sharesA/c 977,233

(Being compulsorily convertible preferenceshares

issued. The same are divided into equity component
and liability component as per the calculation)

31-Mar-20X2 Preference shares Liability A/c Dr. 150,000

P a g e | 19.2
Chapter 19 :

To Bank A/c 150,000

(Being Dividend at the coupon rate of 10% paidto

the shareholders)
31-Mar-20X2 Finance cost A/c Dr. 78,153
To Preference Shares Liability A/c (Being 78,153
interest as per EIR method recorded)
31-Mar-20X3 Preference shares Liability A/c Dr. 150,000
To Bank A/c 150,000

(Being Dividend at the coupon rate of 10% paidto

the shareholders)
31-Mar-20X3 Finance cost A/c Dr. 66,758
To Preference Shares Liability A/c (Being 66,758
interest as per EIR method recorded)
31-Mar-20X4 Preference shares Liability A/c Dr. 150,000
To Bank A/c 150,000

(Being Dividend at the coupon rate of 10% paidto

the shareholders)
31-Mar-20X4 Finance cost A/c Dr. 53,556
To Preference Shares Liability A/c (Being 53,556
interest as per EIR method recorded)
31-Mar-20X5 Preference shares Liability A/c Dr. 150,000
To Bank A/c 150,000

(Being Dividend at the coupon rate of 10% paidto

the shareholders)
31-Mar-20X5 Finance cost A/c Dr. 38,260
To Preference Shares Liability A/c (Being 38,260
interest as per EIR method recorded)
31-Mar-20X6 Preference shares Liability A/c Dr. 150,000
To Bank A/c 150,000

(Being Dividend at the coupon rate of 10% paidto

the shareholders)
31-Mar-20X6 Finance cost A/c Dr. 20,506
To Preference Shares Liability A/c (Being 20,506
interest as per EIR method recorded)
31-Mar-20X6 Equity Component of Preference shares A/c Dr. 977,233

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 Chapter 19 : Financial Instrument

To Equity Share Capital A/cTo 50,000

927,233
Securities Premium A/c
(Being Preference shares converted in equity shares
and remaining equity component is recognised as
securities premium)
Q18: On 1 January 1999, A Ltd issued a 10 per cent convertible debenture with a face value of ₹ 1,000
maturing on 31 December 2008. The debenture is convertible into equity shares of A Ltd 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 per cent.
On 1 January 2004, 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. At the date of repurchase, A Ltd. could have issued non-convertible debt with a five-year
term bearing a coupon interest rate of 8 per cent. Show how an entity accounts for (i) equity and
liability at the inception and (ii) at the repurchase of the convertible instrument.
Ans: At the inception

Computation of fair value of Liability Component ₹

Present value of 20 half yearly interest payments of ₹ 50,
discounted @ 11% (₹ 50 × 11.9504) 597
Present value of ₹ 1,000 due in ten years, discounted @ 11%
compounded half yearly (₹ 1,000 × 0.343) 343
Fair value of liability component 940
Computation of Equity Component ₹
Issue proceeds from convertible debenture 1,000
Less: Fair value of liability component 940
Fair value of Equity Component 60
Journal Entries Debit (₹) Credit (₹)
Cash/Bank A/c Dr. 1,000
To Liability component 940
To Equity component
(Being issue of debentures recorded at fair values)

At the time of repurchase

The repurchase price is allocated as follows:
Carrying value Fair Value Difference

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Chapter 19 :

Liability component
Present value of 10 remaining half- 377 405
yearly interest payments of ₹ 50
discounted at 11%and 8% respectively
Present value of ₹ 1,000 due in 5 years, 593 680
discounted at 11% and 8%
compounded half yearly, respectively
970 1085 115
Equity component 60 615 555
Total 1,030 1,700 670

Journal
Entries
Debit ₹ Credit ₹
Liability Component Dr. 970
Debt settlement expenses (statement of profit and Dr. 115
loss)
1085
To Cash A/c
(Being repurchase of the liability component)
Equity component Dr. 60
Retained Earning Dr. 555
To Cash A/c
615
(Being cash paid for the equity component)

Q19: On 1 January 1999, Entity A issued a 10 per cent convertible debenture with a face value of ₹
1,000 maturing on 31 December 2008. The debenture is convertible into equity shares of Entity
A at a conversion price of ₹25 per share. Interest is payable half-yearly in cash. At the date of
issue, Entity A could have issued non-convertible debt with a ten-year term bearing a coupon
interest rate of 11 per cent.
On 1 January 2006, to induce the holder to convert the convertible debenture promptly, Entity A
reduces the conversion price to ₹20 if the debenture is converted before 1 March 2006 (i.e. within
60 days). The market price of Entity A’s equity shares on the date the terms are amended is ₹40
per share. How will the revised terms be accounted? [RTP May 2022]
Ans: The fair value of the incremental consideration paid by Entity A is calculated as follows:
Number of equity shares to be issued to debenture holders under amended conversion terms:

Face amount ₹ 1,000

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 Chapter 19 : Financial Instrument

New conversion price ₹ 20 per share

Number of equity shares to be issued on conversion (A) 50 shares
Number of equity shares to be issued to debenture holders under
original conversion terms:
Face amount ₹ 1,000
Original conversion price ₹25 per share
Number of equity shares issued upon conversion (B) 40 shares
Number of incremental equity shares issued upon conversion (A-B) 10 Shares
Value of incremental equity shares issued upon conversion (to be
recognised as Loss in PL)
₹40 per share x 10 incremental shares (rec ₹400

Q26: A Ltd has made a security deposit whose details are described below. Make necessary journal
entries for accounting of the deposit. Assume market interest rate for a deposit for similar period
to be 12% per annum.
Particulars Details
Date of Security Deposit (Starting Date) 1-Apr-20X1
Date of Security Deposit (Finishing Date) 31-Mar-20X6
Description Lease
Total Lease Period (Years) 5
Discount rate 12.00%
Security deposit (A) 10,00,000
Present value annuity factor 0.567427

Determine, how above financial asset should be measured and briefly explain measurement
determined as such. Make necessary journal entries for accounting of the security deposit in the
first year and last year. [Exam Nov 2019; Dec 21 (5 Marks); MTP Nov 2023]
Ans: The above security deposit is an interest free deposit redeemable at the end of lease term for ₹
1,000,000. Hence, this involves collection of contractual cash flows and shall be accounted at
amortised cost.
Upon initial measurement – Particulars Details
Security deposit (A) 10,00,000
Total Lease Period (Years) 5
Discount rate 12.00%
Present value annuity factor 0.56743
Present value of deposit at beginning (B) 5,67,427
ROU Assets at beginning (A-B) 4,32,573

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Chapter 19 :

Journal Entries

Security deposit a/c Dr. 5,67,427

ROU Assets a/c Dr. 4,32,573
To Bank a/c 10,00,000

Subsequently, every annual reporting year, interest income shall be accrued@ 12% per annum
and ROU Assets shall be amortised on straight line basis over the lease term.

For instance – year 1

Security deposit a/c Dr. 68,091
To Interest income 68,091
Depreciation Dr. 86,515
To ROU Assets a/c 86,515

At the end of 5 years, the security deposit shall accrue to ₹ 10,00,000 and ROU Assets shall be
fully amortised. Journal entry for realisation of security deposit –

Bank a/c Dr. 10,00,000

To Security deposit a/c 10,00,000

Q28: A Ltd issued redeemable preference shares to a Holding Company – Z Ltd. The terms of the
instrument have been summarized below. Account for this in the books of Z Ltd.
Nature Non-cumulative redeemable preference shares
Repayment: Redeemable after 5 years
Date of Allotment: 1-Apr-20X1
Date of repayment: 31-Mar-20X6
Total period: 5.00 years
Value of preference shares issued: 100,000,000
Dividend rate 0.0001%
Market rate of interest 12.00% per annum
Present value factor 0.56743

[Exam May 2018]

Ans: Applying the guidance in Ind AS 109, a ‘financial asset’ shall be recorded at its fair value upon
initial recognition. Fair value is normally the transaction price. However, sometimes certain type
of instruments may be exchanged at off market terms (ie, different from market terms for a
similar instrument if exchanged between market participants). For example, a long-term loan or
receivable that carries no interest while similar instruments if exchanged between market
participants carry interest, then fair value for such loan receivable will be lower from its
transaction price owing to the loss of interest that the holder bears. In such cases where part of
the consideration given or received is for something other than the financial instrument, an entity
shall measure the fair value of the financial instrument. In the above case, since A Ltd has issued

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 Chapter 19 : Financial Instrument

preference shares to its Holding Company – Z Ltd, the relationship between the parties indicates
that the difference in transaction price and fair value is akin to investment made by Z Ltd. in its
subsidiary. Following is the table summarising the computations on initial recognition:
Market rate of interest 12.00%
Present value factor 0.56743
Present value 56,742,686
Loan component 56,742,686
Investment in subsidiary 43,257,314
Subsequently, such preference shares shall be carried at amortised cost at each reporting date.
The computation of amortised cost at each reporting date has been done as follows:
Year Date Opening Asset Interest @ 12% Closing balance
1 31-Mar-20X2 56,742,686 6,790,467 63,533,153
2 31-Mar-20X3 63,533,153 7,623,978 71,157,131
3 31-Mar-20X4 71,157,131 8,538,856 79,695,987
4 31-Mar-20X5 79,695,987 9,589,720 89,285,707
5 31-Mar-20X6 89,285,707 10,714,285 100,000,000
Journal Entries to be done at every reporting date
Particulars Amount Amount
Date of transaction
Investment - Equity portion Dr. 43,257,314
Loan receivable Dr. 56,742,686
To Bank (100,000,000)
Interest income - March 31, 20X2
Loan receivable Dr. 6,790,467
To Interest income (6,790,467)
Interest income - March 31, 20X3
Loan receivable Dr. 7,623,978
To Interest income (7,623,978)
Interest income - March 31, 20X4
Loan receivable Dr. 8,538,856
To Interest income (8,538,856)
Interest income - March 31, 20X5
Loan receivable Dr. 9,589,720
To Interest income (9,589,720)

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Chapter 19 :

Interest income - March 31, 20X6

Loan receivable Dr. 10,714,285
To Interest income (10,714,285)
Settlement of transaction
Bank Dr. 100,000,000
To Loan receivable (100,000,000)
Q29: Wheel Co. Limited has a policy of providing subsidized loans to its employees for the purpose of
buying or building houses. Mr. X, who’s executive assistant to the CEO of Wheel Co. Limited, took
a loan from the Company on the following terms:
• Principal amount: 1,000,000
• Interest rate: 4% for the first 400,000 and 7% for the next 600,000
• Start date: 1 January 20X1
• Tenure: 5 years
• Pre-payment: Full or partial pre-payment at the option of the employee
• The principal amount of loan shall be recovered in 5 equal annual instalments and will be
first applied to 7% interest bearing principal
• The accrued interest shall be paid on an annual basis
• Mr. X must remain in service till the term of the loan ends
The market rate of a comparable loan available to Mr. X, is 12% per annum.
Following table shows the contractually expected cash flows from the loan given to Mr. X:
(amount in ₹)
Date Outflows Principal Interest Interest Principal
income 7% income 4% outstanding
1-Jan-20X1 (1,000,000) 1,000,000
31-Dec-20X1 200,000 42,000 16,000 800,000
31-Dec-20X2 200,000 28,000 16,000 600,000
31-Dec-20X3 200,000 14,000 16,000 400,000
31-Dec-20X4 200,000 - 16,000 200,000
31-Dec-20X5 200,000 - 8,000 -
Mr. S, pre-pays ₹ 200,000 on 31 December 20X2, reducing the outstanding principal as at that
date to ₹ 400,000.
Following table shows the actual cash flows from the loan given to Mr. X, considering the pre-
payment event on 31 December 20X2: (amount in ₹)
Date Outflows Principal Interest Interest Principal
income 7% income 4% outstanding

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 Chapter 19 : Financial Instrument

1-Jan-20X1 (1,000,000) 1,000,000

31-Dec-20X1 200,000 42,000 16,000 800,000
31-Dec-20X2 400,000 28,000 16,000 400,000
31-Dec-20X3 200,000 - 16,000 200,000
31-Dec-20X4 200,000 - 8,000 -
31-Dec-20X5 - - - -
Record journal entries in the books of Wheel Co. Limited considering the requirements of Ind AS
109. [Exam JULY 2021 (14 Marks); MTP Nov 22]
Ans. As per requirement of Ind AS 109, a financial instrument is initially measured and recorded at its
fair value. Therefore, considering the market rate of interest of similar loan available to Mr. X at
12%, the fair value of the contractual cash flows shall be as follows:
Inflows
Date Principal Interest ₹ Interest Discount PV
income income 4% factor @12%
7%
31-Dec-20X1 200,000 42,000 16,000 0.8929 2,30,357
31-Dec-20X2 200,000 28,000 16,000 0.7972 1,94,515
31-Dec-20X3 200,000 14,000 16,000 0.7118 1,63,709
31-Dec-20X4 200,000 - 16,000 0.6355 1,37,272
31-Dec-20X5 200,000 - 8,000 0.5674 1,18,025
Total (fair value) 8,43,878

Benefit to Mr. X, to be considered a part of employee cost for Wheel Co. ₹ 1,56,121
The deemed employee cost is to be amortised over the period of loan i.e. the minimum period
that Mr. X must remain in service.
The amortization schedule of the ₹ 843,878 loan is shown in the following table:
Date Loan outstanding Total cash inflows (principal Interest @ 12%
repayment + interest
1-Jan-20X1 843,878
31-Dec-20X1 687,143 258,000 101,265
31-Dec-20X2 525,600 244,000 82,457
31-Dec-20X3 358,672 230,000 63,072
31-Dec-20X4 185,713 216,000 43,041
31-Dec-20X5 (0) 208,000 22,287
Journal Entries to be recorded at every period end:
a. 1 January 20X1 –
Particulars Dr. Amount (₹) Cr. Amount (₹)

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Chapter 19 :

Loan to employee A/c Dr. 843,879

Pre-paid employee cost A/c Dr 156,121
To Cash A/c 1,000,000
(Being loan asset recorded at initial fair value)
b. 31 December 20X1 –
Cash A/c Dr. 258,000
To Interest income (profit and loss) @12% A/c 101,265
To loan to employee A/c 156,735
(Being first instalment of repayment of loan accounted
for using the amortised cost and effective interest rate
of 12%)
Employee benefit (profit and loss) A/c Dr. 31,224
To Pre-paid employee cost A/c 31,224
(Being amortization of pre-paid employee cost
charged to profit and loss as employee benefit cost)
On 31 December 20X2, due to pre-payment of a part of loan by Mr. X, the carrying value of the
loan shall be re-computed by discounting the future remaining cash flows by the original effective
interest rate.
There shall be two sets of accounting entries on 31 December 20X2, first the realisation of the
contractual cash flow as shown in (c) below and then the accounting for the pre-payment of ₹
200,000 included in (d) below:
c. 31 December 20X2 –
Particulars Dr. Amount (₹) Cr. Amount (₹)
Cash A/c Dr. 244,000
To Interest income (profit and loss) @12% A/c 82,457
To loan to employee A/c 161,543
(Being second instalment of repayment of loan
accounted for using the amortised cost and effective
interest rate of 12%)
Employee benefit (profit and loss) A/c Dr 31,224
To Pre-paid employee cost A/c 31,224
(Being amortization of pre-paid employee cost
charged to profit and loss as employee benefit cost)
Computation of new carrying value of loan to employee:
Inflows
Date Principal Interest Interest Discount PV
income 7% income 4% factor @12%
31-Dec-20X3 200,000 - 16,000 0.8929 192,857
31-Dec-20X4 200,000 - 8,000 0.7972 165,816
Total (revised carrying value) 358,673

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 Chapter 19 : Financial Instrument

Less: Current carrying value 525,601

Adjustment required 166,928
The difference between the amount of pre-payment and adjustment to loan shall be considered
a gain, though will be recorded as an adjustment to pre-paid employee cost, which shall be
amortised over the remaining tenure of the loan.
d. 31 December 20X2 prepayment–
Particulars Dr. Amount (₹) Cr. Amount (₹)
Cash A/c Dr. 200,000
To Pre-paid employee cost A/c 33,072
To loan to employee A/c 166,928
(Being gain to Wheel Co. Limited recorded as an
adjustment to pre-paid employee cost)
The amortisation schedule of the new carrying amount of loan shall be as follows:
Date Loan Total cash inflows (principal Interest @ 12%
outstanding repayment + interest
31-Dec-20X2 358,673
31-Dec-20X3 185,714 216,000 43,041
31-Dec-20X4 - 208,000 22,286
Amortisation of employee benefit cost shall be as follows:
Date Balance Amortised to P&L Adjustment
1-Jan-20X1 156,121
31-Dec-20X1 124,897 31,224
31-Dec-20X2 60,601 31,224 33,072
31-Dec-20X3 30,300 30,300
31-Dec-20X4 - 30,300
e. 31 December 20X3 –
Particulars Dr. Amount (₹) Cr. Amount (₹)
Cash A/c Dr. 216,000
To Interest income (profit and loss) @12% A/c 43,041
To loan to employee A/c 172,959
(Being third instalment of repayment of loan
accounted for using the amortised cost and effective
interest rate of 12%)
Employee benefit (profit and loss) A/c Dr 30,300
To Pre-paid employee cost A/c 30,300
(Being amortization of pre-paid employee cost
charged to profit and loss as employee benefit cost)
f. 31 December 20X4 –

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Chapter 19 :

Particulars Dr. Amount (₹) Cr. Amount (₹)

Cash A/c Dr 208,000
To Interest income (profit and loss) @12% A/c 22,286
To loan to employee A/c 185,714
(Being last instalment of repayment of loan
accounted for using the amortised cost and
effective interest rate of 12%)
Employee benefit (profit and loss) A/c Dr 30,300
To Pre-paid employee cost A/c 30,300
(Being amortization of pre-paid employee cost
charged to profit and loss as employee benefit
cost)
Q30: KK Ltd. has granted an interest free loan of ₹ 10,00,000 to its wholly owned Indian Subsidiary YK
Ltd. There is no transaction cost attached to the said loan. The Company has not finalised any
terms and conditions including the applicable interest rates on such loans. The Board of Directors
of the Company are evaluating various options and has requested your firm to provide your views
under Ind AS in following situations:
(i) The Loan given by KK Ltd. to its wholly owned subsidiary YK Ltd. is interest free and such
loan is repayable on demand.
(ii) The said Loan is interest free and will be repayable after 3 years from the date of granting
such loan. The current market rate of interest for similar loan is 10%. Considering the same,
the fair value of the loan at initial recognition is ₹ 8,10,150.
(iii) The said loan is interest free and will be repaid as and when the YK Ltd. has funds to repay
the Loan amount.
Based on the same, KK Ltd. has requested you to suggest the accounting treatment of the
above loan in the stand-alone financial statements of KK Ltd. and YK Ltd. and also in the
consolidated financial statements of the group. Consider interest for only one year for the
above loan.
Further the Company is also planning to grant interest free loan from YK Ltd. to KK Ltd. in the
subsequent period. What will be the accounting treatment of the same under applicable Ind AS?
[RTP May 2019; Exam Dec 21 (12 Marks)]
Ans: Scenario (i) : Since the loan is repayable on demand, it has fair value equal to cash
consideration given. KK Ltd. and YK Ltd. should recognize financial asset and liability,
respectively, at the amount of loan given (assuming that loan is repayable within a year). Upon,
repayment, both the entities should reverse the entries that were made at the origination.
Journal entries in the books of KK Ltd.
At origination
Loan to YK Ltd. A/c Dr. ₹ 10,00,000
To Bank A/c ₹ 10,00,000
On repayment

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 Chapter 19 : Financial Instrument

Bank A/c Dr. ₹ 10,00,000

To Loan to YK Ltd. A/c ₹ 10,00,000
Journal entries in the books of YK Ltd.
At origination
Bank A/c Dr. ₹ 10,00,000
To Loan from KK Ltd. A/c ₹ 10,00,000
On repayment
Loan from KK Ltd. A/c Dr. ₹ 10,00,000
To Bank A/c ₹ 10,00,000
In the consolidated financial statements, there will be no entry in this regard since loan receivable
and loan payable will get set off.
Scenario (ii): Applying the guidance in Ind AS 109, a ‘financial asset’ shall be recorded at its fair
value upon initial recognition. Fair value is normally the transaction price. However, sometimes
certain type of instruments may be exchanged at off market terms (ie, different from market
terms for a similar instrument if exchanged between market participants).
If a long-term loan or receivable that carries no interest while similar instruments if exchanged
between market participants carry interest, then fair value for such loan receivable will be lower
from its transaction price owing to the loss of interest that the holder bears. In such cases
where part of the consideration given or received is for something other than the financial
instrument, an entity shall measure the fair value of the financial instrument. The difference
in fair value and transaction cost will treated as investment in Subsidiary YK Ltd.
Both KK Ltd. and YK Ltd. should recognise financial asset and liability, respectively, at fair
value on initial recognition, i.e., the present value of ₹ 10,00,000 payable at the end of 3
years using discounting factor of 10%. Since the question mentions fair value of the loan at
initial recognition as ₹ 8,10,150, the same has been considered. The difference between the loan
amount and its fair value is treated as an equity contribution to the subsidiary. This represents a
further investment by the parent in the subsidiary.
Journal entries in the books of KK Ltd. (for one year)
At origination
Loan to YK Ltd. A/c Dr. ₹ 8,10,150
Investment in YK Ltd. A/c Dr. ₹ 1,89,850
To Bank A/c ₹ 10,00,000
During periods to repayment- to recognise interest
Year 1 – Charging of Interest
Loan to YK Ltd. A/c Dr. ₹ 81,015
To Interest income A/c ₹ 81,015

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Chapter 19 :

Transferring of interest to Profit and Loss

Interest income A/c Dr. ₹ 81,015
To Profit and Loss A/c ₹ 81,015
On repayment
Bank A/c Dr. ₹ 10,00,000
To Loan to YK Ltd. A/c ₹ 10,00,000
Note- Interest needs to be recognised in statement of profit and loss. The same cannot be
adjusted against capital contribution recognised at origination.
Journal entries in the books of YK Ltd. (for one year)
At origination
Bank A/c Dr. ₹ 10,00,000
To Loan from KK Ltd. A/c ₹ 8,10,150
To Equity Contribution in KK Ltd. A/c ₹ 1,89,850
During periods to repayment- to recognise interest
Year 1
Interest expense A/c Dr. ₹ 81,015
To Loan from KK Ltd. A/c ₹ 81,015
On repayment
Loan from KK Ltd. A/c Dr. ₹ 10,00,000
To Bank A/c ₹ 10,00,000
In the consolidated financial statements, there will be no entry in this regard since loan and
interest income/expense will get set off.
Scenario (iii): Generally, a loan which is repayable when funds are available, cannot be stated as
loan repayable on demand. Rather the entity needs to estimate the repayment date and
determine its measurement accordingly by applying the concept prescribed in Scenario (ii).
In the consolidated financial statements, there will be no entry in this regard since loan and
interest income/expense will get set off.
In case the subsidiary YK Ltd. is planning to grant interest free loan to KK Ltd., then the difference
between the fair value of the loan on initial recognition and its nominal value should be treated
as dividend distribution by YK Ltd. and dividend income by the parent KK Ltd.
Q55: An entity purchases a debt instrument with a fair value of ₹ 1,000 on 15th March, 20X1 and
measures the debt instrument at fair value through other comprehensive income. The
instrument has an interest rate of 5% over the contractual term of 10 years, and has a 5%
effective interest rate. At initial recognition, the entity determines that the asset is not a
purchased or original credit-impaired asset.

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 Chapter 19 : Financial Instrument

On 31st March 20X1 (the reporting date), the fair value of the debt instrument has decreased
to ₹ 950 as a result of changes in market interest rates. The entity determines that there has
not been a significant increase in credit risk since initial recognition and that ECL should be
measured at an amount equal to 12 month ECL, which amounts to ₹ 30.
On 1st April 20X1, the entity decides to sell the debt instrument for ₹ 950, which is its fair value
at that date.
Pass journal entries for recognition, impairment and sale of debt instruments as per Ind AS
109. Entries relating to interest income are not to be provided. [RTP May 2019]
Ans: On Initial recognition Debit (₹) Credit (₹)
Financial asset-FVOCI Dr. 1,000
To Cash 1,000
On Impairment of debt instrument
Impairment expense (P&L) Dr. 30
Other comprehensive income Dr. 20
To Financial asset-FVOCI 50
The cumulative loss in other comprehensive income at the reporting date was ₹ 20. That amount
consists of the total fair value change of ₹ 50 (that is, ₹ 1,000-₹ 950) offset by the change in the
accumulated impairment amount representing 12-month ECL, that was recognized (₹ 30).
On Sale of debt instrument
Cash Dr. 950
To Financial asset –FVOCI 950
Loss on sale (P&L) Dr. 20
To Other comprehensive income 20
Q56: On 1st April, 20X1 an entity granted an interest-free loan of ₹ 5,00,000 to an employee for a
period of three years. The market rate of interest for similar loans is 5% per year.

On 31st March, 20X3, because of financial difficulties, the employee asked to extend the interest-
free loan for further three years. The entity agreed. Under the restructured terms, repayment
will take place on 31st March, 20X7. However, the entity only expects to receive a payment of ₹
2,50,000, given the financial difficulty of the employee.

Explain the accounting treatment on initial recognition of loan and after giving effect of the
changes in the terms of the loan as per Ind AS 109. Support your answer with Journal entries and
amortised cost calculation, as on the date of initial recognition and on the date of change in terms
of loan. [RTP Nov 2022]

Ans: As the loan is not at a market interest rate, hence it is not recorded at the transaction price of ₹
5,00,000. Instead, the entity measures the loan receivable at the present value of the future cash
inflows discounted at a market rate of interest available for a similar loan.

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Chapter 19 :

The present value of the loan receivable (financial asset) discounted at 5% per year is ₹ 5,00,000
÷ (1.05)3 = ₹ 4,32,000. Therefore, ₹ 4,32,000 is recorded on initial measurement of the loan
receivable. This amount will accrete to ₹ 5,00,000 over the three-year term using the effective
interest method.

The difference between ₹ 5,00,000 and ₹ 4,32,000 i.e., ₹ 68,000 is accounted for as prepaid
employee cost in accordance with Ind AS 19 ‘Employee Benefits’, which will be deferred and
amortised over the period of loan on straight line basis.

The journal entries on initial recognition are:

₹ ₹
Loan receivable (financial asset) Dr. 4,32,000
Prepaid employee cost (asset) Dr. 68,000
To Cash / Bank (financial asset) 5,00,000
(Being loan granted to the employee recognised)

The amortised cost calculation at 1st April, 20X1 is as follows:

Period Carrying amount Interest at Cash inflow Carrying
at 1st April 5% amount at
31st March
20X1-20X2 4,32,000 21,600 – 4,53,600
20X2-20X3 4,53,600 22,680 – 4,76,280
20X3-20X4 4,76,280 23,720* (5,00,000) –

*Difference of ₹ 94 (₹ 23,814 – ₹ 23,720) is due to approximation.

On 31st March, 20X3, the carrying amount of the loan receivable is ₹ 4,76,280.

As a result of that modification, on 31st March, 20X3, the present value of estimated cash flows
is recalculated to be ₹ 2,05,750 using the asset’s original effective interest rate of 5% (₹ 2,50,000
÷ (1.05)4). An impairment loss of ₹ 2,70,530 (₹ 4,76,280 – ₹ 2,05,750) is recognised in profit or
loss in the year 20X2-20X3. The carrying amount of the loan receivable may be reduced directly,
as follows:
₹ ₹
Profit or loss - impairment loss Dr. 2,70,530
To Loan receivable 2,70,530
(Being impairment loss recognised)

In this case, the loan receivable will be measured at ₹ 2,05,750 at 31st March, 20X3. The
revised amortised cost calculation at 1st April, 20X3 is as follows:
Period Carrying Interest at 5% (the Cash inflow Carrying
amount at 1st original effective amount at 31st
April interest rate) March
20X3-20X4 2,05,750 10,288 – 2,16,038
20X4-20X5 2,16,038 10,802 – 2,26,840
20X5-20X6 2,26,840 11,342 – 2,38,182

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 Chapter 19 : Financial Instrument

20X6-20X7 2,38,182 11,818 (2,50,000) –

Q57:
A) On 1st January 20X1, SamCo. Ltd. agreed to purchase USD ($) 20,000 from JT Bank in future on
31st December 20X1 for a rate equal to ₹ 68 per USD. SamCo. Ltd. did not pay any amount upon
entering into the contract. SamCo Ltd. is a listed company in India and prepares its financial
statements on a quarterly basis.
Following the principles of recognition and measurement as laid down in Ind AS 109, you are
required to record the entries for each quarter ended till the date of actual purchase of USD.
For the purposes of accounting, please use the following information representing marked to
market fair value of forward contracts at each reporting date:
As at 31st March 20X1 – ₹ (25,000)
As at 30th June 20X1 - ₹ (15,000)
As at 30th September 20X1 - ₹ 12,000
Spot rate of USD on 31st December 20X1 - ₹ 66 per USD [May 2018 Exam (8 Marks) ]

Ans:
(i) Assessment of the arrangement using the definition of derivative included under Ind AS 109.
Derivative is a financial instrument or other contract within the scope of this Standard with all
three of the following characteristics:
a) its value changes in response to the change in a Specified 'underlying'.
b) it requires no initial net investment or an initial net investment that is smaller than would be
required for other types of contracts that would be expected to have a similar response to
changes in market factors.
c) it is settled at a future date.
Upon evaluation of contract in question it is noted that the contract meets the definition of a
derivative as follows:
a) the value of the contract to purchase USD at a fixed price changes in response to changes in
foreign exchange rate.
b) the initial amount paid to enter into the contract is zero. A contract which would give the
holder a similar response to foreign exchange rate changes would have required an
investment of USD 20,000 on inception.
c) the contract is settled in future
The derivative is a forward exchange contract.
As per Ind AS 109, derivatives are measured at fair value upon initial recognition and are
subsequently measured at fair value through profit and loss.
(ii) Accounting on 1st January 20X1:

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Chapter 19 :

As there was no consideration paid and without evidence to the contrary the fair value of the
contract on the date of inception is considered to be zero. Accordingly, no accounting entries
shall be recorded on the date of entering into the contract.
(iii) Accounting on 31st March 20X1:
Profit and loss A/c Dr. 25,000
To derivative financial liability 25,000
(Being mark to market loss on forward contract recorded)
(iv) Accounting on 30th June 20X1:
The change in value of the derivative forward contract shall be recorded as a derivative financial
liability in the books of SamCo Ltd. by recording the following journal entry:
Derivative financial liability A/c Dr. 10,000
To Profit and loss A/c 10,000
(being partial reversal of mark to market loss on forward contract recorded)
(v) Accounting on 30th September 20X1:
The value of the derivative forward contract shall be recorded as a derivative financial asset in
the books of SamCo Ltd. by recording the following journal entry:
Derivative financial liability A/c Dr 15,000
Derivative financial asset A/c Dr 12,000
To Profit and loss A/c 27,000
(being gain on mark to market of forward contract booked as derivative financial asset and
reversal of derivative financial liability)
(vi) Accounting on 31st December 20X1:
The settlement of the derivative forward contract by actual purchase of USD 20,000 shall be
recorded in the books of SamCo Ltd. by recording the following journal entry:
Cash (USD Account) @ 20,000 * 66 Dr. 13,20,000
Profit and loss A/c Dr. 52,000
To Cash @ 20,000 x 68 13,60,000
To Derivative financial asset A/c 12,000
(being loss on settlement of forward contract booked on actual purchase of USD)

Q60. Besides construction activity, Buildings & Co. Limited is also engaged in the trading of Copper. On
1st April, 20X1, it had 100 kg of copper costing Rs. 70 per kg - totalling Rs. 7000. The Company
has a scheduled delivery of these 100 kgs of copper to its customer on 30th September, 20X1 at
the rate of USD 100 on that date. To protect itself from decline in currency exchange rate (USD
to Rs.), the entity hedges its position by entering into currency futures contract for equivalent

P a g e | 19.19
 Chapter 19 : Financial Instrument

currency units at Rs. 76 / USD. The future contract mature on 30th September, 20X1. The
management performed an assessment of hedge effectiveness and concluded that the hedging
relationship qualifies for cash flow hedge accounting. The entity determines and documents that
changes in fair value of the currency futures contract will be highly effective in offsetting
variability in cash flow of currency exchange. On 30th September, 20X1, the entity closes out its
currency futures contract. On the same day, it also sells its inventory of copper at USD 100 when
the spot rate is Rs. 72 / USD.
You are required to prepare detailed working and pass necessary journal entries for the sale of
copper and the corresponding hedge instrument taken by the company. Pass the journal entries
as on the initial date (i.e. 1st April 20X1), first quarter end reporting (i.e. 30th June 20X1) and
date of sale of copper and settlement of forward contract (i.e. 30 th September 20X1).
Assume the exchange rates as follows and yield @ 6% per annum.

Date Future price for 30th September 20X1 delivery

(Rs. / USD)
1st April, 20X1 76
30th June, 20X1 74
30th September, 20X1 71

[MTP May 2021]

Ans: Calculation of discounting factor based on yield @ 6% p.a.

Date Spot rate at Forward rate for Discount factor @ 6%

indicated 30th September p.a. on quarter basis
date 20X1
1st April, 20X1 76 0.971
30th June 20X1 74 0.985
30th September, 20X1 72 71 1
Determination of fair value change
1st April, 30th June, 30th
20X1 20X1 September,
20X1
a Nominal value in Rs. @ Rs. 76 / USD 7,600 7,600 7,600
b Nominal value in USD (100 kg for
USD 100) 100 100 100
c Forward rate for 30th September, 76 74 71
20X1
d Value in Rs. (b x c) 7,600 7,400 7,100
e Difference (a-d) 0 200 500
f Discount factor (as calculated in the 0.971 0.985 1
above table)

P a g e | 19.20
Chapter 19 :

g Fair value (e x f) 0 197 500

h Fair value change for the period 0 197 303*
* 500 – 197= 303
Journal Entries
Date Particulars Dr. Cr.
1st April, No entry as initial fair value is zero
20X1
30th June, Future Contract Dr. 197
20X1 To Cash Flow Hedge Reserve (Other Equity)- OCI 197
(Being Change in Fair Value of Hedging Instrument
recognised in OCI accumulated in a separate
component in Equity)
30th Future Contract Dr. 303
September, To Cash Flow Hedge Reserve (Other Equity) - OCI 303
20X1 (Being change in fair value of the hedging instrument
recognised in OCI)
30th Bank/Trade Receivable Dr. 7,200
September, To Revenue from Contracts with Customers 7,200
20X1 (Being sale of 100 kgs. of copper for USD 100
recognised at spot rate of Rs. 72 for USD 1)
30th Cash Flow Hedge Reserve (Other Equity) – OCI Dr. 500
September, To Revenue from Contracts with Customers 500
20X1 (Being fair value change in forward contract
reclassified to profit and loss and recognised in the
line item affected by the hedge item)
30th Bank / Cash Dr. 500
September, To Future Contract 500
20X1
Q61: D Ltd. issues callable preference shares to G Ltd. for a consideration of ₹ 10 lakhs. The holder has
an option to convert these preference shares to a fixed number of equity instruments of the
issuer anytime up to a period of 3 years. If the option is not exercised by the holder, the
preference shares are redeemed at the end of 3 years. The preference shares carry a coupon of
RBI base rate plus 1% p.a.
The prevailing market rate for similar preference shares, without the conversion feature or
issuer’s redemption option, is RBI base rate plus 4% p.a. On the date of contract, RBI base rate is
9% p.a. The value of call as determined using Black and Scholes model for option pricing is is ₹
29,165
Calculate the value of the liability and equity components. [ICAI SM]
Ans: The values of the liability and equity components are calculated as follows:

P a g e | 19.21
 Chapter 19 : Financial Instrument

Present value of principal payable at the end of 3 years (₹ 10 lakhs discounted at 13% for 3 years)
= ₹ 6,93,050
Present value of interest payable in arrears for 3 years (₹ 100,000 discounted at 13% for each of
3 years) = ₹ 2,36,115
The issuer's right to call the instrument in the event that interest rates go up makes a callable
instrument less attractive to the holder than a plain vanilla instrument. This results in a derivative
asset. The value of that early redemption option is ₹ 29,165
Net financial liability (A + B – C) = ₹ 9,00,000
Therefore, equity component = fair value of compound instrument, say, ₹ 1,000,000 less net
financial liability component i.e. ₹ 9,00,000 = ₹ 1,00,000.
In subsequent years, the profit and loss account is charged with interest of RBI base rate plus 4%
p.a. on the liability component at (A) above.

Q74: On 1 April 20X1, Sun Limited guarantees a ₹10,00,000 loan of Subsidiary – Moon Limited, which
Bank STDK has provided to Moon Limited for three years at 8%.

Interest payments are made at the end of each year and the principal is repaid at the end of the
loan term.

If Sun Limited had not issued a guarantee, Bank STDK would have charged Moon Limited an
interest rate of 11%. Sun Limited does not charge Moon Limited for providing the guarantee.

On 31 March 20X2, there is 1% probability that Moon Limited may default on the loan in the next
12 months. If Moon Limited defaults on the loan, Sun Limited does not expect to recover any
amount from Moon Limited.

On 31 March 20X3, there is 3% probability that Moon Limited may default on the loan in the next
12 months. If Moon Limited defaults on the loan, Sun Limited does not expect to recover any
amount from Moon Limited.
Provide the accounting treatment of financial guarantee as per Ind AS 109 in the books of Sun
Ltd., on initial recognition and in subsequent periods till 31 March 20X3.
[RTP MAY 21; MTP NOV 2021; Nov 2022; Nov 2023]

Ans: 1 April 20X1

A financial guarantee contract is initially recognised at fair value. The fair value of the guarantee
will be the present value of the difference between the net contractual cash flows required under
the loan, and the net contractual cash flows that would have been required without the
guarantee.
Particulars Year 1 Year 2 Year 3 Total
(₹ ) (₹ ) (₹ ) (₹ )
Cash flows based on interest rate of 11% 1,10,000 1,10,000 1,10,000 3,30,000
(A)

P a g e | 19.22
Chapter 19 :

Cash flows based on interest rate of 8% 80,000 80,000 80,000 2,40,000

(B)
Interest rate differential (A-B) 30,000 30,000 30,000 90,000
Discount factor @ 11% 0.901 0.812 0.731
Interest rate differential discounted at 11% 27,030 24,360 21,930 73,320
Fair value of financial guarantee contract (at 73,320
inception)

Journal Entry
Particulars Debit (₹) Credit (₹)
Investment in subsidiary Dr. 73,320
To Financial guarantee (liability) 73,320
(Being financial guarantee initially recorded)

31 March 20X2

Subsequently at the end of the reporting period, financial guarantee is measured at the higher
of:

- the amount of loss allowance; and

- the amount initially recognised less cumulative amortization, where appropriate.

At 31 March 20X2, there is 1% probability that Moon Limited may default on the loan in the next
12 months. If Moon Limited defaults on the loan, Sun Limited does not expect to recover any
amount from Moon Limited. The 12-month expected credit losses are therefore ₹10,000
(₹10,00,000 x 1%).

The initial amount recognised less amortisation is ₹51,385 (₹73,320 + ₹8,065 (interest accrued
based on EIR)) – ₹30,000 (benefit of the guarantee in year 1) Refer table below. The unwound
amount is recognised as income in the books of Sun Limited, being the benefit derived by Moon
Limited not defaulting on the loan during the period.
Year Opening balance EIR @ 11% Benefits provided Closing
balance
₹ ₹ ₹
1 73,320 8,065 (30,000) 51,385
2 51,385 5,652 (30,000) 27,037
3 27,037 2,963* (30,000) -

* Difference is due to approximation

P a g e | 19.23
 Chapter 19 : Financial Instrument

The carrying amount of the financial guarantee liability after amortisation is therefore ₹ 51,385,
which is higher than the 12-month expected credit losses of ₹ 10,000. The liability is therefore
adjusted to ₹ 51,385 (the higher of the two amounts) as follows:
Particulars Debit (₹) Credit (₹)
Financial guarantee (liability) Dr. 21,935
To Profit or loss 21,935
(Being financial guarantee subsequently adjusted)

31 March 20X3

At 31 March 20X3, there is 3% probability that Moon Limited will default on the loan in the next
12 months. If Moon Limited defaults on the loan, Sun Limited does not expect to recover any
amount from Moon Limited. The 12-month expected credit losses are therefore ₹ 30,000 (₹
10,00,000 x 3%).

The initial amount recognised less accumulated amortisation is ₹ 27,037, which is lower than the
12-month expected credit losses (₹ 30,000). The liability is therefore adjusted to ₹ 30,000 (the
higher of the two amounts) as follows:
Particulars Debit (₹) Credit (₹)
Financial guarantee (liability) Dr. 21,385*
To Profit or loss (Note) 21,385
(Being financial guarantee subsequently adjusted)

* The carrying amount at the end of 31 March 20X2 = ₹ 51,385 less 12-month expected credit
losses of ₹ 30,000.

Q84: Autumn Limited has a policy of providing subsidized loans to its employees for their personal
purposes. Mrs. Jama Bai, a senior HR manager in the Company, took a loan of ₹ 12.00 lakhs on
the following terms:

 Interest rate 4% per annum

 Loan disbursement date: 1st April, 2019

 The principal amount of the loan shall be recovered in 4 equal annual installments
commencing from 31st March, 2020

 The accumulated interest computed on reducing balance at simple interest is collected in

3 equal annual installments after collection of the principal amount

 Mrs. Jama Bai must remain in service till the principal and interest are paid

 The market rate of a comparable loan to Mrs. Jama Bai is 9% per annum

 The present value of ₹ 1 at 9% per annum at the end of respective years is as follows:

P a g e | 19.24
Chapter 19 :

Year ending 31st 2020 2021 2022 2023 2024 2025 2026
March

Present Value 0.9174 0.8417 0.7722 0.7084 0.6499 0.5963 0.5470

Under the assumption that no probable future economic benefits except the return of loan has
been guaranteed by the employee, you are required to:

I. Provide the journal entries at the time of initial recognition of loan on 1st April, 2019 and
as at 31st March, 2020; and

II. Prepare ledger account of 'Loan to Mrs. Jama Bai' from the inception of the loan till its
final payment.
[Exam May 23 (14 Marks); MTP May 2024]

Ans: (i) Journal Entry

Date Particulars Dr. Cr.

₹ ₹
1/4/2019 Loan to Mrs. Jama Bai A/c Dr. 10,43,638
Pre-paid employee cost A/c Dr. 1,56,362
To Bank A/c 12,00,000
(Being loan to employee recorded at fair value)

31/3/2020 Loan to Mrs. Jama Bai A/c Dr. 93,927

To Finance Income A/c 93,927
(Being finance income @ 9% recorded in the books)

31/3/2020 Bank A/c Dr. 3,00,000

To Loan to Mrs. Jama Bai A/c 3,00,000
(Being installment received at the end of the year)

(ii) In the books of Autumn Ltd. Loan to Mrs. Jama Bai A/c

Date Particulars Amount Date Particulars Amount

(₹) (₹)
1.4.2019 To Bank A/c 10,43,638 31.3.2020 By Bank A/c 3,00,000
31.3.2020 To Finance income (W.N.3) 31.3.2020 By Balance c/d
93,927 8,37,565
11,37,565 11,37,565
1.4.2020 To Balance b/d 8,37,565 31.3.2021 By Bank A/c 3,00,000
31.3.2021 To Finance income (W.N.3) 31.3.2021 By Balance c/d
75,381 6,12,946

P a g e | 19.25
 Chapter 19 : Financial Instrument

9,12,946 9,12,946
1.4.2021 To Balance b/d 6,12,946 31.3.2022 By Bank A/c 3,00,000
31.3.2022 To Finance income (W.N.3) 31.3.2022 By Balance c/d
55,165 3,68,111
6,68,111 6,68,111
1.4.2022 To Balance b/d 3,68,111 31.3.2023 By Bank A/c 3,00,000
31.3.2023 To Finance income (W.N.3) 31.3.2023 By Balance c/d
33,130 1,01,241
4,01,241 4,01,241
1.4.2023 To Balance b/d 1,01,241 31.3.2024 By Bank A/c 40,000
31.3.2024 To Finance income (W.N.3) 31.3.2024 By Balance c/d
9, 70,353
112
1,10,353 1,10,353
1.4.2024 To Balance b/d 70,353 31.3.2025 By Bank A/c 40,000
31.3.2025 To Finance income (W.N.3) 31.3.2025 By Balance c/d
6,332 36,685
76,685 76,685
1.4.2025 To Balance b/d 36,685 31.3.2026 By Bank A/c 40,000
31.3.2026 To Finance income (W.N.3)
3,315*

40,000 40,000
*Difference of ₹ 13 (₹ 3,315 – ₹ 3,302) is due to
approximation.
Working Notes:
i) Calculation of initial recognition amount of loan to employee
Year Estimated Cash Flows PV Factor @9% Present Value
₹ ₹
31/3/2020 3,00,000 0.9174 2,75,220
31/3/2021 3,00,000 0.8417 2,52,510
31/3/2022 3,00,000 0.7722 2,31,660
31/3/2023 3,00,000 0.7084 2,12,520
31/3/2024 40,000 (W.N.2) 0.6499 25,996

P a g e | 19.26
Chapter 19 :

31/3/2025 40,000 (W.N.2) 0.5963 23,852

31/3/2026 40,000 (W.N.2) 0.5470 21,880
Fair Value of Loan 10,43,638
ii) Computation of Interest to be paid

Year Opening Cash Flows Principal Interest @ Cumulative

outstanding outstanding 4% on a Interest
balance at year
a b end c d e
₹ ₹ ₹ ₹
31/3/2020 12,00,000 3,00,000 9,00,000 48,000 48,000
31/3/2021 9,00,000 3,00,000 6,00,000 36,000 84,000
31/3/2022 6,00,000 3,00,000 3,00,000 24,000 1,08,000
31/3/2023 3,00,000 3,00,000 Nil 12,000 1,20,000
31/3/2024 1,20,000 40,000
(1,20,000/3)
31/3/2025 40,000
(1,20,000/3)
31/3/2026 40,000
(1,20,000/3)
iii) Computation of finance cost as per amortization table
Year Opening Balance Interest @ 9% Repayment Closing
Balance
(1) (2) (3) (1+2-3)
₹ ₹ ₹ ₹
1/4/2019 10,43,638
31/3/2020 10,43,638 93,927 3,00,000 8,37,565
31/3/2021 8,37,565 75,381 3,00,000 6,12,946
31/3/2022 6,12,946 55,165 3,00,000 3,68,111
31/3/2023 3,68,111 33,130 3,00,000 1,01,241
31/3/2024 1,01,241 9,112 40,000 70,353
31/3/2025 70,353 6,332 40,000 36,685
31/3/2026 36,685 3,315* 40,000 Nil
*Difference of ₹ 13 (₹ 3,315 – ₹ 3,302) is due to approximation.

P a g e | 19.27
 Chapter 19 : Financial Instrument

Q85: Weak Limited, which is a fully owned subsidiary company of Strong Limited approached Strong
Limited for an interest free loan for mitigation of its financial difficulties. Strong Limited provided
the loan to Weak Limited on the following terms & conditions:

Nature of loan Interest Free

Amount of loan ₹ 60,00,000
Date of disbursement of loan 1st April, 2021
Loan period 3 years
Loan repayable by Weak Ltd. On 31st March, 2024
Market rate of interest for similar loan 8% (both for holding and subsidiary) per annum
P.V. factor of ₹ 1 at the end of 3rd year at 8% per annum is 0.7938

Assuming that there are no transaction costs, you are required to pass necessary accounting
entries in the books of Weak Limited for all the three years. [Exam May 23 (15 Marks)]

Ans: Accounting in the books of Weak Ltd (Subsidiary)

Date Particulars Amount Amount

On the date of loan
1.4.2021 Bank A/c Dr. 60,00,000
To Loan from Strong Ltd. (Payable) 47,62,800
To Equity (Deemed capital contribution from ABC Ltd.) 12,37,200

(Being the loan taken from Strong Ltd. recognised at fair

value)
At the end of Year 1
31.3.2022 Interest expense (Finance cost) Dr. 3,81,024
To Loan from Strong Ltd. (Payable) 3,81,024
(Being interest expense recognised)
At the end of Year 2
31.3.2023 Interest expense (Finance cost) Dr. 4,11,506
To Loan from Strong Ltd. (Payable) 4,11,506
(Being interest expense recognised)
At the end of Year 3
31.3.2024 Interest expense (Finance cost) Dr. 4,44,670*
To Loan from Strong Ltd. (Payable) 4,44,670
(Being interest expense recognised)
On repayment of loan
31.3.2024 Loan from Strong Ltd. (Payable) Dr. 60,00,000
To Bank A/c 60,00,000

P a g e | 19.28
Chapter 19 :

(Being loan repaid by Weak Ltd.)

*Difference is due to approximation.

Working Notes:

1) Present Value of Loan = ₹ 60,00,000 x 0.7938 = ₹ 47,62,800

2) Amortisation table for computation of interest:

Year Opening balance Interest @ 8% Repayment Closing balance
end (1) (2) (3) (1) + (2) - (3)
1 47,62,800.00 3,81,024.00 - 51,43,824.00
2 51,43,824.00 4,11,506.00 - 55,55,330.00
3 55,55,330.00 4,44,670.00* 60,00,000.00 -

*Difference is due to approximation.

P a g e | 19.29
Chapter 20 : Revenue From Contract with Customers
(IND AS 115)

CHAPTER 20
REVENUE FROM CONTRACT WITH CUSTOMERS
(IND AS 115)
Q26: An entity has a fixed fee contract for ₹ 1 million to develop a product that meets specified
performance criteria. Estimated cost to complete the contract is ₹ 950,000. The entity will
transfer control of the product over five years, and the entity uses the cost -to-cost input
method
to measure progress on the contract. An incentive award is available if the product meets the
following weight criteria:
Weight (kg) Award % of fixed fee Incentive fee
951 or greater 0% —
701–950 10% ₹ 100,000
700 or less 25% ₹ 250,000
The entity has extensive experience creating products that meet the specific performance
criteria. Based on its experience, the entity has identified five engineering alternatives that will
achieve the 10 percent incentive and two that will achieve the 25 percent incentive. In this
case, the entity determined that it has 95 percent confidence that it will achieve the 10
percent incentive and 20 percent confidence that it will achieve the 25 percent incentive.
Based on this analysis, the entity believes 10 percent to be the most likely amount when
estimating the transaction price. Therefore, the entity includes only the 10 percent award in the
transaction price when calculating revenue because the entity has concluded it is probable
that a significant reversal in the amount of cumulative revenue recognized will not occur when
the uncertainty associated with the variable consideration is subsequently resolved due to its
95 percent confidence in achieving the 10 percent award.
The entity reassesses its production status quarterly to determine whether it is on track to
meet the criteria for the incentive award. At the end of the year four, it becomes apparent that
this contract will fully achieve the weight-based criterion. Therefore, the entity revises its
estimate of variable consideration to include the entire 25 percent incentive fee in the year
four because, at this point, it is probable that a significant reversal in the amount of cumulative
revenue recognized will not occur when including the entire variable consideration in the
transaction price.
Evaluate the impact of changes in variable consideration when cost incurred is as follows:
Year ₹
1 50,000
2 1,75,000
3 4,00,000

P a g e | 20.1
 Chapter 20 : Revenue From Contract with Customers
(IND AS 115)
4 2,75,000
5 50,000

Calculate yearly Revenue, Operating Profit and Margin (%). For simplification purposes,
calculate revenue for the year independently based on costs incurred during the year divided
by total expected costs, with the assumption that total expected costs do not change.
[Exam Dec 21 (10 Marks)]
Ans: [Note: For simplification purposes, the table calculates revenue for the year independently
based on costs incurred during the year divided by total expected costs, with the assumption
that total expected costs do not change.]
Fixed consideration A 1,000,000
Estimated costs to complete* B 950,000

Year 1 Year 2 Year 3 Year 4 Year 5

Total estimated variable C 100,000 100,000 100,000 250,000 250,000
consideration
Fixed revenue D=A x H/B 52,632 184,211 421,053 289,474 52,632
Variable revenue E=C x H/B 5,263 18,421 42,105 72,368 13,158
Cumulative revenue adjustment F (see — — — 99,370 —
below)
Total revenue G=D+E+F 57,895 202,632 463,158 461,212 65,790
Costs H 50,000 175,000 400,000 275,000 50,000
Operating profit I=G–H 7,895 27,632 63,158 186,212 15,790
Margin (rounded off) J=I/G 14% 14% 14% 40% 24%
* For simplicity, it is assumed there is no change to the estimated costs to complete
throughout the contract period.
* In practice, under the cost-to-cost measure of progress, total revenue for each period is
determined by multiplying the total transaction price (fixed and variable) by the ratio
of cumulative cost incurred to total estimated costs to complete, less revenue
recognized to date.
Calculation of cumulative catch-up adjustment:
Updated variable consideration L 250,000
Percent complete in Year 4: (rounded off) M=N/O 95%
Cumulative costs through Year 4 N 900,000
Estimated costs to complete O 950,000
Cumulative variable revenue through Year 4: P 138,130
Cumulative catch-up adjustment F=L x M–P 99,370

P a g e | 20.2
Chapter 20 : Revenue From Contract with Customers
(IND AS 115)
Q31: ST Limited enters into a contract with a customer to sell an asset. Control of the asset will
transfer to the customer in two years (i.e. the performance obligation will be satisfied at a
point in time). The contract includes two alternative payment options:
Payment of ₹ 5,000 in two years when the customer obtains control of the asset or Payment of
₹ 4,000 when the contract is signed. The customer elects to pay ₹ 4,000 when the contract is
signed.
ST Limited concludes that the contract contains a significant financing component because of
the length of time between when the customer pays for the asset and when the entity
transfers the asset to the customer, as well as the prevailing interest rates in the market.
The interest rate implicit in the transaction is 11.8 per cent, which is the interest rate necessary
to make the two alternative payment options economically equivalent. However, the entity
determines that, the rate that should be used in adjusting the promised consideration is 6%,
which is the entity's incremental borrowing rate.
Pass journal entries showing how the entity would account for the significant financing
component. [MTP May 2020]
Ans: Journal Entries showing accounting for the significant financing component:
(a) Recognise a contract liability for the ₹ 4,000 payment received at contract inception:
Cash Dr. ₹ 4,000
To Contract liability ₹ 4,000
(b) During the two years from contract inception until the transfer of the asset, the entity
adjusts the promised amount of consideration and accretes the contract liability by
recognising interest on ₹ 4,000 at 6% for two years:
Interest expense Dr. ₹ 494*
To Contract liability ₹ 494
* ₹ 494 = ₹ 4,000 contract liability × (6% interest per year for two years).
(c) Recognise revenue for the transfer of the asset:
Contract liability Dr. ₹ 4,494
To Revenue ₹ 4,494
Q43: A Ltd. a telecommunication company, entered into an agreement with B Ltd. which is engaged
in generation and supply of power. The agreement provided that A Ltd. will provide 1,00,000
minutes of talk time to employees of B Ltd. in exchange for getting power equivalent to 20,000
units. A Ltd. normally charges Re.0.50 per minute and B Ltd. Charges ₹ 2.5 per unit. How should
revenue be measured in this case? [MTP Nov 2023]
Ans: Paragraph 5(d) of Ind AS 115 excludes non-monetary exchanges between entities in the same
line of business to facilitate sales to customers or potential customers. For example, this
Standard would not apply to a contract between two oil companies that agree to an exchange
of oil to fulfil demand from their customers in different specified locations on a timely basis.

P a g e | 20.3
 Chapter 20 : Revenue From Contract with Customers
(IND AS 115)
However, the current scenario will be covered under Ind AS 115 since the same is exchange of
dissimilar goods or services.
As per paragraph 47 of Ind AS 115, “an entity shall consider the terms of the contract and its
customary business practices to determine the transaction price. The transaction price is the
amount of consideration to which an entity expects to be entitled in exchange for transferring
promised goods or services to a customer, excluding amounts collected on behalf of third
parties (for example, some sales taxes). The consideration promised in a contract with a
customer may include fixed amounts, variable amounts, or both”.
Paragraph 66 of Ind AS 115 provides that to determine the transaction price for contracts in
which a customer promises consideration in a form other than cash, an entity shall measure
the non-cash consideration (or promise of noncash consideration) at fair value.
On the basis of the above, revenue recognised by A Ltd. will be the consideration in the form
of power units that it expects to be entitled for talktime sold, i.e. ₹ 50,000 (20,000 units x ₹2.5).
The revenue recognised by B Ltd. will be the consideration in the form of talk time that it
expects to be entitled for the power units sold, i.e., ₹ 50,000 (1,00,000 minutes x Re. 0.50).
Q49: An entity enters into a contract with a customer for two intellectual property licences (Licences
A and B), which the entity determines to represent two performance obligations each satisfied
at a point in time. The stand-alone selling prices of Licences A and B are ₹ 1,600,000 and ₹
2,000,000, respectively. The entity transfers Licence B at inception of the contract and
transfers Licence A one month later.
Case A—Variable consideration allocated entirely to one performance obligation
The price stated in the contract for Licence A is a fixed amount of ₹ 1,600,000 and for Licence B
the consideration is three per cent of the customer's future sales of products that use Licence
B. For purposes of allocation, the entity estimates its sales-based royalties (ie the variable
consideration) to be ₹ 2,000,000. Allocate the transaction price.
Case B—Variable consideration allocated on the basis of stand-alone selling prices
The price stated in the contract for Licence A is a fixed amount of ₹ 600,000 and for
Licence B the consideration is five per cent of the customer's future sales of products that use
Licence B. The entity's estimate of the sales-based royalties (ie the variable consideration) is ₹
3,000,000. Here, Licence A is transferred 3 months later. The royalty due from the customer’s
first month of sale is 4,00,000.
Allocate the transaction price and determine the revenue to be recognised for each licence
and the contract liability, if any.
Ans: Case A—Variable consideration allocated entirely to one performance obligation
To allocate the transaction price, the entity considers the criteria in paragraph 85 and
concludes that the variable consideration (ie the sales-based royalties) should be allocated
entirely to Licence B. The entity concludes that the criteria are met for the following reasons:
(a) the variable payment relates specifically to an outcome from the performance obligation
to transfer Licence B (ie the customer's subsequent sales of products that use Licence B).

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(b) allocating the expected royalty amounts of ₹ 2,000,000 entirely to Licence B is consistent
with the allocation objective in paragraph 73 of Ind AS 115. This is because the entity's
estimate of the amount of sales-based royalties (₹ 2,000,000) approximates the stand-
alone selling price of Licence B and the fixed amount of ₹ 1,600,000 approximates the
stand-alone selling price of Licence A. The entity allocates ₹ 1,600,000 to Licence A. This
is because, based on an assessment of the facts and circumstances relating to both
licences, allocating to Licence B some of the fixed consideration in addition to all of the
variable consideration would not meet the allocation objective in paragraph 73 of
Ind AS 115.
The entity transfers Licence B at inception of the contract and transfers Licence A one
month later. Upon the transfer of Licence B, the entity does not recognise revenue
because the consideration allocated to Licence B is in the form of a sales-based royalty.
Therefore, the entity recognises revenue for the sales-based royalty when those
subsequent sales occur.
When Licence A is transferred, the entity recognises as revenue the ₹ 1,600,000 allocated
to Licence A.
Case B—Variable consideration allocated on the basis of stand-alone selling prices
To allocate the transaction price, the entity applies the criteria in paragraph 85 of Ind AS 115 to
determine whether to allocate the variable consideration (ie the sales-based royalties) entirely
to Licence B.
In applying the criteria, the entity concludes that even though the variable payments relate
specifically to an outcome from the performance obligation to transfer Licence B (ie the
customer's subsequent sales of products that use Licence B), allocating the variable
consideration entirely to Licence B would be inconsistent with the principle for allocating the
transaction price. Allocating ₹ 600,000 to Licence A and ₹ 3,000,000 to Licence B does not
reflect a reasonable allocation of the transaction price on the basis of the stand-alone selling
prices of Licences A and B of ₹ 1,600,000 and ₹ 2,000,000, respectively. Consequently, the
entity applies the general allocation requirements of Ind AS 115.
The entity allocates the transaction price of ₹ 600,000 to Licences A and B on the basis of
relative stand-alone selling prices of ₹ 1,600,000 and ₹ 2,000,000, respectively. The entity also
allocates the consideration related to the sales-based royalty on a relative stand-alone selling
price basis. However, when an entity licenses intellectual property in which the consideration is
in the form of a sales-based royalty, the entity cannot recognise revenue until the later of the
following events: the subsequent sales occur or the performance obligation is satisfied (or
partially satisfied).
Licence B is transferred to the customer at the inception of the contract and Licence A is
transferred three months later. When Licence B is transferred, the entity recognises as
revenue ₹ 333,333 [(₹ 2,000,000 ÷ ₹ 3,600,000) × ₹ 600,000] allocated to Licence B. When
Licence A is transferred, the entity recognises as revenue ₹ 266,667 [(₹ 1,600,000 ÷ ₹
3,600,000) × ₹ 600,000] allocated to Licence A.
In the first month, the royalty due from the customer's first month of sales is ₹ 400,000.
Consequently, the entity recognises as revenue ₹ 222,222 (₹ 2,000,000 ÷ ₹ 3,600,000 × ₹

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400,000) allocated to Licence B (which has been transferred to the customer and is therefore a
satisfied performance obligation). The entity recognises a contract liability for the ₹ 177,778 (₹
1,600,000 ÷ ₹ 3,600,000 × ₹ 400,000) allocated to Licence A. This is because although the
subsequent sale by the entity's customer has occurred, the performance obligation to which
the royalty has been allocated has not been satisfied.
Q58: On 01 January 20X1, an entity contracts to renovate a building including the installation of
new elevators. The entity estimates the following with respect to the contract:
Particulars Amount (₹)
Transaction price 5,000,000
Expected costs:
(a) Elevators 1,500,000
(b) Other costs 2,500,000
Total 4,000,000
The entity purchases the elevators and they are delivered to the site six months before they
will be installed. The entity uses an input method based on cost to measure progress towards
completion. The entity has incurred actual other costs of 500,000 by March 31, 20 X1.
How will the Company recognize revenue, if performance obligation is met over a period of
time?
Ans: Costs to be incurred comprise two major components – elevators and cost of construction
service.
(a) The elevators are part of the overall construction project and are not a distinct
performance obligation
(b) The cost of elevators is substantial to the overall project and are incurred well in advance.
(c) Upon delivery at site, customer acquires control of such elevators.
(d) And there is no modification done to the elevators, which the company only procures and
delivers at site. Nevertheless, as part of materials used in overall construction project, the
company is a principal in the transaction with the customer for such elevators also.
Therefore, applying the guidance on Input method –
- The measure of progress should be made based on percentage of costs incurred relative to
the total budgeted costs.
- The cost of elevators should be excluded when measuring such progress and revenue for such
elevators should be recognized to the extent of costs incurred.
The revenue to be recognized is measured as follows:
Particulars Amount (₹)
Transaction price 5,000,000
Costs incurred:

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(a) Cost of elevators 1,500,000
(b) Other costs 500,000
Measure of progress: 500,000 / 2,500,000 = 20%
Revenue to be recognised:
(a) For costs incurred (other than elevators) Total attributable revenue = 3,500,000
% of work completed = 20% Revenue to be recognised = 700,000
(b) Revenue for elevators1,500,000 (equal to costs incurred)
Total revenue to be recognised1,500,000 + 700,000 = 2,200,000
Therefore, for the year ended 31 March 20X1, the Company shall recognize revenue of ₹
2,200,000 on the project.
Q61: An entity enters into a contract for the sale of Product A for ₹ 1,000. As part of the contract, the
entity gives the customer a 40% discount voucher for any future purchases up to ₹ 1,000 in the
next 30 days. The entity intends to offer a 10% discount on all sales during the next 30 days as
part of a seasonal promotion. The 10% discount cannot be used in addition to the 40% discount
voucher.
The entity believes there is 80% likelihood that a customer will redeem the voucher and on an
average, a customer will purchase ₹ 500 of additional products.
Determine how many performance obligations does the entity have and their stand-alone
selling price and allocated transaction price? [MTP May 2020; Exam Nov 22 (4 Marks)]
Ans: Since all customers will receive a 10% discount on purchases during the next 30 days, the only
additional discount that provides the customer with a material right is the incremental discount
of 30% on the products purchased. The entity accounts for the promise to provide the
incremental discount as a separate performance obligation in the contract for the sale of
Product A.
The entity believes there is 80% likelihood that a customer will redeem the voucher and on an
average, a customer will purchase ₹ 500 of additional products. Consequently, the entity’s
estimated stand-alone selling price of the discount voucher is ₹ 120 (₹ 500 average purchase
price of additional products × 30% incremental discount × 80% likelihood of exercising the
option). The stand-alone selling prices of Product A and the discount voucher and the resulting
allocation of the ₹ 1,000 transaction price are as follows:
Performance obligations Stand-alone selling price
Product A ₹ 1000
Discount voucher ₹ 120
Total ₹ 1120
Performance obligations Allocated transaction price (to nearest ₹10)
Product A (₹ 1000 ÷ ₹ 1120 × ₹ 1000) ₹ 890

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Discount voucher (₹ 120 ÷ ₹ 1120 × ₹ 1000) ₹ 110
Total ₹ 1000
The entity allocates ₹ 890 to Product A and recognises revenue for Product A when control
transfers. The entity allocates ₹ 110 to the discount voucher and recognises revenue for the
voucher when the customer redeems it for goods or services or when it expires.

Q62: KK Ltd. runs a departmental store which awards 10 points for every purchase of ₹ 500 which
can be discounted by the customers for further shopping with the same merchant. Unutilised
points will lapse on expiry of two years from the date of credit. Value of each point is ₹ 0.50.
During the accounting period 20X1-20X2, the entity awarded 1,00,00,000 points to various
customers of which 18,00,000 points remained undiscounted. The management expects only
80% of the total award points during the year will be discounted of which normally 60% - 70%
are redeemed during the next year.
The Company has approached your firm with the following queries and has asked you to
suggest the accounting treatment (Journal Entries) under the applicable Ind AS for these award
points:
a) How should the recognition be done for the sale of goods worth ₹ 10,00,000 on a
particular day?
b) How should the redemption transaction be recorded in the year 20X1-20X2? The
Company has requested you to present the sale of goods and redemption as
independent transaction. Total sales of the entity is ₹ 5,000 lakhs.
c) How much of the deferred revenue should be recognised at the year-end (20X1- 20X2)
because of the estimation that only 80% of the outstanding points will be redeemed?
d) In the next year 20X2-20X3, 60% of the expected outstanding points were discounted
Balance 40% of the outstanding points of 20X1-20X2 still remained outstanding. How
much of the deferred revenue should the merchant recognize in the year 20X2-20X3 and
what will be the amount of balance deferred revenue?
e) How much revenue will the merchant recognized in the year 20X3-20X4, if 3,00,000
points are redeemed in the year 20X3-20X4? [RTP May 2019]

Ans:
a) Points earned on ₹ 10,00,000 @ 10 points on every ₹ 500 = [(10,00,000/500) x 10]= 20,000
points.
It is expected that 80% of the award points will only be redeemed.
Hence, considering the likelihood of the variable consideration,
Value of points = 20,000 points x ₹ 0.5 each point x 80% = ₹ 8,000

Revenue recognized for sale of goods ₹ 9,92,063 [10,00,000 x (10,00,000/10,08,000)]

Revenue for points deferred ₹ 7,937 [10,00,000 x (8,000/10,08,000)]

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Journal Entry
₹ ₹
Bank A/c Dr. 10,00,000
To Sales A/c 9,92,063
To Liability under Customer Loyalty programme 7,937

b) Points earned on ₹ 50,00,00,000 @ 10points on every ₹ 500 = [(50,00,00,000/500) x 10] =

1,00,00,000 points.
Value of points considering future likelihood = 1,00,00,000 points x ₹ 0.5 each point x 80% = ₹
40,00,000
Revenue recognized for sale of goods = ₹ 49,60,31,746 [50,00,00,000 x (50,00,00,000 /
50,40,00,000)]
Revenue for points = ₹ 39,68,254 [50,00,00,000x (40,00,000 / 50,40,00,000)]
Journal Entry in the year 20X1

₹ ₹
Bank A/c Dr. 50,00,00,000
To Sales A/c 49,60,31,746
To Liability under Customer Loyalty programme 39,68,254
(On sale of Goods)
Liability under Customer Loyalty programme Dr. 32,53,968
To Sales A/c 32,53,968
(On redemption of [(100 lakhs -18 lakhs) x 80% points]
Revenue for points to be recognized
Undiscounted points estimated to be recognized next year 18,00,000 x 80%
= 14,40,000 points
Total expected points to be redeemed within 2 years = 1,00,00,000 x 80% - 80,00,000
Points redeemed in the previous year= (1,00,00,000 – 18,00,000) x 80% = 65,60,000
Revenue to be recognised with respect to discounted point
= 39,68,254 x (65,60,000/80,00,000) = 32,53,968
c) Revenue to be deferred with respect to undiscounted point in 20X1-20X2
= 39,68,254 – 32,53,968= 7,14,286
d) In 20X2-20X3, KK Ltd. would recognize revenue for discounting of 60% of expected outstanding
points as follows:
Outstanding points = 18,00,000 x 80% x 60% = 8,64,000 points

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Total points discounted till date = 65,60,000 + 8,64,000 = 74,24,000 points
Revenue to be recognized in the year 20X2-20X3 = [{39,68,254 x (74,24,000 / 80,00,000)} –
32,53,968] = ₹ 4,28,572.

Liability under Customer Loyalty programme Dr. 4,28,572

To Sales A/c 4,28,572
(On redemption of further 8,64,000 points)

The Liability under Customer Loyalty programme at the end of the year 20X2-20X3 will be ₹
7,14,286 – 4,28,572 = 2,85,714.
e) In the year 20X3-20X4, the merchant will recognized the balance revenue of ₹ 1,84,873
irrespective of the points redeemed as this is the last year for redeeming the points. Journal
entry will be as follows:

Liability under Customer Loyalty programme Dr. 2,85,714

To Sales A/c 2,85,714
(On redemption of further 5,76,000 points)
Q66: An entity negotiates with major airlines to purchase tickets at reduced rates compared with the
price of tickets sold directly by the airlines to the public. The entity agrees to buy a specific
number of tickets and will pay for those tickets even if it is not able to resell them. The reduced
rate paid by the entity for each ticket purchased is negotiated and agreed in advance. The
entity determines the prices at which the airline tickets will be sold to its customers. The
entity sells the tickets and collects the consideration from customers when the tickets are
purchased; therefore, there is no credit risk.
The entity also assists the customers in resolving complaints with the service provided by
airlines. However, each airline is responsible for fulfilling obligations associated with the ticket,
including remedies to a customer for dissatisfaction with the service.
Determine whether the entity is a principal or an agent. [Exam Nov 23 (6 Marks)]
Ans: To determine whether the entity’s performance obligation is to provide the specified goods or
services itself (i.e. the entity is a principal) or to arrange for another party to provide those
goods or services (i.e. the entity is an agent), the entity considers the nature of its promise. The
entity determines that its promise is to provide the customer with a ticket, which provides the
right to fly on the specified flight or another flight if the specified flight is c hanged or cancelled.
The entity considers the following indicators for assessment as principal or agent under the
contract with the customers:
(a) the entity is primarily responsible for fulfilling the contract, which is providing the right to
fly. However, the entity is not responsible for providing the flight itself, which will be
provided by the airline.

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(b) the entity has inventory risk for the tickets because they are purchased before they are
sold to the entity’s customers and the entity is exposed to any loss as a result of not
being able to sell the tickets for more than the entity’s cost.
(c) the entity has discretion in setting the sales prices for tickets to its customers.
The entity concludes that its promise is to provide a ticket (i.e. a right to fly) to the customer.
On the basis of the indicators, the entity concludes that it controls the ticket before it is
transferred to the customer. Thus, the entity concludes that it is a principal in the transaction
and recognises revenue in the gross amount of consideration to which it is entitled in
exchange for the tickets transferred.
Q68: An entity enters into a contract with a customer on 1 April 20 X1 for the sale of a machine and
spare parts. The manufacturing lead time for the machine and spare parts is two years.
Upon completion of manufacturing, the entity demonstrates that the machine and spare parts
meet the agreed-upon specifications in the contract. The promises to transfer the machine and
spare parts are distinct and result in two performance obligations that each will be satisfied at a
point in time. On 31 March 20X3, the customer pays for the machine and spare parts, but only
takes physical possession of the machine. Although the customer inspects and accepts the
spare parts, the customer requests that the spare parts be stored at the entity’s warehouse
because of its close proximity to the customer’s factory. The customer has legal title to the
spare parts and the parts can be identified as belonging to the customer. Furthermore, the
entity stores the spare parts in a separate section of its warehouse and the parts are ready for
immediate shipment at the customer’s request. The entity expects to hold the spare parts for
two to four years and the entity does not have the ability to use the spare parts or direct them
to another customer.
How will the Company recognise revenue for sale of machine and spare parts? Is there any
other performance obligation attached to this sale of goods?
[Exam May 22 (6 Marks); MTP Nov 2023]
Ans: In the facts provided above, the entity has made sale of two goods – machine and space parts,
whose control is transferred at a point in time. Additionally, company agrees to hold the spare
parts for the customer for a period of 2-4 years, which is a separate performance obligation.
Therefore, total transaction price shall be divided amongst 3 performance obligations –
(i) Sale of machinery
(ii) Sale of spare parts
(iii) Custodial services for storing spare parts.
Recognition of revenue for each of the three performance obligations shall occur as follows:
- Sale of machinery: Machine has been sold to the customer and physical possession as
well as legal title passed to the customer on 31 March 20 X3. Accordingly, revenue for sale
of machinery shall be recognised on 31 March 20X3.
- Sale of spare parts: The customer has made payment for the spare parts and legal title
has been passed to specifically identified goods, but such spares continue to be physically

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held by the entity. In this regard, the company shall evaluate if revenue can be
recognized on bill-n-hold basis if all below criteria are met:
a) the reason for the bill-and-hold arrangement must be substantive (for example,
the customer has requested the arrangement);
The customer has specifically requested for entity to store goods in their
warehouse, owing to close proximity to customer’s factory.
b) the product must be identified separately as belonging to the customer;
The spare parts have been specifically identified and inspected by the customer.
c) the product currently must be ready for physical transfer to the customer; and
The spares are identifiedand segregated, therefore, read for delivery.
d) the entity cannot have the ability to use the product or to direct it to another
customer
Spares have been segregated and cannot be redirected to any other customer.
Therefore, all conditions of bill-and-hold are met and hence, company can recognize
revenue for sale of spare parts on 31 March 20X3.
- Custodial services: Such services shall be given for a period of 2 to 4 years from 31 March
20X3. Where services are given uniformly and customer receives & consumes benefits
simultaneously, revenue for such service shall be recognized on a straight line basis over a
period of time.
Q69: An entity manufactures and sells computers that include an assurance-type warranty for the
first 90 days. The entity offers an optional ‘extended coverage’ plan under which it will repair or
replace any defective part for three years from the expiration of the assurance-type warranty.
Since the optional ‘extended coverage’ plan is sold separately, the entity determines that the
three years of extended coverage represent a separate performance obligation (i.e. a service-
type warranty). The total transaction price for the sale of a computer and the extended
warranty is ₹ 36,000. The entity determines that the stand-alone selling prices of the
computer and the extended warranty are ₹ 32,000 and ₹ 4,000, respectively. The inventory
value of the computer is ₹ 14,400. Furthermore, the entity estimates that, based on its
experience, it will incur ₹ 2,000 in costs to repair defects that arise within the 90-day coverage
period for the assurance-type warranty. Pass required journal entries.
Ans: The entity will record the following journal entries:

₹ ₹
Cash / Trade receivables Dr. 36,000
Warranty expense Dr. 2,000
To Accrued warranty costs (assurance-type 2,000
warranty) 4,000
To Contract liability (service-type warranty) 32,000

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To Revenue
(To record revenue and contract liabilities related to
warranties)
Cost of goods sold Dr. 14,400
14,400
To Inventory
(To derecognise inventory and recognise cost of goods
sold)
The entity derecognises the accrued warranty liability associated with the assurance-type
warranty as actual warranty costs are incurred during the first 90 days after the customer
receives the computer. The entity recognises the contract liability associated with the service-
type warranty as revenue during the contract warranty period and recognises the costs
associated with providing the service-type warranty as they are incurred. The entity had to
determine whether the repair costs incurred are applied against the warranty reserve already
established for claims that occur during the first 90 days or recognised as an expense as
incurred.
In the above illustration, the net effect of the accounting treatment can be seen as follows:

Accounting point Treatment under Ind AS 115 Treatment as per AS 9

How warranty is Expense and liability effect created at Provision is made on past experience
accounted the inception of contract with customer based on a certain percentage of total
revenue to give effect to subsequent
warranty costs, say 5% of revenue.

Accounting treatment Total cash inflow 36,000 Total cash inflow 36,000
Warranty expense 2000 Provision for warranty
Accrued warranty cost 2,000 (at 5% of transaction price) 1800
Contract liability Contract liability – None

(for future service cost) 4000 Actual revenue 34,200

Actual revenue 32,000

Q75: An entity enters into a contract with a customer for the sale of a tangible asset on 1 January
20X1 for ₹ 1 million. The contract includes a call option that gives the entity the right to
repurchase the asset for ₹ 1.1 million on or before December 31, 20X1.
How would the entity account for this transaction?
Ans: In the above case, where the entity has a right to call back the goods upto a certain date –
• The customer cannot be said to have acquired control, owing to the repurchase right
with the seller entity

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• Since the original selling price (₹ 1 million) is lower than the repurchase price (₹ 1.1
million), this is construed to be a financing arrangement and accounted as follows:
(a) Amount received shall be recognized as ‘liability’
(b) Difference between sale price and repurchase price to be recognised as ‘finance
cost’ and recognised over the repurchase term.
Q79: A Ltd. is in the business of the infrastructure and has two divisions under the same; (I) Toll
Roads and (II) Wind Power. The brief details of these business and underlying project details
are as follows:
I. Bhilwara-Jabalpur Toll Project - The Company has commenced the construction of the
project in the current year and has incurred total expenses aggregating to ₹ 50 crores as
on 31st December, 20X1. Under IGAAP, the Company has 'recorded such expenses as
Intangible Assets in the books of account. The brief details of the Concession Agreement
are as follows:
• Total Expenses estimated to be incurred on the project ₹ 100 crores;
• Fair Value of the construction services is ₹ 110 crores;
• Total Cash Flow guaranteed by the Government under the concession agreement is
₹ 200 crores;
• Finance revenue over the period of operation phase is ₹ 15 crores:
• Other income relates to the services provided during the operation phase.
II. Kolhapur- Nagpur Expressway - The Company has also entered into another concession
agreement with Government of Maharashtra in the current year. The construction cost
for the said project will be ₹ 110 crores. The fair value of such construction cost is
approximately ₹ 200 crores. The said concession agreement is Toll based project and the
Company needs to collect the toll from the users of the expressway. Under IGAAP, UK Ltd.
has recorded the expenses incurred on the said project as an Intangible Asset.
Required
(i) What would be the classification of Bhilwara-Jabalpur Toll Project as per applicable
Ind AS? Give brief reasoning for your choice.
(ii) What would be the classification of Kolhapur-Nagpur Expressway Toll Project as per
applicable Ind AS? Give brief reasoning for your choice.
(iii) Also, suggest suitable accounting treatment for preparation of financial statements as
per Ind AS for the above 2 projects. [Exam Nov 22 (10 Marks)]
Ans: (i) Here the operator has a contractual right to receive cash from the grantor. The grantor
has little, if any, discretion to avoid payment, usually because the agreement is
enforceable by law. The operator has an unconditional right to receive cash if the
grantor contractually guarantees to pay the operator. Hence, operator recognizes a
financial asset to the extent it has a contractual right to receive cash.

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(ii) Here the operator has a contractual right to charge users of the public services. A right to
charge users of the public service is not an unconditional right to receive cash because
the amounts are contingent on the extent that the public uses the service. Therefore,
the operator shall recognise an intangible asset to the extent it receives a right (a
licence) to charge users of the public service.
(iii) Accounting treatment for preparation of financial statements
Bhilwara-Jabalpur Toll Project
Journal Entries

Particulars Dr. Cr.

(₹ in crores) (₹ in crores)
During construction:
1 Financial asset A/c Dr. 110
To Construction revenue 110
[To recognise revenue relating to construction
services, to be settled in case]
2 Cost of construction (profit or loss) Dr. 100
To Bank A/c (As and when incurred) 100
[To recognise costs relating to construction services]
During the operation phase:
3 Financial asset Dr. 15
To Finance revenue (As and when received or 15
due to receive)
[To recognise interest income under the financial
asset model]
4 Financial asset Dr. 75
To Revenue [(200-110) – 15] 75
[To recognise revenue relating to the operation
phase]
5 Bank A/c Dr. 200
To Financial asset 200
[To recognise cash received from the grantor]
Kolhapur-Nagpur Expressway -Intangible asset Journal Entries

Particulars Dr. Cr.

(₹ in crores) (₹ in crores)
During construction:
1 Cost of construction (profit or loss) Dr. 110
To Bank A/c (As and when incurred) 110
[To recognise costs relating to construction services]

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2 Intangible asset Dr. 200

To Revenue 200
[To recognise revenue relating to construction
services provided for non-cash consideration]
During the operation phase:
3 Amortisation expense Dr. 200
To Intangible asset (accumulated amortisation) 200
[To recognise amortisation expense relating to the
operation phase over the period of operation]
4 Bank A/c Dr. ?
To Revenue ?
[To recognise revenue relating to the operation
phase]
Note: Amount in entry 4 is kept blank as no information in this regard is given in the question.

Q89: Nivaan Limited commenced work on two long-term contracts during the financial year ended
on 31st March, 2019.
The first contract with A & Co. commences on 1st June, 2018 and had a total sales value of ₹ 40
lakh. It was envisaged that the contract would run for two years and that the total expected
costs would be ₹ 32 lakh. On 31st March, 2019, Nivaan Limited revised its estimate of the total
expected cost to ₹ 34 lakh on the basis of the additional rectification cost of ₹ 2 lakh incurred
on the contract during the current financial year. An independent surveyor has estimated at
31st March, 2019 that the contract is 30% complete. Nivaan Limited has incurred costs up to
31st March, 2019 of ₹ 16 lakh and has received payments on account of ₹ 13 lakh.
The second contract with B & Co. commenced on 1st September, 2018 and was for 18
months. The total sales value of contract was ₹ 30 lakh and the total expected cost is ₹ 24 lakh.
Payments on account already received were ₹ 9.50 lakh and total costs incurred to date were ₹
8 lakh. Nivaan Limited has insisted on a large deposit from B & Co. because the companies had
not traded together prior to the contract. The independent surveyor estimated that on 31st
March, 2019 the contract was 20% complete.
The two contracts meet the requirement of Ind AS 115 ‘Revenue from Contracts with
Customers’ to recognize revenue over time as the performance obligations are satisfied over
time.
The company also has several other contracts of between twelve and eighteen months in
duration. Some of these contracts fall into two accounting periods and were not completed as
at 31st March, 2019. In absence of any financial date relating to the other contracts, you are
advised to ignore these other contracts while preparing the financial statements of the
company for the year ended 31st March, 2019.
Prepare financial statement extracts for Nivaan Limited in respect of the two construction
contracts for the year ending 31st March, 2019. [Exam NOV 2019; MTP NOV 2021]

Ans: Extracts of Balance Sheet of Nivaan Ltd. as on 31stMarch, 2019

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Chapter 20 : Revenue From Contract with Customers
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₹ in lakh
Current Assets
Contract Assets- Work-in-progress (Refer W.N. 3) 9.0
Current Liabilities
Contract Liabilities (Advance from customers) (Refer W.N. 2) 4.5

Extracts of Statement of Profit and Loss of Nivaan Ltd. as on 31 stMarch, 2019

₹ in lakh
Revenue from contracts (Refer W.N. 1) 18
Cost of Revenue (Refer W.N. 1) (15)
Net Profit on Contracts (Refer W.N. 1) 3
Working Notes:
1. Table showing calculation of total revenue, expenses and profit or loss on contract for
the year ₹ in lakh

A & Co. B & Co. Total

Revenue from contracts (40 x 30%) = 12 (30 x 20%) = 6 18
Expenses due for the year (34* x 30%) = 10.2 (24 x 20%) = 4.8 15
Profit or loss on contract 1.8 1.2 3
*Note: Additional rectification cost of ₹ 2 lakh has been treated as normal cost. Hence total
expected cost has been considered as ₹ 34 lakh. However, in case this ₹ 2 lakh is treated
as abnormal cost then expense due for the year would be ₹ 11.6 lakh (ie 30% of ₹ 32 lakh
plus ₹ 2 lakh). Accordingly, with respect to A & Co., the profit for the year would be ₹ 0.4 lakh
and work-in-progress recognised at the end of the year would be ₹ 4.4 lakh.
2. Calculation of amount due from / (to) customers ₹ in lakh

A & Co. B & Co. Total

Billing on the basis of revenue recognised in the 12 6 18
books
Payments received from the customers (13) (9.5) (22.5)
Advance received from the customers 1 3.5 4.5

3. Work in Progress recognised as part of contract asset at the end of the year ₹ in lakh

A & Co. B & Co. Total

Total actual cost incurred during the year 16 8 24
Less: Cost recognised in the books for the year
31.3.2019 (10.2) (4.8) (15)
Work-in-progress recognised at the end of the year 5.8 3.2 9.0

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 Chapter 20 : Revenue From Contract with Customers
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Q92: A Ltd. is a company which is in the business of manufacturing engineering machines and
providing after sales services. The company entered into a contract with Mr. Anik to supply and
install a machine, namely 'model pi' on 1st April 2018 and to service this machine on 30th
September 2018 and 1st April 2019. The cost of manufacturing the machine to A Ltd. was ₹
1,60,000.

It is possible for a customer to purchase both the machine 'model pi' and the maintenance
services separately. Mr. Anik is contractually obliged to pay A Ltd ₹ 4,00,000 on 1st April, 2019.

The prevailing rate for one-year credit granted to trade customers in the industry is 5 percent
per six-month period.

As per the experience, the servicing of the machine 'model pi' sold to Mr. Anik is expected to
cost A Ltd. ₹ 30,000 to perform the first service and ₹ 50,000 to perform the second service.
Assume actual costs equal expected costs. When A Ltd. provides machine services to
customers in a separate transaction it earns a margin of 50 % on cost. On 1st April, 2018, the
cash selling price of the machine 'model pi' sold to Mr. Anik is ₹ 2,51,927.

The promised supply of machine 'model pi' and maintenance service obligations are
satisfactorily carried out in time by the company.

You are required to:

(i) Segregate the components of the transaction that A Ltd. shall apply to the revenue
recognition criteria separately as per Ind AS 115;

(ii) Calculate the amount of revenue which A Ltd. must allocate to each component of the
transaction;

(iii) Prepare journal entries to record the information set out above in the books of accounts
of A Ltd. for the years ended 31st March•2019 and 31st March 2020; and

(iv) Draft an extract showing how revenue could be presented and disclosed in the financial
statements of A Ltd. for the year ended 31st March 2019 and 31st March 2020.
[Exam Jan 2021 (12 Marks); MTP Nov 2022; May 2024]

Ans: (i) As per para 27 of Ind AS 115, a good or service that is promised to a customer is distinct
if both of the following criteria are met:

(a) the customer can benefit from the good or service either on its own or together
with other resources that are readily available to the m. A readily available
resource is a good or service that is sold separately (by the entity or another
entity) or that the customer has already obtained from the entity or from other
transactions or events; and

(b) the entity’s promise to transfer the good or service to the customer is separately
identifiable from other promises in the contract.

Factors that indicate that two or more promises to transfer goods or services to a
customer are separately identifiable include, but are not limited to, the following:

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Chapter 20 : Revenue From Contract with Customers
(IND AS 115)
(a) significant integration services are not provided (i.e. the entity is not using the
goods or services as inputs to produce or deliver the combined output called for
in the contract)

(b) the goods or services does not significantly modify or customize other promised
goods or services in the contract.

(c) the goods or services are not highly inter-dependent or highly interrelated with
other promised goods or services in the contract

Accordingly, on 1st April, 2018, entity A entered into a single transaction with three
identifiable separate components:

1. Sale of a good (i.e. engineering machine);

2. Rendering of services (i.e. engineering machine maintenance services on 30th

September, 2018 and 1st April, 2019); and

3. Providing finance (i.e. sale of engineering machine and rendering of services on

extended period credit).

(ii) Calculation and allocation of revenue to each component of the transaction

Date Opening Finance Goods Services Payment Closing
balance income received balance
1st April, – – 2,51,927 – – 2,51,927
2018
30th 2,51,927 12,596 – 45,000 – 3,09,523
September (Note 1)
, 2018

31stMarch 3,09,523 15,477 – – – 3,25,000

2019 (Note 2)

1st April, 3,25,000 – – 75,000 (4,00,000)

2019

Notes:

1. Calculation of finance income as on 30th September, 2018

= 5% x 2,51,927 = ₹ 12,596

2. Calculation of finance income as on 31st March, 2019

= 5% x 3,09,523 = ₹ 15,477
(iii) Journal Entries
Date Particulars Dr. (₹) Cr. (₹)

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 Chapter 20 : Revenue From Contract with Customers
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1st April, 2018 Mr. Anik Dr. 2,51,927

To Revenue - sale of goods
2,51,927
(Profit or loss A/c)
(Being revenue recognised from the
sale of the machine on credit)
Cost of goods sold (Profit or loss) Dr. 1,60,000
To Inventories 1,60,000
(Being cost of goods sold recognised)
Mr. Anik Dr. 12,596
30th September
To Finance Income (Profit or loss)
2018 (Being finance income recognised) 12,596
Mr. Anik Dr. 45,000
To Revenue- rendering of
45,000
services (Profit or loss)
(Being revenue from the rendering
of maintenance services recognised)
Cost of services (Profit or loss) Dr.
30,000
To Cash/Bank or payables
(Being the cost of performing 30,000
maintenance services recognised)
Mr. Anik Dr.
31st March To Finance Income (Profit or loss) 15,477
(Being finance income recognised)
2019 15,477

1st April, 2019 Mr. Anik Dr. 75,000

To Revenue - rendering of
75,000
services (Profit or loss)
(Being revenue from the rendering
of maintenance services recognised)
Cost of services (Profit or loss) Dr. 50,000
To Cash/Bank or payables 50,000
(Being the cost of performing
maintenance services recognised)
Cash/Bank Dr. 4,00,000
To Mr. Anik 4,00,000
Being the receipt of cash from the
customer recognised)

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Chapter 20 : Revenue From Contract with Customers
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(iv) Extract of Notes to the financial statements for the year ended 31st March, 2019 and
31st March, 2020

Note on Revenue
2019-2020 2018-2019
₹ ₹
Sale of goods – 2,51,927
Rendering of machine - maintenance services 75,000 45,000
Finance income – 28,073
75,000 3,25,000

Q93: ABC Limited supplies plastic buckets to wholesaler customers. As per the contract entered into
between ABC Limited and a customer for the financial year 2019 -2020, the price per plastic
bucket will decrease retrospectively as sales volume increases within the stipulated time of one
year.

The price applicable for the entire sale will be based, on sales volume bracket during the year.
Price per unit (INR) Sales volume
90 0 - 10,000 units
80 10,001 - 35,000 units
70 35,001 units & above

All transactions are made in cash.

(i) Suggest how revenue is to be recognised in the books of accounts of ABC Limited as per
expected value method, considering a probability of 15%, 75% and 10% for sales
volumes of 9,000 units, 28,000 units and 36,000 units respectively. For workings,
assume that ABC Limited achieved the same number of units of sales to the customer
during the year as initially estimated under expected value method for the financial year
2019-2020.

(ii) In case ABC Limited decides to measure revenue, based on most likely meth od instead
of expected value method, how will be the revenue recognised in the books of accounts
of ABC Limited based on above available information assuming that the sales volume of
28,000 units given under the expected value method, with highest probability is the
sales estimated under most likely method too? For workings, assume that ABC Limited
achieved the same number of units of sales to the customer during the year as initially
estimated under most likely value method for the financial year 2019-2020.

(iii) You are required to pass Journal entries in the books of ABC Limited if the revenue is
accounted for as per expected value method for financial year 201 9-2020.

[Exam Nov 2020 (14 Marks); MTP May 2023; MTP Nov 2023; MTP May 2024]

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 Chapter 20 : Revenue From Contract with Customers
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Ans: (i) Determination of how revenue is to be recognised in the books of ABC Ltd. as per
expected value method

Calculation of probability weighted sales volume

Sales volume Probability Probability-weighted sales
(units) volume (units)
9,000 15% 1,350
28,000 75% 21,000
36,000 10% 3,600
25,950

Calculation of probability weighted sales value

Sales Sales Probability Probability-weighted
volume price per sales
(units) unit (₹) value (₹)
9,000 90 15% 1,21,500
28,000 80 75% 16,80,000
36,000 70 10% 2,52,000
20,53,500

Average unit price = Probability weighted sales value/ Probability weighted sales volume

= 20,53,500 / 25,950 = ₹ 79.13 per unit

Revenue is recognised at ₹ 79.13 for each unit sold. First 10,000 units sold will be
booked at ₹ 90 per unit and liability is accrued for the difference price of ₹ 10.87 per
unit (₹ 90 – ₹ 79.13), which will be reversed upon subsequent sales of 15,950 units (as
the question states that ABC Ltd. achieved the same number of units of sales to the
customer during the year as initially estimated under the expected value method for the
financial year 2019-2020). For, subsequent sale of 15,950 units, contract liability is
accrued at ₹ 0.87 (80 – 79.13) per unit and revenue will be deferred.

(ii) Determination of how revenue is to be recognised in the books of ABC Ltd. as per
most likely method

Note: It is assumed that the sales volume of 28,000 units given under the expected
value method, with highest probability is the sales estimated under most likely method
too.

Transaction price will be: 28,000 units x ₹ 80 per unit = ₹ 22,40,000

Average unit price applicable = ₹ 80

First 10,000 units sold will be booked at ₹ 90 per unit and liability of ₹ 1,00,000 is
accrued for the difference price of ₹ 10 per unit (₹ 90 – ₹ 80), which will be reversed

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Chapter 20 : Revenue From Contract with Customers
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upon subsequent sales of 18,000 units (as question states that ABC Ltd. achieved the
same number of units of sales to the customer during the year as initially estimated
under the most likely method for the financial year 2019-2020).

Note: Alternatively, the question may be solved based on 25,950 units (as calculated
under expected value method assuming that the targets were met) as follows:

Transaction price will be:

25,950 units x ₹ 80 per unit = ₹ 20,76,000

Average unit price applicable = ₹ 80.

First 10,000 units sold will be booked at ₹ 90 per unit and liability is accrued for the
difference price of ₹ 10 per unit (₹ 90 – ₹ 80), which will be reversed upon subsequent
sales of 15,950 units.

(iii) Journal Entries in the books of ABC Ltd.

(when revenue is accounted for as per expected value method for

financial year 2019-2020)

₹ ₹
1. Bank A/c (10,000 x ₹ 90)Dr. 9,00,000
To Revenue A/c (10,000 x ₹ 79.13) To 7,91,300
Liability (10,000 x ₹ 10.87) 1,08,700
(Revenue recognised on sale of first 10,000 units)
2. Bank A/c [(25,950 x ₹ 80)- Dr. 11,76,000
9,00,000]
Liability Dr. 86,124
To Revenue A/c (15,950 x ₹ 12,62,124
79.13)
(Revenue recognised on sale of remaining 15,950 units (25,950 - 10,000). Amount paid by
the customer will be the balance amount after adjusting the excess paid earlier since, the
customer falls now in second slab)
3. Liability (1,08,700 – 86,124) Dr. 22,576
To Revenue A/c [25,950 x 22,576
(80-79.13)]
(On reversal of liability at the end of the financial year 2019-2020 i.e. after completion of
stipulated time)

Alternatively, in place of first two entries, one consolidated entry may be passed as
follows:

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 Chapter 20 : Revenue From Contract with Customers
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Bank A/c (25,950 x ₹ 80) Dr. 20,76,000

To Revenue A/c (25,950 x ₹ 79.13) 20,53,424
To Liability (25,950 x ₹ 0.87) 22,576
(Revenue recognised on sale of 25,950 units)

Note: In 2nd journal entry, it is assumed that the customer had paid balance amount of
₹ 11,76,000 after adjusting excess ₹ 1,00,000 paid with first lot of sale of 10,000 unit.
However, one can pass journal entry with total sales value of ₹ 12,76,000 (15,950 units x
₹ 80 per unit) and later on pass third entry for refund. In such a situation, alternatively,
2nd and 3rd entries would be as follows:
Bank A/c (15,950 x ₹ 80) Dr. 12,76,000
To Revenue A/c (15,950 x ₹ 12,62,124
79.13)
To Liability 13,876
(Revenue recognised on sale of remaining 15,950 units (25,950 - 10,000))
Liability (1,08,700 + 13,876) Dr. 1,22,576
To Revenue A/c [25,950 x 22,576
(80-79.13)]
To Bank 1,00,000
(On reversal of liability at the end of the financial year 2019-2020 i.e. after
completion of stipulated time and excess amount refunded)

Q98: On 1st April, 20X1, S Limited enters into a contract with Corp Limited to construct heavy-duty
equipment for a promised consideration of ₹ 20,00,000 with a bonus of ₹ 2,50,000 if the
equipment is completed within 24 months. At the inception of the contract, S Limited correctly
accounts for the promised bundle of goods and services as a single performance obligation in
accordance with Ind AS 115. At the inception of the contract, the Company expects the costs to
be ₹ 11,00,000 and concludes that it is highly probable that a significant reversal in the amount
of cumulative revenue recognised will occur. Completion of the heavy-duty equipment is highly
susceptible to factors outside of the Company’s influence, mainly due to difficulties with the
supply of components.
At 31st March, 20X2, S Limited has satisfied 65% of its performance obligation on the basis of
costs incurred to date and concludes that the variable consideration is still constrained in
accordance with Ind AS 115. However, on 4th June, 20X2, the contract is modified with the
result that the fixed consideration and expected costs increase by ₹ 1,50,000 and ₹ 80,000
respectively. The time allowable for achieving the bonus is extended by six months with the
result that S Limited concludes that it is highly probable that the bonus will be achieved and
that the contract remains a single performance obligation.
S Limited wants your opinion on the accounting treatment of contract with Corp Limited in light
of Ind AS 115, for the year 20X1-20X2 and 20X2-20X3. [RTP May 22; MTP Nov 22; May23]

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Ans: For the year 20X1-20X2
S Limited accounts for the promised bundle of goods and services as a single performance
obligation satisfied over time in accordance with Ind AS 115. At the inception of the contract,
S Limited expects the following:
Transaction price – ₹ 20,00,000
Expected costs – ₹ 11,00,000
Expected profit (45%) – ₹ 9,00,000
At contract inception, S Limited excludes the ₹ 2,50,000 bonus from the transaction price
because it cannot conclude that it is highly probable that a significant reversal in the amount of
cumulative revenue recognised will not occur. Completion of the heavy-duty equipment is
highly susceptible to factors outside the entity’s influence.
By the end of the first year, the entity has satisfied 65% of its performance obligation on the
basis of costs incurred to date. Costs incurred to date are therefore ₹ 7,15,000 and
S Limited reassesses the variable consideration and concludes that the amount is still
constrained. Therefore at 31st March, 20X2, the following would be recognised:
Revenue (A) – ₹ 13,00,000 (₹ 20,00,000 x 65%)
Costs (B) – ₹ 7,15,000 (₹ 11,00,000 x 65%)
Gross profit (C) i.e.(A-B) – ₹ 5,85,000
For the year 20X2-20X3
On 4th June, 20X2, the contract is modified. As a result, the fixed consideration and expected
costs increase by ₹ 1,50,000 and ₹ 80,000, respectively.
The total potential consideration after the modification is ₹ 24,00,000 which is ₹ 21,50,000
fixed consideration + ₹ 2,50,000 completion bonus. In addition, the allowable time for achieving
the bonus is extended by six months with the result that S Limited concludes that it is highly
probable that including the bonus in the transaction price will not result i n a significant reversal
in the amount of cumulative revenue recognised in accordance with Ind AS 115. Therefore, the
bonus of ₹ 2,50,000 can be included in the transaction price.
S Limited also concludes that the contract remains a single performance obligation. Thus, S
Limited accounts for the contract modification as if it were part of the original contract.
Therefore, S Limited updates its estimates of costs and revenue as follows:
S Limited has satisfied 60.60% of its performance obligation ( ₹ 7,15,000 actual costs incurred
compared to ₹ 11,80,000 total expected costs). The entity recognises additional revenue of ₹
1,54,400 [(60.60% of ₹ 24,00,000) – ₹ 13,00,000 revenue recognised to date] at the date of
modification i.e. on 4th June, 20X2 as a cumulative catch-up adjustment.

Q108: A ticket worth ₹ 10,000 is sold at 5% discount per passenger. GST rate @5% is collected on this
sale. Aviation security fee is charged at ₹ 500 per passenger and user development fee is
charged at ₹ 250 per passenger. Airlines collect the aviation security fee from passengers when

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they book their tickets. This is passed to the government. This fee is used to fund the security
arrangements at airports around the country. User development fee or Passenger service fee
are levied by the airline when passengers book the ticket. They are then passed onto the
airport operator like the government owned Airport Authority of India (AAI) or to other private
operators who have the license to operate the airport. In return for this collection service the
airline is compensated at the rate of ₹ 5 per passenger from whom these fees are recovered.

The financial statements of KG Airlines are prepared in accordance with the Indian Accounting
Standards (Ind AS).

DETERMINE the transaction price of KG Airlines in the given case, as per Ind AS 115. How should
it recognize revenue of tickets related to scheduled future flights? [IBS RTP May 2024]
Ans: Revenue recognition for KG Airlines will be based on Ind AS 115 “Revenue from Contracts with
Customers”. Paragraph 47 of Ind AS 115, inter alia states that an entity shall consider the terms
of the contract and its customary business practices to determine the transaction price. The
transaction price is the amount of consideration which an entity expects to be entitled in
exchange for transferring promised goods or services to a customer, excluding amounts
collected on behalf of third parties. Amounts collected on behalf of third parties are not
economic benefits which flow to the entity. Therefore, they are excluded from revenue.

As per Ind AS 115, each booking is a contract that the passenger enters into with KG Airlines.
Passenger revenue should be recognized on flown basis i.e., when KG Airlines provides the
transportation to the passenger. This is when service is rendered to the passenger. Revenue
should be recognized on net of discounts given to the passengers, amount collected on behalf
of third parties, applicable taxes, and airport levies such as passenger service fee, user
development fee, etc., if any. Fees charged for cancellation of flight tickets are recognised as
revenue on rendering of the said service.

Here, the revenue from sale of ticket that should be reflected in the Statement of profit and
loss of KG Airlines would be ₹ 9,500 which would be the airfare charges of ₹ 10,000 per
passenger less 5% discount given to the passenger which is ₹ 500.

Particulars Amount (₹)

Airfare charges 10,000
Less: Discount @5% 500
Net ticket fare (revenue) 9,500
Add: GST @5% on net ticket fare 475
Add: Aviation security fee 500
Add: User development fee 250
Total amount collected from passenger 10,725
Note: Since, Goods and Service Tax (GST) @5% is payable to the government, it does not form
part of revenue. Similarly, aviation security fee and user development fee are payable to the

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government and airport operator respectively. Here, the airline acts only as an agent to collect
the money from the passenger and pass it on to the government or the airport operator. No
service is rendered by the airline to the passenger on this behalf. Therefore, no revenue should
be recognized for aviation security fee or user development fee by KG Airlines.

However, since the airport operator on whose behalf the user development fee is collected,
compensates KG Airlines for ₹ 5 per passenger flown, it would be recognised as revenue in the
books of KG Airlines. Hence, the total revenue of ₹ 9,505 would be reflected in the Statement
of profit and loss separately as ‘revenue from sale of tickets’ and ‘other operating revenue’.

Revenue from sale of tickets that relate to scheduled future flights will be recognised as
“unearned revenue”, forming part of current liabilities. Depending on the facts and
circumstances relating to the contract, the liability recognised represents the entity’s obligation
to either transfer goods or services in the future or refund the consideration received. In either
case, the liability shall be measured at the amount of consideration received from the
customer.

Q99: Card Ltd. is engaged in the business of manufacturing of car locks and nut bolts.

Car Locks: Typically, a contract is entered into for sale of car locks and consideration is received
in the event of delivery of goods to the customer place. The cost of each car lock is ₹ 1,500 and
the selling price is ₹ 1,800. The terms of the contract entitles the customer to return any
unused car locks within 30 days and receive a full refund. The Company estimates that the costs
of recovering the car lock will be immaterial and expects that the returned car locks can be
resold at a profit. The Company has sold a total of 20,000 car locks during the month ended
31st March, 2022. From past experience, Card Ltd. expects that 4% of the car locks will be
returned in the financial year 2022 - 2023.

Nut Bolts: On 1st April, 2021, Card Ltd. enters into a one year contract with a customer to
deliver nut bolts. The contract stipulates that the price per piece will be adjusted
retrospectively once the customer reaches certain sales volume, defined, as follows:

Price per piece Cumulative sales volume

₹ 200 1 – 50,000

₹ 190 50,001 – 1,00,000

₹ 180 1,00,001 & above

Volume is determined based on sales during the financial year. There are no minimum purchase
requirements. Card Ltd. estimates that the total sales volume for the year will be 90,000 based
on its experience with similar contracts and forecasted sales to the customer.
Card Ltd. sells 24,000 pieces to the customer during the first quarter of the financial year 2021-
2022 for a contract price of ₹ 200 per piece.

You are required to:

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 Chapter 20 : Revenue From Contract with Customers
(IND AS 115)

(i) Analyze the terms of the revenue contracts with customers for sale of car locks as per
Ind AS 115. Determine the amount of revenue, refund liability and the asset to be
recognized by Card Ltd. for the said contracts of car locks.

(ii) Determine the transaction price, revenue and liability, if any, for nut bolts as per Ind AS
115 at the end of first quarter of the financial year 2021-2022. [Exam May 22 (8 Marks)]

Ans: Analysis:

(i) (a) Nature of consideration received:

Card Ltd. applies the requirements in Ind AS 115 to the portfolio of 20,000 car
locks because it reasonably expects that the effects on the financial statements
from applying the requirements to the portfolio would not differ materially from
applying the requirements to the individual contracts within the portfolio. Since
the contract allows a customer to return the products, the consideration
received from the customer is variable.

(b) Probability of significant reversal of cumulative revenue:

Card Ltd. considers on constraining estimates of variable consideration to

determine whether the estimated amount of variable consideration of ₹
3,45,60,000 (₹ 1,800 x 19,200 car locks not expected to be returned) can be
included in the transaction price. Card Ltd. determines that although the returns
are outside the entity's influence, it has significant experience in estimating
returns for this product and customer c lass. In addition, the uncertainty will be
resolved within a short time frame ie the 30 -day return period. Thus, Card Ltd.
concludes that it is highly probable that a significant reversal in the cumulative
amount of revenue recognised (i.e. ₹ 3,45,60,000) will not occur as the
uncertainty will be resolved (i.e. over the return period).

Card Ltd. estimates that the costs of recovering the products will be immaterial
and expects that the returned products can be resold at a profit.
Upon transfer of control of the 20,000 car locks, Card Ltd. does not recognise
revenue for 800 car locks that it expects to be returned. Consequently, it
recognises the following:

(a) revenue of ₹ 3,45,60,000 (₹ 1,800 x 19,200 products not expected to be

returned);

(b) a refund liability of ₹ 14,40,000 (₹ 1,800 refund x 800 products expected

to be returned); and

(c) an asset of ₹ 12,00,000 (₹ 1,500 x 800 products for its right to recover
products from customers on settling the refund liability).
(ii) (a) Transaction Price: The transaction price will be based on Card Ltd.’s estimate of
total sales volume for the year. Since Card Ltd. estimates cumulative sales
volume of 90,000 nut bolts during the year, transaction price per nut bolt will be

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₹ 190. Card Ltd. will update its estimate of the total sales volume at each
reporting date until the uncertainty is resolved.

(b) Determination of Revenue: Card Ltd. concludes that based on a transaction

price of ₹ 190 per nut bolt, it is highly probable that a significant reversal in the
amount of cumulative revenue recognised will not occur when the uncertainty is
resolved. Revenue is therefore recognised at a selling price of ₹ 190 per nut bolt
as each nut bolt is sold. Accordingly, for the first quarter of the financial year
2021-2022, Card Ltd. recognizes revenue of ₹ 45,60,000 (24,000 nut bolts x ₹
190).

(c) b Card Ltd. will recognise a liability for cash received in excess of the transaction
price for the first 50,000 nut bolts sold at ₹ 200 per nut bolt (that is, ₹ 10 per nut
bolt) until the cumulative sales volume is reached for the next pricing tier and
the price is retroactively reduced. Accordingly, for the first quarter of the
financial year 2021 -2022, Card Ltd. recognizes liability of ₹ 2,40,000 (24,000 nut
bolts x (₹ 200 – ₹ 190).

Q103: On 1st April, 2021, Z Limited enters into a contract to construct a manufacturing facility for
Mint Limited at a fixed consideration of ₹ 30.00 lakhs. Z Limited can earn an incentive of ₹ 3.75
lakhs if the construction is completed within 24 months. Z Limited expects the costs to be ₹
16.50 lakhs. At the inception of the contract, Z Limited determines that the contract contains
single performance obligation satisfied over time. Z Limited also concludes that it is highly
probable that a significant reversal in the amount of cumulative revenue recognized will occur
as the completion of the manufacturing facility is highly susceptible to factors outside of the
Company's influence, due to exceptionally high rainfall in the region.

At 31st March, 2022, Z Limited has satisfied 65% of its performance obligation on the basis of
costs incurred to date and concludes that the variable consideration is still constrained due to
uncertain weather conditions.

However, on 15th April, 2022, the contract is modified. The fixed consideration is enhanced by
₹ 2.25 lakhs and the expected costs increases by ₹ 1.20 lakhs. The contract period is also
extended by 6 months. Z Limited now concludes that it is highly probable that the incentive
award will be achieved. The contract remains a single performance obligation.

Compute, as per applicable Ind AS: (a) For financial year 2022-2023, revenue from the contract,
contract costs & resultant profit, (b) Additional revenue (catch up adjustment) as on the date of
modification of the contract i.e. 15th April, 2022. [Exam May 23 (6 Marks)]

Ans: Year 1 i.e. financial year 2021-2022

In the given case, at contract inception, Z Ltd. will exclude the performance bonus of ₹ 3,75,000
from the transaction price because it is concluded that there is high probability that a
significant reversal in the amount of cumulative revenue recognised will occur as the
completion of the manufacturing facility is highly susceptible to factors outside the entity’s
influence i.e. exceptionally high rainfall in the region.

Therefore, at the inception of the contract, for Z Ltd:

P a g e | 20.29
 Chapter 20 : Revenue From Contract with Customers
(IND AS 115)

₹
Transaction Price 30,00,000
Expected costs (16,50,000)
Expected profit (45%) 13,50,000

As at the year end, 31st March, 2022, Z Ltd. reassessed the variable consideration (i.e.
performance bonus) and has concluded that the amount is still uncertain in accordance with
paragraphs 56–58 of Ind AS 115. Therefore, the cumulative revenue and costs recognised for
the year ended March, 2022 will be as follows:
₹
Revenue from the contract (65%) 19,50,000
Contract costs (10,72,500)
Resultant profit 8,77,500

Year 2 i.e. financial year 2022-2023

On 15th April, 2022, Z Ltd. and Mint Ltd. agreed to modified the contract. As a result, the fixed
consideration and expected costs increased by ₹ 2,25,000 and ₹ 1,20,000 respectively.

At the date of the modification, since Z Ltd. concluded that it is highly probable that incentive
amount will be achieved, it has to include incentive amount of ₹ 3,75,000 in the transaction
price. Therefore, the total potential consideration after the modification is ₹ 36,00,000 (₹
32,25,000 fixed consideration + ₹ 3,75,000 performance bonus) and total estimated cost is ₹
17,70,000 (₹ 16,50,000 + ₹ 1,20,000).

Further, since the modified contract remains a single performance obligation, Z Ltd. will
account for the contract modification, as if it were part of the original contract in accordance
with paragraph 21(b) of Ind AS 115.

Z Ltd. will update its measure of progress and estimates at the date of the modification as a
cumulative catch-up adjustment as follows:

Calculation of cumulative catch-up adjustment: ₹

Total potential consideration after the modification A 36,00,000
Actual costs incurred B 10,72,500
Total expected costs to complete C 17,70,000
Percent completion of performance obligation (rounded off) D = B/C 60.6%

Revenue recognised till date E 19,50,000

Additional revenue to recognized F = (A x D) - E 2,31,600

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Chapter 21 : Leases (IND AS 116)

CHAPTER 21
LEASES (IND AS 116)
31: Company EFG enters into a property lease with Entity H. The initial term of the lease is 10 years
with a 5- year renewal option. The economic life of the property is 40 years and the fair value of
the leased property is ₹ 50 Lacs. Company EFG has an option to purchase the property at the
end of the lease term for ₹ 30 lacs. The first annual payment is ₹ 5 lacs with an increase of 3%
every year thereafter. The implicit rate of interest is 9.04%. Entity H gives Company EFG an
incentive of ₹ 2 lacs (payable at the beginning of year 2), which is to be used for normal tenant
improvement.
Company EFG is reasonably certain to exercise that purchase option. How would EFG measure
the right-of-use asset and lease liability over the lease term?
Ans: As per Ind AS 116, Company EFG would first calculate the lease liability as the present value of
the annual lease payments, less the lease incentive paid in year 2, plus the exercise price of the
purchase option using the rate implicit in the lease of approximately 9.04%.
PV of lease payments, less lease incentive (W.N. 1) ₹ 37,39,648
PV of purchase option at end of lease term (W.N. 2) ₹ 12,60,000
Total lease liability ₹ 49,99,648 or ₹ 50,00,000
(approx.)
The right-of-use asset is equal to the lease liability because there is no adjustment required for
initial direct costs incurred by Company EFG, lease payments made at or before the lease
commencement date, or lease incentives received prior to the lease commencement date.
Entity EFG would record the following journal entry on the lease commencement date.
Right-of-use Asset Dr. ₹ 50,00,000
To Lease Liability ₹ 50,00,000
To record ROU asset and lease liability at the commencement date.
Since the purchase option is reasonably certain to be exercised, EFG would amortize the right-
of-use asset over the economic life of the underlying asset (40 years). Annual amortization
expense would be ₹ 1,25,000 (₹ 50,00,000 / 40 years)
Interest expense on the lease liability would be calculated as shown in the following table. This
table includes all expected cash flows during the lease term, including the lease incentive paid
by Entity H and Company EFG’s purchase option.
Year Payment Principal Interest paid Interest Lease Liability
paid at the expense (end of the
beginning year
of the year
a b= a-c c = (d of pvs. d = [(e of e = (e of pvs.
Year) pvs. year- a) Year + d – a)

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 Chapter 21 : Leases (IND AS 116)

x 9.04%]
Commencement 50,00,000
Year 1 5,00,000 5,00,000 - 4,06,800 49,06,800
Year 2 3,15,000* (91,800) 4,06,800 4,15,099 50,06,899
Year 3 5,30,450 1,15,351 4,15,099 4,04,671 48,81,120
Year 4 5,46,364 1,41,693 4,04,671 3,91,862 47,26,618
Year 5 5,62,754 1,70,892 3,91,862 3,76,413 45,40,277
Year 6 5,79,637 2,03,224 3,76,413 3,58,042 43,18,682
Year 7 5,97,026 2,38,984 3,58,042 3,36,438 40,58,094
Year 8 6,14,937 2,78,499 3,36,438 3,11,261 37,54,418
Year 9 6,33,385 3,22,124 3,11,261 2,82,141 34,03,174
Year 10 6,52,387 3,70,246 2,82,141 2,49,213* 30,00,000
Year 10 30,00,000 27,50,787 2,49,213* - -
Total 85,31,940 50,00,000 35,31,940 35,31,940
*(5,00,000 + increased by 3% - lease incentive paid amounting to 2,00,000)
Although the lease was for 10 years, the asset had an economic life of 40 years. When Company
EFG exercises its purchase option at the end of the 10-year lease, it would have fully
extinguished its lease liability but continue depreciating the asset over the remaining useful life.
Working Notes
1. Calculating PV of lease payments, less lease incentive:
Year Lease Payment (A) Present value Present value of lease
factor @ 9.04% payments (A*B=C)
(B)
Year 1 5,00,000 1 5,00,000
Year 2 3,15,000 0.92 2,89,800
Year 3 5,30,450 0.84 4,45,578
Year 4 5,46,364 0.77 4,20,700
Year 5 5,62,754 0.71 3,99,555
Year 6 5,79,637 0.65 3,76,764
Year 7 5,97,026 0.59 3,52,245
Year 8 6,14,937 0.55 3,38,215
Year 9 6,33,385 0.50 3,16,693
Year 10 6,52,387 0.46 3,00,098
Total 37,39,648
2. Calculating PV of purchase option at end of lease term:
Year Payment on Present value factor Present value of purchase
purchase option (A) @ 9.04% (B) option (A*B=C)
Year 10 30,00,000 0.42 12,60,000
Total 12,60,000

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Chapter 21 : Leases (IND AS 116)

The discount rate for year 10 is different in the above calculations because in the earlier one its
beginning of year 10 and in the later one its end of the year 10.
Q35: Lessee enters into a 10-year lease for 5,000 square metres of office space. The annual lease
payments are ₹ 50,000 payable at the end of each year. The interest rate implicit in the lease
cannot be readily determined. Lessee’s incremental borrowing rate at the commencement date
is 6% p.a. At the beginning of Year 6, Lessee and Lessor agree to amend the original lease to
reduce the space to only 2,500 square metres of the original space starting from the end of the
first quarter of Year 6. The annual fixed lease payments (from Year 6 to Year 10) are ₹ 30,000.
Lessee’s incremental borrowing rate at the beginning of Year 6 is 5% p.a.
How should the said modification be accounted for?
Ans: In the given case, Lessee calculates the ROU asset and the lease liabilities before modification
as follows:
Lease Liability ROU asset
Year Initial Lease Interest Closing Initial Value Depreciati Closing balance
value payments expense @ 6% balance on
a B c = a x 6% d = a-b + c e f g
1 3,67,950 50,000 22,077 3,40,027 3,67,950 36,795 3,31,155
*
2 3,40,027 50,000 20,402 3,10,429 3,31,155 36,795 2,94,360
3 3,10,429 50,000 18,626 2,79,055 2,94,360 36,795 2,57,565
4 2,79,055 50,000 16,743 2,45,798 2,57,565 36,795 2,20,770
5 2,45,798 50,000 14,748 2,10,546 2,20,770 36,795 1,83,975
6 2,10,546 1,83,975
*(refer note 1)
At the effective date of the modification (at the beginning of Year 6), Lessee remeasures the
lease liability based on:
(a) a five-year remaining lease term,
(b) annual payments of ₹ 30,000 and
(c) Lessee’s incremental borrowing rate of 5% p.a.
Year Lease Payment(A) Present value factor @ 5% (B) Present value of lease
payments (A x B = C)
6 30,000 0.952 28,560
7 30,000 0.907 27,210
8 30,000 0.864 25,920
9 30,000 0.823 24,690
10 30,000 0.784 23,520
Total 1,29,900

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 Chapter 21 : Leases (IND AS 116)

Lessee determines the proportionate decrease in the carrying amount of the ROU Asset on the
basis of the remaining ROU Asset (i.e., 2,500 square metres corresponding to 50% of the
original ROU Asset).
50% of the pre-modification ROU Asset (₹ 1,83,975) is ₹ 91,987.50.
50% of the pre-modification lease liability (₹ 2,10,546) is ₹ 1,05,273.
Consequently, Lessee reduces the carrying amount of the ROU Asset by ₹ 91,987.50 and the
carrying amount of the lease liability by ₹ 1,05,273. Lessee recognises the difference between
the decrease in the lease liability and the decrease in the ROU Asset (₹ 1,05,273 – ₹ 91,987.50 =
₹ 13,285.50) as a gain in profit or loss at the effective date of the modification (at the beginning
of Year 6).
Lessee recognises the difference between the remaining lease liability of ₹ 1,05,273 and the
modified lease liability of ₹ 1,29,900 (which equals ₹ 24,627) as an adjustment to the ROU Asset
reflecting the change in the consideration paid for the lease and the revised discount rate.
Working Note:
1. Calculation of Initial value of ROU asset and lease liability:
Year Lease Payment(A) Present value factor Present value of lease
@ 6% (B) payments (A x B = C)
1 50,000 0.943 47,150
2 50,000 0.890 44,500
3 50,000 0.840 42,000
4 50,000 0.792 39,600
5 50,000 0.747 37,350
6 50,000 0.705 35,250
7 50,000 0.665 33,250
8 50,000 0.627 31,350
9 50,000 0.592 29,600
10 50,000 0.558 27,900
3,67,950
Q37: Lessee enters into a 10-year lease for 2,000 square metres of office space. The annual lease
payments are ₹ 1,00,000 payable at the end of each year. The interest rate implicit in the lease
cannot be readily determined. Lessee’s incremental borrowing rate at the commencement date
is 6% p.a.
At the beginning of Year 6, Lessee and Lessor agree to amend the original lease to:
a) include an additional 1,500 square metres of space in the same building starting from
the beginning of Year 6 and
b) reduce the lease term from 10 years to eight years. The annual fixed payment for the
3,500 square metres is ₹ 1,50,000 payable at the end of each year (from Year 6 to Year
8). Lessee’s incremental borrowing rate at the beginning of Year 6 is 7% p.a.

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Chapter 21 : Leases (IND AS 116)

The consideration for the increase in scope of 1,500 square metres of space is not
commensurate with the stand-alone price for that increase adjusted to reflect the
circumstances of the contract. Consequently, Lessee does not account for the increase in scope
that adds the right to use an additional 1,500 square metres of space as a separate lease.
How should the said modification be accounted for?
Ans: The pre-modification ROU Asset and the pre-modification lease liability in relation to the lease
are as follows:

Lease liability ROU Asset

Year Opening Interest Lease Closing Opening Depreciatio Closing
balance expense @ 6% payment balance balance n charge balance
1 7,35,900* 44,154 (1,00,000) 6,80,054 7,35,900 (73,590) 6,62,310
2 6,80,054 40,803 (1,00,000) 6,20,857 6,62,310 (73,590) 5,88,720
3 6,20,857 37,251 (1,00,000) 5,58,108 5,88,720 (73,590) 5,15,130
4 5,58,108 33,486 (1,00,000) 4,91,594 5,15,130 (73,590) 4,41,540
5 4,91,594 29,496 (1,00,000) 4,21,090 4,41,540 (73,590) 3,67,950
6 4,21,090 3,67,950
*Refer Note 4.
At the effective date of the modification (at the beginning of Year 6), Lessee remeasures the
lease liability on the basis of:
a) A three-year remaining lease term (ie. till 8th year),
b) Annual payments of ₹ 150,000 and
c) Lessee’s incremental borrowing rate of 7% p.a.

Year Lease Payments Present value @ Present value

7% of lease
(A) payments (A x
(B) B = C)
1 1,50,000 0.935 1,40,250
2 1,50,000 0.873 1,30,950
3 1,50,000 0.816 1,22,400
Modified lease liability 3,93,600
The modified liability equals ₹ 3,93,600, of which (a) ₹ 1,31,200 relates to the increase of ₹
50,000 in the annual lease payments from Year 6 to Year 8 and (refer note 1) (b) ₹ 2,62,400
relates to the remaining three annual lease payments of ₹ 1,00,000 from Year 6 to Year 8 with
reduction of lease term (Refer Note 3)
Decrease in the lease term:

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 Chapter 21 : Leases (IND AS 116)

At the effective date of the modification (at the beginning of Year 6), the pre-modification ROU
Asset is ₹ 3,67,950. Lessee determines the proportionate decrease in the carrying amount of
the ROU Asset based on the remaining ROU Asset for the original 2,000 square metres of office
space (i.e., a remaining three-year lease term rather than the original five-year lease term). The
remaining ROU Asset for the original 2,000 square metres of office space is ₹ 2,20,770
[i.e., ₹ (3,67,950 / 5) x 3 years].
At the effective date of the modification (at the beginning of Year 6), the pre-modification lease
liability is ₹ 4,21,090. The remaining lease liability for the original 2,000 square metres of office
space is ₹ 2,67,300 (i.e., present value of three annual lease payments of ₹ 1,00,000,
discounted at the original discount rate of 6% p.a.) (refer note 2).
Consequently, Lessee reduces the carrying amount of the ROU Asset by ₹ 1,47,180 (₹
3,67,950 – ₹ 2,20,770), and the carrying amount of the lease liability by ₹ 1,53,790 (₹ 4,21,090 –
₹ 2,67,300). Lessee recognises the difference between the decrease in the lease liability and
the decrease in the ROU Asset (₹ 1,53,790 – ₹ 1,47,180 = ₹ 6,610) as a gain in profit or loss at
the effective date of the modification (at the beginning of Year 6).

Lease Liability Dr. 1,53,790

To ROU Asset 1,47,180
To Gain 6,610
At the effective date of the modification (at the beginning of Year 6), Lessee recognises the
effect of the remeasurement of the remaining lease liability reflecting the revised discount rate
of 7% p.a., which is ₹ 4,900 (₹ 2,67,300 – ₹ 2,62,400*), as an adjustment to the ROU Asset.
*(Refer note 3)

Lease Liability Dr. 4,900

To ROU Asset 4,900
Increase in the leased space:
At the commencement date of the lease for the additional 1,500 square metres of space (at the
beginning of Year 6), Lessee recognises the increase in the lease liability related to the increase
in leased space of ₹ 1,31,200 (i.e., present value of three annual lease payments of ₹ 50,000,
discounted at the revised interest rate of 7% p.a.) as an adjustment to the ROU Asset.

ROU Asset Dr. 1,31,200

To Lease Liability 1,31,200
The modified ROU Asset and the modified lease liability in relation to the modified lease are as
follows:

Lease liability ROU Asset

Opening Interest Lease Closing Opening Depreciation Closing
Year payment charge
balance expense @ 7% balance balance balance

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Chapter 21 : Leases (IND AS 116)

6 3,93,600 27,552 (1,50,000) 2,71,152 3,47,070** (1,15,690) 2,31,380

7 2,71,152 18,981 (1,50,000) 1,40,133 2,31,380 (1,15,690) 1,15,690
8 1,40,133 9,867* (1,50,000) - 1,15,690 (1,15,690) -
*Difference is due to approximation.
**Refer Note 5
Working Notes:
Calculation of lease liability on increased consideration:
Year Lease Payments Present value @7% (B) Present value of lease
(A) payments (A x B = C)

1 50,000 0.935 46,750

2 50,000 0.873 43,650
3 50,000 0.816 40,800
Modified lease liability 1,31,200
Calculation of remaining lease liability for the original contract of 2000 square meters at
Original discount rate:

Year Lease Present value Present value of lease

Paymen factor @ 6% payments (A x B = C)
ts (A) (B)
1 1,00,000 0.943 94,300
2 1,00,000 0.890 89,000
3 1,00,000 0.840 84,000
Remaining lease liability 2,67,300
Calculation of remaining lease liability for the original contract of 2000 square meters at revised
discount rate:

Year Lease Payments Present value factor @ Present value of lease

7% payments
(A)
(B) (A x B = C)
1 1,00,000 0.935 93,500
2 1,00,000 0.873 87,300
3 1,00,000 0.816 81,600
Remaining lease liability 2,62,400
Calculation of Initial value of ROU asset and lease liability:

Year Lease Present value Present value of

Payment factor @ 6% lease payments

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 Chapter 21 : Leases (IND AS 116)

(B) (A x B = C)
(A)
1 100,000 0.943 94,300
2 100,000 0.890 89,000
3 100,000 0.840 84,000
4 100,000 0.792 79,200
5 100,000 0.747 74,700
6 100,000 0.705 70,500
7 100,000 0.665 66,500
8 100,000 0.627 62,700
9 100,000 0.592 59,200
10 100,000 0.558 55,800
Lease liability as at modification date 7,35,900
Calculation of opening balance of Modified ROU Asset at the beginning of 6th year:

The remaining ROU Asset for the original 2,000 square metres of 2,20,770
office space after decrease in term
Less: Adjustment for increase in interest rate from 6% to 7% (4,900)
Add: Adjustment for increase in leased space 1,31,200
3,47,070
Q45: An entity (Seller-lessee) sells a building to another entity (Buyer-lessor) for cash of ₹ 30,00,000.
Immediately before the transaction, the building is carried at a cost of ₹ 15,00,000. At the same
time, Seller-lessee enters into a contract with Buyer-lessor for the right to use the building for
20 years, with annual payments of ₹ 2,00,000 payable at the end of each year.
The terms and conditions of the transaction are such that the transfer of the building by Seller-
lessee satisfies the requirements for determining when a performance obligation is satisfied in
Ind AS 115 Revenue from Contracts with Customers.
The fair value of the building at the date of sale is ₹ 27,00,000. Initial direct costs, if any, are to
be ignored. The interest rate implicit in the lease is 12% p.a., which is readily determinable by
Seller-lessee.
Buyer-lessor classifies the lease of the building as an operating lease. How should the said
transaction be accounted by the Seller-lessee and the Buyer-lessor? [MTP May 2024]
Ans: Considering facts of the case, Seller-lessee and buyer-lessor account for the transaction as a
sale and leaseback.
Firstly, since the consideration for the sale of the building is not at fair value, Seller-lessee and
Buyer - lessor make adjustments to measure the sale proceeds at fair value. Thus, the amount
of the excess sale price of ₹ 3,00,000 (as calculated below) is recognised as additional financing
provided by Buyer-lessor to Seller-lessee.
Sale Price: 30,00,000
Less: Fair Value (at the date of sale): (27,00,000)

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Chapter 21 : Leases (IND AS 116)

Additional financing provided by Buyer-lessor to Seller-lessee 3,00,000

Next step would be to calculate the present value of the annual payments which amounts
to ₹ 14,94,000 (calculated considering 20 payments of ₹ 2,00,000 each, discounted at 12% p.a.)
of which ₹ 3,00,000 relates to the additional financing (as calculated above) and
balance ₹ 11,94,000 relates to the lease — corresponding to 20 annual payments of ₹ 40,164
and ₹ 1,59,836, respectively (refer calculations below).
Proportion of annual lease payments:
Present value of lease payments (as calculated above) (A) 14,94,000
Additional financing provided (as calculated above) (B) 3,00,000
Relating to the Additional financing provided (C) = (E x B / A) 40,160
Relating to the Lease (D) = (E – C) 1,59,840
Annual payments (at the end of each year) (E) 2,00,000
Seller-Lessee:
At the commencement date, Seller-lessee measures the ROU asset arising from the leaseback
of the building at the proportion of the previous carrying amount of the building that relates to
the right-of-use retained by Seller-lessee, calculated as follows:
Carrying Amount (A) 15,00,000
Fair Value (at the date of sale) (B) 27,00,000
Discounted lease payments for the 20-year ROU asset (C) 11,94,000
ROU Asset [(A / B) x C] 6,63,333
Seller-lessee recognises only the amount of the gain that relates to the rights transferred to
Buyer- lessor, calculated as follows:
Fair Value (at the date of sale) (A) 27,00,000
Carrying Amount (B) 15,00,000
Discounted lease payments for the 20-year ROU asset (C) 11,94,000
Gain on sale of building (D) = (A - B) 12,00,000
Relating to the right to use the building retained by
Seller-lessee (E) = [(D / A) x C] 5,30,667
Relating to the rights transferred to Buyer-lessor (D - E) 6,69,333
At the commencement date, Seller-lessee accounts for the transaction, as follows:
Cash Dr. 30,00,000
ROU Asset Dr. 6,63,333
To Building 15,00,000

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 Chapter 21 : Leases (IND AS 116)

To Financial Liability 14,94,000

To Gain on rights transferred 6,69,333
Buyer-Lessor:
At the commencement date, Buyer-lessor accounts for the transaction, as follows:
Building Dr. 27,00,000
Financial Asset
(20 payments of ₹ 40,160 discounted @ 12% p.a.) (approx.) Dr. 3,00,000
To Cash 30,00,000
After the commencement date, Buyer-lessor accounts for the lease by treating ₹ 1,59,840 of
the annual payments of ₹ 2,00,000 as lease payments. The remaining ₹ 40,160 of annual
payments received from Seller-lessee are accounted for as:
(a) payments received to settle the financial asset of ₹ 3,00,000 AND
(b) interest revenue.
Q54: Entity X (lessee) entered into a lease agreement (‘lease agreement’) with Entity Y (lessor) to
lease an entire floor of a shopping mall for a period of 9 years. The annual lease rent is ₹
70,000 payable at year end. To carry out its operations smoothly, Entity X simultaneously
entered into another agreement (‘facilities agreement’) with Entity Y for using certain other
facilities owned by Entity Y such as passenger lifts, DG sets, power supply infrastructure, parking
space etc., which are specifically mentioned in the agreement, for annual service charges
amounting to ₹ 1,00,000. As per the agreement, the ownership of the facilities shall remain
with Entity Y. Lessee's incremental borrowing rate is 10%.
The facilities agreement clearly specifies that it shall be co-existent and coterminous with ‘lease
agreement’. The facility agreement shall stand terminated automatically on termination or
expiry of ‘lease agreement’.
Entity X has assessed that the stand-alone price of ‘lease agreement’ is ₹ 1,20,000 per annum
and stand-alone price of the ‘facilities agreement’ is ₹ 80,000 per annum. Entity X has not
elected to apply the practical expedient in paragraph 15 of Ind AS 116 of not to separate non-
lease component (s) from lease component(s) and accordingly it separates non-lease
components from lease components.
How will Entity X account for lease liability as at the commencement date? [RTP NOV 2020]
Ans: Entity X identifies that the contract contains lease of premises and non-lease component of
facilities availed. As Entity X has not elected to apply the practical expedient as provided in
paragraph 15, it will separate the lease and non-lease components and allocate the total
consideration of ₹ 1,70,000 to the lease and non-lease components in the ratio of their relative
stand-alone selling prices as follows:
Particulars Stand-alone % of total Stand- Allocation of
Prices alone Price consideration
₹ ₹

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Chapter 21 : Leases (IND AS 116)

Building rent 1,20,000 60% 1,02,000

Service charge 80,000 40% 68,000
Total 2,00,000 100% 1,70,000
Total 2,00,000 100% 1,70,000
As Entity X's incremental borrowing rate is 10%, it discounts lease payments using this rate and
the lease liability at the commencement date is calculated as follows:
Year Lease Present Present value of
Payment value factor lease payments
(A) @ 10% (B) (A X B = C)
Year 1 1,02,000 .909 92,718
Year 2 1,02,000 .826 84,252
Year 3 1,02,000 .751 76,602
Year 4 1,02,000 .683 69,666
Year 5 1,02,000 .621 63,342
Year 6 1,02,000 .564 57,528
Year 7 1,02,000 .513 52,326
Year 8 1,02,000 .467 47,634
Year 9 1,02,000 .424 43,248
Lease Liability at commencement date 5,87,316
Further, ₹ 68,000 allocated to the non-lease component of facility used will be recognised in
profit or loss as and when incurred.

Q55: Entity X is an Indian entity whose functional currency is Indian Rupee. It has taken a plant on
lease from Entity Y for 5 years to use in its manufacturing process for which it has to pay annual
rentals in arrears of USD 10,000 every year. On the commencement date, exchange rate was
USD = ₹ 68. The average rate for Year 1 was ₹ 69 and at the end of year 1, the exchange rate
was ₹ 70. The incremental borrowing rate of Entity X on commencement of the lease for a USD
borrowing was 5% p.a.

How will entity X measure the right of use (ROU) asset and lease liability initially and at the end
of Year 1? [RTP May 2021; MTP May 2023]

Ans: On initial measurement, Entity X will measure the lease liability and ROU asset as under:
Year Lease Present Present Conversion INR value
Payments Value Value of rate (spot
(USD) factor @ Lease rate)
5% Payment
1 10,000 0.952 9,520 68 6,47,360
2 10,000 0.907 9,070 68 6,16,760
3 10,000 0.864 8,640 68 5,87,520
4 10,000 0.823 8,230 68 5,59,640

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5 10,000 0.784 7,840 68 5,33,120

Total 43,300 29,44,400

As per Ind AS 21, The Effects of Changes in Foreign Exchange Rates, monetary assets and
liabilities are restated at each reporting date at the closing rate and the difference due to
foreign exchange movement is recognised in profit and loss whereas non - monetary assets and
liabilities carried measured in terms of historical cost in foreign currency are not restated.

Accordingly, the ROU asset in the given case being a non-monetary asset measured in terms of
historical cost in foreign currency will not be restated but the lease liability being a monetary
liability will be restated at each reporting date with the resultant difference being taken to
profit and loss.

At the end of Year 1, the lease liability will be measured in terms of USD as under: Lease
Liability:
Year Initial Value (USD) Lease Payment Interest @ 5% Closing Value (USD)
(a) (b) (c) = (a x 5%) (d = a + c - b)
1 43,300 10,000 2,165 35,465

Interest at the rate of 5% will be accounted for in profit and loss at average rate of ₹ 69 (i.e.,
USD 2,165 x 69) = ₹ 1,49,385.
Particulars Dr. (₹) Cr. (₹)
Interest Expense Dr. 1,49,385
To Lease liability 1,49,385

Lease payment would be accounted for at the reporting date exchange rate, i.e. ₹ 70 at the end
of year 1
Particulars Dr. (₹) Cr. (₹)
Lease liability Dr. 7,00,000
To Cash 7,00,000

As per the guidance above under Ind AS 21, the lease liability will be restated using the
reporting date exchange rate i.e., ₹ 70 at the end of Year 1. Accordingly, the lease liability will
be measured at ₹ 24,82,550 (35,465 x ₹ 70) with the corresponding impact due to exchange
rate movement of ₹ 88,765 (24,82,550 – (29,44,400 + 1,49,385 – 700,000) taken to profit and
loss.

At the end of year 1, the ROU asset will be measured as under:

Year Opening Balance (₹) Depreciation (₹) Closing Balance (₹)
1 29,44,400 5,88,880 23,55,520

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Q56: Coups Limited availed a machine on lease from Ferrari Limited. The terms and conditions of the
Lease are as under:

Lease period is 3 years, machine costing ₹ 8,00,000.

- Machine has expected useful life of 5 years.

- Machine reverts back to Ferrari Limited on termination of lease.

- The unguaranteed residual value is estimated at ₹ 50,000 at the end of 3rd year.

- 3 equal annual installments are made at the end of each year.

- Implicit Interest Rate (IRR) = 10%.

- Present value of ₹ 1 due at the end of 3rd year at 10% rate of interest is 0.7513.

- Present value of annuity of ₹ 1 due at the end of 3rd year at 10% IRR is 2.4868.

You are required to ascertain whether it is a Finance Lease or Operating Lease and also
calculate Unearned Finance Income with the relevant context to relevant Ind AS.

[Exam Jan 2021 (6 Marks)]

Ans: It is assumed that the fair value of the machine on lease is equivalent t o the cost of the
machine.
(i) 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.

(ii) Computation of annual lease payment to the lessor

₹
Cost of equipment / fair value 8,00,000
Unguaranteed residual value 50,000
Present value of residual value after third year @ 10% 37,565
(50,000 x 0.7513)
Fair value to be recovered from lease payments (8,00,000 – 7,62,435
37,565)
Present value of annuity for three years is 2.4868
Annual lease payment = 7,62,435 / 2.4868 3,06,593

The present value of lease payment i.e., ₹ 7,62,435 is more than 95% of the fair market
value i.e., ₹ 8,00,000. The present value of minimum lease payments substantially
covers the initial fair value of the leased asset and lease term (i.e. 3 years) covers the
major part of the life of asset (i.e. 5 years). Therefore, it constitutes a finance lease.

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(iii) Computation of Unearned Finance Income

₹
Total lease payments (₹ 3,06,593 x 3) 9,19,779
Add: Unguaranteed residual value 50,000
Gross investment in the lease 9,69,779
Less: Present value of investment (lease payments and
residual value) (37,565 + 7,62,435) (8,00,000)
Unearned finance income 1,69,779

Q58: Feel Fresh Limited (the Company) is into manufacturing and retailing of FMCG products listed
on stock exchanges in India. One of its products is bathing soap which the Company sells under
the brand name 'Feel Fresh'. The Company does not have its own manufacturing facilities for
soap and therefore it enters into arrangements with a third party to procure the soaps. The
Company entered into a long term purchase contract of 10 years with M/s. Radhey. Following
are the relevant terms of the contract with M/s. Radhey.
(i) M/s. Radhey has to purchase a machine costing ₹ 10,00,000 from the supplier as specified
by the Company. The machine will be customized to produce the soaps as designed by
the Company. This machine cannot be used by M/s. Radhey to produce the soaps for
buyers other than the Company due to the design specifications. The machine has a
useful life of 10 years and the straight line method of depreciation is best suited
considering the use of the machine.
(ii) The Company will pay ₹ 4.75 per soap for the first year of contract. This is calculated
based on the budgeted annual purchase of 7,00,000 soaps as follows:
Particulars Per soap price
Variable cost of manufacturing 4.00
Cost of machine (₹ 1,74,015 / 7,00,000 soaps) 0.25
M/s. Radhey's margin 0.50
Per soap cost to the Company 4.75

In case the Company purchases more than 7,00,000 (i.e. budgeted number of soaps)
soaps in the first year then the cost of the machine (i.e. 0.25 per soap) will not be paid for
soaps procured in excess of 7,00,000 units. However, in case Company procures less than
budgeted number of soaps, then the Company will pay the differential unabsorbed cost of
the machine, at the end of the year. For example, if the Company purchases only 6,00,000
soaps in first year then the differential amount of ₹ 24,015 (1,74,015 - (6,00,000 x 0.25))
will be paid by the Company to M/s. Radhey at the end of the year. Variable cost will be
actualized at the end of the year.
(iii) The cost per soap will be calculated for each year in advance based on the budgeted
number of soaps to be produced each year. An amount of ₹ 1,74,015 shall be considered
each year for the cost of machine for year 1 to year 8 while calculating the cost per soap.

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Any differential under absorbed amount shall be paid by the Company to M/s. Radhey at
the end of that year. A charge of ₹ 1,74,015 per annum for the machine is derived using
borrowing cost of 8% p.a. For year 9 and year 10, only variable cost and margins will be
paid.
(iv) M/s. Radhey does not have any right to terminate the contract but the Company has the
right to terminate the contract at the end of each year. However, if the Company
terminates the contract, it has to compensate M/s. Radhey for any unabsorbed cost of
Machine. For example, if the Company terminates the contract at the end of second year
then it has to pay ₹ 10,44,090 (i.e. 1,74,015 per year x 6 remaining years). If it terminates
the contract after the 8th year then the Company does not have to pay the compensation
since the cost of the machine would have been absorbed.
(v) In the first year, the Company purchases 5,50,000 soaps at ₹ 4.75 per soap.
Evaluate the contract of the Company with M/s. Radhey and provide necessary accounting
entries for first year in accordance with Ind AS with working notes. Assume all cash flows occur
at the end of the year. [MTP Nov 22]
Ans: Identification of the contract (by applying para 9 of Ind AS 116)
(a) Identified asset
Feel Fresh Ltd. (a customer company) enters into a long-term purchase contract with M/s
Radhey (a manufacturer) to purchase a particular type and quality of soaps for 10 year
period.
Since for the purpose of the contract M/s Radhey has to buy a customized machine as per
the directions of Feel Fresh Ltd. and also the machine cannot be used for any other type
of soap, the machine is an identified asset.
(b) Right to obtain substantially all of the economic benefits from use of the asset
throughout the period of use
Since the machine cannot be used for manufacture of soap for any other buyer, Feel
Fresh Ltd. will obtain substantially all the economic benefits from the use of the asset
throughout the period of use.
(c) Right to direct the use
Feel Fresh Ltd. controls the use of machine and directs the terms and conditions of the
contract with respect to recovery of fixed expenses related to machine.
Hence the contract contains a lease.
Lease term
The lease term shall be 10 years assuming reasonable certainty. Though the lessee is not
contractually bound till 10th year, i.e., the lessee can refuse to make payment anytime without
lessor’s permission but, it is assumed that the lessee is reasonably certain that it will not
exercise this option to terminate.
Identification of lease payment

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Lease payments are defined as payments made by a lessee to a lessor relating to the right to
use an underlying asset during the lease term, comprising the following:
(a) fixed payments (including in-substance fixed payments), less any lease incentives
(b) variable lease payments that depend on an index or a rate
(c) the exercise price of a purchase option if the lessee is reasonably certain to exercise that
option
(d) payments of penalties for terminating the lease, if the lease term reflects the lessee
exercising an option to terminate the lease
Here in-substance fixed payments in the given lease contract are ₹ 1,74,015 p.a. The present
value of lease payment which would be recovered in 8 years @ 8% would be ₹ 10,00,000
(approx.)
Variable lease payments that do not depend on an index or rate and are not, in substance, fixed
are not included as lease payments. Instead, they are recognised in profit or loss in the period
in which the event that triggers the payment occurs (unless they are included in the carrying
amount of another asset in accordance with other Ind AS).
Hence, lease liability will be recognized by ₹ 10,00,000 in the books of Feel Fresh Ltd. Since
there are no payments made to lessor before commencement date less lease incentives
received from lessor or initial direct costs incurred by lessee or estimate of costs for
restoration/dismantling of underlying asset, the right of use asset is equal to lease liability.
Journal Entries
On initial recognition
ROU Asset Dr. 10,00,000
To Lease Liability 10,00,000
To initially recognise the Lease Liability and the corresponding ROU Asset

At the end of the first year

Interest Expense Dr. 80,000
To Lease Liability 80,000
To record interest expense and accrete lease the liability using the effective interest method
(₹ 10,00,000 x 8%)
Depreciation Expense (10,00,000 / 10 years) Dr. 1,00,000
To ROU Asset 1,00,000
To record depreciation on ROU using the straight-line method (₹ 10,00,000 / 10 years)
Lease Liability Dr. 1,74,015
To Bank / M/s. Radhey 1,74,015
To record lease payment
Cost of soap Dr. 24,75,000
To Bank / M/s. Radhey {5,50,000 x (4 + 0.5)} 24,75,000

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To record variable expenses paid as cost of the goods purchased

Q61. A company manufactures specialised machinery. The company offers customers the choice of
either buying or leasing the machinery. A customer chooses to lease the machinery. Details of
the arrangement are as follows:

(i) The lease commences on 1st April, 20X1 and lasts for three years.

(ii) The lessee is required to make three annual rentals payable in arrears of ₹ 57,500.

(iii) The leased machinery is returned to the lessor at the end of the lease.

(iv) The fair value of the machinery is ₹ 1,50,000, which is equivalent to the selling price of
the machinery

(v) The machinery cost ₹ 1,00,000 to manufacture. The lessor incurred costs of ₹ 2,500 to
negotiate and arrange the lease.

(vi) The expected useful life of the machinery is 3 years. The machinery has an expected
residual value of ₹ 10,000 at the end of year three. The estimated residual value does
not change over the term of the lease.

(vii) The interest rate implicit in the lease is 10.19%.

The lessor classifies the lease as a finance lease.

How should the Lessor account for the same in its books of accounts? Pass necessary journal
entries. [RTP Nov 2022]

Ans: The cost to the lessor for providing the machinery on lease consists of the book value of the
machinery (₹ 1,00,000), plus the initial direct costs associated with entering into the lease (₹
2,500), less the future income expected from disposing of the machinery at the end of the lease
(the present value of the unguaranteed residual value of ₹ 10,000 discounted @ 10.19%, being
₹ 7,470). This gives a cost of sale of ₹ 95,030. The lessor records the following entries at the
commencement of the lease:
₹ ₹
Lease receivable Dr. 1,50,000
Cost of sales Dr. 95,030
To Inventory 1,00,000
To Revenue 1,42,530
To Creditors/Cash 2,500

The sales profit recognised by the lessor at the commencement of the lease is therefore ₹
47,500 (₹ 1,42,530 - ₹ 95,030). This is equal to the fair value of the machinery of ₹ 1,50,000,
less the book value of the machinery (₹ 1,00,000) and the initial direct costs of entering into the
lease (₹ 2,500). Revenue is equal to the lease receivable (₹ 1,50,000), less the present value of
the unguaranteed residual value (₹ 7,470).
Year Lease receivable Lease Interest Income Decrease In Lease receivable
at the beginning payments (10.19% per lease at the end of

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of year (₹) (₹) annum) (₹) receivable year (₹)

(a) (b) (c) (₹) (d)=(b)-(c) (e)=(a)-(d)
1 1,50,000 57,500 15,285 42,215 1,07,785
2 1,07,785 57,500 10,983 46,517 61,268
3 61,268 57,500 6,232* 51,268 10,000

*Difference is due to approximation. The lessor will record the following entries:
₹ ₹
Year 1 Cash/Bank Dr. 57,500
To Lease receivable 42,215
To Interest income 15,285
Year 2 Cash/Bank Dr. 57,500
To Lease receivable 46,517
To Interest income 10,983
Year 3 Cash/Bank Dr. 57,500
To Lease receivable 51,268
To Interest income 6,232

At the end of the three-year lease term, the leased machinery will be returned to the lessor,
who will record the following entries:
₹ ₹
Inventory Dr. 10,000
To Lease receivable 10,000

Q62: How will Entity Y account for the incentive in the following scenarios:
Scenario A:
Entity Y (lessor) enters into an operating lease of property with Entity X (lessee) for a five-year
term at a monthly rental of ₹ 1,10,000. In order to induce Entity X to enter into the lease,
Entity Y provides ₹ 6,00,000 to Entity X at lease commencement for lessee improvements (i.e.,
lessee’s assets).
Scenario B:
Entity Y (lessor) enters into an operating lease of property with Entity X (lessee) for a five-year
term at a monthly rental of ₹ 1,10,000. At lease commencement, Entity Y provides ₹ 6,00,000
to Entity X for leasehold improvements which will be owned by Entity Y (i.e., lessor’s assets).
The estimated useful life of leasehold improvements is 5 years. [RTP May 2023]
Ans: Para 70 of Ind AS 116 state that at the commencement date, the lease payments included in
the measurement of the net investment in the lease comprise the following payments for the
right to use the underlying asset during the lease term that are not received at the
commencement date:
(a) fixed payments (including in-substance fixed payments as described in para B42), less any
lease incentives payable;

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(b) variable lease payments that depend on an index or a rate, in itially measured using the
index or rate as at the commencement date;
(c) any residual value guarantees provided to the lessor by the lessee, a party related to the
lessee or a third party unrelated to the lessor that is financially capable of discharging the
obligations under the guarantee;
(d) the exercise price of a purchase option if the lessee is reasonably certain to exercise that
option (assessed considering the factors described in para B37); and
(e) payments of penalties for terminating the lease, if the lease term reflects the lessee
exercising an option to terminate the lease.
Further para 71 of the standard states that a lessor shall recognise lease payments from
operating leases as income on either a straight-line basis or another systematic basis. The lessor
shall apply another systematic basis if that basis is more representative of the pattern in which
benefit from the use of the underlying asset is diminished.”
Scenario A
In accordance with above, in the given case, at lease commencement, Entity Y accounts for the
incentive as follows:
To account for the lease incentive
Deferred lease incentive Dr. ₹ 6,00,000
To Cash ₹ 6,00,000
Recurring monthly journal entries in Years 1 – 5
To record cash received on account of lease rental and amortisation of lease incentive over the
lease term
Cash Dr. ₹ 1,10,000
To Lease income ₹ 1,00,000
To Deferred lease incentive ₹ 10,000*
* This is calculated as ₹ 6,00,000 ÷ 60 months.
Scenario B
Entity Y has provided lease incentive amounting to ₹ 6,00,000 to Entity X for leasehold
improvements in the premises. As Entity Y has the ownership of the leasehold improvements
carried out by the lessee, it shall account for the same as property, plant and equipment and
shall depreciate the same over its useful life.
In accordance with above, in the given case, at lease commencement, Entity Y accounts for the
incentive as follows:
To record the lease incentive
Property, plant & Equipment Dr. ₹ 6,00,000
To Cash ₹ 6,00,000

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Recurring monthly journal entries in Years 1 – 5

To record cash received on account of lease rental over the lease term
Cash Dr. ₹ 1,10,000
To Lease income ₹ 1,10,000
To record depreciation on PPE over the lease term using straight line method
Depreciation Dr. ₹ 10,000
To Accumulated Depreciation ₹ 10,000

Q59: • Jakob Ltd. entered into a contract for lease of machinery with Jason Ltd. on 1.1.2018.
The initial term of the lease is 6 years with a renewal option of further 2 years.

• The annual payments for initial term and renewal term are ₹ 2,80,000 and ₹ 3,50,000
respectively.

• The annual lease payment will increase based on the annual increase in the CPI at the
end of the preceding year. For example, the payment due on 1.1.2019 will be based on
the CPI available at 31.12.2018.

• Jakob Ltd.'s incremental borrowing rate at the lease inception date and as at 1.1.2021 is
8% and 10% respectively and the CPI at lease commencement date and as at 1.1.2021 is
250 and 260 respectively.

• At the lease commencement date, Jakob Ltd. did not think that it will be a viable option
to renew the lease but in the first quarter of 2021, Jakob Ltd. made some major changes
in the retail store which increases its economic life by five years.

• Jakob Ltd. determined that it would only recover the cost of the improvements if it
exercises the renewal option, creating a significant economic incentive to extend.

Jakob Ltd. asked your opinion whether remeasurement of lease is required in the first quarter
of 2021. [Exam Dec 21 (10 Marks)]

Ans: Since in the first quarter of 2021, Jakob Ltd. is reasonably certain that it will exercise its renewal
option, it is required to re-measure the lease in the first quarter of 2021.

The following table summarizes information pertinent to the lease re-measurement:

Re-measured lease term 5 years (3 years remaining in
the initial term plus 2 years in
the renewal period)
Jakob Ltd.’s incremental borrowing rate on the 10%
re-measurement date
CPI available on the re-measurement date 260
Right-of-use asset immediately before the re- ₹ 6,99,019 (Refer note 2)
measurement

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Lease liability immediately before the re-measurement ₹ 7,79,417 (Refer note 2)

Procedure to re-measure the lease liability:

To re-measure the lease liability, Jakob Ltd. would first calculate the present value of the future
lease payments for the new lease term (using the updated discount rate of 10%).

Since the initial lease payments were based on a CPI of 250, the CPI has increased by 4% [{(260-
250)/250} x 100]. As a result, Jakob Ltd. would increase the future lease payments by 4%.

Computation of present value of the future lease payments based on an updated CPI of 260:
Year Total
4 5 6 7 8
Lease payment 2,91,200 2,91,200 2,91,200 3,64,000 3,64,000 16,01,600
Discount @ 10% 1 0.909 0.826 0.751 0.683
Present value 2,91,200 2,64,701 2,40,531 2,73,364 2,48,612 13,18,408

Calculation of the adjustment to the lease liability on re-measurement by comparing the

recalculated and original lease liability balances on the re- measurement date:
Revised lease liability 13,18,408
Original lease liability (7,79,417)
Adjustment to the lease liability on re-measurement 5,38,991

Based on above calculations, it is clear that re-measurement of lease is required and

accordingly adjustment to lease liability and ROU asset is required in the first quarter of 2021.

Journal entry to adjust the lease liability

ROU Asset Dr. 5,38,991
To Lease liability 5,38,991
(Being lease liability and ROU asset adjusted on account of re-measurement)

Working Notes:

1. Calculation of ROU asset before the date of re-measurement

Year beginning Lease Payment Present value factor Present value of lease
(A) @ 8% (B) payments (A x B = C)
1 2,80,000 1.000 2,80,000
2 2,80,000 0.926 2,59,280
3 2,80,000 0.857 2,39,960
4 2,80,000 0.794 2,22,320
5 2,80,000 0.735 2,05,800
6 2,80,000 0.681 1,90,680
Lease liability as at the commencement date 13,98,040

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Or

(2,80,000 x Sum of PV (4.993) @ 8% for 5 years = 13

2. Calculation of Lease Liability and ROU asset at each year end

Year Lease Liability ROU asset
Initial Lease Interest Closing Initial Depreciation Closing
value payments expense balance Value for 6 years balance
@ 8%
a b c = (a-b) x d = a-b+c
8%
1 13,98,040 2,80,000 89,443 12,07,483 13,98,040 2,33,007 11,65,033
2 12,07,483 2,80,000 74,199 10,01,682 11,65,033 2,33,007 9,32,026
3 10,01,682 2,80,000 57,735 7,79,417 9,32,026 2,33,007 6,99,019
4 7,79,417 6,99,019

As per the information given in the third bullet point at page 10, it is inferred that annual lease
payments are due at the beginning of the year. Hence, it can be inferred that the annual lease
payment of 2021 had been paid on 1.1.2021. Accordingly lease liability considered for the
purpose of remeasurement would be of 5 th, 6th, 7th and 8th year only i.e. for 4 years.
However, since remeasurement has been decided in the first quarter of 2021, ROU asset
balance before remeasurement will be after depreciation of 3 years i.e. till 2020.

Based on the above contention, following alternative solution is also possible:

Since in the first quarter of 2021, Jakob Ltd. is reasonably certain that it will exercise its renewal
option, it is required to re-measure the lease in the first quarter of 2021.

The following table summarizes information pertinent to the lease re-measurement:

Re-measured lease term 4 years (2 years remaining in
the initial term plus 2 years in
the renewal period)
Jakob Ltd.’s incremental borrowing rate on the 10%
re-measurement date
CPI available on the re-measurement date 260
Right-of-use asset immediately before the re- ₹ 6,99,019 (Refer note 2)
measurement
Lease liability immediately before the re-measurement ₹ 5,39,370 (Refer note 2)

Procedure to re-measure the lease liability:

To re-measure the lease liability, Jakob Ltd. would first calculate the present value of the future
lease payments for the new lease term (using the updated discount rate of 10%).

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Since the initial lease payments were based on a CPI of 250, the CPI has increased by 4% [{(260-
250)/250} x 100]. As a result, Jakob Ltd. would increase the future lease payments by 4%.

Computation of present value of the future lease payments based on an updated CPI of 260:
Year Total
5 6 7 8
Lease payment 2,91,200 2,91,200 3,64,000 3,64,000 13,10,400
Discount @ 10% 1 0.909 0.826 0.751
Present value 2,91,200 2,64,701 3,00,664 2,73,764 11,30,329

Calculation of the adjustment to the lease liability on re-measurement by comparing the

recalculated and original lease liability balances on the re- measurement date:
Revised lease liability 11,30,329
Original lease liability (5,39,370)
Adjustment to the lease liability on re-measurement 5,90,959

Based on above calculations, it is clear that re-measurement of lease is required and

accordingly adjustment to lease liability and ROU asset is required in the first quarter of 2022.

Journal entry to adjust the lease liability

ROU Asset Dr. 5,90,959
To Lease liability 5,90,959
(Being lease liability and ROU asset adjusted on account of re-measurement)

Working Notes:

1. Calculation of ROU asset before the date of re-measurement

Year beginning Lease Payment Present value Present value of lease
(A) factor @ 8% (B) payments (A x B = C)
1 2,80,000 1.000 2,80,000
2 2,80,000 0.926 2,59,280
3 2,80,000 0.857 2,39,960
4 2,80,000 0.794 2,22,320
5 2,80,000 0.735 2,05,800
6 2,80,000 0.681 1,90,680
Lease liability as at commencement date 13,98,040

Or

(2,80,000 x sum of PV (4.993) @ 8% for 5 years = 13,98,040)

2. Calculation of Lease Liability and ROU asset at each year end

Year Lease Liability ROU asset
Initial Lease Interest Closing Initial Depreciation Closing
value payments expense balance Value for 6 years balance
@ 8%
a b c = (a-b) x d = a-b+c

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 Chapter 21 : Leases (IND AS 116)

8%
1 13,98,040 2,80,000 89,443 12,07,483 13,98,040 2,33,007 11,65,033
2 12,07,483 2,80,000 74,199 10,01,682 11,65,033 2,33,007 9,32,026
3 10,01,682 2,80,000 57,735 7,79,417 9,32,026 2,33,007 6,99,019
4 7,79,417 2,80,000 39,953 5,39,370 6,99,019
5 5,39,370

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Chapter 22 : Income Taxes (IND AS 12)

CHAPTER 22
INCOME TAXES (IND AS 12)
Q5: An asset with a cost of ₹ 100 and a carrying amount of ₹ 80 is revalued to ₹ 150. No equivalent
adjustment is made for tax purposes. Cumulative depreciation for tax purposes is ₹ 30 and the
tax rate is 30%. If the asset is sold for more than cost, the cumulative tax depreciation of ₹ 30
will be included in taxable income but sale proceeds in excess of cost will not be taxable.
Calculate deferred tax in the following cases
a) If the entity expects to recover the carrying amount by using the asset
b) If the entity expects to recover the carrying amount by selling the asset
Ans: The tax base of the asset is ₹ 70 and there is a taxable temporary difference of ₹ 80 (₹ 150 the
revalued amount is the carrying amount).
If the entity expects to recover the carrying amount by using the asset, it must generate taxable
income of ₹ 150, but will only be able to deduct depreciation of ₹ 70. On this basis, there is a
deferred tax liability of ₹ 24 (₹ 80 at 30%).
If the entity expects to recover the carrying amount by selling the asset immediately for
proceeds of ₹ 150, the deferred tax liability is computed as follows:
(i) Sale proceeds ₹ 150
(ii) Sale proceeds in excess of cost (₹ 100) ₹ 50
(iii) Taxable proceeds ₹ 100
(iv) Tax base ₹ 70
(v) Taxable temporary difference ₹ 30
(vi) Tax rate 30%
(vii) Deferred tax liability ₹9
Q7: On 1st April 20X1, S Ltd. leased a machine over a 5 year period. The present value of lease
liability is ₹ 120 Cr (discount rate of 8%) and is recognized as lease liability and corresponding
Right of Use (RoU) Asset on the same date. The RoU Asset is depreciated under straight line
method over the 5 years. The annual lease rentals are ₹ 30 Cr payable starting 31st March
20X2. The tax law permits tax deduction on the basis of payment of rent.
Assuming tax rate of 30%, you are required to explain the deferred tax consequences for the
above transaction for the year ended 31st March 20X2.
Ans: A temporary difference effectively arises between the value of the machine for accounting
purposes and the amount of lease liability, since the rent payment is eligible for tax deduction.
Tax base of the machine is nil as the amount is not eligible for deduction for tax purposes.
Tax base of the lease liability is nil as it is measured at carrying amount less any future tax
deductible amount

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 Chapter 22 : Income Taxes (IND AS 12)

Recognition of deferred tax on 31st March 20X2:

Carrying amount in balance sheet

ROU Asset (120 Cr – 24 Cr (Depreciation)) ₹ 96.00 Dr

Lease Liability (120 Cr + 9.60 Cr (120 Cr x 8%) - 30 Cr) ₹ 99.60 Cr
Net Amount ₹ 3.60 Cr
Tax Base ₹ 0.00 Cr
Temporary Difference (deductible) ₹ 3.60 Cr
Deferred Tax asset to be recognized (₹ 3.60 Cr x 30%) ₹ 1.08 Cr

Q12: On 1st April 20X1, P Ltd. had granted 1 Cr share options worth ₹ 4 Cr subject to a two-year
vesting period. The income tax law permits a tax deduction at the exercise date of the intrinsic
value of the options. The intrinsic value of the options at 31st March 20X2 was ₹ 1.60 Cr and at
31st March 20X3 was ₹ 4.60 Cr. The increase in the fair value of the options on 31st March 20X3
was not foreseeable at 31st March 20X2. The options were exercised at 31st March 20X3.
Give the accounting for the above transaction for deferred tax for period ending 31st March,
20X2 and 31st March, 20X3. Assume that there are sufficient taxable profits available in future
against any deferred tax assets. Tax rate of 30% is applicable to P Ltd.
Ans: On 31st March 20X2:
The tax benefit is calculated as under:
Carrying amount of Share based payment₹ 0.00 Cr
Tax Base of Share based payment (₹ 1.60 Cr x ½) ₹ 0.80 Cr
Temporary Difference (Carrying amount – tax base) ₹ 0.80 Cr
Deferred Tax Asset recognized (Temporary Difference x Tax rate)
(0.80 Cr x 30%) ₹ 0.24 Cr
Journal Entry for above:
Deferred Tax Asset Dr. ₹ 0.24 Cr
To Tax Expense ₹ 0.24 Cr
(Being DTA recognized on equity option)
On 31st March 20X3:
The options have been exercised and a current tax benefit will be available to the entity on the
basis of intrinsic value of ₹ 4.60 Cr. Initially recognized deferred tax asset will no longer be
required.
The accounting entry will be done as under:
Tax Expense Dr ₹ 0.24 Cr

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Chapter 22 : Income Taxes (IND AS 12)

To Deferred Tax Asset ₹ 0.24 Cr

(Being DTA reversed on the exercise of the option)
Q14: A Ltd prepares financial statements to 31 March each year. The rate of income tax applicable
to A Ltd is 20%. The following information relates to transactions, assets and liabilities of A Ltd
during the year ended 31 March 20X2:
1. A Ltd has a 40% shareholding in L Ltd. A Ltd purchased this shareholding for ₹ 45 Cr. The
shareholding gives A Ltd significant influence over L Ltd but not control and therefore A
Ltd. accounts for its interest in L Ltd using the equity method. The equity method
carrying value of A Ltd’s investment in L Ltd was ₹ 70 Cr on 31 March 20X1 and ₹ 75 Cr
on 31 March 20X2. In the tax jurisdiction in which A Ltd operates, profits recognised
under the equity method are taxed if and when they are distributed as a dividend or the
relevant investment is disposed of.
2. A Ltd. measures its head office building using the revaluation model. The building is
revalued every year on 31 March. On 31 March 20X1, carrying value of the building
(after revaluation) was ₹ 40 Cr and its tax base was ₹ 22 Cr. During the year ended 31
March 20X2, A Ltd charged depreciation in its statement of profit or loss of ₹ 2 Cr and
claimed a tax deduction for tax depreciation of ₹ 1.25 Cr. On 31 March 20X2, the
building was revalued to ₹ 45 Cr. In the tax jurisdiction in which A Ltd operates,
revaluation of property, plant and equipment does not affect taxable income at the time
of revaluation.
Basis the above information, you are required to compute:
a) The deferred tax liability of A Ltd at 31 March 20X2
b) The charge or credit to both profit or loss and other comprehensive income relating to
deferred tax for the year ended 31 March 20X2. [MTP Nov 2023]
Ans:
A) Deferred Tax Liability as at 31st March 20X2 Investment in L Ltd:
Carrying Amount = ₹ 75 Cr
Tax base = ₹ 45 Cr (Purchase cost) Temporary Difference
= ₹ 30 Cr
Since carrying amount is higher than the tax base, the temporary difference is recognized as a
taxable temporary difference. Using the tax rate of 20%, a deferred tax liability of ₹ 6 Cr is
recognized:
Head office building
Carrying Amount = ₹ 45 Cr (Revalued amount on 31st of March 20X2)
Tax base = ₹ 20.75 Cr (22 Cr – 1.25 Cr)
Temporary Difference = ₹ 24.25 Cr

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 Chapter 22 : Income Taxes (IND AS 12)

Since carrying amount is higher than the tax base, the temporary difference is recognized as a
taxable temporary difference. Using the tax rate of 20%, a deferred tax liability of ₹ 4.85 Cr is
created.
Total Deferred Tax Liability₹ 6 Cr + ₹ 4.85 Cr = ₹ 10.85 Cr
B) Charge to Statement of Profit or Loss for the year ended 31st March 20X2: Investment in L
Ltd.

Particulars CA TB TD
Opening Balance (1st April 20X1) ₹ 70 ₹ 45 Cr ₹ 25 Cr
Cr
Closing Balance (31st March 20X2) ₹ 75 ₹ 45 Cr ₹ 30 Cr
Net Change Cr ₹ 5 Cr

Increase in Deferred Tax Liability (20% tax rate) ₹ 1 Cr

Considering the increase in the value of investment arising through Statement of Profit or Loss,
the accounting for the increase in deferred tax liability is made as under:
Tax expense (Profit or Loss Statement) Dr ₹ 1 Cr
To Deferred Tax Liability ₹ 1 Cr
(Being increase in deferred tax liability recognized)
Head Office Building:
The deferred tax liability at 31 March 20X1 is ₹ 3.6 Cr (20% x {₹ 40 Cr – ₹ 22 Cr}).
At 31 March 20X2, prior to revaluation, the carrying amount of the property is ₹ 38 Cr and its
tax base is ₹ 20.75 Cr (₹ 22 Cr – ₹ 1.25 Cr). The deferred tax liability at this point is ₹ 3.45 Cr
(20% x {₹ 38 Cr – ₹ 20.75 Cr}).
The reduction in this liability is ₹ 0.15 Cr (₹ 3.6 Cr – ₹ 3.45 Cr). This would be credited to income
tax expense in arriving at profit or loss.
Post revaluation, the carrying value of the building becomes ₹ 45 Cr and the tax base stays the
same. Therefore, the new deferred tax liability is ₹ 4.85 Cr (20% x (₹ 45 Cr – ₹ 20.75 Cr)). The
increase in the deferred tax liability of ₹ 1.4 Cr (₹ 4.85 Cr – ₹ 3.45 Cr) is charged to other
comprehensive income.
Q15: K Ltd prepares consolidated financial statements to 31st March each year. During the year
ended 31st March 20X2, K Ltd entered into the following transactions:
a) On 1st April 20X1, K Ltd purchased an equity investment for ₹ 2,00,000. The investment
was designated as fair value through other comprehensive income. On 31st March
20X2, the fair value of the investment was ₹ 2,40,000. In the tax jurisdiction in which K
Ltd operates, unrealised gains and losses arising on the revaluation of investments of
this nature are not taxable unless the investment is sold. K Ltd has no intention of selling
the investment in the foreseeable future.

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Chapter 22 : Income Taxes (IND AS 12)

b) On 1st August 20X1, K Ltd sold products to A Ltd, a wholly owned subsidiary operating in
the same tax jurisdiction as K Ltd, for ₹ 80,000. The goods had cost to K Ltd for ₹
64,000. By 31st March 20X2, A Ltd had sold 40% of these goods, selling the remaining
during next year.
c) On 31st October 20X1, K Ltd received ₹ 2,00,000 from a customer. This payment was in
respect of services to be provided by K Ltd from 1st November 20X1 to 31st July 20X2. K
Ltd recognised revenue of ₹ 1,20,000 in respect of this transaction in the year ended
31st March 20X2 and will recognise the remainder in the year ended 31st March 20X3.
Under the tax jurisdiction in which K Ltd operates, ₹ 2,00,000 received on 31st October
20X1 was included in the taxable profits of K Ltd for the year ended 31st March 20X2.
Explain and show how the tax consequences (current and deferred) of the three transactions
would be reported in its statement of profit or loss and other comprehensive income for the
year ended 31st March 20X2. Assume tax rate to be 25%. [MTP Nov 22]
Ans:
(a) Because the unrealised gain on revaluation of the equity investment is not taxable until
sold, there are no current tax consequences. The tax base of the investment is ₹
2,00,000. The revaluation creates a taxable temporary difference of ₹ 40,000 (₹ 2,40,000
– ₹ 2,00,000).
This creates a deferred tax liability of ₹ 10,000 (₹ 40,000 x 25%). The liability would be
non- current. The fact that there is no intention to dispose of the investment does not
affect the accounting treatment. Because the unrealised gain is reported in other
comprehensive income, the related deferred tax expense is also reported in other
comprehensive income.
(b) When K Ltd sold the products to A Ltd, K Ltd would have generated a taxable profit of ₹
16,000 (₹ 80,000 – ₹ 64,000). This would have created a current tax liability for K Ltd and
the group of ₹ 4,000 (₹ 16,000 x 25%). This liability would be shown as a current liability
and charged as an expense in arriving at profit or loss for the period.
In the consolidated financial statements the carrying value of the unsold inventory
would be ₹ 38,400 (₹ 64,000 x 60%). The tax base of the unsold inventory would
be ₹ 48,000 (₹ 80,000 x 60%). In the consolidated financial statements there would be a
deductible temporary difference of ₹ 9,600 (₹ 38,400 – ₹ 48,000) and a potential
deferred tax asset of ₹ 2,400 (₹ 9,600 x 25%). This would be recognised as a deferred tax
asset since A Ltd is expected to generate sufficient taxable profits against which to
utilise the deductible temporary difference. The resulting credit would reduce
consolidated deferred tax expense in arriving at profit or loss.
(c) The receipt of revenue in advance on 1st October 20X1 would create a current tax
liability of ₹ 50,000 (₹ 200,000 x 25%) as at 31st March 20X2. The carrying value of the
revenue received in advance at 31st March 20X2 is ₹ 80,000 (₹ 200,000 – ₹ 120,000). Its
tax base is nil. The deductible temporary difference of ₹ 80,000 would create a deferred
tax asset of ₹ 20,000 (₹ 80,000 x 25%). The asset can be recognised because K Ltd has
sufficient taxable profits against which to utilise the deductible temporary difference.

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 Chapter 22 : Income Taxes (IND AS 12)

Q20: B Limited is a newly incorporated entity. Its first financial period ends on March 31, 2011. As on
the said date, the following temporary differences exist:
(a) Taxable temporary differences relating to accelerated depreciation of ₹ 9,000. These are
expected to reverse equally over next 3 years.
(b) Deductible temporary differences of ₹ 4,000 expected to reverse equally over next 4
years.
It is expected that B Limited will continue to make losses for next 5 years. Tax rate is 30%.
Losses can be carried forward but not backwards.
Discuss the treatment of deferred tax as on March 31, 2011.
Ans: The year-wise anticipated reversal of temporary differences is as under:
Particulars March 31, March March March 31,
2012 31, 2013 31, 2014 2015
Reversal of taxable temporary difference
relating to accelerated depreciation over
next 3 years (₹ 9,000/3) 3,000 3,000 3,000 Nil
Reversal of deductible temporary
difference relating to preliminary
expenses over next 4 years (₹ 4,000/4) 1,000 1,000 1,000 1,000

B Limited will recognise a deferred tax liability of ₹ 2,700 on taxable temporary difference
relating to accelerated depreciation of ₹ 9,000 @ 30%.
However, it will limit and recognise a deferred tax asset on reversal of deductible temporary
difference relating to preliminary expenses reversing up to year ending March 31, 2014
amounting to ₹ 900 (₹ 3,000 @ 30%). No deferred tax asset shall be recognized for the reversal
of deductible temporary difference for the year ending on March 31, 2015 as there are no
taxable temporary differences. Further, the outlook is also a loss. However, if there are tax
planning opportunities that could be identified for the year ending on March 31, 2015 deferred
tax asset on the remainder of ₹ 1,000 (₹ 4,000 – ₹ 3,000) of deductible temporary difference
could be recognised at the 30% tax rate.
Q22: X Ltd. prepares consolidated financial statements to 31st March each year. During the year
ended 31st March 2018, the following events affected the tax position of the group:
(i) Y Ltd., a wholly owned subsidiary of X Ltd., made a loss adjusted for tax purposes of ₹
30,00,000. Y Ltd. is unable to utilise this loss against previous tax liabilities . Income-tax
Act does not allow Y Ltd. to transfer the tax loss to other group companies. However, it
allows Y Ltd. to carry the loss forward and utilise it against company’s future taxable
profits. The directors of X Ltd. do not consider that Y Ltd. will make taxable profits in the
foreseeable future.
(ii) Just before 31st March, 2018, X Ltd. committed itself to closing a division after the year
end, making a number of employees redundant. Therefore X Ltd. recognised a provision
for closure costs of ₹ 20,00,000 in its statement of financial position as at 31st March,

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Chapter 22 : Income Taxes (IND AS 12)

2018. Income-tax Act allows tax deductions for closure costs only when the closure
actually takes place. In the year ended 31 March 2019, X Ltd. expects to make taxable
profits which are well in excess of ₹ 20,00,000. On 31st March, 2018, X Ltd. had taxable
temporary differences from other sources which were greater than ₹ 20,00,000.
(iii) During the year ended 31 March 2017, X Ltd. capitalised development costs which
satisfied the criteria in paragraph 57 of Ind AS 38 ‘Intangible Assets’. The total amount
capitalised was ₹ 16,00,000. The development project began to generate economic
benefits for X Ltd. from 1st January 2018. The directors of X Ltd. estimated that the
project would generate economic benefits for five years from that date. The
development expenditure was fully deductible against taxable profits for the year ended
31 March 2018.
(iv) On 1 April 2017, X Ltd. borrowed ₹ 1,00,00,000. The cost to X Ltd. of arranging the
borrowing was ₹ 2,00,000 and this cost qualified for a tax deduction on 1 April 2017. The
loan was for a three-year period. No interest was payable on the loan but the amount
repayable on 31 March 2020 will be ₹ 1,30,43,800. This equates to an effective annual
interest rate of 10%. As per the Income-tax Act, a further tax deduction of ₹ 30,43,800
will be claimable when the loan is repaid on 31st March, 2020.
Explain and show how each of these events would affect the deferred tax assets /
liabilities in the consolidated balance sheet of X Ltd. group at 31 March, 2018 as per Ind
AS. Assume the rate of corporate income tax is 20%. [RTP Nov 2018]
Ans.
(i) The tax loss creates a potential deferred tax asset for the group since its carrying value is
nil and its tax base is ₹ 30,00,000.
However, no deferred tax asset can be recognised because there is no prospect of being
able to reduce tax liabilities in the foreseeable future as no taxable profits are
anticipated.
(ii) The provision creates a potential deferred tax asset for the group since its carrying value
is ₹ 20,00,000 and its tax base is nil.
This deferred tax asset can be recognised because X Ltd. is expected to generate taxable
profits in excess of ₹ 20,00,000 in the year to 31st March, 2019.
The amount of the deferred tax asset will be ₹ 4,00,000 (₹ 20,00,000 x 20%).
This asset will be presented as a deduction from the deferred tax liabilities caused by
the (larger) taxable temporary differences.
(iii) The development costs have a carrying value of ₹ 15,20,000 (₹ 16,00,000 – (₹ 16,00,000
x 1/5 x 3/12)).
The tax base of the development costs is nil since the relevant tax deduction has already
been claimed.
The deferred tax liability will be ₹ 3,04,000 (₹ 15,20,000 x 20%). All deferred tax
liabilities are shown as non-current.

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 Chapter 22 : Income Taxes (IND AS 12)

(iv) The carrying value of the loan at 31st March, 2018 is ₹ 1,07,80,000 (₹ 1,00,00,000 – ₹
2,00,000 + (₹ 98,00,000 x 10%)).
The tax base of the loan is ₹ 1,00,00,000.
This creates a deductible temporary difference of ₹ 7,80,000 (₹ 1,07,80,000 – ₹
1,00,00,000) and a potential deferred tax asset of ₹ 1,56,000 (₹ 7,80,000 x 20%).
Due to the availability of taxable profits next year (see part (ii) above), this asset can be
recognised as a deduction from deferred tax liabilities.

Q36: Following is the summarized Statement of Profit and Loss of New Age Ltd. as per Ind AS for the
year ended 31.3.2022:
Particulars ₹ in lakhs
Revenue from operations 1,450.00
Other income 70.00
(A) Total income 1,520.00
Purchase of stock in trade 50.00
Changes in inventories of stock in trade 20.00
Employee benefit expenses 145.00
Finance costs 180.00
Other expenses 375.00
(B) Total expenses 770.00
(C) Profit before tax (A - B) 750.00
(D) Current tax expense 211.65
(E) Profit after tax (C - D) 538.35
Additional information:
1. Consider that Income tax rate applicable to New Age Ltd. in India is 30%.
2. ‘Other expenses’ include the following expenses which are not deductible for income tax
purposes:
 Penalties ₹ 1.50 lakh
 Donations ₹ 55.00 lakhs
 Impairment of goodwill ₹ 7.00 lakhs
3. ‘Other expenses’ also include expenditure on Scientific Research amounting to ₹ 10 lakhs
in respect of which a 150% weighted deduction is available under income tax laws.
4. ‘Other income’ includes:
 Dividends of ₹ 5 lakhs, which is exempt from tax.
 Long term capital gains of ₹ 12 lakhs which are taxable at the rate of 10%.

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Chapter 22 : Income Taxes (IND AS 12)

5. ‘Profit before tax of ₹750 lakhs’ includes:

 Agriculture income of ₹ 65 lakhs which is exempt from tax; and
 Profit of ₹75 lakhs earned in USA on which New Age Ltd. has paid tax at the rate
of 20%.
During review of financial statements of New Age Ltd., the CFO multiplied profit before tax by
the income tax rate and arrived at ₹ 225 lakhs as the tax expenses. However, the actual income
tax expenses appearing in the summarized Statement of Profit and Loss is ₹ 211.65 lakhs.
You are required to help the CFO of the company in reconciling the difference between the tax
expense amount. [Exam Nov 22 (6 Marks)]

Ans: Reconciliation of income tax expense and current tax as per accounting profit for the year
ended 31st March 2022
Particulars ₹ in lakhs
Accounting profit 750.00
Tax at the applicable tax rate of 30% 225.00
Tax effect of expenses that are not deductible in determiningtaxable profits:

Penalties (1.5 x 30%) 0.45

Impairment of goodwill (7 x 30%) 2.10
Donations (55 x 30%) 16.50 19.05
Tax effect of expenses that are deductible in determiningtaxable profits:

Expenditure on scientific research (10.00 x 50% x 30%) (1.50)

Tax effect of income that are exempted in determiningtaxable profits:

Dividend income (Exempt) (5.00 x 30%) 1.50

Agriculture income (Exempt) (65.00 x 30%) 19.50 (21.00)
Tax effect of income on which different tax rates are usedfor determining
taxable profits:
Differential income tax on long term capital gain [12.00 x(30% - 10%)] 2.40

Foreign income in USA [75.00 x (30% - 20%)] 7.50 (9.90)

Income tax expense (Current) reported in the Statement ofProfit and Loss for the
current year 211.65

Q37. On 1st April, 20X1, an entity paying tax at 30% acquired a non-tax-deductible office building for
₹ 1,00,000 in circumstances in which Ind AS 12 prohibits recognition of the deferred tax liability
associated with the temporary difference of ₹ 1,00,000. The building is depreciated over 10
years at ₹ 10,000 per year to a residual value of zero. The entity’s financial year ends on 31st
March.

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 Chapter 22 : Income Taxes (IND AS 12)

On 1st April, 20X2, the carrying amount of the building is ₹ 90,000, and it is revalued upwards
by ₹ 45,000 to its current market value of ₹ 1,35,000. There is no change to the estimated
residual value of zero, or to the useful life of the building after revaluation.

Determine the carrying amount, depreciation for the year ended 31 st March, 20X3 and defer
tax thereafter till the useful life of the building. Further analyse the treatment and impact of
defer tax since 31st March, 20X3 till the useful life of the building. [RTP Nov 2023]

Ans. Since there is no change to the estimated residual value of zero, or to the useful life of the
building after revaluation, at the end of the 2nd year i.e. 31st March 20X3, the building will be
depreciated over the next 9 years at ₹ 15,000 per year.

Following the revaluation, the temporary difference associated with the building is ₹ 1,35,000.
Of this amount, only ₹ 90,000 arose on initial recognition, since ₹ 10,000 of the original
temporary difference of ₹ 1,00,000 arising on initial recognition of the asset has been
eliminated through depreciation of the asset. The carrying amount (which equals the
temporary difference, since the tax base is zero) and depreciation during the year ended 31st
March, 20X3 and thereafter may then be analysed as follows:
Year Carrying Tax Gross Unrecognised Recognised Deferred
amount base temporary temporary temporary tax
difference (c= difference difference liability
a-b) d (e=c-d)
a b f=e@
30%
0 1,00,000 - 1,00,000 1,00,000 - -
1 90,000 - 90,000 90,000 - -
Reval 1,35,000 - 1,35,000 90,000 45,000 13,500
2 1,20,000 - 1,20,000 80,000 40,000 12,000
3 1,05,000 - 1,05,000 70,000 35,000 10,500
4 90,000 - 90,000 60,000 30,000 9,000
5 75,000 - 75,000 50,000 25,000 7,500
6 60,000 - 60,000 40,000 20,000 6,000
7 45,000 - 45,000 60,000 15,000 4,500
8 30,000 - 30,000 20,000 10,000 3,000
9 15,000 - 15,000 10,000 5,000 1,500
10 - - - - - -

Note: The depreciation is allocated pro rata to the cost element and revalued element of the
total carrying amount.

On 31st March, 20X3, the entity recognises a deferred tax liability based on the temporary
difference of ₹ 45,000 arising on the revaluation (i.e., after initial recognition) giving a deferred
tax expense of ₹ 13,500 (₹ 45,000 @ 30%) recognised in Other Comprehensive Income (OCI).

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Chapter 22 : Income Taxes (IND AS 12)

This has the result that the effective tax rate shown in the financial statements for the
revaluation is 30% (₹ 45,000 gain with deferred tax expense of ₹ 13,500).

As can be seen from the table above, as at 31st March, 20X4 (year 3), ₹ 40,000 of the total
temporary difference arose after initial recognition. The entity, therefore, provides for deferred
tax of ₹ 12,000 (₹ 40,000 @ 30%), and a deferred tax credit of ₹ 1,500 (the reduction in the
liability from ₹ 13,500 to ₹ 12,000) is recognised in profit or loss.

The deferred tax credit can be explained as the tax effect at 30% of the additional ₹ 5,000
depreciation relating to the revalued element of the building.

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Consolidated Financial Statement (IND AS)
Chapter 23 Consolidated Financial Statement (IND AS)

CHAPTER 23
CONSOLIDATED AND SEPARATE FINANCIAL
STATEMENTS OF GROUP ENTITIES
UNIT 1: IND AS 110 CONSOLIDATED FINANCIAL STATEMENTS
Q20: On 1 July 20X1, FA Ltd acquired 75% of the equity shares of Bolton Ltd and gained control of
Bolton Ltd. Bolton Ltd has 12 million equity shares in issue. Details of the purchase
consideration are as follows:
 On 1 July 20X1, FA Ltd issued two shares for every three shares acquired in Bolton
Ltd. On 1 July 20X1, the market value of an equity share in FA Ltd was ₹6.50 and the
market value of an equity share in Bolton Ltd was ₹ 6.00.
 On 30 June 20X2, FA Ltd will make a cash payment of ₹ 7.15 million to the former
shareholders of Bolton Ltd. who sold their shares to FA Ltd on 1 July 20X1. On 1 July
20X1, FA Ltd would have needed to pay interest at an annual rate of 10% on
borrowings
 On 30 June 20X3, FA Ltd may make a cash payment of ₹ 30 million to the former
shareholders of Bolton Ltd who sold their shares to FA on 1 July 20X1. This payment
is contingent upon the revenues of FA Ltd. growing by 15% over the two-year period
from 1 July 20X1 to 30 June 20X3. On 1 July 20X1, the fair value of this contingent
consideration was ₹ 25 million. On 31 March 20X2, the fair value of the contingent
consideration was ₹ 22 million.
On 1 July 20X1, the carrying values of the identifiable net assets of Bolton Ltd in the books of
that company totalled ₹ 60 million. On 1 July 20X1, the fair values of these net assets totalled
₹70 million. The rate of deferred tax to apply to temporary differences is 20%.
During the nine months ended on 31 March 20X2, Bolton Ltd had a poorer than expected
operating performance. Therefore, on 31 March 20X2, it was necessary for FA Ltd to
recognize an impairment of the goodwill arising on acquisition of Bolton Ltd, amounting to
10% of its total computed value.
Compute the impairment of goodwill on acquisition of Bolton Ltd under both the methods
permitted in the relevant Ind AS for the initial computation of the non-controlling interest in
Bolton Ltd at the date of acquisition. [MTP May 2020; May 2024]
Ans: Method I : NCI measured at Fair value
Method II: NCI measured at proportionate share of identifiable net assets
Method I Method II
₹’000 ₹’000
Cost of investment
Share exchange (12 million x 75% x2/3 x₹6·50) 39,000 39,000

P a g e | 23.1.1
 UNIT 1: IND AS 110 CONSOLIDATED FINANCIAL STATEMENTS

Deferred consideration (7.15 million/1.10) 6,500 6,500

Contingent consideration 25,000 25,000
Non-controlling interest at date of acquisition:
Fair value – 3 million x ₹6·00 18,000
% of net assets – 68,000 (W.N.1) x 25% 17,000
88,500 87,500
Net assets at date of acquisition (W.N.1) (68,000) (68,000)
Goodwill on acquisition 20,500 19,500
Impairment – 10% 2,050 1,950
Where the NCI is measured at fair value, the impairment should be attributed partly to
retained earnings and partly to NCI. The allocation is normally based on the group structure
(75/25 in this case).
Where the NCI is measured at % of net assets, the impairment should be attributed wholly to
retained earnings.

Working Notes:
Net assets at date of acquisition
₹ ’000
Fair value at acquisition date 70,000
Deferred tax on fair value adjustments (20% x (70,000 – 60,000)) (2,000)
68,000

Q23: Ram Ltd. acquired 60% ordinary shares of ₹ 100 each of Krishan Ltd. on 1st October 20X1. On
March 31, 20X2 the summarised Balance Sheets of the two companies were as given below:
Ram Ltd. Krishan Ltd.
Assets
Property, Plant Equipment
Land & Buildings 3,00,000 3,60,000
Plant & Machinery 4,80,000 2,70,000
Investment in Krishan Ltd. 8,00,000 -
Inventory 2,40,000 72,800
Financial Assets
Trade Receivable 1,19,600 80,000
Cash 29,000 16,000
Total 19,68,600 7,98,800
Equities & Liabilities
Equity Capital (Shares of ₹ 100 each fully paid) 10,00,000 4,00,000

P a g e | 23.1.2
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Other Equity
Other Reserves 6,00,000 2,00,000
Retained earnings 1,14,400 1,64,000
Financial Liabilities
Bank Overdraft 1,60,000 -
Trade Payable 94,200 34,800
Total 19,68,600 7,98,800
The Retained earnings of Krishan Ltd. showed a credit balance of ₹ 60,000 on 1st April 20X1 out
of which a dividend of 10% was paid on 1st November; Ram Ltd. has credited the dividend
received to its Retained earnings; Fair Value of P& M as on 1st October 20X1 was ₹ 4,00,000;
The rate of depreciation on plant & machinery is 10%.
Following are the changes in Fair value as per respective IND AS from book value as on 1st
October 20X1 which is to be considered while consolidating the Balance Sheets.
Liabilities Amount Assets Amount
Trade Payables 20,000 Land & Buildings 2,00,000
Inventories 30,000
Note:
1. It may be assumed that the inventory is still unsold on balance sheet date and the Trade
Payables are also not yet settled.
2. Also assume that the Other Reserves as on 31st March 20X2 are the same as was on 1st
April 20X1.
Prepare consolidated Balance Sheet as on March 31, 20X2. [Exam May 2018]
Ans: Consolidated Balance Sheet of Ram Ltd. and its subsidiary, Krishan Ltd. as on 31st March,
20X2
Particulars Note No. ₹

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 UNIT 1: IND AS 110 CONSOLIDATED FINANCIAL STATEMENTS

Assets
Non-current assets
Property, Plant & Equipment 1 17,20,000
Goodwill 2 1,65,800
Current Assets
Inventories
3 3,42,800
Financial Assets
Trade Receivables
Cash & Cash equivalents 4 1,99,600
Total Assets 5 45,000
24,73,200
Equity and Liabilities
Equity
Equity Share Capital 6 10,00,000
Other Equity 7 7,30,600
Non-controlling Interest (WN 5) 4,33,600
Current Liabilities
Financial Liabilities
Trade Payables 8 1,49,000
Short term borrowings 9 1,60,000
Total Equity & Liabilities 24,73,200
Statement of Changes in Equity:

1. Equity share Capital

Balance at the beginning of the Changes in Equity share Balance at the end of the
reporting period capital during the year reporting period

10,00,000 0 10,00,000

2. Other Equity
Share Equity Reserves & Surplus Total
application component Capital Retained Other
Money reserve Earnings Reserves
Balance at the beginning of the
reporting period
0 6,00,000 6,00,000
Total
comprehensive 0 1,14,400 1,14,400
income for the year
Dividends 0 (24,000) (24,000)
Total
comprehensive 0 40,200 40,200
income attributable to parent

P a g e | 23.1.4
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Gain on Bargain 0 0
purchase
Balance at the end of reporting
period 1,30,600 6,00,000 7,30,600
Working Notes:
1. Adjustments of Fair Value
The Plant & Machinery of Krishan Ltd. would stand in the books at ₹ 2,85,000 on 1st
October, 20X1, considering only six months’ depreciation on ₹ 3,00,000 total
depreciation being ₹ 30,000. The value put on the assets being ₹ 4,00,000 there is
an appreciation to the extent of ₹ 1,15,000.
2. Acquisition date profits of Krishan Ltd.
Reserves on 1.4. 20X1 2,00,000
Profit & Loss Account Balance on 1.4. 20X1 60,000
Profit for 20X1-20X2: Total (₹ 1,64,000 less ₹ 20,000) x
6/12 i.e. 72,000; upto 1.10. 20X1 72,000
Total Appreciation 3,25,000
6,57,000
Holding Co. Share (60%) 3,94,200
3. Post-acquisition profits of Krishan Ltd.
Profit after 1.10. 20X1 [1,64,000-20,000]x 6/12 72,000
Less: 10% depreciation on ₹ 4,00,000 for 6 months less
depreciation already charged for 2nd half of 20X1-20X2 on ₹ (5,000)
3,00,000 (20,000-15,000) 67,000
Total 40,200
Share of holding Co. (60%)
4. Non-controlling Interest
Par value of 1600 shares 1,60,000
Add: 2/5 Acquisition date profits (6,57,000 – 40,000) 2,46,800
Add: 2/5 Post-acquisition profits [WN 4] 26,800
4,33,600

5. Goodwill:
Amount paid for 2,400 shares 8,00,000
Par value of shares 2,40,000
3,94,200 (6,34,200)
Acquisition date profits share of Ram Ltd.
1,65,800
Goodwill
6. Value of Plant & Machinery:

P a g e | 23.1.5
 UNIT 1: IND AS 110 CONSOLIDATED FINANCIAL STATEMENTS

Ram Ltd. 4,80,000

2,70,000
Krishan Ltd.
1,15,000
Add: appreciation on 1.10. 20X1
3,85,000
Add: Depreciation for 2nd half charged on pre-
revalued value 15,000
(20,000) 3,80,000
Less: Depreciation on ₹ 4,00,000 for 6 months
8,60,000
7. Profit & Loss account consolidated

Ram Ltd. (as given) 1,14,400

Less: Dividend (24,000) 90,400
Share of Ram Ltd. in post-acquisition profits 40,200
1,30,600
Q24: On 1st April 2017, A Limited acquired 80% of the share capital of S Limited. On acquisition date
the share capital and reserves of S Ltd. stood at ₹ 5,00,000 and ₹ 1,25,000 respectively. A
Limited paid initial cash consideration of ₹ 10,00,000.
Additionally, A Limited issued 2,00,000 equity shares with a nominal value of ₹ 1 per share at
current market value of ₹ 1.80 per share.
It was also agreed that A Limited would pay a further sum of ₹ 5,00,000 after three years. A
Limited's cost of capital is 10%. The appropriate discount factor for ₹ 1 @ 10% receivable at the
end of
1st year: 0.91
2nd year: 0.83
3rd year: 0.75
The shares and deferred consideration have not yet been recorded by A limited. Below are the
Balance Sheet of A Limited and S Limited as at 31st March, 2019:
A Limited (₹ 000) S Limited (₹ 000)
Non-current assets:
Property, plant & equipment
5,500 1,500
Investment in S Limited at cost 1,000
Current assets:
Inventory 550 100
Receivables 400 200
Cash 200 50
7,650 1,850
Equity:
Share capital 2,000 500

P a g e | 23.1.6
UNIT 1: IND AS 110 CONSOLIDATED FINANCIAL STATEMENTS

Retained earnings 1,400 300

3,400 800
Non-current liabilities 3,000 400
Current liabilities 1,250 650
7,650 1,850

Further information:

(i) On the date of acquisition the fair values of S Limited's plant exceeded its book value by
₹ 2,00,000. The plant had a remaining useful life of five years at this date;

(ii) The consolidated goodwill has been impaired by ₹ 2,58,000; and

(iii) The A Limited Group, values the non-controlling interest using the fair value method. At
the date of acquisition, the fair value of the 20 % non-controlling interest was ₹
3,80,000.

You are required to prepare Consolidated Balance Sheet of A Limited as at 31st March, 2019.
(Notes to Account on Consolidated Balance Sheet is not required).

[Exam JAN 2021 (15 Marks); MTP May 2022; Nov 2023]

Ans: Consolidated Balance Sheet of A Ltd. and its subsidiary, S Ltd. as at 31st March, 2019
Particulars ₹ in 000s
I.Assets
(1) Non-current assets
(i) Property Plant & Equipment (W.N.4) 7,120.00
(ii) Intangible asset – Goodwill (W.N.3) 1,032.00
(2) Current Assets
650.00
(i) Inventories (550 + 100)
(ii) Financial Assets
600.00
(a) Trade Receivables (400 + 200)
250.00
(b) Cash & Cash equivalents (200 + 50)
9,652.00
Total Assets

II. Equity and Liabilities

(1) Equity
2,200.00
(i) Equity Share Capital (2,000 + 200)
(ii) Other Equity
(a) Retained Earnings (W.N.6) 1190.85
(b) Securities Premium 160.00
(2) Non-Controlling Interest (W.N.5) 347.40
3,400.00

P a g e | 23.1.7
 UNIT 1: IND AS 110 CONSOLIDATED FINANCIAL STATEMENTS

(3) Non-Current Liabilities (3,000 + 400) 2,353.75

(4) Current Liabilities (W.N.8) 9,652.00
Total Equity & Liabilities

Notes:

1. Since the question required not to prepare Notes to Account, the column of
Note to Accounts had not been drawn.

2. It is assumed that shares were issued during the year 2018-2019 and entries are
yet to be made.

Working Notes:

1. Calculation of purchase consideration at the acquisition date i.e. 1st April,

2017
₹ in 000s
Payment made by A Ltd. to S Ltd.
Cash
1,000.00
Equity shares (2,00,000 shares x ₹ 1.80) 360.00
Present value of deferred consideration (₹ 5,00,000 x .75) 375.00
Total consideration 1,735.00

2. Calculation of net assets i.e. net worth at the acquisition date i.e. 1st April,
2017
₹ in 000s
Share capital of S Ltd. 500.00
Reserves of S Ltd. 125.00
Fair value increase on Property, Plant and Equipment 200.00
Net worth on acquisition date 825.00

3. Calculation of Goodwill at the acquisition date i.e. 1st April, 2017 and 31st
March, 2019
₹ in 000s
Purchase consideration (W.N.1) 1,735.00
Non-controlling interest at fair value (as given in the question) 380.00
2,115.00
Less: Net worth (W.N.2) (825.00)
Goodwill as on 1 st April 2017 1,290.00
Less: Impairment (as given in the question) 258.00

P a g e | 23.1.8
UNIT 1: IND AS 110 CONSOLIDATED FINANCIAL STATEMENTS

Goodwill as on 31st March 2019 1,032.00

4. Calculation of Property, Plant and Equipment as on 31st March 2019

₹ in 000s
A Ltd. 5,500
S Ltd. 1,500
Add : Net fair value gain not recorded yet 200.00
Less : Depreciation [(200/5) × 2] (80.00) 120.00 1,620.00
7,120.00

5. Calculation of Post-acquisition gain (after adjustment of impairment on

goodwill) and value of NCI as on 31st March 2019
₹ in 000s ₹ in 000s
NCI A Ltd.
(20%) (80%)
Acquisition date balance 380.00 Nil
Closing balance of Retained Earnings 300.00
Less: Pre-acquisition balance (125.00)
Post-acquisition gain 175.00
Less: Additional Depreciation on PPE [(200/5) x 2]
(80.00)
Share in post-acquisition gain 95.00 19.00 76.00
Less: Impairment on goodwill 258.00 (51.60) (206.40)
347.40 (130.40)

6. Consolidated Retained Earnings as on 31st March 2019

₹ in 000s
A Ltd. 1,400.00
Add: Share of post-acquisition loss of S Ltd. (W.N.5) (130.40)
Less: Finance cost on deferred consideration (37.5 + 41.25) (78.75)
(W.N.7)

Retained Earnings as on 31 st March 2019 1,190.85

7. Calculation of value of deferred consideration as on 31 st March 2019

₹ in
000s

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 UNIT 1: IND AS 110 CONSOLIDATED FINANCIAL STATEMENTS

375.00
Value of deferred consideration as on 1 st April 2017 (W.N.1)
Add: Finance cost for the year 2017-2018 (375 x 10%) 37.50
412.50
Add: Finance cost for the year 2018-2019 (412.50 x 10%) 41.25

Deferred consideration as on 31 st March 2019 453.75

8. Calculation of current Liability as on 31st March 2019

₹ in 000s
A Ltd. 1,250.00
S Ltd. 650.00
Deferred consideration as on 31 st March 2019 (W.N.7) 453.75

Current Liability as on 31 st March 2019 2,353.75

Q25: Ishwar Ltd. holds investments in Vinayak Ltd. The draft balance sheets of two entities at 31st
March, 20X4 were as follows:
Particulars Ishwar Ltd. Vinayak Ltd.
₹ in ‘000s ₹ in ‘000s
Assets
Non-current Assets
Property, Plant and Equipment 26,20,000 18,50,000
Investment 21,15,000 NIL
Total non-current assets 47,35,000 18,50,000
Current Assets
Inventories 6,00,000 3,75,000
Trade Receivables 4,50,000 3,30,000
Cash and Cash Equivalents 75,000 60,000
Total current assets 11,25,000 7,65,000
TOTAL ASSETS 58,60,000 26,15,000
Equity and Liabilities
Equity
Share Capital (₹ 1 shares) 7,00,000 5,00,000
Retained Earnings 28,65,000 10,50,000

P a g e | 23.1.10
UNIT 1: IND AS 110 CONSOLIDATED FINANCIAL STATEMENTS

Other Components of Equity 12,50,000 50,000

Total Equity 48,15,000 16,00,000
Non-current Liabilities
Provisions 6,250 NIL
Long-term Borrowings 4,13,750 4,50,000
Deferred Tax 2,25,000 1,40,000
Total Non-current Liabilities 6,45,000 5,90,000
Current Liabilities
Trade and Other Payables 3,00,000 2,50,000
Short-term Borrowings 1,00,000 1,75,000
Total Current Liabilities 4,00,000 4,25,000
TOTAL EQUITY AND LIABILITIES 58,60,000 26,15,000

Additional Information:

Ishwar Ltd.’s investment in Vinayak Ltd.

On 1st April, 20X1, Ishwar Ltd. acquired 400 million shares in Vinayak Ltd. by means of a share
exchange of one share in Ishwar Ltd. for every two shares acquired in Vinayak Ltd. On 1st April,
20X1, the market value of one share of Ishwar Ltd. was ₹ 7.

Ishwar Ltd. appointed a professional firm for conducting due diligence for acquisition of
Vinayak Ltd., the cost of which amounted to ₹ 15 million. Ishwar Ltd. included these acquisition
costs in the carrying amount of the investment in Vinayak Ltd. in the draft balance sheet of
Ishwar Ltd. There has been no change to the carrying amount of this investment in Ishwar Ltd.’s
own balance sheet since 1 st April, 20X1.

On 1st April, 20X1, the individual financial statements of Vinayak Ltd. showed the following
balances:

- Retained earnings ₹ 750 million

- Other components of equity ₹ 25 million

The directors of Ishwar Ltd. carried out a fair value exercise to measure the identifiable assets
and liabilities of Vinayak Ltd. at 1st April, 20X1. The following matters emerged:

- Property having a carrying amount of ₹ 800 million (land component ₹ 350 million,
buildings component ₹ 450 million) had an estimated fair value of ₹ 1,000 million (land
component ₹ 400 million, buildings component ₹ 600 million). The buildings component
of the property had an estimated useful life of 30 years at 1st April, 20X1.

- Plant and equipment having a carrying amount of ₹ 600 million had an estimated fair
value of ₹ 700 million. The estimated remaining useful life of this plant at 1st April, 20X1

P a g e | 23.1.11
 UNIT 1: IND AS 110 CONSOLIDATED FINANCIAL STATEMENTS

was four years. None of this plant and equipment had been disposed of between 1st
April, 20X1 and 31st March, 20X4.

- On 1st April, 20X1, the notes to the financial statements of Vinayak Ltd. disclosed
contingent liability. On 1st April, 20X1, the fair value of this contingent liability was
reliably measured at ₹ 30 million. The contingency was resolved in the year ended 31st
March, 20X2 and no payments were required to be made by Vinayak Ltd. in respect of
this contingent liability.

- The fair value adjustments have not been reflected in the individual financial statements
of Vinayak Ltd. In the consolidated financial statements, the fair value adjustments will
be regarded as temporary differences for the purposes of computing deferred tax. The
rate of deferred tax to apply to temporary differences is 20%.

The directors of Ishwar Ltd. used the proportion of net assets method when measuring the
non-controlling interest in Vinayak Ltd. in the consolidated balance sheet.

Impairment review of goodwill on acquisition of Vinayak Ltd.

No impairment of the goodwill on acquisition of Vinayak Ltd. was evident when the reviews
were carried out on 31st March, 20X2 and 20X3. On 31st March, 20X4, the directors of Ishwar
Ltd. carried out a further review and concluded that the recoverable amount of the net assets
of Vinayak Ltd. at that date was ₹ 2,000 million. Vinayak Ltd. is regarded as a single cash
generating unit for the purpose of measuring goodwill impairment.

Provision

On 1st April, 20X3, Ishwar Ltd. completed the construction of a non-current asset with an
estimated useful life of 20 years. The costs of construction were recognised in property, plant
and equipment and depreciated appropriately. Ishwar Ltd. has a legal obligation to restore the
site on which the non-current asset is located on 31st March, 2X43. The estimated cost of this
restoration work, at 31st March, 2X43 prices, is ₹ 125 million. The directors of Ishwar Ltd. have
made a provision of ₹ 6.25 million (1/20 x ₹ 125 million) in the draft balance sheet at 31st
March, 20X4.

An appropriate annual discount rate to use in any relevant calculations is 6% and at this rate
the present value of ₹ 1 payable in 20 years is 31.2 paise.

Prepare the consolidated balance sheet of Ishwar Ltd. at 31 st March, 20X4. Consider deferred
tax implications. [RTP Nov 2023]

Ans. Consolidated Balance Sheet of Ishwar Ltd. at 31st March, 20X4

Particulars ₹ in ‘000s
Assets
Non-current Assets:
Property, Plant and Equipment

P a g e | 23.1.12
UNIT 1: IND AS 110 CONSOLIDATED FINANCIAL STATEMENTS

[(26,20,000 + 18,50,000) + {(2,00,000 (W.N.1) – 15,000 (W.N.1)) +

(1,00,000 (W.N.1) – 75,000 (W.N.1)) + (39,000 – 1,950) (WN 7)}] 47,17,050
Investment (21,15,000 – 14,00,000 – 15,000) 7,00,000
Goodwill (W.N.2) 1,85,600
Total non-current assets 56,02,650
Current Assets:
Inventories (6,00,000 + 3,75,000) 9,75,000
Trade Receivables (4,50,000 + 3,30,000) 7,80,000
Cash and Cash Equivalents (75,000 + 60,000) 1,35,000
Total current assets 18,90,000
TOTAL ASSETS 74,92,650
Equity and Liabilities
Equity attributable to equity holders of the parent
Share Capital 7,00,000
Retained Earnings (W.N.5) 30,31,960
Other Components of Equity (W.N.6) 12,70,000
50,01,960
Non-controlling Interest (W.N.4) 3,53,600
Total equity 53,55,560
Non-current Liabilities
Provisions (39,000 + 2,340 (W.N.7)) 41,340
Long-term Borrowings (4,13,750 + 4,50,000) 8,63,750
Deferred Tax (W.N.8) 4,07,000
Total non-current liabilities 13,12,090
Current Liabilities
Trade and Other Payables (3,00,000 + 2,50,000) 5,50,000
Short-term Borrowings (1,00,000 + 1,75,000) 2,75,000
Total Current Liabilities 8,25,000
TOTAL EQUITY AND LIABILITIES 74,92,650

Working Notes:

1. Computation of Net Assets of Vinayak Ltd.

1st April, 20X1 31st March, 20X4

P a g e | 23.1.13
 UNIT 1: IND AS 110 CONSOLIDATED FINANCIAL STATEMENTS

(Date of (Date of
acquisition) consolidation)
₹ in ‘000s ₹ in ‘000s
Share Capital 5,00,000 5,00,000
Retained Earnings:
Per accounts of Vinayak Ltd. 7,50,000 10,50,000
Fair Value Adjustments:
Property (10,00,000 – 8,00,000)* #2,00,000 $2,00,000
Extra depreciation due to Buildings
appreciation*
((6,00,000 – 4,50,000) x 3/30) $(15,000)
Plant and Equipment (7,00,000 – 6,00,000)* #1,00,000 $1,00,000
Extra depreciation due to Plant and
Equipment appreciation*
(1,00,000 x ¾) $(75,000)
Contingent Liability* #(30,000) $NIL
Other Components of Equity 25,000 50,000
Deferred Tax on Fair Value Adjustments*:
Date of acquisition (20% x #2,70,000 (from (54,000)
above))
Date of Consolidation (20% x $2,10,000 (from
above)) (42,000)
Net Assets for Consolidation 14,91,000 17,68,000
The post-acquisition increase in Net Assets is ₹ 2,77,000 (₹ 17,68,000 – ₹ 14,91,000). ₹
25,000 of this increase is due to changes in Other Components of Equity and the
remaining ₹ 2,52,000 due to changes in retained earnings.

2. Computation of Goodwill on Consolidation

Vinayak Ltd.
₹ in ‘000s
Cost of Investment:
Shares issued to acquire Vinayak Ltd. (4,00,000 x ½ x ₹ 7) 14,00,000
Non-controlling Interests at the date of acquisition:
Vinayak Ltd. – 20% x ₹ 1,491,000 (from W.N.1) 2,98,200
16,98,200

P a g e | 23.1.14
UNIT 1: IND AS 110 CONSOLIDATED FINANCIAL STATEMENTS

Net Assets at the date of acquisition:

Vinayak Ltd. (W.N.1) (14,91,000)

Goodwill before Impairment 2,07,200
Less: Impairment of Goodwill (refer W.N.3) (21,600)
Goodwill reported in Consolidated Balance Sheet 1,85,600

3. Impairment of Goodwill on acquisition of Vinayak Ltd.

Vinayak Ltd.
₹ in ‘000s
Net Assets of Vinayak Ltd. at 31st March, 20X4 (W.N.1) 17,68,000
Grossed up Goodwill on acquisition (100/80 x ₹ 2,07,200) (Refer Note
1 below) 2,59,000
20,27,000
Recoverable amount of Vinayak Ltd. as a CGU (20,00,000)
Therefore, gross impairment will be 27,000
Impairment attributed to Parent (refer Note 2 below) 21,600

Note 1: Grossing up of Goodwill

As per Para C4 of Appendix C to Ind AS 36 Impairment of Assets – If an entity measures

non-controlling interests at its proportionate interest in the net identifiable assets of a
subsidiary at the acquisition date, rather than at fair value, goodwill attributable to non-
controlling interests is included in the recoverable amount of the related Cash
Generating Unit but is not recognised in the parent’s consolidated financial statements.
As a consequence, an entity shall gross up the carrying amount of goodwill allocated to
the unit to include the goodwill attributable to the non-controlling interest. This
adjusted carrying amount is then compared with the recoverable amount of the unit to
determine whether the cash-generating unit is impaired.

Note 2: Allocation of Impairment of Goodwill

Since the non-controlling interests of Vinayak Ltd. are measured at proportionate share
of identifiable net assets of Vinayak Ltd., the goodwill computed is entirely attributable
only to the parent of Vinayak Ltd. Accordingly, the impairment also would be attributed
entirely to the parent of Vinayak Ltd., and not to the non- controlling interest.

4. Computation of Non-controlling Interest (NCI)

Vinayak Ltd.
₹ in ‘000s
NCI at the date of acquisition (W.N.2) 2,98,200

P a g e | 23.1.15
 UNIT 1: IND AS 110 CONSOLIDATED FINANCIAL STATEMENTS

Share of post-acquisition increase in net assets (20% x ₹ 2,77,000

(from W.N.1)) 55,400
3,53,600

5. Computation of consolidated Retained Earnings

₹ in ‘000s
Balance as per accounts of Ishwar Ltd. 28,65,000
Adjustments:
Acquisition costs (15,000)
Restoration Provision (W.N.7) 1,960
Share of Vinayak Ltd.’s post-acquisition profits (80% x ₹ 2,52,000
(W.N.1)) 2,01,600
Impairment of Goodwill (W.N.3) (21,600)
30,31,960

6. Other Components of Equity

₹ in ‘000s
Balance as per accounts of Ishwar Ltd. 12,50,000
Share of Vinayak Ltd.’s post-acquisition balance (80% x ₹ 25,000
(W.N.1)) 20,000
12,70,000

7. Computation of Restoration Provision

₹ in ‘000s
Provision for Restoration originally required (₹ 1,25,000 x 0.312) 39,000
One year’s unwinding of discount (₹ 39,000 x 6%) A (2,340)
One year’s depreciation of capitalized cost (₹ 39,000 x 1/20) B (1,950)
Original provision incorrectly made C 6,250
So retained earnings adjustment equals [C -A – B] 1,960

8. Computation of Deferred Tax

₹ in ‘000s
Ishwar Ltd. + Vinayak Ltd. 3,65,000
Fair value adjustments in Vinayak Ltd. (from W.N.1) 42,000
4,07,000

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Q27: The extracts of the Balance Sheets of Hammer Ltd. and its subsidiary Sleek Ltd. as on 31 st
March, 2023 are given below:
Particulars Note Hammer Ltd. Sleek Ltd.
No. (₹) (₹)
I. ASSETS
A. Non-Current Assets
Property, Plant and Equipment 1 6,00,000 3,25,000
Intangible Assets 2 1,25,000 75,000
Investments 6,25,000 1,25,000
B. Current Assets
Inventories 1,25,000 1,60,000
Financial Assets
Trade receivables 3,25,000 2,90,000
Cash and Cash equivalents 1,50,000 3,50,000
Total Assets 19,50,000 13,25,000
II EQUITY AND LIABILITIES
A. Equity
Equity Share Capital (₹ 10 each) 10,00,000 5,00,000
Other Equity 3 5,50,000 3,75,000
B. Non- Current Liabilities
Financial Liabilities
Borrowings 4 - 1,00,000
C. Current Liabilities
Financial Liabilities
Short term borrowings
Bank Overdraft 1,00,000 50,000
Trade Payables 3,00,000 3,00,000
Total Equity and Liabilities 19,50,000 13,25,000

Notes to Accounts
Note Particulars Hammer Ltd. Sleek Ltd.
No. (₹) (₹)
1. Property, Plant and Equipment
(a) Plant and Machinery 2,00,000 1,25,000

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 UNIT 1: IND AS 110 CONSOLIDATED FINANCIAL STATEMENTS

(b) Furniture and Fittings 4,00,000 2,00,000

6,00,000 3,25,000
2. Intangible Assets
Goodwill 1,25,000 75,000
3. Other Equity
(a) General Reserve 2,00,000 1,25,000
(b) Retained Earnings 3,50,000 2,50,000
5,50,000 3,75,000
4. Borrowings
8% Debentures of ₹ 100 each - 1,00,000

Additional information:

Hammer Ltd. acquired 20,000 equity shares of Sleek Ltd. on 1st April, 2022 at a cost of ₹
2,40,000 and further acquired 17,500 equity shares on 1st October, 2022 at a cost of ₹
1,92,500;

The 8% debentures of Sleek Ltd. includes debentures held by Hammer Ltd. of nominal value of
₹ 35,000. These were acquired by Hammer Ltd. on 1st January, 2022 at a cost of ₹ 84,000;

The retained earnings of Sleek Ltd. had a credit balance of ₹ 75,000 as on 1st April, 2022. On
that date the balance of General Reserve was ₹ 50,000;

Sleek Ltd. had paid dividend @ 10% on its paid-up equity share capital out of the balance of
retained earnings as on 1st April, 2022 for the financial year 2021-2022. The entire dividend
received by Hammer Ltd. was credited in its statement of profit and loss;

As per the resolution dated 28th February 2023, Sleek Ltd. had allotted bonus shares @ 1
equity share for every 10 shares held out of its general reserve. The accounting effect has not
been given;

Trade receivables of Hammer Ltd. includes bills receivables of ₹ 2,00,000 drawn upon Sleek Ltd.
Out of this, bills of ₹ 50,000 have been discounted with bank;

During the financial year 2022-2023, Hammer Ltd. purchased goods from Sleek Ltd., of ₹ 25,000
at a sales price of ₹ 30,000, 40% of these goods remained unsold on 31st March, 2023;

On 1st October, 2022, machinery of Sleek Ltd. was overvalued by 20,000 for which necessary
adjustments are to be made. Depreciation is charged @ 10% per annum:

The parent company i.e., Hammer Ltd. has adopted an accounting policy to measure non-
controlling interest at fair value (quoted market price) applying Ind AS 103. Assume the fair
value per equity share of Sleek Ltd. at ₹ 11 on the date when control of Sleek Ltd. was acquired
by Hammer Ltd.

P a g e | 23.1.18
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You are required to prepare a consolidated balance sheet, as per Ind AS, of Hammer Ltd. and its
subsidiary Sleek Ltd. as at 31st March, 2023. [Exam Nov 2023 (20 Marks)]

Ans: Consolidated Balance Sheet of Hammer Ltd. as at 31st March, 2023

Notes No. ₹ in lakhs

Assets
Non-current assets
Property, plant and equipment 1 9,06,000
Intangible assets 1 2,00,000
Financial assets
Investment 1 2,33,500
Current assets
Inventories 1 2,83,000
Financial assets
Trade receivables 1 4,65,000
Cash and cash equivalents 1 5,00,000
Total 25,87,500
Equity and Liabilities
Equity
Share capital - Equity shares of ₹ 10 each 2 10,00,000
Other equity 3 7,47,750
Non-controlling interest (W.N.) 1,74,750
Non-current liabilities:
Financial liabilities
Borrowings 1 65,000
Current Liabilities:
Financial liabilities
Bank Overdraft 1 1,50,000
Trade payables 1 4,50,000
Total 25,87,500

Notes to Accounts

Note 1: Assets and Liabilities ₹

Particulars Hammer Ltd. Sleek Ltd. Adjustments Total

Property, Plant and Equipment 6,00,000 3,25,000 -20,000 +1,000 9,06,000
Intangible Assets 1,25,000 75,000 2,00,000

P a g e | 23.1.19
 UNIT 1: IND AS 110 CONSOLIDATED FINANCIAL STATEMENTS

Investments 1,92,500* 1,25,000 -84,000 2,33,500

Inventories 1,25,000 1,60,000 -2,000 2,83,000
Trade Receivables 3,25,000 2,90,000 -1,50,000 4,65,000
Cash and Cash Equivalents 1,50,000 3,50,000 5,00,000
Borrowings 0 1,00,000 -35,000 65,000
Bank Overdraft 1,00,000 50,000 1,50,000
Trade Payables 3,00,000 3,00,000 -1,50,000 4,50,000

*6,25,000 – 2,40,000-1,92,500

Note 2: Equity Share Capital

1,00,000 equity shares of ₹ 10 each, fully paid 10,00,000

10,00,000

Note 3: Consolidated Other Equity

General Reserve W.N.1 2,28,125

Retained Earnings W.N.1 3,64,625
Capital Reserve W.N.2 1,55,000
7,47,750

Working Notes:

1) Consolidated Other Equity

Particulars General Reserve Retained Earnings

Standalone - Hammer Ltd. 2,00,000 3,50,000
Less: Fair Value Loss of existing stake
(20,000)
[2,40,000 - (20,000 x 11)]
Less: Loss on cancellation of debentures (49,000)
Add: Share in Post-acquisition Profits 28,125 83,625
2,28,125 3,64,625

2) Computation of Goodwill or Bargain Purchase for (75% stake)

(i) Computation of net worth (net identifiable assets) as on 1 st October, 2022

Share Capital 5,00,000

Pre-acquisition Retained Earnings (after adjusting downwardrevaluation of 1,17,500
machinery)
Pre-acquisition General Reserve 37,500

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UNIT 1: IND AS 110 CONSOLIDATED FINANCIAL STATEMENTS

Bonus issue* 50,000

Net Identifiable assets 7,05,000

*Note: Bonus shares issued in 1:10 ratio i.e. ₹ 50,000 and bonus issue has not been
accounted for yet. The opening balance of the general reserve is ₹ 50,000 while the
closing balance is ₹ 1,25,000 which implies that ₹ 75,000 have been transferred
during the year and this amount should be allocated between pre and post-
acquisition based on time proportion. Therefore, the general reserve on the date of
acquisition will be ₹ 50,000 + 50% of ₹ 75,000 i.e. ₹ 37,500 = ₹ 87,500. Here, it should
be noted that the date of bonus issue is 28th February, 2023 and bonus amount is
₹ 50,000. Since the balance of post-acquisition general reserve (50% of ₹ 75,000 i.e.
₹ 37,500) is insufficient, it is assumed that bonus shares are issued from pre-
acquisition general reserve i.e. balance on the date of acquisition assuming that
transfer to general reserve, in general, is an appropriation of profit which is done at
the end of the year. This implies that outstanding balance in general reserve at the time of
bonus issue is the opening balance.

However, one may assume otherwise like insufficient post-acquisition balance of ₹

12,500 (50,000 – 37,500) has only been adjusted through pre-acquisition share of ₹
87,500 or first adjustment of bonus issue has been done and later bifurcation of
remaining balance has been done into pre and post-acquisition. In such a case
balance of consolidated general reserve (post-acquisition), net worth, bargain
purchase and NCI will undergo a change.

(ii) Computation of bargain purchase i.e capital reserve

Net worth or Net identifiable assets 7,05,000

Purchase consideration (1,92,500 + 2,20,000) 4,12,500
NCI [12,500 shares x ₹ 11 (i.e. ₹ 1,92,500 / 17,500
shares)] 1,37,500 5,50,000

Bargain purchase (capital reserve) 1,55,000

3) Non-Controlling Interest A/c (at Fair Value)

NCI at fair value as on 1st October, 2023 1,37,500

Post-acquisition General Reserve 9,375
Post-acquisition Retained Earnings 27,875

NCI at fair value as on 31st March, 2023 1,74,750

4) Analysis of Other Equity

(i) General Reserve

Closing balance as on 31st March, 2023 1,25,000

P a g e | 23.1.21
 UNIT 1: IND AS 110 CONSOLIDATED FINANCIAL STATEMENTS

Less: Opening Balance pre (50,000)

Net Profit transferred during the year 75,000
For 6 months till 30th September, 2022 pre 37,500

For 6 months from 1st October, 2022 to 31st March, 2023 post 37,500
Total pre-acquisition reserve (50,000 + 37,500) pre 87,500
Less: Bonus issue pre (50,000)
Balance General Reserve pre 37,500
Share of Hammer Ltd. in pre-acquisition reserve (75%) pre 28,125
Share of NCI in pre-acquisition reserve (25%) pre 9,375
Share of Hammer Ltd. in post-acquisition reserve (75%) post 28,125
Share of NCI in post-acquisition reserve (25%) post 9,375

(ii) Retained Earnings (RE)

Closing balance as on 31st March, 2023 2,50,000

Less: Opening balance 75,000
Less: Dividend @10% (50,000) pre (25,000)
During the year 2,25,000
For 6 months till 30th September, 2022 pre 1,12,500

For 6 months from 1st October 2022 to 31st March, 2023 post 1,12,500
Add: Saving in Depreciation (W.N.5) 1,000
Less: Unrealised Gain [(30,000-25,000) x 40%] (2,000)
Net post-acquisition RE post 1,11,500

Total pre-acquisition RE (25,000 + 1,12,500) pre 1,37,500

Less: Downward revaluation of machinery (20,000)
pre 1,17,500
Share of Hammer Ltd. in pre-acquisition RE (75%) pre 88,125
Share of NCI in pre-acquisition RE (25%) pre 29,375
Share of Hammer Ltd. in post-acquisition RE (75%) post 83,625
Share of NCI in post-acquisition RE (25%) post 27,875

5) Plant and Machinery balance as on 31st March 2023

₹

P a g e | 23.1.22
UNIT 1: IND AS 110 CONSOLIDATED FINANCIAL STATEMENTS

Balance as on 31.3.2023 as given in question (after depreciation) 1,25,000

Less: Downward revaluation less depreciation saving (19,000)*
1,06,000

*Saving in depreciation = ₹ 20,000 - ₹ 19,000 = ₹ 1,000.

Q30: A Ltd. acquired 10% additional shares of its 70% subsidiary. The following relevant information
is available in respect of the change in non-controlling interest on the basis of Balance sheet
finalized as on 1.4. 20X0:
₹ in thousand
Separate financial statements As on 31.3.20X0
Investment in subsidiary (70% interest) – at cost 14,000
Purchase price for additional 10% interest 2,600
Consolidated financial statements
Non-controlling interest (30%) 6,600
Consolidated profit & loss account balance 2,000
Goodwill 600
The reporting date of the subsidiary and the parent is 31 March, 20X0. Prepare note showing
adjustment for change of non-controlling interest. Should goodwill be adjusted for the change?
Ans: The following accounting entries are passed:
₹ ’000 ₹ ’000
Other Equity (Loss on acquisition of interest in subsidiary) Dr. 400
Non-controlling interest Dr. 2,200
To Bank 2,600
As per para B96 of Ind AS 110, where proportion of the equity of NCI changes, then group shall
adjust controlling and non-controlling interest and any difference between NCI (₹ 22,00,000) is
adjusted and fair value of consideration received (₹ 26,00,000) to be attributed to parent in
other equity ie. ₹ 4,00,000. Consolidated goodwill is not adjusted.
Q39: Reliance Ltd. has a number of wholly-owned subsidiaries including Reliance Jio Infocomm Ltd.
at 31st March 20X2.
Reliance Ltd. consolidated statement of financial position and the group carrying amount of
Reliance Jio Infocomm Ltd. assets and liabilities (ie the amount included in that consolidated
statement of financial position in respect of Reliance Jio Infocomm Ltd. assets and liabilities) at
31st March 20X2 are as follows
Particulars Consolidated (₹ In Group carrying amount
‘000) of Reliance Jio
Infocomm Ltd. asset
and liabilities Ltd.
(₹ In ‘000)

P a g e | 23.1.23
 UNIT 1: IND AS 110 CONSOLIDATED FINANCIAL STATEMENTS

Assets
Non-current Assets
- Goodwill 190 90
- Buildings 1,620 670
Current Assets
- Inventories 70 20
- Trade Receivables 850 450
- Cash 1,550 500
Total Assets 4,280 1,730
Equities & Liabilities
Equity
- Share Capital 800
Other Equity
- Retained Earnings 2,130
2,930
Current liabilities
- Trade Payables 1,350 450
Total Equity & Liabilities 4,280 450
Prepare consolidated Balance Sheet after disposal as on 31st March, 20X2 when Reliance Ltd.
group sold 90% shares of Reliance Jio Infocomm Ltd. to independent party for ₹ 1000 (‘ 000).
Ans: When 90% shares sold to independent party Consolidated Balance Sheet of Reliance Ltd. and its
remaining subsidiaries as on 31st March, 20X2

Particulars Note No. (₹ In ‘000)

Assets
Non-current assets
Property Plant & Equipment 1 950
Goodwill 2 100
Financial Assets
Investments
3 128
Current Assets
Inventories
Financial Assets 4 50
Trade Receivables
Cash & Cash equivalents 5 400
Total Assets 6 2,050
3,678
Equity and Liabilities
Equity
Equity Share Capital 7 800
Other Equity 8 1,978
Current Liabilities
Financial Liabilities
Trade Payables 9 900

P a g e | 23.1.24
UNIT 1: IND AS 110 CONSOLIDATED FINANCIAL STATEMENTS

Total Equity & Liabilities 3,678

Statement of changes in Equity:

1. Equity share Capital

Balance at the beginning of the Changes in Equity share Balance at the end of
reporting period capital during the year the reporting period
800 0 800

2. Other Equity
Share Equity Reserves & Surplus Total
applicati component Capital Retained Securities
on reserve Earnings Premium
money
Balance at the 2,130 2,130
beginning
Total comprehensive 0
income for the year
Dividends 0
Total comprehensive 0
Incom attributable to
parent
Loss on disposal of (152) (152)
Reliance Jio Infocomm
Ltd.
Balance at the end of 0 1,978 1,978
reporting period
Working Notes:

1. When 90% being sold, the carrying amount of all assets and liabilities attributable to
Reliance Jio Infocomm Ltd. were eliminated from the consolidated balance sheet and
further financial asset is recognized for remaining 10%.
2. Carrying value of remaining investment (in ‘000):
Net Assets of Reliance Ltd. 1,280
Less: 90% disposal (1152)
Financial Asset 128
3. Cash on hand (in ‘000):
Cash before disposal of Reliance Jio Infocomm Ltd. 1,550
Less: Reliance Jio Infocomm Ltd. Cash (500)
Add: Cash realized from disposal 1,000
Cash on Hand 2,050
4. Gain/ Loss on disposal of entity (in ‘000):

P a g e | 23.1.25
 UNIT 1: IND AS 110 CONSOLIDATED FINANCIAL STATEMENTS

Proceeds from disposal 1,000

Less: Proportionate (90%) Net assets of Reliance
Jio Infocomm Ltd. (90% of 1,280) (1,152)
Loss on disposal (152)
5. Retained Earnings (in ‘000):
Retained Earnings before disposal 2,130
Less: Loss on disposal (152)
Retained earnings after disposal 1,978

Q40: As at the beginning of its current financial year, AB Limited holds 90% equity interest in BC
Limited. During the financial year, AB Limited sells 70% of its equity interest in BC Limited to
PQR Limited for a total consideration of ₹ 56 crore and consequently loses control of BC
Limited. At the date of disposal, fair value of the 20% interest retained by AB Limited is ₹ 16
crore and the net assets of BC Limited are fair valued at ₹ 60 crore.
These net assets include the following:
(a) Debt investments classified as fair value through other comprehensive income (FVOCI)
of ₹ 12 crore and related FVOCI reserve of ₹ 6 crore.
(b) Net defined benefit liability of ₹ 6 crore that has resulted in a reserve relating to net
measurement losses of ₹ 3 crore.
(c) Equity investments (considered not held for trading) of ₹ 10 crore for which irrevocable
option of recognising the changes in fair value in FVOCI has been availed and related
FVOCI reserve of ₹ 4 crore.
(d) Net assets of a foreign operation of ₹ 20 crore and related foreign currency translation
reserve of ₹ 8 crore.
In consolidated financial statements of AB Limited, 90% of the above reserves were included in
equivalent equity reserve balances, with the 10% attributable to the non-controlling interest
included as part of the carrying amount of the non-controlling interest. [RTP May 20204]
Ans: Paragraph 25 of Ind AS 110 states that if a parent loses control of a subsidiary, the parent:
(a) derecognises the assets and liabilities of the former subsidiary from the consolidated
balance sheet.
(b) recognises any investment retained in the former subsidiary at its fair value when
control is lost and subsequently accounts for it and for any amounts owed by or to
the former subsidiary in accordance with relevant Ind ASs. That fair value shall be
regarded as the fair value on initial recognition of a financial asset in accordance with
Ind AS 109 or, when appropriate, the cost on initial recognition of an investment in an
associate or joint venture.
(c) recognises the gain or loss associated with the loss of control attributable to the
former controlling interest.”

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UNIT 1: IND AS 110 CONSOLIDATED FINANCIAL STATEMENTS

Ind AS 110 states that on loss of control over a subsidiary, a parent shall reclassify to profit or
loss, or transfer directly to retained earnings if required by other Ind AS, the amounts
recognised in other comprehensive income in relation to the subsidiary.
As per paragraph B99, if a parent loses control of a subsidiary, the parent shall account for all
amounts previously recognised in other comprehensive income in relation to that subsidiary
on the same basis as would be required if the parent had directly disposed of the related assets
or liabilities.
Therefore, if a gain or loss previously recognised in other comprehensive income would be
reclassified to profit or loss on the disposal of the related assets or liabilities, the parent shall
reclassify the gain or loss from equity to profit or loss (as a reclassification adjustment) when it
loses control of the subsidiary. If a revaluation surplus previously recognised in other
comprehensive income would be transferred directly to retained earnings on the disposal of
the asset, the parent shall transfer the revaluation surplus directly to retained earnings when it
loses control of the subsidiary.
In view of the basis in its consolidated financial statements, AB Limited shall:
(a) re-classify the FVOCI reserve in respect of the debt investments of ₹5.4 crore (90% of ₹
6 crore) attributable to the owners of the parent to the statement of profit or loss in
accordance Ind AS 109, Financial Instruments.
(b) transfer the reserve relating to the net measurement losses on the defined benefit
liability of ₹ 2.7 crore (90% of ₹3 crore) attributable to the owners of the parent within
equity to retained earnings.
(c) reclassify the cumulative gain on fair valuation of equity investment of ₹3.6 crore (90%
of ₹ 4 crore) attributable to the owners of the same parent from OCI to retained
earnings under equity as per Ind AS 109, Financial Instruments.
(d) reclassify the foreign currency translation reserve of ₹7.2 crore (90% × ₹ 8 crore)
attributable to the owners of the parent to statement of profit or loss as per Ind AS 21,
The Effects of Changes in Foreign Exchange Rates.
The impact of loss of control over BC Limited on the consolidated financial statements
of AB Limited is summarised below: (Rupees in crore)
Particular Amount Amount PL RE
(Dr) (Cr) Impact Impact
Gain /Loss on Disposal on Investments
Bank 56
Non-controlling interest (Derecognised) 6
Investment at FV (20% Retained) 16
Gain on Disposal (PL) balancing figure 18 18
De-recognition of total net assets of 60
subsidiary
Reclassification of FVTOCI reserve on
debt instruments to profit or loss

P a g e | 23.1.27
 UNIT 1: IND AS 110 CONSOLIDATED FINANCIAL STATEMENTS

FVTOCI reserve on debt instruments (6 5.4

cr. x 90%)
To Profit and loss 5.4 5.4
Reclassification of net measurement loss
reserve to profit or loss
Reserve and Surplus 2.7 -2.7
To Net measurement loss reserve 2.7
(FVTOCI) [(3 cr. x 90%)]
Reclassification of FVTOCI reserve on
equity instruments to retained earnings
FVTOCI reserve on equity instruments (4 3.6
cr.x 90%)
To Reserve and Surplus 3.6 3.6
Foreign currency translation reserve
reclassified to profit or loss
Foreign currency translation reserve 7.2
(FVOCI) [8 cr. x 90%]
To Profit and loss 7.2 7.2
Total 30.6 0.9
Q41: Prepare the Consolidated Balance Sheet as on 31st March, 20X2 of a group of companies
comprising P Limited, S Limited and SS Limited. Their balance sheets on that date are given
below ₹in lakhs
P Ltd. S Ltd. SS Ltd.
Assets
Non-Current Assets
320 360 300
Property, Plant and Equipment
Investment :
32 lakhs shares in S Ltd. 340
24 lakhs shares in SS Ltd. 280
Current Assets
Inventories 220 70 50
Financial Assets
Trade Receivables 260 100 220
Bills Receivable 72 - 30
Cash in hand and at Bank 228 40 40
1440 850 640
Equity and Liabilities
Shareholder's Equity
Share capital (₹ 10 per Share) 600 400 320
Other Equity

P a g e | 23.1.28
UNIT 1: IND AS 110 CONSOLIDATED FINANCIAL STATEMENTS

Reserves 180 100 80

Retained earnings 160 50 60
Current Liabilities
Financial Liabilities
Trade Payables 470 230 180
Bills Payable
P Ltd. 70
SS Ltd. 30
1440 850 640

The following additional information is available:

(i) P Ltd. holds 80% shares in S Ltd. and S Ltd. holds 75% shares in SS Ltd. Their holdings
were acquired on 30th September, 20X1.
(ii) The business activities of all the companies are not seasonal in nature and therefore, it
can be assumed that profits are earned evenly throughout the year.
(iii) On 1st April, 20X1 the following balances stood in the books of S Limited and SS Limited.
₹ in lakhs
S Limited SS Limited
Reserves 80 60
Retained earnings 20 30
(iv) ₹ 10 lakhs included in the inventory figure of S Limited, is inventory which has been
purchased from SS Limited at cost plus 25%. The sale of goods by SS Ltd. is done after
acquisition of shares by S Ltd.
(v) The parent company has adopted an accounting policy to measure non-controlling
interest at fair value (quoted market price) applying Ind AS 103. Assume market prices
of S Limited and SS Limited are the same as respective face values.
[MTP May 2020; Exam Nov 22(15Marks)]
Ans: Consolidated Balance Sheet of the Group as on 31st March, 20X2
Particulars Note No. (₹ in lakh)
ASSETS
Non-current assets
Property, plant and equipment 1 980
Current assets
(a) Inventory 2 338
(b) Financial assets
3 580
Trade receivables
Bills receivable 4 2
Cash and cash equivalents 5 308
Total assets 2,208
EQUITY & LIABILITIES

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 UNIT 1: IND AS 110 CONSOLIDATED FINANCIAL STATEMENTS

Equity attributable to owners of the parent

Share capital 600
Other Equity
Reserves (W.N.5) 194
Retained Earnings (W.N.5) 179.8
Capital Reserve (W.N.3) 188
Non-controlling interests (W.N.4) 166.2
Total equity 1,328
LIABILITIES
Non-current liabilities Nil
Current liabilities
(a) Financial Liabilities
(i) Trade payables 6 880
Total liabilities 880
Total equity and liabilities 2,208

Notes to Accounts (₹ in lakh)

1. Property, Plant & Equipment
P Ltd. 320
S Ltd. 360
SS Ltd. 300 980
2. Inventories
P Ltd. 220
S Ltd. (70-2) 68
SS Ltd. 50 338
3. Trade Receivables
P Ltd. 260
S Ltd. 100
SS Ltd. 220 580
4. Bills Receivable
P Ltd. (72-70) 2
SS Ltd. (30-30) - 2
5. Cash & Cash equivalents
P Ltd. 228
S Ltd. 40
SS Ltd. 40 308
6. Trade Payables
P Ltd. 470
S Ltd. 230
SS Ltd. 180 880

Working Notes:
1. Analysis of Reserves and Surplus (₹ in lakh)

P a g e | 23.1.30
UNIT 1: IND AS 110 CONSOLIDATED FINANCIAL STATEMENTS

S Ltd. SS Ltd.
Reserves as on 31.3.20X1 80 60
Increase during the year 20X1-20X2 20 20
Increase for the half year till 30.9.20X1 10 10
Balance as on 30.9.20X1 (A) 90 70
Total balance as on 31.3.20X2 100 80
Post-acquisition balance 10 10

S Ltd. SS Ltd.
Retained Earnings as on 31.3.20X1 20 30
Increase during the year 20X1-20X2 30 30
Increase for the half year till 30.9.20X1 15 15
Balance as on 30.9.20X1 (B) 35 45
Total balance as on 31.3.20X2 50 60
Post-acquisition balance 15 15
Less: Unrealised Gain on inventories (10 x 25%) - (2)
Post-acquisition balance for CFS 15 13
Total balance on the acquisition date ie.30.9.20X1 125 115
(A +B)
2. Calculation of Effective Interest of P Ltd. in SS Ltd.
Acquisition by P Ltd. in S Ltd. = 80%
Acquisition by S Ltd. in SS Ltd. = 75%
Acquisition by Group in SS Ltd. (80% x 75%) = 60%
Non-Controlling Interest = 40%
3. Calculation of Goodwill / Capital Reserve on the acquisition date
S Ltd. SS Ltd.
Investment or consideration 340 (280 × 80%) 224
Add: NCI at Fair value
(400 x 20%) 80
(320 x 40%) ---------- 128
420 352
Less: Identifiable net assets (Share capital + (400+125) (525) (320+115) (435)
Increase in the Reserves and Surplus
till acquisition date)
Reserves and Surplus till acquisition date) (400 + 125) (525) (320 + 115) (435)

Capital Reserve 105 83

Total Capital Reserve (105 + 83) 188

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 UNIT 1: IND AS 110 CONSOLIDATED FINANCIAL STATEMENTS

4. Calculation of Non-Controlling Interest

S Ltd. SS Ltd.
At Fair Value (See Note 3) 80 128
Add: Post Acquisition Reserves (See Note 1) (10× 20%) 2 (10× 40%) 4
Add: Post Acquisition Retained Earnings (15× 20%) 3 (13× 40%) 5.2
(See Note 1)
Less: NCI share of investment in SS Ltd. (280x20%) (56)* _____
29 137.2
Total (29+ 137.2) 166.2

* Note: The Non-controlling interest in S Ltd. will take its proportion in SS Ltd. so
they have to bear their proportion in the investment by S Ltd. (in SS Ltd.) also.
5. Calculation of Consolidated Other Equity
Reserves Retained Earnings
P Ltd. 180 160
Add: Share in S Ltd. (10 x 80%) 8 (15× 80%) 12
Add: Share in SS Ltd. (10× 60%)6 (13× 60%)7.8
194 179.8

P a g e | 23.1.32
Consolidated Financial Statement (IND AS)
Chapter 23: Consolidated Financial Statement (IND AS)

CHAPTER 23
CONSOLIDATED AND SEPARATE FINANCIAL
STATEMENTS OF GROUP ENTITIES
UNIT 2: IND AS 111: JOINT ARRANGEMENTS
Q3: On 1st April 2017 Alpha Ltd. commenced joint construction of a property with Gama Ltd. For this
purpose, an agreement has been entered into that provides for joint operation and ownership
of the property. All the ongoing expenditure, comprising maintenance plus borrowing costs, is
to be shared equally. The construction was completed on 30th September 2017 and utilisation
of the property started on 1st January 2018 at which time the estimated useful life of the same
was estimated to be 20 years.
Total cost of the construction of the property was ₹ 40 crores. Besides internal accruals, the cost
was partly funded by way of loan of ₹ 10 crores taken on 1st January 2017. The loan carries
interest at an annual rate of 10% with interest payable at the end of year on 31st December each
year. The company has spent ₹ 4,00,000 on the maintenance of such property.
The company has recorded the entire amount paid as investment in Joint Venture in the books
of accounts. Suggest the suitable accounting treatment of the above transaction as the
accounting entries as per applicable Ind AS. [RTP Nov 2018; MTP Nov 20203]
Ans: As provided in Ind- AS 111 - Joint Arrangements - this is a joint arrangement because two or more
parties have joint control of the property under a contractual arrangement. The arrangement will
be regarded as a joint operation because Alpha Ltd. and Gama Ltd. have rights to the assets and
obligations for the liabilities of this joint arrangement. This means that the company and the
other investor will each recognise 50% of the cost of constructing the asset in property, plant and
equipment.
The borrowing cost incurred on constructing the property should under the principles of Ind AS
23 ‘Borrowing Costs’, be included as part of the cost of the asset for the period of construction.
In this case, the relevant borrowing cost to be included is ₹ 50,00,000 (₹ 10,00,00,000 x 10% x
6/12).
The total cost of the asset is ₹ 40,50,00,000 (₹ 40,00,00,000 + ₹ 50,00,000)
₹ 20,25,00,000 crores is included in the property, plant and equipment of Alpha Ltd. and the
same amount in the property, plant and equipment of Gama Ltd.
The depreciation charge for the year ended 31 March 2018 will therefore be ₹ 1,01,25,000 (₹
40,50,00,000 x 1/20 x 6/12) ₹ 50,62,500 will be charged in the statement of profit or loss of the
company and the same amount in the statement of profit or loss of Gama Ltd. (finance cost for
the second half year of ₹ 50,00,000 plus maintenance costs of ₹ 4,00,000) will be charged to the
statement of profit or loss of Alpha Ltd. and Gama Ltd. in equal proportions- ₹ 27,00,000 each.

P a g e | 23.2.1
 UNIT 2: IND AS 111: JOINT ARRANGEMENTS
Consolidated Financial Statement (IND AS)
Q4: Entity X is owned by three institutional investors – A Limited, B Limited and C Limited – holding
40%, 40% and 20% equity interest respectively. A contractual arrangement between A Limited
and B Limited gives them joint control over the relevant activities of Entity X. It is determined
that Entity X is a joint operation (and not a joint venture). C Limited is not a party to the
arrangement between A Limited and B Limited. However, like A Limited and B Limited, C Limited
also has rights to the assets, and obligations for the liabilities, relating to the joint operation in
proportion of its equity interest in Entity X.
Would the manner of accounting to be followed by A Limited and B Limited on the one hand and
C Limited on the other in respect of their respective interests in Entity X be the same or different?
Ans: In its separate financial statements, a party that participates in, but does not have joint control
of, a joint arrangement shall account for its interest in:
(a) a joint operation in accordance with paragraph 23;
(b) a joint venture in accordance with Ind AS 109, unless the entity has significant influence
over the joint venture, in which case it shall apply paragraph 10 of Ind AS 27.”
Paragraphs 20 and 21 of Ind AS 111 state that a joint operator shall recognise in relation to its
interest in a joint operation:
(a) its assets, including its share of any assets held jointly;
(b) its liabilities, including its share of any liabilities incurred jointly;
(c) its revenue from the sale of its share of the output arising from the joint operation;
(d) its share of the revenue from the sale of the output by the joint operation; and

(e) its expenses, including its share of any expenses incurred jointly.

A joint operator shall account for the assets, liabilities, revenues and expenses relating to its
interest in a joint operation in accordance with the Ind ASs applicable to the particular assets,
liabilities, revenues and expenses.”
Paragraph 23 of Ind AS 111 states that a party that participates in, but does not have joint control
of a joint operation shall also account for its interest in the arrangement in accordance with
paragraphs 20–22 if that party has rights to the assets, and obligations for the liabilities, relating
to the joint operation.
If a party that participates in, but does not have joint control of, a joint operation does not have
rights to the assets, and obligations for the liabilities, relating to that joint operation, it shall
account for its interest in the joint operation in accordance with the Ind ASs applicable to that
interest.
In the given case, all three investors (A Limited, B Limited and C Limited) share in the assets and
liabilities of the joint operation in proportion of their respective equity interest. Accordingly, both
A Limited and B Limited (which have joint control) and C Limited (which does not have joint
control) shall apply paragraphs 20-22 in accounting for their respective interests in Entity X in
their respective separate financial statements as well as consolidated financial statements.

P a g e | 23.2.2
 UNIT 2: IND AS 111: JOINT ARRANGEMENTS: Consolidated
Financial Statement (IND AS)
Q8. Entities A and B establish a 50:50 joint operation in the form of a separate legal entity, Entity J,
whereby each operator has a 50% ownership interest and takes 50% of the output.

On formation of the joint operation, Entity A contributes a property with fair value of ₹ 110 lakhs
and intangible asset with fair value of ₹ 10 lakhs whereas Entity B contributes equipment with a
fair value of ₹ 120 lakhs.

The carrying amounts of the assets contributed by Entities A and B are ₹ 100 lakhs and ₹ 80 lakhs,
respectively.

What will be the amount of any gain or loss to be recognised by Entity A and Entity B in its
separate financial statements as well as consolidated financial statements? [RTP Nov 2023]

Ans. Paragraph B34 of Ind AS 111 states that when an entity enters into a transaction with a joint
operation in which it is a joint operator, such as a sale or contribution of assets, it is conducting
the transaction with the other parties to the joint operation and, as such, the joint operator shall
recognise gains and losses resulting from such a transaction only to the extent of the other
parties’ interests in the joint operation.

The amount of gain or loss to be recognised by Entity A in its separate financial statements as
well as consolidated financial statements will be computed as below:

(All amounts are ₹ in lakhs)

A’s share of fair value of asset contributed by Entity B 60
(50% x ₹ 120 lakhs)
Less: Asset contributed by Entity A to the joint operation – carrying amount of
proportion ceded to Entity B (50% x ₹ 100 lakhs) (50)
Gain to be recognised by Entity A 10

The gain can alternatively be calculated as:

Share acquired in fair value of net assets of joint operation (50% x ₹ 240 lakhs) 120
Less: Carrying amount of asset contributed (100)
Less: Unrealised portion of gain on asset contributed (10)
(50% × (₹ 120 lakhs – ₹ 100 lakhs))
Gain to be recognised by Entity A 10

The amount of gain or loss to be recognised by Entity B in its separate financial statements as
well as consolidated financial statements will be computed as below:

(All amounts are ₹ in lakhs)

B’s share of fair value of asset contributed by Entity A (50% x ₹ 120 lakhs) 60
Less: Asset contributed by Entity B to the joint operation – carrying amount of
proportion ceded to Entity A (50% x ₹ 80 lakhs) (40)

P a g e | 23.2.3
 UNIT 2: IND AS 111: JOINT ARRANGEMENTS
Consolidated Financial Statement (IND AS)
Gain to be recognised by Entity B 20

The gain can alternatively be calculated as:

Share acquired in fair value of net assets of joint operation (50% x ₹ 240 lakhs) 120
Less: Carrying amount of asset contributed (80)
Less: Unrealised portion of gain on asset contributed (20)
(50% × (₹ 120 lakhs – ₹ 80 lakhs))
Gain to be recognised by Entity B 20

P a g e | 23.2.4
 Consolidated Financial Statement (IND AS)
Chapter 23 Consolidated Financial Statement (IND AS)

CHAPTER 23
CONSOLIDATED AND SEPARATE FINANCIAL
STATEMENTS OF GROUP ENTITIES
UNIT 3: IND AS 28 INVESTMENTS IN ASSOCIATES AND JV
Q5: On 1st April 2019, Investor Ltd. acquires 35% interest in another entity, XYZ Ltd.
Investor Ltd. determines that it is able to exercise significant influence over XYZ Ltd. Investor
Ltd. has paid total consideration of ₹ 47,50,000 for acquisition of its interest in XYZ Ltd. At the
date of acquisition, the book value of XYZ Ltd.’s net assets was ₹ 90,00,000 and their fair value
was ₹ 1,10,00,000. Investor Ltd. has determined that the difference of ₹ 20,00,000 pertains to
an item of property, plant and equipment (PPE) which has remaining useful life of 10 years.
During the year, XYZ Ltd. made a profit of ₹ 8,00,000. XYZ Ltd. paid a dividend of ₹ 12,00,000
on 31st March, 2020. XYZ Ltd. also holds a long-term investment in equity securities. Under Ind
AS, investment is classified as at FVTOCI in accordance with Ind AS 109 and XYZ Ltd. recognized
an increase in value of investment by ₹ 2,00,000 in OCI during the year. Ignore deferred tax
implications, if any.
Calculate the closing balance of Investor Ltd.’s investment in XYZ Ltd. as at 31st March, 2020 as
per the relevant Ind AS. [RTP Nov 20; MTP Nov 22; May 2024; Exam Nov 22 (5 Marks)]
Ans: Calculation of Investor Ltd.’s investment in XYZ Ltd. under equity method:

₹ ₹
Acquisition of investment in XYZ Ltd.
Share in book value of XYZ Ltd.’s net assets (35% of
₹90,00,000) 31,50,000
Share in fair valuation of XYZ Ltd.’s net assets [35% of (₹
1,10,00,000 – ₹90,00,000)] 7,00,000
Goodwill on investment in XYZ Ltd. (balancing figure) 9,00,000
Cost of investment 47,50,000
Profit during the year
Share in the profit reported by XYZ Ltd. (35% of
₹8,00,000) 2,80,000
Adjustment to reflect effect of fair valuation [35% of
(₹ 20,00,000/10 years)] (70,000)
Share of profit in XYZ Ltd. 1ecognized in income by Investor
Ltd. 2,10,000
Long term equity investment
FVTOCI gain recognized in OCI (35% of ₹ 2,00,000) 70,000
Dividend received by Investor Ltd. during the year [35% of
₹12,00,000] (4,20,000)

P a g e | 23.3.1
 UNIT 3: IND AS 28 INVESTMENTS IN ASSOCIATES AND JV
Consolidated Financial Statement (IND AS)
Closing balance of Investor Ltd.’s investment in XYZ
Ltd. 46,10,000

Q7: Entity A holds a 20% equity interest in Entity B (an associate) that in turn has a 100% equity
interest in Entity C. Entity B recognised net assets relating to Entity C of ₹ 1,000 in its consolidated
financial statements. Entity B sells 20% of its interest in Entity C to a third party (a non-controlling
shareholder) for ₹ 300 and recognises this transaction as an equity transaction in accordance
with paragraph 23 of Ind AS 110, resulting in a credit in Entity B’s equity of ₹ 100.
The financial statements of Entity A and Entity B are summarised as follows before and after the
transaction:
Before

A’s consolidated financial statements

Assets ₹ Liabilities ₹
Investment in B 200 Equity 200
Total 200 Total 200
B’s consolidated financial statements

Assets ₹ Liabilities ₹
Assets (from C) 1000 Equity 1000
Total 1000 Total 1000
The financial statements of B after the transaction are summarised below:

After

B’s consolidated financial statements

Assets ₹ Liabilities ₹
Assets (from C) 1000 Equity 1000
Cash 300 Equity transaction with
non- controlling interest 100
Equity attributable to owners 1100
Non-controlling interest 200
Total 1300 Total 1300

Although Entity A did not participate in the transaction, Entity A’s share of net assets in Entity B
increased as a result of the sale of B's 20% interest in C. Effectively, A's share in B's net assets is
now ₹ 220 (20% of ₹ 1,100) i.e., ₹ 20 in addition to its previous share.

P a g e | 23.3.2
UNIT 3: IND AS 28 INVESTMENTS IN ASSOCIATES AND JV
Consolidated Financial Statement (IND AS)
How is an equity transaction that is recognised in the financial statements of Entity B reflected in
the consolidated financial statements of Entity A that uses the equity method to account for its
investment in Entity B?
Ans: Ind AS 28 defines the equity method as “a method of accounting whereby the investment is
initially recognised at cost and adjusted thereafter for the post-acquisition change in the
investor’s share of the investee’s net assets. The investor’s profit or loss includes its share of the
investee’s profit or loss and the investor’s other comprehensive income includes its share of the
investee’s other comprehensive income.”
Paragraph 27 of Ind AS 28, states, inter alia, that when an associate or joint venture has
subsidiaries, associates or joint ventures, the profit or loss, other comprehensive income, and
net assets taken into account in applying the equity method are those recognised in the
associate’s or joint venture’s financial statements (including the associate’s or joint venture’s
share of the profit or loss, other comprehensive income and net assets of its associates and joint
ventures), after any adjustments necessary to give effect to uniform accounting policies.
The change of interest in the net assets / equity of the associate as a result of the investee’s
equity transaction is reflected in the investor’s financial statements as ‘share of other changes in
equity of investee’ (in the statement of changes in equity) instead of gain in Statement of profit
and loss, since it reflects the post-acquisition change in the net assets of the investee as per
paragraph 3 of Ind AS 28 and also faithfully reflects the investor’s share of the associate’s
transaction as presented in the associate’s consolidated financial statements.
Thus, in the given case, Entity A recognises ₹ 20 as change in other equity instead of in statement
of profit and loss and maintains the same classification as of its associate, Entity B, i.e., a direct
credit to equity as in its consolidated financial statements.
Q14: AB Limited holds 30% interest in an associate which it has acquired for a cost of ₹ 300 lakhs. On
the date of acquisition of that stake, the fair value of net assets of the associate was ₹900 lakh.
The value of goodwill on acquisition was ₹ 30 lakhs. After the acquisition, AB Limited accounted
for the investment in the associate as per equity method of accounting and now the carrying
value of such investment in the consolidated financial statements of AB Limited is ₹ 360 lakhs.
The associate has now issued equity shares to some investors other than AB Limited for a
consideration of ₹ 800 lakhs. This has effectively reduced the holding of AB Limited to 20%.
Determine how AB Limited should account for such reduction in interest in the associate?
Ans: Because of the issue of shares by associate to other investors, AB Limited has effectively sold 10%
(30 – 20) of its interest in the associate. The gain / loss on reduction in interest in associate in
calculated as follows:

₹’ lakhs
AB Limited’s share in the consideration received by the 160
associate for issue of shares (800 x 20%) (1)
Less: Carrying value of interest sold (360 x 1/3)(2) (120)

Gain on reduction in interest in associate(3) 40

Notes:

P a g e | 23.3.3
 UNIT 3: IND AS 28 INVESTMENTS IN ASSOCIATES AND JV
Consolidated Financial Statement (IND AS)
a) The share in the consideration received by associate on issue of shares (i.e. ₹ 160 lakhs)
would be recorded as part of investment in associate.
b) The carrying amount of interest sold (i.e. ₹ 120 lakhs) will be derecognised, including
proportionate goodwill of ₹ 10 lakhs (30 * 1/3).
c) Gain of ₹ 40 lakhs will be recorded in the profit or loss.

Q61: The Accountant Mr. Ramesh Kanna of ‘H’ Limited submitted to you the following Stand alone
Balance Sheet extracts as at31stMarch2024:
H Ltd. S Ltd. A Ltd.
Assets
Non-current assets
(a)Property, Plant and 5,50,000 4,80,000 2,50,000
Equipment
(b)Financial Assets
Investments: 4,80,000 2,50,000
14,000sharesinS Ltd. 5,60,000
4,000 shares in A Ltd. 1,00,000 12,10,000
Current assets
(a)Inventory 4,85,000 3,82,500 2,45,500
(b)Financial Assets
Cash and cash 89,000 98,000 1,77,000
equivalents
Trade receivables 3,95,000 9,69,000 3,05,000 7,85,500 1,78,500 6,01,000
Total Assets 21,79,000 12,65,500 8,51,000
Equity & Liabilities
Shareholder’s Equity
(a)Equity Share Capital (₹ 5,00,000 2,00,000 1,00,000
10 per share)
(b)Other Equity
Retained earnings 9,00,000 14,00,000 7,50,000 9,50,000 4,24,000 5,24,000
Non-current liabilities
(a)Financial Liabilities
Borrowing–Term Loans 4,00,000 1,50,000 1,00,000
Current liabilities
(a)Financial Liabilities
Trade payables 3,79,000 1,65,500 2,27,000

P a g e | 23.3.4
UNIT 3: IND AS 28 INVESTMENTS IN ASSOCIATES AND JV
Consolidated Financial Statement (IND AS)
Total Equity and 21,79,000 12,65,500 8,51,000
Liabilities
The following additional information is made available in respect of these companies:
(i) H Limited purchased the shares in S Limited on 31st October 2023 when retrained
earnings of S Limited was ₹500,000 and the shares in A Limited were acquired on 30th
June 2023 when its retained earnings stood at ₹1,75,000.
(ii) Inventory of A Limited as on 31st March, 2024 include inventory valued at ₹ 60,000 which
had been purchased from H Limited, on 1st January, 2024 at cost plus 20%.
(iii) Trade payable of H Limited includes ₹ 25,000 payable to A Limited, the amount receivable
being recorded in the receivables of A Limited.
(iv) Goodwill in respect of the acquisition of S Limited has been fully impaired. The
recoverable amount of the investment in A Limited exceeds its’ carrying value at 31st
March 2024. Non-controlling interest is valued at the proportionate share of the
identifiable net assets.
(v) 10% dividends we declared by both H Limited and S Limited whereas A Limited declared
15% dividend for the year 2023-24.
(vi) On 31st March, 2024, S Limited made a bonus issue of one equity share for every two
shares held by the shareholders of S Limited.
(vii) Dividends were declared but were not accounted for by all these companies in the books
before they earned. Similarly, the bonus issued by S Limited was not reflected in the
balance sheet as on 31st March, 2024.
You are required to take note of the above available information and draw the consolidated
Balance Sheet of H Limited as at 31st March 2024. Notes to accounts are not required.
[May 2024 Exam]
Ans: Note: Since adjustments (v) and (vii) of the question state that dividend has been declared by all
the entities but no information is provided whether it has been paid or due. In this regard, it may
be noted that since dividend is paid for the entire year 2023-2024, it is assumed as final dividend
which is approved in the Annual General Meeting conducted at later point time from the
reporting date.

Accordingly, following assumptions are possible based on which alternative solutions have been
provided:

(a) Ignored the adjustment for dividend completely as dividend has to be approved in the
Annual General Meeting.
(b) Considered dividend was declared but not paid.

Alternative A: Ignore the adjustment for dividend completely as it has to be approved in the
AGM.

P a g e | 23.3.5
 UNIT 3: IND AS 28 INVESTMENTS IN ASSOCIATES AND JV
Consolidated Financial Statement (IND AS)
Consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd. and Associate A Ltd. as at 31st
March, 2024

₹
Assets
Non-current assets
Property, plant and equipment (₹ 5,50,000 + ₹ 4,80,000) 10,30,000
Goodwill (₹ 70,000- Impaired ₹ 70,000) Nil
Financial assets
Investment in A Ltd. (W.N.1 (iii)) 2,05,600
Current assets
Inventory (₹ 4,85,000+ ₹ 3,82,500) 8,67,500
Financial assets
Cash and cash equivalents (₹ 89,000 + ₹ 98,000) 1,87,000
Trade receivables (₹ 3,95,000+₹ 3,05,000) 7,00,000
Total 29,90,100
Equity and Liabilities
Equity
Share capital - Equity shares of ₹ 10 each 5,00,000
Other equity (W.N.4+ W.N.1(i)) 11,10,600
Non-controlling interest (W.N.3) 2,85,000
Non-current liabilities
Financial liabilities
Borrowings-term loans (₹ 4,00,000 + ₹ 1,50,000) 5,50,000
Current Liabilities
Financial liabilities
Trade payables (₹3,79,000+₹ 1,65,500) 5,44,500
Total 29,90,100
Working Notes:

1. Computation of Investment in Associate A Ltd. as per Equity method

(i) Capital reserve on the date of acquisition

The cost of the investment is lower than the net fair value of the investee’s
identifiable assets and liabilities. Hence there is capital reserve calculated as
follows:

P a g e | 23.3.6
UNIT 3: IND AS 28 INVESTMENTS IN ASSOCIATES AND JV
Consolidated Financial Statement (IND AS)
₹
Cost of acquisition of investment 1,00,000
H Ltd.’s share in fair value of net assets of A Ltd.
on the date of acquisition [(1,00,000 + 1,75,000) X 40%] (1,10,000)
Capital Reserve
10,00
0
Capital reserve is recorded directly in equity.
(ii) Share in profit of A Ltd.

Share in post-acquisition profit of A Ltd. [(4,24,000 - 1,75,000) 99,600

X 40%]
(iii) Closing balance of investment of Associate A Ltd. at the endof the year

₹
Cost of acquisition of investment 1,00,000
Add: Capital reserve 10,000
Share in post-acquisition profit 99,600
Less: Unrealized gain on inventory [(60,000 X 20/120) x 40%] (4,000)
Closing balance of investment 2,05,600
2. Analysis of Retained Earnings of S Ltd.

(i) Retained Earnings (RE) of S Ltd. ₹

Closing balance as on 31st March, 2024 7,50,000

Less: Pre-acquisition as on 31st October, 2023 (5,00,000)
Post-acquisition Profit 2,50,000
(ii) Computation of net worth (net identifiable assets) as on31st October, 2023

Share Capital of S Ltd. 2,00,000

Pre-acquisition Retained Earnings 5,00,000
Net Identifiable assets 7,00,000
(iii) Computation of Goodwill on acquisition date of S Ltd.

Purchase consideration 5,60,000

NCI as per proportionate share method
(7,00,000 X 30%) 2,10,000 7,70,000

P a g e | 23.3.7
 UNIT 3: IND AS 28 INVESTMENTS IN ASSOCIATES AND JV
Consolidated Financial Statement (IND AS)
Less: Net worth or Net IdentifiableAssets (7,00,000)
Goodwill 70,000
3. Non-Controlling Interest as on 31st March, 2024 ₹

NCI (by proportionate share method) as on 31st October,

2023 2,10,000
Post-acquisition Retained Earnings (W.N.4) 75,000
NCI as on 31st March, 2024 2,85,000
4. Consolidated Retained Earnings

Particulars H Ltd S Ltd.

₹ ₹
Opening Balance of Retained Earnings 9,00,000
Post-acquisition Retained Earnings(W.N.2(i)) 2,50,000
Less: Unrealised gain on downstream transaction with (4,000)
Associate A Ltd.
Less: Impairment of Goodwill onacquisition of S Ltd. (70,000)
Add: Share of profit and loss in AssociateA Ltd. 99,600
Less: Share of NCI in post-acquisition Retained Earnings (75,000)
[2,50,000 x 30%]
9,25,600 1,75,000
Total Consolidated Retained Earnings 11,00,600
Note: Bonus issue by a subsidiary is a transaction with owner in their capacity as owner.
Therefore, bonus issue is only a transfer from one component of equity to the other thereby not
changing the equity. Accordingly, though bonus issue shall be accounted in the individual
financial statements of subsidiary, the same shall not have any effect in consolidated financial
statements of the Group.

Alternative B: Considered dividend was declared but not paid

Consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd. And Associate A Ltd. as at 31st
March, 2024

₹
Assets
Non-current assets
Property, plant and equipment (₹ 5,50,000 + ₹ 4,80,000)
10,30,000
Goodwill (₹ 70,000- Impaired ₹ 70,000) Nil
Financial assets
Investment in A Ltd. (Refer W.N.1 (iii)) 1,99,600
Current assets

P a g e | 23.3.8
UNIT 3: IND AS 28 INVESTMENTS IN ASSOCIATES AND JV
Consolidated Financial Statement (IND AS)
Inventory (₹ 4,85,000 + ₹ 3,82,500) 8,67,500
Financial assets
Cash and cash equivalents (₹ 89,000+ ₹ 98,000) 1,87,000
Trade receivables (₹ 3,95,000+₹ 3,05,000) 7,00,000
Other Receivables
(Dividend receivable from A Ltd. (₹ 15,000 x 40%) 6,000
Total 29,90,100
Equity and Liabilities
Equity
Share capital - Equity shares of ₹ 10 each 5,00,000
Other equity (W.N.4+W.N.1(i)) 10,60,600
Non-controlling interest (W.N.3) 2,79,000
Non-current liabilities
Financial liabilities
Borrowings- term loans (₹ 4,00,000 + ₹ 1,50,000) 5,50,000
Current Liabilities
Financial liabilities
Trade payables (₹ 3,79,000+₹ 1,65,500) 5,44,500
Other payables 56,000
[Dividend payable to NCI by S Ltd. (₹ 20,000 x 30%) ₹ 6,000+
Dividend payable by H Ltd. to its shareholders ₹50,000)
Total 29,90,100
Working Notes:

1. Computation of Investment in Associate A Ltd. as per Equity method

(i) Capital reserve on the date of acquisition

The cost of the investment is lower than the net fair value of the investee’s
identifiable assets and liabilities. Hence there is capital reserve calculated as
follows:

₹
Cost of acquisition of investment 1,00,000
Less: H Ltd.’s share in fair value of net assets of A Ltd. on the date
of acquisition [(1,00,000 + 1,75,000) x 40%] (1,10,000)

Capital Reserve 10,000

Capital reserve is recorded directly in equity.
(ii) Share in profit of A Ltd.

P a g e | 23.3.9
 UNIT 3: IND AS 28 INVESTMENTS IN ASSOCIATES AND JV
Consolidated Financial Statement (IND AS)
Share in post-acquisition profit of A Ltd. [(4,24,000-
1,75,000) x 40%] 99,600
Less: Dividend (1,00,000 x 15% x 40%) (6,000)
Share in profit of A Ltd. 93,600
(iii) Closing balance of investment of Associate A Ltd. at the endof the year

₹
Cost of acquisition of investment 1,00,000
Add: Capital reserve 10,000
Share in post-acquisition profit 93,600
Less: Unrealised gain on inventory[(60,000 x 20/120)
x 40%] (4,000)
Closing balance of investment 1,99,600
2. Analysis of Retained Earnings of S Ltd.

(i) Retained Earnings (RE) of S Ltd.

Closing balance as on 31st March, 2024 7,50,000

Less: Pre-acquisition as on 31st October, 2023 (5,00,000)
Post-acquisition Profit 2,50,000
(ii) Computation of net worth (net identifiable assets) as on31st October, 2023
₹

Share Capital of S Ltd. 2,00,000

Add: Pre-acquisition Retained Earnings 5,00,000
Net Identifiable assets 7,00,000
(iii) Computation of Goodwill on acquisition date of S Ltd. ₹

Purchase consideration 5,60,000

NCI as per proportionate share method
(7,00,000 x 30%) 2,10,000 7,70,000
Less: Net worth or Net IdentifiableAssets
(7,00,000)
Goodwill 70,000
3. Non-Controlling Interest as on 31st March, 2024 ₹

NCI (by proportionate share method) as on 31st October,

2023 2,10,000
Post-acquisition Retained Earnings (W.N.4) 69,000

P a g e | 23.3.10
UNIT 3: IND AS 28 INVESTMENTS IN ASSOCIATES AND JV
Consolidated Financial Statement (IND AS)
NCI as on 31st March, 2024 2,79,000
4. Consolidated Retained Earnings

Particulars H Ltd. S Ltd.

₹ ₹
Opening Balance of Retained Earnings 9,00,000
Post-acquisition Retained Earnings (W.N.2(i)) 2,50,000
Less: Unrealised gain on downstream transaction with (4,000)
Associate A Ltd.
Less: Impairment of Goodwill on acquisitionof S Ltd. (70,000)
Add: Share of profit and loss in AssociateA Ltd. 93,600
Less: Dividend payable by H Ltd. (50,000) (20,000)
Add: Dividend Income receivable from S Ltd. 14,000
Add: Dividend income receivable from A Ltd. 6,000
Less: Share of NCI in post-acquisitionRetained Earnings (69,000)
[(2,50,000 - 20,000) x 30%]
8,89,600 1,61,000
Total Consolidated Retained Earnings 10,50,600

Note: Bonus issue by a subsidiary is a transaction with owner in their capacity as owner.
Therefore, bonus issue is only a transfer from one component of equity to the other thereby not
changing the equity. Accordingly, though bonus issue shall be accounted in the individual
financial statements of subsidiary, the same shall not have any effect in consolidated financial
statements of the Group.

P a g e | 23.3.11
Chapter 24 : Related Party Disclosures (IND AS 24)

CHAPTER 24
RELATED PARTY DISCLOSURES (IND AS 24)
Q3: Mr. X has an investment in A Limited and B Limited.
Required
(i) Examine when can related party relationship be established
(a) from the perspective of A Limited’s financial statements:
(b) from the perspective of B Limited’s financial statements:
(ii) Will A Limited and B Limited be related parties if Mr. X has only significant influence
over both A Limited and B Limited [Exam May 2023 (4 Marks)]
Ans: (i)
(a) If Mr. X controls or jointly controls A Limited, B Limited is related to A Limited when Mr.
X has control, joint control or significant influence over Entity B.
(b) If Mr. X controls or jointly controls A Limited, A Limited is related to Entity B when Mr. X
has control, joint control or significant influence over Entity B.
(ii) No, A Ltd. & B Ltd., will not be considered as related party since no direct or indirect
control is exercised on each other in any of the manner.
Q11: Uttar Pradesh State Government holds 60% shares in PQR Limited and 55% shares in ABC
Limited. PQR Limited has two subsidiaries namely P Limited and Q Limited. ABC Limited
has two subsidiaries namely A Limited and B Limited. Mr. KM is one of the Key management
personnel in PQR Limited. ·
(a) Determine the entity to whom exemption from disclosure of related party transactions
is to be given. Also examine the transactions and with whom such exemption applies.
(b) What are the disclosure requirements for the entity which has availed the exemption?

RTP Nov 2019]

Ans: (a) As per para 18 of Ind AS 24, ‘Related Party Disclosures’, if an entity had related party
transactions during the periods covered by the financial statements, it shall disclose the
nature of the related party relationship as well as information about those transactions
and outstanding balances, including commitments, necessary for users to understand
the potential effect of the relationship on the financial statements.
However, as per para 25 of the standard a reporting entity is exempt from the disclosure
requirements in relation to related party transactions and outstanding balances,
including commitments, with:
(i) a government that has control or joint control of, or significant influence over,
the reporting entity; and

P a g e | 24.1
 Chapter 24 : Related Party Disclosures (IND AS 24)

(ii) another entity that is a related party because the same government has control
or joint control of, or significant influence over, both the reporting entity and the
other entity
According to the above paras, for Entity P’s financial statements, the exemption in
paragraph 25 applies to:
(i) transactions with Government Uttar Pradesh State Government; and
(ii) transactions with Entities PQR and ABC and Entities Q, A and B.
Similar exemptions are available to Entities PQR, ABC, Q, A and B, with the transactions
with UP State Government and other entities controlled directly or indirectly by UP
State Government. However, that exemption does not apply to transactions with Mr.
KM. Hence, the transactions with Mr. KM needs to be disclosed under related party
transactions.
(b) It shall disclose the following about the transactions and related outstanding balances
referred to in paragraph 25:
(a) the name of the government and the nature of its relationship with the
reporting entity (ie control, joint control or significant influence);
(b) the following information in sufficient detail to enable users of the entity’s
financial statements to understand the effect of related party transactions on
its financial statements:
(i) the nature and amount of each individually significant transaction; and
(ii) for other transactions that are collectively, but not individually, significant, a
qualitative or quantitative indication of their extent.
Q13: An Indian company has a parent company out side India. Parent company negotiates software
licenses with end vendor and based on number of licences, parent company get its
reimbursement from Indian company. Say, license cost of ₹ 12 Lac is charged for calendar
year of 2018. Parent company generates is invoice in February'18. Indian company accounts full
invoice in February'18 and then for Indian financial year, accounts Reimbursement expense
of ₹ 3. 00 Lac during FY 1718 (for licencing cost relating to period January'18 to March'18) and
Prepaid expenses of ₹ 9 Lac for licensing cost reimbursement relating to April'18 to
December'18. Prepaid expense is subsequently reversed and expense of ₹9 Lac is accounted for
in FY 18-19. What amount should be disclosed at Related party transaction? [MTP May 2019]
Ans: Paragraph 9 of Ind AS 24 Related Party Disclosures defines Related Party Transactions as under:
“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.”
Paragraph 6 of Ind AS 24 states as under:
“6 A related party relationship could have an effect on the profit or loss and financial position of
an entity…”

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Chapter 24 : Related Party Disclosures (IND AS 24)

In the given case, there is a transfer of resources to the extent of ₹12 lac from the
company to the parent towards software license. Of this transfer of resources, the company
has consumed the benefits relating to ₹3 lac of software license cost which is recognise in profit
or loss. The benefits relating to ₹9 lac of software license cost will be consumed in the next
reporting period and therefore is recognised in balance sheet as prepaid expenses.
Paragraph 18 of Ind AS 24 states as under:
“18 If an entity has had related party transactions during the periods covered by the financial
statements, it shall disclose the nature of the related party relationship as well as information
about those transactions and outstanding balances, including commitments necessary for users
to understand the potential effect of the relationship of the financial statements. At a
minimum, disclosures shall include:
a. The amount of the transactions;
b. The amount of outstanding balances, including commitments, and;
(i) Their terms and conditions, including whether they are secured, and the nature of
the consideration to be provided in settlement; and
(ii) Details of any guarantees given or received;
c. Provisions for doubtful debts related to the amount of outstanding balances; and
d. The expense recognised during the period in respect of bad and doubtful debts due
from related parties.”
Therefore, the company has to disclose:
1. The amount of transaction with the parent of ₹12 lac towards software license;
2. Outstanding balance of ₹9 lac presented as prepaid expense along with the terms and
conditions and state that the same will be settled in the next reporting period by receipt of
software licensing services.
3. The amount of ₹3 lac recognised as software license expense in profit or loss for the
benefits consumed during the period to make it understandable to users.
Paragraph 113 of Ind AS 1 Presentation of Financial Statements states as under:
“113 An entity shall present notes in a systematic manner. An entity shall cross-reference
each line items in the balance sheet and in the statement of profit and loss, and in the
statement of changes in equity and of cash flows to any related information in the notes.”
Therefore, the company shall cross-reference the software license expense recognised in profit
or loss and prepaid expenses recognised in balance sheet to the notes disclosing related party
transactions.
Q14: Mr. X owns 95% of entity A and is its director. He is also beneficiary of a trust that owns 100%
of entity B, of which he is a director.
Whether entities A and B are related parties?
Would the situation be different if:

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 Chapter 24 : Related Party Disclosures (IND AS 24)

a. Mr. X resigned as a director of entity A, but retained his 95% holding?

b. Mr. X resigned as a director of entities A and B and transferred the 95% holding in entity
A to the trust? [RTP Nov 2020]
Ans: Entities A and B are related parties, because the director (Mr. X) controls entity A and is a
member of the key management personnel of entity B.
Answers to different given situations would be as under:
a) Mr. X resigned as a director of entity A, but retained his 95% holding: Mr. X continues
to control entity A through his 95% holding even though he is not (nominally) a director
of the entity. Entities A and B are related if Mr. X controls the trust. Mr. X controls entity
A and also, through the trust, controls entity B. Entities A and B are controlled by the
same person, and so they are related parties.
Mr. X might still be a member of ‘key management personnel’ even though he is not
(nominally) a director of entity A. Key management personnel includes, but is not
restricted to, directors, which include those who are executive ‘or otherwise’ provided
they had authority and responsibility for planning, directing and controlling the activities
of the entity. There could be two reasons why entities A and B would continue to be
related parties: Mr. X being a member of ‘Key management personnel’ of entity A and
Mr. X controlling entity A.
b) Mr. X resigned as a director of entities A and B and transferred the 95% holding in
entity A to the trust: If Mr. X controls the trust, he controls entities A and B through the
trust, so they will be related parties (see reason in (a) above)
Mr. X is a member of ‘key management personnel’ of the two entities (see (a) above) if,
as seems likely, he continues to direct their operating and financial policies. The
substance of the relationship and not merely the legal form should be considered. If Mr
X is regarded as a member of the key management personnel of, say, entity A, entity B is
a related party, because he exercises control or significant influence over entity B by
virtue of his control over the trust.
Q15: Entity A owns 30% of the share capital of entity B and has the ability to exercise significant
influence over it.

Entity B holds the following investments:

• 70% of the share capital of its subsidiary, entity C; and

• 30% of the share capital of entity D, with the ability to exercise significant influence.

Entity A transacts with entities C and D. Should entity A disclose these transactions as related
party transactions in its separate financial statements? Also explain the disclosure of such
transactions in the financial statements of C and D as related party transaction. [RTP May 2022]

Ans: Entity A should disclose its transactions with entity C in entity A’s separate financial statements.
Entity C is a related party of entity A, because entity C is the subsidiary of entity A’s associate,
entity B.

P a g e | 24.4
Chapter 24 : Related Party Disclosures (IND AS 24)

Entity A’s management is not required to disclose entity A’s transactions with entity D in its
financial statements. Entity D is not a related party of entity A, because entity A has no ability to
exercise control or significant influence over entity D.

Entity C is required to disclose its transactions with entity A in its financial statements, because
entity A is a related partly.
Entity D is not required to disclose transactions with entity A, because they are not related
parties.
Q16: SEL has applied for a term loan from a bank for business purposes. As per the loan agreement,
the loan required a personal guarantee of one of the directors of SEL to be executed. In case of
default by SEL, the director will be required to compensate for the loss that bank incurs. Mr.
Pure Joy, one of the directors had given guarantee to the bank pursuant to which the loan was
sanctioned to SEL. SEL does not pay premium or fees to its director for providing this financial
guarantee.
Whether SEL is required to account for the financial guarantee received from its director? Will
there be any disclosures under Ind AS 24? [RTP May 2023]
Ans: Ind AS 109 ‘Financial Instruments’, defines a financial guarantee contract as ‘a contract that
requires the issuer to make specified payments to reimburse the holder for a loss it incurs
because a specified debtor fails to make payment when due in accordance with the original or
modified terms of a debt instrument.
Based on this definition, an evaluation is required to be done to ascertain whether the contract
between director and Bank qualifies as a financial guarantee contract as defined in Appendix A
to Ind AS 109. In the given case, it does qualify as a financial guarantee contract as:
 the reference obligation is a debt instrument (term loan);
 the holder i.e. Bank is compensated only for a loss that it incurs (arising on account of
non-repayment); and
 the holder is not compensated for more than the actual loss incurred.
Ind AS 109 provides principles for accounting by the issuer of the guarantee. However, it does
not specifically address the accounting for financial guarantees by the beneficiary. In an arm’s
length transaction between unrelated parties, the beneficiary of the financial guarantee would
recognise the guarantee fee or premium paid as an expense.
It is also pertinent to note that the entity needs to exercise judgment in assessing the substance
of the transaction taking into consideration relevant facts and circumstances, for example,
whether the director is being compensated otherwise for providing guarantee. Based on such
an assessment, an appropriate accounting treatment based on the principles of Ind AS should
be followed.
In the given case, SEL is the beneficiary of the financial guarantee and it does not pay a
premium or fees to its director for providing this financial guarantee. Accordingly, SEL will not
be required to account for such financial guarantee in its financial statements considering the
unit of account as being the guaranteed loan, in which case the fair value would be expected to
be the face value of the loan proceeds that SEL received.

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 Chapter 24 : Related Party Disclosures (IND AS 24)

In the given case based on the limited facts provided, SEL will be required to make necessary
disclosures of such financial guarantee in accordance with Ind AS 24 as follows:
(a) the amount of the transactions;
(b) the amount of outstanding balances, including commitments, and:
(i) their terms and conditions, including whether they are secured, and the nature of
the consideration to be provided in settlement; and
(ii) details of any guarantees given or received;
(c) provisions for doubtful debts related to the amount of outstanding balances; and
(d) the expense recognised during the period in respect of bad or doubtful debts due from
related parties.

P a g e | 24.6
IND AS 21
Chapter 25 : IND AS 21

CHAPTER 25
THE EFFECTS OF CHANGES IN FOREIGN
EXCHANGE RATES (IND AS 21)
Q8. M Ltd is engaged in the business of manufacturing of bottles for pharmaceutical companies and
non-pharmaceutical companies. It has a wholly owned subsidiary, G Ltd, which is engaged in
the business of pharmaceuticals. G Ltd purchases the pharmaceutical bottles from its parent
company. The demand of G Ltd is very high and the operations of M Ltd are very large and
hence to cater to its shortfall, G Ltd also purchases the bottles from other companies.
Purchases are made at the competitive prices.
M Ltd sold pharmaceuticals bottles to G Ltd for Euro 12 lacs on 1st February, 20X1. The cost of
these bottles was ₹ 830 lacs in the books of M Ltd at the time of sale. At the year-end i.e.
31st March, 20X1, all these bottles were lying as closing stock with G Ltd.
Euro is the functional currency of G Ltd. while Indian Rupee is the functional currency of M Ltd.
Following additional information is available:
Exchange rate on 1st February, 20X11 Euro = ₹ 83
Exchange rate on 31st March, 20X11 Euro = ₹ 85
Provide the accounting treatment for the above in books of M Ltd. and G Ltd. Also show its
impact on consolidated financial statements. Support your answer by Journal entries, wherever
necessary, in the books of M Ltd. [Exam Nov 23 (4 Marks)]
Ans: Accounting treatment in the books of M Ltd (Functional Currency INR)
M Ltd will recognize sales of ₹ 996 lacs (12 lacs Euro x 83) Profit on sale of inventory = 996 lacs –
830 lacs = ₹ 166 lacs.
On balance sheet date receivable from G Ltd. will be translated at closing rate i.e. 1 Euro = ₹ 85.
Therefore, unrealised forex gain will be recorded in standalone profit and loss of ₹ 24 lacs. (i.e.
(85 - 83) x 12 Lacs)
Journal Entries

₹ (in Lacs) ₹ (in Lacs)

G Ltd. A/c Dr. 996
To Sales 996
(Being revenue recorded on initial recognition)
G Ltd. A/c Dr. 24
To Foreign exchange difference (unrealised) 24
(Being foreign exchange difference recorded at
year end)

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 Chapter 25 : IND AS 21

Accounting treatment in the books of G Ltd (Functional currency EURO)

G Ltd will recognize inventory on 1st February, 20X1 of Euro 12 lacs which will also be its closing
stock at year end.
Journal Entry

(in Euros) (in Euros)

Purchases Dr. 12 lakhs
To M Ltd. 12 lakhs
Accounting treatment in the consolidated financial statements
Receivable and payable in respect of above mentioned sale / purchase between M Ltd and G
Ltd will get eliminated.
The closing stock of G Ltd will be recorded at lower of cost or NRV.

Euro (in lacs) Rate (in lacs)

Cost 12 83 996
NRV (Assumed Same) 12 85 1020
Therefore, no write off is required.
The amount of closing stock includes two components–
 Cost of inventory for ₹ 830 lacs; and
 Profit element of ₹ 166 lacs; and
At the time of consolidation, the two elements amounting to ₹ 166 lacs will be eliminated from
the closing stock.
Journal Entry

₹ (in Lacs) ₹ (in Lacs)

Consolidated P&L A/c Dr. 166
To Inventory 166
(Being profit element of intragroup transaction
eliminated)
Q12: On 30th January, 20X1, A Ltd. purchased a machinery for $ 5,000 from USA supplier on credit
basis. A Ltd.’s functional currency is Rupees. The exchange rate on the date of transaction is 1
$ = ₹ 60. The fair value of the machinery determined on 31st March, 20X1 is $ 5,500. The
exchange rate on 31st March, 20X1 is 1$ = ₹ 65. The payment to overseas supplier done on 31st
March 20X2 and the exchange rate on 31st March 20X2 is 1$ = ₹ 67. The fair value of the
machinery remains unchanged for the year ended on 31st March 20X2. Prepare the Journal

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Chapter 25 : IND AS 21

entries for the year ended on 31st March 20X1 and year 20X2 according to Ind AS 21. Tax rate is
30% [RTP May 2018; Exam Dec 21; MTP Nov 2023]
Ans: Journal Entries
Purchase of Machinery on credit basis on 30th January 20X1:
₹ ₹
Machinery A/c (5,000 x $ 60) Dr. 3,00,000
3,00,000
To Creditor - Machinery
(Initial transaction will be recorded at exchange rate on
the date of transaction)
Exchange difference arising on translating monetary item on 31st March 20X1:
₹ ₹
Profit & Loss A/c [(5,000 x $ 65) – (5,000 x $ 60)] Dr. 25,000
To Creditor - Machinery 20,000
Machinery A/c Dr. 30,000
To Revaluation Surplus (OCI) 30,000
[Being Machinery revalued to USD 5,500; (₹ 60 x (USD
5,500 - USD 5,000)]
Machinery A/c Dr. 27,500
To Revaluation Surplus (OCI) 27,500
(Being Machinery measured at the exchange rate on 31-
03-20X1 [USD 5,500 x (₹ 65 - ₹ 60)]
Revaluation Surplus (OCI) Dr. 17,250
To Deferred Tax Liability 17,250
(DTL created @ of 30% of the total OCI amount)

Exchange difference arising on translating monetary item and settlement of creditors on 31st
March 20X2:
₹ ₹
Creditor - Machinery A/c (5,000 x $65) Dr. 3,25,000
Profit & loss A/c [(5,000 x ($ 67 -$ 65)] Dr. 10,000
To Bank A/c 3,35,000
Machinery A/c [(5,500 x ($ 67 - $ 65)) Dr. 11,000
To Revaluation Surplus (OCI) 11,000

Revaluation Surplus (OCI) Dr. 3,300

To Deferred Tax Liability 3,300
(DTL created @ of 30% of the total OCI amount)

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 Chapter 25 : IND AS 21

Q14: Supplier, A Ltd., enters into a contract with a customer, B Ltd., on 1st January, 2018 to deliver
goods in exchange for total consideration of USD 50 million and receives an upfront payment
of USD 20 million on this date. The functional currency of the supplier is INR. The goods are
delivered and revenue is recognised on 31st March, 2018. USD 30 million is received on 1st
April, 2018 in full and final settlement of the purchase consideration.
State the date of transaction for advance consideration and recognition of revenue. Also state
the amount of revenue in INR to be recognized on the date of recognition of revenue. The
exchange rates on 1st January, 2018 and 31st March, 2018 are ₹ 72 per USD and ₹ 75 per
USD respectively. [RTP May 2019; MTP May 2023]
Ans: This is the case of Revenue recognised at a single point in time with multiple payments. As per
the guidance given in Appendix B to Ind AS 21:
A Ltd. will recognise a non-monetary contract liability amounting ₹ 1,440 million, by translating
USD 20 million at the exchange rate on 1st January, 2018 ie ₹ 72 per USD.
A Ltd. will recognise revenue at 31st March, 2018 (that is, the date on which it transfers the
goods to the customer).
A Ltd. determines that the date of the transaction for the revenue relating to the advance
consideration of USD 20 million is 1st January, 2018. Applying paragraph 22 of Ind
AS 21, A Ltd. determines that the date of the transaction for the remainder of the revenue as
31st March, 2018.
On 31st March, 2018, A Ltd. will:
• derecognise the non-monetary contract liability of USD 20 million and recognise USD
20 million of revenue using the exchange rate as at 1st January, 2018 ie ₹ 72 per USD;
and
• recognise revenue and a receivable for the remaining USD 30 million, using the
exchange rate on 31st March, 2018 ie ₹ 75 per USD.
• The receivable of USD 30 million is a monetary item, so it should be translated using
the closing rate until the receivable is settled.
Q15: Global Limited, an Indian company acquired on 30th September, 20X1 70% of the share capital
of Mark Limited, an entity registered as company in Germany. The functional currency of Global
Limited is Rupees and its financial year end is 31st March, 20X2.
(i) The fair value of the net assets of Mark Limited was 23 million EURO and the purchase
consideration paid is 17.5 million EURO on 30th September, 20X1.
The exchange rates as at 30th September, 20X1 was ₹ 82 / EURO and at 31st March,
20X2 was ₹ 84 / EURO.
What is the value at which the goodwill has to be recognised in the financial
statements of Global Limited as on 31st March, 20X2?
(ii) Mark Limited sold goods costing 2.4 million EURO to Global Limited for 4.2 million EURO
during the year ended 31st March, 20X2. The exchange rate on the date of purchase by
Global Limited was ₹ 83 / EURO and on 31st March, 20X2 was ₹ 84 / EURO. The entire

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Chapter 25 : IND AS 21

goods purchased from Mark Limited are unsold as on 31st March, 20X2. Determine
the unrealised profit to be eliminated in the preparation of consolidated financial
statements. [RTP Nov 2019; Exam May 22 (6 Marks)]
Ans:
(i) Para 47 of Ind AS 21 requires that goodwill arose on business combination shall be
expressed in the functional currency of the foreign operation and shall be translated at
the closing rate in accordance with paragraphs 39 and 42. In this case the amount of
goodwill will be as follows:
Net identifiable asset Dr. 23 million
Goodwill(bal. fig.) Dr. 1.4 million
To Bank 17.5 million
To NCI (23 x 30%) 6.9 million
Thus, goodwill on reporting date would be 1.4 million EURO x ₹ 84 = ₹ 117.6 million
(ii) Particulars EURO in million
Sale price of Inventory 4.20
Unrealised Profit [a] 1.80
Exchange rate as on date of purchase of Inventory [b]₹ 83 / Euro Unrealized profit to
be eliminated [a x b] ₹ 149.40 million
As per para 39 of Ind AS 21 “income and expenses for each statement of profit and loss
presented (ie including comparatives) shall be translated at exchange rates at the dates
of the transactions”.
In the given case, purchase of inventory is an expense item shown in the statement
profit and loss account. Hence, the exchange rate on the date of purchase of inventory
is taken for calculation of unrealized profit which is to be eliminated on the event of
consolidation.

Q16: On 1st April, 20X1, Makers Ltd. raised a long term loan from foreign investors. The investors
subscribed for 6 million Foreign Currency (FCY) loan notes at par. It incurred incremental issue
costs of FCY 2,00,000. Interest of FCY 6,00,000 is payable annually on 31st March, starting from
31st March, 20X2. The loan is repayable in FCY on 31st March, 20X7 at a premium and the
effective annual interest rate implicit in the loan is 12%. The appropriate measurement basis
for this loan is amortised cost. Relevant exchange rates are as follows:
- 1st April, 20X1 - FCY 1 = ₹ 2.50.
- 31st March, 20X2 – FCY 1 = ₹ 2.75.
- Average rate for the year ended 31st Match, 20X2 – FCY 1 = ₹ 2.42. The functional
currency of the group is Indian Rupee.

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 Chapter 25 : IND AS 21

What would be the appropriate accounting treatment for the foreign currency loan in the
books of Makers Ltd. for the FY 20X1-20X2? Calculate the initial measurement amount for the
loan, finance cost for the year, closing balance and exchange gain / loss. [RTP May 2020]
Ans: Initial carrying amount of loan in books
Loan amount received = 60,00,000 FCY
Less: Incremental issue costs = 2,00,000 FCY
58,00,000 FCY
Ind AS 21, “The Effect of Changes in Foreign Exchange Rates” states that foreign currency
transactions are initially recorded at the rate of exchange in force when the transaction was
first recognized.
Loan to be converted in INR= 58,00,000 FCY x ₹ 2.50/FCY = ₹ 1,45,00,000
Therefore, the loan would initially be recorded at ₹ 1,45,00,000.
Calculation of amortized cost of loan (in FCY) at the year-end:

Opening Financial Interest @ Cash Flow Closing Financial Liability

Period Liability (FCY) 12% (FCY) (FCY) (FCY)
A B C A+B-C
20X1-20X2 58,00,000 6,96,000 6,00,000 58,96,000

The finance cost in FCY is 6,96,000

The finance cost would be recorded at an average rate for the period since it accrues over a
period of time.
Hence, the finance cost for FY 20X1-20X2 in INR is ₹ 16,84,320 (6,96,000 FCY x ₹ 2.42 / FCY)
The actual payment of interest would be recorded at 6,00,000 x 2.75 = INR 16,50,000
The loan balance is a monetary item so it is translated at the rate of exchange at the reporting
date.
So the closing loan balance in INR is 58,96,000 FCY x INR 2.75 / FCY = ₹ 1,62,14,000
The exchange differences that are created by this treatment are recognized in profit and loss.
In this case, the exchange difference is
₹ [1,62,14,000 - (1,45,00,000 + 16,84,320 – 16,50,000)] = ₹ 16,79,680.
This exchange difference is taken to profit and loss.
Q17: An Indian entity, whose functional currency is rupees, purchases USD dominated bond at its fair
value of USD 1,000. The bond carries stated interest @ 4.7% p.a. on its face value. The said
interest is received at the year end. The bond has maturity period of 5 years and is redeemable
at its face value of USD 1,250. The fair value of the bond at the end of year 1 is USD 1,060. The
exchange rate on the date of transaction and at the end of year 1 are USD 1 = ₹ 40 and USD 1 =
₹ 45, respectively. The weighted average exchange rate for the year is 1 USD = ₹ 42.

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Chapter 25 : IND AS 21

The entity has determined that it is holding the bond as part of an investment portfolio whose
objective is met both by holding the asset to collect contractual cash flows and selling the asset.
The purchased USD bond is to be classified under the FVTOCI category.
The bond results in effective interest rate (EIR) of 10% p.a.
Calculate gain or loss to be recognised in Profit & Loss and Other Comprehensive Income for
year 1. Also pass journal entry to recognise gain or loss on above. (Round off the figures to
nearest rupees) [RTP Nov 20; MTP Nov 22; MTP May 2024]
Ans: Computation of amounts to be recognized in the P&L and OCI:

Particulars USD Exchange rate ₹

Cost of the bond 1,000 40 40,000
Interest accrued @ 10% p.a. 100 42 4,200
Interest received (USD 1,250 x 4.7%) (59) 45 (2,655)
Amortized cost at year-end 1,041 45 46,845
Fair value at year end 1,060 45 47,700
Interest income to be recognized in P & L 4,200
Exchange gain on the principal amount [1,000 x (45-40)] 5,000
Exchange gain on interest accrual [100 x (45 - 42)] 300
Total exchange gain/loss to be recognized in P&L 5,300
Fair value gain to be recognized in OCI [45 x (1,060 - 1,041)] 855

Journal entry to recognize gain/loss

Bond (₹ 47,700 – ₹ 40,000) Dr. 7,700

Bank (Interest received) Dr. 2,655
To Interest Income (P & L) 4,200
To Exchange gain (P & L) 5,300
To OCI (fair value gain) 855
Q19: PQR Holdings Limited is based in London and has Pound sterling ("GBP") as its functional and
presentation currency. On 1st April, 20X1, PQR Holdings Limited incorporated PQR India Limited
as its wholly owned subsidiary in India. PQR India will be engaged in trading of items purchased
from PQR Holdings. The shares of PQR India, having a face value of ₹ 10 each amounting to
total of ₹ 500 crore, were issued to PQR Holdings in GBP on 1st April, 20X1.
PQR India has adopted Ind AS with effect from its incorporation. In accordance with Ind AS,
management of PQR India has concluded that its functional currency is Indian Rupee ("INR").
Following is the summarized trial balance of PQR India as on 31st March, 20X2, being the
reporting date of PQR India and PQR Holdings:
(Note: All amounts in the below mentioned trial balance are ₹ in crore)

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 Chapter 25 : IND AS 21

S. No. Particulars Debit Credit

Balances Balances
1. Share capital - 500.0
2. Securities premium reserve on issue of equity shares - 150.0
3. Retained earnings - 110.0
4. Long-term borrowings - 30.0
5. Deferred tax liability - 10.0
6. Income tax payable - 25.0
7. Import duty payable - 5.0
8. Employee benefits payable 7.5
9. Sundry trade payables - 2.5
10. Property, plant and equipment (net of depreciation) 550.0 -
11. Computer software (net of amortisation) 70.0 -
12. Inventories purchased on 15th March, 20X2 200.0
(there is no indicator of impairment)
13. Cash and bank balance 5.0 -
14. Sundry trade receivables 17.0 -
15. Allowance for doubtful trade receivables - 2.0
Total 842.0 842.0

Additional information relating to property, plant and equipment, and computer software:

Line item Date of acquisition

Property, plant and equipment 30th April, 20X1
Computer software 5th May, 20X1

PQR India has adopted the following accounting policy in relation to shareholders' funds to
translate equity:

Share capital To be translated using historical exchange rate

Securities premium To be translated using historical exchange rate
Retained earnings To be translated using average exchange rate

Since the presentation currency of PQR Holdings is GBP, PQR India is required to translate its
trial balance from INR to GBP. Following table provides relevant foreign exchange rates:

Closing spot rate as on 1st April, 20X1 1 INR = 0.0123 GBP

Closing spot rate as on 30th April, 20X1 1 INR = 0.0120 GBP
Closing spot rate as on 5th May, 20X1 1 INR = 0.0119 GBP

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Chapter 25 : IND AS 21

Closing spot rate on 15th March, 20X2 1 INR = 0.0108 GBP

Closing spot rate as on 31st March, 20X2 1 INR = 0.0109 GBP
Average exchange rate for the year ended 31st March, 20X2 1 INR = 0.0116 GBP

As the accountant of PQR India, you are required to do the following for its separate financial
statements:
a) Explain the principle of monetary and non-monetary items.Based on this principle, bifurcate
the line items of the trial balance into monetary and non-monetary items.
b) Translate the trial balance of PQR India from INR to GBP. [MTP Nov 2021]
Ans:
a) Monetary items are units of currency held and assets and liabilities to be received or paid in
a fixed or determinable number of units of currency. Para 15 of Ind AS 21 states that the
essential feature of a monetary item is a right to receive (or an obligation to deliver) a fixed
or determinable number of units of currency. Similarly, a contract to receive (or deliver) a
variable number of the entity’s own equity instruments or a variable amount of assets in
which the fair value to be received (or delivered) equals a fixed or determinable number of
units of currency is a monetary item.
Conversely, the essential feature of a non‑ monetary item is the absence of a right to
receive (or an obligation to deliver) a fixed or determinable number of units of currency.
On the basis of above principles, the line items of trial balance should be bifurcated as
follows:
Particulars Monetary item / Non-
monetary item
Share Capital Non-monetary item
Securities Premium reserve on issue of equity shares Non-monetary item
Retained earnings Non-monetary item
Long-term borrowings Monetary item
Deferred tax liability Non-monetary item
Income tax payable Monetary item
Import duty payable Monetary item
Employee benefits payable Monetary item
Sundry trade payables Monetary item
Property, plant and equipment (net of depreciation) Non-monetary item
Computer software (net of amortization) Non-monetary item
Inventories purchased (there is no indicator of impairment) Non-monetary item
Cash and bank balance Monetary item
Sundry trade receivables Monetary item
Allowance for doubtful trade receivables Monetary item

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 Chapter 25 : IND AS 21

As per para 38 of Ind AS 21, an entity may present its financial statements in any currency
(or currencies). If the presentation currency differs from the entity’s functional currency, it
translates its results and financial position into the presentation currency. For example,
when a group contains individual entities with different functional currencies, the results
and financial position of each entity are expressed in a common currency so that
consolidated financial statements may be presented.
b) Translation of the balances for the purpose of consolidation

Particulars INR in crore Rate (GBP) Amount in

GBP
Property, plant and equipment (net of 550.0 0.0109 5.995
depreciation)
Computer software (net of amortization) 70.0 0.0109 0.763
Inventories 200.0 0.0109 2.18
Cash and bank balance 5.0 0.0109 0.0545
Sundry trade receivables net of allowance for 15.0 0.0109 0.1635
doubtful trade receivables (17.0-2.0)
Total Assets 840.0 9.156
Share Capital 500.0 0.0123 6.15
Securities Premium reserve 150.0 0.0123 1.845
Retained earnings 110.0 0.0116 1.276
Long-term borrowings 30.0 0.0109 0.327
Deferred tax liability 10.0 0.0109 0.109
Income tax payable 25.0 0.0109 0.2725
Import duty payable 5.0 0.0109 0.0545
Employee benefits payable 7.5 0.0109 0.08175
Sundry trade payables 2.5 0.0109 0.02725
Foreign Currency Translation reserve recognised
in OCI (balancing figure) (0.987)
Total Equity and liabilities 840.0 9.156

Q23: 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 Total P’s share (70%) NCI (30%)

Net assets 4,000 2,800 1,200

Foreign currency translation reserve gain 900 630 270

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Chapter 25 : IND AS 21

Required: How does an entity account for cumulative translation adjustment (CTA) on disposal
of a foreign subsidiary? [RTP May 2025]

Ans: As per paragraphs 48 and 48B of Ind AS 21, on the disposal of a foreign operation, the
cumulative amount of the exchange differences relating to that foreign operation, recognised
in other comprehensive income and accumulated in the separate component of equity, shall be
reclassified from equity to profit or loss (as a reclassification adjustment) when the gain or loss
on disposal is recognised (see Ind AS 1, Presentation of Financial Statements).
Further, the standard states that on disposal of a subsidiary that includes a foreign operation,
the cumulative amount of the exchange differences relating to that foreign operation that have
been attributed to the non-controlling interests shall be derecognised, but shall not be
reclassified to profit or loss.
Where the subsidiary is partially owned (that is, where a non- controlling interest exists) and
the parent has sold its entire interest, the amount of the CTA that has been allocated to the
non-controlling interest is derecognised, but it is not transferred to profit or loss. Derecognition
of the non-controlling interest (that includes the non- controlling interest’s share of CTA) will
form part of the journal entry to recognise the gain or loss on disposal of the subsidiary.
In P Ltd.’s consolidated financial statements, the following amounts (₹ in thousand) have been
recognised in relation to its investment in S Ltd.:
- net assets of ₹ 4,000 and associated non-controlling interests of ₹ 1,200;
- foreign exchange gains of ₹ 900 were recognised in other comprehensive income, of which
₹ 270 was attributable to non- controlling interests and is therefore included in the ₹ 1,200
non- controlling interests;
- ₹ 630 of foreign exchange gains have been accumulated in a separate component of equity
relating to P Ltd.'s 70% share in S Ltd.
P Ltd. sells its 70% interest in S Ltd. for ₹ 3,200 and records the following amounts:

Cash/Bank A/c Dr. 3,200

NCI Dr. 1,200
OCI Dr. 630
To Net assets 4,000
To Profit on disposal 1,030
{630+(3,200-2,800)}
It can be seen that ₹ 630 of the foreign currency gains previously recognised in OCI, i.e. the
amount attributed to P Ltd. is reclassified to profit or loss (profit on disposal) and adjusted from
OCI. However, ₹ 270 of such gains attributed to the non-controlling interests is not reclassified
to profit or loss and is derecognised as a part of the NCI balance.

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Chapter 26 : Business Combination As Per IND AS103

CHAPTER 26
BUSINESS COMBINATION AS PER IND AS103
Q1: Entity A holds 20% interest in Entity B. Subsequently Entity A, further acquires 50% share in
Entity B by paying ₹ 300 Crores. Fair value of Entity B is ₹ 400 Crores
The fair value of assets acquired and Liabilities assumed are as follows:
Building - ₹ 1000 Crores
Cash and Cash Equivalent - ₹ 200 Crores
Financial Liabilities - ₹ 800 Crores
DTL - ₹ 150 crores
Examine the above transaction is an asset acquisition or business acquisition.
Ans: Fair value of Entity B is ₹ 400 Crores
Fair value of NCI is ₹ 120 Crores (400 x 30%)
Fair value of Entity A’s previously held interest is ₹ 80 Crores (400 x 20%)
Entity A needs to determine whether acquisition is an asset acquisition as per concentration
test.
Fair value of consideration transferred (including fair value of non-controlling interest and fair
value of previously interest held) = 300 + 120 + 80 = ₹ 500 Crores
Fair value of liability assumed (excluding deferred tax) – ₹ 800 crores
Cash and cash equivalent – ₹ 200 crores.
Fair value of gross assets acquired - ₹ 1,100 Crores
In the above scenario, substantially all fair value of gross assets acquired is concentrated in a
single identifiable asset i.e. building. Hence it should be asset acquisition. (1,000 / 1,100 = 91%
of value of gross assets is concentrated into single identifiable asset i.e. building). A Judgement
is required to conclude on the word substantially as the same is not defined in the standard.
In our view we have considered 91% of the value as substantial to conclude the above
transaction as asset acquisition.
Q9: How should contingent consideration payable in relation to a business combination be
accounted for on initial recognition and at the subsequent measurement as per Ind AS in the
following cases:
(i) On 1 April 2016, A Ltd. acquires 100% interest in B Ltd. As per the terms of agreement
the purchase consideration is payable in the following 2 tranches:
a. an immediate issuance of 10 lakhs shares of A Ltd. having face value of INR 10 per
share;

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 Chapter 26 : Business Combination As Per IND AS103

b. a further issuance of 2 lakhs shares after one year if the profit before interest and
tax of B Ltd. for the first year following acquisition exceeds INR 1 crore.
i. The fair value of the shares of A Ltd. on the date of acquisition is INR 20 per
share. Further, the management has estimated that on the date of
acquisition, the fair value of contingent consideration is ₹25 lakhs.
ii. During the year ended 31 March 2017, the profit before interest and tax of B
Ltd. exceeded ₹1 crore. As on 31 March 2017, the fair value of shares of A Ltd.
is ₹25 per share.
(ii) Continuing with the fact pattern in (a) above except for:
c. The number of shares to be issued after one year is not fixed.
d. Rather, A Ltd. agreed to issue variable number of shares having a fair value equal to
₹40 lakhs after one year, if the profit before interest and tax for the first year
following acquisition exceeds ₹1 crore. A Ltd. issued shares with ₹40 lakhs after a
year. [RTP May 2019; RTP Nov 2022]
Ans: Paragraph 37 of Ind AS 103, inter alia, provides that the consideration transferred in a business
combination should be measured at fair value, which should be calculated as the sum of
(a) the acquisition-date fair values of the assets transferred by the acquirer,
(b) the liabilities incurred by the acquirer to former owners of the acquiree and
(c) the equity interests issued by the acquirer.
Further, paragraph 39 of Ind AS 103 provides that the consideration the acquirer transfers
in exchange for the acquiree includes any asset or liability resulting from a contingent
consideration arrangement. The acquirer shall recognize the acquisition-date fair value of
contingent consideration as part of the consideration transferred in exchange for the
acquiree.
With respect to contingent consideration, obligations of an acquirer under contingent
consideration arrangements are classified as equity or a liability in accordance with Ind AS
32 or other applicable Ind AS, i.e., for the rare case of non-financial contingent consideration.
Paragraph 40 provides that the acquirer shall classify an obligation to pay contingent
consideration that meets the definition of a financial instrument as a financial liability or as
equity on the basis of the definitions of an equity instrument and a financial liability in
paragraph 11 of Ind AS 32, Financial Instruments: Presentation. The acquirer shall classify as an
asset a right to the return of previously transferred consideration if specified conditions are
met. Paragraph 58 of Ind AS 103 provides guidance on the subsequent accounting for
contingent consideration.
(i) In the given case the amount of purchase consideration to be recognized on initial
recognition shall be as follows:
Fair value of shares issued (10,00,000 x ₹20) ₹2,00,00,000
Fair value of contingent consideration ₹25,00,000

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Chapter 26 : Business Combination As Per IND AS103

Total purchase consideration ₹2,25,00,000

Subsequent measurement of contingent consideration payable for business
combination
In general, an equity instrument is any contract that evidences a residual interest in
the assets of an entity after deducting all of its liabilities. Ind AS 32 describes an equity
instrument as one that meets both of the following conditions:
(a) There is no contractual obligation to deliver cash or another financial asset to
another party, or to exchange financial assets or financial liabilities with another
party under potentially unfavorable conditions (for the issuer of the instrument).
(b) If the instrument will or may be settled in the issuer's own equity instruments, then
it is:
(i) a non-derivative that comprises an obligation for the issuer to deliver a fixed
number of its own equity instruments; or
(ii) a derivative that will be settled only by the issuer exchanging a fixed amount
of cash or other financial assets for a fixed number of its own equity
instruments.
In the given case, given that the acquirer has an obligation to issue fixed number of
shares on fulfilment of the contingency, the contingent consideration will be classified
as equity as per the requirements of Ind AS 32.
As per paragraph 58 of Ind AS 103, contingent consideration classified as equity should
not be re-measured and its subsequent settlement should be accounted for within
equity.
Here, the obligation to pay contingent consideration amounting to ₹25,00,000 is
recognized as a part of equity and therefore not re-measured subsequently or on
issuance of shares.
(ii) The amount of purchase consideration to be recognized on initial recognition is shall
be as follows:
Fair value shares issued (10,00,000 x ₹20) ₹2,00,00,000
Fair value of contingent consideration ₹25,00,000
Total purchase consideration ₹2,25,00,000
Subsequent measurement of contingent consideration payable for business
combination
The contingent consideration will be classified as liability as per Ind AS 32.
As per paragraph 58 of Ind AS 103, contingent consideration not classified as equity
should be measured at fair value at each reporting date and changes in fair value should
be recognized in profit or loss.

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 Chapter 26 : Business Combination As Per IND AS103

As at 31 March 2017, (being the date of settlement of contingent consideration),

the liability would be measured at its fair value and the resulting loss of ₹15,00,000
(₹40,00,000 - ₹25,00,000) should be recognized in the profit or loss for the period. A
Ltd. would recognize issuance of 160,000 (₹40,00,000/25) shares at a premium of
₹15 per share.
Q17: On 1 April 2016, Company PQR Ltd. acquired 30% of the voting ordinary shares of Company XYZ
Ltd. for INR 8,000 crores. PQR Ltd. accounts its investment in XYZ Ltd. using equity method as
prescribed under Ind AS 28, Investments in Associates and Joint Ventures. At 31 March 2017,
PQR Ltd. recognised its share of the net asset changes of XYZ Ltd. using equity accounting as
follows:
(Amounts in INR-crores)
Share of profit or loss 700
Share of exchange difference in OCI 100
Share of revaluation reserve of PPE in OCI 50
The carrying amount of the investment in the associate on 31 March 2017 was therefore 8,850
(8,000 + 700 + 100 + 50).
On 1 April 2017, PQR Ltd. acquired the remaining 70% of XYZ Ltd. for cash of INR 25,000 crores.
The following additional information is relevant at that date
(Amount in INR-crores)
Fair value of the 30% interest already owned 9,000
Fair value of XYZ's identifiable net assets 30,000
How should such business combination be accounted for? [RTP May 2024]
Ans: Paragraph 42 of Ind AS 103 provides that in a business combination achieved in stages, the
acquirer shall remeasure its previously held equity interest in the acquiree at its acquisition-
date fair value and recognise the resulting gain or loss, if any, in profit or loss or other
comprehensive income, as appropriate. In prior reporting periods, the acquirer may have
recognised changes in the value of its equity interest in the acquiree in other comprehensive
income. If so, the amount that was recognised in other comprehensive income shall be
recognised on the same basis as would be required if the acquirer had disposed directly of the
previously held equity interest.
Applying the above, PQR Ltd. records the following entry in its consolidated financial
statements: (Amounts in INR-crores)
Debit Credit
Identifiable net assets of XYZ Ltd. 30,000
Goodwill (1) 4,000
Foreign currency translation reserve 100
PPE revaluation reserve 50

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Chapter 26 : Business Combination As Per IND AS103

Cash 25,000
Investment in associate -XYZ Ltd. 8,850
Retained earnings (2) 50
Gain on previously held interest in XYZ recognised in Profit or loss (3) 250
(To recognise acquisition of XYZ Ltd.)
Notes:
1. Goodwill calculated as follows: INR
Cash consideration 25,000
Fair value of previously held equity interest in XYZ Ltd. 9,000
Total consideration 34,000
Fair value of identifiable net assets acquired (30,000)
Goodwill 4,000
2. The credit to retained earnings represents the reversal of the unrealised gain of INR 50
crores in Other Comprehensive Income related to the revaluation of property, plant and
equipment. In accordance with Ind AS 16, this amount is not reclassified to profit or loss.
3. The gain on the previously held equity interest in XYZ Ltd. is calculated as follows: INR
Fair Value of 30% interest in XYZ Ltd. at 1 April 2017 9,000
Carrying amount of interest in XYZ Ltd. at 1 April 2017 (8,850)
150
Unrealised gain previously recognised in OCI 100
Gain on previously held interest in XYZ Ltd. recognised in profit or loss 250
Q21: AX Ltd. and BX Ltd. amalgamated on and from 1st January 20X2. A new Company ABX Ltd. was
formed to take over the businesses of the existing companies.
Summarized Balance Sheet as on 31-12-20X2 INR in '000

ASSETS Note No. AX Ltd BX Ltd

Non-current assets
Property, Plant and Equipment 8,500 7,500
Financial assets
Investments 1,050 550
Current assets
Inventory 1,250 2,750

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 Chapter 26 : Business Combination As Per IND AS103

Trade receivable 1,800 4,000

Cash and Cash equivalent 450 400
13,050 15,200
EQUITY AND LIABILITIES
Equity
Equity share capital (of face value of INR 10 each) 6,000 7,000
Other equity 3,050 2,700
Liabilities
Non-current liabilities
Financial liabilities
Borrowings 3,000 4,000
Current liabilities
Trade payable 1,000 1,500
13,050 15,200

ABX Ltd. issued requisite number of shares to discharge the claims of the equity shareholders of
the transferor companies.
Prepare a note showing purchase consideration and discharge thereof and draft the Balance
Sheet of ABX Ltd:
a. Assuming that both the entities are under common control
b. Assuming BX ltd is a larger entity and their management will take the control of the
entity.
The fair value of net assets of AX and BX limited are as follows:
Assets AX Ltd. (‘000) BX Ltd. (‘000)
Fixed assets 9,500 10,000
Inventory 1,300 2,900
Fair value of the business 11,000 14,000
Ans: (a) Assumption: Common control transaction)
1. Calculation of Purchase Consideration

AX Ltd. BX Ltd.
₹ ’000 ₹ ’000
Assets taken over:

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Chapter 26 : Business Combination As Per IND AS103

Property, Plant and Equipment 85,00 75,00

Investment 10,50 5,50
Inventory 12,50 27,50
Trade receivables 18,00 40,00
Cash & Cash equivalent 4,50 4,00
Gross Assets 130,50 152,00
Less : Liabilities
12% Debentures 30,00 40,00
Trade payables 10,00 (40,00) 15,00 (55,00)
Net Assets taken over 90,50 97,00
Less: Other Equity:
General Reserve 15,00 20,00
P & L A/c 10,00 5,00
Investment Allowance Reserve 5,00 1,00
Export Profit Reserve 50 (30,50) 1,00 (27,00)
Purchase Consideration 60,00 70,00
Total Purchase Consideration = 130,00 (60,00 of AX Ltd. & 70,00 of BX Ltd.)
2. Discharge of Purchase Consideration
No. of shares to be issued to AX Ltd =( Net Assets taken over of AX Ltd/ Net Assets
taken over of AX Ltd. and BX Ltd.) X Purchase Consideration
No. of shares to be issued to BX Ltd = Net Assets taken over of BX Ltd./ Net Assets
taken over of AX Ltd. and BX Ltd. x Purchase Consideration

AX Ltd. BX Ltd.
₹ ’000 ₹ ’000
90,50
130,00 x = 6,27,500
187,50 62,75
* Equity shares of ₹ 10 each
97,00
130,00 x = 6,72,500
187,50 67,25
Equity shares of ₹ 10 each
Balance Sheet of ABX Ltd. as on 1.1.20X2 ₹ in '000
ASSETS Note Amount
No.
Non-current assets
Property, Plant and Equipment 16,000
Financial assets

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 Chapter 26 : Business Combination As Per IND AS103

Investments 1,600
Current assets
Inventory 4,000
Trade receivable 5,800
Cash and Cash equivalent 850
28,250
EQUITY AND LIABILITIES
Equity
Equity share capital (of face value of 1 13,000
₹ 10 each)
Other equity 2 5,750
Liabilities
Non-current liabilities
Financial liabilities
Borrowings 3 7,000
Current liabilities
Trade payable 2,500
28,250
Notes to Accounts

(₹ 000) (₹ 000)

1. Share Capital
13,00,000 Equity Shares of ₹ 10 each 130,00
2. Other Equity
General Reserve (15,00 + 20,00) 35,00
Profit & Loss (10,00 + 5,00) 15,00
Investment Allowance Reserve (5,00 + 6,00
1,00) 1,50 57,50
3. Export Profit Reserve (50 + 1,00)
Long Term Borrowings 70,00
12% Debentures
(b) Assuming BX Ltd is a larger entity and their management will take the control of the
entity ABX Ltd.
In this case BX Ltd. and AX Ltd. are not under common control and hence accounting
prescribed under Ind AS 103 for business combination will be applied. A question arises
here is who is the accounting acquirer ABX Ltd which is issuing the shares or AX
Ltd. or BX Ltd. As per the accounting guidance provided in Ind AS 103, sometimes the
legal acquirer may not be the accounting acquirer. In the given scenario although ABX
Ltd. is issuing the shares but BX Ltd. post-merger will have control and is bigger in size

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Chapter 26 : Business Combination As Per IND AS103

which is a clear indicator that BX Ltd. will be an accounting acquirer. This can be justified
by the following table:
(In ‘000s)
AX Ltd. BX Ltd.
Fair Value 11,000 14,000
Value per share 10 10
No. of shares 1,100 1,400
i.e. Total No. of shares in ABX Ltd. = 2,500 thousand shares
Thus, % Held by each Company in Combined Entity 44% 56%

Note: It is a case of Reverse Acquisition.

Accordingly, BX Ltd. assets will be recorded at historical cost in the merged financial
statements.
(1) Calculation of Purchase Consideration (All figures are in thousands)
We need to calculate the number of shares to be issued by BX Ltd. to AX Ltd. to
maintain the same percentage i.e. 56%:
Thus, 700 thousand shares of BX Ltd. (given in the balance sheet) represents
56%. This means that total no. of shares would be 1,250 thousand shares ie 700
thousand shares / 56%.
This implies BX Ltd. would need to issue 550 thousand shares (1,250 less
700) to AX Ltd.
Purchase Consideration = 550 thousand shares x ₹ 20 per share (ie. 14,000
thousand / 700 thousand shares) = ₹ 11,000 thousand.
Balance Sheet of ABX Ltd. as on 1.1.20X2 ₹ in
'000

ASSETS Note Amount

No.
Non-current assets
Goodwill (Refer Working Note) 900
Property, Plant and Equipment (9500+7500) 17,000
Financial assets
Investment (1050+550) 1,600
Current assets
Inventory (1300+2750) 4,050
Trade receivables (1800+4000) 5,800
Cash and Cash equivalent (450+400) 850
30,200

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 Chapter 26 : Business Combination As Per IND AS103

EQUITY AND LIABILITIES

Equity
Equity share capital (of face value of ₹ 10 each) 1 12,500
Other equity 2 8,200
Liabilities
Non-current liabilities
Financial liabilities
Borrowings (12% Debentures) 3 7,000
Current liabilities
Trade payables 2,500
30,200
Notes to Accounts

(₹ 000) (₹ 000)
1. Share Capital
1,250,000 Equity Shares of ₹ 10 each (700,000 to 1,25,00
BX Ltd and 550,000 as computed above to AX LTD)
2. Other Equity
General reserve of BX Ltd 20,00
P&L of BX Ltd 5,00
Export Profit Reserve of BX Ltd 1,00
Investment Allowance Reserve of BX Ltd 1,00
Security Premium (550 shares x 10) 5,500 8,200
3. Long Term Borrowings
12% Debentures 70,00

Working Note: Goodwill Computation:

Assets: ₹ in 000s
Property, Plant and Equipment 9,500
Investment 1,050
Inventory 1,300
Trade Receivable 1,800
Cash & Cash Equivalent 450
Total Assets 14,100
Less : Liabilities:
Borrowings 3,000
Trade Payable 1,000
Net Assets 10,100

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Chapter 26 : Business Combination As Per IND AS103

Purchase Consideration 11,000

Goodwill 900
Q23: On September 30, 20X1 Entity A issues 2.5 shares in exchange for each ordinary share of Entity
B. All of Entity B’s shareholders exchange their shares in Entity B. Therefore, Entity A issues 150
ordinary shares in exchange for all 60 ordinary shares of Entity B.
The fair value of each ordinary share of Entity B at September 30, 20X1 is 40. The quoted
market price of Entity A’s ordinary shares at that date is 16. The fair values of Entity A’s
identifiable assets and liabilities at September 30, 20X1 are the same as their carrying amounts,
except that the fair value of Entity A’s non- current assets at September 30, 20X1 is 1,500.
The statements of financial position of Entity A and Entity B immediately before the business
combination are:

Entity A Entity B
(legal parent, (legal subsidiary,
accounting acquiree) accounting acquirer)
Current assets 500 700
Non-current assets 1,300 3,000
Total assets 1,800 3,700
Current liabilities 300 600
Non-current liabilities 400 1,100
Total liabilities 700 1,700
Shareholders’ equity
Retained earnings 800 1,400
Issued equity
100 ordinary shares 300
60 ordinary shares 600
Total shareholders’ equity 1,100 2,000
Total liabilities and shareholders’ 1,800 3,700
equity

Prepare consolidated balance sheet. Also calculate earnings per share from the following
information:
Entity B’s earnings for the annual period ended December 31, 20X0 were 600 and that the
consolidated earnings for the annual period ended December 31, 20X1 were 800. There was no
change in the number of ordinary shares issued by Entity B during the annual period ended

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December 31, 20X0 and during the period from January 1, 2006 to the date of the reverse
acquisition on September 30, 20X1. [ICAI SM]
Ans: Identifying the acquirer: As a result of Entity A issuing 150 ordinary shares, Entity B’s
shareholders own 60 per cent of the issued shares of the combined entity (i.e., 150 of the 250
total issued shares). The remaining 40 per cent are owned by Entity A’s shareholders. Thus, the
transaction is determined to be a reverse acquisition in which Entity B is identified as the
accounting acquirer (while Entity A is the legal acquirer).
Calculating the fair value of the consideration transferred: If the business combination had
taken the form of Entity B issuing additional ordinary shares to Entity A’s shareholders in
exchange for their ordinary shares in Entity A, Entity B would have had to issue 40 shares for
the ratio of ownership interest in the combined entity to be the same. Entity B’s shareholders
would then own 60 of the 100 issued shares of Entity B — 60 per cent of the combined entity.
As a result, the fair value of the consideration effectively transferred by Entity B and the group’s
interest in Entity A is 1,600 (40 shares with a fair value per share of 40).
The fair value of the consideration effectively transferred should be based on the most reliable
measure. In this example, the quoted market price of Entity A’s shares provides a more reliable
basis for measuring the consideration effectively transferred than the estimated fair value of
the shares in Entity B, and the consideration is measured using the market price of Entity A’s
shares — 100 shares with a fair value per share of 16.
Measuring goodwill: Goodwill is measured as the excess of the fair value of the consideration
effectively transferred (the group’s interest in Entity A) over the net amount of Entity A’s
recognised identifiable assets and liabilities, as follows:
Consideration effectively transferred 1,600
Net recognised values of Entity A’s identifiable assets and liabilities
Current assets 500
Non-current assets 1,500
Current liabilities (300)
Non-current liabilities (400) (1,300)
Goodwill 300
Consolidated statement of financial position at September 30, 20X1
The consolidated statement of financial position immediately after the business combination is:

Current assets [700 + 500] 1,200

Non-current assets [3,000 + 1,500] 4,500
Goodwill 300
Total assets 6,000
Current liabilities [600 + 300] 900

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Non-current liabilities [1,100 + 400] 1,500

Total liabilities 2,400
Shareholders’ equity
Issued equity 250 ordinary shares [600 + 1,600] 2,200
Retained earnings 1,400
Total shareholders’ equity 3,600
Total liabilities and shareholders’ equity 6,000

The amount recognised as issued equity interests in the consolidated financial statements
(2,200) is determined by adding the issued equity of the legal subsidiary immediately before
the business combination (600) and the fair value of the consideration effectively transferred
(1,600). However, the equity structure appearing in the consolidated financial statements (i.e.,
the number and type of equity interests issued) must reflect the equity structure of the legal
parent, including the equity interests issued by the legal parent to effect the combination.
Earnings per share
Earnings per share for the annual period ended December 31, 20X1 is calculated as follows:
Number of shares deemed to be outstanding for the period from January 1,
20X1 to the acquisition date (i.e., the number of ordinary shares issued by Entity A
(legal parent, accounting acquiree) in the reverse acquisition) 150
Number of shares outstanding from the acquisition date to December 31, 20X1 250
Weighted average number of ordinary shares outstanding [(150 × 9/12) + (250 × 3/12)]175
Earnings per share [800/175] 4.57
Restated earnings per share for the annual period ended December 31, 20X0 is 4.00 [calculated
as the earnings of Entity B of 600 divided by the number of ordinary shares Entity A issued in
the reverse acquisition (150)].
Q24: MNC Ltd. is in process of setting up a medicine manufacturing business which is at very initial
stage. For this purpose, MNC Ltd. as part of its business expansion strategy acquired on 1st
April, 2019, 100% shares of Akash Ltd., a company that manufactures pharmacy products. The
purchase consideration for the same was by way of a share exchange valued at ₹ 38 crore. The
fair value of Akash Ltd.’s assets and liabilities were ₹ 68 crore and ₹ 50 crore respectively, but
the same does not include the following:
1. A patent owned by Akash Ltd. for an established successful new drug that has a
remaining life of 6 years. A consultant has estimated the value of this patent to be ₹ 8
crore. However, the outcome of clinical trails for the same are awaited. If the trails are
successful, the value of the drug would fetch the estimated ₹ 12 crore.

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2. Akash Ltd. has developed and patented another new drug which has been approved for
clinical use. The cost of developing the drug was ₹ 13 crore. Based on early assessment
of its sales success, a reputed valuer has estimated its market value at ₹ 19 crore.
However, there is no active market for the patent.
3. Akash Ltd.’s manufacturing facilities have received a favourable inspection by a
government department. As a result of this, the company has been granted an exclusive
five-year license on 1st April, 2018 to manufacture and distribute a new vaccine.
Although the license has no direct cost to the Company, its directors believe that
obtaining the license is valuable asset which assures guaranteed sales and the cost to
acquire the license is estimated at ₹ 7 crore of remaining period of life. It is expected to
generate at least equivalent revenue.
Suggest the accounting treatment of the above transactions with reasoning under applicable
Ind AS in the books of MNC Ltd. [RTP May 2019; Exam Nov 2019; Exam July 2021 (5)]
Ans: As per para 13 of Ind AS 103 ‘Business Combination’, the acquirer’s application of the
recognition principle and conditions may result in recognising some assets and liabilities that
the 14cquire had not previously recognised as assets and liabilities in its financial statements.
This may be the case when the asset is developed by the entity internally and charged the
related costs to expense.
Based on the above, the company can recognise following Intangible assets while determining
Goodwill / Bargain Purchase for the transaction:
(i) Patent owned by Akash Ltd.: The patent owned will be recognised at fair value by MNC
Ltd. even though it was not recognised by Akash Ltd. in its financial statements. The
patent will be amortised over the remaining useful life of the asset i.e. 6 years. Since the
company is awaiting the outcome of the trials, the value of the patent should be valued
at ₹ 8 crore. It cannot be estimated at ₹ 12 crore and the extra ₹ 4 crore should only be
disclosed as a contingent asset and not recognised.
(ii) Patent internally developed by Akash Ltd.: As per para 18 of Ind AS 103 ‘Business
Combination’, the acquirer shall measure the identifiable assets acquired and the
liabilities assumed at their acquisition date fair values. Since the patent developed has
been approved for clinical use, it is an identifiable asset, hence the same will be
measured at fair value ie ₹ 19 crore on the acquisition date.
(iii) Grant of Licence to Akash Ltd. by the Government: As regards to the five-year license,
applying para 18 of Ind AS 103, grant asset will be recognised at fair value on the
acquisition date by MNC Ltd. On acquisition date, the fair value of the license asset is ₹7
crore. However, since the question does not mention about the fair value of the
identifiable liability with respect to grant of license for the acquirer , it is assumed that
the fair value of the liability with respect to grant, for acquirer is nil. Therefore, only, the
grant asset (license) would be recognised at ₹ 7 crore in the books of acquirer MNC Ltd.
Hence the revised working would be as follows:
Fair value of net assets of Akash Ltd. (68-50) ₹ 18 crore
Add: Patent (8 + 19) ₹ 27 crore

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Add: License ₹ 7 crore

Less: Grant for License (Nil)
₹ 52 crore
Purchase Consideration (₹ 38 crore)
Capital Reserve ₹ 14 crore
Q32: Parent A holds 100% in its subsidiary B. Parent A had acquired B, 10 years back and had decided
to account for the acquisition under the purchase method using fair values of the subsidiary B
in its consolidated financial statements.
During the current year, A decides to merge B with itself.
For the purpose of this proposed merger, what values of B should be used for accounting under
the Ind AS? [Exam Nov 19]
Ans: Reference to be included to Appendix C of Ind AS 103
The acquisition of B Ltd. by A Ltd. is business combination under common control. In such a
situation, pooling of interest method should be applied. However, B Ltd. is 100% subsidiary of A
Ltd. and A Ltd. in its Consolidated financial statements use to give the carrying values of assets
and liabilities of B Ltd. at fair value (as per acquisition under purchase method). Hence the
carrying value for the purpose of pooling of interest method will be the values given in
Consolidated financial statements and not in Separate financial statements.
In other words, since B Ltd. is merging with A Ltd. (i.e. parent) nothing has changed and the
transaction only means that the assets, liabilities and reserves of B Ltd. which were appearing in
the consolidated financial statements of Group A immediately before the merger would now be
a part of the separate financial statements of A Ltd. Accordingly, it would be appropriate to
recognise the carrying value of the assets, liabilities and reserves pertaining to B Ltd as
appearing in the consolidated financial statements of A Ltd.

Q40: Entity A acquires entity B. Entity A agrees with the former shareholders of entity B to pay ₹ 900,
with an additional payment of ₹ 500 if the subsequent earnings of entity B reach a specified
target in three years. The former shareholders also become employees. On the acquisition
date, the fair value of the net assets of entity B amount to ₹ 850, and the fair value of
additional payment is estimated at ₹ 200. At the acquisition date, the outflow of additional
payment is not probable.

Over the next three years, the cumulative earnings of entity B (before considering the effects of
the additional payments) amount to ₹ 1,050. At the end of year three, entity A pays ₹ 500 as
the conditions were met.

State the impact on the financial position and results of classifying the payments as
remuneration and contingent consideration. [RTP May 2022]

Ans: The impact on the financial position and results of classifying the payments as remuneration
and contingent consideration is tabulated as follows:
Additional Payment is classified as

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Remuneration Contingent
consideration
Consideration 900 900
Fair value of additional payment 0 200
Total consideration 900 1,100
Fair value of net assets (850) (850)
Goodwill at acquisition date 50 250
Subsequent changes in additional payment 0 0
Total Goodwill 50 250
Cumulative earnings (before considering 1,050 1,050
additional payment)
Impact of additional payment (500) (300)
Reported results across three years 550 750

Q41. Mini Limited is a manufacturing entity in textile industry. Mini Limited decided to reduce the
cost of manufacturing by setting up its own power plant for their captive consumption. As per
market research report, there was non-operational power plant in nearby area. Hence, it
decided to acquire that power plant which was having capacity of 80MW along with all entire
labour force. This Power entity was owned by another entity Max Limited. Mini Limited
approached Max Limited for acquisition of 80MW power plant at following terms:

(i) Mini Limited will seek an independent valuation for determining fair value of 80MW
power plant.

(ii) Value of other Non-current assets acquired, and Non–current financial liabilities
assumed is ₹ 11.10 million and ₹ 32 million respectively.

(iii) Consideration agreed between both the parties is at ₹ 51 million.

Both the parties agreed to the terms and entered into agreement on 1st April, 20X1 with
immediate effect.
Due to unavoidable circumstances, valuation could not be completed by the time Max
Limited finalizes its financial statements for the year ending 31st March, 20X1. Max Limited’s
annual financial statements records the fair value of 80 MW Power Plant at ₹ 46.90 million with
remaining useful life at 40 years.

Max Limited also has license to operate that power plant unrecorded in books. As on 31st
March, 20X1, it has fair value of ₹ 5 million.

Six months after acquisition date, Mini Limited received the independent valuation, which
estimated the fair value of 80MW Power Plant as ₹ 54.90 million.

CFO of Mini Limited, wants you to work upon following aspects of the transaction:

(a) Determine whether transaction should be accounted as asset acquisition or business

combination.

(b) Calculate Goodwill / Bargain Purchase due to the above acquisition.

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(c) Pass necessary journal entities in the books of Mini Limited as per Ind AS 103 and
prepare balance sheet as on date of acquisition.

(d) Determine whether any adjustment is required in case of valuation received subsequent
to acquisition. If yes, pass the necessary entries in the books of Mini Limited.

Balance Sheet of Mini Limited as at 31st March, 20X1

Particulars (₹ in Million)
ASSETS
Non-current assets
Property, plant and equipment 2,158
Capital work-in-progress 12
Deferred Tax Assets (Net) 324
Other non-current assets 25
Total non-current assets 2,519
Current assets
Inventories 368
Financial assets
(i) Investments 45
(ii) Trade Receivables 762
(iii) Cash and Cash Equivalents 110
(iv) Bank balances other than (iii) above 28
(v) Other financial assets 267
Total current assets 1,580
Total assets 4,099
EQUITY AND LIABILITIES
Equity
Equity Share Capital 295
Other equity
Equity component of compound financial instruments 717
Reserves and surplus 2,481
Total equity 3,493

[RTP Nov 2023]

Ans. (a) Ind AS 103 defines business as an integrated set of activities and assets that is capable
of being conducted and managed for the purpose of providing goods and services to

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customers, generating investment income (such as dividends or interest) or generating

other income from ordinary activities.

In the given scenario, acquisition of power plant along with its labour force will be
considered as integrated set of activity as it is capable of being generating power.
Hence, transaction will be considered as business combination and not asset acquisition
and acquisition method of accounting will be applied.

Thus, following will be the case:

(i) Acquirer – Mini Ltd;

(ii) Acquiree – Max Ltd;

(iii) Acquisition date – 1st April, 20X1

(b) Calculation of Goodwill:

Particulars ₹ in Million
Purchase consideration (A) 51
Fair Value of Power Plant – PPE 46.90
Fair Value of other non-current assets 11.10
Fair Value of Intangible Asset (License) – Refer Note 1 below 5
Non-Current Liabilities assumed (32)
Value of net assets acquired (B) 31
Goodwill 20

Note 1: The licence to operate power plant is an intangible asset that meets the
contractual-legal criterion for recognition separately from goodwill though acquirer
cannot sell or transfer it separately from the acquired power plant. Intangible Assets
needs to be recorded by the acquirer at the time of accounting for acquisition though
not recorded by the acquiree in its book.

(c) Journal Entries for acquiring power plant

Particulars ₹ in Million ₹ in Million
Fair Value of Power Plant Dr. 46.90
Fair Value of other assets Dr. 11.10
Fair Value of License acquired Dr. 5
Goodwill Dr. 20
To Liabilities assumed 32
To Bank (PC paid) 51

Balance Sheet of Mini Limited as at 1st April, 20X1

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Particulars Notes to ₹ in Million

Accounts
ASSETS
Non-current assets
Property, plant and equipment 1 2,204.90
Intangible Asset (License acquired in business 5.00
combination)
Capital work-in-progress 12.00
Goodwill on acquisition 20.00
Deferred Tax Assets (Net) 324.00
Other non-current assets 2 36.10
Total non-current assets 2,602.00
Current assets
Inventories 368.00
Financial assets
(i) Investments 45.00
(ii) Trade Receivables 762.00
(iii) Cash and Cash Equivalents 3 59.00
(iv) Bank balances other than (iii) above 28.00
(v) Other financial assets 267.00
Total current assets 1,529.00
Total assets 4,131.00
EQUITY AND LIABILITIES
Equity
Equity Share Capital 295.00
Other equity
Equity component of compound financial
instruments 717.00
Reserves and surplus 2,481.00
Total equity 3,493.00
Liabilities
Non-current liabilities

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Financial Liabilities
Borrowings 4 300.00
Total non-current liabilities 300.00
Current liabilities
Financial Liabilities
(i) Trade payables 302.00
Other current liabilities 36.00
Total current liabilities 338.00
Total liabilities 638.00
Total equity and liabilities 4,131.00

Notes to Accounts

1. Property, Plant and Equipment

Particulars ₹ in Million
PPE value as on 1st April, 20X1 2,158.00
Add: Fair Value of Power Plant acquired 46.90
Total 2,204.90

2. Other Non-current Assets

Particulars ₹ in Million
Other non-current assets value as on 1st April, 20X1 25.00
Add: Fair Value of Non-current assets acquired 11.10
Total 36.10

3. Cash and Cash equivalents

Particulars ₹ in Million
Cash and Cash equivalents as on 1st April, 20X1 110
Less: Payment of Purchase consideration transferred (51)
Total 59

4. Non-current Liabilities
Particulars ₹ in Million
Non-current Liabilities value as on 1st April, 20X1 268
Add: Non-current liabilities assumed in acquisition 32
Total 300

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(d) Subsequent Accounting: Ind AS 103 provides a measurement period window, wherein if
all the required information is not available on the acquisition date, then entity can do
price allocation on provisional basis. During the measurement period, the acquirer shall
retrospectively adjust the provisional amounts recognised at the acquisition date to
reflect new information obtained about facts and circumstances that existed as on the
acquisition date and, if known, would have affected the measurement of the amounts
recognised as of that date. Any change i.e. increase or decrease in the net assets
acquired due to new information available during the measurement period which
existed on the acquisition date will be adjusted against goodwill.

Accordingly, in the financial statements for half year ending 30th September, 20X1,
Mini Limited will retrospectively adjusts the prior year information as follows:

(i) the carrying amount of PPE (including power plant) as of 1st April, 20X1 is
increased by ₹ 8 million (i.e. ₹ 54.90 million minus ₹ 46.90 million). The
adjustment is measured as the fair value adjustment at the acquisition date less
the additional depreciation that would have been recognised if the asset’s fair
value at the acquisition date had been recognised from that date [(80,00,000/40)
x (6/12) = 0.1 million]

(ii) the carrying amount of goodwill as of 1st April, 20X1 is decreased by ₹ 8 million;
and

(iii) depreciation expense for the period ending 30th September, 20X1 will increase
by ₹ 0.1 million

(iv) disclose in its financial statements of 1st April, 20X1, that the initial accounting
for the business combination has not been completed because the valuation of
property, plant and equipment has not yet been received;

(v) disclose in its financial statements of 30th September, 20X1, the amounts and
explanation of the adjustments to the provisional values recognised during the
current reporting period. Therefore, Mini Limited discloses that comparative
information is adjusted retrospectively to increase the fair value of the item of
property, plant and equipment at the acquisition date by ₹ 8 million, offset by
decrease in goodwill of ₹ 8 million.

Journal Entries
(1) PPE (Power Plant) Dr. 8 Million
To Goodwill 8 Million
(2) Depreciation Dr. 0.1 Million
To Provision for Depreciation 0.1 Million

Q42: The draft balance sheets of Swan Limited and Duck Limited as at 31st March 2023 is as under:

Amount ₹ in lakhs
Particulars Swan Limited Duck Limited

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Assets
Non-Current Assets
Property, Plant and Equipment 800 1,000
Investments 900 240
Current Assets
Inventories 360 260
Financial Assets
- Trade Receivables 1,040 540
- Cash & Cash Equivalents 520 290
Other Current Assets 700 350
Total 4,320 2,680
Swan Limited Duck Limited
Equity and Liabilities
Equity
Share Capital
- Swan Limited: Equity Shares of ₹ 10 each 1,200 -
- Duck Limited: Equity Shares of ₹ 100 each - 900
Other Equity 1,450 420
Non-Current Liabilities
Financial Liabilities
- Long-Term Borrowings 700 500
Long-Term Provisions 140 200
Deferred Tax 80 -
Current Liabilities
Financial Liabilities
- Short-Term Borrowings 250 290
- Trade Payables 500 370
Total 4,320 2,680

On 1st April 2023, Swan Limited acquired 80% equity shares of Duck Limited. Swan Limited
agreed to pay to each shareholder of Duck Limited, ₹ 20 per equity share in cash and to issue
five equity shares of ₹ 10 each of Swan Limited in lieu of every six shares held by the
shareholders of Duck Limited. The fair value of the shares of Swan Limited was ₹ 100 per share
as on the date of acquisition.

Swan Limited also agreed to pay an additional consideration being higher of ₹ 90 lakhs and 30%
of any excess profits in the first year, after acquisition, over Duck Limited's profits in the
preceding 12 months (financial year 2022-2023) made by Duck Limited. The additional amount
will be due in 3 years post the date of acquisition. Duck Limited earned ₹ 30 lakhs profit in the
preceding year and expects to earn ₹ 40 lakhs in financial year 2023-2024.

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The fair value exercise resulted in the following:

(a) Fair value of Property, Plant and Equipment and Investments of Duck Limited on 1st April,
2023 was ₹ 1,200 lakhs and ₹ 300 lakhs respectively.

(b) Duck Limited owns a popular brand name that meets the recognition criteria for
Intangible Assets under Ind AS 103 'Business Combinations'. Independent valuers have
attributed a fair value of ₹ 250 lakhs for the brand. However, the brand does not have any
cost for tax purposes and no tax deductions are available for the same.

(c) Following is the statement of contingent liabilities of Duck Limited as on 1st April, 2023:

Particulars Fair Value (₹ in Remarks

lakhs)
Lawsuit filed by a 5 It is not probable that an outflow of resources
customer for a claim of ₹ embodying economic benefits will be required
20 lakhs to settle the claim. Any amount which would
be paid in respect of lawsuit will be tax
deductible.
Income tax demand of ₹ 70 20 It is not probable that an outflow of resources
lakhs raised by tax authorities. embodying economic benefits will be required to
Duck Limited has challenged settle the claim.
the demand in the High Court

(d) Duck Limited had certain equity settled share-based payment awards (original award)
which were replaced by the new awards issued by Swan Limited. As per the terms of
original awards, the vesting period was 5 years and as of the acquisition date the
employees of Duck Limited had already served 2 years of service. As per the new awards,
the vesting period has been reduced to 1 year (1 year from the acquisition date). The fair
value of the award on acquisition date was as follows:

Original Awards: ₹ 12 lakhs

New Awards: ₹ 18 lakhs.

(e) Further, Swan Limited has also agreed to pay one of the founder shareholder of Duck
Limited a sum of ₹ 15 lakhs provided he stays with the Company for two years after the
acquisition.

(f) The acquisition cost of Swan Limited for Duck Limited was ₹ 26 lakhs.

(g) The applicable tax rate for both the companies is 30%.

(h) Assume 10% per annum discount rate.

(i) Also, assume, unless stated otherwise, all items have a fair value and tax base equal to
their carrying amounts at the acquisition date.

You are required to prepare opening Consolidated Balance Sheet of Swan Limited as on
1st April 2023. Working Notes should form part of your answer.

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[Exam May 23 (15 Marks)]

Ans. (a) Consolidated Balance Sheet of Swan Ltd as on 1st April, 2023

Notes No. ₹ in lakhs

Assets
Non-current assets
Property, plant and equipment 9 2,000.00
Intangible assets 10 250.00
Financial assets
Investment 11 1,200.00
Current assets
Inventories 12 620.00
Financial assets:
Trade receivables 13 1,580.00
Cash and cash equivalents 14 640.00
Other current assets 15 1,050.00
Total 7,340.00
Equity and Liabilities
Equity
Share capital - Equity shares of ₹ 10 each 1 1,260.00
Other equity 2 2,475.18
Non-controlling interest (W.N.4) 330.70
Non-current liabilities
Financial liabilities
Long-term borrowings 3 1,200.00
Long-term provisions 4 407.62
Deferred tax liability 5 231.50
Current Liabilities
Financial liabilities
Short-term borrowings 6 540.00
Trade payables 7 870.00
Short-term provision 8 25.00
Total 7,340.00

Notes to Accounts (All figures are ₹ in lakhs)

1. Equity Share capital

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Equity shares of ₹ 10 each as per the balance sheet before 1,200

acquisition of Duck Ltd.
Shares allotted to Duck Ltd. (7,50,000 x 80% x ₹ 10) 60 1,260

2. Other Equity

As per the balance sheet before acquisition of Duck Ltd. 1,450

Less: Acquisition cost (26) 1,424
Replacement award 4.80
Security Premium (7,50,000 shares x 80% x ₹ 90) 540
Capital Reserve (W.N.5) 506.38 2,475.18

3. Long-term borrowings

As per the balance sheet before acquisition of Duck Ltd. 700

Duck Ltd. 500 1,200

4. Long-term provisions

As per the balance sheet before acquisition of Duck Ltd. 140

Deferred consideration 67.62
Duck Ltd. 200 407.62

5. Deferred tax liability

As per the balance sheet before acquisition of Duck Ltd. 80

Deferred tax impact due to acquisition of Duck Ltd. (W.N.2) 151.50 231.50

6. Short term borrowings

As per the balance sheet before acquisition of Duck Ltd. 250

Duck Ltd. 290 540

7. Trade payables
As per the balance sheet before acquisition of Duck Ltd. 500
Duck Ltd. 370 870

8. Short-term provisions

Lawsuit damages 5
Income-tax demand 20 25

9. Property, plant and equipment

As per the balance sheet before acquisition of Duck Ltd. 800

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Duck Ltd. 1,200

2000

10. Intangible assets

Brand of Duck Ltd. acquired 250

11. Investment

As per the balance sheet before acquisition of Duck Ltd. 900

Duck Ltd. 300 1,200

12. Inventories
As per the balance sheet before acquisition of Duck Ltd. 360
Duck Ltd. 260 620

13. Trade receivables

As per the balance sheet before acquisition of Duck Ltd. 1,040
Duck Ltd. 540 1,580

14. Cash and cash equivalents

As per the balance sheet before acquisition of Duck Ltd. 520
Less: Acquisition cost paid (26)
Less: Paid to Duck Ltd. (144) 350
Duck Ltd. 290 640

15. Other current assets

As per the balance sheet before acquisition of Duck Ltd. 700

Duck Ltd. 350 1,050

Working Notes:

1. Computation of Purchase Consideration

Particulars No. of ₹ in lakhs
shares
Share capital of Duck Ltd. 900
Number of shares 9,00,000
Shares to be issued (5 shares against 6 shares of Duck Ltd.) 7,50,000

Fair value of Swan Ltd.’s share is ₹ 100 per share

Purchase consideration

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Shares issued (7,50,000x 80% x ₹ 100 per share) (A) 600

Cash payment (₹ 20 x 9,00,000 x 80%) (B) 144
Deferred consideration (discounting ₹ 90 lakhs for 3 67.62
years @10%) (C)
Replacement award [Market based measure of the
acquiree award (12) x ratio of the portion of the vesting
period completed (2) / greater of the total vesting period
(3) or the original vesting period (5) of the acquiree
award (ie 12 x 2/5)] (D) 4.80
Purchase consideration for 70% shares (A + B + C + D) 816.42

2. Computation of deferred tax impact due to change in fair value of asset and
liabilities acquired

Particulars Book Fair FV

value value adjustment
(A) (B) (A-B)
Property, plant and equipment 1,000 1,200 200
Intangible assets (Brand) - 250 250
Investment 240 300 60
1,750 510
Less: Contingent liability acquired Provision for lawsuit
damages (5)
Net difference in fair value 505
Deferred tax liability @ 30% 151.5

3. Computation of fair value of net identifiable assets acquired f rom Duck Ltd.

Particulars Book value

Total assets as per the balance sheet 2,680
Add: Fair value adjustment in PPE and Investment (200+60) 260
Add: Intangible assets (Brand) 250
Fair value of total identifiable assets 3,190
Less: Total liabilities as per the balance sheet (500+200+290+370) (1,360)

Less: Contingent liability acquired

Lawsuit damages 5
Income tax demand 20 (25)
Less: Defer tax liability (W.N.2) (151.50)
Fair value of net identifiable assets (100%) 1,653.50

4. Computation of non-controlling interest in Duck Ltd. (Proportionate share basis)

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 Chapter 26 : Business Combination As Per IND AS103

Non-controlling interest (1,653.50 x 20%) = 330.70

5. Computation of capital reserve on acquisition of Duck Ltd.

Particulars Book value

Fair value of net identifiable assets 1,653.50
Less: Purchase consideration (816.42)
Less: NCI (W.N.4) (330.70)
Capital reserve 506.38

Notes:

a) The value of replacement award is allocated between consideration transferred and

post combination expense. The portion attributable to purchase consideration is
determined based on the fair value of the replacement award for the service rendered
till the date of the acquisition. Accordingly, ₹ 4.8 lakh (12 x 2/5) is considered as a part
of purchase consideration and is credited to Swan Ltd.’s equity as this will be settled in
its own equity. Since the fair value of the award on the acquisition date is ₹ 18 lakh the
balance of (18 - 4.8) ₹ 13.2 lakh will be recorded as employee expense in the books of
Duck Ltd. over the remaining life, which is 1 year in this scenario.

With respect to deferred consideration, ₹ 90 lakh is the minimum payment to be paid

after 3 years. The other element is if company meet certain target then they will get
30% of that or ₹ 90 lakh whichever is higher. In the given case, since the minimum
what is expected to be paid the fair value of the contingent consideration has been
considered as zero. The impact of time value on deferred consideration has been given
@ 10%.

b) The additional consideration of ₹ 15 lakhs to be paid to the founder shareholder is

contingent to him/her continuing in employment and hence this will be considered as
employee compensation and will be recorded as post combination expenses in the
statement of profit and loss of Duck Ltd.

Q43: On 1st April 20X1, J Ltd. acquired a new subsidiary, B Ltd., purchasing all 150 million shares of B
Ltd. The terms of the sale agreement included the exchange of four shares in J Ltd. for every
three shares acquired in B Ltd. On 1st April 20X1, the market value of a share in J Ltd. was ₹ 10
and the market value of a share in B Ltd. ₹ 12.00.

The terms of the share purchase included the issue of one additional share in J Ltd. for every
five acquired in B Ltd. if the profits of B Ltd. for the two years ending 31st March 20X2
exceeded the target figure. Current estimates are that it is 80% probable that the management
of B Ltd. will achieve this target.

Legal and professional fees associated with the acquisition of B Ltd. shares were ₹ 12,00,000,
including ₹ 2,00,000 relating to the cost of issuing shares. The senior management of J Ltd.
estimate that the cost of their time that can be fairly allocated to the acquisition is ₹ 2,00,000.
This figure of ₹ 2,00,000 is not included in the legal and professional fees of ₹ 12,00,000
mentioned above.

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Chapter 26 : Business Combination As Per IND AS103

The individual Balance Sheet of B Ltd. at 1st April 20X1 comprised net assets that had a fair
value at that date of ₹ 1,200 million. Additionally, J Ltd. considered B Ltd. possessed certain
intangible assets that were not recognized in its individual Balance Sheet:

 Customer relationships – reliable estimate of value ₹ 100 million. This value has been
derived from the sale of customer databases in the past.

 An in process research and development project that had not been recognised by B Ltd.
since the necessary conditions laid down in Ind AS for capitalisation were only just
satisfied at 31st March 20X2. However, the fair value of the whole project (including the
research phase) is estimated at ₹ 50 million.

 Employee expertise – estimated value of Director employees of B Ltd. is ₹ 80 million.

 The market value of a share in J Ltd. on 31st March 20X2 was ₹ 11.

Compute the goodwill on consolidation of B Ltd. that will appear in the consolidated balance
sheet of J Ltd. at 31st March 20X2 with necessary explanation of adjustments therein.

[MTP Nov 2023; MTP MAY 2024]

Ans: Calculation of purchase consideration:

Particulars ₹ in million

Market value of shares issued (150 million x 4/3 x ₹ 10) 2,000

Initial estimate of market value of shares to be issued (150 million x 1/5 x ₹ 10) 300
Total consideration 2,300

Contingent consideration is recognized in full if payment is probable.

As per para 53 of Ind AS 103, acquisition‑related costs are costs the acquirer incurs to effect a
business combination. Those costs include finder’s fees; advisory, legal, accounting, valuation
and other professional or consulting fees; general administrative costs, including the costs of
maintaining an internal acquisitions department; and costs of registering and issuing debt and
equity securities. The acquirer shall account for acquisition-related costs as expenses in the
periods in which the costs are incurred and the services are received, with one exception. The
costs to issue debt or equity securities shall be recognised in accordance with I nd AS 32 and Ind
AS 109.

Statement of fair value of identifiable net assets at the date of acquisition

Particulars ₹ in million
As per Bosman Ltd.’s Balance Sheet 1,200
Fair value of customer relationships 100
Fair value of research and development project 50
Total net assets acquired 1,350

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 Chapter 26 : Business Combination As Per IND AS103

As per Ind AS 38 ‘Intangible assets’, intangible assets can be recognized separately from
goodwill provided they are identifiable, are under the control of the acquiring entity, and their
fair value can be measured reliably.

Customer relationships that are similar in nature to those previously traded, pass these tests
but employee expertise fail the ‘control’ test. Both the research and development phases of in
process project can be capitalised provided their fair value can be measured reliably.

Statement of computation of goodwill

Particulars ₹ in million
Fair value of consideration given 2,300
Fair value of net assets acquired (1,350)
Goodwill on acquisition 950

Paragraph 58 of Ind AS 103 provides guidance on the subsequent accounting for contingent
consideration. In general, an equity instrument is any contract that evidences a residual interest
in the assets of an entity after deducting all of its liabilities. Ind AS 32 describes an equity
instrument as one that meets both of the following conditions:

 There is no contractual obligation to deliver cash or another financial asset to another

party, or to exchange financial assets or financial liabilities with another party under
potentially unfavourable conditions (for the issuer of the instrument).

 If the instrument will or may be settled in the issuer's own equity instruments, then it is:

 a non-derivative that comprises an obligation for the issuer to deliver a fixed

number of its own equity instruments; or

 a derivative that will be settled only by the issuer exchanging a fixed amount of
cash or other financial assets for a fixed number of its own equity instruments.

In the given case, given that the acquirer has an obligation to issue fixed number of shares on
fulfillment of the contingency, the contingent consideration will be classified as equity as per
the requirements of Ind AS 32.

As per paragraph 58 of Ind AS 103, contingent consideration classified as equity should not be
re-measured and its subsequent settlement should be accounted for within equity.

P a g e | 26.30
Chapter 27 : Statement of Cash Flows (IND AS 7)

CHAPTER 27
STATEMENT OF CASH FLOWS (IND AS 7)
QUESTIONS FROM ICAI STUDY MATERIAL
Q12: The relevant extracts of consolidated financial statements of A Ltd. are provided below:
Consolidated Balance Sheet

For the year ended (₹ in Lac)

31st March 20X2 31st March 20X1
Assets
Non-Current Assets
Property, Plant and Equipment 4,750 4,650
Investment in Associate 800 -
Financial Assets 2,150 1,800

Current Assets
Inventories 1,550 1,900
Trade Receivables 1,250 1,800
Cash and Cash Equivalents 4,650 3,550

Liabilities
Current Liabilities
Trade Payables 1,550 3,610
Extracts from Consolidated Statement of Profit and Loss for the year ended 31st March 20X2
Particulars Amount (₹ in Lac)

Revenue 12,380
Cost of Goods Sold (9,860)
Gross Profit 2,520
Other Income 300
Operating Expenses (450)
Other expenses (540)
Interest expenses (110)
Share of Profit of Associate 120
Profit before Tax 1,840
The below information is relevant for A Ltd Group.

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 Chapter 27 : Statement of Cash Flows (IND AS 7)

1. A Ltd had spent ₹ 30 Lac on renovation of a building. A Ltd charged the entire
renovation cost to profit and loss account.
2. On 1st April 20X1, A Ltd acquired 100% shares in S Ltd, for cash of ₹ 300 Lac. Fair value
of the assets acquired and liabilities assumed under the acquisition are as under:
Property, Plant and Equipment 140 Lac
Inventories 60 Lac
Trade Receivables 30 Lac
Cash and Cash Equivalents 20 Lac
Total Assets 250 Lac
Less: Trade Payables (50 Lac)
Net Assets on acquisition 200 Lac
3. A Ltd.‘s property, plant and equipment comprise the following:

Carrying amount on 1st April 20X1 4,650 Lac

Addition (at cost) including assets in S Ltd. 800 Lac
Revaluation Surplus 80 Lac
Disposal (Sale) of Assets (490 Lac)
Depreciation for the year (290 Lac)
Carrying Amount on 31st March 20X2 4,750 Lac
4. A Ltd constructed a machine that is a qualifying asset and incurred construction costs of
₹ 40 Lac that has been charged to other expenses. Of the interest cost of ₹ 110 Lac
charged to profit or loss statement, ₹ 10 Lac includes interest cost on specific
borrowings that need to be capitalized.
5. Property, plant and equipment was sold at 630 Lac. Gain on disposal is adjusted against
operating expenses.
6. A Ltd. purchased 30% interest in an Associate (G Ltd) for cash on 1st April 20X1. The
associate reported profit after tax of ₹ 400 Lac and paid a dividend of ₹ 100 Lac for the
year.
7. Impairment test was conducted on 31st March 20X2. The following were impaired as
under:
 Goodwill impairment loss: ₹ 265 Lac
 Intangible Assets impairment loss ₹900 Lac
8. The goodwill impairment relates to 100% subsidiaries.
9. Assume that interest cost is all paid in cash.

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Chapter 27 : Statement of Cash Flows (IND AS 7)

You are required to determine cash generated from operations for group reporting purposes
for the year ended 31st March 20X2.
Ans: Extracts of Statement of Cash Flows for the year ended 31 st March 20X2

Cash Flows from Operating Activities Amount in ₹ Lacs

Profit before tax (W.N.1) 1,920
Less: Profit on Sale of PPE (630 - 490) (140)
Add back: Depreciation 290
Impairment of Goodwill 265
Impairment of Intangible Assets 900
Less: Share of Profits of Associate (400 x 30%) (120)
Add: Interest expense [110 – 10] 100
Working Capital Changes (W.N.2):
Add: Decrease in Trade Receivables 580
Add: Decrease in Inventories 410
Less: Decrease in Trade Payables (2,110)
Cash generated from operations 2,095

Working Notes:
1. Profit before tax Amount in ₹ Lacs

Reported profit as per Profit or Loss Statement 1,840

Add back: Renovation costs charged as expense 30
Construction costs charged as expense 40
Borrowing costs to be capitalized 10
Revised Profit before tax 1,920
2. Changes in Trade Receivables Amount in ₹ Lacs

Opening Balance 1,800

Add: Receivables of S Ltd. 30
1,830
Less: Closing Balance (1,250)
580

3. Changes in Inventories Amount in ₹ Lacs

Opening Balance 1,900

Add: Receivables of S Ltd. 60
1,960
Less: Closing Balance (1,550)

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 Chapter 27 : Statement of Cash Flows (IND AS 7)

410

4. Changes in Trade Payables Amount in ₹ Lacs

Opening Balance 3,610

Add: Receivables of S Ltd. 50
3,660
Less: Closing Balance (1,550)
2,110
Q16: Z Ltd. has no foreign currency cash flow for the year 2017. It holds some deposit in a bank in
the USA. The balances as on 31.12.2017 and 31.12.2018 were US$ 100,000 and US $ 102,000
respectively. The exchange rate on December 31, 2017 was US$ 1 = ₹ 45. The same on
31.12.2018 was US $ 1 = ₹ 50. The increase in the balance was on account of interest credited
on 31.12.2018. Thus, the deposit was reported at ₹ 45,00,000 in the balance sheet as on
December 31, 2017. It was reported at ₹ 51,00,000 in the balance sheet as on 31.12.2018. How
these transactions should be presented in cash flow for the year ended 31.12.2018 as per Ind
AS 7? [RTP May 2019]
Ans: The profit and loss account was credited by ₹ 1,00,000 (US $ 2,000 × ₹ 50) towards interest
income. It was credited by the exchange difference of US$ 1,00,000 × (₹ 50 - ₹ 45) that is, ₹
500,000. In preparing the cash flow statement, ₹ 5,00,000, the exchange difference, should
be deducted from the ‘net profit before taxes’. However, in order to reconcile the opening
balance of the cash and cash equivalents with its closing balance, the exchange difference ₹
5,00,000, should be added to the opening balance in note to cash flow statement.
Cash flows arising from transactions in a foreign currency shall be recorded in Z Ltd.’s functional
currency by applying to the foreign currency amount the exchange rate between the functional
currency and the foreign currency at the date of the cash flow.
Q17: Company A acquires 70% of the equity stake in Company B on July 20, 20X1. The consideration
paid for this transaction is as below:
(a) Cash consideration of ₹ 15,00,000
(b) 200,000 equity shares having face of ₹ 10 and fair value of ₹ 15 per share.
On the date of acquisition, Company B has cash and cash equivalent balance of ₹ 2,50,000 in its
books of account.
On October 10, 20X2, Company A further acquires 10% stake in Company B for cash
consideration of ₹ 8,00,000.
Advise how the above transactions will be disclosed/presented in the statement of cash flows
as per Ind AS 7. [RTP May 2018]
Ans: As per para 39 of Ind AS 7, the aggregate cash flows arising from obtaining control of subsidiary
shall be presented separately and classified as investing activities.
As per para 42 of Ind AS 7, the aggregate amount of the cash paid or received as consideration
for obtaining subsidiaries is reported in the statement of cash flows net of cash and cash

P a g e | 27.4
Chapter 27 : Statement of Cash Flows (IND AS 7)

equivalents acquired or disposed of as part of such transactions, events or changes in

circumstances.
Further, investing and financing transactions that do not require the use of cash or cash
equivalents shall be excluded from a statement of cash flows. Such transactions shall be
disclosed elsewhere in the financial statements in a way that provides all the relevant
information about these investing and financing activities.
As per para 42A of Ind AS 7, cash flows arising from changes in ownership interests in a
subsidiary that do not result in a loss of control shall be classified as cash flows from financing
activities, unless the subsidiary is held by an investment entity, as defined in Ind AS 110, and is
required to be measured at fair value through profit or loss. Such transactions are accounted
for as equity transactions and accordingly, the resulting cash flows are classified in the same
way as other transactions with owners.
Considering the above, for the financial year ended March 31, 20X2 total consideration of ₹
15,00,000 less ₹ 250,000 will be shown under investing activities as “ Acquisition of the
subsidiary (net of cash acquired)”.
There will not be any impact of issuance of equity shares as consideration in the cash flow
statement however a proper disclosure shall be given elsewhere in the financial statements in a
way that provides all the relevant information about the issuance of equity shares for non-cash
consideration.
Further, in the statement of cash flows for the year ended March 31, 20X3, cash consideration
paid for the acquisition of additional 10% stake in Company B will be shown under financing
activities.

Q21: What will be the classification for following items in the statement of cash flows of both Banks /
Financial institutions and Other Entities?
S. No. Particulars
1. Interest received on loans and advances given
2. Interest paid on deposits and other borrowings
3. Interest and dividend received on investments in subsidiaries, associates and in
other entities
4. Dividend paid on preference and equity shares, including tax on dividend paid on
preference and equity shares by other entities
5. Finance charges paid by lessee under finance lease
6. Payment towards reduction of outstanding finance lease liability
7. Interest paid to vendor for acquiring fixed asset under deferred payment basis
8. Principal sum payment under deferred payment basis for acquisition of fixed
assets
9 Penal interest received from customers for late payments
10. Penal interest paid to suppliers for late payments
11. Interest paid on delayed tax payments
12. Interest received on tax refunds

[RTP Nov 2022]

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 Chapter 27 : Statement of Cash Flows (IND AS 7)

Ans: The following are the classification of various activities in the Statement of Cash Flows
S. Particulars Classification for reporting cash flows
No. Banks / financial Other entities
institutions
1. Interest received on loans and Operating Activities Investing activities
advances given
2. Interest paid on deposits and other Operating Activities Financing activities
borrowings
3. Interest and dividend received on Investing activities Investing activities
investments in subsidiaries,
associates and in other entities
4. Dividend paid on preference and Financing activities Financing activities
equity shares, including tax on
dividend paid on preference and
equity shares by other entities
5. Finance charges paid by lessee Financing activities Financing activities
under finance lease
6. Payment towards reduction of Financing activities Financing activities
outstanding finance lease liability
7. Interest paid to vendor for acquiring Financing activities Financing activities
fixed asset under deferred payment
basis
8. Principal sum payment under Investing activities Investing activities
deferred payment basis for
acquisition of fixed assets
9. Penal interest received from Operating Activities Operating Activities
customers for late payments
10. Penal interest paid to suppliers for Operating Activities Operating Activities
late payments
11. Interest paid on delayed tax Operating Activities Operating Activities
payments
12. Interest received on tax refunds Operating Activities Operating Activities
Q24: Z Ltd. (India) has an overseas branch in USA. It has a bank account having balance of USD 7,000
as on 1st April 2019. During the financial year 2019-2020, Z Ltd. acquired computers for its USA
office for USD 280 which was paid on same date. There is no other transaction reported in USA
or India.

Exchange rates between INR and USD during the financial year 2019-2020 were:

Date USD 1 to INR

1st April 2019 70.00

30th November 2019 71.00 (Date of purchase of computer)

31st March 2020

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Chapter 27 : Statement of Cash Flows (IND AS 7)

71.50

Average for 2019-2020

70.50
Please prepare the extract of Cash Flow Statement for the year ended 31 st March 2020 as per
the relevant Ind AS and also show the foreign exchange profitability from these transactions for
the financial year 2019-2020? [Exam JAN 2021 (5 Marks)]

Ans: In the books of Z Ltd.

Statement of Cash Flows for the year ended 31st March 2020
₹ ₹
Cash flows from operating activ ities
Net Profit (Refer Working Note)
10,360
Adjustments for non-cash items:
Foreign Exchange Gain (10,360)
Net cash outflow from operating activities
0
Cash flows from investing activities
Acquisition of Property, Plant and Equipment (19,880)
Net cash outflow from Investing activities (19,880)
Cash flows from financing activities 0
Net change in cash and cash equivalents (19,880)
Cash and cash equivalents at the beginning of the 4,90,000
year i.e.
1st April 2019
Foreign Exchange difference 10,360
Cash and cash equivalents at the end of the year i.e.
31st March 2020 4,80,480

Working Note:

Computation of Foreign Exchange Gain

Bank Account USD Date USD Exchange ₹
Rate
Opening balance 1.4.2019 7,000 70.00 4,90,000
Less: Purchase of Computer 30.11.2019 280 71.00 19,880
Closing balance calculated 6,720 4,70,120

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 Chapter 27 : Statement of Cash Flows (IND AS 7)

Closing balance (at year end spot 31.3.2020 6,720 71.50 4,80,480
rate)
Foreign Exchange Gain credited
to Profit and Loss account
10,360

Q27: Following is the Balance Sheet of Mars Ltd: ₹ in Lakhs

Particulars 31.3.20X3 31.3.20X2

ASSETS
Non-Current Assets
Property, Plant and Equipment 450 410
Intangible asset 90 90
Deferred Tax Asset (net) 45 45
Other Non-current Asset 95 85
Total Non-current Assets 680 630
Current Assets
Financial Asset
Investments 100 60
Trade Receivables 580 600
Cash and Cash Equivalents 300 300
Inventories 800 700
Other Current Assets 160 120
Total Current Assets 1,940 1,780
Total Assets 2,620 2,410
Equity and Liabilities
Equity
Equity Share Capital 280 250
Other Equity 980 820
Total Equity 1,260 1,070
Non-current Liabilities
Financial Liabilities

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Chapter 27 : Statement of Cash Flows (IND AS 7)

Borrowings 360 300

Other Non-current Liabilities 90 80
Total Non-current Liabilities 450 380
Current Liabilities
Financial Liabilities
Trade Payable 455 450
Bank Overdraft 410 420
Other current liabilities 45 90
Total Current Liabilities 910 960
Total Liabilities 1,360 1,340
Total Equity and Liabilities 2,620 2,410

Additional Information:

a. Profit before tax for the year is ₹ 200 lakhs and provision for tax is ₹ 40 lakhs.

b. Property, Plant and Equipment purchased during the year ₹ 100 lakhs.

c. Current liabilities include Capital creditors of ₹ 25 lakhs as at 31st March 20X3 (Nil – 31st
March 20X2)

d. Long Term Borrowings raised during the year ₹ 120 lakhs.

From the information given, prepare a Statement of Cash Flows following Indirect Method.
Assume that Bank overdraft is an integral part of the entity’s cash management.

[RTP May 2024]

Ans: Statement of Cash Flows for the year ended 31st March, 20X3
(₹ inlakhs) (₹ inlakhs)

Cash flows from operating activities

Profit before taxation 200
Adjustments for non-cash items:
Depreciation [410 - (450 - 100)] 60
260
Increase in inventories (800 - 700) (100)
Decrease in trade receivables (600 - 580) 20
Increase in other non-current assets (95 - 85) (10)

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 Chapter 27 : Statement of Cash Flows (IND AS 7)

Increase in other current assets (160 - 120) (40)

Increase in non-current liabilities (90 - 80) 10
Increase in trade payables (455 – 25 - 450) (20)
Other current liabilities (Refer Note 1)[(90 + 40) - 45] (85)

Net cash generated from operating activities 35

Cash flows from investing activities
Cash paid to purchase PPE (100-25) (75)
Cash paid to acquire investment (100-60) (40)
Net cash outflow from investing activities (115)
Cash flows from financing activities
Raising of equity share capital (280 - 250) 30
Long-term borrowings raised during the year 120
Long-term borrowings repaid during the year[(300 + 120) - 360] (60)
Net cash outflow from financing activities 90
Increase in cash and cash equivalents during
the year 10
Cash and cash equivalents at the beginning of the year (420-300)
(Refer Note 2) (120)
Cash and cash equivalents at the end of the year (410-300) (Refer
Note 2) (110)

Note: Other current liabilities are assumed to consist of provision for taxation.

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Chapter 28 : Interim Financial Reporting (IND AS 34)

CHAPTER 28
INTERIM FINANCIAL REPORTING (IND AS 34)
Q2: ABC Ltd. presents interim financial report quarterly. On 1.4.20X1, ABC Ltd. has carried forward
loss of ₹ 600 lakhs for income-tax purpose for which deferred tax asset has not been
recognized. ABC Ltd. earns ₹ 900 lakhs in each quarter ending on 30.6.20X1, 30.9.20X1,
31.12.20X1 and 31.3.20X2 excluding the carried forward loss. Income-tax rate is expected to
be 40%. Calculate the amount of tax expense to be reported in each quarter.
Ans: Amount of income tax expense reported in each quarter would be as below:
The estimated payment of the annual tax on earnings for the current year:
₹ 3,000* x 40 / 100 = ₹ 1,200 lakhs.
*(3,600 lakhs - ₹ 600 lakhs) = ₹ 3,000 lakhs
Average annual effective tax rate = (1,200 / 3,600) × 100 = 33.33%
Tax expense to be shown in each quarter = 900 x 33.33% = ₹ 300 lakhs
Q5: ABC Limited manufactures automobile parts. ABC Limited has shown a net profit of ₹ 20,00,000
for the third quarter of 20X1.
Following adjustments are made while computing the net profit:
1. Bad debts of ₹ 1,00,000 incurred during the quarter. 50% of the bad debts have been
deferred to the next quarter.
2. Additional depreciation of ₹ 4,50,000 resulting from the change in the method of
depreciation.
3. Exceptional loss of ₹ 28,000 incurred during the third quarter. 50% of exceptional loss
have been deferred to next quarter.
4. ₹ 5,00,000 expenditure on account of administrative expenses pertaining to the third
quarter is deferred on the argument that the fourth quarter will have more sales;
therefore, fourth quarter should be debited by higher expenditure. The expenditures are
uniform throughout all quarters.
Ascertain the correct net profit to be shown in the Interim Financial Report of third quarter to
be presented to the Board of Directors. [Exam Nov 2018; Dec 21 (4 Marks)]
Ans: In the instant case, the quarterly net profit has not been correctly stated. As per Ind AS 34,
Interim Financial Reporting, the quarterly net profit should be adjusted and restated as follows:
1. The treatment of bad debts is not correct as the expenses incurred during an interim
reporting period should be recognised in the same period. Accordingly, ₹ 50,000 should
be deducted from ₹ 20,00,000.
2. Recognising additional depreciation of ₹ 4,50,000 in the same quarter is correct and is in
tune with Ind AS 34.

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 Chapter 28 : Interim Financial Reporting (IND AS 34)

3. Treatment of exceptional loss is not as per the principles of Ind AS 34, as the entire
amount of ₹ 28,000 incurred during the third quarter should be recognized in the same
quarter. Hence ₹ 14,000 which was deferred should be deducted from the profits of third
quarter only.
4. As per Ind AS 34 the income and expense should be recognised when they are earned
and incurred respectively. As per para 39 of Ind AS 34, the costs should be anticipated
or deferred only when: it is appropriate to anticipate or defer that type of cost at the
end of the financial year, and costs are incurred unevenly during the financial year of an
enterprise.
Therefore, the treatment done relating to deferment of ₹ 5,00,000 is not correct as
expenditures are uniform throughout all quarters.
Thus considering the above, the correct net profits to be shown in Interim Financial Report of
the third quarter shall be ₹ 14,36,000 (₹ 20,00,000 -₹ 50,000 - ₹ 14,000 - ₹ 5,00,000).
Q6: The entity’s financial year ends on 31st March. What are the “reporting periods” for which
financial statements (condensed or complete) in the interim financial report of the entity as on
30th September, 20X1 are required to be presented, if:
(i) Entity publishes interim financial reports quarterly
(ii) Entity publishes interim financial reports half-yearly. [RTP May 2023]
Ans: Paragraph 20 of Ind AS 34, Interim Financial Reporting states as follows:
“Interim reports shall include interim financial statements (condensed or complete) for periods
as follows:
a) balance sheet as of the end of the current interim period and a comparative balance
sheet as of the end of the immediately preceding financial year.
b) statements of profit and loss for the current interim period and cumulatively for the
current financial year to date, with comparative statements of profit and loss for the
comparable interim periods (current and year-to-date) of the immediately preceding
financial year.
c) statement of changes in equity cumulatively for the current financial year to date, with a
comparative statement for the comparable year-to-date period of the immediately
preceding financial year.
d) statement of cash flows cumulatively for the current financial year to date, with a
comparative statement for the comparable year-to-date period of the immediately
preceding financial year.
Accordingly, periods for which interim financial statements are required to be presented are
provided herein below:
(i) Entity publishes interim financial reports quarterly
The entity will present the following financial statements (condensed or complete) in its
interim financial report of 30th September, 20X1:

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Chapter 28 : Interim Financial Reporting (IND AS 34)

Balance sheet at 30th September 31st March 20X1 - -

20X1
Statement of profit 3 months ended 3 months ended 6 months ended 6 months ended
and loss for 30th September 30th September 30th September 30th September
20X1 20X0 20X1 20X0
Statement of 6 months ended 6 months ended
changes in equity 30th September 30th September
for 20X1 20X0
Statement of cash 6 months ended 6 months ended - -
flows for 30th September th
30 September
20X1 20X0
(ii) Entity publishes interim financial reports half-yearly
The entity’s financial year ends 31st March. The entity will present the following financial
statements (condensed or complete) in its half-yearly interim financial report of 30th
September, 20X1:
Balance sheet at 30th September, 20X1 31st March, 20X1
Statement of profit and loss for 6 months ending 30th 6 months ending 30th
September, 20X1 September, 20X0
Statement of changes in equity 6 months ending 30th 6 months ending 30th
for September 20X1 September 20X0
Statement of cash flows for 6 months ending 30th 6 months ending 30th
September 20X1 September 20X0
Q7: Lal Ltd. provides you the following information for financial year 2019 -2020: Estimated Income
for the year ended 31 March 2020:

Gross Annual Income (inclusive of Estimated Capital Gains of ₹ 4,00,000) ₹ 16,50,000

Quarter I ₹ 3,50,000
Quarter II ₹ 4,00,000
Quarter III (including Estimated Capital Gains of ₹ 4,00,000) ₹ 6,00,000
Quarter IV ₹ 3,00,000
Tax Rates: On Capital Gains 12%
On Other Income: First ₹ 2,50,000 20%
Balance Income· 30%

Calculate the tax expense for each quarter, assuming that there is no difference between the
estimated taxable income and the estimated accounting income.

[Exam Nov 2020 (6 Marks), MTP NOV 2021]

Ans: As per Ind AS 34 ‘Interim Financial Reporting’, income tax expense is recognised in each interim
period based on the best estimate of the weighted average annual income tax rate expected
for the full financial year.

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 Chapter 28 : Interim Financial Reporting (IND AS 34)

If different income tax rates apply to different categories of income (such as capital gains or
income earned in particular industries) to the extent practicable, a separate rate is applied to
each individual category of interim period pre-tax income.
₹
Estimated annual income exclusive of estimated capital gain 12,50,000
(16,50,000 – 4,00,000) (A)
Tax expense on other income:
20% on ₹ 2,50,000 50,000
30% on remaining ₹ 10,00,000 3,00,000
(B) 3,50,000
𝐵 3,50,000
Weighted average annual income tax rate = = = 28%
𝐴 12,50,000

Tax expense to be recognised in each of the quarterly reports :

₹
Quarter I - ₹ 3,50,000 x 28% 98,000
Quarter II - ₹ 4,00,000 x 28% 1,12,000
Quarter III - ₹ (6,00,000 - 4,00,000) x 28% 56,000
₹ 4,00,000 x 12% 48,000 1,04,000
Quarter IV - ₹ 3,00,000 x 28% 84,000
3,98,000
Q10: An entity’s accounting year ends is 31st December, but its tax year end is 31st March. The
entity publishes an interim financial report for each quarter of the year ended 31st December,
2019. The entity’s profit before tax is steady at ₹10,000 each quarter, and the estimated
effective tax rate is 25% for the year ended 31 st March, 2019 and 30% for the year ended 31st
March, 2020. How the related tax charge would be calculated for the year 2019 and its
quarters. [RTP Nov 2020; MTP May 2024]
Ans: Table showing computation of tax charge:
Quarter Quarter Quarter Quarter Year
ending 31st ending ending ending 31st ending 31st
March, 30th 30th December, Decembe,
2019 June, Septemb, 2019 2019
2019 2019
₹ ₹ ₹ ₹ ₹
Profit before tax 10,000 10,000 10,000 10,000 40,000
Tax charge (2,500) (3,000) (3,000) (3,000) (11,500)
7,500 7,000 7,000 7,000 28,500
Note: As per para B17 of Ind AS 34, since an entity’s accounting year is not same as the tax year,
more than one tax rate might apply during the accounting year. Accordingly, the entity should
apply the effective tax rate for each interim period to the pre-tax result for that period.

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Chapter 28 : Interim Financial Reporting (IND AS 34)

Q12: Antarbarti Limited reported a Profit Before Tax (PBT) of ₹ 4 lakhs for the third quarter ending
30-09-2011. On enquiry you observe the following, give the treatment required under IND AS
34:
(i) Dividend income of ₹ 4 lakhs received during the quarter has been recognized to the
extent of ₹ 1 lakh only.
(ii) 80% of sales promotion expenses ₹ 15 lakhs incurred in the third quarter has been
deferred to the fourth quarter as the sales in the last quarter is high.
(iii) In the third quarter, the company changed depreciation method from WDV to SLM, which
resulted in excess depreciation of ₹ 12 lakhs. The entire amount has been debited in the
third quarter, though the share of the third quarter is only ₹ 3 lakhs.
(iv) ₹ 2 lakhs extra-ordinary gain received in third quarter was allocated equally to the third
and fourth quarter.
(v) Cumulative loss resulting from change in method of inventory valuation was recognized in
the third quarter of ₹ 3 lakhs. Out of this loss ₹ 1 lakh relates to previous quarters.
(vi) Sale of investment in the first quarter resulted in a gain of ₹ 20 lakhs. The company had
apportioned this equally to the four quarters.
Prepare the adjusted profit before tax for the third quarter.
Ans: As per IND AS 34 “Interim Financial Reporting”, seasonal or occasional revenue and cost within a
financial year should not be deferred as of interim date untill it is appropriate to defer at the end
of the enterprise’s financial year. Therefore dividend income, extra-ordinary gain, and gain on
sale of investment received during 3rd quarter should be recognised in the 3rd quarter only.
Similarly, sales promotion expenses incurred in the 3rd quarter should also be charged in the 3rd
quarter only.
Further, as per the standard, if there is change in the accounting policy within the current
financial year, then such a change should be applied retrospectively by restating the financial
statements of prior interim periods of the current financial year. The change in the method of
inventory valuation is a change in the accounting policy. The change in the method of
depreciation is a change in the accounting estimates.
Therefore, the prior interim periods’ financial statements should be restated by applying the
change in the method of valuation retrospectively. Accordingly, the adjusted profit before tax for
the 3rd quarter will be as follows: Statement showing Adjusted Profit Before Tax for the third
quarter
(₹ in lakhs)
Profit before tax (as reported) 4
Add: Dividend income R₹ (4-1) lakhs 3
Add: Extra ordinary gain R ₹ (2-1) lakhs 1
Add: Cumulative loss due to change in the method of inventory valuation
should be applied retrospectively ₹ (3-2) lakhs 1
Less: Sales promotion expenses (80% of ₹ 15 lakhs) (12)
Less: Gain on sale of investment (occasional gain should not be deferred) (5)

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 Chapter 28 : Interim Financial Reporting (IND AS 34)

Adjusted Profit before tax for the third quarter (8)

Q14: Heavy Limited has a plant with normal capacity to produce 90,000 units of a product per annum
and expected fixed production overhead for the year is ₹ 18,00,000. There are no quarterly/
seasonal variations.
Hence, normal expected production of each quarter is uniform. The actual production of the
year is 87,000 units. The production details of each quarter are as under:
Quarter I: 20,000 units
Quarter II: 24,000 units
Quarter III: 23,500 units
Quarter IV: 19,500 units
Calculate the allocation of fixed production overhead for all the four quarters. Will the quarterly
results affect annual result?
Give your answer as per Ind AS 34 read with Ind AS 2. [Exam July 2021 (5 Marks)]
Ans: Since it is considered that there is no quarterly / seasonal variation, then normal expected
production for each quarter is 22,500 units (90,000 units / 4 quarters) and fixed production
overheads for the quarter are ₹ 4,50,000 (₹ 18,00,000 / 4 quarters).
Fixed production overhead to be allocated per unit of production in every quarter will be ₹ 20
per unit.
(Fixed overheads / Normal production i.e. ₹ 4,50,000 / 22,500 units

Quarters
Particulars I II III IV
Actual fixed production overheads on year to date 4,50,000 9,00,000 13,50,000 18,00,000
basis (₹)
Actual production (Units) 20,000 24,000 23,500 19,500
Actual production year to date basis (Units) 20,000 44,000 67,500 87,000

Fixed overheads to be absorbed on year to date 4,00,000 8,80,000 13,50,000 17,40,000

basis (₹)
Under recovery year to date (₹) 50,000 20,000 NIL 60,000

Quarter I:
Unallocated fixed production overheads ₹ 50,000 (i.e. ₹ 4,50,000 – ₹ 4,00,000) to be charged as
expense as per Ind AS 2 and consequently as per Ind AS 34 .
Quarter II:
Since production increased in second quarter by 1,500 units (24,000 – 22,500) i.e. more than
the normal expected production, hence ₹ 30,000 (1,500 units x ₹ 20 per unit) will be reversed

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Chapter 28 : Interim Financial Reporting (IND AS 34)

by way of a credit to the statement of profit and loss of the 2 nd quarter and debit to cost of
production / inventory cost.
Quarter III:
Earlier, ₹ 50,000 was not allocated to production / inventory cost in the 1 st quarter. Out of it, ₹
30,000 was reversed in the 2nd quarter. To allocate entire ₹ 13,50,000 till third quarter to the
production, as per Ind AS 34, remaining ₹ 20,000 (₹ 50,000 – ₹ 30,000) will be reversed by way
of a credit to the statement of profit and loss of the 3 rd quarter and debit to the cost of
production / inventory cost.
Quarter IV:
Unallocated fixed production overheads ₹ 60,000 {i.e. ₹ 4,50,000 – (₹ 20 x 19,500)} in the 4th
quarter will be expensed off as per the principles of Ind AS 2 and Ind AS 34 by way of a charge
to the statement of profit and loss.
For the year:
The cumulative result of all the quarters would also result in unallocated overheads of ₹ 60,000,
thus, meeting the requirements of Ind AS 34 that the quarterly results should not affect the
measurement of the annual result.

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Chapter 29 : Earnings Per Share (IND AS 33)

CHAPTER 29
EARNINGS PER SHARE (IND AS 33)
Q10: At 30 June 20X1, the issued share capital of an entity consisted of 1,500,000 ordinary shares of ₹
1 each. On 1 October 20X1, the entity issued ₹ 1,250,000 of 8% convertible loan stock for cash at
par. Each ₹ 100 nominal of the loan stock may be converted, at any time during the years ended
20X6 to 20X9, into the number of ordinary shares set out below:
30 June 20X6: 135 ordinary shares;
30 June 20X7: 130 ordinary shares;
30 June 20X8: 125 ordinary shares; and
30 June 20X9: 120 ordinary shares.
If the loan stocks are not converted by 20X9, they would be redeemed at par.
The written equity conversion option is accounted for as a derivative liability and marked to
market through profit or loss. The change in the options’ fair value reported in 20X2 and 20X3
amounted to losses of ₹ 2,500 and ₹ 2,650 respectively. It is assumed that there are no tax
consequences arising from these losses.
The profit before interest, fair value movements and taxation for the year ended 30 June 20X2
and 20X3 amounted to ₹ 825,000 and ₹ 895,000 respectively and relate wholly to continuing
operations. The rate of tax for both periods is 33%.
Calculate Basic and Diluted EPS. [Exam JULY 2021 (8 Marks); MTP May 2023]
Ans: Calculation of Basic EPS
20X3 20X2
Trading results ₹ ₹
A. Profit before interest, fair value movements and tax 895,000 825,000
B. Interest on 8% convertible loan stock
(20X2: 9/12 × ₹100,000) (100,000) (75,000)
C. Change in fair value of embedded option (2,650) (2,500)
Profit before tax 792,350 747,500
Taxation @ 33% on (A-B) (262,350) (247,500)
Profit after tax 530,000 500,000
Calculation of basic EPS
Number of equity shares outstanding 1,500,000 1,500,000
Earnings ₹ 530,000 ₹ 500,000
Basic EPS 35 paise 33 paise
Calculation of diluted EPS
Test whether convertibles are dilutive:
The saving in after-tax earnings, resulting from the conversion of ₹ 100 nominal of loan stock,
amounts to ₹ 100 × 8% × 67% + ₹ 2,650/12,500 = ₹ 5.36 + ₹ 0.21 = ₹ 5.57.
There will then be 135 extra shares in issue.

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 Chapter 29 : Earnings Per Share (IND AS 33)

Therefore, the incremental EPS is 4 paise (ie. ₹ 5.57/135). As this incremental EPS is less than the
basic EPS at the continuing level, it will have the effect of reducing the basic EPS of 35 paise.
Hence the convertibles are dilutive.
Adjusted earnings 20X3 20X2
₹ ₹
Profit for basic EPS 530,000 500,000
Add: Interest and other charges on earnings saved
as a result of the conversion 102,650 77,500
(100,000 + 2,650) (75000+ 2500)
Less: Tax relief thereon (33,000) (24,750)
Adjusted earnings for equity 599,650 552,750
Adjusted number of shares
From the conversion terms, it is clear that the maximum number of shares issuable on conversion
of ₹ 1,250,000 loan stock after the end of the financial year would be at the rate of 135 shares
per ₹ 100 nominal (that is, 1,687,500 shares).
20X3 20X2
Number of equity shares for basic EPS 1,500,000 1,500,000
Maximum conversion at date of issue 1,687,500 × 9/12 – 1,265,625
Maximum conversion after balance sheet date 1,687,500 –
Adjusted capital 3,187,500 2,765,625
Adjusted earnings for equity ₹ 599,650 ₹ 552,750
Diluted EPS (approx.) 19 paise 20 paise
Note: Since Effective Interest Rate is not given, splitting of the convertible loan into liability and
equity components as envisaged under Ind AS 109 cannot be done. However, since fair values of
derivatives are given, the same is considered for accounting at FVTPL.
Q11: At 31 December 20X7 and 20X8, the issued share capital of an entity consisted of 4,000,000
ordinary shares of ₹ 25 each. The entity has granted options that give holders the right to
subscribe for ordinary shares between 20Y6 and 20Y9 at ₹ 70 per share. Options outstanding at
31 December 20X7 and 20X8 were 630,000. There were no grants, exercises or lapses of options
during the year. The profit after tax, attributable to ordinary equity holders for the years ended
31 December 20X7 and 20X8, amounted to ₹ 500,000 and ₹ 600,000 respectively (wholly relating
to continuing operations).
Average market price of share:
Year ended 31 December 20X7 = ₹ 120
Year ended 31 December 20X8 = ₹ 160
Calculate basic and diluted EPS.
Ans: Calculation of basic EPS
20X8 20X7
Profit after tax ₹ 600,000 ₹ 500,000
Number of shares 4,000,000 4,000,000
Basic EPS (approx.) 15 paise 13 paise.

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Chapter 29 : Earnings Per Share (IND AS 33)

Calculation of diluted EPS

Adjusted number of shares
Number of shares under option:
Issued at full market price:
(630,000 × 70) ÷ 160 275,625
(630,000 × 70) ÷ 120 367,500
Issued at nil consideration — dilutive 354,375 262,500
Total number of shares under option 630,000 630,000
Number of equity shares for basic EPS 4,000,000 4,000,000
Number of dilutive shares under option 354,375 262,500
Adjusted number of shares (A) 4,354,375 4,262,500
Profit after tax (B) ₹ 600,000 ₹ 500,000
Diluted EPS (B/A) 14 paise 12 paise
Note: If options had been granted or exercised during the period, the number of ‘nil
consideration’ shares in respect of these options would be included in the diluted EPS calculation
on a weighted average basis for the period prior to exercise.
Q12: Ordinary shares outstanding during 2001 10,00,000
An agreement related to a recent business combination provides for the issue of additional
ordinary shares based on the following conditions:
- 5,000 additional ordinary shares for each new retail site opened during 2001
- 1,000 additional ordinary shares for each ₹ 1,000 of consolidated profit in excess of ₹
20,00,000 for the year ended 31 December 2001
Retail sites opened during the year:
- one on 1 May 2001
- one on 1 September 2001
Consolidated year-to-date profit attributable to ordinary equity holders of the parent entity:
- ₹ 11,00,000 as of 31 March 2001
- ₹ 23,00,000 as of 30 June 2001
- ₹ 19,00,000 as of 30 September 2001 (including a ₹ 4,50,000 loss from a discontinued
operation)
- ₹ 29,00,000 as of 31 December 2001
Calculate basic and diluted EPS
Ans: Basic earnings per share

Basic earnings per share

First Second Third Fourth Full year
quarter quarter quarter quarter

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 Chapter 29 : Earnings Per Share (IND AS 33)

Numerator (₹ ) 1,100,000 1,200,000 (400,000) 1,000,000 2,900,000

Denominator:
Ordinary shares outstanding 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000
Retail site contingency – 3,3336 6,6677 10,000 5,0008
Earnings contingency9 – – – – –
Total shares 1,000,000 1,003,333 1,006,667 1,010,000 1,005,000
Basic earnings per share (₹ ) 1.10 1.20 (0.40) 0.99 2.89

6 5,000 shares × 2/3

7 5,000 shares + (5,000 shares × 1/3)
8 (5,000 shares × 8/12) + (5,000 shares × 4/12)
9 The earnings contingency has no effect on basic earnings per share because it is not certain
that the condition is satisfied until the end of the contingency period. The effect is negligible
for the fourth- quarter and full-year calculations because it is not certain that the condition
is met until the last day of the period.
Diluted earnings per share
First Second Third Fourth Full year
quarter quarter quarter quarter
Numerator (₹ ) 1,100,000 1,200,000 (400,000) 1,000,000 2,900,000
Denominator:
Ordinary shares outstanding 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000
Retail site contingency – 5,000 10,000 10,000 10,000
Earnings contingency –10 300,00011 –12 900,00013 900,000
Total shares 1,000,000 1,305,000 1,010,000 1,910,000 1,910,000
Diluted earnings per share (₹ ) 1.10 0.92 (0.40)14 0.52 1.52
10 Company A does not have year-to-date profit exceeding ₹ 2,000,000 at 31 March 20X1.
The Standard does not permit projecting future earnings levels and including the related
contingent shares.
11 [(₹ 2,300,000 – ₹ 2,000,000) ÷ 1,000] × 1,000 shares = 300,000 shares.
12 Year-to-date profit is less than ₹ 2,000,000.
13 [(₹ 2,900,000 – ₹ 2,000,000) ÷ 1,000] × 1,000 shares = 900,000 shares.
14 Because the loss during the third quarter is attributable to a loss from a discontinued
operation, the antidilution rules do not apply. The control number (ie profit or loss from,
continuing operations attributable to the equity holders of the parent entity) is positive.
Accordingly, the effect of potential ordinary shares is included in the calculation of diluted
earnings per share.
Q14: An entity issues 2,000 convertible bonds at the beginning of Year 1. The bonds have a three-year
term, and are issued at par with a face value of ₹ 1,000 per bond, giving total proceeds of ₹
20,00,000. Interest is payable annually in arrears at a nominal annual interest rate of 6 per cent.

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Chapter 29 : Earnings Per Share (IND AS 33)

Each bond is convertible at any time up to maturity into 250 ordinary shares. The entity has an
option to settle the principal amount of the convertible bonds in ordinary shares or in cash.
When the bonds are issued, the prevailing market interest rate for similar debt without a
conversion option is 9 per cent. At the issue date, the market price of one ordinary share is ₹ 3.
Income tax is ignored. Entity has accounted for the convertible instrument using the principles
of Financial Instruments.
Interest @ 9% for the year has already been adjusted in the profit attributable to shareholders.
Profit attributable to ordinary equity holders of the parent entity Year 1 ₹ 10,00,000
Ordinary shares outstanding ₹ 12,00,000
Convertible bonds outstanding 2,000
Calculate basic and diluted EPS when
Ans: Allocation of proceeds of the bond issue:
Liability component ₹ 303,755*
Equity component ₹1,696,245
₹ 20,00,000
The liability and equity components would be determined in accordance with Ind AS 32. These
amounts are recognised as the initial carrying amounts of the liability and equity components.
The amount assigned to the issuer conversion option equity element is an addition to equity and
is not adjusted.
*This represents the present value of the interest discounted at 9% – 120,000 payable annually
in arrears for three years. 2,000,000 assumed to be settled in equity since option is with the
entity will not form part of liability.
Basic earnings per share Year 1:
₹ 10,00,000 / 1,200,000 = ₹ 0.83 per ordinary share
Diluted earnings per share Year 1:
It is presumed that the issuer will settle the contract by the issue of ordinary shares. The dilutive
effect is therefore calculated as under.
[₹ 1,000,000 + Rs 27,3381] / [1,200,000 + 500,0002] = ₹ 0.60 per ordinary share
Note:
1. Profit is adjusted for the accretion of 27,338 (3,03,755 x 9%) of the liability because of
the passage of time.
2. 500,000 ordinary shares = 250 ordinary shares × 2,000 convertible bonds
Q18: CAB Limited is in the process of preparation of the consolidated financial statements of the group
for the year ending 31st March, 20X3 and the extract of the same is as follows:

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 Chapter 29 : Earnings Per Share (IND AS 33)

Attributable to Non-controlling Total (₹ in

Particulars
CAB Limited interest ‘000)
Profit for the year 39,000 3,000 42,000
Other Comprehensive Income 5,000 Nil 5,000
Total Comprehensive Income 44,000 3,000 47,000
The long-term finance of the company comprises of the following:
a. 20,00,00,000 equity shares at the beginning of the year and the company have issued
5,00,00,000 shares on 1st July, 20X2 at full market value.
b. 8,00,00,000 irredeemable preference shares. These shares were in issue for the whole of
the year ended 31st March, 20X3. The dividend on these preference shares is
discretionary.
c. ₹ 18 crores of 6% convertible debentures issued on 1st April, 20X1 and repayable on 31st
March, 20X5 at par. Interest is payable annually. As an alternative to repayment at par,
the holder on maturity can elect to exchange their convertible debentures for 10 crores
ordinary shares in the company. On 1st April, 20X1, the prevailing market interest rate for
four-year convertible debentures which had no right of conversion was 8%. Using an
annual discount rate of 8%, the present value of ₹1 payable in four years is 0.74 and the
cumulative present value of ₹ 1 payable at the end of years one to four is 3.31.
In the year ended 31st March, 20X3, CAB Limited declared an ordinary dividend of 0.10 paise per
share and a dividend of 0.05 paise per share on the irredeemable preference shares.
Compute the following:
a. The finance cost of convertible debentures and its closing balance as on 31st March,
20X3 to be presented in the consolidated financial statements.
b. The basic and diluted earnings per share for the year ended 31 st March, 20X3. Assume
that income tax is applicable to CAB Limited and its subsidiaries at 25%.
[RTP May 2020; Exam Nov 22 (8 Marks)]
Ans: Calculation of the liability and equity components on 6% Convertible debentures:
Present value of principal payable at the end of 4th year (₹ 1,80,000 thousand x 0.74) = ₹ 1,33,200
thousand
Present value of interest payable annually for 4 years (₹ 1,80,000 thousand x 6% x 3.31) = ₹ 35,748
thousand
Total liability component = ₹ 1,68,948 thousand
Therefore, equity component = ₹ 1,80,000 thousand – ₹ 1,68,948 thousand
= ₹ 11,052 thousand
Calculation of finance cost and closing balance of 6% convertible debentures

Opening balance Finance cost Interest paid Closing balance

Year
₹ in ’000 @ 8% @ 6% ₹ in ’000

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Chapter 29 : Earnings Per Share (IND AS 33)

₹ in ’000 ₹ in ’000

a b = a x 8% c d=a+b-c
31.3.20X2 1,68,948 13,515.84 10,800 1,71,663.84
31.3.20X3 1,71,663.84 13,733.11 10,800 1,74,596.95
Finance cost of convertible debentures for the year ended 31.3. 20X3 is ₹ 13,733.11 thousand
and closing balance as on 31.3. 20X3 is ₹ 1,74,596.95 thousand.
Calculation of Basic EPS ₹ in ’000

Profit for the year 39,000

Less: Dividend on preference shares (80,000 thousand x ₹ 0.05) (4,000)
Profit attributable to equity shareholders 35,000
Weighted average number of shares = 20,00,00,000 + {5,00,00,000 x (9/12)}
= 23,75,00,000 shares or 2,37,500 thousand shares
Basic EPS = ₹ 35,000 thousand / 2,37,500 thousand shares = ₹ 0.147
Calculation of Diluted EPS ₹ in ’000
Profit for the year 39,000
Less: Dividend on preference shares (80,000 x 0.05) (4,000)
35,000
Add: Finance cost (as given in the above table) 13,733.11
Less: Tax @ 25% (3,433.28) 10,299.83
45,299.83
Weighted average number of shares
= 20,00,00,000 + {5,00,00,000 x (9/12)} + 10,00,00,000
= 33,75,00,000 shares or 3,37,500 thousand shares
Diluted EPS = ₹ 45,299.83 thousand / 3,37,500 thousand shares = ₹ 0.134
Q20 The following information is available relating to Space India Limited for the Financial Year 2019-
2020.

Net profit attributable to equity shareholders ₹ 90,000

Number of equity shares outstanding 16,000
Average fair value of one equity share during the year ₹ 90

Potential Ordinary Shares:

Options 900 options with exercise price of ₹ 75
Convertible Preference Shares 7,500 shares entitled to a cumulative dividend
of ₹ 9 per share. Each preference share is

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 Chapter 29 : Earnings Per Share (IND AS 33)

convertible into 2 equity shares.

Applicable corporate dividend 8%
tax
10% Convertible Debentures of ₹ 10,00,000 and each debenture is
₹ 100 each convertible into 4 equity shares
Tax rate 25%

You are required to compute Basic and Diluted EPS of the company for the Financial Year 2019-
2020. [Exam Nov 2020 (8 Marks); MTP May 22]

Ans. (i) Basic Earnings per share

Year ended
31.3.2020
Net profit attributable to equity shareholders (A) ₹ 90,000
Number of equity shares outstanding (B) 16,000
Earnings per share (A/B) ₹ 5.625

(ii) Diluted earnings per share

Options are most dilutive as their earnings per incremental share is nil. Hence, for
the purpose of computation of diluted earnings per share, options will be
considered first. 10% convertible debentures being second most dilutive will be
considered next and thereafter convertible preference shares will be considered
(as per W.N.).
Net profit No. of Net Profit
attributable to equity attributable
equity shares per share
shareholders ₹
₹
Net profit attributable to 90,000 16,000 5.625
equity shareholders
Options 150
90,000 16,150 5.572 Dilutive
10% Convertible debentures 75,000 40,000
1,65,000 56,150 2.939 Dilutive
Convertible Preference 72,900 15,000
Shares
2,37,900 71,150 3.344 Anti-

P a g e | 29.8
Chapter 29 : Earnings Per Share (IND AS 33)

Dilutive

Since diluted earnings per share is increased when taking the convertible
preference shares into account (₹ 2.939 to ₹ 3.344), the convertible preference
shares are anti- dilutive and are ignored in the calculation of diluted earnings per
share for the year ended 31 March 2020. Therefore, diluted earnings per share for
the year ended 31 March 2020 is ₹ 2.939.

Working Note:

Calculation of incremental earnings per share and allocation of rank

Increase Increase in Earnings per Rank
in number of incremental
earnings equity shares share (3) = (1)
(2) ÷ (2)
(1)
₹ ₹
Options
Increase in earnings Nil
No. of incremental shares
issued for no 150 Nil 1
consideration
[900 x (90-75)/90]
Convertible Preference Shares
Increase in net profit 72,900
attributable to equity
shareholders as adjusted
by attributable dividend
tax
[(₹ 9 x 7,500) + 8% (₹ 9 x
7,500)]
No. of incremental shares 15,000 4.86 3
(2 x 7,500)
10% Convertible Debentures
Increase in net profit 75,000
[(₹ 10,00,000 x 10% x (1 –
0.25)]
No. of incremental shares 40,000 1.875 2
(10,000 x 4)

P a g e | 29.9
 Chapter 29 : Earnings Per Share (IND AS 33)

Note: Grossing up of preference share dividend has been ignored here. At present dividend
distribution tax has been abolished. However, the question has been solved on the basis of the
information given in the question.

Q25: Company S is a subsidiary of Company P. Following facts are in respect of Company S:

• Company S has 10,000 ordinary shares and 1,000 options outstanding, of which Company
P owns 9,000 shares and 500 options, respectively.

• The options have an exercise price of ₹ 40.

• The average market price of Company S’s ordinary share was ₹ 50 in 20X1.

• In 20X1, Company S’s profit was ₹ 30,000. Following facts are in respect of Company P:

• Company P has 5,000 ordinary shares outstanding.

• In 20X1, Company P’s profit (excluding any distributed and undistributed earnings of
subsidiaries) was ₹ 7,000.

• The options outstanding are dilutive at P’s level.

Determine the diluted EPS of Company P for the year 20X1. Ignore income tax. [RTP Nov 2022]

Ans: To determine the diluted EPS of Company P, the diluted EPS of Company S has to be calculated
first.

Calculation of Company S’s diluted EPS:

Company S’s earnings for the period ₹ 30,000

Weighted average ordinary shares 10,000

Incremental shares (refer W.N.) 200

Company S’s diluted EPS ₹ 30,000 / (10,000 + 200) = ₹ 2.94

Calculation of Company P’s diluted EPS:

Company P’s earning for the period ₹ 7,000

Company P’s share of Company S’s earning attributable to ordinary shares ₹ 26,460

[(9,000 /10,000) x (2.94 x 10,000)]

Company P’s share of Company S’s earning attributable to options ₹ 294

[(500 /1,000) x (2.94 x 200)]

Company P’s weighted average ordinary shares outstanding 5,000

Company P’s diluted EPS = (7,000 + 26,460 + 294) / 5,000 ₹ 6.75

Working Note:

P a g e | 29.10
Chapter 29 : Earnings Per Share (IND AS 33)

Computation of Incremental shares related to weighted average options outstanding:

All options are dilutive because their exercise price is below the average market price of Company
S’s ordinary shares for the period.

The incremental shares are calculated as follows:

Shares issued on assumed exercise of options 1,000
Less: Shares that would be issued at average market Price [(40 x 1,000)/50] (800)
Incremental shares 200

Q26: Company P has both ordinary shares and equity-classified preference shares in issue. The
reconciliation of the number of shares during Year 1 is set out below:
Number of shares
Dates in Transaction Ordinary Treasury Preference
Year 1 shares shares shares
1st April Balance 30,00,000 (5,00,000) 5,00,000
15th April Bonus issue – 5% (no corresponding 1,50,000 (25,000) -
changes in resources)
1st May Repurchase of shares for cash - (2,00,000) -
1st Shares issued for cash 4,00,000 - -
November
31st March Balance 35,50,000 (7,25,000) 5,00,000
The following additional information is relevant for Year 1.
- Company P’s net profit for the year is ₹ 46,00,000.
- On 15th February, non-cumulative preference dividends of ₹ 1.20 per share were declared.
The dividends were paid on 15th March. Preference shares do not participate in additional
dividends with ordinary shares.
- Dividends on non-cumulative preference shares are deductible for tax purposes. The
applicable income tax rate is 30%.
The financial year of Company P ends on 31st March.
Determine the Basic EPS of the Company P for Year 1. Use the number of months or part of
months, rather than the number of days in the calculation of EPS. [RTP May 2023]
Ans: Determination of numerator for calculation of Basic EPS
The first step in the basic EPS calculation is to determine the profit or loss that is attributable to
ordinary shareholders of Company P for the period.
Non-cumulative dividends paid on equity-classified preference shares are not deducted in
arriving at net profit or loss for the period, but they are not returns to ordinary shareholders.
Accordingly, these dividends are deducted from net profit or loss for the period in arriving at the
numerator.

P a g e | 29.11
 Chapter 29 : Earnings Per Share (IND AS 33)

(₹)
Net profit 46,00,000
Preference dividends (5,00,000 shares x 1.2) (6,00,000)
Related tax (₹ 6,00,000 x 30%) 1,80,000 (4,20,000)
Profit or loss attributable to P’s ordinary shareholders 41,80,000
Accordingly, the numerator for calculation of Basic EPS is ₹ 41,80,000
Determination of denominator for calculation of Basic EPS
The second step in the basic EPS calculation is to determine the weighted-average number of
ordinary shares outstanding for the reporting period.
Number of shares Time Weight Weighted
weighting average number
of shares
1st April – opening balance (30,00,000 – 5,00,000) 25,00,000 1
15th April – bonus issue (1,50,000 – 25,000) 1,25,000
1st April to 30th April 26,25,000 1/12 2,18,750
1st May – repurchase of shares (2,00,000)
1st May to 31st October 24,25,000 6/12 12,12,500
1st November – new shares issued 4,00,000
1st November to 31st March 28,25,000 5/12 11,77,083
Weighted average number of shares for the year 26,08,333
The denominator for calculation of Basic EPS is 26,08,333 shares.
Basic EPS = ₹ 41,80,000 / 26,08,333 shares = ₹ 1.60 per share (approx.).

P a g e | 29.12
Chapter 30 : First-Time Adoption of IND As (IND AS 101)

CHAPTER 30
FIRST-TIME ADOPTION OF IND AS (IND AS 101)
Q20: On April 1, 20X1, Sigma Ltd. issued 30,000 6% convertible debentures of face value of ₹ 100 per
debenture at par. The debentures are redeemable at a premium of 10% on 31 March 20X5 or
these may be converted into ordinary shares at the option of the holder. The interest rate for
equivalent debentures without conversion rights would have been 10%. The date of transition
to Ind AS is 1 April 20X3. Suggest how should Sigma Ltd. account for this compound financial
instrument on the date of transition. The present value of ₹ 1 receivable at the end of each year
based on discount rates of 6% and 10% can be taken as:

End of year 6% 10%

1 0.94 0.91
2 0.89 0.83
3 0.84 0.75
4 0.79 0.68

[MTP May 2022]

Ans: The carrying amount of the debenture on the date of transition under previous GAAP, assuming
that all interest accrued other than premium on redemption have been paid, will be ₹
31,50,000 [(30,000 x 100) + (30,000 x 100 x 10/100 x 2/4)]. The premium payable on
redemption is being recognised as borrowing costs as per para 4(b) of AS 16 ie under previous
GAAP on straight-line basis.
As per para D18 of Ind AS 101, Ind AS 32, Financial Instruments: Presentation, requires an entity
to split a compound financial instrument at inception into separate liability and equity
components. If the liability component is no longer outstanding, retrospective application of
Ind AS 32 would involve separating two portions of equity. The first portion is recognised in
retained earnings and represents the cumulative interest accreted on the liability component.
The other portion represents the original equity component. However, in accordance with this
Ind AS, a first-time adopter need not separate these two portions if the liability component is
no longer outstanding at the date of transition to Ind AS.
In the present case, since the liability is outstanding on the date of transition, Sigma Ltd. will
need to split the convertible debentures into debt and equity portion on the date of transition.
Accordingly, we will first measure the liability component by discounting the contractually
determined stream of future cash flows (interest and principal) to present value by using the
discount rate of 10% p.a. (being the market interest rate for similar debentures with no
conversion option).

(₹)
Interest payments p.a. on each debenture 6
Present Value (PV) of interest payment for years 1 to 4 (6 3.17) (Note 1) 19.02

P a g e | 30.1
 Chapter 30 : First-Time Adoption of IND As (IND AS 101)

PV of principal repayment (including premium) 110 0.68 (Note 2) 74.80

Total liability component per debenture 93.82
Equity component per debenture (Balancing figure) 6.18
Face value of debentures 100.00
Total equity component for 30,000 debentures 1,85,400
Total debt amount (30,000 x 93.82) 28,14,600
Thus, on the date of initial recognition, the amount of ₹ 30,00,000 being the amount of
debentures will be split as under:

Debt ₹ 28,14,600
Equity ₹ 1,85,400

However, on the date of transition, unwinding of ₹ 28,14,600 will be done for two years as
follows:

Year Opening Finance cost Interest Closing

balance @ 10% paid balance
1 28,14,600 2,81,460 1,80,000 29,16,060
2 29,16,060 2,91,606 1,80,000 30,27,666
Therefore, on transition date, Sigma Ltd. shall –
 recognise the carrying amount of convertible debentures at ₹ 30,27,666;
 recognise equity component of compound financial instrument of ₹ 1,85,400;
 debit ₹ 63,066 to retained earnings being the difference between the previous GAAP
amount of ₹ 31,50,000 and ₹ 30,27,666 and the equity component of compound
financial instrument of ₹ 1,85,400; and
 derecognise the debenture liability in previous GAAP of ₹ 31,50,000.
Notes:
3.17 is present value of annuity factor of ₹ 1 at a discount rate of 10% for 4 years.
On maturity, ₹ 110 will be paid (₹ 100 as principal payment + ₹ 10 as premium)
Q27: Government of India provides loans to MSMEs at a below-market rate of interest to fund the
set-up of a new manufacturing facility. Sukshma Limited's date of transition to Ind AS is 1st
April 2020.
In financial year 2014-2015, the Company had received a loan of ₹ 2.0 crore at a below - market
rate of interest from the government. Under Indian GAAP, the Company had accounted for the
loan as equity and the carrying amount was ₹ 2.0 crore at the date of transition. The amount
repayable on 31st March 2024 will be ₹ 2.50 crore.
The Company has been advised to recognize the difference of ₹ 0.50 crores in equity by
correspondingly increasing the value of various assets under property, plant & equipment by an

P a g e | 30.2
Chapter 30 : First-Time Adoption of IND As (IND AS 101)

equivalent amount on proportionate basis. Further, on 31st March 2024 when the loan has to
be repaid, ₹ 2.50 crore should be presented as a deduction from property, plant & equipment.
Discuss the above treatment and share your views as per applicable Ind AS.
[Exam July 2021 (6 Marks); MTP May 2023]
Ans: Requirement as per Ind AS:
A first-time adopter shall classify all government loans received as a financial liability or an
equity instrument in accordance with Ind AS 32. A first-time adopter shall apply the
requirements in Ind AS 109 and Ind AS 20, prospectively to government loans existing at the
date of transition to Ind AS and shall not recognise the corresponding benefit of the
government loan at a below-market rate of interest as a government grant.
Treatment to be done:
Consequently, if a first-time adopter did not, under its previous GAAP, recognise and measure a
government loan at a below-market rate of interest on a basis consistent with Ind AS
requirements, it shall use its previous GAAP carrying amount of the loan at the date of
transition to Ind AS as the carrying amount of the loan in the opening Ind AS Balance Sheet. An
entity shall apply Ind AS 109 to the measurement of such loans after the date of transition to
Ind AS.
In the instant case, the loan meets the definition of a financial liability in accordance with Ind
AS 32. Company therefore reclassifies it from equity to liability. It also uses the previous GAAP
carrying amount of the loan at the date of transition as the carrying amount of the loan in the
opening Ind AS balance sheet.
It calculates the annual effective interest rate (EIR) starting 1st April 2020 as below: EIR =
Amount / Principal(1/t) i.e. 2.50/2(1/4) i.e. 5.74%. approx.
At this rate, ₹ 2 crore will accrete to ₹ 2.50 crore as at 31st March 2024.
During the next 4 years, the interest expense charged to statement of profit and loss shall be:
Year ended Opening Interest expense for the Closing
amortised cost year (₹) @ 5.74% p.a. amortised cost
(₹) approx. (₹)
31st March 2021 2,00,00,000 11,48,000 2,11,48,000
31st March 2022 2,11,48,000 12,13,895 2,23,61,895
31st March 2023 2,23,61,895 12,83,573 2,36,45,468
31st March 2024 2,36,45,468 13,54,532 2,50,00,000

An entity may apply the requirements in Ind AS 109 and Ind AS 20 retrospectively to any
government loan originated before the date of transition to Ind AS, provided that the
information needed to do so had been obtained at the time of initially accounting for that loan.
The accounting treatment is to be done as per above guidance and the advice which the
company has been provided is not in line with the requirements of Ind AS 101.

P a g e | 30.3
 Chapter 30 : First-Time Adoption of IND As (IND AS 101)

Q29: Rainy Pvt Ltd. is a company registered under the Companies Act, 2013 following Accounting
Standards notified under the Companies (Accounting Standards) Rules, 2006. The company has
decided to present its first financials under Ind AS for the year ended 31st March, 2021. The
transition date is 1st April, 2019.

The following adjustments were made upon transition to Ind AS:

(i) The company opted to fair value its land as on the date on transition. The fair value of
the land as on 1st April, 2019 was ₹ 95 lakh. The carrying amount as on 1st April, 2019
under the existing GAAP was ₹ 42.75 lakh.

(ii) The company has recognised a provision for proposed dividend of ₹ 5.7 lakh and related
dividend distribution tax of ₹ 1.65 lakh during the year ended 31st March, 2019. It was
written back as on opening balance sheet date.

(iii) The company had a non-integral foreign branch in accordance with AS 11 and had
recognised a balance of ₹ 2 lakh as part of reserves. On first time adoption of Ind AS, the
company intends to avail Ind AS exemption of resetting the cumulative translation
difference to zero.

(iv) The company had made an investment in subsidiary for ₹ 18.62 lakh that carried a fair
value of ₹ 25.75 lakh as at the transition date. The company intends to recognise the
investment at its fair value as at the date of transition.

(v) The company has an Equity Share Capital of ₹ 760 lakh and Redeemable Preference
Share Capital of ₹ 180 lakh. The company identified that the preference shares were in
nature of financial liabilities.

(vi) The Reserves and Surplus as on 1st April, 2019 before transition to lnd AS was ₹ 910 lakh
representing ₹ 380 lakh of general reserve and ₹ 40 lakh of Capital Reserve acquired out
of business combination and balance is surplus in the Retained Earnings.

What is the balance of total equity (Equity and other equity) as on 1st April, 2019 after
transition to Ind AS? Show reconciliation between Total Equity as per AS (Accounting
Standards) and as per lnd AS to be presented in the opening balance sheet as on 1st April,
2019. Ignore deferred tax impact. [Exam Dec 21 (8 Marks); MTP Nov 2023]

Ans: Computation of balance total equity as on 1st April, 2019 after transition to Ind AS
₹ in lakh
Share capital- Equity share Capital 760.00
Other Equity
General Reserve 380.00
Capital Reserve 40.00
Retained Earnings (910.00 – 380.00 – 40.00) 490.00
Add: Increase in value of land (95.00 – 42.75) 52.25
Add: Derecognition of proposed dividend (5.70 + 1.65) 7.35
Add: Transfer of cumulative translation difference
balance to retained earnings 2.00
Add: Increase in value of Investment (25.75 – 18.62) 7.13 558.73 978.73

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Chapter 30 : First-Time Adoption of IND As (IND AS 101)

Balance total equity as on 1st April, 2019 after transition 1,738.73

to Ind AS

Reconciliation between Total Equity as per AS and Ind AS to be presented in the opening
balance sheet as on 1st April, 2019
₹ in lakh
Equity share capital 760.00
Redeemable Preference share capital 180.00
940.00
Reserves and Surplus 910.00
Total Equity as per AS 1,850.00
Adjustment due to reclassification:
Preference share capital classified as financial liability (180.00)
Adjustment due to de-recognition:
Proposed dividend not considered as liability as on 1st April, 2019
7.35
Adjustment due to re-measurement:
Increase in the value of Land due to re-measurement at fair value 52.25
Resetting of cumulative translation difference balance to zero in Ind
AS Transition date Balance Sheet 2.00
Increase in the value of investment due to re-measurement at fair 7.13 61.38
value
Equity as on 1st April, 2019 after transition to Ind AS 1,738.73

Q31: On 1st April 20X1, Nuogen Ltd. had granted 1,20,000 share options to its employees with the
vesting condition being a service condition as follows:

• Vesting date : 31st March 20X2 - 80,000 share options (1-year vesting period since grant
date)

• Vesting date : 31st March 20X5 - 40,000 share options (4-year vesting period since grant
date)

Each option can be converted into one equity share of Nuogen Ltd. The fair value of the options
on grant date, i.e., on 1st April 20X1 was ₹ 20.

Nuogen Ltd. is required to prepare financial statements in Ind AS for the financial year ending
31st March 20X4. The transition date for Ind AS being 1st April 20X2.

The entity has disclosed publicly the fair value of both these equity instruments as determined
at the measurement date, as defined in Ind AS 102.

The previous applicable GAAP for the entity was IGAAP (AS) and therein, the entity had not
adopted intrinsic method of valuation.

The share options have not been yet exercised by the employees of Nuogen Ltd.

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 Chapter 30 : First-Time Adoption of IND As (IND AS 101)

How the share based payment should be reflected in, the books of Nuogen Ltd. as on 31st
March 20X4, assuming that the entity has erred by not passing any entry for the
aforementioned transactions in the books of Nuogen Ltd. on grant date, i.e. 1st April 20X1?

[RTP Nov 2022]

Ans: For 80,000 share-based options vested before transition date:

Ind AS 101 provides that a first-time adopter is encouraged, but not required, to apply Ind AS
102 on ‘Share-based Payment’ to equity instruments that vested before the date of transition
to Ind AS. Hence, Nuogen Ltd. may opt for the exemption given in Ind AS 101 for 80,000 share
options vested before the transition date. However, since no earlier accounting was done for
these share-based options under previous GAAP too, therefore this led to an error on the
transition date, as detected on the reporting date i.e. 31st March, 20X4. Hence, being an error,
no exemption could be availed by Nuogen Ltd. on transition date with respect to Ind AS 102.

While preparing the financial statements for the financial year 20X3 -20X4, an error has been
discovered which occurred in the year 20X1 -20X2, i.e., for the period which was earlier than
earliest prior period presented. The error should be corrected by restating the opening
balances of relevant assets and/or liabilities and relevant component of equity for the year
20X2-20X3. This will result in consequential restatement of balances as at 1st April, 20X2 (i.e,
opening balance sheet as at 1st April, 20X2).

Accordingly, on retrospective calculation of Share based options with respect to 80,000 options,
Nuogen Ltd. will create ‘Share based payment reserve (equity)’ by ₹ 16,00,000 and
correspondingly adjust the same though Retained earnings.

For 40,000 share based options to be vested on 31st March, 20X5:

Since share-based options have not been vested before transition date, no option as per Ind AS
101 is available to Nuogen Ltd. The entity will apply Ind AS 102 retrospectively. However,
Nuogen Ltd. did not account for the same at the grant date. This will result in consequential
restatement of balances as at 1st April, 20X2 (i.e, opening balance sheet as at 1st April, 20X2).
Adjustment is to be made by recognising the ‘ Share based payment reserve (equity)’ and
adjusting the retained earnings by ₹ 2,00,000.

Further, expenses for the year ended 31st March, 20X3 and share based payment reserve
(equity) as at 31st March, 20X3 were understated because of non-recognition of ‘employee
benefits expense’ and related reserve. To correct the above errors in the annual financial
statements for the year ended 31st March, 20X4, the entity should restate the comparative
amounts (i.e., those for the year ended 31 st March, 20X3) in the statement of profit and loss.
In the given case, ‘Share based payment reserve (equity)’ would be credited by ₹ 2,00,000 and
‘employee benefits expense’ would be debited by ₹ 2,00,000

For the year ending 31st March, 20X4, ‘Share based payment reserve (equity)’ would be
credited by ₹ 2,00,000 and ‘employee benefits expense’ would be debited by ₹ 2,00,000.

Working Note:
Period Lot Proportion Fair value Cumulative Expenses

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Chapter 30 : First-Time Adoption of IND As (IND AS 101)

expenses
a b d= b x a e = d-PY d
20X1-20X2 1 (1-year vesting 1/1 16,00,000 16,00,000 16,00,000
period)
20X1-20X2 2 (4-year vesting 1/4 8,00,000 2,00,000 2,00,000
period)
20X2-20X3 2 (4-year vesting 2/4 8,00,000 4,00,000 2,00,000
period)
20X3-20X4 2 (4-year vesting 3/4 8,00,000 6,00,000 2,00,000
period)
Q35: G Ltd. operates oil exploration and production facilities. It is preparing its transition date
opening balance sheet as per Ind AS. G Ltd. has four assets, each in a different class under
property, plant & equipment.
Assets 1 and 2 are revalued under previous GAAP (AS). Assets 3 and 4 are not. Under previous
GAAP, at 31st March 20X1, immediately prior to the entity's date of transition to Ind AS, it
Balance Sheet (extract) is as follows:

Asset 1 Asset 2 Asset 3 Asset 4 Total

Valuation Valuation Cost Cost
₹ ₹ ₹ ₹ ₹
Cost or revaluation 5,000 2,000 4,000 4,500 15,500
Accumulated deprecation (1,000) (500) (2,000) (1,700) (5,200)
Net book value 4,000 1,500 2,000 2,800 10,300
Revaluation surplus 2,500 500 - - 3,000
On adoption of Ind AS, its management decides that, under Ind AS, it will:
o Continue to revalue asset 1. The fair value of asset 1 at the date of transition is not
materially different from its carrying value under previous GAAP;
o Use the previous valuation of asset 2 as deemed cost, and adopt a policy of cost less
depreciation under Ind AS;
o Adopt a policy of revaluation for asset 3. The fair value of asset 3 at the entity's date of
transition is ₹ 5,000;
o Continue to use a policy of cost less depreciation for asset 4.
All depreciation methods are already in accordance with those required by Ind AS 16.
Discuss the treatment under Ind AS of valuation of assets 1, 2, 3 & 4, being part of property,
plant & equipment? [MTP May 2022]
Ans: Measurement basis for valuation of PPE: An entity has the following options with respect to
measurement of its property, plant and equipment (Ind AS 16) in the opening Ind AS Balance
Sheet:

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 Chapter 30 : First-Time Adoption of IND As (IND AS 101)

 Measurement basis as per the respective standards applied retrospectively. This

measurement option can be applied on an item-by-item basis. For example, Plant A can
be measured applying Ind AS 16 retrospectively and Plant B can be measured applying the
“fair value” or “revaluation” options mentioned below.
 Fair value at the date of transition to Ind AS. This measurement option can be applied on
an item-by-item basis in similar fashion as explained above.
 Previous GAAP revaluation, if such revaluation was, at the date of revaluation, broadly
comparable to (a) fair value or (b) cost or depreciated cost in accordance with other Ind
AS adjusted to reflect changes in general or specific price index. This measurement option
can be applied on an item-by-item basis in similar fashion as explained above.
Analysis of given case:

Asset 1 Asset 2 Asset 3 Asset 4

Basis used in Revaluation Revaluation Cost Model Cost Model
previous GAAP Model Model

Intent of G Ltd. on To continue with Use previous Adopt a policyof Continue to use a
transition Revaluation valuation as revaluation policy of cost less
model deemed cost depreciation

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Chapter 30 : First-Time Adoption of IND As (IND AS 101)

Treatment at the Since fair value An entity may Fair value at the The entity is not
Time of transition to Ind at the transition elect to measure date of transition availing any
AS date is not an item of to Ind AS is exemption given in
materially property, plant materially Ind AS 101. The
different from its and equipment at different from its entity can measure
carrying value the date of carrying Value applying Ind AS 16
under previous transition to Ind under previous retrospectively. It
GAAP, G Ltd. AS at its fair value GAAP. The asset is assumed that
Can carry and use that should be measurement bases
Forward with fairvalue as its revalued and for cost of asset
revalued deemed cost at stated at its fair as per previous
carrying value ₹ that date. In Ind value of ₹ 5,000 GAAP and Ind AS
4,000 as per AS financial on the date of are same so asset
previous GAAP statements, asset transition to Ind will be shown in
in Ind AS books will be carried AS. the Ind AS financial
and continue to forward at ₹ 1,500 statements at
A revaluation
disclose a and previously ₹ 2,800.
surplus of ₹
revaluation disclosed 3,000 (5,000
surplus of revaluation – 2,000) will be
₹ 2,500. surplus is transferred to
transferred to revaluation
retained earnings reserve.
or another
component of
equity.

P a g e | 30.9
Chapter 31 : Fair Value Measurement (IND AS 113)

CHAPTER 31
FAIR VALUE MEASUREMENT (IND AS 113)
Q6: UK Ltd. is in the process of acquisition of shares of PT Ltd. as part of business reorganization
plan. The projected free cash flow of PT Ltd. for the next 5 years are as follows:
(₹ in crore)
Particulars Year 1 Year 2 Year 3 Year 4 Year 5
Cash flows 187.1 187.6 121.8 269 278.8
Terminal Value 3,965
The weightage average cost of capital of PT Ltd. is 11%. The total debt as on measurement date
is ₹ 1,465 crore and the surplus cash & cash equivalent is ₹ 106.14 crore.
The total numbers of shares of PT Ltd. as on the measurement date is 8,52,84,223 shares.
Determine value per share of PT Ltd. as per Income Approach. [Exam Nov 22 (5 Marks)]
Ans:
Determination of equity value of (in
PT Ltd. crore)
Particulars Year 1 Year 2 Year 3 Year 4 Year 5
Cash flows 187.1 187.6 121.8 269 278.8
Terminal Value 3,965
Discount rate 0.9009 0.8116 0.7312 0.6587 0.5935
Free Cash Flow
available to the firm 168.56 152.26 89.06 177.19 2,518.69
Total of all years 3,105.76
Less: Debt (1,465)
Add: Cash & Cash equivalent 106.14
Equity Value of PT Ltd. 1,746.90
No. of Shares 85,284,223
Per Share Value 204.83
Q7: You are a senior consultant of your firm and are in process of determining the valuation of KK
Ltd. You have determined the valuation of the company by two approaches i.e. Market
Approach and Income approach and selected the highest as the final value. However, based
upon the discussion with your partner you have been requested to assign equal weights to both
the approaches and determine a fair value of shares of KK Ltd. The details of the KK Ltd. are as
follows:
Particulars ₹ in crore
Valuation as per Market Approach 5268.2
Valuation as per Income Approach 3235.2
Debt obligation as on Measurement date 1465.9

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Surplus cash & cash equivalent 106.14

Fair value of surplus assets and Liabilities 312.4
Number of shares of KK Ltd. 8,52,84,223 shares
Determine the Equity value of KK Ltd. as on the measurement date on the basis of above details
[Exam Dec 21 (4 Marks); MTP May 2024]
Ans: Equity Valuation of KK Ltd
Particulars Weights (₹ in crore)
As per Market Approach 50 5268.2
As per Income Approach 50 3235.2
Enterprise Valuation based on weights (5268.2 x 50%) + (3235.2 4,251.7
x 50%)
Less: Debt obligation as on measurement date (1465.9)
Add: Surplus cash & cash equivalent 106.14
Add: Fair value of surplus assets and liabilities 312.40
Enterprise value of KK Ltd. 3204.33
No. of shares 85,284,223
Value per share 375.72

Q9: On 1st January, 20X1, A Ltd assumes a decommissioning liability in a business combination. The
reporting entity is legally required to dismantle and remove an offshore oil platform at the end
of its useful life, which is estimated to be 10 years. The following information is relevant:

If A Ltd was contractually allowed to transfer its decommissioning liability to a market

participant, it concludes that a market participant would use all of the following inputs,
probability weighted as appropriate, when estimating the price it would expect to receive:

Labour costs

a) Labour costs are developed based on current marketplace wages, adjusted for
expectations of future wage increases, required to hire contractors to dismantle and
remove offshore oil platforms. A Ltd. assigns probability to a range of cash flow estimates
as follows:
Cash Flow Estimates: 100 Cr 125 Cr 175 Cr
Probability: 25% 50% 25%

b) Allocation of overhead costs:

Assigned at 80% of labour cost

c) The compensation that a market participant would require for undertaking the activity
and for assuming the risk associated with the obligation to dismantle and remove the
asset. Such compensation includes both of the following:

1) Profit on labour and overhead costs:

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A profit mark-up of 20% is consistent with the rate that a market participant would
require as compensation for undertaking the activity

2) The risk that the actual cash outflows might differ from those expected, excluding
inflation:

A Ltd. estimates the amount of that premium to be 5% of the expected cash flows.
The expected cash flows are ‘real cash flows’ / ‘cash flows in terms of monetary
value today’.

d) Effect of inflation on estimated costs and profits

A Ltd. assumes a rate of inflation of 4 percent over the 10 -year period based on available
market data.

e) Time value of money, represented by the risk-free rate: 5%

f) Non-performance risk relating to the risk that Entity A will not fulfill the obligation,
including A Ltd.’s own credit risk: 3.5%.

A Ltd, concludes that its assumptions would be used by market participants. In addition, A Ltd.
does not adjust its fair value measurement for the existence of a restriction preventing it from
transferring the liability.

You are required to calculate the fair value of the asset retirement obligation.

[RTP Nov 2021]

Ans:
Particulars Workings Amount
(In Cr)
Expected Labour Cost (Refer W.N.) 131.25
Allocated Overheads (80% x 131.25 Cr) 105.00
Profit markup on Cost (131.25 + 105) x 20% 47.25
Total Expected Cash Flows before inflation 283.50
Inflation factor for next 10 years (4%) (1.04)10 =1.4802
Expected cash flows adjusted for inflation 283.50 x 1.4802 419.65
Risk adjustment - uncertainty relating to cash (5% x 419.65) 20.98
flows
Total Expected Cash Flows (419.65+20.98) 440.63
Discount rate to be considered = risk-free rate +
entity’s non-performance risk 5% + 3.5% 8.5%
Expected present value at 8.5% for 10 years (440.63 / (1.08510)) 194.88

Working Note:
Expected labour cost:

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Cash Flows Estimates Probability Expected Cash Flows

100 Cr 25% 25.00 Cr

125 Cr 50% 62.50 Cr

175 Cr 25% 43.75 Cr

Total 131.25 Cr

Q10:
(i) Entity A owns 250 ordinary shares in company XYZ, an unquoted company. Company XYZ has a
total share capital of 5,000 shares with nominal value of ₹ 10. Entity XYZ’s after-tax
maintainable profits are estimated at ₹ 70,000 per year. An appropriate price/earnings ratio
determined from published industry data is 15 (before lack of marketability adjustment). Entity
A’s management estimates that the discount for the lack of marketability of company XYZ’s
shares and restrictions on their transfer is 20%. Entity A values its holding in company XYZ’s
shares based on earnings. Determine the fair value of Entity A’s investment in XYZ’s shares.
(ii) Based on the facts given in the aforementioned part (i), assume that, Entity A estimates the fair
value of the shares it owns in company XYZ using a net asset valuation technique. The fair value
of company XYZ’s net assets including those recognised in its balance sheet and those that are
not recognised is ₹ 8,50,000. Determine the fair value of Entity A’s investment in XYZ’s shares.
[RTP Nov 2021; MTP May 2023; MTP Nov 2023]
Ans:
(i) An earnings-based valuation of Entity A’s holding of shares in company XYZ could be
calculated as follows:
Particulars Unit
Entity XYZ’s after-tax maintainable profits (A) ₹ 70,000
Price/Earnings ratio (B) 15
Adjusted discount factor (C) (1- 0.20) 0.80
Value of Company XYZ (A) x (B) x (C) ₹ 8,40,000

Value of a share of XYZ = ₹ 8,40,000 ÷ 5,000 shares = ₹ 168

The fair value of Entity A’s investment in XYZ’s shares is estimated at ₹ 42,000 (that is, 250
shares × ₹ 168 per share).
(ii) Share price = ₹ 8,50,000 ÷ 5,000 shares = ₹ 170 per share.
The fair value of Entity A’s investment in XYZ shares is estimated to be ₹ 42,500 (250 shares
× ₹ 170 per share).

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Q11: An asset is sold in two different active markets at different prices. Manor Ltd. enters into
transactions in both markets and can access the price in those markets for the asset at the
measurement date.
In Mumbai market, the price that would be received is ₹ 290, transaction costs in that market
are ₹ 40 and the costs to transport the asset to that market are ₹ 30. Thus, the net amount that
would be received is ₹ 220.
In Kolkata market the price that would be received is ₹ 280, transaction costs in that market are
₹ 20 and the costs to transport the asset to that market are ₹ 30. Thus, the net amount that
would be received in Kolkata market is ₹ 230.
1. What should be the fair value of the asset if Mumbai Market is the principal market?
What should be fair value if none of the markets is principle market?
2. It the net realization after expenses is more in export market, say ₹ 280, but
Government allows only 15% of the production to be exported out of India. Discuss
what would be fair value in such case. [Exam Nov 2019]
Ans: 1 (a) If Mumbai Market is the principal market
If Mumbai Market is the principal market for the asset (i.e., the market with the greatest
volume and level of activity for the asset), the fair value of the asset would be measured
using the price that would be received in that market, after taking into account
transportation costs. Fair value will be
₹
Price receivable 290
Less: Transportation cost (30)
Fair value of the asset 260

(b) If neither of the market is the principal market

If neither of the market is the principal market for the asset, the fair value of the asset
would be measured using the price in the most advantageous market. The most
advantageous market is the market that maximises the amount that would be received
to sell the asset, after taking into account transaction costs and transportation costs (i.e.,
the net amount that would be received in the respective markets).
₹ ₹
Mumbai Kolkata
Market Market
Fair value of the asset as per the question 220 230

Since the entity would maximise the net amount that would be received for the asset in
Kolkata Market i.e. ₹ 230, the fair value of the asset would be measured using the price
in Kolkata Market.
Fair value in such a case would be

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₹
Price receivable 280
Less: Transportation cost (30)
Fair value of the asset 250

2) Export prices are more than the prices in the principal market and it would give highest
return comparing to the domestic market. Therefore, the export market would be
considered as most advantageous market. But since the Government has capped the
export, maximum up to 15% of total output, maximum sale activities are being done at
domestic market only i.e. 85%. Since the highest level of activities with highest volume is
being done at domestic market, principal market for asset would be domestic market.
Therefore, the prices received in domestic market would be used for fair valuation of
assets.

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CHAPTER 32
PROFESSIONAL AND ETHICAL DUTY
Q1: Infostar Ltd. is a listed company engaged in the provision of IT services in India. The directors are
paid a bonus based on the profits achieved by the company during the year as per the bonus
table given below:
Range of Profit after tax Bonus to Directors
Less than ₹ 1 crore NIL
₹ 1 crore to < ₹ 5 crores 2% of Net Profit after tax
₹ 5 crores to < ₹ 10 crores 4% of Net Profit after tax
The draft Statement of Profit and Loss for the year ended 31 March 20X2 currently shows a profit
of ₹ 2 crores.
Issue:
On 25 March 20X2, Infostar Ltd. sold land located adjacent to its head office to a third party Zest
Ltd. for a consideration of ₹ 40 crores, with an option to purchase the land back on 25 May 20X2
for ₹ 40 crores plus a premium of 6%. The amount received from the transaction eliminated the
bank overdraft of Infostar Ltd. as on 31 March 20X2. On instructions of the Chief Financial Officer
of the company, who is a chartered accountant, the transaction was treated as a sale, including
the profit arising on disposal in the Statement of Profit and Loss for the year ending 31 March
20X2.
Required:
Discuss the ethical and accounting implications of the above issues with respect to a chartered
accountant in service, referring to the relevant Ind AS wherever appropriate.
Ans: Accounting Treatment
The sale of land meets the conditions specified in Ind AS 115, Revenue from Contracts with
Customers for qualifying as a repurchase agreement as Infostar Ltd. has an option to buy back
the land from Zest Ltd. and therefore, control is not transferred as Zest Ltd.’s ability to use and
gain benefit from the land is limited. Infostar Ltd. must treat the transaction as a financing
arrangement and record both the asset (land) and the financial liability (the amount received
which is repayable to Zest Ltd.).
Infostar Ltd. should not have derecognized the land from the financial statements because the
risks and rewards of ownership are not transferred. Thus, the substance of the transaction is a
loan of ₹ 40 crores, with the 6% ‘premium’ on repurchase effectively reflecting interest payment.
Recording the aforesaid transaction as a sale is an attempt to manipulate the financial statements
in order to show an improved profit figure and a more favourable cash position. The sale must
be reversed and the land should be reinstated at its carrying amount prior to the transaction.
Ethical Issues

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Chartered Accountants are required to comply with the fundamental principles laid down in the
Code of Ethics. This includes acting with integrity. It appears that the integrity of CFO is
compromised in this situation as he had accounted the transaction as sale and not as a loan or
financial arrangement. The effect of accounting it as sale just before the year end is merely to
improve profits and eliminate the bank overdraft, thereby making the cash position seem better
than it is. This effectively amounts to ‘window dressing’, which is not honest as it does not present
the actual performance and position of Infostar Ltd.
Accountants must also act with objectivity, which means they must not allow bias, conflict or
undue influence of others to override professional or business judgments. Therefore, the
management must put the interests of the company and the shareholders before their own
interests. The pressure to show profits and achieve a bonus is in the self-interest of the directors
and seems to have been partly driven the transaction and the subsequent accounting, which is
clearly a conflict of interest.
It is further necessary for the accountants to comply with the principles of professional
behaviour, which require compliance with relevant laws and regulations. In the instant case, the
accounting treatment is not in conformity with Ind AS. The given facts do not make it clear
whether CFO is aware of this or not. If he is aware but still applied the incorrect treatment, he
has not complied with the principle of professional behaviour. It may be that he was under undue
pressure from the directors to record the transaction in this manner. If, however, he is not aware
that the treatment is incorrect, then he has not complied with the principle of professional
competence as his knowledge and skills are not updated.
In such a case, he is subject to professional misconduct under Clause 1 of Part II of Second
Schedule of the Chartered Accountants Act, 1949. Clause 1 states that a member of the Institute,
whether in practice or not, shall be deemed to be guilty of professional misconduct, if he
contravenes any of the provisions of this Act or the regulations made thereunder or any
guidelines issued by the Council. As per the Guidelines issued by the Council, a member of the
Institute who is an employee shall exercise due diligence and shall not be grossly negligent in the
conduct of his duties.
Q2: Rustom Ltd., a company engaged in oil extraction, has a present obligation to dismantle the oil
rig installed by it at the end of the useful life of 10 years. Rustom Ltd. cannot cancel this obligation
or transfer it. Rustom Ltd. intends to carry out the dismantling work itself and estimates the cost
of the work to be ₹ 100 crores at the end of 10 years.
The directors of Rustom Ltd. are aware of the requirements of Ind AS 37 ‘Provisions, Contingent
Liabilities and Contingent Assets’, read with Ind AS 16 ‘Property, Plant and Equipment’. However,
they propose to expense the costs of dismantling the oil rig as and when incurred, with no entries
or disclosures in the latest financial statements. They argue that application of Ind AS involves
judgment, and although prudence is mentioned in the Conceptual Framework, it is only one
among the many ways of achieving faithful representation.
Required:
Discuss whether the directors are acting unethically in the above instance what should be the
practising Chartered Accountant’s course of action in this regard.

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Ans: The treatment proposed by the director is in contravention of Ind AS 37. As per Ind AS 16 and
Ind AS 37, an entity, at the time of initial recognition of the asset, capitalises the present value
of the cost of dismantling to be occurred at the end of the life of the asset, to the cost of the
asset by simultaneously creating a provision for the same. In the given case, it appears to be a
deliberate intention to contravene Ind AS 16 and Ind AS 37, and not an unintentional mistake.
Though the directors can exercise strong or undue influence over the chartered accountant,
the chartered accountant is bound to act with integrity and remain unbiased, recommending
to the directors that Ind AS 16 and Ind AS 37 must be complied with, and ensure appropriate
entries are passed in the financial statements. The matter may be raised before the non-
executive directors, explaining the issue to them and ensure the financial statements are true
and fair and comply with the relevant Ind AS.
It is essential for the chartered accountant to inform those in governance (directors) about the
necessary corrective measures in this case. By doing so, he uphold the fundamental principle
of professional behaviour and demonstrate compliance with relevant laws and regulations. By
communicating the corrective measures to those responsible for governance, the chartered
accountant can ensure that the contravention of Ind AS 16 and Ind AS 37 is addressed and
rectified.
However, if he does not communicate the corrective measures to the directors, the
fundamental principle of professional behaviour will be breached. Members should comply
with relevant laws and regulations and avoid any action that discredits the profession. By
knowingly allowing the directors not to apply the requirements of an Ind AS, the Chartered
Accountant would not be acting diligently in accordance with applicable guidance and would
not be demonstrating professional competence and due care. In such a situation, he will be
subject to professional misconduct under Clauses 5, 6 and 7 of Part I of Second Schedule of
the Chartered Accountants Act, 1949.
Clause 5 states that a chartered accountant is guilty of professional misconduct when he fails
to disclose a material fact known to him which is not disclosed in a financial statement, but
disclosure of which is necessary in making such financial statement where he is concerned
with that financial statement in a professional capacity.
Clause 6 states that a CA is guilty of professional misconduct when he fails to report a material
misstatement known to him to appear in a financial statement with which he is concerned in
a professional capacity.
Clause 7 states that a Chartered Accountant is guilty of professional misconduct when he does
not exercise due diligence or is grossly negligent in the conduct of his professional duties.

Q4: Sunshine Ltd., a listed company in the cosmetics industry, has debt covenants attached to some
of its borrowings which are included in Financial Liabilities in the Balance Sheet. These covenants

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mandate the company to repay the debt in full if Sunshine Ltd. fails to maintain a liquidity ratio
and operating margin above the specified limit.
The directors alongwith the CFO of the Company who is a chartered accountant are considering
entering into a fresh five-year leasing arrangement but are concerned about the negative impact
any potential lease obligations may have on the above-mentioned covenants. Accordingly, the
directors and CFO propose that the lease agreement be drafted in such a way that it is a series of
six ten-month leases rather than a single five-year lease in order to utilize the short-term lease
exemption available under Ind AS 116, Leases. This would then enable accounting for the leases
in their legal form. The directors believe that this treatment will meet the requirements of the
debt covenant, though such treatment may be contrary to the accounting standards.
Required:
Discuss the ethical and accounting implications of the above issue from the perspective of CFO.
[MTP May 2024]
Ans: Lease agreement substance presentation
Stakeholders make informed and accurate decisions based on the information presented in
the financial statements and as such, ensuring the financial statements are reliable and of
utmost importance. The directors of Sunshine Ltd. are ethically responsible to produce
financial statements that comply with Ind AS and are transparent and free from material error.
Lenders often attach covenants to the terms of the agreement in order to protect their
interests in an entity. They would also be of crucial importance to potential debt and equity
investors when assessing the risks and returns from any future investment in the entity.
The proposed action by Sunshine Ltd. appears to be a deliberate attempt to circumvent the
terms of the covenants. The legal form would require treatment as a series of short-term
leases which would be recorded in the profit or loss, without any right-of-use asset and lease
liability being recognized as required by Ind AS 116, Leases. This would be a form of ‘off-
balance sheet finance’ and would not report the true assets and obligations of Sunshine Ltd.
As a result of this proposed action, the liquidity ratios would be adversely misrepresented.
Further, the operating profit margins would also be adversely affected, as the expenses
associated with the lease are likely to be higher than the deprecation charge if a leased asset
was recognized, hence the proposal may actually be detrimental to the operating profit
covenant.
Sunshine Ltd. is aware that the proposed treatment may be contrary to Ind AS. Such
manipulation would be a clear breach of the fundamental principles of objectivity and integrity
as outlined in the Code of Ethics. It is important for a chartered accountants to exercise
professional behaviour and due care all the time. The proposals by Sunshine Ltd. are likely to
mislead the stakeholders in the entity. This could discredit the profession by creating a lack of
confidence within the profession. The directors of Sunshine Ltd. must be reminded of their
ethical responsibilities and persuaded that the accounting treatment must fully comply with

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the Ind AS and principles outlined within the framework should they proceed with the
financing agreement.
However, if the CFO fails to comply with his professional duties, he will be subject to
professional misconduct under Clause 1 of Part II of Second Schedule of the Chartered
Accountants Act, 1949. The Clause 1 states that a member of the Institute, whether in practice
or not, shall be deemed to be guilty of professional misconduct, if he contravenes any of the
provisions of this Act or the regulations made thereunder or any guidelines issued by the
Council. As per the Guidelines issued by the Council, a member of the Institute who is an
employee shall exercise due diligence and shall not be grossly negligent in the conduct of his
duties.

Q9: As at 31 March 20X4, Mitra Ltd. had a plan to dispose off its 75% subsidiary Dosti Ltd. This plan
had been approved by the board and was reported in the media as well as to the Stock Exchange
where Mitra Ltd. was listed. It is expected that Jaya Ltd., the non-controlling shareholder in Dosti
Ltd. holding 25% stake, will acquire the 75% equity interest as well. The sale is expected to be
completed by October 20X4. Dosti Ltd. is expected to have substantial trading losses in the period
up to the sale. Mr. X, a chartered accountant, who is an employee in the finance department of
Mitra Ltd., wishes to show Dosti Ltd. as held for sale in the financial statements and to create a
restructuring provision to include the expected costs of disposal and future trading losses.
However, the Chief Operating Officer (COO) does not wish Dosti Ltd. to be categorized as held
for sale nor to provide for the expected losses. The COO is concerned as to how this may affect
the sales and would surely result in bonus targets not being met. He has argued that as the
management, it is his duty to secure a high sales price to maximize the return for shareholders
of Mitra Ltd. He has also hinted that Mr. X’s job could be at stake if such a provision were to be
made in the financial statements. The expected costs from the sale are as follows:
Future Trading Losses: ₹ 20 crores
Various legal costs of sale ₹ 1.5 crores
Redundancy costs for Dosti Ltd.’s employees ₹ 4 crores
Impairment losses on Property, Plant and Equipment ₹ 7 crores
Required:
(a) Discuss the accounting treatment which Mitra Ltd. should adopt to address the issue above
for the financial statements.
(b) Discuss the ethical issues which may arise in the above scenario, including any actions
which Mitra Ltd. and Mr. X should take [MTP May 2024]
Ans:
a) In terms of Ind AS 105, Non-current Assets Held for Sale and Discontinued Operations, an
entity shall classify a non-current asset (or disposal group) as held for sale if its carrying amount
will be recovered principally through a sale transaction rather than through continuing use.

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For this to be the case, the asset (or disposal group) must be available for immediate sale in
its present condition subject only to terms that are usual and customary for sales of such assets
(or disposal groups) and its sale must be highly probable.
For the sale to be highly probable, the appropriate level of management must be committed
to a plan to sell the asset (or disposal group), and an active programme to locate a buyer and
complete the plan must have been initiated. Further, the asset (or disposal group) must be
actively marketed for sale at a price that is reasonable in relation to its current fair value. In
addition, the sale should be expected to qualify for recognition as a completed sale within one
year from the date of classification, except in specific cases as permitted by the Standard, and
actions required to complete the plan should indicate that it is unlikely that significant changes
to the plan will be made or that the plan will be withdrawn. The probability of required
approvals (as per the jurisdiction) should be considered as part of the assessment of whether
the sale is highly probable.
An entity that is committed to a sale plan involving loss of control of a subsidiary shall classify
all the assets and liabilities of that subsidiary as held for sale when the criteria set out above
are met, regardless of whether the entity will retain a non-controlling interest in its former
subsidiary after the sale.
Based on the provisions highlighted above, the disposal of Dosti Ltd. appears to meet the
criteria of held for sale. Jaya Ltd. is the probable acquirer, and the sale is highly probable,
expected to be completed seven months after the year end, well within the 12-months criteria
highlighted above. Accordingly, Dosti Ltd. should be treated as a disposal group, since a single
equity transaction is the most likely form of disposal. In case Dosti Ltd. is deemed to be a
separate major component of business or geographical area of the group, the losses of the
group should be presented separately as a discontinued operation within the Financial
Statements of Mitra Ltd.
In terms of Ind AS 105, Non-current Assets Held for Sale and Discontinued Operations, an
entity shall measure a non-current asset (or disposal group) classified as held for sale at the
lower of its carrying amount and fair value less costs to sell. The carrying amount of Dosti Ltd.
(i.e., the subsidiary of Mitra Ltd.) comprises of the net assets and goodwill less the non-
controlling interest. The impairment loss recognised to reduce Dosti Ltd. to fair value less
costs to sell should be allocated first to goodwill and then on a pro-rata basis across the other
non-current assets of the Company.
The Chief Operating Officer (COO) is incorrect to exclude any form of restructuring provision
in the Financial Statements. Since the disposal is communicated to the media as well as the
Stock Exchange, a constructive obligation exists. However, ongoing costs of business should
not be provided for, only directly attributable costs of restructuring should be provided. Future
operating losses should be excluded as no obligating event has arisen, and no provision is

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required for impairment losses of Property, Plant and Equipment as it is already considered in
the remeasurement to fair value less costs to sell. Thus, a provision is required for ₹ 5.5 crores
(₹ 1.5 crores + ₹ 4 crores).
b) Ethics
Accountants have a duty to ensure that the financial statements are fair, transparent and
comply with the accounting standards. Mr. X have committed several mistakes. In particular,
he was unaware of which costs should be included within a restructuring provision and has
failed to recognise that there is no obligating event in relation to future operating losses. A
chartered accountant is expected to carry his work with due care and attention for lending
credibility to the financial statements. Accordingly, he must update his knowledge and ensure
that work is carried out in accordance with relevant ethical and professional standards. Failure
to do so would be a breach of professional competence. Accordingly, Mr. X must ensure that
this issue is addressed, for example by attending regular training and professional
development courses.
It appears that the chief operating officer is looking for means to manipulate the financial
statements for meeting the bonus targets. Neither is he is willing to reduce the profits of the
group by applying held for sale criteria in respect of Dosti Ltd. nor is he willing to create
appropriate restructuring provisions. Both the adjustment which comply with the
requirements of Ind AS will result in reduction of profits. His argument that the management
has a duty to maximize the returns for the shareholders is true, but such maximization must
not be achieved at the cost of objective and faithful representation of the performance of the
Company. In the given case, it appears that the chief operating officer is motivated by bonus
targets under the garb of maximizing returns for the shareholders, thereby resulting in
misrepresentation of the results of the group.
Further, by threatening to dismiss Mr. X, the COO has acted unethically. Threatening and
intimidating behaviour is unacceptable and against all ethical principles. This has given rise to
an ethical dilemma for Mr. X. He has a duty to produce financial statements but doing so in a
fair manner could result in a loss of job for him. The chartered accountant should approach
the chief operating officer and remind him the basic ethical principles and communicate him
to do the necessary adjustments in the accounts so that they are fair and objective.
In case Mr. X, falls under undue influence of COO and applies the incorrect accounting
treatment, he will be subject to professional misconduct under Clause 1 of Part II of Second
Schedule of the Chartered Accountants Act, 1949. The Clause 1 states that a member of the
Institute, whether in practice or not, shall be deemed to be guilty of professional misconduct,
for contravening the provisions of this Act or the regulations made thereunder or any
guidelines issued by the Council. As per the Guidelines issued by the Council, a member of the

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Institute who is an employee shall exercise due diligence and shall not be grossly negligent in
the conduct of his duties.

Q11: Astra Ltd. is a listed entity which operates in the defence and fibre optics sector. It supplies fibre
optic cables and racks in the domestic country. This activity is only a trading activity for Astra Ltd.
as it procures goods from pre-approved suppliers, and after inspection, sells the goods to IT
companies. The sale contract requires Astra Ltd. to deliver these goods to the IT companies’
locations (i.e., delivery on site). Payment terms are 30 days after the invoice date to Astra Ltd.
Ms. Suparna Dasgupta, a chartered accountant, has recently joined Astra Ltd. as the Head of the
Finance Department.
The Chief Operating Officer (also the executive director) of Astra Ltd. is Ms. Padmaja Srinivasan,
a mechanical engineer with an MBA from Harvard University, who rose through the ranks
through her excellent skills in project management, marketing, and customer management. Her
remuneration includes a bonus computed as a percentage of turnover achieved during the year,
and an additional incentive for achieving an EBITDA in excess of 15% of turnover.
Astra Ltd. has sold fibre optic cables amounting to ₹ 2 crores (invoice dated 31st March 20X2) to
Ethernet Bullet Ltd., a company providing high-speed internet connectivity services through fibre
optic cables as well as dedicated leased lines. The service unit of Ethernet Bullet Ltd. is located
next to the factory of Astra Ltd. Though the goods were not moved to Ethernet Bullet Ltd.’s
service unit, Astra Ltd. recognized the sale for the year, based on the contention that the service
unit is adjacent, and hence the transfer can happen within few minutes.
The annual results are due for board approval, for the year ending 31st March, and require the
sign-off of Ms. Suparna Dasgupta.
Ms. Suparna Dasgupta has been given a 40% increment on joining Astra Ltd., which enables her
to comfortably pay off her housing loan mortgage every month. Additionally, she is also given
perquisites in the form of business class travel, an exclusive chauffeur-driven car and stock
options of the company. Accordingly, she has stated that she cannot afford to lose this job as the
salary and perquisites are among the best in the country.
Ms. Padmaja Srinivasan has communicated to Ms. Suparna Dasgupta that many more benefits
will accrue if she agrees to present the numbers without any modifications. She has also said that
the company would not hesitate to replace Ms. Suparna Dasgupta should she disagree with the
contentions above.
Required:
Discuss the potential conflicts which are arising in the above scenario and the ethical principles
that would guide Ms. Suparna Dasgupta in responding to the situation. [RTP May 20204]
Ans: Presentation of Revenue numbers:
Ind AS 115 ‘Revenue from Contracts with Customers’ requires revenue to be recognized only
on satisfaction of the performance obligations under the contract. It is crucial that the
performance obligations be identified at the commencement of the contract, so that the
trigger points for revenue recognition become identifiable.

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Chapter 32 : PROFESSIONAL AND ETHICAL DUTY

Management would always have an incentive to present higher revenue numbers. In the given
case, the fact that the COO is given an incentive for revenues and EBITDA indicates that
revenue is a potential area for material misstatement, given the personal interest of the COO
in the same.
The sale of fibre optic cable cannot be recognized on 31st March 20X2 as the goods are not
yet transferred to the customer Ethernet Bullet Ltd.’s factory premises, which is one of the
critical obligations of Astra Ltd. The contention of the COO that it takes merely a few minutes
to shift the goods, and hence the sale can be recognized does not hold true. One can always
cross-question as to why the movement of goods did not happen, if it was merely a few
minutes job. It could be a possibility that the goods may not be packed, or there may still be
some pending inspection of the goods before transferring the same etc. In view of this, the
performance obligation under this contract has not been completed, and hence booking the
revenue has resulted in an overstatement of revenue by ₹ 2 crores, and a consequent inflation
of profits, assuming that Astra Ltd. is making profit on this sale transaction. Additionally,
booking this sale has resulted in an understatement of inventory as at the reporting
date of 31st March 20X2.
In view of the above, multiple conflicts of interest arise for Ms. Suparna Dasgupta:
a) Pressure to present favourable revenue figures and chartered accountant’s personal
circumstances
The chartered accountant is under pressure to present favourable numbers, notably in
favour of the COO, thereby increasing the incentives to the COO, and in turn benefiting
with the continued job prospects. Thus, the ethical and professional standards required
of the accountant are at odds with the pressures of her personal circumstances.
b) Duty to stakeholders
The directors have a duty to act in the best interests of the company’s stakeholders.
While higher revenue numbers do indicate a good growth trajectory of the company,
recognizing the revenue before fulfilling the performance obligations, or incorrectly
booking grant income as revenue, results in misleading the stakeholders about the
actual performance of the entity, thereby actually becoming detrimental to the
stakeholders.
Ethical principles guiding the chartered accountant’s response
By exhibiting bias in reporting higher revenue figures due to the risk of losing the job,
objectivity stands compromised. Knowingly disclosing incorrect information compromises
integrity, and erring in complying with Ind AS requirements, though continuing to report so in
the financial statements, results in displaying absence of professional competence.
Appropriate action

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 Chapter 32 : PROFESSIONAL AND ETHICAL DUTY

In the given case, the chartered accountant faces an ethical dilemma, and must apply her
moral and ethical judgment. As a professional, she is responsible for presenting the truth, and
to avoid indulging in ‘creative accounting practices’ due to pressure.
The chartered accountant accordingly must put the interests of the company and professional
ethics first and insist that the financial statements represent correct revenue numbers, in
compliance with the relevant Ind AS. Being an advisor to the directors, she must prevent
deliberate misrepresentation / fraudulent financial reporting, regardless of the personal
consequences. The accountant should not allow any undue influence from the directors to
override her professional judgment or integrity. This is in the long-term interests of the
company,
Further, knowingly providing incorrect information is regarded as professional misconduct. To
prevent such misconduct, the chartered accountant should not sign off on the financial
statements containing incorrect financial information. By adhering to the ethical principles,
the chartered accountant will maintain her professional integrity and contribute to the trust
and reliability placed in the work expected from her.
However, if she signs the financial statements containing the inflated revenue numbers, Ms.
Suparna Dasgupta would be guilty of professional misconduct under Clause I of Part II of
Second Schedule to the Chartered Accountants Act, 1949. The Clause states that a member of
the Institute, whether in practice or not, shall be guilty of professional misconduct, if he
contravenes any of the provisions of this Act or the regulations made thereunder, or any
guidelines issued by the Council. As per the Council guidelines, a member of the Institute who
is an employee shall exercise due diligence and shall not be grossly negligent in the conduct of
his duties.

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Chapter 33 : ACCOUNTING AND TECHNOLOGY

CHAPTER 33
ACCOUNTING AND TECHNOLOGY
Illustration 3
Company Z is engaged in the business of importing oil seeds for further processing as well as trading
purposes. It enters into the following types of contracts as on 1st October 20X1:

Particulars Contract 1 Contract 2 Contract 3

Nature of Import of oil seeds from a Purchase of oil seeds from a Contract to sell oil seeds on
Contract foreign supplier domesticproducer / supplier the commodity exchange

Quantity and rate 100 MT at USD 400 50 MT at ` 30,000 per MT to be 50 MT at USD 450 per MT,
per MT to be delivered as on delivered as on 31st January maturing as on 15th
31st March 20X2 20X2 January 20X2

Net settlement clause Yes Yes Yes

included in the
contract
Net settlement in There have also been Yes – company Z has net settled Yes – these contracts are
practice for similar several instances of the oil some of the domestic purchase required to be net settled
contracts seeds being sold prior to or contracts. with the exchange on the
shortly after taking delivery. However, these instances maturity date.
These instances of net constitute only 1 per cent of the Company Z enters into these
settlement constitute total domestic purchase types of derivative contracts
approximately 30 per cent contracts in value. to hedge the risks on its
of the valueof total import The remaining contracts are domestic oil seeds purchase
contracts. settled by taking delivery of oil contracts
seedswhich are used forfurther
processing.

Company Z wants to determine if the contracts entered into for purchase and sale of oil seeds are
derivatives within the scope of lnd AS 109 or are executory contracts outside the scope of lnd AS 109.
Though the Company Z is using an ERP accounting package it is not properly configured to provide the
required reports for above said decision making. Therefore, Company Z requires your advice on whether
such process of determining the nature of contracts is possible through use of external sources of
technology.

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 Chapter 33 : ACCOUNTING AND TECHNOLOGY

Solution: Yes, it is possible by extracting the data from the accounting package or by connecting to the
database of the accounting package.
For example, the same can be done by connecting the spreadsheet with database through ODBC
connectivity or by extracting the data from accounting package into a spreadsheet. In case the data is
being extracted from accounting package, the following steps may be followed:
1) Identify the relevant data fields in the accounting package that contain the contract information,
such as contract particulars, quantities, rates, and settlement details.
2) Export the required data from the accounting package in a compatible format (e.g., CSV, Excel,
or other supported formats).
3) Open the exported data in Microsoft Excel.
4) Clean the data by removing any unnecessary or irrelevant columns and rows.
5) Ensure that the data is properly formatted and aligned for further analysis.
6) Define the rules or criteria for categorizing the contracts as derivative or executory based on the
requirements of Ind AS 109.
7) Establish conditions using Excel formulas or logical functions to evaluate the contract data.
8) Apply the defined rules or criteria to the contract data using Excel formulas or logical functions.
9) Use functions such as IF, AND, OR, or VLOOKUP to evaluate the conditions and determine the
nature of each contract.
10) Create additional columns in Excel to categorize the contracts based on the analysis results.
11) Assign appropriate labels or values to indicate whether a contract is a derivative or an executory
contract.
Q2: New Way Ltd. decides to enter a new market that is currently experiencing economic difficulty
and expects that in future the economy will improve. New Way Ltd. enters into an arrangement
with a customer in the new region for networking products for promised consideration of `
12,50,000.
At contract inception, New Way Ltd. wants to
a. Define criteria for identifying contracts with customers, such as enforceable rights and
obligations, agreement terms, and consideration.
b. Establish rules to link relevant transactions to specific contracts and assign unique
identifiers to each contract
Required: Advice the steps to automate the process to perform the above tasks on behalf of
New Way Ltd.
Ans: A contract management system may be implemented which allows to store and organize
contract documents electronically. This system can help you define and capture key contract
details, such as enforceable rights and obligations, agreement terms, and consideration.
Accordingly, the said contract management system shall be enabled to configure a mechanism
to assign unique identifiers to each contract.

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o Integrate the contract management system or accounting software with other

operational systems, such as sales, CRM, or project management systems. This
integration allows for the automatic capture and synchronization of contract-related
data, ensuring that transactions associated with specific contracts are accurately linked.
o Assign specific tags or attributes to contracts based on the defined criteria, such as
contract type, customer name, contract start and end dates, or specific service offerings,
to enable efficient searching, filtering, and grouping of contracts based on various criteria.
o Use custom queries or predefined templates to extract information on the number of
contracts identified, their characteristics, and the associated transactions. This provides
visibility into the implementation of Ind AS 115 and helps to monitor compliance.
In addition to the above, the following may be adopted:
o Consider utilizing OCR technology to extract relevant information automatically. OCR can
convert printed or handwritten text into machine-readable format, enabling efficient
extraction of contract details for further processing and analysis.
o Apply machine learning and Neuro-Linguistic Programming (NLP) techniques to analyze
and extract contract data automatically. These technologies can help identify specific
contract terms, clauses, or obligations, aiding in the accurate identification and
classification of contracts based on predefined criteria.
o Utilize workflow automation tools to streamline the contract identification process.
Establish predefined rules or triggers within your system that automatically identify new
contracts based on specific criteria and assign unique identifiers. This automation reduces
manual effort and ensures consistency in contract identification.

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Chapter 34 : Analysis of Financial Statements

CHAPTER 34
ANALYSIS OF FINANCIAL STATEMENTS
COMMON MISTAKES IN FINANCIAL STATEMENTS
Balance Sheets
 In Ind AS, Assets are not presented in the Balance sheet as ‘Fixed Asset’, rather they are
classified under various categories of non-current assets as PPE etc. if question is silent, assume
fixed assets are PPE
 PPE which are not ready for intended use as on the date of Balance Sheet are disclosed as
“Capital work-in-progress”. It would be reclassified from PPE to Capital work-in-progress.
 Land and building held for capital appreciation or for earning rental income should be
reclassified as Investment property rather than PPE.
 ROU Asset will be separately shown under PPE or Investment property as per its classification.
 Goodwill acquired in a business combination to be shown separately from other Intangible
Assets.
 If deferred tax liabilities and deferred tax assets relate to taxes on income levied by the same
governing taxation laws, these shall be set off, in accordance with Ind AS 12.
 Bank deposits with more than 12m to maturity should be disclosed under OTHER FINANCIAL
ASSETS under Non-Current Assets
 Capital Advances should be always shown under Other Non-Current Assets.
 Non-Current Assets classified as held for Sale should be shown as a separate line item in
Balance Sheet
 Trade Receivables/ Loan Receivables shall be sub-classified as;
Trade Receivables considered good - Secured;
Trade Receivables considered good - Unsecured;
Trade Receivables which have significant increase in Credit Risk
Trade Receivables - credit impaired
Less: Allowance for bad and doubtful debts shall be disclosed under the relevant
heads separately.
 There is no need to subclassify trade receivable as outstanding for more than six months and
outstanding within six months.
 Bonus shares issued; Shares issued for consideration other than cash & shares bought back
should be DISCLOSED in Notes to Accounts.
 Debit balance of Profit and Loss should be shown as NEGATIVE FIGURE as Retained Earnings
which will be shown under Other Equity.
 Reserve for Foreseeable Loss should NOT BE INCLUDED as RESERVES. It should be recognised as
provisions either as current or non-current as the case may be.

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 Chapter 34 : Analysis of Financial Statements

 Interest Expense accrued but not due/ Interest Accrued and Due but not paid should be
included in Current Liabilities as Other Financial Liabilities
 Accrued income (if not recognised) will be shown in SOPL as other income and as other
financial assets under current liability in Balance sheet.
 Proposed Dividend after the end of the year shall be DISCLOSED in Notes to Accounts and shall
not be included in Current Liabilities
 Other Financial Liabilities include Unpaid Dividends, Application money received for allotment
of shares to the extent refundable
 Redeemable Preference Shares are presented under Non-Current Liabilities as Financial
Liabilities – Borrowing.
 Liabilities for which there is no contractual obligation to deliver cash or other financial asset to
another entity, are not financial liabilities.
- Govt and other Statutory Dues are not FINANCIAL LIABILITIES. They need to be disclosed
under Other Current Liabilities.
- Income Tax Payable are not FINANCIAL LIABILITIES. They need to be disclosed as Current
Tax Liabilities.
- Unearned Revenue is not a FINANCIAL LIABILITY. It should be shown under Other Current
Liabilities
 Assets for which the future economic benefit is the receipt of goods or services, rather than the
right to receive cash or another financial asset, are not financial assets.
- Prepaid expenses are not a FINANCIAL ASSETS. They need to be disclosed under Other
Current assets.
- Income Tax Refundable are not FINANCIAL ASSETS. They need to be disclosed Current Tax
assets.
 If a company applies retrospective application of Accounting Policy as per Ind AS 8, the
company shall prepare 3rd Set of Balance Sheet at the Beginning of the Previous Year.
 Non-Controlling Interest should be shown as a part of Equity in CFS

Statement of Profit and Loss

 SOPL shall include Profit & Loss for the Current Period + OCI for the Period
 Profit & Loss attributable to Owners and NCI should be presented separately.
 Preference Dividend on Preference shares classified as Financial Liability will be shown as
Finance Cost in SOPL
 Foreign Currency Translation Reserve as per Ind AS 21, FVOCI Reserve as per Ind As 109 (FVTOCI
Debt) & Cash Flow Hedging Reserve as per Ind AS 109 shall be RECLASSIFIED from OCI to PL as
Reclassification adjustment.
 Revaluation Reserve as per Ind AS 16, FVOCI Reserve as per Ind As 109 (FVTOCI Equity) &
Remeasurement Reserve as per Ind As 19 shall be NOT BE RECLASSIFIED to PL.
 As per Division II of Schedule III to the Companies Act, 2013, the Statement of Profit and Loss
should present the Earnings per Equity Share.

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Chapter 34 : Analysis of Financial Statements

Q7: Mercury Ltd. has sold goods to Mars Ltd. at a consideration of ₹ 10 lakhs, the receipt of which
receivable in three equal installments of ₹ 3,33,333 over a two year period (receipts on 1st April
20X1, 31st March 20X2 and 31st March 20X3).
The company is offering a discount of 5 % (i.e. ₹ 50,000) if payment is made in full at the time of
sale. The sale agreement reflects an implicit interest rate of 5.36% p.a.
The total consideration to be received from such sale is at ₹ 10 Lakhs and hence, the
management has recognised the revenue from sale of goods for ₹ 10 lakhs. Further, the
management is of the view that there is no difference in this aspect between Indian GAAP and
Ind AS.
Required: Analyse whether the above accounting treatment made by the accountant is in
compliance of the Ind AS. If not, advise the correct treatment along with working for the same.
[Exam Nov 22 (6 Marks); MTP May 2024]
Ans: The above treatment needs to be examined in the light of the provisions given in Ind AS 115 :
Revenue from Contract with customer
In determining the transaction price, an entity shall adjust the promised amount of
consideration for the effects of the time value of money if the timing of payments agreed to
by the parties to the contract (either explicitly or implicitly) provides the customer or the
entity with a significant benefit of financing the transfer of goods or services to the customer.
A significant financing component may exist regardless of whether the promise of financing is
explicitly stated in the contract or implied by the payment terms agreed to by the parties to the
contract.
The objective when adjusting the promised amount of consideration for a significant financing
component is for an entity to recognise revenue at an amount that reflects the price that a
customer would have paid for the promised goods or services if the customer had paid cash for
those goods or services when (or as) they transfer to the customer (ie the cash selling price).
The Transaction (cash price equivalent) of the sale of goods is calculated as follows: INR
Year Consideration Present value Present value of
(Installment) factor consideration
Time of sale 3,33,333 - 3,33,333
End of 1st year 3,33,333 0.949 3,16,333
End of 2nd year 3,33,334 0.901 3,00,334
10,00,000 9,50,000
The Company that agrees for deferring the cash inflow from sale of goods will recognise the
revenue from sale of goods and finance income as follows:
Initial recognition of sale of goods INR INR
Cash Dr. 3,33,333
Trade Receivable Dr. 6,16,667
To Sale 9,50,000
Recognition of interest expense and receipt of second

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 Chapter 34 : Analysis of Financial Statements

installment
Cash Dr. 3,33,333
To Interest Income 32,999
To Trade Receivable 3,00,334
Recognition of interest expense and payment of final
installment
Cash Dr. 3,33,334
To Interest Income (Balancing figure) 17,000
To Trade Receivable 3,16,333
Balance Sheet and Profit and Loss extracts showing the presentation for the year ended as at
for the year ending 31st March 20X2 and 31st March 20X3
Ind AS compliant Division II of Schedule III needs to be referred for presentation requirement in
Balance Sheet and Profit and Loss on Ind AS.
Balance Sheet (extracts) as at 31st March 20X2 and 31st March 20X3 INR
As at Mar 31, 20X2 As at Mar 31, 20X3
Assets
Current Assets
Financial Assets
Trade Receivable 3,16,333 XXX
Statement of Profit and Loss (extracts) for the year ended 31st March 20X2 and 31st March
20X3
As at Mar 31, 20X2 As at Mar 31, 20X3
Income
Sale of Goods 9,50,000 -
Other Income (Finance income) 32,999 17,000
Q8: On April 1, 20X1, Sun Ltd. has acquired 100% shares of Earth Ltd. for ₹ 30 lakhs. Sun Ltd. has 3
cash-generating units A, B and C with fair value of ₹ 12 lakhs, 8 lakhs and 4 lakhs respectively.
The company recognizes goodwill of ₹ 6 lakhs that relates to CGU ‘C’ only.
During the financial year 20X2-20X3, the CFO of the company has a view that there is no
requirement of any impairment testing for any CGU since their recoverable amount is
comparatively higher than the carrying amount and believes there is no indicator of
impairment.
Required: Analyse whether the view adopted by the CFO of Sun Ltd is in compliance of the Ind
AS. If not, advise the correct treatment in accordance with relevant Ind AS
Ans: The above treatment needs to be examined in the light of the provisions given in Ind AS 36:
Impairment of Assets.

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Chapter 34 : Analysis of Financial Statements

Para 9 of Ind AS 36 ‘Impairment of Assets’ states that “An entity shall assess at the end of each
reporting period whether there is any indication that an asset may be impaired. If any such
indication exists, the entity shall estimate the recoverable amount of the asset.”
Further, paragraph 10(b) of Ind AS 36 states that:
“Irrespective of whether there is any indication of impairment, an entity shall also test goodwill
acquired in a business combination for impairment annually.”
Sun Ltd has not tested any CGU on account of not having any indication of impairment is
partially correct i.e. in respect of CGU A and B but not for CGU C. Hence the treatment made by
the Company is not in accordance with Ind AS 36.
Accordingly, impairment testing in respect of CGU A and B are not required since there are no
indications of impairment. However, Sun Ltd shall test CGU C irrespective of any indication of
impairment annually as the goodwill acquired on business combination is fully allocated to CGU
‘C’.
Q15: Deepak started a new company Softbharti Pvt. Ltd. with Iktara Ltd. wherein investment of 55%
is done by Iktara Ltd. and rest by Deepak. Voting powers are to be given as per the
proportionate share of capital contribution. The new company formed was the subsidiary of
Iktara Ltd. with two directors, and Deepak eventually becomes one of the directors of company.
A consultant was hired and he charged ₹ 30,000 for the incorporation of company and to do
other necessary statuary registrations. ₹ 30,000 is to be charged as an expense in the books
after incorporation of company. The company, Softbharti Pvt. Ltd. was incorporated on 1st
April 2019.
The financials of Iktara Ltd. are prepared as per Ind AS.
An accountant who was hired at the time of company’s incorporation, has prepared the draft
financials of Softbharti Pvt. Ltd. for the year ending 31st March, 2020 as follows:
Statement of Profit and Loss
Particulars Amount (₹)
Revenue from operations 10,00,000
Other Income 1,00,000
Total Revenue (a) 11,00,000
Expenses:
Purchase of stock in trade 5,00,000
(Increase)/Decrease in stock in trade (50,000)
Employee benefits expense 1,75,000
Depreciation 30,000
Other expenses 90,000
Total Expenses (b) 7,45,000
Profit before tax (c) = (a)-(b) 3,55,000
Current tax 1,06,500

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 Chapter 34 : Analysis of Financial Statements

Deferred tax 6,000

Total tax expense (d) 1,12,500
Profit for the year (e) = (c) – (d) 2,42,500
Balance Sheet
Particulars Amount (₹)
EQUITY AND LIABILITIES
(1) Shareholders’ Funds
(a) Share Capital 1,00,000
(b) Reserves & Surplus 2,27,500
(2) Non-Current Liabilities
(a) Long Term Provisions 25,000
(b) Deferred tax liabilities 6,000
(3) Current Liabilities
(a) Trade Payables 11,000
(b) Other Current Liabilities 45,000
(c) Short Term Provisions 1,06,500
TOTAL 5,21,000

ASSETS
(1) Non Current Assets
(a) Property, plant and equipment (net) 1,00,000
(b) Long-term Loans and Advances 40,000
(c) Other Non Current Assets 50,000
(2) Current Assets
(a) Current Investment 30,000
(b) Inventories 80,000
(c) Trade Receivables 55,000
(d) Cash and Bank Balances 1,15,000
(e) Other Current Assets 51,000
TOTAL 5,21,000
Additional information of Softbharti Pvt Ltd.:
• Deferred tax liability of ₹ 6,000 is created due to following temporary difference:
Difference in depreciation amount as per Income tax and Accounting profit
• There is only one property, plant and equipment in the company, whose closing balance
as at 31st March, 2020 is as follows:

Asset description As per Books As per Income tax

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Chapter 34 : Analysis of Financial Statements

Property, plant and ₹1,00,000 ₹80,000

equipment
• Pre incorporation expenses are deductible on straight line basis over the period of five
years as per Income tax. However, the same are immediately expensed off in the books.
• Current tax is calculated at 30% on PBT - ₹ 3,55,000 without doing any adjustments
related to Income tax. The correct current tax after doing necessary adjustments of
allowances / disallowances related to Income tax comes to ₹ 1,25,700.
• After the reporting period, the directors have recommended dividend of ₹ 15,000 for the
year ending 31st March, 2020 which has been deducted from reserves and surplus.
Dividend payable of ₹ 15,000 has been grouped under ‘other current liabilities’ along with
other financial liabilities.
• There are ‘Government statuary dues’ amounting to ₹ 15,000 which are grouped under
‘other current liabilities’.
• The capital advances amounting to ₹ 50,000 are grouped under ‘Other non-current
assets’.
• Other current assets of ₹ 51,000 comprise Interest receivable from trade receivables.
• Current investment of ₹ 30,000 is in shares of a company which was done with the
purpose of trading; current investment has been carried at cost in the financial
statements. The fair value of current investment in this case is ₹ 50,000 as at 31st
March, 2020.
• Actuarial gain on employee benefit measurements of ₹ 1,000 has been omitted in the
financials of Softbharti private limited for the year ending 31 st March, 2020.
The financial statements for financial year 2019-2020 have not been yet approved.
You are required to ascertain that whether the financial statements of Softbharti Pvt. Ltd. are
correctly presented as per the applicable financial reporting framework. If not, prepare the
revised financial statements of Softbharti Pvt. Ltd. after the careful analysis of mentioned facts
and information. [RTP Nov 2020; MTP Nov 2021; MTP Nov 2023]
Ans: If Ind AS is applicable to any company, then Ind AS shall automatically be made applicable to all
the subsidiaries, holding companies, associated companies, and joint ventures of that
company, irrespective of individual qualification of set of standards on such companies.
In the given case it has been mentioned that the financials of Iktara Ltd. are prepared as per Ind
AS. Accordingly the results of its subsidiary Softbharti Pvt. Ltd. should also have been prepared
as per Ind AS. However, the financials of Softbharti Pvt. Ltd. have been presented as per
accounting standards (AS).
Hence, it is necessary to revise the financial statements of Softbharti Pvt. Ltd. as per Ind AS
after the incorporation of necessary adjustments mentioned in the question.
The revised financial statements of Softbharti Pvt. Ltd. as per Ind AS and Division II to Schedule
III of the Companies Act, 2013 are as follows:
STATEMENT OF PROFIT AND LOSS

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 Chapter 34 : Analysis of Financial Statements

for the year ended 31st March, 2020

Particulars Amount (₹)

Revenue from operations 10,00,000
Other Income (1,00,000 + 20,000) (refer note -1) 1,20,000
Total Revenue 11,20,000
Expenses:
Purchase of stock in trade 5,00,000
(Increase) / Decrease in stock in trade (50,000)
Employee benefits expense 1,75,000
Depreciation 30,000
Other expenses 90,000
Total Expenses 7,45,000
Profit before tax 3,75,000
Current tax 1,25,700
Deferred tax (W.N.1) 4,800
Total tax expense 1,30,500
Profit for the year (A) 2,44,500
OTHER COMPREHENSIVE INCOME
Items that will not be reclassified to Profit or Loss:
Remeasurements of net defined benefit plans 1,000
Tax liabilities relating to items that will not be reclassified to Profit or Loss
Remeasurements of net defined benefit plans (tax) [1000 x 30%] (300)
Other Comprehensive Income for the period (B) 700
Total Comprehensive Income for the period (A+B) 2,45,200
BALANCE SHEET as at 31st March, 2020

Particulars (₹)
ASSETS
Non-current assets
Property, plant and equipment 1,00,000
Financial assets
Other financial assets (Long-term loans and advances) 40,000
Other non-current assets (capital advances) (refer note-2) 50,000
Current assets
Inventories 80,000
Financial assets
Investments (30,000 + 20,000) (refer note -1) 50,000

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Trade receivables 55,000

Cash and cash equivalents/Bank 1,15,000
Other financial assets (Interest receivable from trade receivables) 51,000
TOTAL ASSETS 5,41,000
EQUITY AND LIABILITIES
Equity
Equity share capital 1,00,000
Other equity 2,45,200
Non-current liabilities
Provision (25,000 – 1,000) 24,000
Deferred tax liabilities (4800 + 300) 5,100
Current liabilities
Financial liabilities
Trade payables 11,000
Other financial liabilities (Refer note 5) 15,000
Other current liabilities (Govt. statuary dues) (Refer note 3) 15,000
Current tax liabilities 1,25,700
TOTAL EQUITY AND LIABILITIES 5,41,000
STATEMENT OF CHANGES IN EQUITY For the year ended 31st March, 2020
A. EQUITY SHARE CAPITAL

Balance (₹)
As at 31st March, 2019 -
Changes in equity share capital during 1,00,000
the year
As at 31st March, 2020 1,00,000

B. OTHER EQUITY

Retained Earnings (₹)

As at 31st March, 2019 -
Profit for the year 2,44,500
Other comprehensive income for the year 700
Total comprehensive income for the year 2,45,200
Less: Dividend on equity shares (refer note – 4) -
As at 31st March, 2020 2,45,200
DISCLOSURE FORMING PART OF FINANCIAL STATEMENTS:

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 Chapter 34 : Analysis of Financial Statements

Proposed dividend on equity shares is subject to the approval of the shareholders of the
company at the annual general meeting and not recognized as liability as at the Balance Sheet
date. (refer note-4)
Notes:
1. Current investment are held for the purpose of trading. Hence, it is a financial asset
classified as FVTPL. Any gain in its fair value will be recognised through profit or loss.
Hence, ₹ 20,000 (50,000 – 30,000) increase in fair value of financial asset will be
recognised in profit and loss.
2. Assets for which the future economic benefit is the receipt of goods or services, rather
than the right to receive cash or another financial asset, are not financial assets.
3. Liabilities for which there is no contractual obligation to deliver cash or other financial
asset to another entity, are not financial liabilities.
4. As per Ind AS 10, ‘Events after the Reporting Period’, If dividends are declared after
the reporting period but before the financial statements are approved for issue, the
dividends are not recognized as a liability at the end of the reporting period because
no obligation exists at that time. Such dividends are disclosed in the notes in
accordance with Ind AS 1, Presentation of Financial Statements.
5. Other current financial liabilities:
(₹)
Balance of other current liabilities as per financial statements 45,000
Less: Dividend declared for FY 2019 - 2020 (Note – 4) (15,000)
Reclassification of government statuary dues payable to
‘other current liabilities’ (15,000)
Closing balance 15,000

Working Note:
1. Calculation of deferred tax on temporary differences as per Ind AS 12 for financial year
2019 – 2020

Item Carrying Tax Difference DTA / DTL

amount base (₹) @ 30% (₹)
(₹) (₹)
Property, Plant and Equipment 1,00,000 80,000 20,000 6,000-DTL
Pre-incorporation expenses Nil 24,000 24,000 7,200-DTA
Current Investment 50,000 30,000 20,000 6,000-DTL
Net DTA 4,200-DTL

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